MFS COMMUNICATIONS CO INC, S-3/A, 1996-06-05

MFS COMMUNICATIONS CO INC
S-3/A, 1996-06-05
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 1996

REGISTRATION NO. 333-4395
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------

AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
MFS COMMUNICATIONS COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 47-0714388
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)

----------------
11808 MIRACLE HILLS DRIVE
OMAHA, NEBRASKA 68154
(402) 231-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
TERRENCE J. FERGUSON, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
MFS COMMUNICATIONS COMPANY, INC.
11808 MIRACLE HILLS DRIVE
OMAHA, NEBRASKA 68154
(402) 231-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
WITH COPIES TO:

JOHN S. D'ALIMONTE, ESQ. BRUCE S. MENDELSOHN, P.C.
STEVEN J. GARTNER, ESQ. EDWARD D. SOPHER, ESQ.
WILLKIE FARR & GALLAGHER AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
ONE CITICORP CENTER 1333 NEW HAMPSHIRE AVENUE, N.W.
153 EAST 53RD STREET WASHINGTON, D.C. 20036
NEW YORK, NEW YORK 10022 (202) 887-4000
(212) 821-8000

----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] ..................
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ....................................................
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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<PAGE>

EXPLANATORY NOTE

This Registration Statement contains two forms of prospectus: one to be used
in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and one to be used in connection with an offering outside of the
United States and Canada (the "International Prospectus"). The two
prospectuses are identical except for the front and back cover pages, the
section entitled "Underwriting" and a section in the International Prospectus
entitled "Certain United States Tax Considerations for Non-United States
Holders." Each of the pages for the International Prospectus included herein
is labeled "Alternate Page for International Prospectus."
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO BUY NOR +
+SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, +
+SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION +
+UNDER THE SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION

JUNE 5, 1996
PROSPECTUS

28,000,000 SHARES

MFS COMMUNICATIONS COMPANY, INC. [MFS LOGO APPEARS HERE]

COMMON STOCK

(PAR VALUE $.01 PER SHARE)

All of the shares of Common Stock offered hereby (the "Shares") are being sold
by MFS Communications Company, Inc. (the "Company" or "MFS"). Of the 28,000,000
Shares, 22,400,000 Shares are being offered hereunder by the U.S. Underwriters
(as defined herein) in the United States and Canada (the "U.S. Offering") and
5,600,000 Shares are being offered by the International Underwriters (as
defined herein), in a concurrent offering outside the United States and Canada
(the "International Offering" and together with the U.S. Offering, the
"Offerings"), subject to transfers between the U.S. Underwriters and the
International Underwriters (collectively, the "Underwriters"). The public
offering price and the aggregate underwriting discount per share will be
identical for the Offerings. See "Underwriting." The Common Stock is listed on
The Nasdaq Stock Market's National Market (the "Nasdaq National Market") under
the symbol "MFST." On June 4, 1996, the last reported sale price for the Common
Stock as reported by the Nasdaq National Market was $34.75 per share. See
"Price Range of Common Stock."

PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY MATTERS DISCUSSED UNDER THE
CAPTION "RISK FACTORS" BEGINNING ON PAGE 13.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

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<TABLE>
<CAPTION>
PROCEEDS
PRICE TO UNDERWRITING TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.......................................... $ $ $
Total(3)........................................... $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $ .
(3) The Company has granted to the U.S. Underwriters and the International
Underwriters 30-day options to purchase up to 4,200,000 additional Shares,
at the Price to Public, less the Underwriting Discount, solely to cover
over-allotments, if any. If the Underwriters exercise these options in
full, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."

The Shares are offered subject to receipt and acceptance by the Underwriters,
to prior sale and to the Underwriters' right to reject any order in whole or in
part and to withdraw, cancel or modify the offer without notice. It is expected
that delivery of the Shares will be made at the office of Salomon Brothers Inc,
Seven World Trade Center, New York, New York, or through the facilities of The
Depository Trust Company, on or about , 1996.

SALOMON BROTHERS INC
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
SMITH BARNEY INC.
UBS SECURITIES

The date of this Prospectus is , 1996.
<PAGE>

[INSERT MAP]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN U.S. UNDERWRITERS AND SELLING
GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE
10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."

2
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AVAILABLE INFORMATION

MFS and UUNET Technologies, Inc. ("UUNET") are subject to the informational
requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), and
in accordance therewith file reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information filed may be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and may be
available at the following Regional Offices of the Commission: Midwest
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and New York Regional Office, 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such materials can be obtained
at prescribed rates from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a Web site that contains reports, proxy and information
statements and other materials that are filed through the Commission's
Electronic Data Gathering, Analysis, and Retrieval system. This Web site can
be accessed at http://www.sec.gov. In addition, material filed by each of MFS
and UUNET can be inspected at the offices of the National Association of
Securities Dealers, Inc., at 1735 K Street, N.W., Washington, D.C. 20006.

