MCI COMMUNICATIONS CORP
10-K, 1998-04-15
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C.  20549

                                    FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

     For the fiscal year ended December 31, 1997

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the transition period from _____ to _______

                         Commission File Number: 0-6457

                         MCI COMMUNICATIONS CORPORATION

          (Exact name of registrant as specified in its charter)

     Delaware                                  52-0886267
(State of incorporation)            (I.R.S. Employer Identification No.)

     1801 Pennsylvania Avenue, N.W., Washington, D.C.         20006
(Address of principal executive offices)                   (Zip Code)

Registrant's telephone number, including area code:  (202) 872-1600

Securities registered pursuant to Section 12(b) of the Act:  None

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

                       Common Stock, $.10 par value per share
                                (Title of class)

       8.00% Cumulative Quarterly Income Preferred Securities, Series A*
                                (Title of class)
- --------------------------
* Issued by MCI Capital I, a Delaware  statutory  business trust. The payment of
trust  distributions  and payments on  liquidation  or redemption are guaranteed
under   certain   circumstances   by   MCI   Communications   Corporation.   MCI
Communications  Corporation is the owner of 100% of the common securities issued
by MCI Capital I.

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months,  and (2) has been subject to such filing  requirements
for the past 90 days. Yes [X] No [ ]

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

The aggregate market value of the voting stock of registrant, which includes the
Common   Stock  and  Class  A  Common   Stock,   held  by   non-affiliates   was
$32,812,112,363  at February 2, 1998, based upon the closing price of the Common
Stock on that date.

As of January 20, 1998, registrant had outstanding  571,230,935 shares of Common
Stock and 135,998,932 shares of Class A Common Stock.

Documents Incorporated by Reference:

Portions of the Annual Report to  Stockholders  for the year ended  December 31,
1997 - Part II.

Portions of the Proxy Statement for the Special  Meeting of  Stockholders  dated
January 22, 1998 - Part III.

<PAGE>


PAGE 2




Forward-looking Statements May Prove Inaccurate


          MCI has made certain forward-looking  statements in this Annual Report
on Form  10-K  that are  subject  to risks  and  uncertainties.  Forward-looking
statements  include  information  concerning  the  possible  future  results  of
operations  of  the  company,  its  long-distance   telecommunication   services
business, its investments in ventures and developing markets ("VDM") businesses,
the  possible  future  results of  operations  of the  company  and those of MCI
WorldCom,  Inc. ("MCI WorldCom")  after the proposed merger with WorldCom,  Inc.
("WorldCom")  and  statements of  information  preceded by,  followed by or that
include the words "believes", "expects",  "anticipates", or similar expressions.
For those statements,  the company claims the protection of the safe- harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of  1995.  The  reader  is  cautioned  that  important  factors  such as the
following,  in addition to those  contained  elsewhere in this Annual  Report on
Form 10-K,  could affect the future  results of the company,  its  long-distance
telecommunication  services and VDM  businesses  and those of MCI WorldCom after
the  proposed  merger with  WorldCom  and could  cause  those  results to differ
materially  from those  expressed in the  forward-looking  statements:  material
adverse changes in the economic  conditions in the markets served by the company
and MCI WorldCom;  a significant  delay in the expected  closing of the proposed
merger with WorldCom;  future regulatory actions and conditions in the company's
and MCI  WorldCom's  operating  areas,  including  the ability of the company to
implement its local strategy and obtain local  facilities at competitive  rates;
the ability to pass on additional charges imposed by the Federal  Communications
Commission  ("FCC");  competition  from others in the United States ("U.S.") and
international  long-distance  markets,  including the entry of the Regional Bell
Operating Companies ("RBOCs") and other companies into the long-distance markets
in the U.S.; the cost of the company's  year 2000  compliance  efforts;  and the
effect of future technological changes on its business.





<PAGE>


PAGE 3



                                     PART I

Item 1. Business

GENERAL
- -------

     MCI* is one of the world's leading providers of communication  services. It
is the second largest carrier of long-distance telecommunication services in the
U.S.   and  the   second   largest   carrier  of   international   long-distance
telecommunication  services in the world.  On November 9, 1997, MCI entered into
an agreement to merge with WorldCom  which will be  consummated  upon receipt of
the necessary  regulatory  approvals (see "The Merger" below for a more detailed
discussion).

     MCI   provides  a  broad  range  of   communication   services,   including
long-distance   telecommunication   services,   local  and  wireless   services,
data/Internet/intranet  services  and  information  technology  and  outsourcing
services.  The provision of long- distance  telecommunication  services is MCI's
core  business.  Long-  distance  telecommunication  services  comprise  a  wide
spectrum  of  domestic  and  international  voice and data  services,  including
long-distance    telephone   services,    data   communication    services   and
teleconferencing services. During each of the last three years, more than 90% of
MCI's  operating  revenues  and  operating  income  were  derived  from its core
business.

     The communication  services industry  continues to change both domestically
and  internationally,  providing  significant  opportunities  and  risks  to the
participants in these markets. In the U.S., the  Telecommunications  Act of 1996
(the "Telecom  Act") is expected to have a significant  impact on MCI's business
by opening the U.S. local service  markets to competition and allowing the RBOCs
to compete in the long-distance market. However, challenges to the orders issued
by the FCC pursuant to the Telecom Act have delayed the  anticipated  opening of
the local markets to effective competition.  Internationally,  in February 1997,
72 member countries, including the U.S., of the World Trade Organization ("WTO")
entered into an agreement (the "WTO Agreement")

- --------
* MCI conducts its business primarily through  subsidiaries.  Unless the context
otherwise requires, "MCI" or "company" means MCI Communications  Corporation,  a
Delaware  corporation  organized  in  August  1968,  and its  subsidiaries  on a
consolidated  basis.  MCI is a  registered  service  mark of MCI  Communications
Corporation.  MCI has  its  principal  executive  offices  at 1801  Pennsylvania
Avenue, N.W., Washington, D.C. 20006 (telephone number (202) 872-1600).

<PAGE>


PAGE 4


to open their  respective  markets,  some of which are monopoly  controlled,  to
foreign competition.

     The changes in the communication  services industry are driven by providers
of  telecommunication  services,  such as MCI, that are  entering,  or trying to
enter, new markets, both domestically and internationally. MCI, as well as other
telecommunication  service providers  previously  offering services primarily in
one segment of the  communication  services  market,  are now  offering,  either
directly or through  alliances  with others,  new services to  complement  their
primary service  offerings.  The offering of these new  complementary  services,
facilitated by evolving technology and by the regulatory  developments described
above, is meant to meet the needs of customers who desire to have most or all of
their  communication  requirements  fulfilled  by one  supplier.  The ability of
companies, such as MCI, to be that single supplier may result in the convergence
of the international, domestic long-distance and local telecommunication service
markets into one global market.

     MCI expects that  competition  from the RBOCs and any others that enter the
long-distance  telecommunication services market, some of which have significant
financial  and other  resources,  will be intense.  Due to the rapidly  changing
nature of these markets,  the advances being made in communications  technology,
the timing of the  consummation  of the  proposed  merger with  WorldCom and the
other  factors  summarized  above,  MCI cannot  predict  the level of its future
success,  but the company  believes that it can and will compete  effectively in
providing its services.

     MCI anticipates that continued  substantial  capital  expenditures  will be
required to compete effectively in the long-distance and local telecommunication
service markets.  MCI continues to expand its digital transmission and switching
facilities  and  capabilities  to meet the  requirements  of its  customers  for
additional and enhanced domestic and international  services,  to add redundancy
to its network and to enhance network intelligence, which enables MCI to utilize
its transmission resources more effectively and provide enhanced services. Total
capital  expenditures  for these expansions were  approximately  $3.8 billion in
1997,  $3.3 billion in 1996 and $2.9 billion in 1995. MCI  anticipates  that its
core  business and its  ventures  and  developing  markets  business  units will
require total capital expenditures of approximately $3.3 billion in 1998.

     In 1997,  the company  developed  and began to implement its plan to become
Year 2000  compliant by the year 2000. The plan includes (i) an inventory of the
company's  internal  systems and  applications  for year 2000  compliance,  (ii)
solicitation of its outside vendors,  suppliers and major customers,  including,
but not limited to, each of the RBOCs,  major  communications  equipment vendors
and foreign PTTs, to determine the level of and plans for their year 2000

<PAGE>


PAGE 5


compliance,  (iii) development of necessary conversion programs,  (iv) replacing
or  upgrading  non-compliant  equipment,  (v)  conversion  of systems,  and (vi)
testing.

     The company  expects to incur  approximately  $400 million of expenses over
the next two years to implement  its Year 2000 plan.  The company  expects to be
Year 2000 compliant on or before December 31, 1999.

     As of December 31, 1997, MCI had approximately 60,000 full-time employees.

      The Merger
      ----------

     On November 9, 1997, MCI entered into an agreement (the "Merger Agreement")
to merge  with  WorldCom  to  create a fully  integrated  global  communications
company.  The  combined  company  will be named MCI  WorldCom and will provide a
complete   range  of   local,   long-   distance,   data/Internet/intranet   and
international communications services.

     On March 11,  1998,  the  stockholders  of MCI and  WorldCom  approved  the
Merger.  Consummation  of the  Merger is also  subject  to  certain  conditions,
including  the  receipt  of  required  regulatory  approvals.  See  MCI's  Proxy
Statement for its 1998 Special Meeting for a full  description of the Merger and
the risks and benefits of the Merger,  which description is incorporated  herein
by reference.

     Concurrent  with the Merger  Agreement,  the Company,  WorldCom and British
Telecommunications  plc  ("BT")  entered  into an  agreement  (the  "Termination
Agreement")  whereby (i) the Agreement and Plan of Merger,  dated as of November
3, 1996,  as amended  (the "BT Merger  Agreement"),  among the  Company,  BT and
Tadworth Corporation was terminated; (ii) WorldCom agreed to pay BT $450,000,000
and  expenses  not in  excess  of  $15,000,000  in  connection  with the plan of
reorganization  in order to induce BT to waive its  rights  under,  and agree to
terminate,  the BT Merger  Agreement;  (iii) BT agreed to  support  and vote its
shares  of Class A Common  Stock in favor of the  Merger;  and (iv) BT agreed to
exercise  its call  option to acquire  MCI's  shares in  Concert  Communications
Company immediately following the effective time of the Merger.

     MCI believes MCI WorldCom, with the combined resources of MCI and WorldCom,
will be able to expand into new  markets,  offer new  services  and compete more
effectively  in the  local  services  market  faster  than MCI  would  have on a
standalone   basis.  See  "CORE  BUSINESS  -  COMPETITION"  and  "CORE  BUSINESS
REGULATION"  below  for  a  further  discussion  of  the  Telecom  Act  and  its
anticipated impact on competition and MCI.


<PAGE>


PAGE 6


CORE BUSINESS
- -------------

      Services
      --------
     MCI  provides a wide  range of  long-distance  telecommunication  services,
including:  basic long-distance telephone service; dial around; collect calling,
operator assistance and calling card services (including prepaid calling cards);
toll free or 800 services;  and 900 services.  MCI also provides a wide range of
basic and enhanced  voice and data  services,  including  private line services;
voice and data services provided over software-defined virtual private networks;
switched and dedicated  Internet access services and Internet backbone services.
The company  offers these services  individually  and in  combinations.  Through
combined offerings, MCI provides customers with benefits such as single billing,
unified services for multi-location companies and customized calling plans.

     MCI markets  domestic and  international  long-distance  telecommunication,
domestic data  telecommunication  and electronic messaging services to business,
government and residential customers primarily through the sales organization of
its  long-  distance   telecommunication   subsidiary,   MCI  Telecommunications
Corporation  ("MCIT").   International  data  telecommunication  and  electronic
messaging services are marketed through MCI International,  Inc., a wholly-owned
subsidiary  of MCI.  To a lesser  extent,  MCI also  markets  its voice and data
communication  services  domestically and internationally  through  arrangements
with third parties.


      System
      ------
     Domestic  long-distance  services  are  provided  primarily  over MCI's own
optical fiber and terrestrial digital microwave  communication systems and, to a
lesser extent,  over transmission  facilities leased from other common carriers,
utilizing  MCI's  digital  switches.  International  communication  services are
provided by submarine  cable  systems in which MCI holds  investment  positions,
satellites and facilities of other domestic and foreign carriers.







<PAGE>


PAGE 7


      Local Access
      ------------

     MCI  provides  customers  that  utilize  large  volumes  of long-  distance
telecommunication  services  with direct access to its long-  distance  network.
Most customers  access MCI's services through local  interconnection  facilities
provided by the incumbent  local  exchange  carriers  ("ILECs"),  the largest of
which are  subsidiaries of the RBOCs,  and competitive  local exchange  carriers
("CLECs").  To a much lesser extent,  local access is provided by MCI. The costs
of these local  interconnection  facilities are a significant component of MCI's
operating  expenses.  See  "REGULATION"  below for a discussion of the impact on
local  access  costs  MCI  anticipates  from the  Telecom  Act and the FCC rules
relating thereto.


      Competition
      -----------

     MCI's   primary  and  most   vigorous   competitor   in  the  domestic  and
international  long-distance  telecommunication  services market continues to be
AT&T  Corp.  ("AT&T"),   which  has  substantial  capital  and  other  financial
resources.  Other  competitors  include  Sprint  Corporation  ("Sprint"),  other
facilities-based   domestic   telecommunication  common  carriers  and  numerous
resellers of long- distance  telecommunication  services. MCI also competes with
RBOCs,  which  provide  toll  telecommunication  services  within  local  access
transport  areas  ("LATA"),  and with ILECs that provide toll  telecommunication
services.

     MCI believes that the RBOCs will eventually become substantial  competitors
of MCI for interLATA  long-distance  telecommunication  services,  especially in
their local service regions when allowed to offer such services  pursuant to the
Telecom Act.  (See  "REGULATION  - Telecom Act" below.) This is due to the RBOCs
ownership  of  extensive  facilities  in  their  local  service  regions,  their
long-standing  customer  relationships  and very  substantial  capital and other
financial  resources.  MCI expects to compete effectively against the RBOCs as a
result of MCI's  innovation in, and quality of,  services,  the diversity of its
services, its ability to offer a combination of services, its marketing strategy
and customer  service.  However,  MCI expects that the RBOCs' ability to provide
interLATA long-distance  telecommunications services in their local regions will
result in certain additional pricing and margin pressures.

     The telecommunications  industry is also in a period of rapid technological
evolution,  marked by the introduction of new product and service  offerings and
increasing satellite and fiber optic transmission  capacity for services similar
to those provided by

<PAGE>


PAGE 8


MCI. MCI may be subject to additional competition as a result of the development
of new  technologies  and increased  availability of domestic and  international
transmission  capacity.  Even though fiber optic networks,  such as that of MCI,
are now widely used for  long-distance  transmission,  it is  possible  that the
competitiveness  of such  networks  could  be  adversely  affected  by  changing
technology.

     MCI cannot  predict  which of many  possible  future  product  and  service
offerings  will be  important  to  maintain  its  competitive  position  or what
expenditures  will be required to develop and provide such products and services
or the  impact  these  expenditures  and the  pricing  pressures  expected  from
competing  with the RBOCs will have on its  consolidated  financial  position or
results of operations.


REGULATION
- ----------


      General
      -------

     MCI  is  subject  to  varying   degrees  of  federal,   state,   local  and
international  regulation. In the United States, the FCC has extensive authority
to  regulate  interstate  services  and local  access  facilities  and  services
provided by common carriers,  including the power to review the interstate rates
charged by carriers  and to establish  policies  that  promote  competition  for
interstate telecommunication services. However, MCI is not currently required to
obtain FCC authorization for installation or operation of its network facilities
used for  domestic  services,  other  than  licenses  for  specific  terrestrial
microwave and satellite earth station  facilities  which utilize radio frequency
spectrum. FCC approval is required,  however, for the installation and operation
of international facilities and services.

     At the state level, MCI must be separately certified in each state to offer
local  exchange  and  intrastate  long-distance  services.  No  state,  however,
subjects MCI to price cap or rate of return  regulation.  MCI is also subject to
varying degrees of regulation in the foreign  jurisdictions in which it conducts
business,  including authorization for the installation and operation of network
facilities.







<PAGE>


PAGE 9


      Telecom Act
      -----------

     The Telecom Act, among other things,  permits the RBOCs to provide domestic
and  international  long-distance  services to customers  located outside of the
RBOCs'  home  regions.   It  also  permits  an  RBOC  to  provide  domestic  and
international long-distance service originating within states in its region upon
a finding by the FCC that the RBOC has satisfied certain criteria for opening up
its  local  exchange   network  to   competition   and  that  its  provision  of
long-distance  services would further the public interest;  and removes existing
barriers  to entry into local  service  markets.  Additionally,  the Telecom Act
changes the manner in which certain interconnection agreements between ILECs and
carriers are negotiated,  arbitrated and approved; provides procedures to revise
universal service standards; and imposes penalties for unauthorized switching of
customers.

     In  implementing  the  Telecom  Act,  the FCC issued an order  establishing
nationwide  rules designed to encourage new entrants to participate in the local
services  markets through  interconnection  with ILECs,  resale of ILECs' retail
services,  and use of individual and combinations of unbundled network elements.
These rules set the groundwork for the statutory  criteria  governing RBOC entry
into the long-distance  telecommunications market. The FCC order was appealed to
the  Eighth  Circuit,  which,  among  other  things,  vacated  all of the  FCC's
nationwide  pricing  rules  and the FCC's  requirement  that  unbundled  network
elements be provided on a combined  basis.  The United States  Supreme Court has
granted certiorari to review the decision.

     Pursuant to the Telecom Act, the FCC has denied four applications  filed by
three  of  the  RBOCs   seeking   authority  to  provide   in-region   interLATA
long-distance   telecommunication  service.  Three  of  the  denials  have  been
appealed.  Certain  RBOCs have also  raised a  constitutional  challenge  to the
provision  of the Telecom Act that  grants the FCC the  authority  to deny these
applications   and  restricts  RBOC   provision  of  interLATA   long-  distance
telecommunication  services in their local  regions.  On December 31, 1997,  the
United States District Court for the Northern  District of Texas ruled that this
restriction violates the Bill of Attainder Clause of the U.S. Constitution.  The
District Court subsequently stayed its decision pending appeal.

     The Telecom Act also provided for the FCC to review and  implement  reforms
to the Universal Service subsidies which, among other things, allow consumers in
rural or other  high cost  areas  access to  telecommunication  and  information
services at rates comparable to those charged in urban areas. The access charges
that MCI pays to ILECs have been set at levels intended to provide

<PAGE>


PAGE 10


Universal Service  subsidies;  such access charges are a principal  component of
MCI's telecommunication  expense. On May 7, 1997, the FCC announced that it will
issue a series of orders that will reform Universal Service subsidy  allocations
and adopted various reforms to the existing rate structure for interstate access
services provided by the ILECs that are designed to reduce access charges,  over
time, to more economically  efficient levels and rate structures.  These actions
have been  appealed  by the ILECs to federal  courts of  appeals.  In  addition,
several state agencies have started  proceedings to address the  reallocation of
implicit  subsidies  contained in the access rates and retail  service  rates to
state Universal Service funds.

      International
      -------------

     MCI  offers  its  international  public  switched  voice  services  through
arrangements with foreign public utility authorities and is compensated based on
traditional settlement rates and proportionate return regimes. In December 1996,
the FCC  adopted  a new  policy  that  makes it  easier  for U.S.  international
carriers  to obtain  authority  to route  international  public  switched  voice
traffic to and from the United States outside of the traditional settlement rate
and  proportionate  return regimes.  In February 1997, the United States entered
into the WTO Agreement that contemplates  liberalizing the provision of switched
voice  telephone  and other  telecommunication  services  in  scores of  foreign
countries over the next several years. In November 1997, in order to comply with
U.S. commitments to the WTO Agreement,  the FCC adopted new rules,  effective as
of  February  9, 1998,  that  liberalize  existing  policies  regarding  (i) the
services that may be provided in the U.S. by certain  carriers  affiliated  with
foreign  carriers and the rates to be charged for  international  switched voice
services;  and (ii) the  provision  of  international  switched  voice  services
outside of the traditional settlement rate and proportionate return regimes.

     In August 1997, the FCC adopted lower mandatory  settlement rate benchmarks
to attempt  to reduce  the rates that U.S.  carriers  pay  foreign  carriers  to
terminate  traffic  in  their  home  countries.  The FCC also  adopted  rules to
encourage  foreign  carriers and WTO member  countries to reduce the  settlement
rates below the benchmarks.

     MCI cannot  predict the ultimate  outcome of the  challenges  to the orders
issued by the FCC pursuant to the Telecom  Act.  Nor can it predict  whether the
resolution of these  challenges,  the  implementation  of the Telecom Act or any
further  legislation,  regulation or  regulatory  changes,  whether  domestic or
international,  will  have  a  material  impact  on its  consolidated  financial
position  or results  of  operations  or will  facilitate  MCI's  entry into new
markets.

<PAGE>


PAGE 11



VENTURES AND DEVELOPING MARKETS BUSINESS
- ----------------------------------------

     MCI  has   diversified  the   communication   services  it  offers  through
investments in ventures and developing markets businesses.  This diversification
enables MCI to meet more of the  communications  needs of its  customers  and to
take advantage of developing opportunities in the communication services market.
See Item 6.  Management's  Discussion  and Analysis and "VENTURES AND DEVELOPING
MARKETS  BUSINESS" below for information of the financial  operations of the VDM
business.

      Local Services
      --------------

     Through either its own local city networks or through arrangements with the
ILECs and CLECs for special access and switched  access  services,  MCI provides
businesses  and  governments  with  high  quality  dedicated  access  to the MCI
network. As of December 31, 1997, MCI had been granted authority to offer a full
range of local switched  services in 42 states and had applications  pending for
such services in 7 other states.  MCI has 80 operational local city networks and
provides  facilities-based switched local services in 31 markets. MCI intends to
offer such local  services  in over 100 U.S.  markets  after  completion  of the
Merger. To a limited extent,  MCI resells local services to customers in several
states in the U.S.

     Although  the Telecom Act  requires  ILECs to provide  interconnection  and
access to its local  networks and to provide for resale of its local services on
reasonable and  nondiscriminatory  terms,  MCI does not know if this requirement
will be met.  This  uncertainty  is  increased  due to the rulings of the Eighth
Circuit  on  actions  taken  by the  FCC  to  implement  the  Telecom  Act.  See
"REGULATION - Telecom Act" above.  The pace at which local services will be made
available  for resale and at which network  elements  will be made  available on
reasonable  and  nondiscriminatory  terms,  the prices at which MCI can purchase
such services from the ILEC and the amount of capital available to MCI to expand
its local  facilities  will affect the types of local services MCI can offer and
its  ability to compete  with the ILECs in  providing  local  telecommunications
services.  MCI  announced  in 1998  that  the  resale  of ILEC  services  is not
profitable and that it will focus on providing  facilities  based local services
to its customers.

     The ILECs have very substantial capital and other resources,  long standing
customer   relationships   and  extensive   existing   facilities   and  network
rights-of-way and are MCI's primary

<PAGE>


PAGE 12


competitors in the local services market. In addition,  it is anticipated that a
number of long-distance telecommunication,  wireless and cable service providers
and others will enter the local services market in competition with MCI. Some of
these potential competitors have substantial financial and other resources.  MCI
will also compete in the local  services  market with a number of other CLECs, a
few of which have existing local networks and significant financial resources.

     To the extent MCI and others provide  intrastate  local services,  they are
also subject to regulation by state regulatory commissions, which have extensive
authority to regulate the provision of local  services.  MCI is required to file
tariffs as a competitive local exchange carrier.  Those filing  requirements may
be less restrictive than those imposed on the ILECs.


      Wireless Services
      -----------------

     Through the acquisition in September 1995 of Nationwide  Cellular  Service,
Inc.  ("Nationwide"),  a reseller of cellular  phone  services and a retailer of
cellular phone equipment, and, as a result of the execution of resale agreements
with  facilities-based   cellular  telephone  service  providers,  MCI  has  the
capability to offer cellular  telephone  services obtained from facilities based
providers to a substantial portion of the U.S. population.

     MCI markets  these  services to both  business  and  residential  customers
through the former  Nationwide's  sales organization and stores and MCIT's sales
organization.  In 1997, the company  focused on providing  wireless  services as
part  of a total  communications  services  package  rather  than as  standalone
offerings.

     MCI's  primary  competitors  in  the  wireless  market  are  AT&T  Wireless
Services, Airtouch Communications,  Inc., Ameritech, Bell Atlantic NYNEX Mobile,
GTE,  SBC and Sprint,  all of which  provide  wireless  services  over their own
facilities.  As MCI is not a facilities based wireless operator,  its ability to
be  competitive  depends  on the terms and  conditions  under  which it  obtains
services and its ability to renew on satisfactory  terms its resale  agreements.
Competition  is expected to  intensify  as the winning  bidders in the  Personal
Communication System spectrum auctions offer competing services.

     As a wireless  reseller,  MCI is not subject to any  tariffing or licensing
requirements by the FCC or state regulatory agencies.




<PAGE>


PAGE 13


      Information Technology Services
      -------------------------------

     MCI's  information   technology   ("IT")  services   primarily  consist  of
outsourcing,  IT consulting,  systems  integration,  private network management,
technology  deployment and  applications  and systems  development.  IT services
generally  involve the use of technology,  know-how and methodologies to gather,
collate,  analyze,  record,   characterize,   categorize,   process,   generate,
distribute and/or store  information for end-users.  In addition to IT services,
MCI offers call center  services,  which include  technical  help desk services,
customer services,  telesales,  call center consulting and implementation,  call
center  network  integration   services,   and   software/database   application
development.

     MCI offers IT services to commercial and government enterprises through SHL
Systemhouse Co., acquired by MCI in November 1995. MCI's IT services include the
design,  development  and  implementation  of IT  systems  with an  emphasis  on
client/server technologies; the management,  operation and maintenance of client
IT  functions  as  part  of  outsourcing  arrangements;  and  the  delivery  and
installation of IT hardware and software.

     MCI serves its IT clients by (i)  working  with a client to analyze  its IT
needs and, based on this analysis,  designing,  developing and  implementing  an
integrated  client/server  IT system;  (ii)  providing  systems  operations  and
management  services  for  a  broad  range  of  computing  platforms,  including
mainframe, mid-range computers, personal computer and network environments, such
as local-area  networks and wide-area  networks;  and (iii) assessing a client's
computing  platform and network  requirements and then configuring,  delivering,
installing  and testing the needed  hardware and software  products to meet such
requirements. MCI also offers service for IT products and training and education
of client IT users.

     Competitors  in the  IT  business  include  Andersen  Consulting,  Computer
Sciences  Corporation,  Electronic Data Systems  Corporation  and  International
Business Machines Corporation, all of which have substantial financial and other
resources.  MCI derives a material amount of its IT revenues from a small number
of customers. In addition, MCI faces competition in the IT industry not only for
contracts, but also for personnel.  There is a shortage of skilled employees and
a high turnover rate among skilled employees in the client/server portion of the
IT business.







<PAGE>


PAGE 14


      International Services
      ----------------------

     MCI  continues to develop  global  alliances to expand the use and reach of
its services and to meet the global needs of its customers.

     On March 9, 1998, MCI entered into a strategic  alliance with Telefonica de
Espana  ("Telefonica")  and WorldCom to create strategic business ventures which
will enter the telecommunication  markets in Europe and the Americas. As part of
the  alliance,   MCI  and  Telefonica's   international  unit,  T.I.  Telefonica
Internacional de Espana S.A., amended their Pan-American Joint Venture Agreement
entered into last year.  The joint venture was formed to target the fast growing
Latin American  communications  market, and to establish a state-of-the-art  Pan
American network to provide  customers a portfolio of integrated  communications
services.

     AVANTEL  S.A.  de C.V.  ("AVANTEL")  is a business  venture  between  Grupo
Financiero Banamex-Accival,  Mexico's largest financial group, and MCI, in which
MCI owns a 44.5% equity  interest.  AVANTEL  built  Mexico's  first  all-digital
fiber-optic  network.  In 1996,  AVANTEL  became  the first  company  to provide
alternative  long-distance  telecommunication  service in Mexico in  competition
with   Telefonos   de   Mexico   ("TelMex").   TelMex,   the   former   monopoly
telecommunications provider, is AVANTEL's primary competitor. TelMex's financial
and other  resources are  substantially  greater than  AVANTEL's,  and it has an
extensive existing customer base.

     Concert Communications  Company ("Concert"),  is a business venture between
MCI and BT in which MCI owns a 24.9% equity interest. Concert*** provides global
enhanced  and  value-added  telecommunication  services,  such as  packet  data,
virtual  network,  frame  relay  and  managed  bandwidth  services.  MCI  is the
exclusive  distributor of Concert services in North,  Central and South America,
and BT is the  exclusive  distributor  of  Concert  services  in the rest of the
world.

     Pursuant to the Termination  Agreement,  BT has agreed to exercise its call
option to acquire  MCI's shares in Concert  immediately  following the effective
time of the Merger at a value to be mutually  agreed to by MCI and BT or, absent
such  agreement,  by an  independent  investment  bank.  Upon  purchase of MCI's
interest  in Concert by BT, MCI will no longer be an  exclusive  distributor  of
Concert  services  and will no longer be bound by the  territorial  restrictions
affecting international enhanced services. However,
- --------
***  Concert is a mark of Concert  Communications  Company,  a business  venture
between MCI and BT, and is used under license.


<PAGE>


PAGE 15


MCI will be able to continue  to provide  Concert  services on a non-  exclusive
basis to customers in the U.S. for a period of at least two years and as many as
five years.

     AT&T and Sprint have each formed global alliances that compete with Concert
and will  compete  with the  international  enhanced  service  offerings  of MCI
WorldCom.  AT&T's  WorldPartners is an association of member companies formed in
1993 to provide a family of  telecommunication  services  (private  line,  frame
relay and virtual network services) to multinational  customers.  Members of the
association include AT&T, KDD of Japan, Singapore Telecom, Telstra of Australia,
Telecom New Zealand, Hong Kong Telecom,  Unitel of Canada, Korea Telecom and the
members of  Unisource  (which  include  Royal PTT  Netherlands  NV, Telia AB and
Schweizerische  PTT -  Betriebe).  Sprint,  France  Telecom  ("FT") and Deutsche
Telekom  ("DT") have formed  Global One, a global  partnership  which  offers an
array of  international  telecommunication  services to  multinational  business
customers.  As part of the transaction,  FT and DT each acquired 10% of Sprint's
common stock.

     In 1992, MCI entered into a strategic alliance with Stentor, an alliance of
major Canadian telephone  companies,  to develop a fully integrated  intelligent
network linking the U.S. and Canada. In 1995,  Stentor entered into an agreement
with MCI to become the exclusive  distributor of Concert services in Canada. The
Stentor  alliance and the AVANTEL joint venture will  facilitate the development
of a fully  integrated,  seamless  North American  network  capable of providing
services with identical  features to customers  throughout the U.S.,  Canada and
Mexico.

     In  addition,  MCI owns  minority  equity  interests  in  telecommunication
service  providers  in  Portugal,  New  Zealand  and  Belize  and  is  exploring
opportunities in Central and South America and other areas of the world.


      Multimedia Services
      -------------------

     In 1995  and  1996,  MCI  invested  a total of  $1.35  billion  in The News
Corporation  Limited ("News Corp").  In May 1997, MCI and News Corp entered into
an agreement to form a Direct Broadcast Satellite ("DBS") joint venture in which
MCI would hold a 19.9%  interest  with the stated  intention  of seeking a third
party to acquire their combined interest.

     DBS service is a  point-to-multipoint  service  that uses high-  powered KU
band  satellites  which are placed in a  geosynchronous  orbit.  DBS  service is
capable of delivering a wide range of services, such as subscription television,
pay-per-view services,

<PAGE>


PAGE 16


such as movies,  concerts and sporting events,  and digitized  content,  such as
magazines.

