MFS COMMUNICATIONS CO INC, 8-K, 1996-08-12

MFS COMMUNICATIONS CO INC
8-K, 1996-08-12
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 8-K

CURRENT REPORT

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PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): August 12, 1996

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MFS COMMUNICATIONS COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

DELAWARE 0-21594 47-0714388
(STATE OR (COMMISSION FILE NUMBER) (IRS
OTHER EMPLOYER
JURISDICTION IDENTIFICATION
OF NO.)
INCORPORATION)

11808 MIRACLE HILLS DRIVE, OMAHA, 68154
NEBRASKA (ZIP
(ADDRESS OF PRINCIPAL EXECUTIVE CODE)
OFFICES)

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Registrant's telephone number, including area code: 402-231-3000

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NOT APPLICABLE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED FROM LAST REPORT)

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<PAGE>

ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS

(a) On August 12, 1996, pursuant to an Agreement and Plan of Merger, dated
as of April 29, 1996 (the "Merger Agreement"), among MFS Communications
Company, Inc., ("MFS"), a Delaware corporation, MFS Global Internet Services,
Inc., a Delaware corporation and a wholly owned subsidiary of MFS ("Sub"), and
UUNET Technologies, Inc., a Delaware corporation ("UUNET"), Sub was merged
with and into UUNET (the "Merger"). The description of the Merger Agreement
contained herein is qualified in its entirety by reference to the Merger
Agreement, which is attached hereto as Exhibit 2.1 and is incorporated herein
by reference. Pursuant to the Merger, each share of Common Stock of UUNET has
been canceled and converted into and represents the right to receive 1.777776
shares (the "Exchange Ratio") of common stock, par value $0.01 per share of
MFS (the "MFS Common Stock"). No fractional shares will be issued; MFS will
make cash payments in lieu of fractional share interests. The 58,152,481
shares of MFS Common Stock to be issued pursuant to the terms of the Merger
Agreement will be issued from MFS' authorized, but unissued, common stock. The
Merger was approved by the stockholders of UUNET at a special meeting of
stockholders held on August 9, 1996. The issuance of the MFS Common Stock in
the Merger was approved by the stockholders of MFS at the MFS Annual Meeting
held on August 10, 1996. For accounting purposes, the Merger will be accounted
for as a purchase. The Exchange Ratio was determined through negotiation of
the parties to the Merger Agreement based upon negotiated share prices.

(b) The assets of UUNET consist primarily of cash, accounts receivable,
inventory, prepaid expenses and other current assets, property and equipment
and investments in affiliates. UUNET utilizes its assets to provide a
comprehensive range of Internet access options, applications, and consulting
services, which include Web server hosting and integration services, client
software and security products, training, and network integration and
consulting services. MFS intends to use the assets of UUNET's business
substantially as previously used.

On August 12, 1996, MFS issued a press release relating to the Merger, a
copy of which is attached hereto as Exhibit 99.1 and is incorporated herein by
reference.

ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS

(a) Financial Statements of businesses acquired:

The following financial statements of UUNET Technologies, Inc. and the
report of Arthur Andersen LLP, UUNET's independent public accountants
are included in this Report:

Report of Independent Public Accountants

Consolidated Balance Sheets at December 31, 1994 and 1995

Consolidated Statements of Operations for the Three Years Ended
December 31, 1995

Consolidated Statements of Stockholders' Equity for the Three Years
Ended December 31, 1995

Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1995

Notes to Consolidated Financial Statements

Report of Independent Public Accountants

Valuation and Qualifying Accounts

Unaudited Condensed Consolidated Balance Sheets at December 31, 1995
and March 31, 1996

Unaudited Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1995 and March 31, 1996

Unaudited Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1995 and March 31, 1996

1
<PAGE>

Unaudited Notes to Condensed Interim Consolidated Financial Statements
for the Three Months Ended March 31, 1996

(b) Pro Forma financial information:

The following pro forma consolidated condensed financial statements are
included in this Report:

Pro Forma Consolidated Condensed Statement of Operations for the Three
Months Ended March 31, 1996

Pro Forma Consolidated Condensed Statements of Operations for the Year
Ended December 31, 1995

Pro Forma Consolidated Condensed Balance Sheets at March 31, 1996

Notes to Pro Forma Consolidated Condensed Financial Statements

2.1 Agreement and Plan of Merger, dated as of April 29, 1996, among
MFS Communications Company, Inc. ("MFS"), a Delaware corporation,
MFS Global Internet Services, Inc., a Delaware corporation and a
wholly owned subsidiary of MFS, and UUNET Technologies, Inc.

99.1 Press Release of MFS Communications Company, Inc., dated August
12, 1996.

99.2 Reports of Arthur Andersen LLP

2
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

MFS COMMUNICATIONS COMPANY, INC.

/s/ Terrence J. Ferguson
_____________________________________
Terrence J. Ferguson
Senior Vice President, Secretary and
General Counsel
August 12, 1996

3
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To UUNET Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of UUNET
Technologies, Inc. (a Delaware corporation) and Subsidiaries, as of December
31, 1994 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of UUNET Technologies, Inc.,
and Subsidiaries, as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.

Arthur Andersen LLP

Washington, D.C.
January 31, 1996

F-1
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UUNET TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- --------
(IN THOUSANDS,
EXCEPT PAR VALUE
AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $10,493 $ 60,424
Accounts receivable, net of allowance of $455 and $1,647,
respectively, for doubtful accounts...................... 5,387 17,768
Inventories............................................... 1,214 1,251
Prepaid expenses and other current assets................. 1,253 2,149
------- --------
Total current assets........................................ 18,347 81,592
Property and equipment, net................................. 11,080 54,523
Investments in affiliates................................... -- 1,321
Other assets................................................ 198 174
------- --------
Total assets................................................ $29,625 $137,610
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable.......................... $ 1,060 $ 4,652
Accounts payable.......................................... 4,876 10,580
Accrued expenses.......................................... 4,826 24,604
Deferred revenues......................................... 3,315 3,421
------- --------
Total current liabilities................................... 14,077 43,257
Notes payable, net of current portion....................... 1,196 13,686
------- --------
Total liabilities........................................... 15,273 56,943
------- --------
Commitments and contingencies (Notes 6 and 9)
Redeemable Convertible Preferred Stock, $.001 par value;
(Notes 1 and 4):
Series A, B, C, D and E, 20,000 shares authorized; 11,150
shares issued and
outstanding as of December 31, 1994...................... 14,073 --
------- --------
Stockholders' equity (Notes 1 and 5):
Preferred Stock, $.001 par value; 500 shares authorized as
of December 31, 1995; none issued or outstanding......... -- --
Common Stock, $.001 par value; 50,000 shares authorized as
of December 31, 1995; 10,393 and 32,057 shares issued and
outstanding as of December 31, 1994 and 1995,
respectively............................................. 10 32
Additional paid-in capital................................ 9,584 108,071
Deferred compensation..................................... (207) (165)
Notes receivable from officers and stockholders (Note 5).. (113) --
Foreign currency translation adjustment................... 301 282
Accumulated deficit....................................... (9,296) (27,553)
------- --------
Total stockholders' equity.................................. 279 80,667
------- --------
Total liabilities and stockholders' equity.................. $29,625 $137,610
======= ========
</TABLE>

The accompanying notes are an integral part of these balance sheets.

F-2
<PAGE>

UUNET TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Internet services................................ $10,039 $16,860 $ 71,521
Software......................................... 13,980 16,278 22,940
------- ------- --------
Total revenues................................. 24,019 33,138 94,461
------- ------- --------
Costs and expenses:
Cost of revenues--
Internet services.............................. 6,452 10,262 46,393
Software....................................... 7,240 9,369 12,946
Network operations and support................... 3,850 6,764 13,127
Sales and marketing.............................. 5,558 9,681 18,762
General and administrative....................... 2,248 5,288 12,709
Acquisition expense.............................. -- -- 11,067
------- ------- --------
Total costs and expenses....................... 25,348 41,364 115,004
------- ------- --------
Loss from operations............................... (1,329) (8,226) (20,543)
Interest income.................................... 36 440 2,747
Interest expense................................... (103) (76) (808)
Equity in net loss of affiliates................... -- -- (127)
Loss on sale of investment in related party (Note
7)................................................ (433) -- --
------- ------- --------
Loss before income taxes........................... (1,829) (7,862) (18,731)
Benefit (provision) for income taxes (Note 10)..... (197) (126) 474
------- ------- --------
Net loss........................................... $(2,026) $(7,988) $(18,257)
======= ======= ========
Unaudited pro forma data (Note 1):
Pro forma net loss per common and equivalent
share........................................... $ (0.35) $ (0.63)
Shares used in computing pro forma net loss per
common and equivalent share..................... 22,946 28,987
</TABLE>

The accompanying notes are an integral part of these statements.

F-3
<PAGE>

UUNET TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------
NOTES
REDEEMABLE RECEIVABLE
CONVERTIBLE FROM FOREIGN RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL OFFICERS CURRENCY EARNINGS
------------------ ------------- PAID-IN DEFERRED AND TRANSLATION (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS ADJUSTMENT DEFICIT)
-------- -------- ------ ------ ---------- ------------ ------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1992, AS PREVIOUSLY
REPORTED................ 100 $ 200 5,100 $ 5 $ -- $ -- $-- $-- $ 582
Adjustment for pooling
of interests with UUNET
PIPEX (Note 1)......... 200 314 2,205 2 1,061 -- -- 255 392
-------- -------- ------ --- -------- ----- ---- ---- --------
BALANCE, DECEMBER 31,
1992, AS RESTATED....... 300 514 7,305 7 1,061 -- -- 255 974
Issuance of Series A
Preferred Stock, net of
issuance costs of $24,
together with warrants
to purchase Series B
Preferred Stock ....... 4,119 2,476 -- -- -- -- -- -- --
Redemption of UUNET
PIPEX Preferred Stock.. (200) (314) -- -- -- -- -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- (342) --
UUNET PIPEX fiscal year
conversion (Note 1).... -- -- -- -- -- -- -- -- (127)
Net loss............... -- -- -- -- -- -- -- -- (2,026)
-------- -------- ------ --- -------- ----- ---- ---- --------
BALANCE, DECEMBER 31,
1993, AS RESTATED....... 4,219 2,676 7,305 7 1,061 -- -- (87) (1,179)
Issuance of Series B
Preferred Stock, net of
issuance costs of $15.. 3,300 3,285 -- -- -- -- -- -- --
Issuance of Series C
Preferred Stock, net of
issuance costs of $58.. 3,631 8,112 -- -- -- -- -- -- --
Exercise of stock
options and stock
purchase rights........ -- -- 2,170 2 320 -- (113) -- --
Deferred compensation.. -- -- -- -- 208 (208) -- -- --
Amortization of
deferred compensation.. -- -- -- -- -- 1 -- -- --
Sale of Common Stock in
connection with an
initial public offering
by UUNET PIPEX, net of
issuance costs of $880
(Note 1)............... -- -- 918 1 7,995 -- -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- 388 --
Dividends distributed
by UUNET PIPEX......... -- -- -- -- -- -- -- -- (129)
Net loss............... -- -- -- -- -- -- -- -- (7,988)
-------- -------- ------ --- -------- ----- ---- ---- --------
BALANCE, DECEMBER 31,
1994, AS RESTATED....... 11,150 14,073 10,393 10 9,584 (207) (113) 301 (9,296)
Issuance of Series D
Preferred Stock, net of
issuance costs of $45,
together with warrant
to purchase Series E
Preferred Stock........ 1,664 3,849 -- -- -- -- -- -- --
Issuance of Series E
Preferred Stock........ 2,500 12,500 -- -- -- -- -- -- --
Sale of Common Stock in
connection with an
initial public
offering, net of
issuance costs of
$6,576................. -- -- 5,309 5 67,742 -- -- -- --
Conversion of Preferred
Stock in connection
with an initial public
offering............... (15,314) (30,422) 15,314 15 30,407 -- -- -- --
Exercise of stock
options and stock
purchase rights........ -- -- 889 1 338 -- -- -- --
Issuance of Common
Stock for UUNET PIPEX
outstanding options
(Note 1)............... -- -- 152 1 -- -- -- -- --
Amortization of
deferred compensation.. -- -- -- -- -- 42 -- -- --
Repayment of notes
receivable............. -- -- -- -- -- -- 113 -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- (19) --
Net loss............... -- -- -- -- -- -- -- -- (18,257)
-------- -------- ------ --- -------- ----- ---- ---- --------
BALANCE, DECEMBER 31,
1995.................... -- $ -- 32,057 $32 $108,071 $(165) $-- $282 $(27,553)
======== ======== ====== === ======== ===== ==== ==== ========
</TABLE>

The accompanying notes are an integral part of these statements.

F-4
<PAGE>

UUNET TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(2,026) $(7,988) $(18,257)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities--
UUNET PIPEX fiscal year conversion............... (127) -- --
Depreciation and amortization.................... 1,209 2,151 8,322
Stock option compensation........................ -- 1 42
Write-off of property and equipment.............. 350 582 1,846
Loss on sale of investment in related party...... 433 -- --
Equity in net loss of affiliates................. -- -- 127
Cash provided by (used in) changes in assets and
liabilities:
Accounts receivable, net........................ (58) (2,333) (12,430)
Inventories..................................... (90) (414) (39)
Prepaid expenses and other current assets....... (294) (515) (906)
Accounts payable................................ 1,042 2,124 5,741
Accrued expenses................................ 745 2,862 19,875
Deferred revenues............................... 304 2,312 111
------- ------- --------
Net cash provided by (used in) operating
activities...................................... 1,488 (1,218) 4,432
------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment............... (3,121) (9,394) (53,654)
Repayments of notes receivable from officers and
stockholders..................................... -- -- 113
Investments in affiliates......................... (15) -- (1,462)
Advances to related party......................... (266) -- --
Repayments from related party..................... 475 -- --
------- ------- --------
Net cash used in investing activities............ (2,927) (9,394) (55,003)
------- ------- --------
Cash flows from financing activities:
Proceeds from notes payable....................... 435 1,302 20,766
Repayments of notes payable....................... (683) (740) (4,641)
Proceeds from sale of Preferred Stock, net........ 2,476 11,397 16,349
Proceeds from sale of Common Stock, net........... -- 8,205 68,087
Redemption of shares.............................. (314) -- --
Dividends distributed by UUNET PIPEX.............. -- (129) --
------- ------- --------
Net cash provided by financing activities........ 1,914 20,035 100,561
------- ------- --------
Effect of foreign currency exchange rate changes on
cash and cash equivalents......................... 197 213 (59)
------- ------- --------
Net increase in cash and cash equivalents.......... 672 9,636 49,931
Cash and cash equivalents, beginning of period..... 185 857 10,493
------- ------- --------
Cash and cash equivalents, end of period........... $ 857 $10,493 $ 60,424
======= ======= ========
Supplemental disclosure of cash flow information:
Cash paid for interest............................ $ 196 $ 121 $ 718
Cash paid for income taxes........................ 250 202 41
Supplemental disclosure of noncash financing
activities:
Stockholder notes received for shares of Common
Stock............................................ -- 113 --
</TABLE>

The accompanying notes are an integral part of these statements.

F-5
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:

Organization and Operations

UUNET Technologies, Inc. ("UUNET") was incorporated in the state of Delaware
in 1990. UUNET and its wholly-owned subsidiaries are collectively referred to
herein as the "Company." The Company is a leading worldwide provider of a
comprehensive range of Internet access options, applications, and consulting
services to businesses, professionals and on-line services providers. The
Company's Internet access options provide dedicated and dial-up Internet
access. Other applications and services include Web server hosting and
integration services, client software and security products, training, and
network integration and consulting services. In addition, the Company
developed, operates and maintains the high speed dial-up network for Microsoft
Corporation ("Microsoft").

The Company has incurred cumulative losses of approximately $28.3 million
during the three-year period ended December 31, 1995. The Company's operations
are subject to certain risks and uncertainties including, among others, actual
and potential competition by entities with greater financial resources,
experience and market presence than the Company, risks associated with
consolidation in the industry, risks associated with acquisitions and
international expansion, the need to manage growth and expansion, certain
technology and regulatory risks, and dependence upon sole and limited source
suppliers. See "Risk Factors" elsewhere is this Joint Proxy Statement-
Prospectus.

Acquisition of UUNET PIPEX

On November 15, 1995, UUNET acquired Unipalm Group plc (doing business as
"UUNET PIPEX") ("UUNET PIPEX"), a provider of Internet access options,
networking software, training and consulting services in the United Kingdom
and Europe. Under the terms of the tender offer made by UUNET, UUNET PIPEX
shareholders received 0.1543 of a share of UUNET Common Stock for each UUNET
PIPEX share. Each holder of a UUNET PIPEX option received 0.1543 of a share of
UUNET Common Stock for each option, after taking into account the fair market
value of such options. Accordingly, UUNET issued 3,338,009 shares of its
Common Stock for all of the outstanding shares of UUNET PIPEX stock and
options to acquire shares of UUNET PIPEX stock, and paid cash for fractional
shares. The acquisition was accounted for as a pooling of interests and, as
such, UUNET's financial statements have been restated to include the results
of UUNET PIPEX for all periods presented.

Combined and separate results of UUNET and UUNET PIPEX during the periods
preceding the acquisition are as follows (in thousands):

<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- -------------
1993 1994 1995
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Previously reported........................ $ 7,895 $12,414 $33,394
UUNET PIPEX................................ 16,124 20,724 27,260
------- ------- -------
Total.................................... $24,019 $33,138 $60,654
======= ======= =======
Net income (loss):
Previously reported........................ $(2,244) $(6,949) $ (750)
UUNET PIPEX................................ 218 (1,039) (5,641)
------- ------- -------
Total.................................... $(2,026) $(7,988) $(6,391)
======= ======= =======
</TABLE>

F-6
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

UUNET PIPEX previously had an April 30 fiscal year-end. In order to conform
UUNET PIPEX's fiscal year-end to UUNET's calendar year-end, the statement of
operations for UUNET PIPEX for its fiscal year ended April 30, 1994 has been
combined with UUNET's statement of operations for its year ended December 31,
1993. The consolidated statement of operations for the year ended December 31,
1993 includes four months (January 1, 1994 through April 30, 1994) which are
also included in the consolidated statement of operations for the year ended
December 31, 1994. Accordingly, an adjustment has been made in the year ended
December 31, 1993 to retained earnings for the duplication of net income of
$127,000 for such four month period. Revenues of UUNET PIPEX for that four-
month period were approximately $6.1 million.

In connection with the acquisition, the Company recorded one-time charges in
the fourth quarter of 1995 for acquisition-related costs of $11.1 million.
These costs consisted primarily of investment banking and professional fees,
and direct costs necessary to complete the transaction, including taxes and
printing and mailing costs.

Investments in Affiliates

The following summarizes the Company's investments in various international
Internet access and related services providers (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1995
-------------
<S> <C> <C>
Accounted for by the equity method............................ $ -- $ 484
Accounted for by the cost method.............................. -- 837
----- -------
Total....................................................... $ -- $ 1,321
===== =======
</TABLE>

Subsequent to year end, UUNET acquired a 40% interest in the outstanding
capital of EUnet Deutschland GmbH ("EUnet Germany"), a provider of Internet
access options, applications and consulting services in Germany, for $1.6
million.

In January 1996, UUNET and UUNET Canada, Inc. ("UUNET Canada") entered into
a letter of intent providing for an increase in UUNET's equity ownership of
UUNET Canada from 20% to 51%. On April 1, 1996, UUNET paid $3,585,329 in cash
and issued 27,079 shares of Common Stock for the additional 31 percent
interest in UUNET Canada.

Initial Public Offerings

In May 1995, UUNET completed an initial public offering of 5,433,750 shares
of Common Stock at a price per share of $14.00, of which 5,308,750 shares were
sold by UUNET and 125,000 shares were sold by a selling stockholder. After the
underwriting discounts, commissions and other expenses, net proceeds to UUNET
from the initial public offering were approximately $67.7 million. Upon the
closing of the initial public offering, all outstanding shares of Redeemable
Convertible Preferred Stock, including those shares issued in connection with
warrants for the purchase of 2,500,000 shares of Series E Preferred Stock
exercised immediately prior to the closing of the initial public offering,
automatically converted into Common Stock.

In March 1994, UUNET PIPEX completed an initial public offering, with net
proceeds of approximately $8.0 million.

F-7
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Summary of Significant Accounting Policies

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 revenues and expenses during
the reporting periods and reported amounts of assets and liabilities at the
date of the financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of UUNET and all
majority-owned subsidiaries. All material intercompany balances and
transactions have been eliminated. Investments in affiliated companies owned
20% or more are accounted for using the equity method, while investments in
companies owned less than 20% are accounted for using the cost method.