     The DBS  license,  awarded  by the FCC to MCI in  December  1996 for $682.5
million,  granted MCI the right to use 28 of 32 channels in the  satellite  slot
located at 110 degrees  west  longitude,  which  provides  coverage to all fifty
states in the U.S. and Puerto Rico.

     In June 1997,  MCI and News Corp entered into an agreement  with  Primestar
Partners,  L.P.  ("Primestar") for the sale of substantially all of their assets
related to the DBS business,  including the DBS license but excluding two of the
four  satellites  under  construction.  This  transaction  is part  of a  larger
transaction  that  involves the  consolidation  of Primestar  and TCI  Satellite
Entertainment,  Inc.  into a newly formed entity ("New  Primestar").  Concurrent
with the closing of the Primestar transaction, MCI will acquire preferred shares
in a subsidiary  of News Corp for a face amount equal to MCI's cost of obtaining
the FCC license plus  interest  thereon.  MCI will also  receive from  Primestar
consideration in the form of cash and interest bearing  non-voting New Primestar
securities for its 19.9% interest in the DBS joint venture.  The  transaction is
subject to regulatory approvals, including approval by the FCC of MCI's transfer
of the DBS license to New Primestar and approval by the Department of Justice.

     Competition  in the DBS  service  market  will arise  from  three  sources:
existing  and future DBS  service  providers,  including,  two RBOCs  which have
formed an alliance with a DBS service  provider;  medium-power  satellite  video
service providers; and cable companies that operate land based facilities. These
competitors have substantial  financial  resources,  existing customer bases and
experienced  marketing  organizations.  In  addition,  it  is  anticipated  that
long-distance  telecommunication  service  providers and other RBOCs may seek to
form  alliances  with DBS  service or other  multimedia  service  providers  and
compete in this market using terrestrial or satellite-based  technologies,  such
as KA band satellite,  digital broadcast spectrum and Local Multipoint  Delivery
Service.





<PAGE>


PAGE 17


Item 2.  Properties.
- -------------------

     MCI leases, under long-term leases, portions of railroad, utility and other
rights-of-way for the fiber-optic  transmission system used in its long-distance
network.  MCI also has numerous tower sites,  generally in rural areas, to serve
as repeater  stations in its domestic  microwave  transmission  system.  Most of
these  sites are  leased,  although  MCI does own many of those  which are at an
intersection of two or more routes of MCI's transmission system.  Generally, MCI
owns the buildings that serve as switch facilities for the transmission  system.
In metropolitan  areas, MCI leases facilities to serve as operations  facilities
for its transmission systems.

     MCI's local services network consists of a fiber optic transmission network
consisting  of lighted  (currently  used) and dark (not  currently  used) fibers
which are  either  owned or leased  under  long-term  leases.  These  fibers are
located in conduits,  which are either owned or leased under  long-term  leases.
MCI supplements  its local services  network with  transmission  capacity leased
from other carriers under  long-term  leases.  MCI also leases,  under long-term
leases,  the  buildings  that house its Class 5 switches  and other  network and
administrative office space.

     In addition,  MCI leases, under long-term leases,  office space to serve as
sales office and/or  administrative  facilities.  Some of these  facilities  are
located  jointly  with  operations   facilities.   In  addition,  MCI  owns  its
headquarters  building in  Washington,  D.C.  and two  buildings  in a suburb of
Washington,  D.C., as well as administrative facilities in Cary, North Carolina;
Cedar Rapids,  Iowa;  Colorado Springs,  Colorado;  Piscataway,  New Jersey; and
Richardson, Texas.


Item 3.  Legal Proceedings.
- ---------------------------

     Information  regarding  contingencies  and legal proceedings is included in
Note 14 of the  Notes to  Consolidated  Financial  Statements  in the  company's
Annual Report to  Stockholders  for the year ended  December 31, 1997,  which is
incorporated  herein by  reference  to Exhibit 13 to this Annual  Report on Form
10-K.


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

      None.


<PAGE>


PAGE 18


                          PART II

Item 5.  Market for Registrant's Common Equity and Related
- ----------------------------------------------------------
Stockholder Matters.
- -------------------

      MCI Common Stock is traded on the NASDAQ National Market. The tables below
set forth the high and low bid prices of the Common  Stock as  reported  for the
periods indicated.

                                                     1997

                                               HIGH      LOW
                                            --------   ---------

                    4th Quarter              $45.00    $33.13
                    3rd Quarter               43.38     27.31
                    2nd Quarter               41.88     35.63
                    1st Quarter               38.75     32.38



                                                    1996

                                              HIGH        LOW
                                            --------   ---------

                    4th Quarter              $33.88    $23.88
                    3rd Quarter               28.13     22.38
                    2nd Quarter               30.38     24.88
                    1st Quarter               31.13     25.63



      MCI paid cash  dividends  of $.025  per share of Common  Stock in July and
December of 1997 and 1996 and an equivalent cash dividend on the shares of Class
A Common Stock.

      At January 20, 1998,  there were 44,754  holders of record of MCI's Common
Stock and 1 holder of record of MCI's Class A Common Stock.




<PAGE>


PAGE 19


Recent Sales of Unregistered Securities
- ---------------------------------------

On June 30, 1995,  as part of the merger  consideration  under the Agreement and
Plan of Merger among Darome  Teleconferencing,  Inc.,  MCI and MCIT,  MCI issued
793,297 shares of MCI Common Stock, par value $.10 per share,  with an aggregate
value of  approximately  $16,000,000 or  approximately  $20.17 per share, to the
shareholders  of  Darome  Teleconferencing,   Inc.  MCI  claims  exemption  from
registration  of the shares under Section 4(2) of the Securities Act of 1933, as
amended.

Items 6 through 8.
- -----------------

     The information required by these items is included in the company's Annual
Report to Stockholders for the year ended December 31, 1997,  which  information
is filed as Exhibit 13 to this  Annual  Report on Form 10-K and is  incorporated
herein by reference.

Item 9.  Change in and Disagreements with Accountants on
- --------------------------------------------------------
 Accounting and Financial Disclosure.
- ------------------------------------

       None.





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<PAGE>


PAGE 20



                                    PART III


Item 10.  Directors and Executive Officers.
- ------------------------------------------

      Executive Officers of the Registrant.*
      ------------------------------------

      The executive  officers of MCI,  including its  subsidiaries,  are elected
annually and serve at the pleasure of the  respective  board of directors.  They
are:


       Name            Age*         Position**

Bert C. Roberts, Jr.   55        Chairman of the Board,
                                  Director

Gerald H. Taylor       56        Chief Executive Officer, Director

Timothy F. Price       44        President and
                                  Chief Operating Officer

Seth D. Blumenfeld     57        President,
                                 MCI International, Inc.

John W. Gerdelman      45        Executive Vice President,
                                 MCI Telecommunications Corporation

Douglas L. Maine       49        Executive Vice President and
                                  Chief Financial Officer

Scott B. Ross          46        Director, SHL Systemhouse Co.,
                                 Director, President and Chief
                                 Operating Officer, MCI Systemhouse
                                 Corp.

Michael J. Rowny       47        Executive Vice President

Michael H. Salsbury    48        Executive Vice President and
                                  General Counsel

David M. Case          42        Vice President and Controller

- --------------------
 *  As of March 1, 1998.
**  Unless otherwise indicated, the position is with MCI
    Communications Corporation.


<PAGE>


PAGE 21




     Mr.  Roberts has been  Chairman of the Board of MCI since June 1992. He was
Chief  Executive  Officer of MCI from  December  1991 to November  1996.  He was
President and Chief Operating  Officer of MCI from October 1985 to June 1992 and
President of MCI  Telecommunications  Corporation ("MCIT") from May 1983 to June
1992.  Mr.  Roberts  has been a  director  of MCI since  1985;  a  non-executive
director of Telefonica de Espana, a telecommunications company located in Spain,
since March 1998; a non-executive  director of The News Corporation  Limited,  a
global multi-media company located in Australia,  since November 1995; and was a
non-  executive  director of British  Telecommunications  plc  ("BT"),  a global
telecommunications provider which has an approximate 20% equity interest in MCI,
from October 1994 to March 1998.

     Mr. Taylor has been Chief Executive  Officer of MCI since November 1996. He
has been Vice  Chairman  of MCIT  since July 1995.  He was  President  and Chief
Operating Officer of MCI from July 1994 to November 1996 and President and Chief
Operating Officer of MCIT from April 1994 to July 1995. He was an Executive Vice
President and Group  Executive of MCIT from September 1993 to April 1994. He was
an Executive Vice  President of MCIT,  serving as President,  Consumer  Markets,
from  November  1990 to September  1993.  Mr.  Taylor has been a director of MCI
since September 1994 and was a non- executive  director of BT from November 1996
to November 1997.

     Mr.  Price has been  President  and Chief  Operating  Officer  of MCI since
November 1996. He has been President and Chief  Operating  Officer of MCIT since
July 1995.  He was an  Executive  Vice  President  and Group  President of MCIT,
serving as Group President,  Communication  Services, from December 1994 to July
1995. He was an Executive Vice President of MCIT, serving as President, Business
Markets, from June 1993 to December 1994. He was a Senior Vice President of MCIT
from November 1990 to June 1993, serving as President,  Business Services,  from
July 1992 to June 1993 and as Senior  Vice  President,  Consumer  Markets,  from
November 1990 to July 1992.

     Mr. Blumenfeld was President of MCI  International,  Inc., from August 1983
to July 1993. He was Executive Vice  President and Group  Executive of MCIT from
July 1993 to September 1994 and has been President of MCI International, Inc.
since September 1994.



<PAGE>


PAGE 22



     Mr.  Gerdelman  has been an Executive  Vice  President of MCIT,  serving as
President,  networkMCI  Services,  since  October  1994.  He was a  Senior  Vice
President  of MCIT from  August 1992 to October  1994.  From July 1991 to August
1992, he was President and Chief  Executive  Officer of MCI Services  Marketing,
Inc.,  a company  that  provided  telemarketing  services to, and in which a 51%
equity  interest was held by, MCIT.  Since July 1994,  Mr.  Gerdelman has been a
director of General Communication,  Inc. ("GCI"), a telecommunications  provider
in Alaska,  of which MCIT owns  approximately  22% of the outstanding  shares of
Class A Common Stock and approximately 31% of the outstanding  shares of Class B
Common Stock.

     Mr. Maine has been an Executive Vice President of MCI since April 1994. Mr.
Maine has been Chief  Financial  Officer of MCI since  February  1992.  He was a
Senior Vice President of MCI from  September  1988 to April 1994.  From November
1990 to  February  1992,  he was a Senior  Vice  President  of MCIT,  serving as
President of the Southern Division.

     Mr. Ross has been President and Chief Operating  Officer of MCI Systemhouse
Corp. since September 1995. He was an Executive Vice President of MCIT,  serving
as President,  Finance and Business  Operations,  from August 1995 to March 1996
and as President,  Business Markets, from December 1994 to August 1995. He was a
Senior Vice  President of MCIT from  September  1993 to December 1994 and a Vice
President of MCIT for more that 5 years prior thereto.

     Mr. Rowny has been an Executive  Vice President of MCI since April 1995 and
an Executive Vice  President of MCIT since June 1994,  serving as Executive Vice
President,  Ventures  and  Alliances.  He was  President of MJR  Enterprises,  a
consulting company,  from April 1994 to June 1994;  Executive Vice President and
Chief  Financial  Officer and a director of ICF Kaiser  International,  Inc., an
environmental and engineering  services company,  from April 1992 to April 1994;
and Chairman and Chief Executive Officer of Ransohoff Company, a manufacturer of
environmental and industrial equipment, from November 1989 to April 1992.

     Mr.  Salsbury has been Executive Vice President and General  Counsel of MCI
since November 1995. He was a partner in the law firm of Jenner & Block for more
than five years prior thereto.

     Mr. Case has been Vice President and Controller of MCI since September 1995
and a Vice  President of MCIT since October 1993. For more than five years prior
thereto, he served MCIT in various management capacities.



<PAGE>


PAGE 23





Directors of the Registrant
- ---------------------------
(as of December 31, 1997)

Stock ownership of the directors,  and related  footnotes,  is incorporated into
this  Annual  Report  on Form  10-K by  reference  to  pages  131 and 132 of the
registrant's  Proxy  Statement  for the Special  Meeting of  Stockholders  dated
January 22, 1998.

Clifford L. Alexander, Jr. (64)(A)(N)              1982

President of Alexander & Associates,  Inc., management consultants,  since 1981;
director of Dreyfus 3rd Century Fund, Dreyfus General Family of Funds, Mutual of
America Life Insurance Company,  Dun & Bradstreet  Corporation and American Home
Products Corporation, Cognizant Corporation and TLC Holdings, Inc.

Judith Areen (53)(A)(N)                            1992

Executive Vice President for Law Center Affairs and Dean of the Law
Center, Georgetown University, since 1989; Professor of Law,
Georgetown University, since 1976.

Michael H. Bader (68)(A)                           1968

Member of the law firm Haley Bader & Potts PLC;  Chairman of radio stations WGLL
and WCBG from 1983 to 1993;  Chairman of radio  station  WTHU from 1988 to 1993;
Vice President of Bach n' Roll Radio of Brandon, Inc. since 1989.

Sir Peter L. Bonfield (53)                         1996

Chief  Executive of BT, a worldwide  telecommunications  company,  since January
1996;  Chairman and Chief Executive of ICL plc from 1985 to 1995;  non-executive
Chairman of ICL plc since 1996; non- executive Director of BICC PLC from 1992 to
1996;  non-executive Director of ZENECA Group PLC; Vice President of the British
Quality Foundation; Chairman of DESC Ltd to 1996.

Robert P. Brace (47)                               1997

A director and Group Finance  Director of BT since  October  1993;  joined BT in
1989 as Finance Director of its UK Division.



<PAGE>


PAGE 24



Richard M. Jones (71)(C)(F)                        1988

A director  of Guaranty  Federal  Savings  Bank,  formerly a director of Applied
Power and Illinois Tool Works Inc.

Gordon S. Macklin (69)(C)(F)                       1988

Chairman, White River Corporation; director, Fund American Enterprises Holdings,
Inc.; CCC Information Services Group, Inc.;  MedImmune,  Inc.; Shoppers Express;
Spacehab,  Inc.; and director,  trustee or managing general partner, as the case
may be of 52 of the  investment  companies  in the Franklin  Templeton  Group of
Funds; formerly Chairman,  Hambrecht and Quist Group;  director,  H&Q Healthcare
Investors; and President, National Association of Securities Dealers, Inc.

Bert C. Roberts, Jr. (55)(F)(N)                    1985

Richard B. Sayford (67)(C)                         1980

President and Chief Executive Officer of Strategic Enterprises,
Inc., a management consulting firm, since 1986; a director of Laser
Technologies, Inc. and Visx, Inc.

Gerald H. Taylor (56)                              1994

Judith Whittaker (59)(C)                           1985

Vice President, General Counsel and Secretary of Hallmark Cards, Incorporated, a
greeting card and gift manufacturing  company, since January 1997; prior to that
Corporate Vice President - Legal of Hallmark  Cards,  Incorporated,  since 1992;
Associate  General Counsel of Hallmark Cards,  Incorporated,  for more that five
years prior thereto;  Vice President and General Counsel of Univision  Holdings,
Inc., a subsidiary of Hallmark Cards, Incorporated, from 1988 to 1992.

John R. Worthington (67)(A)                         1968

A consultant since March 1996. General Counsel of MCI from 1971 to November 1995
and a Senior Vice President of MCI from November 1995 to March 1996.





<PAGE>


PAGE 25


Section 16(a) Beneficial Ownership Reporting Compliance

      Based  solely  upon  review of Forms 3, 4 and 5 (and  amendments  thereto)
furnished  to MCI during or in respect of the  fiscal  year ended  December  31,
1997,  MCI is not aware of any director or executive  officer who has not timely
filed reports required by Section 16(a) of the Exchange Act during or in respect
of such fiscal year,  except John  Gerdelman,  Bert C. Roberts,  Jr. and John R.
Worthington who each filed one Form 4 late with respect to one transaction.





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<PAGE>


PAGE 26



Item 11.  Executive Compensation.
- --------------------------------
<TABLE>
<CAPTION>

                           SUMMARY COMPENSATION TABLE

                                                 Annual Compensation                       Long Term Compensation Awards
                                                                                                      Securities
Name and Principal                                              Other Annual    Restricted Stock      Underlying      All Other
Position                                 Salary      Bonus      Compensation    Award(s)              Options       Compensation
                                Year        ($)      ($)(1)        ($)(2)          ($)(3),(4)            (#)(4)       ($)(5)
============================= ======= =========== ============ =============== ===================  ============= =================
<S>                             <C>    <C>         <C>               <C>               <C>              <C>           <C>


Bert C. Roberts, Jr.            1997   1,000,000   4,800,000               0                   0         90,000         4,449
Chairman                        1996     960,000           0               0           7,205,000        180,000         6,030
                                1995     890,000   1,300,000         231,703                   0        150,000         6,030

Gerald H. Taylor                1997     700,000   3,966,667               0                   0         65,000         6,365
Chief Executive Officer         1996     565,000           0               0           5,185,000        130,000         6,030
                                1995     525,000     800,000          76,914                   0        100,000         6,030

Timothy F. Price                1997     550,000   3,600,000               0                   0         57,500         6,365
President and Chief             1996     460,000     150,000               0           3,352,500        115,000         6,030
Operating Officer               1995     400,000     600,000          28,607             597,500        115,000       136,849


Michael J. Rowny                1997     350,000   1,850,000         908,375                   0         40,000        13,074
Executive Vice President        1996     310,000           0               0           1,072,500         80,000        11,679
                                1995     270,000     300,000               0             597,500         70,000         8,788


Douglas L. Maine                1997     330,000   1,775,000                0                  0         40,000         6,123
Executive Vice President        1996     290,000           0                0            895,500         70,000         4,123
and Chief Financial Officer     1995     260,000     265,000           26,077            478,000         70,000         6,030



===================================================================================================================================
</TABLE>


(1)  The  amounts  listed as paid in this  column do not  include  the amount of
     bonus (otherwise payable currently in cash) invested at the election of the
     executive in incentive stock units ("ISUs"). Such amount are reported under
     the  Restricted  Stock  Awards  column.  The  1997  bonus  consists  of the
     following  (a)  1997  Incentive  Award  and (b) an award  made  from a cash
     retention award pool established in connection with the MCI/WorldCom Merger
     to provide retention incentive for MCI senior executives.  One third of the
     retention  incentive was paid December 1, 1997.  The  applicable  incentive
     amounts  for  each  executive  are:  Mr.  Roberts  (a)  $1,300,000  and (b)
     $3,500,000;  Mr.  Taylor (a)  $800,000  and (b)  $3,166,667;  Mr. Price (a)
     $600,000 and (b) $3,000,000; Mr. Rowny (a) $350,000 and (b) $1,500,000; and
     Mr. Maine (a) $275,000 and (b) $1,500,000.

(2)  Represents the annuity premium and taxes paid on behalf of the executive as
     the result of the  purchase  of an annuity to  discharge  the  Supplemental
     Pension Plan's obligation to the executive. These amounts reduce dollar for
     dollar  the  actual  amount of  pension  to be paid to the  executive  upon
     retirement.  The 1997 amount for Mr. Rowny  includes  relocation  costs and
     related taxes of $893,698 for Mr. Rowny's relocation to and return from the
     United Kingdom.

(3)  No restricted  shares or ISUs were awarded in 1997 to the named executives.
     No bonus was deferred into ISUs. As of December 31, 1997,  executives  held
     the following  restricted  shares and non vested ISUs,  valued based on the
     market  price  on  December  31,  1997 as  follows:  Mr.  Roberts,  255,736
     restricted shares, 44,167 ISUs, valued at $12,814,024; Mr. Taylor, 229,641
     ISUs, valued at $9,831,505; Mr. Price, 154,138 ISUs, valued at $6,599,033;
     Mr. Rowny,  76,940 ISUs, valued at $3,293,993;  and Mr. Maine, 52,573 ISUs,
     valued at $2,250,782.

(4)  Stock  options,  restricted  stock  awards  and ISUs  granted  on or before
     November 9, 1997, which are outstanding on the merger date, will fully vest
     upon the close of the MCI/WorldCom merger.

(5)  Consists  of  the  following:  (a)  contributions  by  the  Company  to the
     executives'  accounts under the MCI ESOP and 401(k);  and for Mr. Rowny (b)
     premiums paid by the Company for executive life insurance  during the year.
     The values of the applicable components for each executive officer are: Mr.
     Roberts (a) $4,449;  Mr. Taylor (a) $6,365; Mr. Price (a) $6,365; Mr. Rowny
     (a) $6,285 and (b) $6,789; and Mr. Maine (a) $6,123.

<PAGE>


PAGE 27
<TABLE>
<CAPTION>

                                                 OPTION GRANTS IN LAST FISCAL YEAR(1)

                                                                                
                                                                              


                       Number of     % of Total                               Potential Realizable Value at Assumed Annual Rates
                        Securities    Options                                   of Stock Price Appreciation for Option Term(2)
                       Underlying     Granted       Exercise
                         Options        to           or Base
                         Granted     Employees in     Price      Expiration
Name                     (#)(3)       Fiscal Year   ($/Sh)(4)      Date(5)    0% ($)(6)       5% ($)              10% ($)
- ----------------------  ----------   ------------  ------------- ------------ --------- ---------------- -----------------------
<S>                    <C>             <C>           <C>           <C>          <C>       <C>                     <C>

Bert C. Roberts, Jr.      90,000         0.688%       36.25        2/05/07      0              2,052,000               5,199,300

Gerald H. Taylor          65,000         0.497%       36.25        2/05/07      0              1,482,000               3,755,050

Timothy F. Price          57,500         0.440%       36.25        2/05/07      0              1,311,000               3,321,775

Michael J. Rowny          40,000         0.306%       36.25        2/05/07      0                912,000               2,310,800

Douglas L. Maine          40,000         0.306%       36.25        2/05/07      0                912,000               2,310,800

- -----------------------------------------------------------------------------------------------------------------------------------
All Optionees(7)       13,079,895      100.00%       $36.2663       various     0            298,008,931             755,412,859

All Stockholders          N/A             N/A          N/A             N/A      0         19,039,520,388(8)       48,248,417,881(8)
===================================================================================================================================
</TABLE>


(1)  The Company did not grant any stock appreciation  rights during the last or
     any prior fiscal year.

(2)  The potential realizable value uses the hypothetical rates specified by the
     SEC and is not  intended to forecast  future  appreciation,  if any, of the
     Company's stock price.  The Company did not use an alternative  formula for
     this  valuation  as the  Company  is not aware of any  formula  which  will
     determine with reasonable  accuracy a present value based on future unknown
     or volatile  factors.  In fact, the Company disavows the ability of this or
     any other valuation model to predict or estimate the Company's future stock
     price or to  place a  reasonably  accurate  present  value  on the  options
     because all models  depend on  assumptions  about the stock's  future price
     movement,  which is simply unknown. The value indicated is a net amount, as
     the aggregate  exercise price has been deducted from the final  appreciated
     value.  An annual  appreciation  of 5% and 10% from the  exercise  price of
     $36.25  would  result in per  share  prices  of  approximately  $59.05 and
     $94.02, respectively, as of February 5, 2007.

(3)  Grants become  exercisable to the extent of one-third of the shares covered
     thereby on each of the first,  second and third  anniversary  of the grant.
     Vesting may be  accelerated  upon a  reorganization  event or upon a tender
     offer for 30% or more of the  Company's  voting  stock by a third  party in
     accordance with plan provisions.  Pursuant to the Merger Agreement, options
     granted prior to November 9, 1997 become fully vested and exercisable  upon
     the closing of the Merger.

(4)  The exercise  price of the options is equal to the fair market value of the
     underlying stock on the date of grant.

(5)  All options granted in 1997 expire ten years from the date of grant.

(6)  Unless the stock  price  increases,  which will  benefit  all  stockholders
     commensurately, an optionee will realize no gain.

(7)  Options were granted to 8,202  employees in 1997. The potential  realizable
     value uses a 10-year option term and base price of $36.2663.

(8)  Values were calculated using the total shares outstanding  (including Class
     A Common  Stock) as of December 31, 1997  (707,066,025  shares) and using a
     base  price of  $42.8125.  Appreciation  of 5% and 10% would  result in per
     share prices of approximately $69.74 and $111.05, respectively, at December
     31,  2007.  The values set forth in the table do not reflect the effects of
     the merger.



<PAGE>


PAGE 28
<TABLE>
<CAPTION>

                                                          AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                                                                     AND FY-END OPTION VALUES

                                                                    Number of Securities         Value of Unexercised In-the-Money
                                                                    Underlying Unexercised          Options at FY-End ($)(1)
                                                                     Options at FY-End (#)
Name                    Shares Acquired on      Value Realized ($)   Exercisable/Unexercisable      Exercisable/Unexercisable
                           Exercise (#)
- -----------------------------------------------------------------------------------------------------------------------------------
<S>                          <C>                 <C>                   <C>                           <C>

Bert C. Roberts, Jr.         560,000             16,401,496            658,400/261,600               13,286,175/3,472,575

Gerald H. Taylor                   0                      0            563,070/186,100               13,251,186/2,438,731

Timothy F. Price             237,470              4,272,415              6,800/173,650                  162,775/2,377,841

Michael J. Rowny                   0                      0            152,600/117,400                3,082,063/1,571,063

Douglas L. Maine                   0                      0            363,300/110,700                8,841,244/1,480,194

===================================================================================================================================
</TABLE>


(1)  Options are  "in-the-money"  if, on December 31, 1997,  the market price of
     the Common Stock  ($42.8125)  exceeded the exercise  price of such options.
     All options, on December 31, 1997, were  "in-the-money".  The value of such
     options is calculated by determining  the difference  between the aggregate
     market  price of the Common  Stock  covered by the options on December  31,
     1997 and the aggregate exercise price of such options.



<PAGE>


PAGE 29
<TABLE>
<CAPTION>


             Long-Term Incentive Plans -- Awards in Last Fiscal Year


          (a)                        (b)                      (c)
                                  Number of               Performances or
                                Shares, Units            Other Period Until
                                  or Other                 Maturation or
Name                            Rights($)(1)                 Payout(2)
- -------------------------------------------------------------------------------
<S>                             <C>                     <C>
Bert C. Roberts, Jr.            7,000,000               12/1/98;12/1/99

Gerald H. Taylor                6,333,333               12/1/98;12/1/99

Timothy F. Price                6,000,000               12/1/98;12/1/99

Michael J. Rowny                3,000,000               12/1/98;12/1/99

Douglas L. Maine                3,000,000               12/1/98;12/1/99

===============================================================================
</TABLE>


(1)  Represents the dollar amount of the retention  incentive  award granted but
     not yet paid to each named  executive by the board of directors on December
     1, 1997.

(2)  The retention incentive awards will be paid over three years. One-third was
     received by the executive on December 1, 1997;  and one-third  will be paid
     on each of December 1, 1998 and  December  1, 1999.  Any amounts  remaining
     unpaid at the merger date will be paid to the executive upon the closing of
     the Merger.




<PAGE>


PAGE 30



Pension Plans

      MCI sponsors a tax-qualified defined benefit plan ("Qualified Plan") and a
supplemental   nonqualified  defined  benefit  plan  ("Supplemental  Plan"  and,
together with the  Qualified  Plan,  the "Pension  Plans").  The Qualified  Plan
covers all employees of MCI,  including  executive  officers,  who work at least
1,000 hours in a year. The  Supplemental  Plan covers only MCI's key executives,
including  the executive  officers,  who work at least 1,000 hours in a year. No
employee  contributions  are required for  participation  in the Pension  Plans.
Retirement  benefits  are based  upon the  employee's  compensation  during  the
employee's employment with MCI or a participating subsidiary.

         Compensation  used to calculate  benefits  includes bonuses  (including
bonuses  invested in ISUs) but does not include  compensation  related to fringe
benefits,  stock options or restricted stock. During 1997,  compensation for the
purposes of calculating  pension  benefits for the Qualified Plan was limited by
section  401(a)(17)  of the  Internal  Revenue  Code of 1986,  as  amended  (the
"Code"),  to  $160,000.  The  Supplemental  Plan  pays the  incremental  benefit
attributable to that part of the employee's  compensation which exceeds the Code
limitation in any plan year.

         Employees are fully vested upon the earlier of five years of service or
upon reaching age 65 while employed by MCI or a participating subsidiary.  There
is no partial vesting. Normal retirement age is 65, but an employee may elect to
receive  an  actuarially-reduced  pension  at or after age 55 with five years of
service with MCI or a participating  subsidiary.  In addition,  the Supplemental
Plan permits MCI to grant additional  service and additional  pension amounts to
selected employees.

         For employees employed after January 1, 1989, the Pension Plans provide
a normal retirement benefit for each year of credited service equal to 1% of the
compensation  earned by the employee  during that year up to the Social Security
"covered compensation" level plus an additional 1.5% of compensation earned over
that  level.  However,  employees  employed  on or before  January  1, 1993 were
credited with an updated past service  benefit which provides a benefit of 1% of
the employee's  average annual  compensation (for the years 1990, 1991 and 1992)
up to  $21,000  and  1.5% of such  compensation  over  $21,000  for  such  years
multiplied by the employee's  service  through  December 31, 1992. For employees
employed on or after January 1, 1994, the Pension Plans provide a future service
benefit for each subsequent year of credited service equal to a flat 1.8% of the
employee's eligible compensation.  Effective January 1, 1996, MCI adopted a Part
II to the  Qualified  Plan ("Part II") which changed the manner in which pension
benefits will be determined.  Part II is a defined benefit  pension plan.  Under
Part II an initial  account balance has been  established  for each  participant
equal to the actuarial  equivalent of the participant's prior accruals under the
Qualified Plan. Participants employed on or after 


<PAGE>


PAGE 31


January 1, 1996  receive  compensation  credits  and  interest  credits to their
accounts.  Compensation  credits are a designated  percent of pay,  based on the
participant's age, according to the following  schedule:  employees younger than
age 25, 2.0%;  age 25-29,  2.5%; age 30-34,  3.0%;  age 35-39,  4.0%; age 40-44,
5.0%; age 45-54,  6.0%; and age 55 or older,  6.5%. Part II guarantees a minimum
interest  credit of 4% per year on the prior year's account  balance.  For 1997,
the guaranteed interest credit is 6.09%. Part II Participants who were age 50 or
older with 5 years of  service as of  December  31,  1995 will  accrue a pension
benefit  equal to the  greater of  benefits  calculated  under Part I or Part II
until the Plan year ended  December  31, 2000 for each year they are employed by
MCI.

       Benefits  payable from tax qualified plans are further limited by section
415 of the Code; in 1997, the annual maximum benefit from the Qualified Plan was
limited to  $125,000.  When the pension  formula  would  result in an  executive
receiving a benefit above the applicable limit, the Supplemental Plan assumes an
obligation to pay the incremental portion above such limit.

         As of December 31, 1997,  Messrs.  Roberts,  Taylor,  Price,  Rowny and
Maine, upon normal retirement,  would be entitled to annual retirement  benefits
from the Pension Plans of approximately $648,394;  $310,662;  $272,964; $128,668
and $149,451,  respectively.  Mr. Rowny will not vest under the plans until June
1998.  Should Mr.  Rowny leave MCI before he vests,  he will  receive no pension
benefit from MCI.

Compensation of Directors

         During 1997,  directors of MCI who were not officers  were  entitled to
receive a retainer of $2,250 per month and an additional $1,500 for each meeting
of the board of directors  which they attended and for each meeting of the Audit
or Compensation  Committee they attended that was not held on the day or the day
preceding  the day on which a meeting  of the board of  directors  was held.  In
addition, the Chairman of each of the Audit and Compensation Committees received
an  additional  retainer  of $300 per  month,  and each  member of the Audit and
Compensation  Committees who attended an Audit or Compensation Committee meeting
on the day or the day  preceding  the day on which a board of directors  meeting
was held was paid an additional $700 for each such meeting  attended.  Directors
also were  reimbursed  for actual  out-of-pocket  travel  expenses  incurred  in
connection with attendance at board and/or committee meetings.

Employment Contracts

     In November  1996,  MCI entered  into  employment  contracts  with  Messrs.
Roberts,  Taylor,  Price,  Rowny  and  Maine.  The  summary  description  of the
employment  contracts on pages 63 through 65 of MCI's  Proxy  Statement  for the
Special  Meeting of Stockholders  dated January 22, 1998 is  incorporated  into
this Annual Report on Form 10-K by reference.


<PAGE>


PAGE 32




Compensation Committee Interlocks and Insider Participation

         During 1997, no member of the Compensation  Committee of MCI's board of
directors  was a current  or former  officer  or  employee  of MCI or any of its
subsidiaries.  No executive  officer of MCI serves as a member of a compensation
committee of another entity,  one of whose  executive  officers is a director of
MCI.


MCI COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
- -----------------------------------------------------------

MCI Executive Compensation Policies and Objectives
- --------------------------------------------------

         The   Compensation   Committee  of  MCI's  board  of   directors   (the
"Compensation  Committee")  evaluates  and sets the base  salary  and  incentive
compensation  for the Chairman,  Chief  Executive  Officer ("CEO") and the Chief
Operating  Officer ("COO") of MCI and  administers  MCI's Stock Option Plans and
the  Executive  Incentive  Compensation  Plan  (the  "EICP").  The  Compensation
Committee also  establishes the target awards and performance  goals for the CEO
and COO under the Senior Executive  Incentive  Compensation  Plan (the "SEICP").
The Compensation Committee reviews, but does not evaluate, determine or approve,
the  compensation  of MCI's other  executives,  which is  determined  by the CEO
and/or COO with the assistance of MCI's human resources staff.

       The Compensation  Committee consists solely of non-employee directors who
are not eligible to participate in the compensation plans which they administer.

         The Compensation  Committee's executive compensation objectives are (1)
to ensure competitive levels of compensation that enable MCI to attract,  retain
and  motivate  executives  of  outstanding  ability  and  character  to lead MCI
successfully  in  its  highly  competitive   industry   characterized  by  rapid
technological   change,    innovation   and   significant   capital   investment
requirements; (2) to tie a meaningful portion of compensation to the achievement
of improved long term stockholder  value and other business  objectives  through
the EICP and the SEICP; and (3) to provide stock-based long term incentives that
directly  link the  compensation  of executives  to  appreciation  in the Common
Stock. The Compensation  Committee accomplishes these objectives by periodically
reviewing surveys of executive compensation,  by establishing an annual EICP and
by setting performance levels and target awards under the SEICP.  Through annual
grants of options,  incentive  stock units and, at times,  awards of  restricted
stock, the Compensation  Committee  strives to align the financial  interests of
the executives with those of MCI's stockholders.


<PAGE>


PAGE 33



MCI Executive Officer Compensation and MCI Performance
- ------------------------------------------------------

         MCI has standard  salary ranges for all executive  positions  below the
level of Chairman, CEO and COO. These salary ranges are developed by MCI's human
resources  staff  from  surveys  conducted  by  compensation  consultants  using
competitive market data from similarly sized companies in the telecommunications
industry,  as well as other  industries.  This group of  companies  includes all
companies that comprise MCI's peer group used in constructing  MCI's performance
graph.  (See the  section  of this Form 10-K  entitled,  "Five-Year  Performance
Comparison,"  below.) Salary range midpoints are targeted to be at approximately
the median of the survey data for companies of similar size and  complexity.  An
executive's  salary  within these  salary  ranges  depends upon the  executive's
experience and  capabilities,  the executive's  unique talents and strengths and
the  executive's  contribution  to  MCI.  The  CEO,  the COO or  another  senior
executive  responsible  for the business  unit  annually  reviews the salary and
performance  of  executives  in the business  unit.  In this review,  individual
contribution,  attainment of individual and business unit performance objectives
and level within the salary range are considered;  however, there is no specific
weight given to each criterion.

       The purpose of the EICP is to encourage  consistent growth in stockholder
value by creating a motivational environment in which compensation is contingent
upon the  performance  of MCI;  the business  unit,  where  applicable;  and the
individual. All executive officers participate in the EICP.

         At the beginning of MCI's 1997 fiscal year, the Compensation  Committee
approved a 1997 EICP.  Target  awards were  designed to provide a level of total
cash compensation,  including salary,  between the 50th and 75th percentiles for
similar  companies,  including those in MCI's peer group,  if performance  goals
were achieved.  The  Compensation  Committee set overall  financial  performance
goals for the executives  covered by the plan. In addition,  in order to tie the
executive's  incentive  award  more  closely  to  such  executive's  performance
objectives for the year, the EICP provided the business units with discretion in
determining  individual  performance  measurements and resulting awards for each
executive.  Prior to the end of the first quarter of 1997, the senior management
of the business units  established the individual  performance  criteria for the
executives in their  respective  business units.  The performance  criteria were
based  on  each  executive's   individual   performance   objectives,   and,  as
appropriate, business unit's objectives. The performance criteria for the senior
management of the business  units were  established  by the COO and CEO and were
based on MCI's business plan with  consideration  for business unit  performance
and individual contribution.

         In 1996, the Compensation Committee recommended, MCI's board of
directors adopted and MCI stockholders approved the SEICP.  The SEICP was


<PAGE>


PAGE 34


designed to allow compensation  awarded under it to qualify as performance based
compensation  meeting the requirements of section 162(m) of the Internal Revenue
Code of 1986,  as amended.  The SEICP  entitles  MCI to deduct for tax  purposes
amounts  awarded under the SEICP that would not otherwise be deductible  for tax
purposes.

         Under the SEICP, the Compensation  Committee sets financial performance
goals based on factors  specified  in the plan,  and sets ranges of awards to be
granted if  performance  goals are met,  subject to the  SEICP's  maximum  award
limits. In 1997, the Compensation  Committee set goals for the Chairman, CEO and
the COO using the SEICP factors.

       MCI has a long history of encouraging  employee ownership of MCI's Common
Stock. In the belief that employees who have a proprietary  interest in MCI will
focus  on  its  long  term  success  and on  building  stockholder  wealth,  the
Compensation  Committee  uses  MCI's  Stock  Option  Plan as a basis to create a
foundation for the long-term  growth of MCI and increased  stockholder  value by
providing executives and key employees with an opportunity to obtain and build a
meaningful  stake in MCI's  future.  At the  beginning of each fiscal year,  the
Compensation  Committee grants stock options to executives and key employees who
are  recommended  by  management  as being in a position to  contribute to MCI's
profitability.   Option  awards  are  intended  to  encourage   contribution  to
profitability  over a longer  term  than the  EICP.  Therefore,  options  become
exercisable  based  on  continued  employment  with  MCI  and  generally  remain
exercisable for a period of ten years. To provide the desired level of potential
stock  ownership,  the number of stock options granted to Company  executives is
targeted to be above average in  comparison to executives in similar  companies,
including  those in MCI's  peer  group.  The  number  of  options  granted  to a
particular  executive  is  based  on  the  grade  level  of  the  executive  and
management's assessment of the executive's  performance and contribution.  Stock
options  have been granted to key  employees at all levels of MCI's  management.
The ultimate value of the options,  if any, depends on the extent to which MCI's
Common Stock appreciates in market value.

         The Stock  Option  Plan  allows  the  Compensation  Committee  to award
incentive stock units.  Incentive stock units are an unfunded promise to deliver
shares of stock in the future.  Incentive  stock units are awarded to executives
under the terms of a program  called the  Executive  Stock  Award  Program  (the
"ESA").  Under the ESA,  cash target  awards are set for each  executive  salary
range and awards determined based on the same performance  criteria as the EICP.
Cash awards are  converted to  incentive  stock units by dividing the cash award
amount  by the MCI  Common  Stock  price  on the  date  awards  are  determined.
Incentive  stock  units  granted  under the ESA vest  ratably  over a three year
period.

         MCI's Executive Deferred  Compensation Plan permits executives to defer
all or a portion of their cash bonus into incentive stock units. MCI matches the
executive's deferral with an additional grant of one incentive 


<PAGE>


PAGE 35


stock unit for each four incentive  stock units  voluntarily  purchased with the
executive's  bonus.  The  incentive  stock  units  used to match  the  voluntary
purchase  vest  ratably  over a three year period.  The  Compensation  Committee
believes  that the use of  incentive  stock units  fosters the same goals as the
grant of stock options with the added benefit of providing  more  flexibility on
timing of recognition of income related to such instruments as well as promoting
continued investment in MCI Common Stock.

Other Executive Compensation Plans
- ----------------------------------

         MCI sponsors  other  employee  benefit  plans for both  executives  and
non-management  employees.  In  addition  to the  Supplemental  Retirement  Plan
relating to executive retirement  benefits,  MCI has an executive life insurance
program for executives. The Compensation Committee neither administers nor makes
any determinations with respect to any such plan or program,  with the exception
of MCI's 1990 Employee Stock Purchase Plan.

Compensation of MCI's Chairman, Chief Executive Officer and Chief Operating
- ---------------------------------------------------------------------------
Officer and Company Performance
- -------------------------------

         The Chairman,  Bert C. Roberts, Jr.; the CEO, Gerald H. Taylor; and the
President  and COO,  Timothy F.  Price  participate  in the SEICP.  In the first
ninety days of 1997, the Compensation Committee set performance goals and target
awards for these top three officers using the SEICP guidelines. The Compensation
Committee also established their 1997 salaries.

         The  Compensation  Committee  conducts  an  annual  evaluation  of  the
competitiveness  of Messrs.  Roberts',  Taylor's and Price's total  compensation
relative to the  compensation  of the Chairmen,  CEOs and COOs of other similar-
sized  companies  in  the  telecommunications  industry  as  well  as  in  other
industries. The Compensation Committee considers compensation data available for
the  companies  in  MCI's  peer  group,  as well as data  available  from  other
similar-sized  companies  not in the peer group  because it considers the market
for Messrs.  Roberts',  Taylor's and Price's  skills and strengths  much broader
than  the  telecommunications   industry.  As  part  of  this  evaluation,   the
Compensation  Committee  annually  requests a market  analysis  of  compensation
levels by a  nationally-known  compensation  consulting  firm. The  compensation
consulting firm also furnishes other  information to the Compensation  Committee
as requested or needed.  Salaries are targeted to be approximately at the median
of salaries of top  executives  of companies  of similar  size,  complexity  and
performance.  Based on a  review  of  corporate  performance  relative  to MCI's
business plan, Messrs.  Roberts',  Taylor's and Price's individual  performance,
information  supplied by the  consultant,  the expected  challenges  for Messrs.
Roberts,  Taylor  and  Price in the  coming  year  and  other  factors  that the
Compensation 


<PAGE>


PAGE 36


Committee in its  discretion  may deem relevant at that time,  the  Compensation
Committee establishes the salaries for the new fiscal year.

         Under the SEICP,  the Compensation  Committee  develops the performance
goals for determining  Messrs.  Roberts',  Taylor's and Price's annual incentive
award using one or more of the  measurable  financial  criteria  required by the
Plan, i.e., revenue;  operating income; earnings before interest expense, taxes,
depreciation,  amortization  and  other  non-cash  items  ("EBITDA");  return on
equity;  return on assets;  and economic value added. In 1997, the  Compensation
Committee  set financial  targets for net revenue and earnings  before taxes and
noted that because of the proposed merger with British  Telecommunications  plc,
there  might be a need to  adjust  the  results  for  extraordinary  items.  The
financial  targets were weighted  equally in  determining  whether the financial
goals  were met and  applied  to each of the  Chairman,  CEO and  COO,  but were
weighted  differently  for their total award when compared to their  qualitative
objectives.  The qualitative performance goals adopted for the Chairman, CEO and
COO  were:   1)   achievement   of   certain   strategic   goals  in  the  local
telecommunications   market;   2)   completion   of  the  merger  with   British
Telecommunications  plc with  emphasis  on  achieving  a stock  price above that
estimated on the  announcement of the  transaction;  3) shifting certain revenue
from minutes based revenue to services  based  revenue;  and 4)  maintenance  of
strong organizational capabilities, despite increasing competitive pressures for
management talent. In addition to these qualitative performance goals, Mr. Price
had two  additional  goals:  1) to  maintain  product and market  leadership  in
integrated services,  virtual data services and Internet services and to develop
momentum in "new to MCI" or emerging  markets and 2) to develop MCI's management
team to improve  diversity of skill sets, to provide greater  flexibility as MCI
enters new markets and to  creatively  sustain  MCI's  management  team  despite
aggressive recruitment by other companies.

         Additionally,  the Compensation Committee established minimum levels of
Company  performance  below which no performance award would be made and maximum
levels above which the executives would not earn additional amounts.

         In February 1998, the Committee met to evaluate the  performance of the
top three  executives.  It recognized 1997 had been an unusual year and that the
executives   performance   should  be  viewed  against  the  background  of  the
difficulties  the Company  experienced  in being able to enter the local  market
profitably,  the  uncertainty  arising  from  the  renegotiation  of the  merger
agreement with BT, the unsolicited  acquisition offers from WorldCom and GTE and
the execution of the WorldCom merger  agreement and termination of the BT merger
agreement  and the impact of these events on the  employees  and  customers.  It
reviewed the Company's performance against the previously  established financial
goals,  appropriately  adjusted to reflect special items, and noted the role the
executives  had played in retaining and  motivating  the Company's key employees
and in maintaining the

<PAGE>


PAGE 37


Company's momentum during this period of uncertainty.  It further recognized the
benefit  to the  Company  and its  stockholders  of the  merger  agreement  with
WorldCom. As a result, the Compensation  Committee awarded an incentive award of
$1.3 million to Mr. Roberts, $800,000 to Mr. Taylor, and $600,000 to Mr. Price.

         In  preparation  for making any decision  regarding  the grant of stock
options and/or  restricted stock, the Compensation  Committee  evaluated Messrs.
Roberts',  Taylor's and Price's performance relative to the guidelines described
above, MCI's achievements  during the year (discussed above), the awards made to
them in prior years,  their  differing  yet critical  leadership  roles in MCI's
future  success and noted the degree to which other  companies have linked their
Chairman's,  CEO's and COO's long term compensation to stockholder  return.  The
Compensation  Committee also used subjective  criteria it deemed relevant in its
reasonable  business  discretion,  such  as  its  opinions  about  the  business
environment  and the  particular  challenges  for  MCI as well as the  potential
market for Messrs.  Roberts',  Taylor's and Price's services.  In addition,  the
Compensation  Committee  considers awards under the Stock Option Plan as a means
to align the financial  interest of the Chairman,  the CEO and the COO with that
of MCI's stockholders.

Richard M. Jones
Gordon S. Macklin
Richard B. Sayford
Judith Whittaker
Members of the Compensation Committee


Five-Year Performance Comparison

         Set forth below is a graphical presentation comparing MCI's cumulative,
five-year stockholder returns on an indexed basis with the Standard & Poor's 500
Stock Index and an index of peer  companies  selected by MCI. MCI has selected a
peer group  generally  consisting of the major  providers of  telecommunications
services.  The members of the peer group are the following:  AT&T Corp.,  Sprint
Corporation,  NYNEX Corporation (merged with Bell Atlantic Corporation 9/15/97),
Bell Atlantic Corporation,  BellSouth Corporation,  Ameritech  Corporation,  SBC
Communications,  Inc., US West,  Inc.,  Pacific  Telesis Group  (acquired by SBC
Communications,   Inc.  5/19/97)  and  GTE  Corporation.   For  the  purpose  of
calculating  the peer  group  average,  the  returns of each  company  have been
weighted  according to its stock market  capitalization.  The  measurements  are
indexed to a value of $100 at December 31, 1992,  and assume that all  dividends
are reinvested.





<PAGE>


PAGE 38


Performance Graph

                   MCI Communications Corporation
                  Five-Year Cumulative Total Return
                   for MCI, Peer Group and S&P 500


              | 92Q4 | 93Q1 | 93Q2 | 93Q3 | 93Q4 | 94Q1 | 94Q2
              |--------|--------|--------|--------|--------|--------|--------
MCI           | $100   |$112.306|$145.24 |$139.557|$142.861|$118.208|$112.013
- --------------|--------|--------|--------|--------|--------|--------|--------
S&P 500 Index | $100   |$104.367|$104.875|$107.585|$110.079|$105.905|$106.351
- --------------|--------|--------|--------|--------|--------|--------|--------
Peer Group    | $100   |$110.96 |$116.674|$121.667|$113.567|$108.434|$114.673


              | 94Q3 | 94Q4 | 95Q1 | 95Q2 | 95Q3 | 95Q4 | 96Q1
              |--------|--------|--------|--------|--------|--------|--------
MCI           |$129.732| $93.146|$104.552|$111.66 |$132.277|$132.72 |$153.676
- --------------|--------|--------|--------|--------|--------|--------|--------
S&P 500 Index |$111.551|$111.534|$122.393|$134.078|$144.732|$153.446|$161.682
- --------------|--------|--------|--------|--------|--------|--------|--------
Peer Group    |$113.782|$108.282|$115.967|$142.381|$168.256|$183.867|$173.105


              | 96Q2 | 96Q3 | 96Q4 | 97Q1 | 97Q2 | 97Q3 | 97Q4
              |--------|--------|--------|--------|--------|--------|--------
MCI           |$130.292|$130.292|$166.335|$181.286|$194.929|$149.579|$218.125
- --------------|--------|--------|--------|--------|--------|--------|--------
S&P 500 Index |$168.937|$174.159|$188.677|$193.735|$227.557|$244.603|$251.625
- --------------|--------|--------|--------|--------|--------|--------|--------
Peer Group    |$180.802|$162.90 |$185.565|$183.594|$203.65 |$216.206|$265.453





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<PAGE>


PAGE 39



Item 12.  Security Ownership of Certain Beneficial Owners and
- -------------------------------------------------------------
Management.
- ----------

Security Ownership of Beneficial Holders

Class      Beneficial Owner               Beneficial Ownership     % of Class

Common            FMR Corp.                  53,466,490(1)             9.5%
 Stock            82 Devonshire Street
                  Boston, Massachusetts

Class A           British                   135,998,932 shares(2)     100%
Common            Telecommunications plc
Stock             81 Newgate Street
                  London U.K.


(1) FMR Corp.  has (i) sole  voting  power with  respect to  5,017,736  of these
shares and (ii) sole  dispositive  power with  respect  to  53,466,490  of these
shares.

(2) BT has sole voting and investment power with respect to all these shares.



Item 13.  Certain Relationships and Related Transactions.
- --------------------------------------------------------


None.







<PAGE>


PAGE 40



                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on
- ---------------------------------------------------------------------------
Form 8-K.
- --------

(a)    Documents filed as a part of this report.

       (1)  Financial Statements.

           Report of Independent Accountants

           Income Statements for the years
             ended December 31, 1997, 1996
             and 1995

           Balance Sheets at December 31, 1997
             and 1996

           Statements of Cash Flows for the
             years ended December 31, 1997,
             1996 and 1995

           Statements of Stockholders' Equity
             for the years ended December 31,
             1997, 1996 and 1995

           Notes to Consolidated Financial Statements

         The Financial  Statements and Notes thereto are incorporated  herein by
reference to Exhibit 13 of this Annual Report on Form 10-K. See Part II.

       (2)  Financial Statement Schedule.

         The following  additional  financial data should be read in conjunction
with the Financial Statements and Notes thereto which are incorporated herein by
reference to Exhibit 13.  Schedules not included with this additional  financial
data have been  omitted  because  they are not  required  or  applicable  or the
required information is shown in the Financial Statements or Notes thereto.

          Report of Independent Accountants on
            Financial Statement Schedule

          Valuation and Qualifying Accounts (Schedule II)



<PAGE>


PAGE 41


         The  Report  of  Independent  Accountants  on the  Financial  Statement
Schedule is submitted as Exhibit 99(c) to this Annual Report on Form 10-K, which
is incorporated herein by reference.

         The Financial  Statement Schedule is submitted as Exhibit 99(a) to this
Annual Report on Form 10-K, which is incorporated herein by reference.

       (3) Exhibits.

        Executive  compensation plans and arrangements required to be filed, and
which have been filed, with the Commission pursuant to Item 14(c) of this Annual
Report on Form 10-K are listed in this  Annual  Report on Form 10-K as  Exhibits
10(a)-(u).

Exhibit
  No.                          Description
- ------                         -----------

2    Agreement and Plan of Merger dated November 9, 1997, among WorldCom,  Inc.,
     MCI  Communications  Corporation and TC Investments Corp.  (Incorporated by
     reference to Exhibit 2 to Registrant's  Current Report on Form 8-K/A, filed
     November 14, 1997.)

3(a) Restated  Certificate of  Incorporation of MCI  Communications  Corporation
     filed on March 28,  1995.  (Incorporated  by  reference  to Exhibit 3(a) to
     registrant's  Annual Report on Form 10-K for the fiscal year ended December
     31, 1994.)

 (b) By-laws of registrant,  as amended.  (Incorporated  by reference to Exhibit
     3(ii) to registrant's Registration Statement on Form S-3, Reg. No.
     33-57155.)

4(a) Indenture,  dated as of October 15, 1989,  between  registrant  and Bankers
     Trust Company.  (Incorporated  by reference to Exhibit 4(c) to registrant's
     Registration Statement on Form S-3, Reg. No. 33-31600.)

(b)  Indenture dated as of October 15, 1989 between registrant and Bankers Trust
     Company.  (Incorporated  by  reference  to  Exhibit  4(d)  to  registrant's
     Registration Statement on Form S-3, Reg. No. 33-31600.)

(c)  Indenture  dated as of October 15, 1989 between  registrant  and  Citibank,
     N.A.   (Incorporated   by  reference   to  Exhibit  4(e)  to   registrant's
     Registration Statement on Form S-3, Reg. No. 33-31600.)


<PAGE>


PAGE 42


(d)  Indenture  dated as of February 17, 1995 between  registrant  and Citibank,
     N.A.  (Incorporated  by reference to Exhibit 4 (d) to  registrant's  Annual
     Report on Form 10-K for the fiscal year ended December 31, 1994.)

(e)  Supplement No. 1, dated as of October 4, 1996, to the  Indenture,  dated as
     of February 17,  1995,  between MCI and  Citibank,  N.A.  (Incorporated  by
     reference to Exhibit 4(e) to  registrant's  Annual  Report on Form 10-K for
     the fiscal year ended December 31, 1996.)

(f)  Supplement No. 2, dated as of March 12, 1998, to the Indenture, dated as of
     February 17, 1995, between MCI and Citibank, N.A.

(g)  Form of Senior Fixed Rate Medium-Term  Note.  (Incorporated by reference to
     Exhibit 4(a) to  Registrant's  Current Report on Form 8-K, filed October 7,
     1996.)

(h)  Form of Senior Floating Rate Medium-Term  Note.  (Incorporated by reference
     to Exhibit 4(b) to  Registrant's  Current Report on Form 8-K, filed October
     7, 1996.)

(i)  Form  of  Subordinated  Fixed  Rate  Medium-Term  Note.   (Incorporated  by
     reference to Exhibit 4(g) to  registrant's  Registration  Statement on Form
     S-3, Reg. No. 33-31600.)

(j)  Form of  Subordinated  Floating Rate  Medium-Term  Note.  (Incorporated  by
     reference to Exhibit 4(i) to  registrant's  Registration  Statement on Form
     S-3, Reg. No. 33-31600.)

(k)  Form of 7-1/2% Senior Note due August 20, 2004.  (Incorporated by reference
     to Exhibit 4 of registrant's  Quarterly Report on Form 10-Q for the Quarter
     Ended June 30, 1992.)

(l)  Form of 7-1/8% Senior Note due January 20, 2000. (Incorporated by reference
     to Exhibit 1(b) of  registrant's  Current  Report on Form 8-K filed January
     19, 1993.)

(m)  Form of 8-1/4%  Senior  Debenture  due January 20, 2023.  (Incorporated  by
     reference to Exhibit 1(c) of registrant's  Current Report on Form 8-K filed
     January 19, 1993.)

(n)  Form of  7-3/4%  Senior  Debenture  due March 15,  2024.  (Incorporated  by
     reference to Exhibit 4(a) of registrant's  Current Report on Form 8-K filed
     March 12, 1993.)


<PAGE>


PAGE 43


(o)  Form of 6-1/4% Senior Note due March 23, 1999.  (Incorporated  by reference
     to Exhibit 4(a) of registrant's  Current Report on Form 8-K filed March 15,
     1994.)

(p)  Form of  7-3/4%  Senior  Debenture  due March 23,  2025.  (Incorporated  by
     reference to Exhibit 4(b) of registrant's  Current Report on Form 8-K filed
     March 15, 1994.)

(q)  Form of 7-1/8%  Debenture due June 15, 2027.  (Incorporated by reference to
     Exhibit  4(a) of  registrant's  Current  Report on Form 8-K filed  June 21,
     1996.)

(r)  Form of 6.95% Senior Note due August 15, 2006.  (Incorporated  by reference
     to Exhibit 4(a) of registrant's  Current Report on Form 8-K filed August 8,
     1996.)

(s)  Form of Senior  Floating  Rate Note due March 16,  1999.  (Incorporated  by
     reference to Exhibit 4(c) of registrant's  Current Report on Form 8-K filed
     March 15, 1994.)

(t)  Rights  Agreement,  dated as of September 30, 1994,  between the registrant
     and Mellon  Bank,  N.A.  (Incorporated  by  reference  to  Exhibit  4(a) to
     registrant's Current Report on Form 8-K filed October 4, 1994.)

(u)  Amendment No. 1, dated as of November 3, 1996, to Rights  Agreement,  dated
     as of September  30, 1994,  between the  registrant  and Mellon Bank,  N.A.
     (Incorporated  by reference to Exhibit 2 to  registrant's  Form 8-A/A filed
     November 20, 1996.)

(v)  Amendment No. 2, dated as of August 20, 1997, to Rights Agreement, dated as
     of September 30, 1994 and amended,  between the Company and Morgan Guaranty
     Trust Company of New York, as Rights Agent.  (Incorporated  by reference to
     Exhibit 4 to registrant's Form 8-A/A filed November 20, 1997.)

(w)  Amendment No. 3, dated as of November 9, 1997, to Rights  Agreement,  dated
     as of  September  30,  1994 and  amended,  between  the  Company and Morgan
     Guaranty  Trust  Company of New York,  as Rights  Agent.  (Incorporated  by
     reference to Exhibit 5 to registrant's Form 8-A/A filed November 20, 1997.)



<PAGE>


PAGE 44


(x)  Junior  Subordinated  Indenture  between  registrant and  Wilmington  Trust
     Company,  as Debenture Trustee.  (Incorporated by reference to Exhibit 4.01
     of registrant's  Registration  Statement on Form S-3, Registration No. 333-
     02593.)

(y)  Form  of  Amended  and  Restated  Trust  Agreement  among  registrant,   as
     Depositor,  Wilmington  Trust  Company,  as Property  Trustee and  Delaware
     Trustee,  and the Administrative  Trustees named therein.  (Incorporated by
     reference to Exhibit 4.10 of  registrant's  Registration  Statement on Form
     S-3, Registration No. 333-02593.)

(z)  Form  of  Guarantee  Agreement  between  registrant,   as  Guarantor,   and
     Wilmington Trust Company, as Trustee. (Incorporated by reference to Exhibit
     4.12 of registrant's Registration Statement on Form S-3, Registration No.
     333- 02593.)

(aa) Form of  Supplemental  Indenture  between  registrant and Wilmington  Trust
     Company,  as Debenture Trustee.  (Incorporated by reference to Exhibit 4.13
     of registrant's  Registration  Statement on Form S-3, Registration No. 333-
     02593.)

10(a)1979  Stock   Option  Plan  of   registrant,   as  amended  and   restated.
     (Incorporated  by reference to Exhibit 10(a) to registrant's  Annual Report
     on Form 10-K for the fiscal year ended December 31, 1988.)

(b)  Supplemental   Retirement   Plan  for   Employees  of  MCI   Communications
     Corporation and  Subsidiaries,  as amended.  (Incorporated  by reference to
     Exhibit  10(b) to  registrant's  Annual  Report on Form 10-K for the fiscal
     year ended December 31, 1993.)

(c)  Description  of  Executive  Life  Insurance  Plan  for  MCI  Communications
     Corporation and  Subsidiaries.  (Incorporated by reference to "Remuneration
     of Officers" in registrant's Proxy Statement for its 1992 Annual Meeting of
     Stockholders.)

(d)  MCI  Communications  Corporation  Executive  Incentive  Compensation  Plan.
     (Incorporated  by reference to Exhibit 10(e) to registrant's  Annual Report
     on Form 10-K for the fiscal year ended December 31, 1995.)



<PAGE>


PAGE 45


(e)  Amendment  No.  1 to MCI  Communications  Corporation  Executive  Incentive
     Compensation   Plan.   (Incorporated  by  reference  to  Exhibit  10(e)  to
     registrant's  Annual Report on Form 10-K for the fiscal year ended December
     31, 1996.)

(f)  Form of Director  Indemnification  Agreement.(Incorporated  by reference to
     Appendix B to  registrant's  Proxy Statement for its 1987 Annual Meeting of
     Stockholders.)

(g)  1988 Directors' Stock Option Plan of registrant. (Incorporated by reference
     to Exhibit D to registrant's Proxy Statement for its 1989 Annual Meeting of
     Stockholders.)

(h)  Amendment  No. 1 to the 1988  Directors'  Stock Option Plan of  registrant.
     (Incorporated  by reference to Appendix D to  registrant's  Proxy Statement
     for its 1996 Annual Meeting of Stockholders.)

(i)  Amendment  No.  2 to 1988  Directors'  Stock  Option  Plan  of  registrant.
     (Incorporated  by reference to Exhibit 10(i) to registrant's  Annual Report
     on Form 10-K for the fiscal year ended December 31, 1996.)

(j)  Amendment  No.  3 to 1988  Directors'  Stock  Option  Plan  of  registrant.
     (Incorporated  by reference to Exhibit 10(j) to registrant's  Annual Report
     on Form 10-K for the fiscal year ended December 31, 1996.)

(k)  Stock Option Plan of registrant. (Incorporated by reference to Exhibit C to
     registrant's Proxy Statement for its 1989 Annual Meeting of Stockholders.)

(l)  Amendment No. 1 to the Stock Option Plan of  registrant.  (Incorporated  by
     reference to Exhibit 10(l) to  registrant's  Annual Report on Form 10-K for
     the fiscal year ended December 31, 1996.)

(m)  Amendment No. 2 to the Stock Option Plan of  registrant.  (Incorporated  by
     reference to Appendix B to registrant's Proxy Statement for its 1996 Annual
     Meeting of Stockholders.)

(n)  Amendment No. 3 to the Stock Option Plan of  registrant.  (Incorporated  by
     reference to Exhibit 10(n) to  registrant's  Annual Report on Form 10-K for
     the fiscal year ended December 31, 1996.)


<PAGE>


PAGE 46


(o)  Amendment No. 4 to the Stock Option Plan of  registrant.  (Incorporated  by
     reference to Exhibit 10(o) to  registrant's  Annual Report on Form 10-K for
     the fiscal year ended December 31, 1996.)

(p)  Amendment No. 5 to the Stock Option Plan of  registrant.  (Incorporated  by
     reference to Exhibit 10(p) to  registrant's  Annual Report on Form 10-K for
     the fiscal year ended December 31, 1996.)

(q)  Board of Directors Deferred Compensation Plan of Registrant.  (Incorporated
     by reference to Exhibit  10(i) to  registrant's  Annual Report on Form 10-K
     for the fiscal year ended December 31, 1994.)

(r)  The  Senior   Executive   Incentive   Compensation   Plan  of   registrant.
     (Incorporated  by reference to Appendix A to  registrant's  Proxy Statement
     for its 1996 Annual Meeting of Stockholders.)

(s)  Amendment  No. 1 to the Senior  Executive  Incentive  Compensation  Plan of
     registrant.  (Incorporated  by reference to Exhibit  10(s) to  registrant's
     Annual Report on Form 10-K for the fiscal year ended December 31, 1996.)

(t)  Executive Severance Policy.  (Incorporated by reference to Exhibit 10(a) to
     Registrant's  Quarterly Report on Form 10-Q for the quarter ended September
     30, 1996.)