Pro Forma Net Loss Per Common and Equivalent Share

Pro forma net loss per common and equivalent share is based on the weighted
average number of shares outstanding during the periods presented. Pursuant to
the Securities and Exchange Commission Staff Accounting Bulletin No. 83, all
shares, options and warrants issued during the twelve months immediately
preceding the initial public offering were treated as if they had been
outstanding through March 31, 1995, using the treasury stock method and at a
per share price of $14.00, the initial public offering price. Subsequent to
March 31, 1995, the effects of warrants and options have not been considered
because the effect would be antidilutive.

Earnings per share data prior to 1994 has been omitted because the automatic
conversion of the Redeemable Preferred Stock into Common Stock materially
changed UUNET's capitalization. Fully-diluted loss per share is not presented
as it would not materially differ from primary loss per share.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents as
of December 31, 1994 consisted of U.S. Treasury Bills totaling approximately
$3.0 million. Cash equivalents as of December 31, 1995 consisted of short-term
commercial paper totaling approximately $8.7 million. As of December 31, 1994
and 1995, the fair value of these securities approximated cost.

Concentrations of Cash and Accounts Receivable

Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash, cash equivalents and accounts
receivable. As of December 31, 1994, the Company had concentrations of cash in
two banks in the form of demand deposits and money market accounts, totaling
approximately $1.2 million at one bank and $5.8 million at the other bank. As
of December 31, 1995, the Company had concentrations of cash in a financial
institution money market fund of approximately $47.8 million and short-term
commercial paper of approximately $8.7 million. Also as of December 31, 1995,
UUNET had approximately $6.4 million in accounts receivable from Microsoft
(see Note 2). The Company believes that concentrations of credit risk with
respect to the remaining balance in accounts receivable are limited due to the
large number of entities comprising the Company's customer base. The Company
maintains an allowance for doubtful accounts for accounts receivable based
upon factors surrounding the credit risk of specific customers, historical
trends and other information.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market,
and consist primarily of third party packaged software for resale.

F-8
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Property and Equipment

Property and equipment are recorded at cost. Depreciation, including
depreciation of assets acquired under capital lease agreements, is recorded on
a straight-line basis for financial reporting purposes. Property and equipment
consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
---------------- USEFUL LIVES
1994 1995 (IN YEARS)
------- ------- ------------
<S> <C> <C> <C>
Network and computer equipment................ $11,480 $58,244 4- 5
Furniture and office equipment................ 1,743 6,899 4-10
Purchased software............................ 1,357 1,908 3- 4
Vehicles...................................... 693 1,029 4
------- -------
Property and equipment, at cost............... 15,273 68,080
Less--Accumulated depreciation................ (4,193) (13,557)
------- -------
Property and equipment, net................. $11,080 $54,523
======= =======
</TABLE>

The Company leases certain vehicles and computer equipment under
noncancelable capital leases. Total cost of equipment capitalized under
capital leases as of December 31, 1994 and 1995 was approximately $1,398,000
and $5,220,000, respectively, while related accumulated depreciation was
approximately $405,000 and $1,478,000, respectively.

Accrued Expenses

Accrued expenses consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995
------ -------
<S> <C> <C>
Network costs................................................ $ 912 $10,501
Acquisition expenses......................................... -- 7,377
Compensation and benefits.................................... 2,009 3,407
Professional fees............................................ 467 820
Other........................................................ 1,438 2,499
------ -------
Total...................................................... $4,826 $24,604
====== =======
</TABLE>

Foreign Currency Translation

Assets and liabilities of foreign subsidiaries are translated at the
exchange rate in effect at each year-end. Statements of operations accounts
are translated at the average rate of exchange during the year. Translation
adjustments arising from differences in exchange rates from period to period
are included in the foreign currency translation adjustment account in
stockholders' equity. Gains and losses from transactions denominated in a
foreign currency are included in operations currently.

Revenue Recognition

Internet services revenues consist primarily of monthly service fees,
equipment sales and installation charges. Service fees consist of fixed
monthly amounts and/or hourly amounts based on usage and are recognized as the
service is provided. Payments received in advance of providing services are
deferred until the period such services are provided. Equipment sales and
installation charges are recognized when installation is completed.

F-9
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Revenues under network agreements (Note 2) are included in Internet services
revenues and are recognized as costs are incurred plus the applicable fees
earned. Adjustments to fees provided as incentives under contract provisions
and estimated losses on contracts, if any, are recorded when such adjustments
or losses are known.

Software revenues consist primarily of the sale of packaged third party
software. The Company recognizes revenue on software product sales at the time
of delivery of the software, provided no significant future vendor obligations
exist. Customer support fees are deferred and recognized ratably over the
period of the service obligation.

Cost of Revenues

Internet services cost of revenues consists primarily of network
telecommunication costs, depreciation of network equipment, and the cost of
equipment and other products sold to customers. Software cost of revenues
consists primarily of packaged third party software costs.

Network Operations and Support

Network operations and support expenses consists primarily of the costs of
operating and monitoring the network and providing technical support to
customers.

Recent Pronouncement

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-
Based Compensation," which is effective for the Company's December 31, 1996
financial statements. SFAS No. 123 allows companies to either account for
stock-based compensation under the new provisions of SFAS No. 123 or under the
provisions of APB 25, but requires pro forma disclosure in the footnotes to
the financial statements as if the measurement provisions of SFAS 123 had been
adopted. The Company intends to continue accounting for its stock-based
compensation in accordance with the provisions of APB 25. As such, the
adoption of SFAS No. 123 will not impact the financial position or the results
of operations of the Company.

2. NETWORK AGREEMENTS:

In December 1994, UUNET and Microsoft entered into a binding Memorandum of
Understanding, which was formalized into a definitive agreement (the
"Microsoft Agreement") in March 1995, for the development, operation and
maintenance of a high speed dial-up and ISDN TCP/IP access network (the "Dial-
Up Network"). Microsoft is obligated to reimburse UUNET for the cost of
constructing, maintaining and operating the Dial-Up Network, as well as pay a
management fee. The initial term of the Microsoft Agreement expires in March
2000, and it may be extended by Microsoft for an additional five-year term. In
March 1995 and as part of this strategic relationship, Microsoft purchased
1,664,000 shares of Series D Preferred Stock at $2.34 per share and in May
1995 exercised warrants to purchase 2.5 million shares of Series E Preferred
Stock at $5.00 per share (Notes 4 and 5). Upon closing of the initial public
offering, Microsoft's Preferred Stock was converted into 4,164,000 shares of
Common Stock. UUNET also entered into a $26.0 million loan agreement (Note 3)
with Microsoft, which allows UUNET to borrow funds to finance the purchase of
equipment for the construction of the Dial-Up Network. UUNET owns the network
equipment, subject to Microsoft's security interest. UUNET controls and
operates the Dial-Up Network and is able to sell a portion of the Dial-Up
Network capacity to other customers. Revenues from network services relating
to the Dial-Up Network represented 20.4% of total revenues for the year ended
December 31, 1995.

F-10
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3. BORROWING ARRANGEMENTS:

In December 1994, UUNET entered into a Credit Agreement with a bank to
provide for a $500,000 working capital line of credit ("Working Capital
Facility"), a $1,000,000 term facility ("Term Facility") and a $3,500,000
equipment facility ("Equipment Facility"). No amounts had been borrowed under
the Working Capital Facility, which expired in August 1995. The Term Facility
and Equipment Facility accrued interest at the bank's prime rate plus 1.75%
(10.5% at December 31, 1994). As of December 31, 1994, UUNET had borrowed the
$1,000,000 available under the Term Facility, which was repaid in June 1995.
During 1995, UUNET borrowed approximately $2,500,000 under the Equipment
Facility, all of which was repaid in June 1995. The Term Facility and
Equipment Facility expired in 1995.

UUNET had notes payable to a related party (Note 7) that were due in monthly
installments through December 1995. Interest was fixed at rates of 8% or 10%,
and the notes were secured by specified network computer equipment of UUNET.
The notes were repaid in full in April 1995. Interest expense on these notes
was approximately $58,000, $33,000 and $4,000 in 1993, 1994 and 1995,
respectively. UUNET also had a note payable to a stockholder ($59,000 at
December 31, 1993) that was due and repaid in full in September 1994. Interest
accrued at 8% annually.

In connection with the Microsoft Agreement, UUNET obtained a $26.0 million
equipment loan facility from Microsoft to finance equipment purchases in
conjunction with the construction of the Dial-Up Network. Principal and
interest, at the higher of the Applicable Federal Rate ("AFR") in effect on
the date of the Microsoft Agreement (7.74%) or the AFR in effect at the time
of the advance (5.79% as of December 31, 1995), are payable on each advance
quarterly over five years. Borrowings under the agreement are collateralized
by the equipment purchased. The carrying amount of the equipment loan facility
as of December 31, 1995 approximated fair market value. As of December 31,
1995, $10,501,000 was available for future advances under this facility.

Notes payable outstanding consisted of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1995
------ -------
<S> <C> <C>
Note payable to Microsoft................................... $ -- $14,595
Notes payable to banks...................................... 1,000 --
Notes payable to related parties............................ 199 --
Capital leases.............................................. 1,057 3,743
------ -------
Total obligations......................................... 2,256 18,338
Less: Current portion....................................... (1,060) (4,652)
------ -------
Long-term obligations....................................... $1,196 $13,686
====== =======
</TABLE>

Aggregate future principal payments on notes payable and future minimum
lease payments under capital leases as of December 31, 1995, are as follows
(in thousands):

<TABLE>
<CAPTION>
YEARS ENDING CAPITAL
DECEMBER 31, NOTES LEASES TOTAL
------------ ------- ------- -------
<S> <C> <C> <C>
1996............................................. $ 3,100 $1,833 $ 4,933
1997............................................. 3,100 1,630 4,730
1998............................................. 3,100 550 3,650
1999............................................. 3,100 86 3,186
2000............................................. 2,195 -- 2,195
------- ------ -------
14,595 4,099 18,694
Less: Amount representing interest............... -- (356) (356)
------- ------ -------
Total........................................... $14,595 $3,743 $18,338
======= ====== =======
</TABLE>

F-11
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK:

Redeemable Convertible Preferred Stock consists of the following (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
-------------- -------------
SHARES AMOUNT SHARES AMOUNT
------ ------- ------ ------
<S> <C> <C> <C> <C>
Series A Preferred Stock, $.001 par value; 4,219
shares designated and authorized as Series A;
preference in liquidation of $0.64 per share,
$2,700 in the aggregate.......................... 4,219 $ 2,676 -- $--
Series B Preferred Stock, $.001 par value; 3,300
shares designated and authorized as Series B;
preference in liquidation of $1.00 per share,
$3,300 in the aggregate.......................... 3,300 3,285 -- --
Series C Preferred Stock, $.001 par value; 4,000
shares designated and authorized as Series C;
preference in liquidation of $2.25 per share,
$8,170 in the aggregate.......................... 3,631 8,112 -- --
Series D Preferred Stock, $.001 par value, 1,664
shares designated and authorized as Series D;
preference in liquidation of $2.34 per share..... -- -- -- --
Series E Preferred Stock, $.001 par value, 2,500
shares designated and authorized as Series E;
preference in liquidation of $5.00 per share..... -- -- -- --
------ ------- --- ----
Total........................................... 11,150 $14,073 -- $--
====== ======= === ====
</TABLE>

Preferred Stock Warrants

In connection with the sale of Series A Preferred Stock in 1993, UUNET
issued warrants for the purchase of 3,300,000 shares of Series B Preferred
Stock at an exercise price of $1.00 per share. These warrants were exercised
during 1994, which resulted in gross proceeds of $3,300,000 to UUNET.

As part of its strategic relationship with Microsoft, UUNET issued warrants
to Microsoft for the purchase of 2,500,000 shares of Series E Preferred Stock
in March 1995, at an exercise price of $5.00 per share. These warrants were
exercised in May 1995, which resulted in gross proceeds of $12.5 million to
UUNET.

5. STOCKHOLDERS' EQUITY:

Microsoft has agreed that it will not directly or indirectly, except in
connection with any exercise of its right of first refusal, acquire shares of
Common Stock which when combined with its holdings, would result in Microsoft
owning greater than 18.11% of the then outstanding shares of Common Stock.
Microsoft also has agreed that it will not (i) enter into any voting agreement
or voting trust in connection with UUNET securities, (ii) form, or participate
in the formation of, any legal entity for the purpose of acquiring, voting or
disposing of UUNET securities, or (iii) act in concert with any person or
entity for the purpose of acquiring, holding, voting or disposing of UUNET
securities if by so acting Microsoft or such other person would be required to
file a Schedule 13D or 13G with the Securities and Exchange Commission or to
amend a previously filed Schedule 13D or 13G. UUNET has granted Microsoft a
right of first refusal and a right of first offer with respect to certain
acquisitions of more than 50 percent of the stock or assets of UUNET that may
be proposed in the future.

Increase in Authorized Shares

On January 31, 1996, the stockholders of UUNET at a Special Meeting of
Stockholders approved the increase in the authorized shares of Common Stock to
175,000,000, and UUNET filed a Certificate of Amendment to Restated
Certificate of Incorporation effecting such increase.

F-12
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Notes Receivable from Employees for Stock Purchases

During 1994, certain employees of UUNET signed promissory notes in favor of
UUNET in conjunction with the purchase of stock under the terms and conditions
of UUNET's Incentive Stock Plan. The loans accrued interest at 8% annually and
were repaid during 1995.

Incentive Stock and Equity Incentive Plans

UUNET's Incentive Stock Plan (the "Option Plan") was adopted in 1990 and was
terminated on May 25, 1995. Under the Option Plan, the Board of Directors of
UUNET had the authority to grant incentive stock options, nonqualified stock
options and stock purchase rights at their discretion. Options granted under
the Option Plan are exercisable for periods up to ten years from the date of
grant. All options outstanding on the date of the Option Plan termination
remained exercisable in accordance with their terms.

In 1995, UUNET adopted an Equity Incentive Plan (the "Incentive Plan"),
which provides for the grant of options, restricted stock, stock purchase
rights and performance shares to employees of the Company. Incentive stock
options and nonqualified stock options may be granted under the Incentive Plan
at exercise prices of 100% and at least 85%, respectively, of the fair market
value of Common Stock at the date of grant. Restricted stock awards consist of
shares of Common Stock with transfer restrictions that lapse over a period not
to exceed ten years. Stock purchase rights provide for the purchase of shares
of Common Stock at a price of at least 85% of the Common Stock's fair market
value. These stock purchase rights are generally exercisable for a period of
30 days after the date of grant. Performance awards of shares of Common Stock
may be granted for attainment of performance criteria determined by the Board
of Directors of UUNET. A total of 2,669,514 shares of Common Stock were
reserved for issuance under the Incentive Plan and the Option Plan. Any shares
not issued or reserved under the Option Plan become available for issuance
under the Incentive Plan. On January 31, 1996, the stockholders of UUNET at a
Special Meeting of Stockholders approved an increase in the number of shares
reserved for issuance under the Incentive Plan to 6,669,514.

The following table summarizes all option and purchase right activity under
the Option Plan and the Incentive Plan for the three years ended December 31,
1995:

<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
---------- --------------
<S> <C> <C>
Outstanding as of December 31, 1992............... 350,000 $ 1.00
Granted......................................... 175,000 1.00
---------- ------------
Outstanding as of December 31, 1993............... 525,000 1.00
Granted......................................... 4,680,450 0.05-$ 0.25
Exercised....................................... (2,110,950) 0.05- 0.25
Canceled........................................ (1,160,042) 0.05- 0.16
---------- ------------
Outstanding as of December 31, 1994............... 1,934,458 0.05- 1.00
Granted......................................... 991,150 5.00- 75.00
Exercised....................................... (862,661) 0.05- 1.00
Canceled........................................ (86,783) 0.05- 45.00
---------- ------------
Outstanding as of December 31, 1995............... 1,976,164 $0.05-$75.00
========== ============
</TABLE>

As of December 31, 1994 and 1995, options to purchase 771,049 and 383,751
shares, respectively, were exercisable.

F-13
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Compensation equal to the difference between the assumed fair value of
Common Stock at the grant date and the exercise price of the options, if any,
is recognized ratably over the vesting period. Compensation expense related to
options granted in 1994 is approximately $207,000 and will be recognized over
the vesting period, which is generally five years. Compensation expense
relating to stock options was $1,000 in 1994 and $42,000 in 1995.

Prior to the acquisition, UUNET PIPEX maintained its own stock option plan.
Stock options granted under the Unipalm plan were 194,078 and 39,347 in 1994
and 1995, respectively. The statement of stockholders' equity reflects the
exercise of vested options of 36,862 and 26,089 in 1994 and 1995,
respectively. All remaining Unipalm options outstanding at the time of the
acquisition were exchanged for UUNET Common Stock.

1995 Performance Option Plan

In 1995, UUNET adopted the 1995 Performance Option Plan (the "Performance
Plan") that provides for grants of nonqualified stock options to purchase
shares of Common Stock to employees of UUNET. Options to purchase 161,180
shares of Common Stock at an exercise price of $6.00 per share were granted in
February 1995, of which options to purchase 17,600 shares were canceled as of
December 31, 1995. Options granted under the Performance Plan were exercisable
on December 31, 2004, subject to acceleration provisions if the Company met
performance goals specified in the Performance Plan. Such performance goals
were achieved in 1995, resulting in the acceleration of vesting of the options
outstanding under the Performance Plan to March 31, 1996.

Employee Stock Purchase Plan

In 1995, UUNET adopted the Employee Stock Purchase Plan (the "Purchase
Plan") to permit employees of UUNET to purchase Common Stock at a price equal
to 85% of the lesser of the fair market value at the beginning or end of the
enrollment period as defined by the Purchase Plan. The first enrollment period
begins in February 1996.

Nonemployee Directors Stock Option Plan

In 1995, UUNET adopted the Nonemployee Directors Stock Option Plan (the
"Directors Plan") to grant nonqualified stock options to directors of UUNET
who are not employees. Eligible nonemployee directors will be granted an
option to purchase 7,500 shares of Common Stock on the day of their election,
re-election or appointment. The exercise price of all options will be equal to
the fair market value of Common Stock on the grant date. The options will vest
ratably over a three-year period. As of December 31, 1995, no options had been
granted under the Directors Plan.

Reserved Shares

The Company has reserved 6,843,565 shares of Common Stock for issuance
pursuant to stock plans as of January 31, 1996.

F-14
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

6. COMMITMENTS AND CONTINGENCIES:

Telecommunications Lines

The Company has guaranteed monthly usage levels with various communications
vendors through January 2009. As of December 31, 1995, the annual commitments
(exclusive of usage discounts) were as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
------------------------- --------
<S> <C>
1996............................................................... $ 37,448
1997............................................................... 31,407
1998............................................................... 30,002
1999............................................................... 22,780
2000............................................................... 10,638
Thereafter......................................................... 10,464
--------
Total............................................................ $142,739
========
</TABLE>

Facilities Leases

The Company leases and subleases office space at various locations with
expiration dates through April 2001. In 1994, UUNET terminated its then
existing office lease in conjunction with the signing of a sublease agreement
and recorded approximately $330,000 for costs associated with lease
termination and idle equipment during the lease termination period. During
1995, the Company recorded lease termination and idle equipment costs of
approximately $1.8 million classified as general and administrative expense in
the accompanying statements of operations as a result of consolidating
substantially all of UUNET PIPEX operations into a new facility. Rent expense
for the years ended December 31, 1993, 1994 and 1995, including lease
termination and idle equipment costs, was approximately $828,000, $1,323,000
and $3,361,000, respectively.

Future minimum annual lease payments under all operating lease and sublease
agreements as of December 31, 1995, were as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
------------------------- ------
<S> <C>
1996................................................................. $2,599
1997................................................................. 2,361
1998................................................................. 2,382
1999................................................................. 1,248
2000................................................................. 1,109
Thereafter........................................................... 284
------
Total.............................................................. $9,983
======
</TABLE>

7. RELATED PARTY TRANSACTIONS:

In 1993, UUNET realized a loss of $433,000 on the disposition to a third
party of its investment in an affiliate. The investment in this affiliate
consisted of shares of common stock, capital contributions and loans totaling
$778,000. The disposition included agreements settling guarantees and
obligations of UUNET for the benefit of this affiliate.

At its inception, UUNET acquired the assets and liabilities of UUNET
Communications Services, Inc. ("UCS"). UUNET assumed all of the assets,
liabilities and customers of UCS in exchange for a note and a five-

F-15
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
year royalty agreement. The carrying amounts of the assets and liabilities
assumed were equal to the historical book value of UCS. The agreement required
UUNET to pay UCS a royalty equal to 4% of the gross revenue billed for certain
services. Royalty expense for the years ended December 31, 1993, 1994 and
1995, was approximately $76,000, $99,000 and $55,000, respectively. In 1995,
UUNET entered into an agreement with UCS, whereby UUNET repaid all of its UCS
debt obligations and agreed upon and prepaid all of its royalty obligations to
UCS.