(u)  Form of employment agreement, effective as of November 2, 1996, between MCI
     and  certain  executive  officers of MCI.  (Incorporated  by  reference  to
     Exhibit  10(u) to  registrant's  Annual  Report on Form 10-K for the fiscal
     year ended December 31, 1996.)

(v)  Amended  and  Restated  Investment  Agreement  dated as of January 31, 1994
     between MCI Communications  Corporation and British Telecommunications plc.
     (Incorporated by reference to Appendix I of registrant's  Notice of Special
     Meeting of Stockholders and Proxy Statement dated February 4, 1994.)

(w)  Modified  Joint  Venture  Agreement  dated as of July 1, 1994  between  MCI
     Communications  Corporation  and  British  Telecommunications  plc  and MCI
     Ventures   Corporation   and   Moorgate   (Twelve)   Limited   and  Concert
     Communications  Company.  (Incorporated  by reference  to Exhibit  10(l) to
     registrant's  Annual Report on Form 10-K for the fiscal year ended December
     31, 1994.)


<PAGE>


PAGE 47


(x)  Warrant Purchase Agreement by and between The News Corporation  Limited and
     MCI Communications Corporation dated as of August 2, 1995. (Incorporated by
     reference to Exhibit 10(p) to  registrant's  Annual Report on Form 10-K for
     the fiscal year ended December 31, 1995.)

(y)  Preferred Stock Purchase Agreement by and among MCI, News Triangle Finance,
     Inc. and News T Investments, Inc. dated as of August 2, 1995. (Incorporated
     by reference to Exhibit  10(q) to  registrant's  Annual Report on Form 10-K
     for the fiscal year ended December 31, 1995.)

(z)  $4,000,000,000  Revolving  Credit  Agreement,  dated as of April 30,  1997,
     among  the  registrant,   Bank  of  America   National  Trust  and  Savings
     Association,  as agent,  and the  several  financial  institutions  parties
     thereto.  (Incorporated  by  reference  to  Exhibit  10(a) of  registrant's
     Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.)

(aa) Agreement,  dated as of November 9, 1997, among British  Telecommunications
     plc, MCI  Communications  Corporation and WorldCom,  Inc.  (Incorporated by
     reference to Exhibit 10 of registrant's Current Report on Form 8-K filed on
     November 12, 1997.)

12   Computation of Ratio of Earnings to Fixed Charges.

13   Certain portions of the registrant's  Annual Report to Stockholders for the
     year ended December 31, 1997 which are  incorporated by reference into this
     Annual Report on Form 10-K.

21   Significant Subsidiaries of MCI Communications Corporation.

23   Consent of Independent Accountants.

27(a) Financial Data Schedule - December 31, 1997.

  (b) Financial Data Schedule - December 31, 1996.

  (c) Financial Data Schedule - December 31, 1995.

99(a) Valuation and Qualifying Accounts (Schedule II).

(b)  Capitalization Schedule.

(c)  Accountant's Report on Financial Statement Schedule.



<PAGE>


PAGE 48


(b)    Reports on Form 8-K.

           (i)       Current  Report  on Form 8-K  filed on  November  12,  1997
                     reporting on Items 5 and 7.

           (ii)      Amendment  to Current  Report on Form 8-K filed on November
                     14, 1997 reporting on Item 7.

(c)    Exhibits.

        See Item 14(a)(3) of this Annual Report on Form 10-K.

(d)    Financial Statement Schedule.

        See Items 14(a)(2) and 14(a)(3) of this Annual Report on Form 10-K.




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<PAGE>


PAGE 49



                                   SIGNATURES

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

                             MCI COMMUNICATIONS CORPORATION

                                  /s/ Bert C. Roberts, Jr.
Dated:  March 31, 1998       By:  --------------------------
                                      Bert C. Roberts, Jr.
                                      Chairman

        Pursuant to the  requirements  of the  Securities  Exchange Act of 1934,
this report has been signed below by the following  persons on March 31, 1998 on
behalf of the registrant and in the capacities indicated.

Signature                            Title


/s/ Gerald H. Taylor
- ----------------------------         Chief Executive Officer,
Gerald H. Taylor                     Director

/s/ Douglas L. Maine
- -----------------------------        Principal Financial Officer
Douglas L. Maine

/s/ David M. Case
- -----------------------------        Principal Accounting Officer
David M. Case

/s/ Bert C. Roberts, Jr.
- -----------------------------        Director
Bert C. Roberts, Jr.

/s/ Clifford L. Alexander, Jr.
- -----------------------------        Director
Clifford L. Alexander, Jr.


/s/ Judith Areen
- ------------------------------       Director
Judith Areen



<PAGE>


PAGE 50



/s/ Michael H. Bader
- -----------------------------        Director
Michael H. Bader



- -----------------------------        Director
Sir Peter L. Bonfield




- -----------------------------        Director
Robert P. Brace


/s/ Richard M. Jones
- -----------------------------        Director
Richard M. Jones


/s/ Gordon S. Macklin
- -----------------------------        Director
Gordon S. Macklin



/s/ Richard B. Sayford
- -----------------------------        Director
Richard B. Sayford


/s/ Judith Whittaker
- -----------------------------        Director
Judith Whittaker


/s/ John R. Worthington
- -----------------------------        Director
John R. Worthington


<PAGE>


PAGE 1


                                  Exhibit Index
                                 ---------------

Exhibit
  No.                          Description
- ------                         -----------

2    Agreement and Plan of Merger dated November 9, 1997, among WorldCom,  Inc.,
     MCI  Communications  Corporation and TC Investments Corp.  (Incorporated by
     reference to Exhibit 2 to Registrant's  Current Report on Form 8-K/A, filed
     November 14, 1997.)

3(a) Restated  Certificate of  Incorporation of MCI  Communications  Corporation
     filed on March 28,  1995.  (Incorporated  by  reference  to Exhibit 3(a) to
     registrant's  Annual Report on Form 10-K for the fiscal year ended December
     31, 1994.)

 (b) By-laws of registrant,  as amended.  (Incorporated  by reference to Exhibit
     3(ii)  to  registrant's  Registration  Statement  on  Form  S-3,  Reg.  No.
     33-57155.)

4(a) Indenture,  dated as of October 15, 1989,  between  registrant  and Bankers
     Trust Company.  (Incorporated  by reference to Exhibit 4(c) to registrant's
     Registration Statement on Form S-3, Reg. No. 33-31600.)

(b)  Indenture dated as of October 15, 1989 between registrant and Bankers Trust
     Company.  (Incorporated  by  reference  to  Exhibit  4(d)  to  registrant's
     Registration Statement on Form S-3, Reg. No. 33-31600.)

(c)  Indenture  dated as of October 15, 1989 between  registrant  and  Citibank,
     N.A.   (Incorporated   by  reference   to  Exhibit  4(e)  to   registrant's
     Registration Statement on Form S-3, Reg. No. 33-31600.)

(d)  Indenture  dated as of February 17, 1995 between  registrant  and Citibank,
     N.A.  (Incorporated  by reference to Exhibit 4 (d) to  registrant's  Annual
     Report on Form 10-K for the fiscal year ended December 31, 1994.)

(e)  Supplement No. 1, dated as of October 4, 1996, to the  Indenture,  dated as
     of February 17,  1995,  between MCI and  Citibank,  N.A.  (Incorporated  by
     reference to Exhibit 4(e) to  registrant's  Annual  Report on Form 10-K for
     the fiscal year ended December 31, 1996.)


<PAGE>


PAGE 2

(f)  Supplement No. 2, dated as of March 12, 1998, to the Indenture, dated as of
     February 17, 1995, between MCI and Citibank, N.A.

(g)  Form of Senior Fixed Rate Medium-Term  Note.  (Incorporated by reference to
     Exhibit 4(a) to  Registrant's  Current Report on Form 8-K, filed October 7,
     1996.)

(h)  Form of Senior Floating Rate Medium-Term  Note.  (Incorporated by reference
     to Exhibit 4(b) to  Registrant's  Current Report on Form 8-K, filed October
     7, 1996.)

(i)  Form  of  Subordinated  Fixed  Rate  Medium-Term  Note.   (Incorporated  by
     reference to Exhibit 4(g) to  registrant's  Registration  Statement on Form
     S-3, Reg. No. 33-31600.)

(j)  Form of  Subordinated  Floating Rate  Medium-Term  Note.  (Incorporated  by
     reference to Exhibit 4(i) to  registrant's  Registration  Statement on Form
     S-3, Reg. No. 33-31600.)

(k)  Form of 7-1/2% Senior Note due August 20, 2004.  (Incorporated by reference
     to Exhibit 4 of registrant's  Quarterly Report on Form 10-Q for the Quarter
     Ended June 30, 1992.)

(l)  Form of 7-1/8% Senior Note due January 20, 2000. (Incorporated by reference
     to Exhibit 1(b) of  registrant's  Current  Report on Form 8-K filed January
     19, 1993.)

(m)  Form of 8-1/4%  Senior  Debenture  due January 20, 2023.  (Incorporated  by
     reference to Exhibit 1(c) of registrant's  Current Report on Form 8-K filed
     January 19, 1993.)

(n)  Form of  7-3/4%  Senior  Debenture  due March 15,  2024.  (Incorporated  by
     reference to Exhibit 4(a) of registrant's  Current Report on Form 8-K filed
     March 12, 1993.)

(o)  Form of 6-1/4% Senior Note due March 23, 1999.  (Incorporated  by reference
     to Exhibit 4(a) of registrant's  Current Report on Form 8-K filed March 15,
     1994.)

(p)  Form of  7-3/4%  Senior  Debenture  due March 23,  2025.  (Incorporated  by
     reference to Exhibit 4(b) of registrant's  Current Report on Form 8-K filed
     March 15, 1994.)

(q)  Form of 7-1/8%  Debenture due June 15, 2027.  (Incorporated by reference to
     Exhibit  4(a) of  registrant's  Current  Report on Form 8-K filed  June 21,
     1996.)

<PAGE>


PAGE 3


(r)  Form of 6.95% Senior Note due August 15, 2006.  (Incorporated  by reference
     to Exhibit 4(a) of registrant's  Current Report on Form 8-K filed August 8,
     1996.)

(s)  Form of Senior  Floating  Rate Note due March 16,  1999.  (Incorporated  by
     reference to Exhibit 4(c) of registrant's  Current Report on Form 8-K filed
     March 15, 1994.)

(t)  Rights  Agreement,  dated as of September 30, 1994,  between the registrant
     and Mellon  Bank,  N.A.  (Incorporated  by  reference  to  Exhibit  4(a) to
     registrant's Current Report on Form 8-K filed October 4, 1994.)

(u)  Amendment No. 1, dated as of November 3, 1996, to Rights  Agreement,  dated
     as of September  30, 1994,  between the  registrant  and Mellon Bank,  N.A.
     (Incorporated  by reference to Exhibit 2 to  registrant's  Form 8-A/A filed
     November 20, 1996.)

(v)  Amendment No. 2, dated as of August 20, 1997, to Rights Agreement, dated as
     of September 30, 1994 and amended,  between the Company and Morgan Guaranty
     Trust Company of New York, as Rights Agent.  (Incorporated  by reference to
     Exhibit 4 to registrant's Form 8-A/A filed November 20, 1997.)

(w)  Amendment No. 3, dated as of November 9, 1997, to Rights  Agreement,  dated
     as of  September  30,  1994 and  amended,  between  the  Company and Morgan
     Guaranty  Trust  Company of New York,  as Rights  Agent.  (Incorporated  by
     reference to Exhibit 5 to registrant's Form 8-A/A filed November 20, 1997.)

(x)  Junior  Subordinated  Indenture  between  registrant and  Wilmington  Trust
     Company,  as Debenture Trustee.  (Incorporated by reference to Exhibit 4.01
     of registrant's  Registration  Statement on Form S-3, Registration No. 333-
     02593.)

(y)  Form  of  Amended  and  Restated  Trust  Agreement  among  registrant,   as
     Depositor,  Wilmington  Trust  Company,  as Property  Trustee and  Delaware
     Trustee,  and the Administrative  Trustees named therein.  (Incorporated by
     reference to Exhibit 4.10 of  registrant's  Registration  Statement on Form
     S-3, Registration No. 333-02593.)



<PAGE>


PAGE 4


(z)  Form  of  Guarantee  Agreement  between  registrant,   as  Guarantor,   and
     Wilmington Trust Company, as Trustee. (Incorporated by reference to Exhibit
     4.12 of registrant's Registration Statement on Form S-3, Registration No.
     333- 02593.)

(aa) Form of  Supplemental  Indenture  between  registrant and Wilmington  Trust
     Company,  as Debenture Trustee.  (Incorporated by reference to Exhibit 4.13
     of registrant's  Registration  Statement on Form S-3, Registration No. 333-
     02593.)

10(a)1979  Stock   Option  Plan  of   registrant,   as  amended  and   restated.
     (Incorporated  by reference to Exhibit 10(a) to registrant's  Annual Report
     on Form 10-K for the fiscal year ended December 31, 1988.)

(b)  Supplemental   Retirement   Plan  for   Employees  of  MCI   Communications
     Corporation and  Subsidiaries,  as amended.  (Incorporated  by reference to
     Exhibit  10(b) to  registrant's  Annual  Report on Form 10-K for the fiscal
     year ended December 31, 1993.)

(c)  Description  of  Executive  Life  Insurance  Plan  for  MCI  Communications
     Corporation and  Subsidiaries.  (Incorporated by reference to "Remuneration
     of Officers" in registrant's Proxy Statement for its 1992 Annual Meeting of
     Stockholders.)

(d)  MCI  Communications  Corporation  Executive  Incentive  Compensation  Plan.
     (Incorporated  by reference to Exhibit 10(e) to registrant's  Annual Report
     on Form 10-K for the fiscal year ended December 31, 1995.)

(e)  Amendment  No.  1 to MCI  Communications  Corporation  Executive  Incentive
     Compensation   Plan.   (Incorporated  by  reference  to  Exhibit  10(e)  to
     registrant's  Annual Report on Form 10-K for the fiscal year ended December
     31, 1996.)

(f)  Form of Director  Indemnification  Agreement.(Incorporated  by reference to
     Appendix B to  registrant's  Proxy Statement for its 1987 Annual Meeting of
     Stockholders.)

(g)  1988 Directors' Stock Option Plan of registrant. (Incorporated by reference
     to Exhibit D to registrant's Proxy Statement for its 1989 Annual Meeting of
     Stockholders.)


<PAGE>


PAGE 5

(h)  Amendment  No. 1 to the 1988  Directors'  Stock Option Plan of  registrant.
     (Incorporated  by reference to Appendix D to  registrant's  Proxy Statement
     for its 1996 Annual Meeting of Stockholders.)

(i)  Amendment  No.  2 to 1988  Directors'  Stock  Option  Plan  of  registrant.
     (Incorporated  by reference to Exhibit 10(i) to registrant's  Annual Report
     on Form 10-K for the fiscal year ended December 31, 1996.)

(j)  Amendment  No.  3 to 1988  Directors'  Stock  Option  Plan  of  registrant.
     (Incorporated  by reference to Exhibit 10(j) to registrant's  Annual Report
     on Form 10-K for the fiscal year ended December 31, 1996.)

(k)  Stock Option Plan of registrant. (Incorporated by reference to Exhibit C to
     registrant's Proxy Statement for its 1989 Annual Meeting of Stockholders.)

(l)  Amendment No. 1 to the Stock Option Plan of  registrant.  (Incorporated  by
     reference to Exhibit 10(l) to  registrant's  Annual Report on Form 10-K for
     the fiscal year ended December 31, 1996.)

(m)  Amendment No. 2 to the Stock Option Plan of  registrant.  (Incorporated  by
     reference to Appendix B to registrant's Proxy Statement for its 1996 Annual
     Meeting of Stockholders.)

(n)  Amendment No. 3 to the Stock Option Plan of  registrant.  (Incorporated  by
     reference to Exhibit 10(n) to  registrant's  Annual Report on Form 10-K for
     the fiscal year ended December 31, 1996.)

(o)  Amendment No. 4 to the Stock Option Plan of  registrant.  (Incorporated  by
     reference to Exhibit 10(o) to  registrant's  Annual Report on Form 10-K for
     the fiscal year ended December 31, 1996.)

(p)  Amendment No. 5 to the Stock Option Plan of  registrant.  (Incorporated  by
     reference to Exhibit 10(p) to  registrant's  Annual Report on Form 10-K for
     the fiscal year ended December 31, 1996.)

(q)  Board of Directors Deferred Compensation Plan of Registrant.  (Incorporated
     by reference to Exhibit  10(i) to  registrant's  Annual Report on Form 10-K
     for the fiscal year ended December 31, 1994.)

<PAGE>


PAGE 6

(r)  The  Senior   Executive   Incentive   Compensation   Plan  of   registrant.
     (Incorporated  by reference to Appendix A to  registrant's  Proxy Statement
     for its 1996 Annual Meeting of Stockholders.)

(s)  Amendment  No. 1 to the Senior  Executive  Incentive  Compensation  Plan of
     registrant.  (Incorporated  by reference to Exhibit  10(s) to  registrant's
     Annual Report on Form 10-K for the fiscal year ended December 31, 1996.)

(t)  Executive Severance Policy.  (Incorporated by reference to Exhibit 10(a) to
     Registrant's  Quarterly Report on Form 10-Q for the quarter ended September
     30, 1996.)

(u)  Form of employment agreement, effective as of November 2, 1996, between MCI
     and  certain  executive  officers of MCI.  (Incorporated  by  reference  to
     Exhibit  10(u) to  registrant's  Annual  Report on Form 10-K for the fiscal
     year ended December 31, 1996.)

(v)  Amended  and  Restated  Investment  Agreement  dated as of January 31, 1994
     between MCI Communications  Corporation and British Telecommunications plc.
     (Incorporated by reference to Appendix I of registrant's  Notice of Special
     Meeting of Stockholders and Proxy Statement dated February 4, 1994.)

(w)  Modified  Joint  Venture  Agreement  dated as of July 1, 1994  between  MCI
     Communications  Corporation  and  British  Telecommunications  plc  and MCI
     Ventures   Corporation   and   Moorgate   (Twelve)   Limited   and  Concert
     Communications  Company.  (Incorporated  by reference  to Exhibit  10(l) to
     registrant's  Annual Report on Form 10-K for the fiscal year ended December
     31, 1994.)

(x)  Warrant Purchase Agreement by and between The News Corporation  Limited and
     MCI Communications Corporation dated as of August 2, 1995. (Incorporated by
     reference to Exhibit 10(p) to  registrant's  Annual Report on Form 10-K for
     the fiscal year ended December 31, 1995.)

(y)  Preferred Stock Purchase Agreement by and among MCI, News Triangle Finance,
     Inc. and News T Investments, Inc. dated as of August 2, 1995. (Incorporated
     by reference to Exhibit  10(q) to  registrant's  Annual Report on Form 10-K
     for the fiscal year ended December 31, 1995.)

<PAGE>


PAGE 7

(z)  $4,000,000,000  Revolving  Credit  Agreement,  dated as of April 30,  1997,
     among  the  registrant,   Bank  of  America   National  Trust  and  Savings
     Association,  as agent,  and the  several  financial  institutions  parties
     thereto.  (Incorporated  by  reference  to  Exhibit  10(a) of  registrant's
     Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.)

(aa) Agreement,  dated as of November 9, 1997, among British  Telecommunications
     plc, MCI  Communications  Corporation and WorldCom,  Inc.  (Incorporated by
     reference to Exhibit 10 of registrant's Current Report on Form 8-K filed on
     November 12, 1997.)

12   Computation of Ratio of Earnings to Fixed Charges.

13   Certain portions of the registrant's  Annual Report to Stockholders for the
     year ended December 31, 1997 which are  incorporated by reference into this
     Annual Report on Form 10-K.

21   Significant Subsidiaries of MCI Communications Corporation.

23   Consent of Independent Accountants.

27(a) Financial Data Schedule - December 31, 1997.

  (b) Financial Data Schedule - December 31, 1996.

  (c) Financial Data Schedule - December 31, 1995.

99(a) Valuation and Qualifying Accounts (Schedule II).

(b)  Capitalization Schedule.

(c)  Accountant's Report on Financial Statement Schedule.



                                SUPPLEMENT NO. 2

                                     TO THE

                                   INDENTURE,

                         DATED AS OF FEBRUARY 17, 1995,

                                     BETWEEN

                         MCI COMMUNICATIONS CORPORATION

                                       AND

                             CITIBANK, N.A., TRUSTEE

                                       FOR

                             SENIOR DEBT SECURITIES


     THIS SUPPLEMENT NO. 2, dated as of March 12, 1998  ("Supplement No. 2"), to
the Indenture,  dated as of February 17, 1995, as supplemented by Supplement No.
1  (the  "Indenture")  between  MCI  Communications   Corporation,   a  Delaware
corporation  (hereinafter  called  the  "Company"),   with  an  office  at  1801
Pennsylvania  Avenue,  N.W.,  Washington,  D.C.  20006,  and  CITIBANK,  N.A., a
national banking  association  duly  incorporated and existing under the laws of
the United States, as Trustee under the Indenture.

     WHEREAS,  pursuant to Section 1101(6) of the Indenture, the Company desires
to amend certain provisions contained in the Indenture, but only with respect to
Debt  Securities  initially  issued  under the  Indenture  on and after the date
hereof;

     NOW,  THEREFORE,  in consideration of the mutual covenants and promises set
forth herein and other good and valuable consideration, the adequacy and receipt
of which is hereby  acknowledged,  the parties  agree to amend the  Indenture as
follows,  but only with respect to Debt  Securities  initially  issued under the
Indenture on and after the date hereof:

1. In Article 5, delete Section 501(7) in its entirety.

2. In Article 12, delete Section 1209 in its entirety.

3.   This  Supplement  No. 2 shall be effective as of the date hereof,  but only
     with respect to Debt Securities initially issued under the Indenture on and
     after the date  hereof  and shall have no effect  with  respect to any Debt
     Securities initially issued under the Indenture prior to the date hereof.

                                        1

<PAGE>



4.   Capitalized terms not otherwise defined in this Supplement No. 2 shall have
     the meanings  provided for in the Indenture.  This  Supplement No. 2 may be
     executed in  counterparts,  each of which together will  constitute one and
     the same  instrument.

5.   This  Supplement  No. 2 shall be  deemed  to be a  contract  made and to be
     performed  entirely in the State of New York, and for all purposes shall be
     governed by and construed in accordance with the laws of said State without
     regard to the conflicts of law rules of said State.

6.   Except as modified herein with respect to Debt Securities  initially issued
     under  the  Indenture  on and after the date  hereof,  all other  terms and
     conditions of the Indenture remain unchanged.




                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]




                                        2

<PAGE>



     IN WITNESS WHEREOF, the parties hereto have caused this Supplement No. 2 to
the Indenture to be executed as of the date first written above.

                                        MCI COMMUNICATIONS CORPORATION


                                    BY:  /s/Jonelle St. John
                                         --------------------------
                                    NAME:     Jonelle St. John
[CORPORATE SEAL]                    TITLE:    Vice President and Treasurer


Attest:


BY:  /s/ C. Bolton-Smith, Jr.
    --------------------------
NAME: C. Bolton-Smith, Jr.
TITLE: Secretary


                                  CITIBANK, N.A., as Trustee

                              BY:   /s/ Carol Ng
                                  -------------------------
                              NAME:   Carol Ng
[CORPORATE SEAL]              TITLE:  Vice President


Attest:


BY:           /s/ Wafaa Oafy
             -----------------
NAME:            Wafaa Oafy
TITLE:        Senior Trust Officer



                                        3





         Exhibit 12

<TABLE>
<CAPTION>

                 MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
                       (In millions, except ratio amounts)
                                   (unaudited)

                                                                                  Year Ended December 31,
                                                                       --------------------------------------------
                                                          1997              1996             1995              1994           1993
                                                        ------            ------           ------            ------         ------
<S>                                                   <C>                 <C>               <C>              <C>            <C>
  Earnings:
    Income before
    income taxes and
    extraordinary item (a)                            $    239            $1,955           $  897            $1,280         $1,045

  Add:
    Fixed charges                                          568               460              344               315            315

  Less:
    Capitalized interest                                   153               118               93                78             61
                                                        ------            ------           ------            ------         ------
    Total earnings                                      $  654            $2,297           $1,148            $1,517         $1,299
                                                        ======            ======           ======            ======         ======

  Fixed Charges:
    Fixed charges on
    indebtedness,
    including amortization
    of debt discount and
    premium(a)                                          $  448            $  349           $  242            $  231         $  239
  Interest portion of
    operating lease
    rentals(b)                                             120               111              102                84             76
                                                        ------            ------           ------            ------         ------
     Total fixed charges                                $  568            $  460           $  344            $  315         $  315
                                                        ======            ======           ======            ======         ======
  Ratio of earnings to
    fixed charges                                         1.15              4.99             3.34              4.82           4.12
                                                        ======            ======           ======            ======         ======
</TABLE>

  (a)  Includes   distributions  on  subsidiary  Trust  mandatorily   redeemable
preferred securities.

  (b) The interest portion of operating lease rentals is calculated as one third
  of rent expense which  represents a reasonable  approximation  of the interest
  factor.
  
  

<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION                                                                           Exhibit 13
MCI Communications Corporation and Subsidiaries

Year ended December 31,                               1997             1996              1995             1994         1993

- ---------------------------------------------------------------------------------------------------------------------------
(In millions, except per share amounts and employees)
<S>                                                 <C>             <C>               <C>               <C>         <C>    

CONSOLIDATED INCOME STATEMENT DATA
Revenue                                            $19,653          $18,494           $15,265          $13,338     $ 11,921
Total operating expenses                            18,978           16,181            14,147           11,882       10,653
Income from operations                                 675            2,313             1,118            1,456        1,268
Equity in income (losses) of affiliated companies     (144)            (156)             (187)              (4)          (2)
Income before extraordinary item                       149            1,202               548              795          627
Net income                                             149            1,202               548              795          582
Earnings applicable to common stockholders             149            1,202               548              794          581
Basic earnings per common share, before 
extraordinary item                                     .22             1.75               .81             1.33         1.20
Basic earnings per common share                        .22             1.75               .81             1.33         1.11
Diluted earnings per common share, before
  extraordinary item                                   .21             1.73               .80             1.32         1.12
Diluted earnings per common share                      .21             1.73               .80             1.32         1.04
Cash dividends per share                               .05              .05               .05              .05          .05


CONSOLIDATED BALANCE SHEET DATA
Gross investment in property and equipment         $21,724           $18,709          $15,547          $13,408     $ 11,618
Total assets                                        25,510           22,978            19,301           16,366       11,276
Long-term debt                                       3,276            4,798             3,444            2,997        2,366
Subsidiary Trust mandatorily redeemable 
preferred securities                                   750              750                -                 -            -
Stockholders' equity                                11,311           10,661             9,602            9,004        4,713


CONSOLIDATED CASH FLOW DATA
Cash from operating activities                      $3,488          $ 3,144          $  2,979          $ 2,355      $ 1,978
Capital expenditures for property and equipment      3,828            3,347             2,866            2,897        1,733
Acquisition of businesses and investment
   in affiliates, DBS and News Corp.                   291            1,549             2,737              284            8
Cash from (used for) financing activities              480            1,354               355            3,826         (286)

OPERATIONS DATA
Capacity circuit miles                              11,401            9,157             6,786            4,767        3,556
Number of full-time employees                       60,409           55,285            50,367           40,667       36,235
</TABLE>

In 1997, the company  adopted  Statement of Financial  Accounting  Standards No.
128,   "Earnings  Per  Share"  (SFAS  No.  128).  This  statement  modifies  the
computation of earnings per share (EPS) by replacing the  computation of primary
EPS with  basic  EPS,  which  excludes  the  dilutive  effect  of  common  stock
equivalents. Additionally, the statement replaces fully diluted EPS with diluted
EPS. The calculation of common stock equivalents using the treasury stock method
is modified  under  diluted EPS to utilize an average price during the period as
compared  to the  Accounting  Principles  Board  Opinion  No. 15  method,  which
utilized the higher of the average or ending price.  EPS  information  for years
prior to 1997 has been restated to reflect the provisions of SFAS No. 128.

In May 1996, MCI Capital I, a  wholly-owned  Delaware  statutory  business trust
(Trust),  issued  $750  million  aggregate  principal  amount  of 8%  Cumulative
Quarterly Income Preferred Securities,  Series A (preferred securities) due June
30,  2026.  The Trust  exists  for the sole  purpose of  issuing  the  preferred
securities  and investing  the proceeds in the company's 8% Junior  Subordinated
Deferrable Interest Debentures, Series A (Subordinated Debt Securities) due June
30, 2026.

In September  and November  1995,  the company  acquired all of the  outstanding
shares of common stock of Nationwide Cellular Service,  Inc.  (Nationwide),  and
SHL Systemhouse Co. (MCI Systemhouse), respectively, (collectively, the acquired
companies). These acquisitions were accounted for as purchases; accordingly, the
net assets and results of operations  of the acquired  companies are included in
the information above since their respective acquisition dates.

In 1994,  British  Telecommunications  plc (BT)  completed  the  purchase of 136
million  shares of the company's  Class A common stock for $4.3  billion,  which
resulted in a 20% voting interest in the company.  This purchase was achieved by
the company's issuance of 108.5 million shares of Class A common stock to BT for
$3.5 billion on September  30, 1994 and BT's  conversion  on that date of 13,736
shares of the company's Series D convertible preferred stock, purchased for $830
million in June 1993,  into 27.5 million  shares of Class A common  stock.  This
investment is included in stockholders' equity.


<PAGE>




MANAGEMENT'S DISCUSSION AND ANALYSIS


OVERVIEW
The following discussion and analysis provides  information  management believes
is relevant to an assessment and understanding of MCI Communications Corporation
and subsidiaries' (collectively, the company) consolidated results of operations
and  financial  condition  for the three  years ended  December  31,  1997.  The
discussion  should  be read  in  conjunction  with  the  company's  consolidated
financial statements and accompanying notes.

The company is a leading provider of local-to-global  communications services to
business,  government and  residential  users.  The company  operates one of the
world's largest and most advanced digital networks,  connecting local markets in
the U.S.  to more  than 280  countries  and  locations  worldwide.  The  company
provides a broad  range of  communications  services,  including  long-distance,
local and wireless  telecommunications  services and information technology (IT)
services.  The  company's  "core"  business,   long-distance  telecommunications
services,   comprises  a  portfolio  of  domestic  and  international  services,
including voice, intelligent 800, data, conferencing, Internet, managed network,
and electronic  messaging services.  Through continued  investments and business
acquisitions in recent years, the company has expanded its portfolio of services
into certain  ventures and developing  markets,  including the U.S.  local,  IT,
wireless, international and multimedia markets (the VDM businesses).

Merger Agreement
On November 9, 1997,  the company  entered into an Agreement  and Plan of Merger
(the MCI WorldCom Merger Agreement) with WorldCom,  Inc.  (WorldCom),  a Georgia
corporation, and TC Investments Corp. (Merger Sub), a Delaware corporation and a
wholly-owned  subsidiary  of WorldCom,  pursuant to which the company will merge
with and into Merger Sub (the MCI WorldCom Merger or the Merger.) As a result of
the Merger,  (a) each outstanding share of the company's common stock, par value
$.10 per share,  (other than  shares  owned by WorldCom or Merger Sub or held by
the company)  will be converted  into the right to receive that number of shares
of  WorldCom  common  stock,  par value  $.01 per share,  equal to the  quotient
determined by dividing  $51.00 by the average of the high and low sale prices of
WorldCom  common stock as reported on the Nasdaq  National Market on each of the
20  consecutive  trading  days  ending with the third  trading  day  immediately
preceding the effective time of the Merger (the Exchange  Ratio),  provided that
the Exchange Ratio shall not be less than 1.2439 or greater than 1.7586; and (b)
each outstanding  share of the company's Class A common stock shall be converted
into the right to receive $51.00 in cash, without interest thereon. The combined
companies plan to operate under the MCI WorldCom name.