8. SEGMENT AND GEOGRAPHIC INFORMATION:

The Company sells its products and services in several geographic regions.
Net revenues relating to each region are as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
United States........................................ $ 7,984 $13,989 $59,305
Europe............................................... 15,737 19,004 34,405
Other................................................ 298 145 751
------- ------- -------
$24,019 $33,138 $94,461
======= ======= =======
</TABLE>

A summary of net revenues, operating income (loss) and identifiable assets
by operating location is as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Net revenues:
United States................................. $ 7,895 $12,414 $ 57,375
Europe........................................ 16,124 20,724 37,086
------- ------- --------
Total net revenues.......................... $24,019 $33,138 $ 94,461
======= ======= ========
Operating income (loss):
United States................................. $(1,758) $(6,974) $ (1,300)
Europe........................................ 429 (1,252) (8,176)
Acquisition costs............................. -- -- (11,067)
------- ------- --------
Total operating loss........................ $(1,329) $(8,226) $(20,543)
======= ======= ========
Identifiable assets:
United States................................. $ 3,645 $12,025 $118,385
Europe........................................ 14,312 17,600 19,225
------- ------- --------
Total identifiable assets................... $17,957 $29,625 $137,610
======= ======= ========
</TABLE>

Net revenues are categorized by the location of the office from which the
sales were generated, rather than the customer's geographic location.

9. EMPLOYEE RETIREMENT PLAN:

Effective January 1, 1995, UUNET adopted a 401(k) salary deferral plan (the
"401(k) Plan"). Employees of UUNET are eligible to participate in the 401(k)
Plan when they reach age 21 and have completed half of a year of service with
UUNET. The 401(k) Plan replaced a Simplified Employee Pension ("SEP") Plan,
which allowed UUNET to make discretionary contributions. Total expense related
to the SEP Plan was approximately

F-16
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) $165,000 and
$451,000 for the years ended December 31, 1993 and 1994, respectively; no
contribution was made during 1995. UUNET matched 1% of contributions made by
eligible employees in 1995 under the 401(k) Plan, which expense totaled $71,000
for the year ended December 31, 1995.

10. INCOME TAXES:

The Company records income taxes in accordance with SFAS 109, "Accounting for
Income Taxes." The adoption of SFAS 109 by UUNET on January 1, 1993, had no
effect on the consolidated financial position or results of operations for the
year ended December 31, 1993.

The components of the benefit (provision) for income taxes are as follows (in
thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
-----------------------------
<S> <C> <C> <C>
Current:
Federal..................................... $ 15 $ -- $ --
State....................................... 2 -- --
Foreign..................................... (123) (242) 570
------- -------- --------
Total current............................. (106) (242) 570
------- -------- --------
Deferred:
Federal..................................... -- -- --
State....................................... -- -- --
Foreign..................................... (91) 116 (96)
------- -------- --------
Total deferred............................ (91) 116 (96)
------- -------- --------
Total..................................... $ (197) $ (126) $ 474
</TABLE>
======= ======== ========

Significant components of the Company's deferred tax assets (liabilities) are
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Net operating loss carryforwards...................... $ 2,146 $ 5,547
Accruals not currently deductible for tax purposes.... 1,753 2,351
Depreciation.......................................... (646) (2,170)
Allowance for doubtful accounts....................... 76 446
-------- --------
Gross deferred tax assets........................... 3,329 6,174
Valuation allowance................................... (3,233) (6,174)
-------- --------
Net deferred tax assets............................. $ 96 $ --
======== ========
</TABLE>
A reconciliation between the Company's effective tax rate and the federal
income tax rate on loss from continuing operations is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax rate............. (34)% (34)% (34)%
State income taxes............................ (4) (4) (4)
Difference in tax rates on consolidated for-
eign subsidiaries............................ (1) 1 2
Acquisition expense........................... -- -- 18
Losses not benefited.......................... 47 34 16
Other......................................... 3 5 (1)
------- -------- --------
Effective income tax rate................... 11% 2% (3)%
======= ======== ========
</TABLE>

F-17
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)

As of December 31, 1995, the Company had U.S. federal and foreign net
operating loss ("NOLs") of approximately $12,177,000 and $2,455,000,
respectively. The federal NOLs expire in years 2008 through 2010; foreign NOLs
may be utilized in future years to the extent of foreign income. The amount of
federal NOLs available to be used in any given year may be limited in the
event of significant changes in the ownership of UUNET. Management believes
that the prior ownership changes will not significantly limit the Company's
ability to use its NOLs. The Company has fully reserved its deferred tax
assets as of December 31, 1995.

F-18
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To UUNET Technologies, Inc.:

We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of UUNET Technologies, Inc. (a Delaware
corporation) and Subsidiaries, and have issued our report thereon dated
January 31, 1996. Our audits were made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The schedule listed in the
index to the consolidated financial statements is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required
to be set forth therein, in relation to the basic financial statements taken
as a whole.

ARTHUR ANDERSEN LLP

Washington, D.C.
January 31, 1996

F-19
<PAGE>

SCHEDULE II

UUNET TECHNOLOGIES, INC.

VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year Ended December 31,
1993
Allowance for doubtful
accounts............... $ 23 $ 112 $ -- $ 135
Deferred tax asset
valuation.............. -- 726 -- 726
Year Ended December 31,
1994
Allowance for doubtful
accounts............... 135 416 (96) 455
Deferred tax asset
valuation.............. 726 2,507 -- 3,233
Year Ended December 31,
1995
Allowance for doubtful
accounts............... 455 2,064 (872) 1,647
Deferred tax asset
valuation.............. 3,233 2,941 -- 6,174
</TABLE>

F-20
<PAGE>

UUNET TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PAR VALUE
AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 60,424 $ 45,413
Accounts receivable, net of allowance of $1,647 and
$1,540, respectively, for doubtful accounts........ 17,768 23,575
Inventories......................................... 1,251 1,436
Prepaid expenses and other current assets........... 2,149 3,514
-------- --------
Total current assets.................................. 81,592 73,938
Property and equipment, net........................... 54,523 75,877
Investments in affiliates............................. 1,321 6,297
Other assets.......................................... 174 166
-------- --------
Total assets.......................................... $137,610 $156,278
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable.................... $ 4,652 $ 6,813
Accounts payable.................................... 10,580 17,824
Accrued expenses.................................... 24,604 26,486
Deferred revenues................................... 3,421 5,026
-------- --------
Total current liabilities............................. 43,257 56,149
Notes payable, net of current portion................. 13,686 18,045
-------- --------
Total liabilities..................................... 56,943 74,194
Commitments and contingencies Stockholders' equity:
Preferred Stock, $0.001 par value; 500 shares autho-
rized, none issued or outstanding.................. -- --
Common Stock, $0.001 par value; 175,000 shares au-
thorized as of March 31, 1996; 32,057 and 32,202
shares issued and outstanding, respectively........ 32 32
Additional paid-in capital.......................... 108,071 109,328
Deferred compensation............................... (165) (154)
Foreign currency translation adjustment............. 282 198
Accumulated deficit................................. (27,553) (27,320)
-------- --------
Total stockholders' equity............................ 80,667 82,084
-------- --------
Total liabilities and stockholders' equity............ $137,610 $156,278
======== ========
</TABLE>

The accompanying notes are an integral part of these balance sheets.

F-21
<PAGE>

UUNET TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Revenues:
Internet services...................................... $ 8,815 $39,004
Software............................................... 6,205 4,009
--------- ---------
Total revenues....................................... 15,020 43,013
--------- ---------
Costs and expenses:
Cost of revenues--
Internet services.................................... 4,490 25,062
Software............................................. 3,557 2,391
Network operations and support......................... 2,315 5,265
Sales and marketing.................................... 3,210 6,798
General and administrative............................. 1,839 3,126
--------- ---------
Total costs and expenses............................. 15,411 42,642
--------- ---------
Income (loss) from operations............................ (391) 371
Interest income.......................................... 194 577
Interest expense......................................... (83) (329)
Equity in net loss of affiliates......................... -- (386)
--------- ---------
Income (loss) before income taxes........................ (280) 233
Benefit for income taxes................................. 17 --
--------- ---------
Net income (loss)........................................ $ (263) $ 233
========= =========
Net income (loss) per common and equivalent share (Note
2)...................................................... $ (0.01) $ 0.01
Shares used in computing net income (loss) per common and
equivalent share (Note 2)............................... 25,774 33,436
</TABLE>

The accompanying notes are an integral part of these statements.

F-22
<PAGE>

UUNET TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ (263) $ 233
Adjustments to reconcile net income (loss) to net cash
provided by operating activities--
Depreciation and amortization........................ 1,025 3,948
Stock option compensation............................ 11 10
Equity in net loss of affiliates..................... -- 386
Cash provided by (used in) changes in assets and lia-
bilities:
Accounts receivable, net........................... (2,679) (5,675)
Inventories........................................ (446) (202)
Prepaid expenses and other current assets.......... 42 (1,451)
Accounts payable................................... 4,650 7,330
Accrued expenses................................... 1,001 2,015
Deferred revenues.................................. (963) 1,642
--------- ---------
Net cash provided by operating activities............ 2,378 8,236
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment.................... (7,363) (25,330)
Investments in affiliates.............................. -- (4,398)
--------- ---------
Net cash used in investing activities................ (7,363) (29,728)
--------- ---------
Cash flows from financing activities:
Proceeds from notes payable............................ 2,957 7,316
Repayments of notes payable............................ (291) (840)
Proceeds from sale of Preferred Stock, net............. 3,849 --
Proceeds from sale of Common Stock, net................ 38 101
--------- ---------
Net cash provided by financing activities................ 6,553 6,577
--------- ---------
Effect of foreign currency exchange rate changes on cash
and cash equivalents.................................... 264 (96)
--------- ---------
Net increase (decrease) in cash and cash equivalents..... 1,832 (15,011)
Cash and cash equivalents, beginning of period........... 10,493 60,424
--------- ---------
Cash and cash equivalents, end of period................. $ 12,325 $ 45,413
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest................................. $ 56 $ 239
Cash paid for income taxes............................. -- --
Supplemental disclosure of noncash financing activities:
Capital lease obligations.............................. -- 110
</TABLE>

The accompanying notes are an integral part of these statements.

F-23
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)

1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:

UUNET Technologies, Inc., together with its wholly-owned subsidiaries
("UUNET" or the "Company"), is a leading provider of a comprehensive range of
Internet access options, applications and consulting services to businesses,
professionals and on-line services providers.

The condensed interim consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although the Company
believes that the disclosures made are adequate to make the information
presented not misleading. The condensed interim consolidated financial
statements should be read in conjunction with the financial statements and the
notes thereto, included in the Company's Annual Report on Form 10-K/A as filed
with the Securities and Exchange Commission on April 1, 1996, for the year
ended December 31, 1995.

The accompanying condensed interim consolidated financial statements have
been prepared, in all material respects, in conformity with the standards of
accounting measurements set forth in Accounting Principles Board Opinion No.
28 and reflect, in the opinion of management, all adjustments, which are of a
normal recurring nature, necessary to summarize fairly the financial position
and results of operations for such periods. The results of operations for such
interim periods are not necessarily indicative of the results to be expected
for the full year.

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents. As of March
31, 1996, the Company's cash and cash equivalents consisted of demand deposits
and money market accounts in banks and other financial institutions totaling
approximately $43.0 million and available-for-sale securities consisting of
commercial paper totaling approximately $2.4 million, which approximated
market value.

2. NET INCOME (LOSS) PER COMMON AND EQUIVALENT SHARE:

Net income (loss) per common and equivalent share is based on the weighted
average number of shares outstanding during the periods presented. Pursuant to
the Securities and Exchange Commission Staff Accounting Bulletin No. 83, all
shares, options and warrants issued during the twelve months immediately
preceding the initial public offering were treated as if they had been
outstanding through March 31, 1995, using the treasury stock method and at a
per share price of $14.00, the initial public offering price.

Fully-diluted net income (loss) per share is not presented as it would not
materially differ from primary net income (loss) per share.

F-24
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

3. PROPERTY AND EQUIPMENT:

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

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
<S> <C> <C>
Network and computer equipment..................... $ 58,244 $ 80,743
Furniture and office equipment..................... 6,899 8,720
Purchased software................................. 1,908 2,727
Vehicles........................................... 1,029 1,071
-------- --------
Property and equipment, at cost.................. 68,080 93,261
Less--Accumulated depreciation and amortization.... (13,557) (17,384)
-------- --------
$ 54,523 $ 75,877
======== ========
</TABLE>

4. MFS AND UUNET MERGER AGREEMENT:

On April 30, 1996, UUNET and MFS Communications Company, Inc. ("MFS")
announced that the two companies had entered into an Agreement and Plan of
Merger (the "Merger Agreement"). Under the terms of the Merger Agreement, each
share of UUNET common stock would be converted into 1.777776 shares of MFS
common stock. Consummation of the merger is subject to, among other things,
approval by the stockholders of each company and clearance under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended. Stockholders of
UUNET owning approximately 59.5 percent of the outstanding shares and
stockholders of MFS owning approximately 12 percent of the outstanding shares
have committed to vote in favor of the merger. The merger will be accounted
for by MFS as a purchase.

MFS is a leading provider of telecommunications services to business and
government end users. The combined company would provide a single source for a
full range of Internet, voice, data and video services through an
international network platform.

5. ACQUISITION OF UNIPALM:

On November 15, 1995, UUNET acquired Unipalm Group plc ("Unipalm"), (doing
business as "UUNET PIPEX") ("UUNET PIPEX"), a provider of Internet access
options, networking software, training and consulting services in the United
Kingdom and Europe. The acquisition was accounted for as a pooling of
interests and, as such, UUNET's financial statements for the three months
ended March 31, 1995 have been restated to include the results of UUNET PIPEX.
For the three month period ended March 31, 1995, UUNET had previously reported
revenues of $6,482,000 as compared to combined revenues of $15,020,000 and a
net loss of $792,000 as compared to a combined net loss of $263,000.

6. INVESTMENTS IN AFFILIATES:

During the quarter ended March 31, 1996, UUNET acquired a 40% interest in
the outstanding capital stock of EUnet Deutschland GmbH ("EUnet Germany"), a
provider of Internet access options, applications and consulting services in
Germany, for $1.6 million. The investment in EUnet Germany is accounted for
under the equity method.

On April 1, 1996, UUNET paid approximately $3.6 million in cash and issued
27,079 shares of its Common Stock with a then fair market value of
approximately $0.7 million to increase UUNET's equity ownership of UUNET
Canada, Inc. ("UUNET Canada"), from 20% to 51%. The financial statements of
UUNET Canada will be consolidated with UUNET's financial statements beginning
with the second quarter of 1996.

F-25
<PAGE>

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The following unaudited pro forma consolidated condensed financial
statements give effect to the merger of UUNET with Sub pursuant to the Merger
Agreement. The pro forma consolidated condensed balance sheet assumes that the
Merger occurred on March 31, 1996. The pro forma consolidated condensed
statements of operations assume that the Merger occurred as of January 1,
1995. The pro forma consolidated condensed financial statements are not
necessarily indicative of the results that actually would have been attained
if the Merger had been in effect on the dates indicated or which may be
attained in the future. Such statements should be read in conjunction with the
MFS and UUNET historical consolidated financial statements and notes thereto.

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996

<TABLE>
<CAPTION>
MFS UUNET
COMMUNICATIONS TECHNOLOGIES, PRO FORMA
COMPANY, INC. INC. ADJUSTMENTS PRO FORMA
-------------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue................. $ 186,316 $ 43,013 $ (1,322)(4) $ 228,007
Costs and expenses:
Operating expenses.... 174,173 35,568 (1,322)(4) 208,419
Depreciation and
amortization......... 44,609 3,948 105,907 (1) 154,464
General and
administrative
expenses............. 34,892 3,126 -- 38,018
----------- ----------- ---------- -----------
253,674 42,642 104,585 400,901
----------- ----------- ---------- -----------
Income (loss) from
operations............. (67,358) 371 (105,907) (172,894)
Other income (expense):
Interest income....... 5,644 577 -- 6,221
Interest expense...... (23,626) (329) -- (23,955)
Other................. (784) (386) -- (1,170)
----------- ----------- ---------- -----------
Total other income
(expense).......... (18,766) (138) -- (18,904)
----------- ----------- ---------- -----------
Income (loss) before
income taxes........... (86,124) 233 $ (105,907) (191,798)
Income tax expense...... (100) -- -- (100)
----------- ----------- ---------- -----------
Net income (loss)....... (86,224) 233 (105,907) (191,898)
Dividends on preferred
stock.................. (7,072) -- -- (7,072)
----------- ----------- ---------- -----------
Net income (loss)
applicable to common
stockholders........... $ (93,296) $ 233 $ (105,907) $ (198,970)
=========== =========== ========== ===========
Weighted average number
of shares outstanding.. 125,017,000 57,248,000 (6) 182,265,000
=========== ========== ===========
Pro forma net loss per
share applicable to
common stockholders.... $ (0.75) $ (1.09)
=========== ===========
</TABLE>

See accompanying notes to pro forma consolidated condensed financial
statements.

F-26
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995

<TABLE>
<CAPTION>
MFS UUNET
COMMUNICATIONS TECHNOLOGIES, PRO FORMA
COMPANY, INC. INC. ADJUSTMENTS PRO FORMA
-------------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue................. $ 583,194 $ 94,461 $ (5,845)(4) $ 671,810
Costs and expenses:
Operating expenses.... 562,300 82,906 (5,845)(4) 639,361
Depreciation and
amortization......... 142,496 8,322 423,628 (1) 574,446
General and
administrative
expenses............. 117,703 12,709 -- 130,412
Other................. -- 11,067 -- 11,067
----------- ---------- ---------- -----------
822,499 115,004 417,783 1,355,286
----------- ---------- ---------- -----------
Loss from operations.... (239,305) (20,543) (423,628) (683,476)
Other income (expense):
Interest income....... 13,188 2,747 -- 15,935
Interest expense...... (38,606) (808) -- (39,414)
Other................. (2,575) (127) -- (2,702)
----------- ---------- ---------- -----------
Total other income
(expense).......... (27,993) 1,812 -- (26,181)
----------- ---------- ---------- -----------
Loss before income
taxes.................. (267,298) (18,731) (423,628) (709,657)
Income tax (expense)
benefit................ (600) 474 (474)(5) (600)
----------- ---------- ---------- -----------
Net loss................ (267,898) (18,257) (424,102) (710,257)
Dividends on preferred
stock.................. (15,064) -- -- (15,064)
----------- ---------- ---------- -----------
Net loss applicable to
common stockholders.... $ (282,962) $ (18,257) $ (424,102) $ (725,321)
=========== ========== ========== ===========
Weighted average number
of shares outstanding
(after stock split).... 127,786,000 57,248,000 (6) 185,034,000
=========== ========== ===========
Net loss per share
applicable to common
stockholders........... $ (2.21) $ (3.92)
=========== ===========
</TABLE>

See accompanying notes to pro forma consolidated condensed financial
statements.

F-27
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1996

<TABLE>
<CAPTION>
MFS UUNET
COMMUNICATIONS TECHNOLOGIES, PRO FORMA
COMPANY, INC. INC. ADJUSTMENTS PRO FORMA
-------------- ------------- ----------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 92,588 $ 45,413 -- $ 138,001
Marketable
securities........... 368,266 -- -- 368,266
Accounts receivable
and other assets..... 260,860 28,525 -- 289,385
---------- ---------- ---------- ----------
Total current
assets............. 721,714 73,938 -- 795,652
Networks and equipment,
at cost................ 1,466,254 93,261 -- 1,559,515
Less accumulated
depreciation and
amortization......... (245,321) (17,384) -- (262,705)
---------- ---------- ---------- ----------
Networks and
equipment, net..... 1,220,933 75,877 -- 1,296,810
Goodwill, net........... 279,970 166 $1,898,309 (1) 2,178,445
Other assets, net....... 124,594 6,297 135,500 (1) 266,391
---------- ---------- ---------- ----------
Total assets........ $2,347,211 $ 156,278 $2,033,809 $4,537,298
========== ========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 168,235 $ 17,824 -- 186,059
Other current
liabilities.......... 99,421 38,325 14,400 (2) 152,146
---------- ---------- ---------- ----------
Total current
liabilities........ 267,656 56,149 14,400 338,205
Long-term obligations,
less current portion... 1,286,354 18,045 -- 1,304,399
Other liabilities and
minority interest...... 38,619 -- -- 38,619
Stockholders' equity:
Preferred stock, $.01
par value.
Series A, 8%
cumulative
convertible........ 1 -- -- 1
Series B, 7 3/4%
cumulative
convertible........ 150 -- -- 150
Common stock.......... 1,255 32 (32)(3)
573 (6) 1,828
Additional paid-in
capital................ 1,482,442 109,328 (109,328)(3)
2,100,920 (6) 3,583,362
Other................... (1,956) 44 (44)(3) (1,956)
Accumulated deficit..... (727,310) (27,320) 27,320 (3) (727,310)
---------- ---------- ---------- ----------
Total stockholders'
equity................. 754,582 82,084 2,019,409 2,856,075
---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity... $2,347,211 $ 156,278 $2,033,809 $4,537,298
========== ========== ========== ==========
</TABLE>

See accompanying notes to pro forma consolidated condensed financial
statements.