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

Forward-looking Statements May Prove Inaccurate
The  company  has  made  certain  forward-looking   statements  in  Management's
Discussion   and  Analysis   that  are  subject  to  risks  and   uncertainties.
Forward-looking  statements include  information  concerning the possible future
results of operations of the company, its core business,  its investments in VDM
businesses,  the possible  future  results of  operations of the company and MCI
WorldCom  after the Merger and  statements  preceded  by,  followed  by, or that
include  the  words  believes,   expects,   anticipates,   intends,  or  similar
expressions.  For those  statements,  the company  claims the  protection of the
safe-harbor for forward-looking  statements  contained in the Private Securities
Litigation  Reform  Act of 1995.  The  reader is  cautioned  that the  following
important  factors,  among others,  in addition to those contained  elsewhere in
Management's Discussion and Analysis,  could adversely affect the future results
of the company, its long-distance telecommunications services and VDM businesses
and the company and MCI WorldCom  after the Merger and could cause those results
to differ  materially  from the  statements  and  information  expressed  in the
forward-looking statements:  material adverse changes in the economic conditions
in the markets  served by the company and MCI WorldCom;  a significant  delay in
the expected closing of the Merger;  future regulatory actions and conditions in
the company's operating areas, including the ability of the company to implement
its  local  strategy  and  obtain  local  facilities  at  competitive  rates and
resulting changes in the  implementation of its local strategy,  and the ability
to pass on additional charges imposed by the Federal  Communications  Commission
(FCC);  competition  from  others in the U.S.  and  international  long-distance
markets,  including the entry of the regional Bell operating  companies  (RBOCs)
and other  companies in the  long-distance  markets in the U.S.; and the cost of
the company's year 2000 compliance efforts.


<PAGE>


Concurrent with the MCI WorldCom Merger Agreement, the company,  WorldCom and BT
entered  into  an  agreement  (the BT  Termination  Agreement)  whereby  (i) the
Agreement  and Plan of Merger,  dated as of November 3, 1996, as last amended on
August  21,  1997  (the MCI BT Merger  Agreement),  among  the  company,  BT and
Tadworth  Corporation  was  terminated;  (ii) WorldCom agreed to pay BT a fee of
$450  million and expenses not in excess of $15 million in order to induce BT to
waive its  rights  under and agree to  terminate,  the MCI BT Merger  Agreement;
(iii) BT agreed to support and vote its shares of Class A common  stock in favor
of the  Merger;  and (iv) BT agreed to  exercise  its call option to acquire the
company's  shares in Concert  Communications  Company  (Concert CS)  immediately
following the effective time of the Merger. The company will be a distributor of
Concert CS services  on a  nonexclusive  basis to  customers  in the U.S.  for a
period of at least two years and as many as five years  following  BT's exercise
of its call option.

On March 11, 1998, the  stockholders of the company and shareholders of WorldCom
approved  the  Merger.  The Merger is also  subject to the  receipt of  required
regulatory approvals which the company expects to receive in the summer of 1998.
The Merger will be accounted for as a purchase for financial accounting purposes
in  accordance  with  generally  accepted  accounting  principles.  The  company
believes  that the MCI  WorldCom  Merger will create a fully  integrated  global
communications  company that will be well positioned to take advantage of growth
opportunities  in the global  telecommunications  market by providing a complete
range  of  local,  long-distance,   Internet  and  international  communications
services.

Telecommunications Legislation
In 1997, the  implementation  of the  Telecommunications  Act of 1996 (1996 Act)
continued to influence market  opportunities for entry into local markets and to
govern the climate for long-distance  services, with federal courts and lawsuits
playing an increasingly  important role. The 1996 Act encouraged  competition in
local markets by requiring incumbent local exchange companies (ILECs), including
the RBOCS, to interconnect  with new competitive local exchange carriers (CLECs)
and, among other things,  permit the CLECs to use unbundled  parts of the ILECs'
networks. The 1996 Act directed the Federal  Communications  Commission (FCC) to
issue rules  governing the  availability  of these  unbundled  network  elements
(UNEs) and guidelines  governing  ILEC-CLEC  interconnection  arrangements.  The
FCC's rules  prescribed the minimum  degree of unbundling  required of ILECs and
that UNEs should be priced at forward-looking  costs.  However, on petitions for
review by the ILECs and certain state public utility commissions, the U.S. Court
of Appeals for the Eighth Circuit  (Eighth  Circuit)  concluded that the FCC had
exceeded  its  authority  in  issuing  these  rules.  As a  result,  each  state
independently must determine its own applicable  interconnection  guidelines and
pricing. Many states have explicitly adopted  forward-looking cost principles on
their own,  mitigating the effects of the Eighth Circuit  decision.  The Supreme
Court has agreed to review the Eighth  Circuit  decision  during  1998,  and the
company is hopeful that the FCC's rules will be reinstated.

The 1996 Act also  barred  the  RBOCs  from  providing  in-region  long-distance
services until their local markets had been sufficiently  opened to competition.
The FCC has denied RBOC petitions to provide long-distance services in Oklahoma,
Michigan,  South  Carolina  and  Louisiana.  On March 20, 1998 the D.C.  Circuit
affirmed the FCC's rejection of SBC Communications  Inc.'s  long-distance bid in
Oklahoma. On December 31, 1997, a federal district court in Wichita Falls, Texas
declared  unconstitutional  the 1996 Act's provisions  barring RBOC provision of
in-region  long-distance  services.  The company and others  have  appealed  the
decision  and the judge has stayed the  decision  pending its appeal to the U.S.
Court of Appeals for the Fifth Circuit.

During 1997,  the company made progress in opening local markets to  competition
by obtaining regulatory approval as a CLEC in 18 additional states, bringing the
total to 42 states.  Applications  are pending in 7 other  states as of December
31,  1997.  The company  also made  progress  in  convincing  regulators  of the
inadequate  steps  being taken by the ILECs to open local  markets.  The FCC and
several state  regulators have  determined that the operational  support systems
necessary to sell local services  provisioned  from the ILEC networks  currently
are insufficient to enable the company to compete  effectively with the ILEC for
customers when using such ILEC facilities.

In May 1997, the FCC also adopted several orders that implemented  access charge
reform  and  adjusted  the price cap rules  that  regulate  the  largest  ILECs'
interstate access charges. The FCC's Access Reform Order restructured interstate
access  charges to shift more costs  directly  to end users.  The Access  Reform
Order  also  reduced  per-minute  charges  long-distance  carriers  will pay and
created new flat-rate  charges to long-distance  carriers based on the number of
pre-subscribed  customers  the  carrier has and  subscriber  lines held by these
customers.  As a result of FCC actions in 1997, the  long-distance  industry saw
annualized interstate access reductions of $1.7 billion. State intrastate access
charges were reduced by more than $100 million in 1997.

While  per-minute  access rates were dropping,  per-line charges were increasing
and new universal service support  obligations for  telecommunications  services
for schools and libraries and rural health care facilities  were created.  Costs
of providing telecommunications service in 1998 are expected to increase despite
rate  reductions  that went into  effect on  January 1, 1998.  The  company  has
announced that it will continue to review costs and rates,  and will recalibrate
rates as necessary to ensure it is collecting the amounts  necessary to pay ILEC
per-minute  and per-line  access charges and the universal  service  obligations
imposed directly on the company.

Certain provisions of the access reform, price cap, and universal service orders
are now under review by various U.S. Courts of Appeals. In addition, the company
has renewed its requests that the FCC itself  revisit  access reform and mandate
that access charges decrease to cost.

Internationally,  the company  will also  benefit  from the signing of the World
Trade  Organization  Telecom  Agreement by the United States and 71 other member
countries  that opens to  competition  markets  controlled by  monopolies.  This
agreement  should provide  additional  opportunities  for the company to provide
services in the rapidly expanding global market.

Recently Issued Accounting Pronouncements
In 1997, the Financial  Accounting  Standards Board issued three statements that
will be effective for the company's  year ending  December 31, 1998. The company
is  currently  evaluating  the effects of  Statements  of  Financial  Accounting
Standards  (SFAS) No.  130,  "Reporting  Comprehensive  Income",  SFAS No.  131,
"Disclosure about Segments of an Enterprise and Related  Information",  and SFAS
No.132,   "Employers'   Disclosures  about  Pensions  and  Other  Postretirement
Benefits", however management believes the adoption of these statements will not
have a material  impact on the financial  statements  taken as a whole. In March
1998, the American Institute of Certified Public Accountants issued Statement of
Position No. 98-1  "Accounting for the Costs of Computer  Software  Developed or
Obtained for Internal Use", that will be effective for the company's year ending
December 31, 1999.  Management is currently analyzing the impact of the adoption
of the statement, which may be material to the financial statements.

CONSOLIDATED RESULTS OF OPERATIONS

The following discusses the company's consolidated results of operations for the
three  years ended  December  31,  1997.  Prior to 1996 and the  acquisition  of
Nationwide and MCI  Systemhouse  in September and November  1995,  respectively,
substantially  all of the company's  revenue was derived from its core business.
Refer  to  the  Enterprise  Reporting  section  for  further  discussion  of the
company's core and VDM businesses.

Revenue
In 1997, revenue increased by $1.2 billion,  or 6%, from 1996 compared to a $3.2
billion,  or 21%  increase in 1996  revenue over 1995.  In 1997,  core  business
revenue increased $835 million, or 5%, while VDM revenue, excluding intercompany
sales,  increased $324 million, or 19%. In 1996, core business revenue increased
$1.8 billion or 12% and VDM revenue,  excluding  intercompany  sales,  increased
$1.4  billion.  Core  business  growth  slowed in 1997 as a result of the access
price reduction flow through,  competitive pricing dynamics in certain areas and
strategic  decisions by management.  In 1997,  management  took several steps to
improve long-term  profitability  and growth including  eliminating  acquisition
promotions  in  the  residential  market,  focusing  on  high-value  residential
customers and de-emphasizing  growth in the wholesale carrier sales channel.  In
1997, the VDM revenue increase was driven by increases in IT and local services,
while the 1996  year-over-year  revenue  increase  reflects the full year impact
from acquired  companies  which  accounted for 44% of the  consolidated  revenue
growth during that period.

Cost of Services
Cost of  services  consist  of  telecommunications  expense  and  costs of other
products   and   services    primarily    associated    with   VDM   businesses.
Telecommunications expense is primarily comprised of access facilities fees paid
to local exchange  carriers and other domestic service  providers,  and payments
made to foreign  telephone  companies  (international  settlements)  to complete
calls made to foreign countries from the U.S. by the company's customers. In the
VDM  businesses,   costs  of  other  products  and  services  primarily  include
equipment,  software, and IT services costs. In 1997, cost of services increased
by $1,467 million,  or 15.5%, to $10,956 million  compared to $9,489 million and
$7,893 million in 1996 and 1995, respectively.  Cost of services as a percentage
of revenue  was 55.7% in 1997,  51.3% in 1996 and 51.7% in 1995.  The  increased
expense  and  related  percentage  of revenue  in 1997  reflects  $361  million,
representing  1.8% of revenue,  of costs to exit,  restructure or settle several
business  contracts as the company  de-emphasized its wholesale carrier business
and ceased certain product and service offerings. The remaining increase in cost
of services and the related  percentage  of revenue  increase was  primarily the
result of consolidated revenue growth and increases in direct operating expenses
in the  company's  local  and IT  businesses.  Telecommunications  expense  as a
percentage  of core  business  revenue was 50.2% in 1997 as compared to 49.9% in
1996 and 51.9% in 1995.  The  increase  from 1996 to 1997 was due to the revenue
mix and the impact of newly  required  compensation  to payphone  owners for 800
calls, partially offset by the reduction in international settlement expense and
more efficient  network  usage.  In 1996,  cost of services  increased by $1,596
million,  or 20%, from 1995,  which was  consistent,  as a percentage,  with the
increase in  consolidated  revenue and full year  consolidation  of the acquired
companies.

Sales, Operations and General
Sales,  operations and general  expenses  increased in 1997 by $912 million,  or
18.1%,  to $5,940  million as compared to $5,028  million and $4,426  million in
1996 and  1995,  respectively.  Sales,  operations  and  general  expenses  as a
percentage of revenue were 30.2% in 1997,  27.2% in 1996,and  29.0% in 1995. The
higher  expenses  and  related  percentage  of  revenue  in 1997 and  1995  were
primarily the result of business  growth and certain actions taken in the second
half of 1997 as  discussed  below.  During the second half of 1997,  the company
initiated and completed a  comprehensive  review of certain  product and service
offerings, and selected operations. In conjunction with this review, the company
decided to consolidate  certain  operating centers and streamline or discontinue
certain  non-core or  under-performing  IT operations,  and  reorganize  certain
operations and to eliminate  certain  product and service  offerings  within its
core business. The company recorded $282 million,  representing 1.4% of revenue,
of costs  for  these  actions  which  included  approximately  $103  million  of
severance in connection with workforce alignments associated with reorganization
efforts and $93 million of  obligations  and  penalties  associated  with lease,
vendor and customer contracts.  The remainder  represents other costs associated
with the  company's  business  reorganization  and  certain  legal  costs.  Cash
expenditures  related to these  obligations  were and will continue to be funded
through cash from operations.  Once these initiatives are completed, the company
expects annual operating expense savings of approximately $150 million in sales,
operations and general  expense,  partially offset by increased costs associated
with planned business growth.

During the fourth quarter of 1997, the company also incurred  approximately $220
million,  representing  1.1%  of  revenue,  of  costs  for  employee  pre-merger
retention bonuses and increased  customer  retention  activities.  In connection
with the  execution  of the BT Merger  Agreement  and as modified  under the MCI
WorldCom Merger  Agreement,  pre-merger  retention bonus pools (retention pools)
totaling $270 million were established to retain key executives and employees of
the  company.  The company  recorded  compensation  costs in 1997 of $93 million
related to these  retention  pools of which $82 million was paid by December 31,
1997. The remaining accrued  compensation costs of $11 million and other amounts
payable from these  retention  pools are  scheduled to be paid in 1998 and 1999.
However,  all unpaid  amounts  under these  retention  pools will be paid on the
closing date of the MCI WorldCom Merger or any other  transaction  involving the
sale or other disposition of a majority of the company's capital stock or assets
if occurring  earlier  than the  scheduled  payment  dates.  Customer  retention
activities   included   additional   advertising  and  marketing   expenses  for
residential product offerings meant, in part, to reinforce the company brand and
service  offerings to consumers.  These  initiatives  included  advertising  and
marketing  related to a national  product  rollout  as well as  increased  brand
advertising  for  consumer  offerings.  The  company  does not expect to incur a
similar level of expense in 1998 related to these activities.

The remaining increase in sales, operations and general expenses in 1997 was due
to  business  growth in local  and IT  services  and the  related  increases  in
marketing,  selling,  and personnel  costs.  The percentage  reduction in sales,
operations and general expenses in 1996 was primarily the result of cost savings
associated with the 1995 restructuring  efforts, and more efficient  utilization
of personnel costs. In 1995,  sales,  operations and general  expenses  included
$216  million  of costs  related  to the  consolidation  of the  company's  core
business operations and the centralization of major administrative functions.

Depreciation including Asset Write-downs
Depreciation  expense  increased  by $418  million,  or 25%,  to $2,082  million
compared to $1,664  million and $1,308  million in 1996 and 1995,  respectively.
The  increase  primarily  relates  to  capital  expenditures  for  property  and
equipment principally for the core and local services communications networks to
increase network  capacity,  redundancy and reliability and add product features
and  functionality  which were $3.8 billion and $3.3 billion for the years ended
December 31, 1997, and 1996 respectively.  In 1998, the company expects to incur
$3.3 billion in capital expenditures,  an anticipated year-over-year decline due
to lower  long-distance  network  requirements.  The 1997 expense  increase also
reflects $60 million related to the write-down of certain assets included in the
company's  fourth quarter 1997 asset  disposition  plan described  below and the
depreciation impact of asset additions.  In 1996, depreciation expense increased
by $356 million,  or 27%, primarily as a result of the network additions in 1996
and 1995.  During the third quarter of 1995, the company recorded a $520 million
charge for an asset  write-down  primarily  related to the  consolidation of the
company's core business, the centralization of major administrative functions or
assets no longer aligned with strategic product offerings.

In connection  with an asset  disposition  plan adopted in the fourth quarter of
1997, the company will dispose of certain equipment  primarily in the first half
of 1998.  The net book value of the assets to be  disposed  of  aggregated  $265
million with no significant proceeds expected. The productive assets included in
the  disposition  plan were  identified  in  response  to  changes  in  specific
customer,  product  and  technology  strategies.  The  major  part of this  plan
included  the early  replacement  of central  processing  units and data storage
devices.  The company reassessed and consequently revised its strategies related
to data  processing and storage in order to maximize  facility space in its data
centers which is critical to support  growth in products  that require  customer
collocation  in such  centers.  The company  will replace  this  equipment  with
devices that offer  greater  processing  and storage  capabilities  with reduced
operating and maintenance  costs and less floor space.  Depreciation  expense in
1997 includes $60 million representing the net book value of the assets included
in the  disposition  plan which had been  removed  from  service by December 31,
1997.  The company  will  continue to use the  remaining  assets  until they are
removed from service and accelerate the recognition of  depreciation  expense on
these assets over their shortened  remaining service period. The company expects
that  substantially  all of the  remaining  assets  will be  decommissioned  and
disposed of by June 30, 1998.  This change will result in  estimated  additional
depreciation  expense of up to  approximately  $190 million in the first half of
1998. The company had been  depreciating  this  equipment  over estimated  lives
averaging six years.  This would compare with an average life of four years, had
the assets been  depreciated  over the revised service period as contemplated in
the fourth quarter 1997 disposition plan.  Moreover,  had the company originally
depreciated these assets ratably over such revised service period,  depreciation
expense,  exclusive  of the $60  million  referred  to  above,  would  have been
approximately $59 million,  $55 million and $43 million higher in 1997, 1996 and
1995, respectively.

Interest
Interest  expense in 1997 rose $39  million  from 1996 due to an increase in the
average amount of debt  outstanding as a result of commercial paper issuances in
1997 and capital  lease  commitments  made in 1997.  In 1996,  interest  expense
increased $47 million from 1995 also due to an increase in the average amount of
outstanding  debt as a result of commercial  paper and debt securities  issuance
during 1995.

Interest income decreased $16 million from 1996 due to lower cash and marketable
securities  balances held throughout  1997. In 1996,  interest income  decreased
$113 million from 1995 due to lower marketable securities balances that resulted
from the continued use of cash to fund capital network expenditures, investments
in the VDM  businesses  and the Direct  Broadcast  Satellite  (DBS)  license and
construction costs.

Equity in Income (Losses) of Affiliated Companies
Equity in income  (losses) of affiliated  companies  decreased by $12 million to
$(144)  million  in  1997.  The  company's  share  of  operating  losses  of ICS
Communications,  Inc. (ICS), Concert CS, and its former on-line project with the
News  Corporation  Limited (News Corp.)  declined in 1997.  These  declines were
offset by the  company's  share of increased  operating  losses of Avantel which
included  $16  million  related  to the  company's  share  of  operating  losses
recognized  in  connection  with  an  Avantel  restructuring  and  equal  access
implementation.  In 1996, equity in losses of affiliated  companies decreased by
$31 million as compared to 1995.  This  decrease is the result of the absence in
1996 of any charges  similar to the $95 million charge  incurred in 1995 related
to investee restructuring plans and the 1995 write-down of the carrying value of
several equity investees, offset by increased losses in certain of the company's
investments  and start-up  ventures  including  Avantel,  ICS, and the company's
on-line project with News Corp.

Other
Other  expense,  net,  increased  by $10  million in 1997 and  decreased  by $27
million in 1996.  The 1996  decrease is  primarily  due to $54 million full year
dividend income from the company's preferred stock investment in News Corp.
compared to a partial year in 1995.

Distributions on Subsidiary Trust Mandatorily Redeemable Preferred Securities
Distributions on subsidiary Trust mandatorily  redeemable preferred  securities,
issued in May 1996,  totaled  $60  million  and $35  million for the years ended
December 31, 1997, and 1996, respectively.

ENTERPRISE REPORTING

This section  discusses the results of operations of the company's  core and VDM
businesses. The Enterprise Reporting financial data table and ensuing discussion
on pages 8 to 10 are intended to supplement management's discussion and analysis
of the consolidated results of operations.  The unaudited data appearing in this
table was  prepared  using all amounts  included in the  consolidated  financial
statements  and reflects  estimates and  allocations  that  management  believes
provide a reasonable basis on which to present such information. The revenue and
net income (loss) amounts include sales of services  between the core businesses
and VDM businesses based primarily upon prevailing market rates.  Administrative
expenses are  allocated to the  respective  enterprises  on a fully  distributed
basis  reflective  of  actual   utilization.   Net  interest  expense  is  fully
distributed based upon proportionate debt levels reflecting the cash flow of the
respective  enterprise.  The  consolidated  income tax provision and related tax
payments  are  allocated  to each  enterprise  based  on their  respective  tax
attributes.


<PAGE>
<TABLE>
<CAPTION>


SUPPLEMENTAL ENTERPRISE REPORTING DATA

                                                     CORE RESULTS                        VDM RESULTS
Year ended December 31,                               1997     1996                 1997       1996
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
<S>                                                <C>      <C>                   <C>        <C>    
Revenue                                            $17,619  $16,784               $2,508     $1,953
Income (loss) from operations                        1,535    2,453                 (814)      (126)
Equity in income (losses) of affiliated companies        -        -                 (144)      (156)
Net income (loss)                                      945    1,514                 (766)      (298)
Depreciation including asset write-downs             1,860    1,536                  222        128
Net interest, income taxes and other expense          (590)    (939)                 192        (16)
EBITDA*                                              3,395    3,989                 (592)         2
</TABLE>

* EBITDA,  as defined by  management,  includes  earnings,  excluding  equity in
income (losses) of affiliates, other income (expense), net, and subsidiary Trust
mandatorily  redeemable  preferred  securities  before  interest,  income taxes,
depreciation  including asset write-downs and amortization.  EBITDA represents a
measure of the  company's  ability to generate cash flows and does not represent
net income or cash flows from operating,  investing and financing  activities as
defined by generally accepted  accounting  principles  (GAAP).  EBITDA should be
considered in addition to, but not as a substitute for, or superior to, measures
of financial  performance reported in accordance with GAAP. EBITDA is often used
by analysts when evaluating the performance of a company.  Readers are cautioned
that the company's  definition of EBITDA may not be comparable to similar titled
measures used by other companies or analysts.

CORE BUSINESS
In 1997,  revenue increased 5%, to $17.6 billion,  on traffic growth of 6%, from
1996. In 1996, revenue and traffic increased 12% and 13%, respectively. The 1997
revenue  growth  reflects a reduction  of $67 million  primarily  related to the
impact of an increase in uncollectible  provisions  required by bankruptcies and
delinquencies  of business  customer  accounts.  In addition  and as  previously
mentioned,  revenue and traffic  growth slowed in 1997 due to several  strategic
decisions  addressing  long-term  financial  performance of the business and the
continued industry-wide  competitive pricing pressures.  The revenue and traffic
trends and  related  variance in 1997 and 1996  reflects  changes in product and
business sales channel mix, the impact of eliminating  acquisition promotions in
the residential market, focus on high-value residential customers,  and enhanced
and value added services.

Revenue in the business market  continued to increase in 1997 driven by sales to
commercial  customers,  while  revenue and traffic  growth on sales to wholesale
carrier  customers  slowed  as the  company  took  actions  to  restructure  and
de-emphasize  this  sales  channel to improve  profitability.  In 1997,  revenue
growth in the business  market  continued in  strategic  services  such as data,
Internet,  and conferencing as well as traditional  voice services.  In the mass
market,  the company  continued to focus on  transitioning  its customer base to
high-value  customers  by  offering  integrated   communications  services  with
products such as MCI One(R). While revenue decreased in the mass market in 1997,
customer churn continued to decline and revenue and traffic trends improved with
the  launch of 5-Cent  SundaysSM  and  growth in  transactional  brands  such as
10-321(R)  and  1-800-COLLECT(R).  In  1996,  revenue  in  the  business  market
increased   across  all  sales  channels  driven  by  growth  in  strategic  and
traditional  products,  while  growth  in the  mass  market  was  slowed  due to
competitive pressures.

VENTURES AND DEVELOPING MARKETS BUSINESSES

Investments  in the VDM businesses  are included in the  accompanying  financial
statements as consolidated  subsidiaries,  unconsolidated  equity investments or
cost method investments such as News Corp. The company's result of operations in
these businesses is provided below.

Local Services
The company  provides  switched  local service to both business and  residential
customers  and  provides  dedicated  access and dark fiber  services to business
customers  using  its owned  network  facilities  and  facilities  or  wholesale
services provided by other companies. In addition to these services, the company
provides  infrastructure  support to the company's core  long-distance  network.
Company-owned  facilities-based  local  service  continues  to  be  a  strategic
priority  of the  company  because  it is a  critical  factor in its  ability to
deliver  end-to-end  communications  service  from local  markets in the U.S. to
domestic and  worldwide  locations.  At December 31, 1997,  the company had been
granted authority to offer local exchange service in 42 states, had applications
for authority pending in 7 other states,  and has an investment in a provider of
local  service in Alaska.  Since  December 31, 1996,  the number of  operational
local city networks  increased to 80 in 39 cities from 62 networks in 35 cities,
and route  miles  increased  by 24%, to 3,654 miles at  December  31,  1997.  At
December 31, 1997, the company provided facilities-based, switched local service
in 31 markets and intends to have  service  operational  in at least 100 markets
after the  completion of the MCI WorldCom  Merger.  Local service  expansion and
traffic  growth  continued  to be  hampered  by  changes  in  Federal  and state
regulations governing the opening of local markets. In January 1998, the company
ceased efforts to resell local services to new residential consumers due to high
costs associated with the service offering.

In 1997,  local service revenue  increased $165 million,  to $343 million,  from
$178  million in 1996 on sales of  switched,  competitive  access  services  and
fiber-optic  capacity. A majority of this growth resulted from services provided
to the company's  business  customers,  with a smaller  portion  resulting  from
services provided to residential  customers and the core long-distance  network.
The loss from  operations  was $(559)  million  and $(97)  million for the years
ended  December  31,  1997,  and 1996,  respectively,  while net loss was $(375)
million and $(70) million,  respectively,  for the same periods.  EBITDA for the
years ended  December 31, 1997,  and 1996 was $(485)  million and $(62) million,
respectively.  In 1997,  local services'  start-up  nature and  facilities-based
expansion into 13 new markets  contributed  to the increases in operating  costs
and net loss and the decrease in EBITDA.

Information Technology Services
IT services include the results of MCI Systemhouse and call center services. MCI
Systemhouse  services  include  equipment  deployment,  consulting  and  systems
integration,  and outsourcing.  IT services revenue increased by $426 million to
$1,827  million,  or 30%,  in 1997  from  $1,401 in 1996.  Revenue  grew in each
service line in 1997 compared to 1996.  Revenue from  equipment  deployment  and
educational  services  increased  15%, to $788 million;  consulting  and systems
integration revenue increased 51%, to $603 million; outsourcing services revenue
grew by 45%, to $324 million, and call center services revenue increased 20%, to
$112  million.  This  growth  reflects  the  emerging  industry-wide  demand for
information technology and call center outsourcing and automation services. Cost
of services and sales,  operations and general expenses increased by 48% in 1997
as a result of the business  growth and the related  increase in  equipment  and
personnel requirements to address new contract and customer requirements as well
as strategic  decisions  made by  management.  As previously  described,  in the
second half of 1997 MCI  Systemhouse  initiated  efforts to consolidate  certain
operating   centers  and  streamline   certain  non-core  and  under  performing
operations to enhance efficiencies within its expanding organization.  Including
the impact of costs  associated  with these 1997  actions,  IT  services  income
(loss) from  operations  was $(195)  million and $42  million,  and net loss was
$(212)  million and $(59)  million for the years ended  December 31,  1997,  and
1996,  respectively.  EBITDA was $(83)  million  and $114  million  for the same
periods.

Backlog, which includes amounts committed under executed contracts or letters of
intent at December 31, 1997 and 1996, was approximately $2 billion, the majority
of which is from MCI Systemhouse's  largest customers.  The company expects that
approximately 24% of the backlog will be delivered in the next 12 months.  Since
revenue  depends on actual usage under  service  contracts and may be subject to
termination  under  certain  circumstances,  actual  revenue  for  a  particular
contract may be higher or lower than the reported backlog for such contract.

Wireless
Wireless includes the results of operations of the company's cellular and paging
services. In 1997, the company focused on providing wireless services as part of
a total  communications  services package rather than as stand-alone  offerings.
Wireless  revenue  decreased  by $33 million,  to $314  million,  in 1997.  This
decrease  is the  result  of a  reduction  in paging  subscribers  of 43% to 176
thousand.  This decline was offset by a 3% increase in cellular  subscribers  at
December 31, 1997.

International Services
During  1997,  the  company  invested  $61  million in Concert CS, a 24.9% owned
international  services  venture with BT that  provides a complete  portfolio of
advanced global communications services, including virtual network, frame relay,
managed  bandwidth  and packet  services,  available to  multinational  business
customers worldwide.  For the years ended December 31, 1997 and 1996, Concert CS
distributor  revenue  amounted to  approximately  $750 million and $570 million,
respectively.  The company's  share of Concert CS losses  reported in accordance
with U.S. GAAP was $(21) million and $(31) million for the years ended  December
31, 1997,  and 1996,  respectively.  Through  December 31, 1997, the company had
invested approximately $231 million in Concert CS since its launch in July 1994.

Pursuant to the BT  Termination  Agreement,  BT has agreed to exercise  its call
option to acquire the companys  shares in Concert CS immediately  following the
effective  time of the MCI  WorldCom  Merger.  Upon  purchase  of the  companys
interest  in  Concert  CS by BT,  the  company  will no longer  be an  exclusive
distributor of Concert CS. However, Concert CS will continue to provide services
to MCI WorldCom on a  nonexclusive  basis for customers in the U.S. for a period
of at least  two  years  and as many as five  years.  MCI  WorldCom  expects  to
continue providing global service solutions either through Concert CS or its own
operations.

In April  1997,  the company  formed a strategic  alliance  with  Telefonica  de
Espana,   S.A.   (Telefonica)  to  explore   opportunities  in  Latin  America's
telecommunications  market.  In March 1998, the company and Telefonica  expanded
the scope of their alliance to include WorldCom and to pursue certain activities
in the Americas and Europe.

During 1997, the company invested an additional $54 million in Avantel,  a 44.5%
owned business venture with Grupo Financiero Banamex-Accival, bringing its total
invested cash position to $549 million. Avantel built Mexico's first all digital
fiber-optic   network  and  was  the  first   company  to  provide   alternative
long-distance service in Mexico's  telecommunications  market, competing against
Telefonos de Mexico. On January 1, 1997,  Avantel began offering a full range of
competitive,   switched  long-distance  services  to  residential  and  business
customers.  Offering  services  throughout most of Mexico,  Avantel has obtained
more than a 10% share in the  addressable  Mexico long-distance  market.  The
company's  share of  Avantel's  losses  reported in  accordance  with U.S.  GAAP
increased by $73 million, to $(103) million, in 1997 from $(30) million in 1996.
The  increased  losses  relate to the start-up  nature of their  operations  and
additional costs incurred with the  implementation of equal access in Mexico and
certain restructuring efforts. The company expects to incur additional losses on
its  investment  during  1998 as Avantel  continues  to expand its  service  and
customer bases in Mexico's telecommunications market. In connection with the
strategic  alliance  agreement,  Telefonica  agreed to invest  $250  million  in
Avantel  and to purchase  additional  equity if certain  qualified  transactions
occur. In certain circumstances, Telefonica has the right to require the company
to acquire its interest in Avantel at its cost.

Multimedia Services
The company's  investments in News Corp. and DBS comprise  Multimedia  Services.
Dividend  income on the company's  investment in News Corp.  for the years ended
December 31, 1997 and 1996 was $59 million and $54 million, respectively.