F-28
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 1: PRO FORMA STATEMENTS

The pro forma information as of, and for, the three months ended March 31,
1996 is based on unaudited financial statements after giving effect to the
preliminary allocation of the purchase price and the adjustments described in
Note 2. The pro forma information for the year ended December 31, 1995 is
based on historical financial statements of the MFS and UUNET after giving
effect to the adjustments described in Note 2.

The unaudited pro forma consolidated condensed financial statements may not
be indicative of the results that actually would have been achieved if the
acquisition had occurred on the dates assumed and do not project MFS'
financial position or results of operations at any future date or period then
ended.

NOTE 2: PRO FORMA ADJUSTMENTS

(1) Reflects the excess of the purchase price over the net book value (which
approximates fair value) of the net tangible assets acquired which was
recorded as goodwill, a customer contract and customer list. The pro forma
adjustment to depreciation and amortization represents the amortization of
the goodwill and other intangibles and was calculated using the
straightline method over a five year life for goodwill and three to four
year lives for the other intangibles.

(2) Reflects liabilities incurred, such as compensation costs and legal,
accounting and consulting fees, related to the Merger.

(3) Reflects the elimination of the equity accounts of UUNET.

(4) Reflects the elimination of intercompany revenues and expenses.

(5) Reflects adjustment of federal income tax expense for the effects of the
Merger.

(6) Reflects the effect of the issuance of MFS Common Stock and options to
purchase MFS Common Stock as consideration for the UUNET Common Stock and
options to purchase UUNET Common Stock, respectively, in connection with
the Merger. The MFS Common Stock was valued at $34.69 per share for
purposes of calculating the Merger consideration.

F-29
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT PAGE
------- ----
<C> <S> <C>
2.1 Agreement and Plan of Merger, dated as of April 29, 1996, among
MFS Communications Company, Inc. ("MFS"), a Delaware
corporation, MFS Global Internet Services, Inc., a Delaware
corporation and a wholly owned subsidiary of MFS, and UUNET
Technologies, Inc.
Press Release of MFS Communications Company, Inc., dated August
99.1 1, 1996
99.2 Report of Arthur Andersen LLP
</TABLE>

<PAGE>

EXHIBIT 2.1

AGREEMENT AND PLAN

OF MERGER

DATED AS OF

APRIL 29, 1996

AMONG

MFS COMMUNICATIONS COMPANY, INC.

MFS GLOBAL INTERNET SERVICES, INC.

AND

UUNET TECHNOLOGIES, INC.
<PAGE>

TABLE OF CONTENTS

<TABLE>
<C> <S> <C>
ARTICLE I.THE MERGER....................................................... 1
Section 1.1. The Merger............................................... 1
Section 1.2. Effective Date of the Merger............................. 1
ARTICLE II.THE SURVIVING CORPORATION....................................... 2
Section 2.1. Certificate of Incorporation............................. 2
Section 2.2. By-Laws.................................................. 2
Section 2.3. Board of Directors; Officers............................. 2
Section 2.4. Effects of Merger........................................ 2
ARTICLE III.CONVERSION OF SHARES........................................... 2
Section 3.1. Exchange Ratio........................................... 2
Section 3.2. Parent to Make Certificates Available.................... 2
Section 3.3. Dividends; Transfer Taxes................................ 3
Section 3.4. No Fractional Shares..................................... 4
Section 3.5. Stock Options............................................ 4
Section 3.6. Stockholders' Meetings................................... 5
Section 3.7. Closing of the Company's Transfer Books.................. 5
Section 3.8. Assistance in Consummation of the Merger................. 5
Section 3.9. Closing.................................................. 5
Section 3.10. No Further Rights in Company Common Stock................ 6
Section 3.11. No Liability............................................. 6
Section 3.12. Withholding Rights....................................... 6
ARTICLE IV.REPRESENTATIONS AND WARRANTIES OF PARENT........................ 6
Section 4.1. Organization and Qualification........................... 6
Section 4.2. Capitalization........................................... 6
Section 4.3. Subsidiaries............................................. 7
Section 4.4. Authority Relative to this Merger Agreement.............. 7
Section 4.5. Reports and Financial Statements......................... 8
Section 4.6. Absence of Certain Changes or Events..................... 8
Section 4.7. Employee Benefit Plans................................... 8
Section 4.8. ERISA.................................................... 9
Section 4.9. Parent Action............................................ 9
Section 4.10. Fairness Opinion......................................... 9
Section 4.11. No Brokers............................................... 9
Section 4.12. Parent Ownership of Company Common Stock................. 9
ARTICLE V.REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................... 9
Section 5.1. Organization and Qualification........................... 9
Section 5.2. Capitalization........................................... 10
Section 5.3. Subsidiaries............................................. 10
Section 5.4. Authority Relative to this Merger Agreement.............. 10
Section 5.5. Reports and Financial Statements......................... 11
Section 5.6. Absence of Certain Changes or Events..................... 12
Section 5.7. Employee Benefit Plans................................... 12
Section 5.8. ERISA.................................................... 12
Section 5.9. Takeover Provisions Inapplicable......................... 13
Section 5.10. Company Action........................................... 13
Section 5.11. Fairness Opinion......................................... 13
Section 5.12. No Brokers............................................... 13
</TABLE>

i
<PAGE>

<TABLE>
<C> <S> <C>
ARTICLE VI.REPRESENTATIONS AND WARRANTIES REGARDING SUB................... 13
Section 6.1. Organization........................................... 13
Section 6.2. Capitalization......................................... 13
Section 6.3. Authority Relative to this Merger Agreement............ 13
ARTICLE VII.CONDUCT OF BUSINESS PENDING THE MERGER........................ 14
Section 7.1. Conduct of Business by the Company Pending the Merger.. 14
Section 7.2. Conduct of Business by Parent Pending the Merger....... 16
Section 7.3. Conduct of Business of Sub............................. 16
Section 7.4. Notice of Breach....................................... 16
ARTICLE VIII.ADDITIONAL AGREEMENTS........................................ 16
Section 8.1. Access and Information................................. 16
Section 8.2. Registration Statement/Proxy Statement................. 16
Section 8.3. Compliance with the Securities Act..................... 17
Section 8.4. Listing................................................ 17
Section 8.5. Indemnification........................................ 17
Section 8.6. HSR Act................................................ 19
Section 8.7. Additional Agreements.................................. 19
Section 8.8. No Solicitation........................................ 19
Section 8.9. Limitation on Acquisition Activities................... 20
Section 8.10. Notice of Actions...................................... 20
Section 8.11. Benefit Plans Generally................................ 20
Section 8.12. Stockholders' Rights Plan.............................. 21
ARTICLE IX.CONDITIONS PRECEDENT........................................... 21
Conditions to Each Party's Obligation to Effect the
Section 9.1. Merger................................................ 21
Conditions to Obligation of the Company to Effect the
Section 9.2. Merger................................................ 21
Conditions to Obligations of Parent and Sub to Effect
Section 9.3. the Merger............................................ 22
ARTICLE X.TERMINATION, AMENDMENT AND WAIVER............................... 22
Section 10.1. Termination............................................ 22
Section 10.2. Effect of Termination.................................. 23
Section 10.3. Amendment.............................................. 23
Section 10.4. Extension; Waivers..................................... 23
ARTICLE XI.GENERAL PROVISIONS............................................. 23
Non-Survival of Representations, Warranties and Agree-
Section 11.1. ments................................................. 23
Section 11.2. Notices................................................ 24
Section 11.3. Fees and Expenses...................................... 24
Section 11.4. Publicity.............................................. 25
Section 11.5. Specific Performance................................... 25
Section 11.6. Assignment; Binding Effect............................. 25
Section 11.7. Entire Agreement....................................... 26
Section 11.8. Governing Law.......................................... 26
Section 11.9. Counterparts........................................... 26
Section 11.10. Headings, Table of Contents, Index of Defined Terms.... 26
Section 11.11. Interpretation......................................... 26
Section 11.12. Waivers................................................ 26
Section 11.13. Severability........................................... 26
Section 11.14. Subsidiaries........................................... 26
Exhibit 1.1(a)--The Stock Option Agreement
Exhibit 1.1(b)--The Parent Voting Agreement
Exhibit 8.3(a)--The Affiliate Letter
</TABLE>

ii
<PAGE>

INDEX OF DEFINED TERMS

<TABLE>
<S> <C>
Acquisition Proposal........................................................ 20
Affiliate................................................................... 17
Certificates................................................................ 3
Claim....................................................................... 18
Code........................................................................ 1
Commission.................................................................. 7
Company..................................................................... 1
Company Benefit Plans....................................................... 12
Company Common Stock........................................................ 2
Company Disclosure Letter................................................... 10
Company ERISA Affiliate..................................................... 12
Company Material Adverse Effect............................................. 10
Company Meeting............................................................. 5
Company SEC Reports......................................................... 11
DGCL........................................................................ 2
Effective Date.............................................................. 1
Encumbrances................................................................ 7
ERISA....................................................................... 8
Excess Shares............................................................... 4
Exchange Act................................................................ 8
Exchange Agent.............................................................. 2
Exchange Fund............................................................... 3
Exchange Ratio.............................................................. 2
Form S-4.................................................................... 16
Fractional Securities Fund.................................................. 4
HSR Act..................................................................... 8
Indemnified Party........................................................... 18
IRS......................................................................... 9
Merger...................................................................... 1
Merger Agreement............................................................ 1
MS.......................................................................... 11
MS Agreement................................................................ 11
Nasdaq...................................................................... 4
Options..................................................................... 10
Outstanding Options......................................................... 4
Parent...................................................................... 1
Parent Benefit Plans........................................................ 8
Parent Common Stock......................................................... 2
Parent Disclosure Letter.................................................... 6
Parent ERISA Affiliate...................................................... 9
Parent Material Adverse Effect.............................................. 6
Parent Meeting.............................................................. 5
Parent Rights Plan.......................................................... 2
Parent SEC Reports.......................................................... 8
Parent Share Proposal....................................................... 5
Parent Stock Split.......................................................... 2
</TABLE>

iii
<PAGE>

<TABLE>
<S> <C>
Parent Voting Agreement..................................................... 1
Parent Voting Debt.......................................................... 6
Permitted Options........................................................... 14
Proposed Transactions....................................................... 10
Proxy Statement/Prospectus.................................................. 16
Purchase Event.............................................................. 22
Securities Act.............................................................. 8
Share Consideration......................................................... 3
Significant Subsidiaries.................................................... 7
Stock Option Agreement...................................................... 1
Stock Option Plans.......................................................... 4
Stock Purchase Plan......................................................... 5
Sub......................................................................... 1
Surviving Corporation....................................................... 1
Voting Debt................................................................. 10
</TABLE>

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<PAGE>

AGREEMENT AND PLAN OF MERGER

This Agreement and Plan of Merger (the "Merger Agreement"), dated as of
April 29, 1996, by and among MFS Communications Company, Inc., a Delaware
corporation ("Parent"), MFS Global Internet Services, Inc., a Delaware
corporation and a wholly owned subsidiary of Parent ("Sub"), and UUNET
Technologies, Inc., a Delaware corporation (the "Company").

WITNESSETH:

Whereas, Parent and the Company desire to effect a business combination (the
"Merger") by means of the merger of Sub with and into the Company;

Whereas, the Boards of Directors of Parent, Sub and the Company have
approved the Merger, upon the terms and subject to the conditions set forth
herein;

Whereas, as a condition and inducement to Parent's and Sub's entering into
this Merger Agreement and incurring the obligations set forth herein,
concurrently with the execution and delivery of this Merger Agreement, Parent
is entering into a Stockholder Option, Voting and Proxy Agreement with certain
stockholders of the Company, in the form of Exhibit 1.1(a) (the "Stock Option
Agreement"), pursuant to which, among other things, such stockholders have
agreed to grant Parent the irrevocable option to purchase the shares of
Company Common Stock owned by such stockholders; and agreed to vote the shares
of Company Common Stock (as defined below) owned by such stockholders in favor
of the Merger provided for herein and to grant Parent irrevocable proxies to
vote such shares of Company Common Stock;

Whereas, as a condition and inducement to the Company's entering into this
Merger Agreement and incurring the obligations set forth herein, concurrently
with the execution and delivery of this Merger Agreement, the Company is
entering into a Parent Voting and Proxy Agreement with certain stockholders of
Parent, in the form of Exhibit 1.1(b) (the "Parent Voting Agreement"),
pursuant to which, among other things, such stockholders have agreed to vote
the shares of Parent Common Stock (as defined below) owned by such
stockholders in favor of the Parent Share Proposal (as defined below) provided
for herein and to grant the Company irrevocable proxies to vote such shares of
Parent Common Stock;

Whereas, for Federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");

Now, therefore, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein, the parties
hereto agree as follows:

ARTICLE I.

The Merger

Section 1.1. The Merger. Upon the terms and subject to the conditions
hereof, on the Effective Date (as defined in Section 1.2), Sub shall be merged
with and into the Company and the separate existence of Sub shall thereupon
cease, and the Company, as the surviving corporation in the Merger (the
"Surviving Corporation"), shall by virtue of the Merger continue its corporate
existence under the laws of the State of Delaware.

Section 1.2. Effective Date of the Merger. The Merger shall become effective
at the date and time (the "Effective Date") when a properly executed
Certificate of Merger is duly filed with the Secretary of State of the State
of Delaware, which filing shall be made as soon as practicable following
fulfillment of the conditions set forth in Article IX hereof, or at such time
thereafter as is provided in such Certificate.

<PAGE>

ARTICLE II.

The Surviving Corporation

Section 2.1. Certificate of Incorporation. Subject to Section 8.5 of this
Merger Agreement, after the Effective Date, the Certificate of Incorporation
of the Surviving Corporation shall be amended and restated in its entirety to
read as the Certificate of Incorporation of Sub as in effect immediately prior
to the Effective Date, except that Article One shall be amended to read as
follows: "The name of the Corporation is UUNET TECHNOLOGIES, INC."

Section 2.2. By-Laws. Subject to Section 8.5 of this Merger Agreement, after
the Effective Date, the By-laws of Sub, as in effect immediately prior to the
Effective Date, shall be the By-laws of the Surviving Corporation until
thereafter amended as provided by law, the Certificate of Incorporation of the
Surviving Corporation and such By-laws.

Section 2.3. Board of Directors; Officers. The directors of Sub immediately
prior to the Effective Date and John W. Sidgmore shall be the directors of the
Surviving Corporation and the officers of the Company immediately prior to the
Effective Date shall be the officers of the Surviving Corporation, in each
case until their respective successors are duly elected and qualified.

Section 2.4. Effects of Merger. The Merger shall have the effects set forth
in Section 259 of the Delaware General Corporation Law (the "DGCL").

ARTICLE III.

Conversion of Shares

Section 3.1. Exchange Ratio. On the Effective Date, by virtue of the Merger
and without any action on the part of any holder of any common stock, $0.001
par value, of the Company ("Company Common Stock"):

(a) All shares of Company Common Stock which are held by the Company or
any subsidiary of the Company, and any shares of Company Common Stock owned
by Parent, Sub or any other subsidiary of Parent, shall be canceled.

(b) Subject to Section 3.4, each remaining outstanding share of Company
Common Stock shall be converted into and represent the right to receive
1.777776, subject to adjustment pursuant to Section 3.1(c) (as may be
adjusted, the "Exchange Ratio") fully paid and nonassessable shares of the
common stock, $.01 par value, of Parent (the "Parent Common Stock"), which
reflects the stock split of the Parent Common Stock that was paid on April
26, 1996 (the "Parent Stock Split"), together with the associated rights
under Parent's Rights Agreement, dated as of September 30, 1995, between
Parent and Continental Stock Transfer & Trust Company (the "Parent Rights
Plan").

(c) In the event of any stock dividend, stock split, reclassification,
recapitalization, combination or exchange of shares with respect to, or
rights issued in respect of, Parent Common Stock other than the Parent
Stock Split after the date hereof, the Exchange Ratio shall be adjusted
accordingly.

(d) Each issued and outstanding share of capital stock of Sub shall be
converted into and become one fully paid and nonassessable share of Common
Stock, $.01 par value, of the Surviving Corporation.

Section 3.2. Parent to Make Certificates Available.

(a) Prior to the Effective Date, Parent shall appoint Continental Stock
Transfer and Trust Company to act as exchange agent (the "Exchange Agent")
for the Merger. At the Effective Date, Parent shall deposit with the
Exchange Agent, for the benefit of the holders of shares of Company Common
Stock, for exchange in accordance with this Article III, through the
Exchange Agent, certificates representing a number of shares of Parent
Common Stock equal to the product (rounded down to the nearest whole
number) of the Exchange

2
<PAGE>

Ratio multiplied by the number of shares of Company Common Stock
outstanding immediately prior to the Effective Date. For purposes of the
Merger Agreement, shares of Parent Common Stock, together with any
dividends or distributions with respect thereto, are hereinafter referred
to as the "Exchange Fund" and such shares of Parent Common Stock, is
hereinafter referred to as the "Share Consideration." The Exchange Agent
shall deliver the Share Consideration out of the Exchange Fund as directed
by Parent. The Share Consideration shall be deemed to have been issued on
the Effective Date.

(b) On the Effective Date, Parent shall instruct the Exchange Agent to
mail to each holder of record of a certificate or certificates which
immediately prior to the Effective Date represented outstanding shares of
Company Common Stock (collectively, the "Certificates") whose shares were
converted into the right to receive the Share Consideration pursuant to
Section 3.1(b) within three business days of receiving from the Company a
list of such holders of record, (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other provisions as
Parent may reasonably specify) and (ii) instructions for use in effecting
the surrender of the Certificates in exchange for certificates representing
the Share Consideration. Upon surrender of a Certificate for cancellation
to the Exchange Agent, together with such letter of transmittal, duly
executed, and such other documents as reasonably may be required by the
Exchange Agent, and acceptance thereof by the Exchange Agent, each holder
of a Certificate shall be entitled to receive in exchange therefor
certificates representing the Share Consideration that such holder has the
right to receive pursuant to the provisions of this Article III, and the
Certificate so surrendered shall forthwith be canceled. The Exchange Agent
shall accept such Certificates upon compliance with such reasonable terms
and conditions as the Exchange Agent may impose to effect an orderly
exchange thereof in accordance with normal exchange practices. Subject to
applicable law, following surrender of any such Certificate, there shall be
paid to the record holder thereof the certificates representing the Share
Consideration and cash in consideration of fractional shares as provided in
Section 3.4.

(c) Any portion of the Exchange Fund and the Fractional Securities Fund
(as defined below) that remains undistributed to the former stockholders of
the Company for 12 months after the Effective Date shall be delivered to
Parent upon demand. Any holder of shares of Company Common Stock who has
not exchanged his shares for Parent Common Stock in accordance with
subsection (a) within 12 months after the Effective Date shall have no
further claim upon the Exchange Agent and shall thereafter look only to
Parent for payment in respect of his shares of Company Common Stock. Until
so surrendered, certificates representing Company Common Stock shall
represent solely the right to receive the Share Consideration.

(d) Notwithstanding paragraph (b) above, all shares of Company Common
Stock subject to a right of repurchase which remains in effect following
the Merger shall continue to bear a restrictive legend with respect to such
right of repurchase and shall be delivered to Parent to hold, pending the
lapse of the right of repurchase.

Section 3.3. Dividends; Transfer Taxes. No dividends or other distributions
that are declared or made on Parent Common Stock will be paid to persons
entitled to receive certificates representing Parent Common Stock pursuant to
this Merger Agreement until such persons surrender their Certificates
representing Company Common Stock. Upon such surrender, there shall be paid to
the person in whose name the certificates representing such Parent Common
Stock shall be issued any dividends or other distributions which shall have
become payable with respect to such Parent Common Stock in respect of a record
date after the Effective Date. In no event shall the person entitled to
receive such dividends be entitled to receive interest on such dividends. In
the event that any certificates for any shares of Parent Common Stock are to
be issued in a name other than that in which the Certificates representing
shares of Company Common Stock surrendered in exchange therefor are
registered, it shall be a condition of such exchange that the Certificate or
Certificates so surrendered shall be properly endorsed or be otherwise in
proper form for transfer and that the person requesting such exchange shall
pay to the Exchange Agent any transfer or other taxes required by reason of
the issuance of certificates for such shares of Parent Common Stock in a name
other than that of the registered holder of the Certificate surrendered, or
shall establish to the satisfaction of the Exchange Agent that such tax has
been paid or is not applicable.