DBS is a  point-to-multipoint  broadcast  service that uses high-powered Ku band
satellites placed in geosynchronous  orbit. In December 1996, the FCC issued the
DBS license  awarded to the company in the January 1996 public  auction.  In May
1997,  the  company and News Corp.  entered  into an  agreement  to form a joint
venture (DBS Venture) in which both parties would  contribute  their  respective
DBS assets and cash. In exchange,  the company would receive a 19.9% interest in
the new venture. The agreement also provided that the parties would seek a third
party to acquire their  combined  interests in this DBS business.  In June 1997,
the company and News Corp.  entered into an agreement with  Primestar  Partners,
L.P.  (Primestar)  for the sale and transfer of the  company's and News Corp.'s
DBS  assets  other  than  two of the  four  DBS  Venture  satellites  (Primestar
Transaction).  In March  1998,  the  parties  sold their  interest in one of the
remaining  satellites.  The parties are  pursuing the  disposition  of the other
satellite, which is still under construction.  The Primestar Transaction is part
of a larger  transaction  that involves the  consolidation  of Primestar and TCI
Satellite  Entertainment,  Inc. into a newly formed entity (New  Primestar) that
was completed in April 1998.  Concurrent with the  consummation of the Primestar
Transaction,  the company will acquire  preferred shares in a subsidiary of News
Corp. for a face amount equal to the company's cost of obtaining the FCC license
plus  interest  thereon.  The  company  will  also  receive  from New  Primestar
consideration in the form of cash and interest bearing  non-voting New Primestar
securities for its share of the DBS Venture assets transferred to New Primestar.
The Primestar Transaction is subject to regulatory approvals, including approval
by the FCC and the  Department of Justice.  As of December 31, 1997, the company
had capitalized $1,043 million related to its investment in DBS, $682 million of
which was for the payment of the license and the remainder  related primarily to
the construction of two satellites.

YEAR 2000 EFFORTS
The company is continuing its  evaluation and upgrading of its computer  systems
and  applications  for the year 2000.  The company is also seeking  confirmation
from its primary  processing  and supplier  vendors that they are developing and
implementing plans to become year 2000 compliant.  The company is utilizing both
internal and external resources to identify, correct or reprogram, and test its
systems for year 2000 compliance. The company expects to incur internal labor as
well as consulting and other expenses related to  infrastructure  and facilities
enhancements  necessary  to prepare  its  systems  for the year 2000.  The costs
incurred to date have not been  significant,  however,  the  company  expects to
incur approximately $400 million in expense over the next two years to implement
its year  2000  plan.  The  company  expects  to be year 2000  compliant  before
December 31, 1999.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash Flows
Cash from  operating  activities  increased by $344  million to $3,488  million.
Receipts from customers increased by $1,589 million in 1997 due primarily to the
increase in revenue.  Payments to suppliers  and  employees  increased by $1,397
million as a result of the increases in costs of services and sales,  operations
and  general  expenses in 1997.  Taxes paid  decreased  in 1997 by $203  million
primarily due to the reduction in net income for the year. Interest paid in 1997
rose as the result of higher  average debt balances  during the year.  Cash used
for  investing  activities  decreased by $888  million in 1997 due  primarily to
lower  funding   requirements   for  investments  in  VDM  businesses.   Capital
expenditures, primarily for the company's core and local services networks, were
the most significant  investing activity and increased by $481 million to $3,828
million.  The company also made  additional  capital  contributions  to Avantel,
Concert CS, and other  affiliated  entities of $130 million,  an approximate 60%
decline from 1996. Current year investments related to DBS and related satellite
construction  costs declined by $692 million from 1996 due primarily to the $682
million  payment for the FCC license  made in 1996.  In 1996,  the company  also
invested an additional $350 million in News Corp. No additional investments were
made in News  Corp.  in 1997.  Cash  from  operating  activities  and  financing
activities was used to support the company's investing activities during 1997.

Cash required from financing  activities declined by $874 million in 1997 due to
the  increase in cash from  operating  activities  and the  reduction in amounts
required for investing activities. In 1997, the company's financing requirements
were met by issuances of commercial  paper and proceeds raised from issuances of
stock to employees  under  benefit  plans.  During 1997,  the  commercial  paper
balance increased to $384 million. Proceeds from issuances of common stock under
employee benefit plans were $580 million, an increase of $154 million from 1996.
Other  investing  activities in 1997 included the payment of dividends on common
stock of $35 million,  distributions  paid on the subsidiary  Trust  mandatorily
redeemable  preferred  securities of $60 million and purchases of treasury stock
of $93 million.

Working Capital
Working  capital  (defined  as current  assets  less  current  liabilities)  was
$(2,836) million and $(330) million at December 31, 1997 and 1996, respectively.
The  significant  decrease  in  working  capital  is the result of the change in
classification  of  commercial  paper  balances  of $1,806  million  to  current
liabilities as described  below. At December 31, 1997,  current assets increased
by $544 million from December 31, 1996, primarily as a result of the increase in
accounts  receivable  related to the growth in revenue;  and a receivable from a
sale-lease back  transaction  offset by a  reduction  in  marketable  securities
balances  that  were  used  to  fund  working  capital   requirements.   Current
liabilities,  excluding  the  reclassification  referred to above,  increased by
$1,244  million  from  December 31, 1996 as a result of the increase in accounts
payable, accrued telecommunications  expenses and other accrued liabilities from
higher operating  expenses and the impact of the actions taken by the company in
the last half of 1997.

Liquidity and Capital Resources
In 1997,  the  company  funded its  capital  expenditures  and other  investment
activities  through cash from  operations,  commercial paper issuances and other
financing  activities.  In 1998, the company plans approximately $3.3 billion in
capital  expenditures,  with the  year-to-year  reduction coming from lower core
business  requirements,  a  majority  of  which  will be  funded  by  cash  from
operations.  The company has a $4 billion bank credit facility that supports the
companys   commercial  paper  program  and  may  be  used  to  fund  short-term
fluctuations in working capital and other  corporate  requirements.  This credit
facility expires in April 1998 and, accordingly, borrowings associated with this
bank credit facility have been classified as short-term  liabilities at December
31,  1997.  The  company  expects to extend this  credit  facility  prior to its
expiration.  The company also has a $1.2 billion shelf  registration  in effect,
which  covers the  issuance of debt  securities  with a range of  maturities  at
either fixed or variable rates.  At December 31, 1997,  there was $1,806 million
outstanding under the commercial paper program and bank credit facility,  and no
securities  had been issued under the shelf  registration.  The company plans to
issue up to $1 billion  aggregate  principal  amount of senior  debt  securities
under this shelf registration  during the second quarter of 1998, which proceeds
will be used for general corporate  purposes,  including repayment of short term
borrowings under the companys commercial paper program. The company believes it
will  be  able  to  meet  its  current  and  long-term   liquidity  and  capital
requirements  from cash from  operating  activities,  existing  debt  facilities
including  the  extended   facility   discussed  above  and  use  of  the  shelf
registration. In July 1997, the company entered into a forward starting interest
rate swap agreement (the swap) in the notional  principal amount of $500 million
for a term of 15 years. The swap involves the receipt of floating-rate  interest
and the  payment of  fixed-rate  interest at 6.71%  without the  exchange of the
underlying  principal  amount.  The swap has been  designated as a hedge against
adverse  changes in market  interest  rates on  fixed-rate  debt  expected to be
issued in the second  quarter of 1998.  The  companys  credit  risk  related to
interest  rate swaps is dependent  upon both the movement of interest  rates and
the possibility of non-payment by swap counterparties. The company mitigates its
credit  risk  by  only  entering   into  swap   agreements   with   high-quality
counterparties. The company believes its market risk exposure with regard to its
financial  instruments is limited to changes in interest rates  primarily in the
U.S. Based upon the composition of the companys  variable rate debt outstanding
at December 31, 1997 which is primarily  borrowings  under the commercial  paper
program,  the  company  does not  believe  that a  hypothetical  100 basis point
increase in short-term rates would be material to net income.

The companys debt to total capitalization,  defined as total debt to total debt
plus subsidiary Trust mandatorily  redeemable  preferred  securities and equity,
increased  to 31% at December  31,  1997,  from 30% at December  31,  1996.  The
increase in 1997 was the result of  commercial  paper  issuances in 1997 to fund
investments in the VDM  businesses,  capital  expenditures  and other  corporate
requirements.

<PAGE>
<TABLE>
<CAPTION>


CONSOLIDATED INCOME STATEMENTS
MCI Communications Corporation and Subsidiaries

Year ended December 31,                                                             1997              1996             1995
- ---------------------------------------------------------------------------------------------------------------------------
(In millions, except per share amounts)
<S>                                                                              <C>               <C>              <C>    
REVENUE                                                                          $19,653           $18,494          $15,265
                                                                                  
OPERATING EXPENSES
  Cost of services                                                                10,956             9,489            7,893
  Sales, operations and general                                                    5,940             5,028            4,426
  Depreciation including asset write-downs                                         2,082             1,664            1,828
                                                                                                                
                                                                                  -----------------------------------------
TOTAL OPERATING EXPENSES                                                          18,978            16,181           14,147
                                                                                                          
                                                                                  -----------------------------------------
INCOME FROM OPERATIONS                                                               675             2,313            1,118

Interest expense                                                                    (235)             (196)            (149)
Interest income                                                                       18                34              147
Equity in income (losses) of affiliated companies                                   (144)             (156)            (187)
Other expense, net                                                                   (15)               (5)             (32)
                                                                                  
INCOME BEFORE INCOME TAXES                                                           299             1,990              897

Income tax provision                                                                  90               753              349
Distributions on subsidiary Trust mandatorily redeemable preferred securities         60                35                -
                                                                                                                 
                                                                                  -----------------------------------------
NET INCOME                                                                    $      149           $ 1,202         $    548
                                                                                                                    
                                                                                   =======================================


BASIC EARNINGS PER COMMON SHARE                                                 $   0.22         $    1.75         $   0.81
DILUTED EARNINGS PER COMMON SHARE                                               $   0.21         $    1.73         $   0.80


Weighted average number of common shares                                             693               687              680
Weighted average number of common shares - assuming dilution                         707               695              687

See accompanying Notes to Consolidated Financial Statements.


</TABLE>


<PAGE>
<TABLE>
<CAPTION>


CONSOLIDATED BALANCE SHEETS
MCI Communications Corporation and Subsidiaries

December 31,                                                                                 1997                      1996
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
<S>                                                                                 <C>                         <C>   
ASSETS
CURRENT ASSETS
Cash and cash equivalents                                                            $        261               $       187
Marketable securities                                                                           -                       161
Receivables, net of allowance for
  uncollectibles  of $372 and $273  million                                                 3,576                     3,480
Other current assets                                                                        1,423                       888

  TOTAL CURRENT ASSETS                                                                      5,260                     4,716

PROPERTY AND EQUIPMENT
Communications  system in service                                                          16,291                    14,005
Furniture, fixtures and equipment                                                           3,263                     2,848
Other property                                                                                616                       519
                                                                                        
  TOTAL PROPERTY AND EQUIPMENT                                                             20,170                    17,372
Accumulated  depreciation                                                                  (7,856)                   (6,535)
Construction in progress                                                                    1,554                     1,337

  TOTAL PROPERTY AND EQUIPMENT, NET                                                        13,868                    12,174


Investment in affiliates                                                                      653                       690
Investment in Direct Broadcast Satellite                                                    1,043                       893
Investment in News Corp.                                                                    1,350                     1,350
Other assets and deferred charges, net                                                        991                       736
Goodwill, net                                                                               2,345                     2,419

TOTAL OTHER ASSETS                                                                          6,382                     6,088

TOTAL ASSETS                                                                            $  25,510                 $  22,978

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable                                                                        $   1,321                $      992
Accrued telecommunications  expense                                                         2,416                     2,045
Other accrued liabilities                                                                   2,248                     1,806
Long-term debt due within one year                                                          2,111                       203

  TOTAL CURRENT LIABILITIES                                                                 8,096                     5,046

NONCURRENT LIABILITIES
Long-term debt                                                                              3,276                     4,798
Deferred taxes and other                                                                    2,077                     1,723

   TOTAL NONCURRENT LIABILITIES                                                             5,353                     6,521

COMMITMENTS AND CONTINGENT LIABILITIES

COMPANY OBLIGATED  MANDATORILY  REDEEMABLE  PREFERRED SECURITIES  OF
SUBSIDIARY  TRUST HOLDING  SOLELY JUNIOR SUBORDINATED  DEFERRABLE  INTEREST
DEBENTURES OF THE COMPANY                                                                     750                       750

STOCKHOLDERS' EQUITY
Class A common stock, $.10 par value, authorized  500 million shares, issued  136
 million shares                                                                                14                        14
Common stock, $.10 par value, authorized  2 billion shares, issued  593 million shares         60                        60
Additional paid-in capital                                                                  6,362                     6,410
Retained earnings                                                                           5,345                     5,231
Treasury stock, at cost, 22 and 44 million shares                                           (470)                   (1,054)

  TOTAL STOCKHOLDERS'  EQUITY                                                              11,311                    10,661

TOTAL LIABILITIES AND STOCKHOLDERS'  EQUITY                                              $ 25,510                  $ 22,978

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


<PAGE>
<TABLE>
<CAPTION>


CONSOLIDATED  STATEMENTS OF CASH FLOWS
MCI Communications Corporation and Subsidiaries

Year ended December 31,                                                     1997             1996              1995
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)

OPERATING ACTIVITIES
<S>                                                                     <C>              <C>               <C>    
  Receipts from customers                                               $ 19,405         $ 17,816          $ 14,888
  Payments to suppliers and employees                                    (15,341)         (13,944)          (11,549)
  Taxes paid                                                                (412)            (615)             (416)
  Interest paid                                                             (176)            (147)             (113)
  Interest received                                                           12               34               169

       CASH FROM OPERATING ACTIVITIES                                      3,488            3,144             2,979

INVESTING ACTIVITIES
  Capital expenditures for property and equipment                         (3,828)          (3,347)           (2,866)
  Purchases of marketable securities                                          (3)            (487)           (4,630)
  Proceeds from sales and maturities of marketable  securities               222              641             5,930
  Acquisition of businesses, net of cash acquired                              -              (40)           (1,243)
  Investment in News Corp.                                                     -             (350)           (1,000)
  Investment in Direct Broadcast Satellite                                  (161)            (853)                -
  Investment in affiliates                                                  (130)            (306)             (494)
  Other, net                                                                   6              (40)               11

       CASH USED FOR INVESTING ACTIVITIES                                 (3,894)          (4,782)           (4,292)

       NET CASH FLOW BEFORE FINANCING ACTIVITIES                            (406)          (1,638)           (1,313)

FINANCING ACTIVITIES
  Issuance of Senior Notes and other debt                                      -              796                 -
  Payment of Senior Notes and other debt                                    (296)            (595)             (305)
  Commercial paper and bank credit facility activity, net                    384              717               702
  Issuance of subsidiary Trust mandatorily redeemable 
  preferred securities, net                                                    -              726                 -
  Issuance of common stock for employee plans                                580              426               275
  Payment of dividends on common stock                                       (35)             (34)              (33)
  Distributions  paid on subsidiary Trust mandatorily redeemable 
  preferred securities                                                       (60)             (35)                -
  Purchase of treasury stock                                                 (93)            (647)             (284)

       CASH FROM FINANCING ACTIVITIES                                        480            1,354               355

Net increase(decrease)in cash and cash equivalents                           74             (284)             (958)
Cash and cash equivalents at beginning of year                               187              471             1,429

CASH AND CASH EQUIVALENTS AT END OF YEAR                                 $   261         $    187           $   471

Reconciliation of net income to cash from operating activities:
Net income                                                               $   149        $   1,202          $    548
Adjustments to net income:
  Depreciation including asset write-downs and amortization                2,118            1,722             1,887
  Equity in (income) losses of affiliated companies                          144              156               187
  Deferred income tax provision                                               92              298               144
Net change in operating  activity accounts other than cash and cash equivalents,
  net of effects of acquisition of businesses:
  Receivables                                                                (96)            (568)             (442)
  Operating accounts payable and accrued liabilities                         621              350               634
  Other operating activity accounts                                          460              (16)               21

        CASH FROM OPERATING ACTIVITIES                                    $3,488         $  3,144           $ 2,979

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


<PAGE>
<TABLE>
<CAPTION>


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MCI Communications Corporation and Subsidiaries


                                        Class A           Additional                  Treasury      Stock-
                                         Common   Common  Paid-in      Retained         Stock,      holders'    
                                          Stock   Stock   Capital      Earnings        at Cost      Equity
(In millions)  
<S>                                         <C>    <C>    <C>           <C>             <C>       <C>

BALANCE AT DECEMBER 31, 1994                $14    $60    $6,227        $3,548          $(845)    $9,004
Common stock issued for employee
  stock and benefit plans
  (18 million shares)                         -      -       132             -            189        321
Tax benefit of common stock
  transactions related to employee
  benefit plans                               -      -        25             -              -         25
Acquisition of business
  (.8 million shares)                         -      -        16             -              -         16
Unrealized loss on investments and other      -      -         5             -              -          5
Net income                                    -      -         -           548              -        548
Common stock dividends                        -      -         -           (33)             -        (33)
Treasury stock purchased
  (13 million shares)                         -      -         -             -           (284       (284)



BALANCE AT DECEMBER 31, 1995                 14     60     6,405         4,063           (940)     9,602
Common stock issued for employee
  stock and benefit plans
  (23 million shares)                         -      -      (56)            -            533         477
Tax benefit of common stock
  transactions related to employee
  benefit plans                               -      -        60             -              -         60
Unrealized gains on investments and other     -      -         1             -              -          1
Net income                                    -      -         -         1,202              -      1,202
Common stock dividends                        -      -         -           (34)             -        (34)
Treasury stock purchased
  (23 million shares)                         -      -         -             -           (647)       (647)


BALANCE AT DECEMBER 31, 1996                 14     60     6,410         5,231         (1,054)     10,661
Common stock issued for employee
  stock and benefit plans
  (25 million shares)                         -     -       (111)           -            671          560
Tax benefit of common stock
  transactions related to employee
  benefit plans                               -     -         44             -              -          44
Unrealized gains on investments and other     -     -         19             -              -          19
Net income                                    -     -          -           149              -         149
Common stock dividends                        -     -          -           (35)             -         (35)
Treasury stock purchased
  (3 million shares)                          -     -          -             -            (87)        (87)


BALANCE AT DECEMBER 31, 1997                 $14  $60     $6,362        $5,345          $(470)     $11,311





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



<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MCI Communications Corporation and Subsidiaries

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations
MCI   Communications    Corporation   and   its   majority-owned    subsidiaries
(collectively,  the company) operate  predominately  in a single  industry,  the
telecommunications  industry  which  includes the broad range of  long-distance,
local,  and wireless  telecommunications  services;  the company  also  provides
information  technology  services.   Long-distance  telecommunications  services
comprise a wide spectrum of domestic and international  voice and data services,
including  long-distance  telephone,   data  communications,   teleconferencing,
Internet and electronic messaging services.

Use of Estimates in Preparation of Financial Statements
The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those  estimates.  Estimates are used when  accounting
for  revenue,   including   long-term  customer  contracts  and  allowances  for
uncollectible receivables, investments, telecommunications expense, depreciation
including asset write-downs and amortization,  reorganization accruals, employee
benefit plans and taxes.

Principles of Consolidation
The financial  statements include the consolidated  accounts of the company with
all significant intercompany transactions eliminated.

Revenue
The company records as revenue the amount of communications  services furnished,
as measured  primarily by the minutes of traffic  processed,  after deducting an
estimate  of  traffic  which  will be  neither  billed  nor  collected.  Service
discounts  and  incentives  are  accounted  for as a reduction  of revenue  when
granted or,  where a service  continuation  contract  exists,  ratably  over the
contract  period.  Revenue from information  technology  services is recognized,
depending on the service  provided,  on a percentage of  completion  basis or as
services and products are furnished or delivered.

Cash and Cash Equivalents
Cash equivalents consist primarily of certificates of deposit, securities of the
U.S. Government and its agencies and corporate debt securities having maturities
of 90  days  or  less  when  purchased.  The  carrying  amount  reported  in the
accompanying balance sheets for cash equivalents  approximates fair value due to
the short-term maturity of these instruments.

Investments
Investments in marketable  securities are classified as  available-for-sale  and
are reported at fair value in accordance with Statement of Financial  Accounting
Standards  No.  115,  "Accounting  for  Certain  Investments  in Debt and Equity
Securities."  The  fair  values  are  based on  quoted  market  prices,  and any
unrealized  gains or losses,  net of applicable  income taxes, are excluded from
earnings  and  reported  as a net amount in  additional  paid-in  capital  until
realized. Realized gains and losses are recorded in the income statement and the
cost assigned to securities sold is based on the specific identification method.

The company  uses the equity  method to account for  investments  in entities in
which  it has  less  than a  majority  interest  but  can  exercise  significant
influence.  These investments are classified on the accompanying  balance sheets
as investments in affiliates.  Under the equity method, investments,  originally
recorded at cost,  are  adjusted to  recognize  the  company's  share of the net
earnings or losses of the affiliates as they occur,  rather than as dividends or
other  distributions  are  received,  limited  to the  extent  of the  company's
investment in,  advances to, and  guarantees  for the  investees.  The company's
share of net earnings or losses of affiliates includes  amortization of purchase
adjustments.  Unlisted  securities or securities in privately  held companies in
which  the  ownership  is less  than  20%  and the  company  does  not  exercise
significant influence are recorded at cost.


<PAGE>



Property and Equipment
The communications  system in service is recorded at cost and includes material,
interest,  labor and  overhead.  The costs of  construction  and  equipment  are
transferred to  communications  system in service as  construction  projects are
completed  and/or  equipment  is placed in  service.  Depreciation  is  recorded
commencing  with the first full  month  that the  assets  are in service  and is
provided using the straight-line method over the assets' estimated useful lives.
A majority of the  company's  communications  system  assets are grouped in like
pools for depreciation  purposes.  For these asset groups, the cost of equipment
retired  in the  ordinary  course of  business,  less  proceeds,  is  charged to
accumulated depreciation. Gains or losses on assets that are not grouped in like
pools for  depreciation  purposes are  included in  depreciation  expenses.  The
company  periodically  reviews and adjusts  the useful  lives  assigned to fixed
assets to ensure  that  depreciation  charges  provide  appropriate  recovery of
capital costs over the estimated physical and technological lives of the assets.
The  weighted   average   depreciable   life  of  the  assets   comprising   the
communications  system in service approximates nine years.  Furniture,  fixtures
and  equipment  are  depreciated  over a weighted  average life of six years and
include  computer  and data  center  equipment  along with other  administrative
assets.  Other  property  includes land,  buildings and leasehold  improvements.
Buildings are depreciated using lives of up to 35 years.  Leasehold improvements
are depreciated over the shorter of the life of the equipment or the life of the
lease.  Maintenance,  repairs, and reengineering costs are charged to expense as
incurred.

Capital Leases
Certain of the company's lease obligations meet the criteria of a capital lease.
These  obligations  are  recorded  at the  present  value  of the  future  lease
payments,  including  estimated  bargain  purchase  options,  discounted  at the
approximate  interest rate implicit in each lease.  Amounts are depreciated over
the estimated useful lives of the equipment, which are generally longer than the
terms of the leases.  Leases not  capitalized  are  primarily  for land on which
communications equipment is located and for administrative facilities, including
office  buildings,  vehicles,  certain  data  processing  equipment  and  office
equipment.

Other Assets and Deferred Charges,net
Other assets and deferred charges,  net includes  unamortized customer discounts
and service incentives,  right-of-way agreements with third parties,  noncurrent
marketable  securities and  investments  accounted for at cost and debt issuance
costs. Deferred customer discounts and service incentives are amortized over the
life of the specific  contract to which they relate;  also  included are amounts
recoverable under long-term customer service contracts, which are amortized over
the contract period.  Right-of-way  costs are amortized as the assets are placed
in service, over the lesser of the remaining term of the agreements or 25 years.
Debt issuance costs are amortized over the life of the applicable debt.

Goodwill
Goodwill  represents  the  excess of the cost to acquire  subsidiaries  over the
estimated  fair  market  value of the net assets  acquired.  These  amounts  are
amortized using the straight-line method over lives ranging from 10 to 40 years.
The company  periodically  evaluates the  realizability  of goodwill  based upon
projected  undiscounted  cash  flows and  operating  income  or other  valuation
techniques for each subsidiary having a material  goodwill balance.  The company
believes that no impairment of goodwill existed at December 31, 1997.

Long-Lived Assets
In the event that facts and circumstances indicate that the carrying amount of a
long-lived asset may be impaired,  an evaluation of recoverability is performed.
If an  evaluation  is required,  the estimated  future  undiscounted  cash flows
associated  with the  asset  are  compared  to the  asset's  carrying  amount to
determine if a write-down to market value or discounted cash flow is required.

Transactions with British Telecommunications plc
British  Telecommunications plc (BT) controls an approximate 20% voting interest
in the company  through its  ownership of Class A common stock and common stock.
In 1994,  the  company  and BT formed a joint  venture,  Concert  Communications
Company (Concert CS), to provide global enhanced  telecommunications services to
business  customers.  The  company  and BT lease each  other's  access  lines at
accepted  market rates in the ordinary  course of business to process traffic in
the U.S. and U.K. During 1997, 1996 and 1995, the amounts  associated with these
transactions were not material to the company.

Foreign Exchange Contracts and Interest Rate Swaps
The company  enters into  foreign  exchange  contracts  and  interest  rate swap
agreements  to hedge its foreign  currency  risks and reduce its  interest  rate
exposure.  While the company  does not engage in  speculation,  it is exposed to
credit  rate risk in the event of  nonperformance  by the other  parties  to the
agreements.  The  company  manages  credit  risk  by  regularly  monitoring  and
evaluating the  counterparties and believes the credit risk exposure is limited.
At December  31,  1997,  the fair value of and  potential  risk of loss on these
agreements were not material.

Income Taxes
The company files a consolidated  federal income tax return on a March 31 fiscal
year end.  Deferred income taxes are provided on transactions  that are reported
in the financial  statements in different  periods than for income tax purposes.
Income tax benefits of tax deductions  related to common stock transactions with
the company's employee benefit plans are recorded directly to additional paid-in
capital. General business credits are accounted for by the flow-through method.

Basic and Diluted Earnings per Common Share 
The company  implemented  Statement of Financial  Accounting  Standards  No. 128
(SFAS No. 128) Earnings per Share, in 1997, which requires certain disclosures
relating to the  calculation of earnings per share (EPS).  Basic EPS is based on
the weighted  average number of shares of common stock  outstanding  during each
year.  Diluted EPS is based on the weighted  average  number of shares of common
stock  outstanding  during each year,  adjusted  for the effect of common  stock
equivalents arising from the assumed exercise of stock options, if dilutive.

Reclassifications
Certain prior year  information has been  reclassified to conform to the current
year presentation.

NOTE 2. MERGER AGREEMENT

On November 9, 1997,  the company  entered into an Agreement  and Plan of Merger
(the MCI WorldCom Merger Agreement) with WorldCom,  Inc.  (WorldCom),  a Georgia
corporation, and TC Investments Corp. (Merger Sub), a Delaware corporation and a
wholly-owned  subsidiary  of WorldCom,  pursuant to which the company will merge
with and into Merger Sub (the MCI WorldCom Merger or the Merger). As a result of
the Merger,  (a) each outstanding share of the company's common stock, par value
$.10 per share,  (other than  shares  owned by WorldCom or Merger Sub or held by
the company)  will be converted  into the right to receive that number of shares
of  WorldCom  common  stock,  par value  $.01 per share,  equal to the  quotient
determined by dividing  $51.00 by the average of the high and low sale prices of
WorldCom  common stock as reported on the Nasdaq  National Market on each of the
20  consecutive  trading  days  ending with the third  trading  day  immediately
preceding the effective time of the Merger (the Exchange  Ratio),  provided that
the Exchange Ratio shall not be less than 1.2439 or greater than 1.7586; and (b)
each outstanding  share of the company's Class A common stock shall be converted
into the right to receive $51.00 in cash, without interest thereon. The combined
companies plan to operate under the MCI WorldCom name.

Concurrent with the MCI WorldCom Merger Agreement, the company,  WorldCom and BT
entered  into  an  agreement  (the BT  Termination  Agreement)  whereby  (i) the
Agreement  and Plan of Merger,  dated as of November 3, 1996, as last amended on
August  21,  1997  (the MCI BT Merger  Agreement),  among  the  company,  BT and
Tadworth  Corporation  was  terminated;  (ii) WorldCom agreed to pay BT a fee of
$450  million and expenses not in excess of $15 million in order to induce BT to
waive its  rights  under and agree to  terminate,  the MCI BT Merger  Agreement;
(iii) BT agreed to support and vote its shares of Class A common  stock in favor
of the  Merger;  and (iv) BT agreed to  exercise  its call option to acquire the
company's  shares in Concert CS immediately  following the effective time of the
Merger  . The  company  will  be a  distributor  of  Concert  CS  services  on a
nonexclusive  basis to  customers in the U.S. for at least two years and as many
as five years following BT's exercise of its call option.

On March 11, 1998, the  stockholders of the company and shareholders of WorldCom
approved  the  Merger.  The Merger is also  subject to the  receipt of  required
regulatory approvals.

In  connection  with the  execution of the BT Merger  Agreement  and as modified
under the MCI  WorldCom  Merger  Agreement,  pre-merger  retention  bonus  pools
(retention   pools)  totaling  $270  million  were  established  to  retain  key
executives and employees of the company. The company recorded compensation costs
in 1997 of $93 million,  related to these  retention  pools of which $82 million
was paid by December 31, 1997. The remaining accrued  compensation  costs of $11
million and other amounts payable from these retention pools are scheduled to be
paid in 1998 and 1999.  However,  all unpaid amounts under these retention pools
will be paid  on the  closing  date of the  MCI  WorldCom  Merger  or any  other
transaction  involving  the  sale or  other  disposition  of a  majority  of the
company's  capital  stock or  assets if  occurring  earlier  than the  scheduled
payment dates.  The company and WorldCom have certain  interconnection  or other
service  agreements at prevailing  market rates in the ordinary  course of their
businesses.  Since the  execution  of the MCI  WorldCom  Merger  Agreement,  the
amounts associated with these transactions were not material to the company.


<PAGE>



NOTE 3. INVESTMENTS IN MARKETABLE SECURITIES

At December 31, 1997 and 1996, the company had various investments in marketable
securities,  all of which were  classified as  available-for-sale  and stated at
fair value. At December 31, 1997, the portfolio  consisted of equity  securities
with an  aggregate  cost of $60 million and fair value of $120  million and were
included in other assets and deferred  charges,  net. At December 31, 1996,  the
portfolio  consisted of $40 million of certificates of deposit,  $143 million of
U.S. Government agency securities,  $67 million of corporate debt securities and
equity  securities  with an aggregate cost and fair value of $11 million.  These
investments were included in the  accompanying  balance sheet as either cash and
cash  equivalents,  marketable  securities or other assets and deferred charges,
net, as appropriate.

Gross unrealized holding gains associated with these investments at December 31,
1997 were $60 million and there were no gross unrealized holding gains or losses
at December 31,  1996.  There were no realized  gains on sales of available  for
sale marketable securities for the years ended December 31, 1997 and 1996.

NOTE 4. INVESTMENTS IN AFFILIATES

The company has various investments in affiliates accounted for under the equity
method. At December 31, 1997 and 1996, the net investment  balance in affiliated
companies was $653 million and $690 million,  respectively. The more significant
of these are Avantel,  S.A. de C.V. (Avantel) and Concert CS. Avantel is a 44.5%
owned business venture with Grupo Financiero  Banamex-Accival  formed to provide
competitive domestic and international long-distance telecommunications services
in Mexico. At December 31, 1997 and 1996, the net investment balance for Avantel
was $415 million and $465 million, respectively. The company's 24.9% interest in
Concert  CS,  had a net  investment  balance  of $92  million  and $53  million,
respectively  at December 31, 1997 and 1996.  In 1997,  the company  pledged its
investment in Avantel as security for a loan to Avantel.  In  connection  with a
strategic  alliance  agreement  with  Telefonica  de Espana,  S.A.  (Telefonica)
entered in April 1997 and  expanded in March 1998,  Telefonica  agreed to invest
$250 million in Avantel and to purchase  additional  equity if certain qualified
transactions  occur.  In  certain  circumstances,  Telefonica  has the  right to
require the company to acquire its interest in Avantel at cost.