3
<PAGE>

Section 3.4. No Fractional Shares. No certificates or scrip representing
less than one share of Parent Common Stock shall be issued upon the surrender
for exchange of Certificates representing Company Common Stock pursuant to
Section 3.1(b). In lieu of any such fractional share, each holder of Company
Common Stock who would otherwise have been entitled to a fraction of a share
of Parent Common Stock upon surrender of Certificates for exchange pursuant to
Section 3.1(b) shall be paid upon such surrender cash (without interest) in an
amount equal to such holder's proportionate interest in the net proceeds from
the sale or sales in the open market by the Exchange Agent, on behalf of all
such holders, of the aggregate fractional Parent Common Stock issued pursuant
to this Section 3.4. As soon as practicable following the Effective Date, the
Exchange Agent shall determine the excess of (i) the number of full shares of
Parent Common Stock delivered to the Exchange Agent by Parent over (ii) the
aggregate number of full shares of Parent Common Stock to be distributed to
holders of Company Common Stock (such excess being herein called the "Excess
Shares"), and the Exchange Agent, as agent for the former holders of Company
Common Stock, shall sell the Excess Shares at the prevailing prices on The
Nasdaq Stock Market ("Nasdaq"). The Exchange Agent shall deduct from the
proceeds of the sale of the Excess Shares all commissions and transfer taxes
incurred in connection with such sale of Excess Shares. Until the net proceeds
of such sale have been distributed to the former stockholders of the Company,
the Exchange Agent will hold such proceeds in trust for such former
stockholders (the "Fractional Securities Fund"). As soon as practicable after
the determination of the amount of cash to be paid to former stockholders of
the Company in lieu of any fractional interests, the Exchange Agent shall make
available in accordance with the terms of this Merger Agreement such amounts
to such former stockholders.

Section 3.5. Stock Options. At or prior to the Effective Date, the Company
and Parent shall take all action necessary to cause the assumption by Parent
as of the Effective Date of the Company's 1995 Performance Option Plan,
Incentive Stock Option Plan, Equity Incentive Plan and Nonemployee Directors
Stock Option Plan (the "Stock Option Plans"). Each of the options to purchase
Company Common Stock, whether vested or unvested, issued under the Stock
Option Plans or pursuant to separate option agreements outstanding as of the
Effective Date (the "Outstanding Options") shall be converted without any
action on the part of the holder thereof into an option to purchase shares of
Parent Common Stock as of the Effective Date. The number of shares of Parent
Common Stock that the holder of an Outstanding Option shall be entitled to
receive upon the exercise of such option shall be a number of whole shares
determined by multiplying the number of shares of Company Common Stock subject
to such option, determined immediately before the Effective Date, by the
Exchange Ratio. The option price of each share of Parent Common Stock subject
to an Outstanding Option shall be the amount (rounded up to the nearest whole
cent) obtained by dividing the exercise price per share of Company Common
Stock at which such option is exercisable immediately before the Effective
Date by the Exchange Ratio. The assumption and substitution of options as
provided herein shall not give the holders of such options additional benefits
or additional vesting rights (other than rights to the acceleration of vesting
or the lapse of the right of repurchase caused by the Merger under existing
contractual arrangements) which they did not have immediately prior to the
Effective Date or relieve the holders of any obligations or restrictions
applicable to their options or the shares obtainable upon exercise of the
options. After the Effective Date, the Stock Option Plans shall be continued
in effect by Parent subject to amendment, modification, suspension,
abandonment or termination as provided therein, and the Stock Option Plans as
so continued shall relate only to the issuance of Parent Common Stock as
provided in this Section 3.5. Parent shall comply with the terms of the Stock
Option Plans and use all reasonable efforts to ensure, to the extent required
by, and subject to the provisions of such Stock Option Plans, that the
Outstanding Options which qualified as incentive stock options prior to the
Effective Date continue to qualify as incentive stock options after the
Effective Date. Parent shall take all corporate action necessary to reserve
for issuance a sufficient number of shares of Parent Common Stock for delivery
under Outstanding Options assumed in accordance with this Section 3.5. As soon
as practicable after the Effective Date, and not more than one business day
thereafter, Parent shall file a registration statement on Form S-8 relating to
such assumed options and shall use all reasonable efforts to maintain the
effectiveness of such registration statement (and maintain the current status
of the prospectus or prospectuses contained therein) for so long as such
options remain outstanding. Parent shall use all reasonable efforts to qualify
as soon as practicable after the Effective Date under applicable state
securities laws the issuance of such shares of Parent Common Stock issuable
upon exercise of such Outstanding Options. With respect to those individuals
who subsequent to the

4
<PAGE>

Merger will be subject to the reporting requirements under Section 16(a) of
the Exchange Act, Parent shall administer the Stock Option Plans assumed
pursuant to this Section 3.5 in a manner that complies with Rule 16b-3
promulgated under the Exchange Act to the extent the Stock Option Plans
complied with such rule prior to the Merger. Upon the earlier to occur of (i)
July 31, 1996 or (ii) the trading day immediately preceding the Effective
Date, all then outstanding rights to acquire shares of Company Common Stock
under the Company's Employee Stock Purchase Plan (the "Stock Purchase Plan")
will be exercised for the purchase of shares of Company Common Stock.
Effective no later than the close of the second trading day immediately
preceding the Effective Date, (but in no event prior to the exercise
contemplated in the previous sentence), the Board of Directors of the Company
shall terminate the Stock Purchase Plan and all outstanding options to
purchase Company Common Stock thereunder. All funds contributed to the Stock
Purchase Plan that have not been used to purchase shares of Company Common
Stock shall be returned, in cash, to participants of the Stock Purchase Plan
as soon as administratively feasible after such termination date, in
accordance with Section 17(b) of the Stock Purchase Plan.

Section 3.6. Stockholders' Meetings.

(a) The Company shall take all action necessary, in accordance with
applicable law and its Certificate of Incorporation and By-laws, to convene
a special meeting of the holders of Company Common Stock (the "Company
Meeting") as promptly as practicable for the purpose of considering and
taking action upon this Merger Agreement. The Board of Directors of the
Company will recommend that holders of Company Common Stock vote in favor
of and approve the Merger and the adoption of the Merger Agreement at the
Company Meeting. The Company shall use all reasonable efforts to solicit
from its stockholders proxies in favor of the adoption of the Merger
Agreement and shall take all other action necessary or advisable to secure
the vote or consent of stockholders required by Delaware law to obtain such
approval. At the Company Meeting, all of the shares of Company Common Stock
then owned by Parent, Sub, or any other subsidiary of Parent, or with
respect to which Parent, Sub, or any other subsidiary of Parent holds the
power to direct the voting, will be voted in favor of approval of the
Merger and adoption of this Merger Agreement.

(b) Parent shall take all action necessary, in accordance with applicable
law and its Certificate of Incorporation and By-laws, to convene a special
meeting of the holders of Parent capital stock (the "Parent Meeting") as
promptly as practicable for the purpose of considering and taking action to
authorize the issuance of Parent Common Stock associated with the Merger
under the applicable guidelines of Nasdaq (the "Parent Share Proposal").
The Board of Directors of Parent will recommend that holders of Parent
Common Stock vote in favor of and approve the Parent Share Proposal at the
Parent Meeting. Parent shall use all reasonable efforts to solicit from its
stockholders proxies in favor of the adoption of the Parent Share Proposal
and shall take all other action necessary or advisable to secure the vote
or consent of stockholders required by Delaware law to obtain such
approval.

Section 3.7. Closing of the Company's Transfer Books. At the Effective Date,
the stock transfer books of the Company shall be closed and no transfer of
shares of Company Common Stock shall be made thereafter. In the event that,
after the Effective Date, Certificates are presented to the Surviving
Corporation, they shall be canceled and exchanged for Parent Common Stock
and/or cash as provided in Sections 3.1(b) and 3.4.

Section 3.8. Assistance in Consummation of the Merger. Each of Parent, Sub
and the Company shall provide all reasonable assistance to, and shall
cooperate with, each other to bring about the consummation of the Merger as
soon as possible in accordance with the terms and conditions of this Merger
Agreement. Parent shall cause Sub to perform all of its obligations in
connection with this Merger Agreement.

Section 3.9. Closing. The closing of the transactions contemplated by this
Merger Agreement shall take place (i) at the offices of Willkie Farr &
Gallagher, One Citicorp Center, 153 East 53rd Street, New York, New York
10022, as soon as practicable after the last of the conditions set forth in
Article IX is fulfilled or waived or (ii) at such other time and place as
Parent and the Company shall agree in writing.

5
<PAGE>

Section 3.10. No Further Rights in Company Common Stock. All shares of
Parent Common Stock issued upon conversion of the shares of Company Common
Stock in accordance with the terms hereof (including any cash paid pursuant to
Sections 3.3 or 3.4) shall be deemed to have been issued in full satisfaction
of all rights pertaining to such shares of Company Common Stock.

Section 3.11. No Liability. Neither Parent nor the Company shall be liable
to any holder of shares of Company Common Stock for any such shares of Company
Common Stock (or dividends or distributions with respect hereto), or cash
delivered to a public official pursuant to any abandoned property, escheat or
similar law, rule, regulation, statute, order, judgment or decree.

Section 3.12. Withholding Rights. Each of Surviving Corporation and Parent
shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Merger Agreement to any holder of shares of Company
Common Stock such amounts as it is required to deduct and withhold with
respect to the making of such payment under the Code, or any provision of
state, local or foreign tax law. To the extent that amounts are so withheld by
the Surviving Corporation or Parent, as the case may be, such withheld amounts
shall be treated for all purposes of this Merger Agreement as having been paid
to the holder of the shares of Company Common Stock in respect of which such
deduction and withholding was made by the Surviving Corporation or Parent, as
the case may be.

ARTICLE IV.

Representations and Warranties of Parent

Parent represents and warrants to the Company as follows:

Section 4.1. Organization and Qualification. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware and has the corporate power to carry on its business as it is now
being conducted or currently proposed to be conducted. Parent is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities make such qualification necessary,
except where the failure to be so qualified will not, individually or in the
aggregate, have a material adverse effect on the business, properties, assets,
condition (financial or otherwise), liabilities or operations of Parent and
its subsidiaries taken as a whole (a "Parent Material Adverse Effect").
Complete and correct copies as of the date hereof of the Certificate of
Incorporation and By-laws of Parent have been delivered to the Company as part
of a disclosure letter delivered by Parent to the Company prior to the date of
this Merger Agreement (the "Parent Disclosure Letter").

Section 4.2. Capitalization. The authorized capital stock of Parent consists
of 400,000,000 shares of Parent Common Stock, and 25,000,000 shares of
preferred stock, $.01 par value. As of April 26, 1996, as adjusted for the
Parent Stock Split (i) 125,804,234 shares of Parent Common Stock were validly
issued and outstanding, fully paid and nonassessable, (ii) 95,000 shares of
Parent's Series A 8% Cumulative Convertible Preferred Stock, were validly
issued and outstanding, fully paid, and nonassessable and (iii) 15,000,000
shares of Series B Cumulative Convertible Preferred Stock were validly issued
and outstanding, fully paid, and nonassessable. As of the date hereof, there
are no bonds, debentures, notes or other indebtedness having the right to vote
on any matters on which the Parent's stockholders may vote ("Parent Voting
Debt") issued or outstanding. As of April 26, 1996, after giving effect to the
Parent Stock Split, except for options to acquire 20,614,274 shares of Parent
Common Stock pursuant to the Parent's 1992 Stock Plan and 1993 Stock Plan,
warrants to purchase 1,500,000 shares of Parent Common Stock, commitments to
issue shares of Parent Common Stock under Parent's Shareworks and Shareworks
Plus programs and commitments to issue shares of Parent Common Stock to non-
employee directors pursuant to Parent's 1993 Stock Plan, and, except as
provided herein and in the Parent Rights Plan, there are no options, warrants,
calls or other rights, agreements or commitments presently outstanding
obligating Parent to issue, deliver or sell shares of its capital stock or
debt securities, or obligating Parent to grant, extend or enter into any such
option, warrant, call or other such right, agreement or

6
<PAGE>

commitment. All of the shares of Parent Common Stock issuable in accordance
with this Merger Agreement in exchange for Company Common Stock at the
Effective Date will be, when so issued, duly authorized, validly issued, fully
paid and nonassessable and shall be delivered free and clear of any pledge,
lien, security interest, mortgage, charge, claim, equity, option, proxy,
voting restriction, right of first refusal, limitation on disposition, adverse
claim of ownership or use or encumbrance of any kind ("Encumbrances"),
including any preemptive rights of any stockholder of Parent.

Section 4.3. Subsidiaries. The only "Significant Subsidiaries" (as such term
is defined in Rule 1-02 of Regulation S-X of the Securities and Exchange
Commission (the "Commission")) ("Significant Subsidiaries") of Parent are
those named in Section 4.3 of the Parent Disclosure Letter or set forth on
Exhibit 21 to Parent's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995. Each Significant Subsidiary incorporated in the United
States is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation and has the corporate
power to carry on its business as it is now being conducted or currently
proposed to be conducted. Each Significant Subsidiary is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease
or the nature of its activities makes such qualification necessary except
where the failure to be so qualified will not have a Parent Material Adverse
Effect. Except as disclosed in Section 4.3 of the Parent Disclosure Letter,
all the outstanding shares of capital stock of each Significant Subsidiary are
validly issued, fully paid and nonassessable and owned by Parent or by a
Significant Subsidiary of Parent free and clear of any Encumbrances. There are
no existing options, warrants, calls or other rights, agreements or
commitments of any character relating to the issued or unissued capital stock
or other securities of any of the Significant Subsidiaries of Parent. Except
as set forth in the Parent's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, as disclosed in Section 4.3 of the Parent Disclosure
Letter and except for wholly owned subsidiaries which are formed after the
date hereof in the ordinary course of business, Parent does not directly or
indirectly own any interest in any other corporation, partnership, joint
venture or other business association or entity that is a Significant
Subsidiary.

Section 4.4. Authority Relative to this Merger Agreement.

(a) Parent has the corporate power to execute and deliver this Merger
Agreement and to carry out its obligations hereunder. The execution and
delivery of this Merger Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by Parent's Board of
Directors. The Merger Agreement constitutes a valid and binding obligation
of Parent, enforceable against Parent in accordance with its terms, except
as enforcement may be limited by bankruptcy, insolvency or other similar
laws affecting the enforcement of creditors' rights generally and except
that the availability of equitable remedies, including specific
performance, is subject to the discretion of the court before which any
proceeding therefor may be brought. Except for the approval of the holders
of the Parent capital stock described in Section 3.6(b), no other corporate
proceedings on the part of Parent are necessary to authorize the execution
and delivery by Parent of this Merger Agreement or the consummation of the
transactions contemplated hereby.

(b) The execution and delivery of this Merger Agreement and the
consummation of the transactions contemplated hereby, does not and will not
result in the change in conversion ratios, conversion rights or voting
rights, or the breach, violation, default (with or without notice or lapse
of time, or both), termination, cancellation or acceleration of any
obligation or the loss of a material benefit, under (i) the Parent's
charter or by-laws or (ii) any indenture or other loan document provision
or other contract, license, franchise, permit, order, decree, concession,
lease, instrument, judgment, statute, law, ordinance, rule or regulation
applicable to Parent or any of its subsidiaries or their respective
properties or assets, other than, in the case of clause (ii) only, (A) any
breaches, violations, defaults, terminations, cancellations, accelerations
or losses which, either singly or in the aggregate, will not have a Parent
Material Adverse Effect or prevent the consummation of the transactions
contemplated hereby and (B) the laws and regulations referred to in the
next paragraph.

(c) Except as disclosed in Section 4.4 of the Parent Disclosure Letter,
or in connection, or in compliance, with the provisions of the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended

7
<PAGE>

(the "HSR Act"), the Securities Act of 1933, as amended (the "Securities
Act"), the Securities Exchange Act of 1934 (the "Exchange Act"), and the
corporation, securities or blue sky laws or regulations of the various
states, no filing or registration with, or authorization, consent or
approval of, any public body or authority is necessary for the consummation
by Parent of the Merger or the other transactions contemplated by this
Merger Agreement, other than filings, registrations, authorizations,
consents or approvals the failure of which to make or obtain will not have
a Parent Material Adverse Effect or prevent the consummation of the
transactions contemplated hereby.

Section 4.5. Reports and Financial Statements. Parent has previously
furnished the Company with true and complete copies of its (i) Annual Report
on Form 10-K, as amended, for the fiscal years ended December 31, 1994 and
December 31, 1995, as filed with the Commission, (ii) proxy statements related
to all meetings of its stockholders (whether annual or special) since January
1, 1994, and (iii) all other reports or registration statements filed by
Parent with the Commission under the Exchange Act since December 31, 1992
through the date hereof, except Quarterly Reports on Form 10-Q for fiscal
quarters ended prior to December 31, 1995 (the items in clauses (i) through
(iii) being referred to herein collectively as the "Parent SEC Reports"). As
of their respective dates, the Parent SEC Reports complied in all material
respects with the requirements of the Exchange Act, and the rules and
regulations of the Commission thereunder applicable to such Parent SEC
Reports. As of their respective dates, the Parent SEC Reports did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and unaudited interim financial
statements of Parent included in the Parent SEC Reports comply as to form in
all material respects with applicable accounting requirements and with the
published rules and regulations of the Commission with respect thereto. The
financial statements included in the Parent SEC Reports: have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis (except as may be indicated therein or in the notes thereto);
present fairly, in all material respects, the financial position of Parent and
its subsidiaries as at the dates thereof and the results of their operations
and cash flows for the periods then ended subject, in the case of the
unaudited interim financial statements, to normal year-end audit adjustments,
any other adjustments described therein and the fact that certain information
and notes have been condensed or omitted in accordance with the Exchange Act
and the rules promulgated thereunder; and are in all material respects, in
accordance with the books of account and records of Parent.

Section 4.6. Absence of Certain Changes or Events. Except as disclosed in
the Parent SEC Reports or as disclosed in Section 4.6 of the Parent Disclosure
Letter, from December 31, 1995 through the date of this Merger Agreement,
there has not been (i) any transaction, commitment, dispute or other event or
condition (financial or otherwise) of any character (whether or not in the
ordinary course of business) individually or in the aggregate having a Parent
Material Adverse Effect (other than as a result of changes in laws or
regulations of general applicability); (ii) any damage, destruction or loss,
whether or not covered by insurance, which would have a Parent Material
Adverse Effect; or (iii) any entry into any commitment or transaction material
to Parent and its subsidiaries taken as a whole (including, without
limitation, any borrowing or sale of assets) except in the ordinary course of
business consistent with past practice.

Section 4.7. Employee Benefit Plans. Except as disclosed in the Parent SEC
Reports or as disclosed in Section 4.7 of the Parent Disclosure Letter, there
are no material employee benefit or compensation plans, agreements or
arrangements, including "employee benefit plans," as defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and including, but not limited to, plans, agreements or arrangements relating
to former employees, including, but not limited, to retiree medical plans,
maintained or contributed to by Parent or any of its subsidiaries or material
collective bargaining agreements to which Parent or any of its subsidiaries is
a party, other than "multiemployer plans," as defined in Section 3(37) of
ERISA (together, the "Parent Benefit Plans"). To the best knowledge of Parent,
no default exists with respect to the obligations of Parent or any of its
subsidiaries under any Parent Benefit Plan, which default, alone or in the
aggregate, would have a Parent Material Adverse Effect. Since January 1, 1995,
there have been no disputes or grievances subject to any grievance procedure,
unfair labor practice proceedings, arbitration or litigation under

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any Parent Benefit Plans, which have not been finally resolved, settled or
otherwise disposed of (other than claims for benefits in the ordinary course),
nor, to the best knowledge of Parent, is there any condition related to any
Parent Benefit Plans which, with notice or lapse of time or both, which
failure to resolve, settle or otherwise dispose of, alone or in the aggregate
with any other such conditions, would have a Parent Material Adverse Effect.
Since January 1, 1995, there have been no strikes, lockouts or work stoppages
or slowdowns, or to the best knowledge of Parent, jurisdictional disputes or
organizing activity occurring or threatened with respect to the business or
operations of Parent or its subsidiaries which have had or would have a Parent
Material Adverse Effect.

Section 4.8. ERISA. All Parent Benefit Plans have been administered in
accordance, and are in compliance with the applicable provisions of ERISA,
except where such failures to administer or comply would not have a Parent
Material Adverse Effect. Each of the Parent Benefit Plans which is intended to
meet the requirements of Section 401(a) of the Code has been determined by the
Internal Revenue Service (the "IRS") to meet the requirements of such section
of the Code (except with respect to any such benefit plans which have not yet
been submitted to the IRS, each of which is still within the "remedial
amendment period" described in Section 401(b) of the Code), and Parent knows
of no fact which is likely to have an adverse affect on the qualified status
of such plans. None of the Parent Benefit Plans are subject to Title IV of
ERISA, and neither Parent nor any entity treated as a single employer with
Parent under Section 414(b) or (c) of the Code (a "Parent ERISA Affiliate")
has maintained such a plan during the six-year period ended on the date
hereof. To the best knowledge of Parent, there are not now nor have there been
any non-exempt "prohibited transactions," as such term is defined in Section
4975 of the Code or Section 406 of ERISA, involving the Parent Benefit Plans
which could subject Parent or its subsidiaries to any penalty or tax imposed
under Section 502(i) of ERISA or Section 4975 of the Code other than a de
minimis penalty or tax. Neither Parent nor any Parent ERISA Affiliate has any
obligation to contribute to, or has had within the six-year period ending on
the date hereof, any obligation to or has actually contributed to, any
multiemployer plan. Neither Parent nor any ERISA Affiliate has engaged in any
transaction described in Section 4069 of ERISA within the five-year period
ending on the date hereof.

Section 4.9. Parent Action. The Board of Directors of Parent (at a meeting
duly called and held) has by the unanimous vote of all directors present with
no abstentions (a) determined that the Parent Share Proposal is advisable and
in the best interests of Parent and its stockholders and (b) recommended the
approval of the Parent Share Proposal by the holders of Parent Common Stock
and directed that the Parent Share Proposal be submitted for consideration by
Parent's stockholders at the Parent Meeting.

Section 4.10. Fairness Opinion. Parent has received the written opinion of
Gleacher NatWest Inc., financial advisor to Parent, dated no later than the
date hereof, to the effect that the Exchange Ratio is fair to the stockholders
of Parent from a financial point of view.

Section 4.11. No Brokers. Except for Gleacher NatWest Inc., no broker,
finder or investment banker is entitled to any brokerage, finder's or other
fee or commission in connection with the Merger or the transactions
contemplated by this Merger Agreement based upon arrangements made by or on
behalf of Parent.

Section 4.12. Parent Ownership of Company Common Stock. Parent and its
"associates" and "affiliates" (as defined under both Section 203 of the DGCL
and Rule 405 under the Securities Act), collectively beneficially own and have
beneficially owned at all times during the three-year period prior to the date
hereof less than 1% of the shares of Company Common Stock outstanding (other
than shares of Company Common Stock issuable pursuant to the Stock Option
Agreement to be entered into concurrently herewith).

ARTICLE V.

Representations and Warranties of the Company

The Company represents and warrants to Parent and Sub as follows:

Section 5.1. Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power to carry on

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its business as it is now being conducted or currently proposed to be
conducted. The Company is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned or held under lease or the nature of its activities makes
such qualification necessary, except where the failure to be so qualified will
not have a material adverse effect on the business, properties, assets,
condition (financial or otherwise), liabilities or operations of the Company
and its subsidiaries taken as a whole (a "Company Material Adverse Effect").
Complete and correct copies as of the date hereof of the Certificate of
Incorporation and By-laws of the Company and each of its subsidiaries have
been delivered to Parent as part of a disclosure letter delivered by the
Company to Parent on or prior to the date of this Merger Agreement (the
"Company Disclosure Letter").

Section 5.2. Capitalization. The authorized capital stock of the Company
consists of 175,000,000 shares of Company Common Stock and 500,000 shares of
preferred stock, $0.001 par value. As of April 26, 1996, (i) 32,258,139 shares
of Company Common Stock were validly issued and outstanding, fully paid and
nonassessable and (ii) no shares of preferred stock were issued and
outstanding. As of the date hereof, there are no bonds, debentures, notes or
other indebtedness having the right to vote on any matters on which the
Company's stockholders may vote ("Voting Debt") issued or outstanding. As of
April 26, 1996, except for (i) options to acquire 3,232,015 shares of Company
Common Stock (the "Options"), (ii) options outstanding under the Company's
Employee Stock Purchase Plan, and (iii) the issuance of shares pursuant to the
proposed transactions described in Section 5.2 of the Company Disclosure
Letter (the "Proposed Transactions"), there are no options, warrants, calls or
other rights, agreements or commitments presently outstanding obligating the
Company to issue, deliver or sell shares of its capital stock or debt
securities, or obligating the Company to grant, extend or enter into any such
option, warrant, call or other such right, agreement or commitment.

Section 5.3. Subsidiaries. The only Significant Subsidiaries of the Company
are disclosed in Section 5.3 of the Company Disclosure Letter, all of which
have been named in the Company SEC Reports (as hereinafter defined). Each
Significant Subsidiary is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation and has
the corporate power to carry on its business as it is now being conducted or
currently proposed to be conducted. Each Significant Subsidiary incorporated
in the United States is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned or held under lease or the nature of its activities makes
such qualification necessary except where the failure to be so qualified will
not have a Company Material Adverse Effect. All the outstanding shares of
capital stock of each Significant Subsidiary are validly issued, fully paid
and nonassessable and owned by the Company or by a subsidiary of the Company
free and clear of any Encumbrances. There are no existing options, warrants,
calls or other rights, agreements or commitments of any character relating to
the issued or unissued capital stock or other securities of any of the
Significant Subsidiaries of the Company. Except as set forth in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995, as
disclosed in Section 5.3 of the Company Disclosure Letter and except for
wholly owned subsidiaries which are formed after the date hereof in the
ordinary course of business, the Company does not directly or indirectly own
any interest in any other corporation, partnership, joint venture or other
business association or entity.

Section 5.4. Authority Relative to this Merger Agreement.

(a) The Company has the corporate power to execute and deliver this
Merger Agreement and to carry out its obligations hereunder and, subject to
approval of the Merger Agreement by the holders of the Company Common
Stock, to carry out its obligations hereunder. The execution and delivery
of this Merger Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by the Company's Board of
Directors. This Merger Agreement constitutes a valid and binding obligation
of the Company, enforceable against the Company in accordance with its
terms, except as enforcement may be limited by bankruptcy, insolvency or
other similar laws affecting the enforcement of creditors' rights generally
and except that the availability of equitable remedies, including specific
performance, is subject to the discretion of the court before which any
proceeding therefor may be brought.

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<PAGE>

(b) Except as disclosed in Section 5.4 of the Company Disclosure Letter,
the execution and delivery of this Merger Agreement and the consummation of
the transactions contemplated hereby, does not and will not result in the
breach, violation, default (with or without notice or lapse of time, or
both), termination, cancellation or acceleration of any obligation or the
loss of a material benefit, under (i) the Company's charter or by-laws or
(ii) any indenture or other loan document provision or other contract,
license, franchise, permit, order, decree, concession, lease, instrument,
judgment, statute, law, ordinance, rule or regulation applicable to the
Company or any of its subsidiaries or their respective properties or
assets, other than, in the case of clause (ii) only, (A) any breaches,
violations, defaults, terminations, cancellations, accelerations or losses
which, either singly or in the aggregate, will not have a Company Material
Adverse Effect or prevent the consummation of the transactions contemplated
hereby and (B) the laws and regulations referred to in the next paragraph.
Contemporaneously with the execution and delivery of this Merger Agreement,
Microsoft Corporation ("MS") has delivered a written waiver of any (i) MS
right of first refusal or first offer contained in that certain TCP/IP
Local Access Network Agreement, dated as of March 6, 1995, by and between
MS and the Company (the "MS Agreement"), (ii) any MS right of termination
of the MS Agreement, in each case as a result of the execution and delivery
of this Merger Agreement and the consummation of the transactions
contemplated hereby, (iii) any MS right to declare a default under the
Equipment Loan Agreement dated as of March 6, 1996, between MS and the
Company as a result of the exercise of the rights granted under the Stock
Option Agreement or the consummation of the transactions contemplated
hereby and (iv) any MS right to have representation on the Company's Board
of Directors. In addition, contemporaneously with the execution and
delivery of this Merger Agreement, Microsoft Network L.L.C. has delivered a
written waiver of any right of termination of the TCP/IP Network Access
Provider Agreement, dated April 9, 1996, as a result of the execution and
delivery of this Merger Agreement and the consummation of the transactions
contemplated hereby.

(c) Except as disclosed in Section 5.4 of the Company Disclosure Letter
or transactions contemplated thereby in connection, or in compliance, with
the provisions of the HSR Act, the Securities Act, the Exchange Act, and
the corporation, securities or blue sky laws or regulations of the various
states, no filing or registration with, or authorization, consent or
approval of, any public body or authority is necessary for the consummation
by the Company of the Merger or the other transactions contemplated hereby,
other than filings, registrations, authorizations, consents or approvals
the failure of which to make or obtain will not have a Company Material
Adverse Effect or prevent the consummation of the transactions contemplated
hereby.

Section 5.5. Reports and Financial Statements. The Company has previously
furnished Parent with true and complete copies of its (i) Annual Report on
Form 10-K, as amended, for the fiscal year ended December 31, 1995, as filed
with the Commission, (ii) proxy statements related to all meetings of its
stockholders (whether annual or special) since January 1, 1995, and (iii) all
other reports or registration statements filed by the Company with the
Commission under the Exchange Act since December 31, 1994, except Quarterly
Reports on Form 10-Q for fiscal quarters ended prior to December 31, 1995 (the
items in clauses (i) through (iii) being referred to herein collectively as
the "Company SEC Reports"). As of their respective dates, the Company SEC
Reports complied in all material respects with the requirements of the
Exchange Act and the rules and regulations of the Commission thereunder
applicable to such Company SEC Reports. As of their respective dates, the
Company SEC Reports did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading. The audited consolidated financial statements and
unaudited interim financial statements of the Company included in the Company
SEC Reports comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the
Commission with respect thereto. The financial statements included in the
Company SEC Reports: have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis (except as may be
indicated therein or in the notes thereto); present fairly, in all material
respects, the financial position of the Company and its subsidiaries as at the
dates thereof and the results of their operations and cash flow for the
periods then ended subject, in the case of the unaudited interim financial
statements, to normal year-end audit adjustments and any other adjustments
described therein and the fact that certain information and notes have

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<PAGE>

been condensed or omitted in accordance with the Exchange Act and the rules
promulgated thereunder; and are in all material respects, in accordance with
the books of account and records of the Company.

Section 5.6. Absence of Certain Changes or Events. Except as disclosed in
the Company SEC Reports or as disclosed in Section 5.6 of the Company
Disclosure Letter, from December 31, 1995 through the date of this Merger
Agreement, there has not been (i) any transaction, commitment, dispute or
other event or condition (financial or otherwise) of any character (whether or
not in the ordinary course of business) individually or in the aggregate
having a Company Material Adverse Effect (other than as a result of changes in
laws or regulations of general applicability); (ii) any damage, destruction or
loss, whether or not covered by insurance, which would have a Company Material
Adverse Effect; or (iii) any entry into any commitment or transaction material
to the Company and its subsidiaries taken as a whole (including, without
limitation, any borrowing or sale of assets) except in the ordinary course of
business consistent with past practice.

Section 5.7. Employee Benefit Plans. Except as disclosed in the Company SEC
Reports or as disclosed in Section 5.7 of the Company Disclosure Letter, there
are no material employee benefit or compensation plans, agreements or
arrangements, including "employee benefit plans," as defined in Section 3(3)
of ERISA, and including, but not limited to, plans, agreements or arrangements
relating to former employees, including, but not limited, to retiree medical
plans, maintained or contributed to by the Company or any of its subsidiaries
or material collective bargaining agreements to which the Company or any of
its subsidiaries is a party, other than "multiemployer plans," as defined in
Section 3(37) of ERISA (together, the "Company Benefit Plans"). To the best
knowledge of the Company, no default exists with respect to the obligations of
the Company or any of its subsidiaries under any Company Benefit Plan, which
default, alone or in the aggregate, would have a Company Material Adverse
Effect. Since January 1, 1995, there have been no disputes or grievances
subject to any grievance procedure, unfair labor practice proceedings,
arbitration or litigation under any Company Benefit Plans, which have not been
finally resolved, settled or otherwise disposed of (other than claims for
benefits in the ordinary course), nor, to the best knowledge of the Company,
is there any condition related to any Company Benefit Plans which, with notice
or lapse of time or both, which failure to resolve, settle or otherwise
dispose of, alone or in the aggregate with any other such conditions, would
have a Company Material Adverse Effect. Since January 1, 1995, there have been
no strikes, lockouts or work stoppages or slowdowns, or to the best knowledge
of the Company, jurisdictional disputes or organizing activity occurring or
threatened with respect to the business or operations of the Company or its
subsidiaries which have had or would have a Company Material Adverse Effect.

Section 5.8. ERISA. All Company Benefit Plans have been administered in
accordance, and are in compliance with the applicable provisions of ERISA,
except where such failures to administer or comply would not have a Company
Material Adverse Effect. Each of the Company Benefit Plans which is intended
to meet the requirements of Section 401(a) of the Code has been determined by
the IRS to meet the requirements of such section of the Code (except with
respect to any such benefit plans which have not yet been submitted to the
IRS, each of which is still within the "remedial amendment period" described
in Section 401(b) of the Code), and the Company knows of no fact which is
likely to have an adverse affect on the qualified status of such plans. None
of the Company Benefit Plans are subject to Title IV of ERISA, and neither the
Company nor any entity treated as a single employer with Company under Section
414(b) or (c) of the Code (a "Company ERISA Affiliate") has maintained such a
plan during the six-year period ended on the date hereof. To the best
knowledge of the Company, there are not now nor have there been any non-exempt
"prohibited transactions," as such term is defined in Section 4975 of the Code
or Section 406 of ERISA, involving the Company Benefit Plans which could
subject the Company or its subsidiaries to any penalty or tax imposed under
Section 502(i) of ERISA or Section 4975 of the Code other than a de minimis
penalty or tax. Neither the Company nor any Company ERISA Affiliate has any
obligation to contribute to, or has had within the six-year period ending on
the date hereof, any obligation to or has actually contributed to, any
multiemployer plan. Neither the Company nor any Company ERISA Affiliate has
engaged in any transaction described in Section 4069 of ERISA within the five-
year period ending on the date hereof.

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<PAGE>

Section 5.9. Takeover Provisions Inapplicable. Assuming the accuracy of the
representation of Parent set forth in Section 4.12, as of the date hereof and
at all times on or prior to the Effective Date, Section 203 of the DGCL is,
and shall be, inapplicable to the Merger and the transactions contemplated by
this Merger Agreement, the approval of the execution and delivery of the Stock
Option Agreement.

Section 5.10. Company Action. The Board of Directors of the Company (at a
meeting duly called and held) has by the unanimous vote of all directors
present with no abstentions (a) determined that the Merger is advisable and
fair and in the best interests of the Company and its stockholders, (b)
approved the Merger in accordance with the provisions of Section 251 of the
DGCL, (c) recommended the approval of this Merger Agreement and the Merger by
the holders of the Company Common Stock and directed that the Merger be
submitted for consideration by the Company's stockholders at the Company
Meeting, (d) taken all necessary steps to render Section 203 of the DGCL
inapplicable to the Merger and the transactions contemplated by this Merger
Agreement (assuming the accuracy of the representation of Parent set forth in
Section 4.12), and (e) adopted a resolution having the effect of causing the
Company not to be subject, to the extent permitted by applicable law, to any
state takeover law that may purport to be applicable to the Merger and the
transactions contemplated by this Merger Agreement.

Section 5.11. Fairness Opinion. The Company has received the written opinion
of Goldman, Sachs & Co., financial advisor to the Company dated no later than
the date hereof, to the effect that the Exchange Ratio is fair to the
stockholders of the Company.

Section 5.12. No Brokers. (i) Except as set forth in Section 5.12 of the
Company Disclosure Letter and for Goldman, Sachs & Co., no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or the transactions contemplated by
this Merger Agreement based upon arrangements made by or on behalf of the
Company, and (ii) the fees and commissions payable as contemplated by this
Section 5.12.

ARTICLE VI.

Representations and Warranties Regarding Sub

Parent and Sub jointly and severally represent and warrant to the Company as
follows:

Section 6.1. Organization. Sub is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Sub was
incorporated on March 27, 1996. Except as related to the Merger, this Merger
Agreement and the consummation of the transactions contemplated hereby, Sub
has not engaged in any business or activities (other than certain
organizational matters) or incurred any commitments or liabilities since it
was incorporated.

Section 6.2. Capitalization. The authorized capital stock of Sub consists of
1,000 shares of Common Stock, par value $0.01 per share, 100 shares of which
are validly issued and outstanding, fully paid and nonassessable and, except
as disclosed in Section 6.2 of the Parent Disclosure Letter, are owned by
Parent free and clear of all Encumbrances.

Section 6.3. Authority Relative to this Merger Agreement. Sub has the
corporate power to enter into this Merger Agreement and to carry out its
obligations hereunder. The execution and delivery of this Merger Agreement and
the consummation of the transactions contemplated hereby have been duly
authorized by its Board of Directors and sole stockholder, and no other
corporate proceedings on the part of Sub are necessary to authorize this
Merger Agreement and the transactions contemplated hereby. Except as referred
to herein or in connection, or in compliance, with the provisions of the HSR
Act, the Securities Act, the Exchange Act and the corporation, securities or
blue sky laws or regulations of the various states, no filing or registration
with, or authorization, consent or approval of, any Governmental Entity is
necessary for the consummation by Sub of the Merger or the transactions
contemplated by this Merger Agreement, other than filings, registrations,

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<PAGE>

authorizations, consents or approvals the failure to make or obtain would not
prevent the consummation of the transactions contemplated hereby.

ARTICLE VII.

Conduct of Business Pending the Merger

Section 7.1. Conduct of Business by the Company Pending the Merger. Prior to
the Effective Date, unless Parent shall otherwise agree in writing:

(a) the Company shall, and shall cause its subsidiaries to, carry on
their respective businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, and shall, and shall
cause its subsidiaries to, use all reasonable efforts to preserve intact
their present business organizations, keep available the services of their
present officers and employees and preserve their relationships with
customers, suppliers and others having business dealings with them to the
end that their goodwill and on-going businesses shall be unimpaired at the
Effective Date, except such impairment as would not have a Company Material
Adverse Effect. The Company shall, and shall cause its subsidiaries to, (a)
maintain insurance coverages and its books, accounts and records in the
usual manner consistent with prior practices; (b) comply in all material
respects with all laws, ordinances and regulations of Governmental Entities
applicable to the Company and its subsidiaries; (c) maintain and keep its
properties and equipment in good repair, working order and condition,
ordinary wear and tear excepted; and (d) perform in all material respects
its obligations under all contracts and commitments to which it is a party
or by which it is bound, in each case other than where the failure to so
maintain, comply or perform, either individually or in the aggregate, would
result in a Company Material Adverse Effect;

(b) except as required by this Merger Agreement the Company shall not and
shall not propose to (A) sell or pledge or agree to sell or pledge any
capital stock owned by it in any of its subsidiaries, (B) amend its
Certificate of Incorporation or By-laws, (C) split, combine or reclassify
its outstanding capital stock, or declare, set aside or pay any dividend or
other distribution payable in cash, stock or property, or (D) directly or
indirectly redeem, purchase or otherwise acquire or agree to redeem,
purchase or otherwise acquire any shares of capital stock of the Company
except for the repurchase at cost of shares of Company Common Stock from
employees, consultants or directors of the Company upon termination of
their relationship with the Company in accordance with existing contractual
rights of repurchase in favor of the Company;

(c) the Company shall not, nor shall it permit any of its subsidiaries
to, (A) except as required by this Merger Agreement, issue, propose to
issue, deliver or sell or agree to issue, deliver or sell any additional
shares of, or rights of any kind to acquire any shares of, its capital
stock of any class, any option, rights or warrants to acquire, or
securities convertible into, shares of capital stock other than issuances
of options to purchase Company Common Stock under the Stock Option Plans on
or after the date of this Merger Agreement to employees of the Company or
its subsidiaries (including subsidiaries acquired or formed on or after the
date of this Merger Agreement) in the ordinary course of business and
consistent with past practice, other than to such employees who are
executive officers of the Company ("Permitted Options") or issuances of
Company Common Stock pursuant to the Proposed Transactions, the Stock
Purchase Plan or the exercise of options outstanding on the date of this
Merger Agreement or Permitted Options; (B) acquire, lease or dispose or
agree to acquire, lease or dispose of any capital assets or any other
assets other than (i) in the ordinary course of business or (ii) in
connection with any additional deployment or expansion of network
infrastructure requested by MS; (C) incur additional Indebtedness or
encumber or grant a security interest in any asset or enter into any other
material transaction other than in each case (i) in the ordinary course of
business, (ii) pursuant to any extension of credit by MS, or (iii) pursuant
to credit facilities in an aggregate amount not to exceed $40,000,000; (D)
acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, in each case in this Clause (D) which are
material, individually or in the aggregate, to the Company and its
subsidiaries taken as a whole, except that the Company may acquire or
create new wholly owned subsidiaries in the

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ordinary course of business and as contemplated by the Proposed
Transactions; (E) authorize any capital expenditures in excess of the
Company's 1996 capital expenditure budget provided to Parent prior to the
date hereof, except for capital expenditures funded by an increase in
credit facilities with MS; or (F) enter into any contract, agreement,
commitment or arrangement with respect to any of the foregoing;

(d) except as disclosed in the Company Disclosure Letter, the Company
shall not, nor shall it permit, any of its subsidiaries to, except as
required to comply with applicable law and except as provided in Section
3.5 hereof, (A) adopt, enter into, terminate or amend any bonus, profit
sharing, compensation, severance, termination, stock option, pension,
retirement, deferred compensation, employment or other Company Benefit
Plan, agreement, trust, fund or other arrangement for the benefit or
welfare of any director, officer or current or former employee, other than
in the ordinary course of business consistent with past practice (B)
increase in any manner the compensation or fringe benefit of any director,
officer or employee (except for normal increases in the ordinary course of
business that are consistent with past practice and that, in the aggregate,
do not result in a material increase in benefits or compensation expense to
the Company and its subsidiaries relative to the level in effect prior to
such amendment and except for increases pursuant to the Company's pending
1996 salary increases in an aggregate amount not to exceed 15% of the base
salary of current employees, (C) pay any benefit not provided under any
existing plan or arrangement, (D) grant any awards under any bonus,
incentive, performance or other compensation plan or arrangement or Company
Benefit Plan (including, without limitation, the grant of stock options,
stock appreciation rights, stock based or stock related awards, performance
units or restricted stock, or the removal of existing restrictions in any
benefit plans or agreements or awards made thereunder) (other than such
plans and arrangements (other than stock options) which are made in the
ordinary course of business consistent with past practice, including
Permitted Options), (E) take any action to fund or in any other way secure
the payment of compensation or benefits under any employee plan, agreement,
contract or arrangement or Company Benefit Plan other than in the ordinary
course of business consistent with past practice, or (F) adopt, enter into,
amend or terminate any contract, agreement, commitment or arrangement to do
any of the foregoing;

(e) except as set forth on Section 7.1(e) of the Company Disclosure
Letter, the Company shall not, nor shall it permit any of its subsidiaries
to, make any investments in non-investment grade securities exceeding
$1,000,000; provided, however, that the Company will be permitted to create
new wholly owned subsidiaries in the ordinary course of business or
pursuant to the Proposed Transactions.