The summarized financial  information for all affiliated companies accounted for
by the  company  under  the  equity  method,  as  reported  in  their  financial
statements  as of  December  31,  1997 and 1996 and for the  three  years  ended
December 31, 1997 is as follows:
<TABLE>
<CAPTION>



December 31,                                             1997                   1996
            ---
- --------------------------------------- ---------------------- ----------------------
- ---------------------------------------                        ----------------------
(In millions)
<S>                                                 <C>                        <C>    
Current assets                                                                
                                                    $     647                  $  425
Other assets                                            
                                                        1,864                   1,674
Current liabilities                                                           
                                                          863                     868
Noncurrent liabilities                                                        
                                                          785                     739
</TABLE> 
<TABLE>
<CAPTION>



Year ended December 31,                                  1997                   1996                   1995
- --------------------------------------- ---------------------- ---------------------- ----------------------
- ---------------------------------------
(In millions)
<S>                                                  <C>                   <C>                    <C>
Net Sales                                            $  1,309              $     868              $     590
Gross profit                                              366                    146                    100
Net loss from continuing operations                      (341)                  (395)                  (437)
Net loss                                                 (190)                  (395)                  (442)
</TABLE>

The company's share of net losses of affiliated companies including amortization
of purchase  adjustments was $(144) million,  $(156) million and $(187) million,
in 1997, 1996 and 1995, respectively. The company conducts business with Concert
CS through  the  provision  and receipt of  communications  services at accepted
rates in the  ordinary  course of  business.  The company  and  Avantel  conduct
business  through the  exchange of domestic  and  international  interconnection
services at prevailing  market rates in the ordinary course of business.  During
1997,  1996 and 1995, the amounts  associated with these  transactions  were not
material to the company.

NOTE 5.  INVESTMENTS IN NEWS CORP. AND DIRECT BROADCAST SATELLITE

At  December  31,  1997,  the company had  invested  $1,350  million in the News
Corporation  Limited  (News  Corp.)  comprised  of  (i)  cumulative  convertible
preferred shares of two U.S.  subsidiaries of News Corp. with a stated value and
liquidation  preference of $1,148 million and bearing a dividend rate of 5.147%,
and (ii) four-year  warrants  (purchase price $202 million) to acquire up to 210
million News Corp. ordinary shares for an exercise price of $1,148 million.  The
exercise price of the warrants is payable,  at the company's  option,  in either
cash or through the surrender of the cumulative convertible preferred shares, or
a  combination  of both. In May 1997,  the company and News Corp.  amended their
investment  agreement to, among other things,  terminate the company's  previous
obligation  to invest an  additional  $650  million  in News Corp.  The  company
recorded dividend income of $59 million,  $54 million and $18 million,  in 1997,
1996 and 1995, respectively, on its investment.

Direct Broadcast Satellite (DBS) is a point-to-multipoint broadcast service that
uses high-powered Ku band satellites placed in geosynchronous orbit. In December
1996, the FCC issued the DBS license  awarded to the company in the January 1996
public  auction.  In May  1997,  the  company  and News  Corp.  entered  into an
agreement  to form a joint  venture (DBS  Venture) in which both  parties  would
contribute their respective DBS assets and cash. In exchange,  the company would
receive a 19.9%  interest in the new venture.  The agreement  also provided that
the parties would seek a third party to acquire their combined interests in this
DBS business. In June 1997, the company and News Corp. entered into an agreement
with  Primestar  Partners,  L.P.  (Primestar)  for the sale and  transfer of the
company's  and News  Corp.'s  DBS assets other than two of the four DBS Venture
satellites  (Primestar  Transaction).  In March  1998,  the  parties  sold their
interest  in one of the  remaining  satellites.  The parties  are  pursuing  the
disposition  of the other  satellite,  which is still  under  construction.  The
Primestar  Transaction  is  part  of a  larger  transaction  that  involves  the
consolidation  of Primestar and TCI Satellite  Entertainment,  Inc. into a newly
formed entity (New Primestar) that was completed in April 1998.  Concurrent with
the  consummation  of  the  Primestar  Transaction,  the  company  will  acquire
preferred  shares in a subsidiary  of News Corp.  for a face amount equal to the
company's cost of obtaining the FCC license plus interest  thereon.  The company
will  also  receive  from New  Primestar  consideration  in the form of cash and
interest  bearing  non-voting New Primestar  securities for its share of the DBS
Venture  assets  transferred  to New  Primestar.  The Primestar  Transaction  is
subject  to  regulatory  approvals,  including  approval  by  the  FCC  and  the
Department  of Justice.  As of December  31, 1997,  the company had  capitalized
$1,043  million  related to its investment in DBS, $682 million of which was for
the  payment  of  the  license  and  the  remainder  related  primarily  to  the
construction of two satellites.

NOTE 6.  SUPPLEMENTARY BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>

December 31,                                                                1997             1996
- ---------------------------------------------------------------------------------------------------------------------------
(In millions) 
Other current assets:
<S>                                                                     <C>               <C>           
  Deferred income taxes                                                 $    452          $   376
  Other receivables, net                                                     578              191
  Other                                                                      393              321
- ---------------------------------------------------------------------------------------------------------------------------
Total other current assets                                              $  1,423        $   888
- ---------------------------------------------------------------------------------------------------------------------------

Other accrued liabilities:
  Taxes, other than income                                              $    207          $   335
  Payroll and employee benefits                                              431              328
  Reorganization costs                                                       295               92
  Other                                                                    1,315            1,051
- ---------------------------------------------------------------------------------------------------------------------------
Total other accrued liabilities                                          $ 2,248           $1,806
- ---------------------------------------------------------------------------------------------------------------------------

Deferred taxes and other:
  Deferred income taxes                                                  $ 1,866           $1,697
  Other                                                                      211               26
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred taxes and other                                           $ 2,077           $1,723
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>

Accumulated  amortization associated with goodwill at December 31, 1997 and 1996
was $321 million and $247 million, respectively.

At December  31,  1997 and 1996,  checks not yet  presented  for payment of $319
million and $338 million in excess of cash balances, respectively, were included
in  accounts  payable  on  the  accompanying  balance  sheet.  The  company  had
sufficient  funds  available  to cover these  outstanding  checks when they were
presented for payment.

In 1997,  the company  completed a  comprehensive  review of product and service
offerings.  In  conjunction  with this  review,  the  company  decided  to exit,
restructure or settle several business contracts;  consolidate certain operating
centers and streamline or discontinue  certain non-core or  under-performing  IT
operations;  and reorganize  certain operations or eliminate certain product and
service offerings within its core business. The company recorded $361 million in
its costs of services to reflect costs and  provisions to exit,  restructure  or
settle  several  business  contracts  and cease  certain  product and service
offerings.  The company also recorded $282 million in its sales,  operations and
general  expense  primarily for other  reorganization  actions,  which  included
approximately $103 million of severance  associated with workforce alignment and
$93 million of  obligations  and  penalties  associated  with lease,  vendor and
customer  contracts.  The remainder  represents  other costs associated with the
company's business reorganization and certain legal costs.

At December 31, 1997, the company had expended $153 million of the accrued costs
related to the above  items,  with the  majority of the  remaining  $490 million
expected to be expended during 1998. The remaining  accrual,  which was included
in reorganization  costs and other in other accrued  liabilities,  was primarily
comprised of lease  obligations,  severance  and  customer  and vendor  contract
termination and commitment costs and certain legal costs. Cash expenditures from
these  obligations  were  and will  continue  to be  funded  through  cash  from
operations.  Reorganization liabilities at December 31, 1997 also included lease
and  other  commitments  related  to the  company's  consolidation  of its  core
business and centralization of major  administrative  functions that occurred in
the year ended December 31, 1995.

NOTE 7.  DEBT AND LEASE OBLIGATIONS

Company debt consists of:
<TABLE>
<CAPTION>

December 31,                                                                1997             1996
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
<S>                                                                       <C>              <C>    
Senior Notes, net of unamortized discounts of
    $1.1 million and $1.5 million at weighted average
     interest rates of 6.9%, and with maturities ranging
     from February 1998 to August 2006                                    $1,468           $1,485
Senior Debentures, net of unamortized discounts
    of $6.5 million and $6.5 million at a weighted
    average interest rates of 7.6%, and with
    maturities ranging from January 2023 to June 2027                      1,384            1,384
Capital lease obligations at a weighted
    average interest rate of 8.6% and 9.1%                                   528              504
Commercial paper and bank credit facility
    borrowings at a weighted average interest
    rate of 5.8% and 5.4%                                                  1,806            1,422
Other debt at a weighted average interest
    rate of  7.4% and 5%                                                     201              206
- ---------------------------------------------------------------------------------------------------------------------------
Total debt                                                                 5,387            5,001
Debt due within one year                                                  (2,111)            (203)
===========================================================================================================================
Total long-term debt                                                      $3,276           $4,798
===========================================================================================================================
</TABLE>

Annual  maturities of long-term  debt for the five years after December 31, 1997
are as follows:  $2,111 million in 1998;  $596 million in 1999;  $281 million in
2000; $47 million in 2001; and $41 million in 2002.

Total  interest  costs were $388 million in 1997,  $314 million in 1996 and $242
million  in  1995,  of  which  $153  million,  $118  million  and  $93  million,
respectively, were capitalized.

At  December  31,  1997 and 1996,  the  estimated  fair  value of the  company's
long-term debt,  excluding  capital lease  obligations,  is listed below.  These
valuations  represent  either  quoted market  values,  where  available,  or the
company's estimate based upon market prices of comparable debt instruments.
<TABLE>
<CAPTION>

December 31,                                                    1997                              1996
- ---------------------------------------------------------------------------------------------------------------------------
                                                                       Estimated                          Estimated
                                                      Carrying              Fair         Carrying              Fair
                                                        Amount             Value           Amount             Value
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
<S>                                                     <C>                <C>            <C>                <C>   
Senior Notes                                            $1,468            $1,503           $1,485            $1,516
Senior Debentures                                        1,384             1,438            1,384             1,456
Commercial paper and bank
  credit facility borrowings                             1,806             1,806            1,422             1,422
Other debt                                                 201               201              206               206
- ---------------------------------------------------------------------------------------------------------------------------
Total debt, excluding capital leases                    $4,859            $4,948           $4,497            $4,600
===========================================================================================================================
</TABLE>

The excess in the  estimated  fair value versus the carrying  amount of debt for
1997 and 1996  reflects  the trend  during the periods  where  market rates were
below the company's fixed-rate debt.

Senior Notes and Debentures
In June 1996, the company issued $500 million in aggregate principal amount of 7
1/8% Senior  Debentures  due June 15, 2027. In August 1996,  the company  issued
$300  million  aggregate  principal  amount of 6.95% Senior Notes due August 15,
2006.  The proceeds of the issuances were used for general  corporate  purposes,
including the repayment of short-term  borrowings under the company's commercial
paper  program.  The company has in effect a $1.2  billion  shelf  registration,
which will  enable it to issue debt  securities  with a range of  maturities  at
either fixed or variable rates.  The company had not issued any securities under
this shelf  registration at December 31, 1997. During 1997 and 1996, the company
repaid $17 million and $300  million,  respectively,  of maturing  Senior Notes,
leaving $2,852 million and $2,869  million of debt  securities  outstanding at a
weighted  average  annual  interest rate of 7.22% and 7.21% at December 31, 1997
and 1996, respectively.

Commercial Paper and Bank Credit Facility Borrowings
On April 30, 1997,  the company  entered into a revolving  credit loan agreement
with several parties under which the company may borrow up to $4 billion through
April 28, 1998. This credit  facility  supports the company's  commercial  paper
program and, in conjunction with this program,  may be used to fund fluctuations
in  working  capital  and other  general  corporate  requirements.  There are no
amounts  outstanding  under this credit  facility at December 31,  1997.  During
1997,  the company issued $7,340 million and repaid $6,956 million of commercial
paper borrowings.  During 1996, the company issued commercial paper and borrowed
under the credit facility an aggregate of $9,089 million and repaid an aggregate
of $8,372  million.  Borrowings  under the  commercial  paper program and credit
facility are classified as current, as the remaining term of the credit facility
agreement  is less than one year.  The company  expects to extend this  facility
prior to its expiration.

Interest Rate Swap
In July 1997,  the company  entered into a forward  starting  interest rate swap
agreement  (the "swap") in the notional  principal  amount of $500 million for a
term of 15 years.  The swap involves the receipt of  floating-rate  interest and
the  payment  of  fixed-rate  interest  at 6.71%  without  the  exchange  of the
underlying  principal  amount.  The  swap,  which  requires  biannual  net  cash
settlements  commencing  in July 1998,  has been  designated  as a hedge against
adverse  changes in market  interest  rates on  fixed-rate  debt  expected to be
issued under the shelf  registration  in the second quarter of 1998. The gain or
loss  recognized upon the expiration or settlement of the swap will be amortized
over the life of the  associated  debt as an  offset  or  addition  to  interest
expense.  The fair  value of the swap and  amount  of gain or loss  deferred  is
estimated as the amount the company  would  receive  (pay) to terminate the swap
taking  into  account the  then-current  interest  rates.  The  unrealized  loss
resulting from the fair value of the swap at December 31, 1997, was $20 million.

Lease Obligations
Future  minimum  rental  commitments  for capital  leases are as  follows:  $181
million in 1998;  $56 million in 1999; $54 million in 2000; $57 million in 2001;
$45  million  in 2002;  and $461  million  thereafter.  At  December  31,  1997,
aggregate  future  minimum  capital lease  payments were $854 million  including
interest of $326 million.  The present value of future capital lease payments at
December  31, 1997 was $528  million.  The gross and net book values of property
and  equipment  financed by capital  leases were $353 million and $202  million,
respectively,   at  December  31,  1997  and  $497  million  and  $215  million,
respectively,  at December 31,  1996.  Future  minimum  rental  commitments  for
noncancelable  operating  leases are as  follows:  $401  million  in 1998;  $355
million in 1999;  $302 million in 2000;  $232  million in 2001;  $181 million in
2002;  and $770  million  thereafter.  At December 31,  1997,  aggregate  future
minimum payments for noncancelable  operating leases were $2,241 million.  Total
rental expense for all operating leases was $361 million,  $332 million and $321
million for the years ended December 31, 1997, 1996 and 1995, respectively.

In December 1997, the company sold equipment at net book value to an independent
entity  and  leased  it back  under a six  year  noncancelable  operating  lease
agreement with options to renew the lease for an additional  three-year term and
to purchase the  equipment at various  amounts  during the lease term based upon
amounts as specified under the lease terms. At December 31, 1997,  other current
assets on the  accompanying  balance sheet included a receivable of $360 million
for the transaction proceeds, which were received in January 1998.

NOTE  8.  COMPANY  OBLIGATED  MANDATORILY  REDEEMABLE  PREFERRED  SECURITIES  OF
SUBSIDIARY  TRUST  HOLDING  SOLELY  JUNIOR   SUBORDINATED   DEFERRABLE  INTEREST
DEBENTURES OF THE COMPANY

On May 29, 1996, MCI Capital I, a wholly-owned Delaware statutory business trust
(Trust),  issued  $750  million  aggregate  principal  amount  of 8%  Cumulative
Quarterly Income Preferred  Securities,  Series A representing 30 million shares
outstanding  (preferred  securities) due June 30, 2026. The Trust exists for the
sole purpose of issuing the preferred  securities  and investing the proceeds in
the company's 8% Junior Subordinated  Deferrable Interest  Debentures,  Series A
(Subordinated  Debt Securities) due June 30, 2026, the only assets of the Trust.
The net proceeds from the issuance of the Subordinated Debt Securities were used
for general corporate purposes.

Holders  of the  preferred  securities  are  entitled  to  receive  preferential
cumulative cash distributions from the Trust on a quarterly basis,  provided the
company has not elected to defer the payment of interest due on the Subordinated
Debt  Securities to the Trust.  The company may elect this deferral from time to
time, provided that the period of each such deferral does not exceed five years.
The company  made $60 million  and $35  million in Trust  distributions  for the
years ended December 31, 1997, and 1996, respectively.  The preferred securities
are subject to mandatory redemption,  in whole or in part, upon repayment of the
Subordinated  Debt  Securities  at maturity or earlier in an amount equal to the
amount of Subordinated Debt Securities maturing or being repaid. In addition, in
the event the company  terminates the Trust,  the  Subordinated  Debt Securities
will be  distributed  to the then  holders of the  preferred  securities  of the
Trust.  The Trust assets had an estimated  fair market value of $788 million and
$750 million at December 31, 1997 and 1996, respectively.

In  connection  with the  issuance  of the  preferred  securities,  the  company
executed a Trust Agreement, an Indenture, a Guarantee Agreement,  and an Expense
Agreement.   These   agreements,   taken  together  with  the  issuance  of  the
Subordinated Debt Securities,  constitute a full, irrevocable, and unconditional
guarantee by the company of all of the Trust's  obligations  under the preferred
securities  (the  Guarantee).  The  Guarantee  Agreement  covers  payment of the
preferred  securities'  quarterly  distributions  and  payments  on  maturity or
redemption of the preferred  securities,  but only in each case to the extent of
funds held by the Trust.  If the company does not make interest  payments on the
Subordinated Debt Securities held by the Trust, the Trust will have insufficient
funds to pay such  distributions.  The  obligations  of the  company  under  the
Guarantee and the  Subordinated  Debt  Securities are  subordinate and junior in
right of payment to all senior debt of the company.

NOTE 9.  STOCKHOLDERS' EQUITY

Preferred Stock Rights Plan
In September  1994,  the company's  board of directors  adopted a  stockholders'
rights  plan  (Rights  Plan) and  declared a  dividend  of one  preferred  share
purchase  right (Right) for each  outstanding  share of common stock and Class A
common stock (collectively,  Common Shares). The Rights dividend was distributed
on October  11,  1994 to the  holders of record on that  date.  The Rights  have
attached  and will  continue  to attach to certain  future  issuances  of Common
Shares.  Each Right entitles the registered  holder to purchase from the company
one  one-hundredth  of a share of the  company's  Series E Junior  Participating
Preferred  Stock,  par value $.10 per share (Series E Preferred  Stock),  for an
initial  purchase  price of $100,  subject to  adjustment.  The Rights  Plan was
amended on November 9, 1997,  in  connection  with the Merger to avoid  WorldCom
becoming  an  "acquiring  person"  under  the  Rights  Plan as a  result  of the
approval,  execution  or delivery of the MCI  WorldCom  Merger  Agreement or the
consummation of the Merger.

The Rights will become  exercisable  upon the  occurrence  of certain  specified
events,  including a public announcement that a person or group of affiliated or
associated  persons  (Acquiring  Person)  (other  than  WorldCom  or  any of its
affiliates  as a  result  of the  approval,  execution  or  delivery  of the MCI
WorldCom  Merger  Agreement  or the  consummation  of the Merger)  has  acquired
beneficial  ownership of 10% or more of the outstanding Common Shares (more than
20.1% in the case of share  acquisitions by BT). In the event that any person or
group of affiliated  or associated  persons  becomes an Acquiring  Person,  each
holder of a Right (other than Rights beneficially owned by the Acquiring Person,
which will  become  void)  will  thereafter  have the right,  subject to certain
restrictions,  to receive upon exercise in lieu of Series E Preferred Stock that
number  of  shares of the  company's  common  stock  (or,  at the  option of the
company,  that  number of one  one-hundredth  of a share of  Series E  Preferred
Stock) determined as set forth in the Rights Plan.

For purposes of the Rights Plan, the company's board of directors has designated
10 million shares of Series E Preferred Stock,  which amount may be increased or
decreased by the board of  directors.  All Rights  expire on September 30, 2004,
unless this date is extended or the Rights are earlier  redeemed or exchanged by
the company in  accordance  with the Rights Plan.  In addition,  the Rights Plan
provides that the Rights will expire  immediately prior to the effective time of
the Merger.

Class A Common Stock
In September  1994,  the company issued 136 million shares of its Class A common
stock to BT for $4.3  billion,  which  resulted in a 20% voting  interest in the
company.  At December 31,  1997,  the Class A common  stock is  equivalent  on a
per-share  basis to the company's  common stock,  except with respect to certain
voting rights.  BT is entitled to proportionate  representation on the company's
board of directors, which currently equates to three seats. In addition to board
representation, BT is entitled to preemptive rights with respect to the issuance
of additional shares of common stock and to investor protections with respect to
certain  corporate  actions  of the  company.  Shares  of Class A  common  stock
automatically  convert  into common  stock upon  transfer  and in certain  other
events.

Class A and Common Stock  Dividends 
For each of the three years ended December 31, 1997,  1996 and 1995, the company
paid annual dividends of $.05 per share on its common stock.

NOTE 10.  STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS

Employee Stock Option Plan
The current  Employee  Stock Option Plan (Stock  Option  Plan)  provides for the
issuance  of up to 142  million  shares of  common  stock.  On an annual  basis,
pursuant to the Stock  Option  Plan,  the board of  directors  may  increase the
maximum  number of shares  available for issuance under the Stock Option Plan as
of  each  January  1,  by up to 5% of the  number  of  shares  of  common  stock
outstanding at each such date.  Options  granted under the Stock Option Plan are
exercisable  at  such  times  and in  such  installments  as  determined  by the
compensation  committee of the board of  directors.  Options  granted  under the
Stock  Option Plan may not have an option price lower than the fair market value
of the common stock on the date of the grant.

Stock  appreciation  rights may be granted in  combination  with a stock  option
either at the time of the grant or any time thereafter. As of December 31, 1997,
no stock appreciation rights had been granted.

The   compensation   committee  may  also  grant  restricted  stock  awards  and
performance  share  awards,  subject  to  such  conditions,   restrictions,  and
requirements as the committee in its sole  discretion may determine.  During the
year ended December 31, 1997, no restricted shares were granted. At December 31,
1997,  there  were  approximately  276,000  restricted  shares  outstanding.  No
performance share awards had been issued at December 31, 1997.

The   compensation   committee  may  grant  both  incentive  stock  options  and
nonqualified options under the Plan. All options granted in the last three years
have been  nonqualified  options.  These  nonqualified  options expire after ten
years, and are exercisable ratably over a three year period.

Under the Stock Option Plan,  executives  may be granted  incentive  stock units
(ISUs)  that vest over a three  year  period and  entitle  the holder to receive
shares  of the  company's  common  stock.  At  December  31,  1997,  there  were
approximately  2.3 million  ISUs  outstanding.  For the year ended  December 31,
1997, the company recognized  approximately $34 million of compensation  expense
for ISU's issued during the year. In  conjunction  with the MCI WorldCom  Merger
Agreement,  the senior  retention ISUs granted under the MCI BT Merger Agreement
were cancelled.

Directors' Stock Option Plan
The company also has a stock option plan for non-employee  directors (Directors'
Plan) that provides for the issuance of up to 2 million  shares of common stock.
Under the  Directors'  Plan,  each  non-employee  director has been granted upon
commencement  of  service as a director a  five-year  option to  purchase  up to
40,000  shares of common  stock at the closing  price of the common stock on the
date of grant. Two directors  declined such option.  The options are exercisable
after the first anniversary of the date of grant, in cumulative  installments of
25% per year.  Similar  options will be granted  automatically  to all new board
members who are not employees.  Upon the fifth  anniversary of the date of grant
of options,  the unexercised portion of the grant expires,  and a new option for
40,000 shares is granted automatically.

Both of the above plans permit the holder of an option to pay the purchase price
for stock option exercises by surrendering  shares of the company's common stock
having a fair market value equal to, or greater than, the purchase price.

Employee Stock Purchase Plan
Under the current  Employee  Stock  Purchase Plan (ESPP Plan),  up to 56 million
shares of common  stock may be  purchased  by eligible  employees of the company
through  payroll  deductions of up to 15% of their  eligible  compensation.  The
purchase price is equal to the lesser of (a) 85% of the fair market value of the
stock on the date it is  purchased  or (b) 85% of the fair  market  value of the
stock on certain  specified  valuation  dates.  During 1997 and 1996,  employees
purchased approximately 6.8 million and 6.3 million shares, respectively,  under
the ESPP Plan.

Common Stock Reserved for Future Issuance
At December 31,  1997,  96 million  shares of the  company's  authorized  common
stock,  including  69.5 million  shares under  option,  were reserved for future
issuance under the Employee and Directors' Stock Option Plans and the ESPP Plan.
The company had opted to use treasury shares to fulfill the purchases made under
these plans during the three-year period ended December 31, 1997.

Accounting for Stock Issued to Employees
The company  accounts  for its stock option  plans under  Accounting  Principles
Board (APB),  Opinion No. 25 "Accounting  for Stock Issued to Employees" and, in
accordance with the recognition requirements set forth under this pronouncement,
no  compensation  expense was  recognized for the three years ended December 31,
1997. In 1996, the company  elected to adopt SFAS No. 123  "Accounting for Stock
Based Compensation" for disclosure purposes only.

For disclosure purposes,  the fair value of each stock option grant is estimated
on the date of grant  using  the  Black-Scholes  option-pricing  model  with the
following  weighted-average  assumptions used for stock options granted in 1997,
1996,  and 1995,  respectively:  annual  dividends  of $0.05 and  actual  option
forfeitures for all three years,  expected volatility of 24.7%, 24.7% and 33.2%,
risk-free interest rate of 6.3%, 5.4%, and 7.4%, and expected life of five years
for all grants. The weighted-average  fair value of the stock options granted in
1997, 1996, and 1995 was $12.52, $9.42, and $7.83, respectively.

The fair value of each stock  purchase right under the ESPP Plan is estimated on
the  date of  grant  using  the  Black-Scholes  option-pricing  model  with  the
following weighted-average assumptions used for stock purchase rights granted in
1997,  1996 and 1995,  respectively:  expected  volatility  of 36.5%,  30.7% and
30.2%,  risk-free interest rate of 5.2%, 5.1% and 5.7%, and expected life of one
month for all  grants.  The  weighted-average  fair value of the stock  purchase
rights granted in 1997, 1996 and 1995 was $5.78, $4.87 and $3.99, respectively.

Under the above models,  the total value of stock options granted in 1997, 1996,
and 1995 was $155 million, $195 million, and $167 million,  respectively,  which
would be  amortized  ratably  on a pro forma  basis over the  three-year  option
vesting  period,  and the total value of the stock  purchase  rights  granted in
1997, 1996 and 1995 was $40 million, $31 million, and $26 million, respectively.
Had the company determined  compensation cost for these plans in accordance with
SFAS No. 123, the company's pro forma net income and earnings per
share would have been:


<TABLE>
<CAPTION>

Year ended December 31,                             1997            1996           1995
- ------------------------------------------ -------------- --------------- --------------
- ------------------------------------------ -------------- --------------- --------------
(In millions, except per share amounts)
<S>                                             <C>               <C>             <C>    
Pro forma net income                            $     20          $1,105          $ 498

Pro forma basic earnings per share               $  0.03         $  1.61          $0.73

Pro forma diluted earnings per share             $  0.03         $  1.59          $0.72
</TABLE>

The SFAS No. 123 method of accounting does not apply to options granted prior to
January 1, 1995, and, accordingly, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.

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

                                                        Number       Exercise Price      Weighted-Average
                                                      of Shares          Range            Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
(In millions, except exercise price amounts)
- ---------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>            <C>                    <C>    
- ---------------------------------------------------------------------------------------------------------------------------
Shares under option, December 31, 1994                    62.3         $  3.44-28.75           $19.97
Options granted                                           25.2           18.38-26.50            19.13
Options exercised                                        (9.8)            3.44-26.88            15.20
Options terminated                                       (6.0)            5.38-28.25            22.37
- ---------------------------------------------------------------------------------------------------------------------------
Shares under option, December 31, 1995                    71.7         $  3.44-28.75           $20.13
Options granted                                           22.4           25.13-30.25            29.18
Options exercised                                       (13.6)            3.44-28.75            18.83
Options terminated                                       (5.5)            9.94-30.06            25.04
- ---------------------------------------------------------------------------------------------------------------------------
Shares under option, December 31, 1996                    75.0         $  9.94-30.25           $22.70
Options granted                                           13.1           29.75-42.56            36.26
Options exercised                                       (16.5)            9.94-36.25            21.03
Options terminated                                       (2.1)            9.94-42.56            29.07
- ---------------------------------------------------------------------------------------------------------------------------
Shares under option, December 31, 1997                    69.5         $  9.94-42.56           $25.46
- ---------------------------------------------------------------------------------------------------------------------------
Options exercisable, December 31, 1997                    38.7            9.94-36.25            21.83
Options exercisable, December 31, 1996                    36.4            9.94-28.75            19.91
Options exercisable, December 31, 1995                    31.1            3.44-28.75            18.17
</TABLE>


The following  table  summarizes  information  about the shares  outstanding  at
December 31, 1997:
<TABLE>
<CAPTION>

                -------------------Options Outstanding-------------------   --------Options Exercisable-----------
                  Number         Weighted-Average                               Number
Range of          Outstanding   Remaining Contractual  Weighted-Average          Outstanding    Weighted-Average
Exercise Prices   (In millions)  Life (Years)          Exercise Price           (In millions)  Exercise Price
- ---------------   -------------  ------------          --------------           -------------  --------------
<S>                     <C>           <C>                      <C>                      <C>             <C>    
$ 9.94-14.88             3.4            4.1                    $10.38                    3.4            $10.38
15.81-19.56             18.2            6.6                     18.07                   12.7             17.94
20.06-24.13              6.7            6.0                     21.09                    6.6             21.07
25.00-30.25             28.9            8.4                     28.28                   15.9             27.62
35.25-42.56             12.3            9.9                     36.29                    0.1             36.25
                                                             
                        69.5                                                            38.7
                                                                      
</TABLE>

At  December  31,  1997,  the  company  had an  aggregate  of 11 million  shares
available for future grant under both its Employee and  Directors'  Stock Option
Plans combined.

NOTE 11.  EMPLOYEE BENEFIT PLANS

Pension Plans
The company maintains a noncontributory  defined benefit pension plan (MCI Plan)
and  a   supplemental   pension  plan   (Supplemental   Plan).   Western   Union
International,  Inc.  (WUI),  a subsidiary  of the  company,  also has a defined
benefit pension plan (WUI Plan).  Collectively,  these plans cover substantially
all employees who work 1,000 hours in a year.

The MCI Plan and the  Supplemental  Plan provide pension benefits that are based
on the employee's compensation for each year of service prior to retirement. The
WUI Plan provides pension benefits based on the employee's compensation for each
year of service after 1990 and prior to retirement.

The company's policy is to fund the MCI Plan and the WUI Plan in accordance with
the funding  requirements of the Employee Retirement Income Security Act of 1974
and within the limits of allowable tax  deductions.  The assets of the plans are
primarily invested in corporate equities,  government securities,  and corporate
debt securities.