(f) the Company shall not, nor shall it permit any of its subsidiaries
to, take or cause to be taken any action (other than in the ordinary course
of business consistent with past practices), with respect to accounting
policies or procedures (including, without limitation, procedures with
respect to the payment of accounts payable and collection of accounts
receivable);

(g) the Company shall prepare and file all tax returns required to be
filed with respect to the Company and its subsidiaries (or any of them)
after the date of this Merger Agreement and on or before the Effective Date
in a timely manner, and in a manner consistent with prior years and
applicable laws and regulations other than such tax returns for which the
failure to file would not have a Company Material Adverse Effect; and

(h) the Company shall file with the Commission all reports required to be
filed under the Exchange Act on or prior to the date each such report is
due and all such reports shall comply in all material respects with the
requirements of the Exchange Act, and the rules and regulations of the
Commission thereunder applicable to such reports and, upon such filing,
shall not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading. The unaudited interim financial statements of the
Company included in such reports shall comply as to form in all material
respects with applicable accounting requirements and with the published
rules and regulations of the Commission with respect thereto and shall be
prepared in accordance with generally accepted accounting principles
applied on a consistent basis (except as may be indicated therein or in the
notes thereto), shall present fairly, in all material respects, the
financial position of the Company and its subsidiaries as at the dates
thereof and the results of their operations and cash flows for the periods
then ended subject to normal year-end audit

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adjustments, any other adjustments described therein and the fact that
certain information and notes shall be condensed or omitted in accordance
with the Exchange Act and the rules and regulations promulgated thereunder,
and shall be in all material respects, in accordance with the books of
account and records of the Company.

Section 7.2. Conduct of Business by Parent Pending the Merger. Prior to the
Effective Date, unless the Company shall otherwise agree in writing or except
as otherwise required by this Merger Agreement, Parent shall, and shall cause
its subsidiaries to, carry on their respective businesses in the usual,
regular and ordinary course in substantially the same manner as heretofore
conducted, and shall, and shall cause its subsidiaries to, use all reasonable
efforts to preserve intact their present business organizations, keep
available the services of their present officers and employees and preserve
their relationships with customers, suppliers and others having business
dealings with them to the end that their goodwill and on-going businesses
shall be unimpaired at the Effective Date. From the date of this Merger
Agreement through the Effective Date. From the date of this Merger Agreement
through the Effective Date, Parent shall not pay or declare any dividend or
make any distribution with respect to the Parent Common Stock, other than the
events contemplated by Section 3.1(c).

Section 7.3. Conduct of Business of Sub. During the period from the date of
this Merger Agreement to the Effective Date, Sub shall not engage in any
activities of any nature except as provided in or contemplated by this Merger
Agreement.

Section 7.4. Notice of Breach. Each party shall promptly give written notice
to the other party upon becoming aware of the occurrence or, to its best
knowledge, impending or threatened occurrence, of any event which would cause
or constitute a breach of any of its representations, warranties or covenants
contained or referenced in this Merger Agreement and will use all reasonable
efforts to prevent or promptly remedy the same. Any such notification shall
not be deemed an amendment of the Company Disclosure Letter or the Parent
Disclosure Letter.

ARTICLE VIII.

Additional Agreements

Section 8.1. Access and Information. Each of the Company and Parent and
their respective subsidiaries shall afford to the other and to the other's
accountants, counsel and other representatives full access during normal
business hours after reasonable notice (and at such other times as the parties
may mutually agree) throughout the period prior to the Effective Date to all
of its properties, books, contracts, commitments, records and personnel and,
during such period, each shall furnish promptly to the other (i) a copy of
each report, schedule and other document filed or received by it pursuant to
the requirements of Federal or state securities laws, and (ii) all other
information concerning its business, properties and personnel as the other may
reasonably request. Each of the Company and Parent shall hold, and shall cause
their respective employees and agents to hold, in confidence all such
information in accordance with the terms of the Confidentiality Agreement
dated March 5, 1996 between Parent and the Company.

Section 8.2. Registration Statement/Proxy Statement. Parent and the Company
shall cooperate and promptly prepare and Parent shall file with the Commission
as soon as practicable a Registration Statement of Form S-4 (the "Form S-4")
under the Securities Act, with respect to the Parent Common Stock issuable in
the Merger, a portion of which Registration Statement shall also serve as the
joint proxy statement with respect to the Company Meeting and the Parent
Meeting (the "Proxy Statement/Prospectus"). The respective parties will cause
the Proxy Statement/Prospectus and the Form S-4 to comply as to form in all
material respects with the applicable provisions of the Securities Act, the
Exchange Act and the rules and regulations thereunder. Parent shall use all
reasonable efforts, and the Company will cooperate with Parent, to have the
Form S-4 declared effective by the Commission as promptly as practicable and
to keep the Form S-4 effective as long as is necessary to consummate the
Merger. Parent shall, as promptly as practicable, provide copies of any
written comments

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received from the Commission with respect to the Form S-4 to the Company and
advise the Company of any verbal comments with respect to the Form S-4
received from the Commission. Parent shall use its best efforts to obtain,
prior to the effective date of the Form S-4, all necessary state securities
law or "Blue Sky" permits or approvals required to carry out the transactions
contemplated by the Merger Agreement and will pay all expenses incident
thereto. Parent agrees that the Proxy Statement/Prospectus and each amendment
or supplement thereto at the time of mailing thereof and at the time of the
Company Meeting and the Parent Meeting, or, in the case of the Form S-4 and
each amendment or supplement thereto, at the time it is filed or becomes
effective, will not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that the foregoing shall not apply to the
extent that any such untrue statement of a material fact or omission to state
a material fact was made by Parent in reliance upon and in conformity with
written information concerning the Company furnished to Parent by the Company
specifically for use in the Proxy Statement/Prospectus. The Company agrees
that the written information concerning the Company provided by it for
inclusion in the Proxy Statement/Prospectus and each amendment or supplement
thereto, at the time of mailing thereof and at the time of the Company Meeting
and the Parent Meeting, or, in the case of written information concerning the
Company provided by the Company for inclusion in the Form S-4 or any amendment
or supplement thereto, at the time it is filed or becomes effective, will not
include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. No amendment or supplement to the Proxy Statement/Prospectus will
be made by Parent or the Company without the approval of the other party.
Parent will advise the Company, promptly after it receives notice thereof, of
the time when the Form S-4 has become effective or any supplement or amendment
has been filed, the issuance of any stop order, the suspension of the
qualification of Parent Common Stock issuable in connection with the Merger
for offering or sale in any jurisdiction, or any request by the Commission for
amendment of the Proxy Statement/Prospectus or the Form S-4 or comments
thereon and responses thereto or requests by the Commission for additional
information. At the effective date of the registration statement on Form S-4,
all of the Parent Common Stock to be issued in the Merger shall be covered by
such registration statement.

Section 8.3. Compliance with the Securities Act. At least 30 days prior to
the Closing Date, the Company shall deliver to Parent a list of names and
addresses of those persons who were, in the Company's reasonable judgment, at
the record date for the Company Meeting, "affiliates" (each such person, an
"Affiliate") of the Company within the meaning of Rule 145 of the rules and
regulations promulgated under the Securities Act. The Company shall use all
reasonable efforts to deliver or cause to be delivered to Parent, prior to the
Effective Date, from each of the Affiliates of the Company identified in the
foregoing list, an Affiliate Letter in the form attached hereto as Exhibit
8.3. Parent shall be entitled to place legends as specified in such Affiliate
Letters on the certificates evidencing any Parent Company Common Stock to be
received by such Affiliates pursuant to the terms of the Merger Agreement, and
to issue appropriate stop transfer instructions to the transfer agent for the
Parent Company Common Stock, consistent with the terms of such Affiliate
Letters.

Section 8.4. Listing. Parent shall use its best efforts to include on
Nasdaq, upon official notice of issuance, the Parent Common Stock to be issued
pursuant to the Merger.

Section 8.5. Indemnification.

(a) The By-laws and the Certificate of Incorporation of the Surviving
Corporation shall be amended prior to the Effective Date to contain
provisions identical with respect to indemnification to those set forth in
the By-laws and the Certificate of Incorporation of the Company as in
effect on the date of this Merger Agreement, which provisions of the By-
laws and the Certificate of Incorporation of the Surviving Corporation
shall not be amended, repealed or otherwise modified for a period of six
years after the Effective Date in any manner that would adversely affect
the rights thereunder of individuals who immediately prior to the Effective
Date were directors, officers, agents or employees of the Company. Parent
and the Surviving Corporation shall jointly and severally indemnify, defend
and hold harmless the directors, officers and agents of the Company as
provided in the Company's Certificate of Incorporation, By-Laws or

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indemnification agreements, as in effect as of the date hereof, with
respect to matters occurring through the Effective Date. Parent agrees to
cause Surviving Corporation to maintain in effect for not less than three
years after the Effective Date the current policies of directors' and
officers' liability insurance maintained by the Company with respect to
matters occurring prior to the Effective Date; provided, however, that (i)
the Surviving Corporation may substitute therefor policies of at least the
same coverage (with carriers comparable to the Company's existing carriers)
containing terms and conditions which are no less advantageous to the
officers, directors and employees of the Company and (ii) the Surviving
Corporation shall not be required to pay an annual premium for such
insurance in excess of three times the last annual premium paid prior to
the date hereof, but in such case shall purchase as much coverage as
possible for such amount.

(b) The Company's Board of Directors has consulted with financial and
legal advisors in connection with the execution, delivery and performance
by the Company of this Merger Agreement and the approval for purposes of
Section 203 of the DGCL, the transactions contemplated by the execution and
delivery of a Stock Option Agreement by certain members of the Company's
Board of Directors or an affiliate or employer of certain members of the
Company's Board of Directors, and the Company's Board of Directors believes
that the members of the Company's Board of Directors have complied with
their fiduciary duties under Delaware law and that there is no pending or,
to the best knowledge of the Company, threatened suit, action or proceeding
against the Company or any member of the Company's Board of Directors
asserting a claim that the Company's Board of Directors or any individual
member of the Company's Board of Directors did not comply with its or his
fiduciary duties under Delaware law.

(c) In reliance upon the representations in paragraph (b), Parent agrees
to indemnify, defend and hold harmless each member of the Company's Board
of Directors that has executed and delivered, or whose affiliate or
employer has executed and delivered, a Stock Option Agreement (each an
"Indemnified Party") against any loss, claim, damage, liability or expense,
to which such Indemnified Party may become subject, insofar, but only
insofar, as such loss, claim, damage, liability or expense arises solely
out of, or is based solely upon, a claim that an Indemnified Party's
fiduciary duty as a member of the Company's Board of Directors under
Delaware law was breached by the execution and delivery by him, or his
affiliate or employer, in his or its capacity as a stockholder of the
Company, of a Stock Option Agreement (a "Claim"). Should a court of
competent jurisdiction award damages against any Indemnified Party without
specifying the portion thereof allocable solely to the matters referred to
in the preceding sentence, the Parent and the Company shall petition such
court to make such allocation. If the court refuses to do so, the Parent
and the Company shall negotiate in good faith to reach an agreement with
respect to such allocation.

(d) Notwithstanding the provisions of paragraph (c) above, Parent shall
have no obligation to indemnify, defend and hold harmless any Indemnified
Party pursuant to paragraph (c) unless: (i) the representations contained
in paragraph (b) above are true and (ii) neither the Indemnified Party nor
any affiliate or employer of the Indemnified Party is a party to a Claim;
provided that if the Company is the beneficiary of any Claim, the amount
that such Indemnified Party is entitled to receive pursuant to paragraph
(c) shall be reduced by an amount equal to the pro rata amount of such
Claim paid to the Company, indirectly attributable to the Indemnified Party
by reason of its stockholdings in the Company. In addition, Parent's
obligation to indemnify, defend and hold harmless any Indemnified Party
shall be reduced by and to the extent that (i) such Indemnified Party is
indemnified pursuant to the Company's By-laws and (ii) such Indemnified
Party is indemnified from, or receive proceeds of, any insurance policy
applicable to a Claim. Each Indemnified Party shall make any and all claims
pursuant to the Company's By-laws with respect to seeking indemnification
for a Claim and shall file any and all claims under such insurance policy
with respect to a Claim and use its reasonable efforts to file any and all
claims under such By-law provisions and insurance policy on a timely basis.
If Parent shall release an Indemnified Party from its obligations under the
Stock Option Agreement prior to the use of the Proxy granted therein at the
Company Meeting or the exercise of the option contemplated by the Stock
Option Agreement, Parent shall have no obligation to indemnify, defend and
hold harmless such Indemnified Party for loss claim, damage, liability or
expense incurred after such release.

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(e) If any Claim shall be brought against an Indemnified Party, Parent
shall assume the defense thereof with counsel of its selection, and shall
have absolute discretion to settle any Claims, and each Indemnified Party
shall cooperate with the defense or settlement thereof. After Parent has
assumed the defense of such claim, Parent shall not be liable to the
Indemnified Party under this Section 8.5 for any legal or other expenses
subsequently incurred by the Indemnified Party in connection with the
defense thereof.

Section 8.6. HSR Act. The Company and Parent shall use their best efforts to
file as soon as practicable notifications under the HSR Act in connection with
the Merger and the transactions contemplated hereby, and to respond as
promptly as practicable to any inquiries received from the Federal Trade
Commission and the Antitrust Division of the Department of Justice for
additional information or documentation and to respond as promptly as
practicable to all inquiries and requests received from any State Attorney
General or other governmental authority in connection with antitrust matters.

Section 8.7. Additional Agreements.

(a) Subject to the terms and conditions herein provided, each of the
parties hereto agrees to use all reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate and
make effective the transactions contemplated by this Merger Agreement,
including using all reasonable efforts to obtain all necessary waivers,
consents and approvals, to effect all necessary registrations and filings
(including, but not limited to, filings under the HSR Act and with all
applicable Governmental Entities) and to lift any injunction or other legal
bar to the Merger (and, in such case, to proceed with the Merger as
expeditiously as possible), subject, however, in the case of the Merger
Agreement and the Parent Share Proposal, to the appropriate vote of the
stockholders of the Company and Parent. Notwithstanding the foregoing,
there shall be no action required to be taken and no action will be taken
in order to consummate and make effective the transactions contemplated by
this Merger Agreement if such action, either alone or together with another
action, would result in a Company Material Adverse Effect or a Parent
Material Adverse Effect.

(b) In case at any time after the Effective Date any further action is
necessary or desirable to carry out the purposes of this Merger Agreement,
the proper officers and/or directors of Parent, the Company and the
Surviving Corporation shall take all such necessary action.

(c) Following the Effective Date, Parent shall use its best efforts to
conduct the business, and shall cause the Surviving Corporation to use its
best efforts to conduct its business, except as otherwise contemplated by
this Merger Agreement, in a manner which would not jeopardize the
characterization of the Merger as a reorganization within the meaning of
Section 368(a) of the Code.

Section 8.8. No Solicitation. Neither the Company nor any of its
subsidiaries shall, directly or indirectly, take (nor shall the Company
authorize or permit its subsidiaries, officers, directors, employees,
representatives, investment bankers, attorneys, accountants or other agents or
affiliates, to take) any action to (i) encourage, solicit or initiate the
submission of any Acquisition Proposal, (ii) enter into any agreement with
respect to any Acquisition Proposal or (iii) participate in any way in
discussions or negotiations with, or furnish any information to, any person in
connection with, or take any other action to facilitate any inquiries or the
making of any proposal that constitutes, or may reasonably be expected to lead
to, any Acquisition Proposal; provided, however, that nothing contained in
this Merger Agreement shall prevent the Company or its Board of Directors from
(A) furnishing non-public information to, or entering into discussions with
any person or entity in connection with an unsolicited bona fide written
Acquisition Proposal by such person or entity (including a new and unsolicited
Acquisition Proposal received by the Company after the execution of this
Merger Agreement from a person or entity whose initial contact with the
Company may have been solicited by the Company prior to the execution of this
Merger Agreement) if prior to furnishing such non-public information to, or
entering into discussions or negotiations with, such person or entity, such
Board of Directors receives from such person or entity an executed
confidentiality agreement or, (B) withdrawing the Company's Board of
Directors' recommendation of the Merger Agreement, if and only to the extent
that the Company's Board of Directors believes in good faith (after
consultation with and based upon the advice of its financial advisor) that
such

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Acquisition Proposal would, if consummated, result in a transaction more
favorable to the Company's stockholders than the Merger and the Board of
Directors of the Company determines in good faith after consultation with and
based upon a written opinion of its outside legal counsel that such withdrawal
is necessary for the directors to comply with their fiduciary duties to the
stockholders under applicable Delaware law and that such withdrawal will not
affect the validity of the submission of the Merger Agreement to the
stockholders of the Company pursuant to Delaware law or the enforceability of
the Stock Option Agreement; or (B) complying with Rule 14e-2(a)(2) or (3)
promulgated under the Exchange Act with regard to an Acquisition Proposal. The
Company will promptly communicate to Parent any solicitation by the Company
and the terms of any proposal or inquiry, including the identity of the person
and its affiliates making the same, that it may receive in respect of any such
transaction, or of any such information requested from it or of any such
negotiations or discussions being sought to be initiated with it. "Acquisition
Proposal" shall mean any proposed (A) merger, consolidation or similar
transaction involving the Company, (B) sale, lease or other disposition
directly or indirectly by merger, consolidation, share exchange or otherwise
of assets of the Company or its subsidiaries representing 10% or more of the
consolidated assets of the Company and its subsidiaries, (C) issue, sale, or
other disposition of (including by way of merger, consolidation, share
exchange or any similar transaction) securities (or options, rights or
warrants to purchase, or securities convertible into or exchangeable for, such
securities) representing 10% or more of the voting power of the Company or (D)
transaction in which any person shall acquire beneficial ownership (as such
term is defined in Rule 13d-3 under the Exchange Act), or the right to acquire
beneficial ownership or any "group" (as such term is defined under the
Exchange Act) shall have been formed which beneficially owns or has the right
to acquire beneficial ownership of 25% or more of the outstanding Company
Common Stock.