Net periodic pension cost includes:
<TABLE>
<CAPTION>

Year ended December 31,                                                 1997               1996                1995

- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
<S>                                                                     <C>                 <C>                 <C>   
Service cost during the period                                          $57                 $45                 $40

Interest cost on projected benefit obligation                            34                  29                  25

Actual return on plan assets                                            (70)                (54)                (70)

Net amortization and deferral                                            32                  22                  48

===========================================================================================================================
Net pension cost                                                        $53                 $42                 $43
===========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
The company's pension asset consists of:

December 31,                                                            1997               1996
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
<S>                                                                   <C>                  <C>        
Plan assets at fair value                                             $ 494                $453
Accumulated benefit obligation including vested
  benefits of $390 in 1997 and $307 in 1996                            (447)              (347)
===========================================================================================================================
Plan assets in excess of accumulated
  benefit obligation                                                    $47               $ 106
===========================================================================================================================

Plan assets at fair value                                              $494               $453

Projected benefit obligation for service
  rendered to date                                                     (563)              (432)
- ---------------------------------------------------------------------------------------------------------------------------
Plan assets (less than) in excess of projected benefit obligation       (69)                21
Unrecognized net loss (gain) from past experience
  different from that assumed                                            35                 (1)
Prior service cost not yet recognized in net
  periodic pension cost                                                  31                 30
Unrecognized net asset at January 1, 1986
  being recognized over 16 years                                         (3)                (3)
===========================================================================================================================
Total (liability) prepaid pension asset                                 $(6)               $47
===========================================================================================================================
</TABLE>
The  discount  rate and rate of increase in future  compensation  levels used in
determining the actuarial present value of the projected  benefit  obligation at
December 31,  1997,  was 7.0% for both plans and 5.75% and 5.00% for the MCI and
WUI Plans, respectively.  At December 31, 1996, the discount rate used was 7.75%
for both plans, and the rate of increase in future compensation levels was 5.75%
and 5.00% for the MCI and WUI plans,  respectively.  The expected long-term rate
of  return on assets in 1997 and 1996 was 9.0% for the MCI Plan and 8.5% for the
WUI Plan.

Annual  service cost is  determined  using the Projected  Unit Credit  actuarial
method,  and prior service cost is amortized on a  straight-line  basis over the
average remaining service period of employees.

Effective January 1, 1996, the company amended the MCI Plan. Retirement benefits
are calculated by first  establishing  an initial  balance for each  participant
based on the present value of benefits  earned  through 1995.  For service after
1995,  participants  accrue  benefits  based on a specific  percentage of annual
salary and earn interest credits based on the prior year's balance at a specific
interest rate. Employees who are age 50 or older and have at least five years of
service as of December 31,  1995,  will have their  benefits  continue to accrue
under the previous  formula  through the year 2000.  Effective  January 1, 1997,
employees of MCI  Systemhouse  Corp.  became  eligible to participate in the MCI
Plan.


<PAGE>



Employee Stock Ownership Plan and 401(k) Plans
The  company has  combined  employee  stock  ownership  (ESOP) and 401(k)  plans
covering substantially all of its employees. The 401(k) plans allow employees to
defer pretax income in accordance with the requirements of Internal Revenue Code
Section  401(k).  The company  matches  employee  contributions  up to a certain
limit.  Participants vest in the company's  matching  contributions at a rate of
20% per year of  service  and are  immediately  100%  vested  in their  elective
deferrals. The company contributed approximately 1.5 million shares, 1.6 million
shares,  and 1.7 million  shares of its common stock as the  company's  matching
contribution  to the 401(k)  plans for the plan years ended  December  31, 1997,
1996, and 1995, respectively. The company suspended contributions to the ESOP in
1994.

WUI sponsors a 401(k) savings plan for its collectively bargained employees (WUI
401(k)).  The savings plan is intended to meet  requirements of Internal Revenue
Code Section  401(k).  WUI 401(k)  participants  vest in the company's  matching
contributions  at a rate of 20% per year of  service  and are  immediately  100%
vested in their elective deferrals. The company contributed approximately 15,000
shares,  18,000 shares,  and 24,000 shares of its common stock to the WUI 401(k)
for the plan years ended December 31, 1997, 1996, and 1995, respectively.

Employee Severance Plan
The company has a severance  plan covering  substantially  all of its employees,
which  entitles  employees to receive  severance pay benefits in the event their
employment  is  permanently  terminated as a result of a  reduction-in-force or
other internal  reorganizations as specified in the severance plan. Each covered
employee is eligible to receive a severance  benefit  based on years of service.
For the year ended  December 31, 1997,  approximately  $103 million of severance
under the plan was included in sales,  operations and general expenses and other
accrued  liabilities in connection  with work force  alignments  associated with
reorganization  efforts.  As a result of its  decision  to sell and  discontinue
certain non-core  operations and streamline other  operations,  the company will
eliminate  approximately 4,500 positions in specific areas of the company. These
employees include  management and non management,  mostly in staff,  support and
administrative  positions.  Approximately  3,200 of these employees had left the
company by March 31, 1998. The remaining  employees are expected to leave by the
end of 1998.

NOTE 12. INCOME TAXES
<TABLE>
<CAPTION>

The components of the total income tax provision are:

Year ended December 31,                                   1997              1996             1995
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
<S>                                                       <C>               <C>              <C>    
Current
Federal                                                   $ 21              $387             $182
State and local                                              -                68               23
- ---------------------------------------------------------------------------------------------------------------------------
Current income tax provision                                21               455              205

Deferred
Federal                                                     57               276              129
State and local                                             12                22               15
- ---------------------------------------------------------------------------------------------------------------------------
Deferred income tax provision                               69               298              144
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax provision                                $ 90              $753             $349
===========================================================================================================================
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

A  reconciliation  of the  statutory  federal  income tax rate to the  company's
effective income tax rate is:

Year ended December 31,                                     1997            1996             1995
- ---------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>               <C>              <C>    
Statutory federal income tax rate                           35%               35%              35%
State and local income taxes, net
  of federal income tax effect                               3                 3                3
Nondeductible amortization                                  10                 1                2
Nontaxable dividends                                        (7)               (1)              (1)
R&D tax credits                                             (8)               (1)              (1)
Other                                                        5                 1                1
===========================================================================================================================
Effective income tax rate                                   38%               38%              39%
===========================================================================================================================
</TABLE>
In 1997, 1996, and 1995, the company recorded a tax benefit of $44 million,  $60
million,  and $25 million,  respectively,  to additional paid-in capital for tax
deductions related to common stock transactions with its employee benefit plans.

At December  31, 1997,  for federal  income tax  purposes,  the company had $179
million of Alternative Minimum Tax (AMT) credit carryforwards available that had
no expiration date. In addition,  the company had available $576 million of U.S.
net operating loss carryforwards  expiring through 2012, $121 million which were
subject  to  limitation  due to change in  ownership  control,  $159  million of
Canadian net operating loss carryforwards  expiring through 2004 and $53 million
of U.K. net operating loss carryforwards which had an indefinite life.

At December 31, 1997,  1996,  and 1995,  the company's  net deferred  income tax
liability was comprised of the following:
<TABLE>
<CAPTION>

                                                          1997              1996             1995
- ---------------------------------------------------------------------------------------------------------------------------
(In millions)
<S>                                                   <C>              <C>              <C>    
     Deferred income tax asset                        $    929         $     550        $     587

     Deferred income tax liability                      (2,343)           (1,871)          (1,627)
===========================================================================================================================
Net deferred income tax liability                      $(1,414)          $(1,321)         $(1,040)
===========================================================================================================================

The components of these amounts are:
     Communications system                             $(2,373)          $(1,885)         $(1,577)
     Customer discounts                                    (22)              (77)             (87)
     Allowance for uncollectibles                           37               114               56
     Reorganization and realignment expenses               228                34               61
     Domestic equity investments                            (6)               62               38
     Alternative minimum and general
       business tax credits                                 41                 -              104
     Net operating loss carryforward                       296                96               33
     Capital losses carryforward                            64                 -                -
     Other, net                                            321               335              332
===========================================================================================================================
Net deferred income tax liability                      $(1,414)          $(1,321)         $(1,040)
===========================================================================================================================
</TABLE>
The company  believes  that it is more likely than not that it will  realize the
deferred  income tax asset and,  accordingly,  no valuation  allowance  has been
recorded in the three years ended December 31, 1997.

NOTE 13.  ASSET DISPOSALS

In connection  with an asset  disposition  plan adopted in the fourth quarter of
1997, the company will dispose of certain equipment  primarily in the first half
of 1998.  The net book value of the assets to be  disposed  of  aggregated  $265
million with no significant proceeds expected. The productive assets included in
the  disposition  plan were  identified  in  response  to  changes  in  specific
customer,  product  and  technology  strategies.  The  major  part of this  plan
included  the early  replacement  of central  processing  units and data storage
devices.  The company reassessed and consequently revised its strategies related
to data  processing and storage in order to maximize  facility space in its data
centers which is critical to support  growth in products  that require  customer
collocation  in such  centers.  The company  will replace  this  equipment  with
devices that offer  greater  processing  and storage  capabilities  with reduced
operating and maintenance  costs and less floor space.  Depreciation  expense in
1997 includes $60 million representing the net book value of the assets included
in the  disposition  plan which had been  removed  from  service by December 31,
1997.  The company  will  continue to use the  remaining  assets  until they are
removed from service and accelerate the recognition of  depreciation  expense on
these assets over their shortened  remaining service period. The company expects
that  substantially  all of the  remaining  assets  will be  decommissioned  and
disposed of by June 30, 1998.  This change will result in  estimated  additional
depreciation  expense of up to  approximately  $190 million in the first half of
1998. The company had been  depreciating  this  equipment  over estimated  lives
averaging six years.  This would compare with an average life of four years, had
the assets been  depreciated  over the revised service period as contemplated in
the fourth quarter 1997 disposition plan.  Moreover,  had the company originally
depreciated these assets ratably over such revised service period,  depreciation
expense,  exclusive  of the $60  million  referred  to  above,  would  have been
approximately $59 million,  $55 million and $43 million higher in 1997, 1996 and
1995, respectively.

During the third quarter of 1995, the company recorded a $520 million charge for
an asset write-down.  The write-down primarily related to communications systems
and administrative  assets that had become redundant due to the consolidation of
its core business and centralization of major  administrative  functions or were
no longer aligned with strategic product offerings. The amount of the write-down
was measured in conformity with Statement of Financial  Accounting Standards No.
121  "Accounting  for the  Impairment  of Long-Lived  Assets and for  Long-Lived
Assets to be Disposed of."

NOTE 14. CONTINGENCIES

The  company,  in the  normal  course  of  business,  is a party to a number  of
lawsuits and  regulatory  and other  proceedings  and has included  accrued loss
contingencies  in other accrued  liabilities  for certain of these matters.  The
company does not expect that the results in these lawsuits and proceedings  will
have a material adverse effect on the consolidated financial position or results
of operations of the company.

On November 4, 1996, and thereafter, and on August 25, 1997, and thereafter, the
company  and all of its  directors,  including  the two  directors  who are also
executive  officers of the company and the three  directors  elected by BT, were
named as defendants  in a total of 15 complaints  filed in the Court of Chancery
in the State of Delaware.  BT was named as a defendant in 13 of the  complaints.
The complaints were brought by alleged stockholders of the company, individually
and  purportedly  as class  actions on behalf of all other  stockholders  of the
company. In general, the complaints allege that the company's directors breached
their  fiduciary duty in connection  with the MCI BT Merger  Agreement,  that BT
aided and abetted those breaches of duty,  that BT owes fiduciary  duties to the
other  stockholders  of the  company  and  that  it  breached  those  duties  in
connection  with the MCI BT Merger  Agreement.  The complaints  seek damages and
injunctive and other relief.

On or about October 8, 1997, all of the company's  directors,  including the two
directors who are also executive officers of the company and the three directors
elected by BT,  were named as  defendants  in a purported  derivative  complaint
filed in the  Court  of  Chancery  in the  State of  Delaware.  BT and  Tadworth
Corporation  were  also  named as  defendants,  and the  company  was named as a
nominal  defendant.  The plaintiff,  derivatively  and on behalf of the company,
alleges  breach of  fiduciary  duty by the  company's  directors  and aiding and
abetting  those  breaches  of duty by BT in  connection  with the MCI BT  Merger
Agreement and WorldCom's  exchange offer. The complaint seeks injunctive relief,
damages, and other relief.

One of the  purported  shareholder  class actions  pending in Delaware  Chancery
Court has been amended and plaintiffs in four of the other purported shareholder
class  actions have moved to amend their  complaints to name WorldCom and Merger
Sub. as  additional  defendants. They  generally  allege  that the  defendants
breached their fiduciary duty to shareholders in connection with the Merger, the
agreement to pay a termination fee to WorldCom,  and alleged  discrimination  in
favor of BT in connection with the Merger.  They seek,  inter alia,  damages and
injunctive relief  prohibiting the consummation of the Merger and the payment of
the inducement fee to BT.

Three  complaints  have been filed in the federal  district court in Washington,
D.C., as class  actions on behalf of  purchasers of the company's  shares during
three different periods from; August 14, 1997 through August 22, 1997; August 14
through August 20, 1997 and July 10 through July 22, 1997. The three  complaints
allege  that the company and certain of its  officers  and  directors  failed to
disclose material information about the company,  including that the company was
renegotiating  the terms of the MCI BT Merger  Agreement dated November 3, 1996.
The complaints seek damages and other relief.

The  company  believes  that all of the  complaints  are  without  merit and the
company  presently  does not expect that the above  actions will have a material
adverse effect on the consolidated  financial  position or results of operations
of the company.


<PAGE>


NOTE 15.  BASIC AND DILUTED EARNINGS PER SHARE

The company implemented SFAS No. 128 in 1997, which requires certain disclosures
relating  to  the  calculation  of  earnings  per  share.  The  following  is  a
reconciliation  of the numerators and  denominators of the basic and diluted EPS
computations for net income.

Basic Earnings Per Share
<TABLE>
<CAPTION>

For the Year ended December 31,                      1997                  1996              1995
- -------------------------------------------------------------------------------------------------
(In millions, except per share amounts)
<S>                                                       <C>            <C>              <C>    
Net income                                                $ 149          $ 1,202          $   548
                                                          ========================================
Weighted average shares of common
   stock outstanding                                        693              687              680
                                                          ========================================

Basic earnings per share for net income                   $0.22            $1.75         $   0.81
                                                          ========================================
</TABLE>
SFAS No. 128  replaces  primary  EPS with basic EPS and  excludes  the effect of
common  stock  equivalents  when  computing  basic EPS. In previous  years,  the
company  included the effect of common stock  equivalents for the calculation of
primary EPS in  accordance  with APB Opinion No. 15. At December 31,  1996,  and
1995, primary EPS were disclosed as $1.73 and $0.80, respectively.

Diluted Earnings Per Share
<TABLE>
<CAPTION>
For the Year ended December 31,                      1997                  1996              1995
- -------------------------------------------------------------------------------------------------
(In millions, except per share amounts)
<S>                                                 <C>                <C>                  <C>  
Net income                                         $  149              $ 1,202              $ 548
                                                   ==============================================

Adjustment of shares outstanding:
  Weighted average shares of common
      stock outstanding                               693                  687                680
  Shares of common stock issuable upon the
    assumed exercise of common stock
    equivalents                                        71                  55                  52
  Shares of common stock assumed
    repurchased for treasury                          (57)                (47)                (45)
         `                                                                             
Adjusted shares of common stock and
  common stock equivalents for
  computation                                         707                 695                 687
                                                   ===============================================

Diluted earnings per share for net income          $0.21               $ 1.73               $0.80
                                                   ===============================================
</TABLE>
SFAS No. 128 requires that the average stock price for the period always be used
in determining the number of treasury  shares assumed  repurchased for treasury,
rather  than the  higher of the  average  or ending  stock  price,  as  required
previously  under APB Opinion No. 15.  Accordingly,  fully  diluted EPS has been
restated  from $1.72 and $0.79 at December 31, 1996 and 1995,  respectively,  to
reflect diluted EPS in accordance with SFAS No. 128.


<PAGE>



The following  provides  information  regarding those options to purchase common
stock that were excluded from the  computation of diluted EPS under the treasury
stock method because the options'  exercise  prices was greater than the average
market price of the common  shares.  Had they been included in the  computation,
these options would have had an antidilutive effect on EPS.
<TABLE>
<CAPTION>

For the Year ended December 31,                               1997              1996               1995
<S>                                                  <C>                        <C>                <C>    <C>    <C>
Number of Options Excluded:                          0.2 million                20.0 million       19.8 million

Price Range Covered by Excluded Options:             $38.38 - $42.56            $28.00 - $30.25    $22.50 - $28.75

Date Range for Expiration of Options:                 May 7, 2007 -             June 28, 2003 -     April 27, 2003 -
                                                         July 9, 2007             November 2, 2006    December  5, 2005
</TABLE>
NOTE 16. SELECTED QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended                                  Dec. 31,          Sept. 30,          June 30,          Mar. 31,
                                                     1997              1997               1997              1997
- ---------------------------------------------------------------------------------------------------------------------------
(In millions, except per share amounts)
<S>                                                    <C>                <C>              <C>               <C>    
Revenue                                                 $5,108            $4,819           $4,843            $4,883
Operating expenses:
  Cost of services                                       2,866             3,018            2,547             2,525
   Sales, operations and general                         1,912             1,444            1,265             1,319
  Depreciation including asset-write-down                  607               543              479               453
Income (loss) from operations                             (277)             (186)             552               586
Equity in income (losses) of affiliated companies          (37)              (46)             (24)              (37)
Net income (loss)                                         (244)             (182)             280               295
Basic earnings (loss) per common share                    (.35)             (.26)             .41               .43
Diluted earnings (loss) per common share                  (.35)             (.26)             .40               .42
Weighted average number of common shares                   703               695              689               685
Weighted average number of common shares - assuming dilution 703             695              708               701

Three months ended                                  Dec. 31,          Sept. 30,          June 30,          Mar. 31,
                                                          1996              1996             1996              1996
- ---------------------------------------------------------------------------------------------------------------------------
(In millions, except per share amounts)

Revenue                                                 $4,753            $4,685           $4,565            $4,491
Operating expenses:
  Cost of services                                       2,433             2,370            2,342             2,344
  Sales, operations and general                          1,310             1,304            1,229             1,185
  Depreciation                                             441               430              412               381
Income from operations                                     569               581              582               581
Equity in income (losses) of affiliated companies          (28)              (28)             (45)              (55)
Net income                                                 303               304              300               295
Basic earnings per common share                            .44               .44              .44               .43
Diluted earnings per common share                          .44               .44              .43               .42
Weighted average number of common shares                   685               685              689               689
Weighted average number of common shares -
 assuming dilution                                         694               691               698               701
</TABLE>
Since there are changes in the  weighted  average  number of shares  outstanding
each  quarter,  the sum of earnings  per common and common  equivalent  share by
quarter may not equal the total share for the applicable year.

EPS amounts have been restated to conform to SFAS No. 128.

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








Concert is a  trademark  of  Concert  Communications  Company  and is used under
license.


<PAGE>


REPORT OF  MANAGEMENT  

The  management  of the  company is  responsible  for the
financial information and representations contained in the financial statements,
notes and all other sections of the annual report. The financial statements have
been  prepared in  conformity  with  generally  accepted  accounting  principles
appropriate under the circumstances to reflect,  in all material  respects,  the
substance of events and  transactions  which have  occurred.  In  preparing  the
financial  statements,  it is necessary that management make informed  estimates
and judgments  based on currently  available  information in order to record the
results of certain events and  transactions.  

The  company  maintains  a  system  of  internal  controls  designed  to  enable
management  to  meet  its   responsibility   for  reporting  reliable  financial
information.  The system is designed to provide reasonable assurance that assets
are safeguarded  and  transactions  are recorded and executed with  managements
authorization.  Internal control systems are subject to inherent limitations due
to the necessity to balance costs incurred with benefits  provided.  The company
believes  that the  existing  system of internal  controls  provides  reasonable
assurance that errors or irregularities  that could be material to the financial
statements are prevented or would be detected in a timely manner.

The board of directors  pursues its oversight role for the financial  statements
through its audit committee,  which is comprised solely of directors who are not
officers or employees of the company. They are responsible for engaging, subject
to stockholder approval, the independent accountants.  The audit committee meets
periodically  with  management and the  independent  accountants to review their
activities in connection  with  financial  reporting  matters.  The  independent
accountants have full and free access to meet with the audit committee,  without
management  representatives present, to discuss the results of their examination
and the adequacy and quality of internal controls and financial reporting.

The  report  of our  independent  accountants,  Price  Waterhouse  LLP,  appears
herewith.  Their  audit of the  financial  statements  includes  a review of the
companys  system of  internal  controls  and  testing of records as required by
generally accepted auditing standards.

/s/ David M.Case

David  M.  Case 
Vice  President  and  Controller  
April  9,  1998 


<PAGE>

  REPORT  OF INDEPENDENT  ACCOUNTANTS 

To the Board of Directors and Stockholders of MCI Communications Corporation

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated  income  statements,  statements  of cash  flows and  stockholders
equity present fairly, in all material  respects,  the financial position of MCI
Communications  Corporation and its  subsidiaries at December 31, 1997 and 1996,
and the results of their  operations  and their cash flows for each of the three
years in the period ended  December  31,  1997,  in  conformity  with  generally
accepted   accounting   principles.   These   financial   statements   are   the
responsibility of the companys management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements  in  accordance  with  generally  accepted  auditing
standards which 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,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.

/s/ Price Waterhouse LLP 

Price Waterhouse LLP
April 9, 1998 
Washington, D.C.











Exhibit 21
- ----------
(1 of 1)


Significant Subsidiaries of MCI Communications Corporation at
December 31, 1997


    Subsidiary                               State of Incorporation
    ----------                               ----------------------

MCI International, Inc.                              Delaware

MCI International Telecommunications Corporation     Delaware

MCI Telecommunications Corporation                   Delaware

Telecom*USA, Inc.                                    Delaware























Exhibit 23

                       CONSENT OF INDEPENDENT ACCOUNTANTS



We  hereby  consent  to the  incorporation  by  reference  in  the  Registration
Statements on Form S-8 (Nos. 33-21740,  33-23275,  33-29547, 33-29549, 33-29550,
33-35339,  33-49304,  33-49403,   33-52133,  33-58071,   333-01137,   333-02887,
333-08569,  333-12845,  333-12847,  333-12849,  333-23089, 333-29623, 333-32451,
333-38897,  and  333-46785)  and  the  Prospectuses  constituting  part  of  the
Registration Statements on Form S-3 (Nos. 33-57155, 333-02593, and 333-11193) of
MCI Communications  Corporation ("MCI") of our report dated April 9, 1998, which
appears  in  Exhibit  13 to this  Annual  Report on Form 10-K  (which  report is
incorporated  by reference in this Annual Report on Form 10-K).  We also consent
to the  incorporation  by  reference  of our report on the  Financial  Statement
Schedule, which appears in Exhibit 99(c) which is also incorporated by reference
in this Form 10-K.


/s/ Price Waterhouse LLP

Price Waterhouse LLP
Washington, DC
April 15, 1998

 

<TABLE> <S> <C>

<ARTICLE>                                                          5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of MCI Communications Corporation and Subsidiaries at December 31, 1997
and the income statement for the year ended December 31, 1997 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<CIK>                                                     0000064079
<NAME>                                    MCI Communications Corporation
<MULTIPLIER>                                               1,000,000
       
<S>                                                   <C>
<PERIOD-TYPE>                                                 12-MOS
<FISCAL-YEAR-END>                                        DEC-31-1997
<PERIOD-START>                                           JAN-01-1997
<PERIOD-END>                                             DEC-31-1997
<CASH>                                                           261
<SECURITIES>                                                       0
<RECEIVABLES>                                                  3,576
<ALLOWANCES>                                                     372
<INVENTORY>                                                        0
<CURRENT-ASSETS>                                               5,260
<PP&E>                                                        21,724
<DEPRECIATION>                                                 7,856
<TOTAL-ASSETS>                                                25,510
<CURRENT-LIABILITIES>                                          8,096
<BONDS>                                                        3,276
                                            750
                                                        0
<COMMON>                                                          74
<OTHER-SE>                                                    11,237
<TOTAL-LIABILITY-AND-EQUITY>                                  25,510
<SALES>                                                            0
<TOTAL-REVENUES>                                              19,653
<CGS>                                                              0
<TOTAL-COSTS>                                                 18,978
<OTHER-EXPENSES>                                                   0
<LOSS-PROVISION>                                                   0
<INTEREST-EXPENSE>                                               235
<INCOME-PRETAX>                                                  299
<INCOME-TAX>                                                      90
<INCOME-CONTINUING>                                              149
<DISCONTINUED>                                                     0
<EXTRAORDINARY>                                                    0
<CHANGES>                                                          0
<NET-INCOME>                                                     149
<EPS-PRIMARY>                                                   0.22
<EPS-DILUTED>                                                   0.21
        


</TABLE>

<TABLE> <S> <C>

<ARTICLE>                                                          5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of MCI Communications Corporation and Subsidiaries at December 31, 1996
and the income statement for the year ended December 31, 1996 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<CIK>                                                     0000064079
<NAME>                                    MCI Communications Corporation
<MULTIPLIER>                                               1,000,000
       
<S>                                                   <C>
<PERIOD-TYPE>                                                 12-MOS
<FISCAL-YEAR-END>                                        DEC-31-1996
<PERIOD-START>                                           JAN-01-1996
<PERIOD-END>                                             DEC-31-1996
<CASH>                                                           187
<SECURITIES>                                                     161
<RECEIVABLES>                                                  3,480
<ALLOWANCES>                                                     273
<INVENTORY>                                                        0
<CURRENT-ASSETS>                                               4,716
<PP&E>                                                        18,709
<DEPRECIATION>                                                 6,535
<TOTAL-ASSETS>                                                22,978
<CURRENT-LIABILITIES>                                          5,046
<BONDS>                                                        4,798
                                            750
                                                        0
<COMMON>                                                          74
<OTHER-SE>                                                    10,587
<TOTAL-LIABILITY-AND-EQUITY>                                  22,978
<SALES>                                                            0
<TOTAL-REVENUES>                                              18,494
<CGS>                                                              0
<TOTAL-COSTS>                                                 16,181
<OTHER-EXPENSES>                                                   0
<LOSS-PROVISION>                                                   0
<INTEREST-EXPENSE>                                               196
<INCOME-PRETAX>                                                1,990
<INCOME-TAX>                                                     753
<INCOME-CONTINUING>                                            1,202
<DISCONTINUED>                                                     0
<EXTRAORDINARY>                                                    0
<CHANGES>                                                          0
<NET-INCOME>                                                   1,202
<EPS-PRIMARY>                                                   1.75
<EPS-DILUTED>                                                   1.73
        


</TABLE>

<TABLE> <S> <C>

<ARTICLE>                                                          5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of MCI Communications Corporation and Subsidiaries at December 31, 1995
and the income statement for the year ended December 31, 1995 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<CIK>                                                     0000064079
<NAME>                                    MCI Communications Corporation
<MULTIPLIER>                                               1,000,000
       
<S>                                                   <C>
<PERIOD-TYPE>                                                 12-MOS
<FISCAL-YEAR-END>                                        DEC-31-1995
<PERIOD-START>                                           JAN-01-1995
<PERIOD-END>                                             DEC-31-1995
<CASH>                                                           471
<SECURITIES>                                                     373
<RECEIVABLES>                                                  2,912
<ALLOWANCES>                                                     260
<INVENTORY>                                                        0
<CURRENT-ASSETS>                                               4,505
<PP&E>                                                        15,547
<DEPRECIATION>                                                 5,238
<TOTAL-ASSETS>                                                19,301
<CURRENT-LIABILITIES>                                          4,870
<BONDS>                                                        3,444
                                              0
                                                        0
<COMMON>                                                          74
<OTHER-SE>                                                     9,528
<TOTAL-LIABILITY-AND-EQUITY>                                  19,301
<SALES>                                                            0
<TOTAL-REVENUES>                                              15,265
<CGS>                                                              0
<TOTAL-COSTS>                                                 14,147
<OTHER-EXPENSES>                                                   0
<LOSS-PROVISION>                                                   0
<INTEREST-EXPENSE>                                               149
<INCOME-PRETAX>                                                  897
<INCOME-TAX>                                                     349
<INCOME-CONTINUING>                                              548
<DISCONTINUED>                                                     0
<EXTRAORDINARY>                                                    0
<CHANGES>                                                          0
<NET-INCOME>                                                     548
<EPS-PRIMARY>                                                   0.81
<EPS-DILUTED>                                                   0.80
        


</TABLE>


<TABLE>
<CAPTION>

                                                                                                                       Exhibit 99(a)
                                                                                                                       Schedule II
                 MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
                          ALLOWANCE FOR UNCOLLECTIBLES
                                  (In millions)

                                           Balance at                                                                     Balance at
                                            Beginning                                           Deductions                   End of
                                            of Period                  Additions              (Write-offs)                    Period
                                          -----------                 ----------              ------------               -----------
<S>                                              <C>                        <C>                       <C>                       <C>
    December 31, 1997                            $273                       $624                      $525                      $372

    December 31, 1996                             260                        572                       559                       273

    December 31, 1995                             226                        437                       403                       260
</TABLE>






<TABLE>
<CAPTION>

                                                                                                                       Exhibit 99(b)
                                                                                                                       -------------
                 MCI COMMUNICATIONS CORPORATION AND SUBSIDIARIES
                             CAPITALIZATION SCHEDULE
                                  (In millions)
                                   (unaudited)

Set forth below is the capitalization of the company as of December 31, 1997:
<S>                                                                                                                          <C>

Debt(a):
  Secured debt:
     Capital lease obligations............................                                                                   $   528
     Other secured obligations............................                                                                        22
                                                                                                                             -------
  Total secured debt......................................                                                                       550
                                                                                                                             -------
  Unsecured debt:
     Senior Notes, net....................................                                                                     1,468
     Senior Debentures, net...............................                                                                     1,384
     Commercial paper borrowings..........................                                                                     1,806
     Other unsecured debt.................................                                                                       179
                                                                                                                             -------
  Total unsecured debt....................................                                                                     4,837
                                                                                                                             -------
Total debt................................................                                                                     5,387
                                                                                                                             -------
Company Obligated Mandatorily Redeemable Preferred
     Securities of Subsidiary Trust Holding Solely
     Junior Subordinated Deferrable Interest
     Debentures of the Company (b)........................                                                                       750
                                                                                                                             -------
Stockholders' equity:
     Class A common stock, $.10 par value, authorized
       500 million shares, issued 136 million shares......                                                                        14
     Common stock, $.10 par value, authorized 2 billion
       shares, issued 593 million shares..................                                                                        60
     Additional paid in capital...........................                                                                     6,362
     Retained earnings....................................                                                                     5,345
     Treasury stock, at cost, 44 million shares...........                                                                     (470)
                                                                                                                             -------
Total stockholders' equity................................                                                                    11,311
                                                                                                                             -------
Total capitalization......................................                                                                   $17,448
                                                                                                                            =======


</TABLE>

(a)  For  additional   information   concerning  the  company's   capital  lease
obligations,  which are  obligations  of  subsidiaries  of the company  that are
guaranteed  by the  company,  and  for  additional  information  concerning  the
company's  long-term  debt,  see  Note  7 of  Notes  to  Consolidated  Financial
Statements  in the  company's  Annual  Report to  Stockholders,  which Note 7 is
included in Exhibit 13 to the company's  Annual Report on Form 10-K for the year
ended  December 31, 1997.  Interest  rates on capital  lease  obligations,  on a
weighted average basis, approximated 8.6% per annum at December 31, 1997.

(b) On May 29, 1996, MCI Capital I, a wholly-owned  Delaware  statutory business
trust (Trust),  issued $750 million aggregate  principal amount of 8% Cumulative
Quarterly Income Preferred Securities,  Series A (preferred securities) due June
30,  2026.  The Trust  exists  for the sole  purpose of  issuing  the  preferred
securities  and investing  the proceeds in the company's 8% Junior  Subordinated
Deferrable Interest Debentures, Series A (Subordinated Debt Securities) due June
30, 2026.



Exhibit 99 (c)


                        REPORT OF INDEPENDENT ACCOUNTANTS
                         ON FINANCIAL STATEMENT SCHEDULE



To the Board of Directors and Stockholders of MCI Communications Corporation

Our audits of the consolidated  financial  statements  referred to in our report
dated April 9, 1998  appearing in Exhibit 13 to this Annual  Report on Form 10-K
(which  report  and  consolidated   financial  statements  are  incorporated  by
reference  in this  Annual  Report on Form 10-K) also  included  an audit of the
Financial  Statement  Schedule  in  Exhibit  99 (a) of this  Form  10-K.  In our
opinion,  the Financial  Statement  Schedule  presents  fairly,  in all material
respects,  the information  set forth therein when read in conjunction  with the
related consolidated financial statements.

/s/ Price Waterhouse LLP

Price Waterhouse LLP 
April 9, 1998 
Washington, D.C.





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