Section 8.9. Limitation on Acquisition Activities. From the date of the
Merger Agreement until the Effective Date, Parent shall not participate in any
way in discussions or negotiations with, or enter into any agreement pursuant
to which Parent would acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial equity interest in, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, in which case either (i) the
acquired business or entity is in the business of providing Internet access,
(ii) the acquisition would involve aggregate consideration in excess of
$500,000,000, or (iii) the acquisition could reasonably be expected to delay
the satisfaction of the conditions set forth in Article IX hereof.

Section 8.10. Notice of Actions. From the date of the Merger Agreement until
the Effective Date, each party shall promptly notify the other party in
writing of any pending or, to the best knowledge of the first party,
threatened action, proceeding or investigation by any Governmental Entity or
any other person (i) challenging or seeking material damages in connection
with the Merger or the conversion of the Company Common Stock into Parent
Common Stock pursuant to the Merger or (ii) seeking to restrain or prohibit
the consummation of the Merger or otherwise limit the right of Parent or, to
the best knowledge of such party, Parent's subsidiaries to own or operate all
or any portion of the businesses or assets of the Company, which in either
case is reasonably likely to have a Company Material Adverse Effect prior to
or after the Effective Date, or a Parent Material Adverse Effect after the
Effective Date.

Section 8.11. Benefit Plans Generally. Parent agrees to honor in accordance
with their terms all employment, severance and similar agreements to which the
Company or any subsidiary is a party and all accrued benefits that are vested
as of the Effective Date under any Company Benefit Plan or Stock Option Plan,
except as provided by the terms thereof. Parent agrees to provide employees of
the Company and its subsidiaries with credit for all service with the Company
or its affiliates for purposes of vesting and eligibility under any employee
benefit plan, program or arrangement of Parent or its affiliates, including
all employee equity incentive programs of Parent. To the extent not otherwise
specified in this Merger Agreement, Parent agrees that employees of the
Company and its subsidiaries who continue to be employed by the Company or its
subsidiaries after the Effective Date may continue to participate in their
current Company sponsored employee benefit programs through twelve months
following the Effective Date. After the Effective Date, the employees of the

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Company and its subsidiaries shall be eligible to participate in the
appropriate employee equity incentive programs of Parent, as determined by
Parent in its sole discretion.

Section 8.12. Stockholders' Rights Plan. From the date of this Merger
Agreement until the expiration or termination of the Stock Option Agreement,
the Company shall not amend its certificate of incorporation or otherwise take
action to provide for the issuance of securities pursuant to a stockholder
rights plan or any similar program or plan.

ARTICLE IX.

Conditions Precedent

Section 9.1. Conditions to each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Date of the following conditions:

(a) This Merger Agreement and the transactions contemplated hereby shall
have been approved and adopted by the requisite vote of the holders of the
Company Common Stock.

(b) The Parent Share Proposal shall have been approved by the requisite
vote of the holders of the Parent capital stock.

(c) The Parent Common Stock issuable in the Merger shall have been
authorized for inclusion in Nasdaq upon official notice of issuance.

(d) The waiting period applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated.

(e) The Registration Statement shall have become effective in accordance
with the provisions of the Securities Act. No stop order suspending the
effectiveness of the Registration Statement shall have been issued by the
Commission and remain in effect and all necessary approvals under state
securities laws relating to the issuance or trading of the Parent Common
Stock to be issued to the Company stockholders in connection with the
Merger shall have been received.

(f) No preliminary or permanent injunction or other order by any Federal
or state court in the United States which prevents the consummation of the
Merger shall have been issued and remain in effect (each party agreeing to
use its best efforts to have any such injunction lifted).

Section 9.2. Conditions to Obligation of the Company to Effect the
Merger. The obligation of the Company to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Date of the additional following
conditions, unless waived by the Company:

(a) Parent and Sub shall have performed in all material respects their
agreements contained in this Merger Agreement required to be performed on
or prior to the Effective Date and the representations and warranties of
Parent and Sub contained in this Merger Agreement shall be true in all
material respects when made and on and as of the Effective Date as if made
on and as of such date (except to the extent they relate to a particular
date), and the Company shall have received a certificate of the President
or Chief Executive Officer or a Vice President of Parent and Sub to that
effect.

(b) The Company shall have received an opinion dated the Effective Date
from Heller Ehrman White & McAuliffe, counsel to the Company, that, based
upon certain factual representations of the Company, Parent and Sub
reasonably requested by such counsel, the Merger will be treated as a
reorganization within the meaning of Section 368(a).

(c) All permits, consents, authorizations, approvals, registrations,
qualifications, designations and declarations set forth in Section 4.4 of
the Parent Disclosure Letter shall have been obtained, and all filings and
notices set forth in Section 4.4 of the Parent Disclosure Letter shall have
been submitted by Parent.

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(d) Parent shall have taken all action necessary to cause Mr. John W.
Sidgmore and up to two additional individuals designated by the Company and
acceptable to Parent, to become members of the Board of Directors of Parent
subject to the consummation of the Merger.

Section 9.3. Conditions to Obligations of Parent and Sub to Effect the
Merger. The obligations of Parent and Sub to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Date of the additional
following conditions, unless waived by Parent:

(a) The Company shall have performed in all material respects its
agreements contained in this Merger Agreement required to be performed on
or prior to the Effective Date and the representations and warranties of
the Company contained in this Merger Agreement shall be true in all
material respects when made and on and as of the Effective Date as if made
on and as of such date (except to the extent they relate to a particular
date), except as contemplated or permitted by this Merger Agreement, and
Parent and Sub shall have received a certificate of the President or Chief
Executive Officer or a Vice President of the Company to that effect.

(b) Parent shall have received an opinion of counsel to Parent that, the
Merger will be treated as a reorganization within the meaning of Section
368(a) of the Code, and that the Company, Parent and Sub will each be a
party to that reorganization within the meaning of Section 368(b) of the
Code.

(c) All permits, consents, authorizations, approvals, registrations,
qualifications, designations and declarations set forth in Section 5.4 of
the Company Disclosure Letter shall have been obtained and to the extent
required to be submitted prior to the Effective Date, all filings and
notices set forth in Section 5.4 of the Company Disclosure Letter shall
have been submitted by the Company.

(d) Parent shall have received the Affiliate Letters.

ARTICLE X.

Termination, Amendment and Waiver

Section 10.1. Termination. This Merger Agreement may be terminated at any
time prior to the Effective Date, whether before or after approval by the
stockholders of the Company:

(a) by mutual consent of the Board of Directors of Parent and the Board
of Directors of the Company;

(b) by either Parent or the Company if the Merger shall not have been
consummated on or before November 30, 1996 (provided the terminating party
is not otherwise in material breach of its representations, warranties or
obligations under this Merger Agreement);

(c) by the Company if any of the conditions specified in Sections 9.1 and
9.2 have not been met or waived by the Company at such time as such
condition is no longer capable of satisfaction;

(d) by Parent if any of the conditions specified in Sections 9.1 and 9.3
have not been met or waived by Parent at such time as such condition is no
longer capable of satisfaction;

(e) by Parent if any of the following shall have occurred (each, a
"Purchase Event"):

(i) any person (other than Parent or any subsidiary of Parent) shall
have commenced (as such term is defined in Rule 14d-2 under the
Exchange Act), a tender offer or exchange offer to purchase any shares
of Company Common Stock such that, upon consummation of such offer,
such person would own or control 50% or more of the then outstanding
Company Common Stock, and the Board of Directors of the Company, within
ten business days after such tender or exchange offer shall have been
so commenced, fails to recommend against acceptance of such tender or
exchange offer by its stockholders, and Parent shall deliver a written
notice of termination to the Company within 20 business days after the
expiration of such 10 day period;

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(ii) the Company or any subsidiary of the Company shall have
authorized, recommended, proposed or publicly announced an intention to
authorize, recommend or propose, or entered into, an agreement with any
person (other than Parent or any subsidiary of Parent) to (A) effect a
merger, consolidation or similar transaction involving the Company or
any of its material subsidiaries, (B) sell, lease or otherwise dispose
of assets of the Company or its subsidiaries representing 10% or more
of the consolidated assets of the Company and its subsidiaries (other
than in the ordinary course of business) or (C) issue, sell or
otherwise dispose of (including by way of merger, consolidation, share
exchange or any similar transaction) securities (or options, rights or
warrants to purchase, or securities convertible into, such securities)
representing 10% or more of the voting power of the Company or any of
its subsidiaries;

(iii) any person (other than Parent, any subsidiary of Parent or the
Company or any of its subsidiaries in a fiduciary capacity) shall have
acquired beneficial ownership (as such term is defined in Rule 13d-3
under the Exchange Act) or the right to acquire beneficial ownership
of, or any "group" (as such term is defined under the Exchange Act)
shall have been formed which beneficially owns or has the right to
acquire beneficial ownership of, 25% or more of the then outstanding
Company Common Stock; or

(f) by either Parent or the Company if the approval of the Company's
stockholders required by Section 9.1(a) shall not have been obtained at the
Company Meeting; or

(g) by either Parent or the Company if the approval of Parent's
stockholders required by Section 9.1(b) shall not have been obtained at the
Parent Meeting.

Section 10.2. Effect of Termination. In the event of termination of this
Merger Agreement by either Parent or the Company, as provided above, this
Merger Agreement shall forthwith become void and (except for the willful
breach of this Merger Agreement by any party hereto) there shall be no
liability on the part of either the Company, Parent or Sub or their respective
officers, directors, employees or agents; provided that the last sentence of
Section 8.1 and Sections 8.5, 8.6, 8.12, 10.2 and Article XI (other than
Section 11.4) shall survive the termination.

Section 10.3. Amendment. This Merger Agreement may be amended by the parties
hereto, by or pursuant to action taken by their respective Boards of
Directors, at any time before or after approval hereof by the stockholders of
the Company and Parent, but, after such approval, no amendment shall be made
which changes the ratios at which Company Common Stock is to be converted into
Parent Common Stock as provided in Section 3.1 or which in any way materially
adversely affects the rights of such stockholders, without the further
approval of such stockholders. This Merger Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties hereto.

Section 10.4. Extension; Waivers. At any time prior to the Effective Date,
the parties hereto, by or pursuant to action taken by their respective Boards
of Directors, may (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
documents delivered pursuant hereto and (iii) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a
party hereto to any such extension or waiver shall be valid if set forth in an
instrument in writing signed on behalf of such party.

ARTICLE XI.

General Provisions

Section 11.1. Non-Survival of Representations, Warranties and
Agreements. All representations and warranties set forth in the Merger
Agreement shall terminate at the Effective Date. All covenants and agreements
set forth in the Merger Agreement shall survive in accordance with their
terms.

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Section 11.2. Notices. All notices or other communications under this Merger
Agreement shall be in writing and shall be given by delivery in person, by
facsimile, cable, telegram, telex or other standard form of
telecommunications, or by registered or certified mail, postage prepaid,
return receipt requested, addressed as follows (or such other address for a
party as shall be specified in a notice given in accordance with this Section
11.2) and shall be deemed to have been given one business day after
transmission by facsimile, cable, telegram, telex or other standard form of
telecommunications or four days after deposit in the U.S. mail:

If to the Company:

UUNET Technologies, Inc.
3060 William Drive
Fairfax, Virginia 22031
Attention: John W. Sidgmore
Martina W. Knee, Esq.
Facsimile No.: (703) 206-5807

with a copy to:

Heller Ehrman White & McAuliffe
525 University Avenue
Palo Alto, California 94301
Attention: August J. Moretti, Esq.
and Richard Friedman, Esq.
Facsimile No.: (415) 324-0638

If to Parent or Sub:

Prior to May 18, 1996:

MFS Communications Company, Inc.
3555 Farnam Street, 2nd Floor
Omaha, Nebraska 68131
Attention: General Counsel
Facsimile No.: (402) 977-5335

On or after May 18, 1996:

MFS Communications Company, Inc.
11808 Miracle Hills Drive
Omaha, Nebraska 68154
Attention: General Counsel
Facsimile No.: (402) 231-3545

With a copy to:

Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: John S. D'Alimonte, Esq.
Facsimile No.: (212) 821-8111

or to such other address as any party may have furnished to the other parties
in writing in accordance with this Section.

Section 11.3. Fees and Expenses.

(a) Whether or not the Merger is consummated, all costs and expenses
incurred in connection with this Merger Agreement and the transactions
contemplated by this Merger Agreement shall be paid by the party incurring
such expenses.

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<PAGE>

(b) If (i) Parent has terminated this Agreement pursuant to the
provisions of (A) Section 10.1(f) or (B) Section 10.1(d) as such Section
relates to Section 9.3(a) and (ii) within 18-months after the date of such
termination, the Company shall either accept, or recommend to its
stockholders for approval, an Acquisition Proposal that Parent in good
faith believes would, if consummated, result in a transaction more
favorable to the stockholders of the Company than the Merger, the Company
shall pay to Parent a fee of $60,000,000, which amount shall be payable by
wire transfer of immediately available funds within two business days after
the acquisition contemplated by such Acquisition Proposal is consummated.
The obligation of the Company pursuant to this paragraph (b) shall not be
prejudiced by an exercise of termination rights by the Company within five
business days prior to the exercise by Parent of its termination rights
under this Merger Agreement.

(c) If (i) the Company has terminated this Agreement pursuant to the
provisions of (A) Section 10.1(g) or (B) Section 10.1(c) as such Section
relates to Section 9.2(a), Parent shall:

(i) pay to the Company a fee of $60,000,000, which amount shall be
payable by wire transfer of immediately available funds within two
business days after such termination;

(ii) at the option of the Company, purchase from the Company
1,551,724 shares of Company Common Stock (as adjusted for stock splits,
reverse stock splits, stock dividends, recapitalizations and other
similar events) for an aggregate purchase price of $90,000,000, which
purchase shall take place on the fifth business day following the later
of (A) written notice by the Company to the Parent that a registration
statement under the Securities Act pursuant to which such shares will
be sold to the Parent has been declared effective and (B) written
notice by the Company to the Parent that the waiting period applicable
to such purchase under the HSR Act has expired or has been terminated;
and

(iii) at the option of the Company, commencing on a date to be
mutually agreed upon by the Company and Parent, but in no event later
than 180 days after notification by the Company, provide data
communications services, including private line and local special
access circuits to the Company at Parent's cost for a period of five
years, with an aggregate total value of such circuits not to exceed
$100,000,000, with no more than $25,000,000 in any calendar year, and
the cost of such services to be jointly determined by the parties or by
a mutually acceptable third-party. Parent will provide the Company with
timely network planning information regarding Parent's network
expansions and service availability.

The obligation of Parent pursuant to this paragraph (c) shall not be
prejudiced by an exercise of termination rights by Parent within five
business days prior to the exercise by the Company of its termination
rights under this Merger Agreement.

Section 11.4. Publicity. So long as this Merger Agreement is in effect,
Parent, Sub and the Company agree to consult with each other in issuing any
press release or otherwise making any public statement with respect to the
transactions contemplated by this Merger Agreement, and none of them shall
issue any press release or make any public statement relating to the
transactions contemplated hereby prior to such consultation, except as may be
required by law or by obligations pursuant to any listing agreement with
Nasdaq. The commencement of litigation relating to the Merger Agreement or the
transactions contemplated hereby or any proceedings in connection therewith
shall not be deemed a violation of this Section 11.4.

Section 11.5. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Merger Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Merger
Agreement and to enforce specifically the terms and provisions hereof in any
court of the United States or any state having jurisdiction, this being in
addition to any other remedy to which they are entitled at law or in equity.

Section 11.6. Assignment; Binding Effect. Neither this Merger Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties, except that Sub shall have the
right to assign to

25
<PAGE>

Parent or any direct wholly owned subsidiary of Parent any and all rights and
obligations of Sub under this Merger Agreement. Subject to the preceding
sentence, this Merger Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
Nothing in this Merger Agreement, expressed or implied, except as specifically
set forth in Sections 8.5 or 10.2, is intended to confer on any person other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations or liabilities under or by reason of this Merger
Agreement.

Section 11.7. Entire Agreement. This Merger Agreement, the Exhibits, the
Company Disclosure Letter, the Parent Disclosure Letter, the Confidentiality
Agreement dated March 5, 1996, between the Company and Parent and any
documents delivered by the parties in connection herewith constitute the
entire agreement among the parties with respect to the subject matter hereof
and supersede all prior agreements and understandings among the parties with
respect thereto. No addition to or modification of any provision of this
Merger Agreement shall be binding upon any party hereto unless made in writing
and signed by all parties hereto.

Section 11.8. Governing Law. THIS MERGER AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD
TO ITS RULES OF CONFLICT OF LAWS.

Section 11.9. Counterparts. This Merger Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a
number of copies hereof each signed by less than all, but together signed by
all of the parties hereto.

Section 11.10. Headings, Table of Contents, Index of Defined Terms. Headings
of the Articles and Sections of this Merger Agreement, the Table of Contents
and the Index of Defined Terms are for the convenience of the parties only,
and shall be given no substantive or interpretive effect whatsoever.

Section 11.11. Interpretation. In this Merger Agreement, unless the context
otherwise requires, words describing the singular number shall include the
plural and vice versa, and words denoting any gender shall include all genders
and words denoting natural persons shall include corporations and partnerships
and vice versa.

Section 11.12. Waivers. Except as provided in this Merger Agreement, no
action taken pursuant to this Merger Agreement, including, without limitation,
any investigation by or on behalf of any party, shall be deemed to constitute
a waiver by the party taking such action of compliance with any
representations, warranties, covenants or agreements contained in this Merger
Agreement. The waiver by any party hereto of a breach of any provision
hereunder shall not operate or be construed as a waiver of any prior or
subsequent breach of the same or any other provision hereunder.

Section 11.13. Severability. Any term or provision of this Merger Agreement
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining
terms and provisions of this Merger Agreement or affecting the validity or
enforceability of any of the terms or provisions of this Merger Agreement in
any other jurisdiction. If any provision of this Merger Agreement is so broad
as to be unenforceable, the provision shall be interpreted to be only so broad
as is enforceable.

Section 11.14. Subsidiaries. As used in this Merger Agreement, the word
"subsidiary" when used with respect to any party means any corporation or
other organization, whether incorporated or unincorporated, of which such
party directly or indirectly owns or controls at least a majority of the
securities or other interests having by their terms ordinary voting power to
elect a majority of the board of directors or others performing similar
functions with respect to such corporation or other organization, or any
organization of which such party is a general partner.

[Signature pages follow.]

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<PAGE>

In Witness Whereof, Parent, Sub and the Company have caused this Merger
Agreement to be executed by their respective officers thereunder duly
authorized all as of the date first written above.

MFS Communications Company, Inc.

/s/ James Q. Crowe
_____________________________________
Name: James Q. Crowe
Title: Chairman and CEO

MFS Global Internet Services, Inc.

/s/ James Q. Crowe
_____________________________________
Name: James Q. Crowe
Title: President

UUNET Technologies, Inc.

/s/ John W. Sidgmore
_____________________________________
Name: John W. Sidgmore
Title: President and CEO

<PAGE>

EXHIBIT 99.1

FOR IMMEDIATE RELEASE

MFS Contacts:
Media: Josh Howell, 402/231-3405 Investors: Gary Brandt
Steve Ingish, 402/231-3423 402/231-3432

MFS COMMUNICATIONS COMPLETES MERGER WITH UUNET TECHNOLOGIES

Omaha, Neb., August 12, 1996--MFS Communications Company, Inc. (Nasdaq:MFST)
today announced the completion of its merger with UUNET Technologies, Inc.
(Nasdaq:UUNT) after stockholders of both companies approved the transaction
and the issuance of MFS common stock, which is valued at approximately $2
billion. The transaction closed effective prior to the opening of trading
today. In the merger, each share of UUNET common stock has been converted into
and represents the right to receive 1.777776 shares of MFS common stock.

MFS is a leading provider of communication services for business. The
Company provides one-stop shopping for integrated local and long distance
services as well as a wide range of high quality voice, data and other
enhanced services and systems specifically designed to meet the requirements
of business and government customers. MFS currently has all-fiber optic
networks in operation or development in 52 metropolitan markets in the U.S.
and abroad. MFS is headquartered in Omaha, Nebraska, USA. Its World Wide Web
address is http://www.mfst.com. MFS' common stock is traded on the Nasdaq
National Market under the symbol MFST.

<PAGE>

EXHIBIT 99.2

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To UUNET Technologies, Inc.:

Arthur Andersen LLP

Washington, D.C.
January 31, 1996
<PAGE>

EXHIBIT 99.2

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To UUNET Technologies, Inc.:

ARTHUR ANDERSEN LLP

Washington, D.C.
January 31, 1996