This Prospectus does not contain all the information set forth in the
Registration Statement on Form S-3 and exhibits relating thereto, including
any amendments (the "Registration Statement"), of which this Prospectus is a
part, and which MFS has filed with the Commission under the Securities Act of
1933, as amended (the "Securities Act"). Reference is made to such
Registration Statement for further information with respect to MFS and the
Shares offered hereby. Statements contained herein concerning the provisions
of documents are necessarily summaries of such documents, and each statement
is qualified in its entirety by reference to the copy of the applicable
document filed with the Commission.

INCORPORATION OF DOCUMENTS BY REFERENCE

MFS hereby incorporates by reference into this Prospectus the following
documents previously filed by MFS with the Commission pursuant to the Exchange
Act:

1. Annual Report on Form 10-K for the year ended December 31, 1995, as
amended by MFS' Form 10-K/A Amendment No. 1 on April 30, 1996;

2. Current Reports on Form 8-K dated May 10, 1996, April 30, 1996 and
January 23, 1996;

3. Quarterly Report on Form 10-Q for the quarter ended March 31, 1996;
and

4. The description of Common Stock contained in MFS' Registration
Statement on Form 8-A (File No. 0-21594) filed with the Commission pursuant
to Section 12(g) of the Exchange Act on April 21, 1993, as amended by
Amendment No. 1 filed with the Commission on a Form 8 on May 10, 1993.

In addition, all reports and other documents filed by MFS pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to the termination of the Offerings of the Shares shall be
deemed to be incorporated by reference herein and to be a part hereof from the
date of filing of such reports and documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein, or in any other subsequently filed
document that also is incorporated or deemed to be incorporated by reference
herein, modified or supersedes such statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.

MFS hereby undertakes to provide without charge to each person, including
any beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any or all of the
documents incorporated by reference herein. Such requests should be addressed
to MFS Communications Company, Inc., 11808 Miracle Hills Drive, Omaha,
Nebraska 68154, Attention: Secretary, Telephone No. (402) 231-3000.

3
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PROSPECTUS SUMMARY

The following information is a summary of the more detailed information and
financial statements appearing elsewhere or incorporated by reference in this
Prospectus and is qualified in its entirety by reference thereto. Unless
otherwise indicated, all information contained in this Prospectus assumes that
the Underwriters' over-allotment options will not be exercised.

See "Glossary" for definitions of certain other terms used in this
Prospectus.

THE COMPANY

MFS is an integrated communications provider ("ICP") of local and long
distance telecommunications services and certain Internet-related services to
business and government end users. The Company provides services by utilizing a
combination of its own facilities and network capacity leased from others
(taken together, the "International Network Platform") in the United States,
Western Europe and Asia. As the first ICP to focus on business and government
customers, the Company believes it is uniquely positioned to take advantage of
technical, regulatory and market changes which promote demand for an integrated
set of communications services.

The Company's strategy is to become the premier provider of communications
services to business and government end users. The Company believes business
and government end users have distinct communications service requirements,
including maximum reliability, consistent high quality, responsive customer
service and continuous attention to service enhancement and new service
development. The Company believes it has multiple advantages over its
competitors as a result of the Company's: (i) focus on business and government
end users; (ii) expertise in developing and operating highly reliable, advanced
digital fiber optic networks which offer substantial transmission capacity;
(iii) emphasis on providing comprehensive and responsive customer service; (iv)
International Network Platform that serves customers with multiple offices in
key international business centers; (v) network development plan which helps
assure an efficient evolution from a voice-oriented, circuit switched network
to a packet switched network supporting Internet and other protocols (an "IP
Packet") switched network; (vi) plan to develop new services, including voice
service to be provided over an IP Packet switched network; and (vii) ability to
bundle local, long distance telecommunications services and Internet-related
services provided over an end-to-end network controlled by the Company.

As part of the implementation of its IP Packet switched network and Internet-
based service offering plans, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with UUNET on April 29, 1996 pursuant to which
UUNET will become a wholly owned subsidiary of MFS (the "Merger"). There can be
no assurance that the Merger will be consummated. See "Risk Factors--Risk That
Merger May Not Be Consummated" and "Description of the Merger."

The Company is organized as a holding company and operates through its
subsidiaries in two business segments: telecommunications services and network
systems integration.

Telecommunications Services

. The MFS Telecom Companies serve the needs of large businesses and
government customers by providing dedicated circuits, local switched
services and high speed data communications for large corporations.

. The MFS Intelenet Companies serve the needs of medium and small
businesses by providing integrated local and long distance switched
telecommunications and telecommunication management services and a
variety of value-added services including voice mail, calling card and
specialized call accounting.

4
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. MFS International serves the needs of communications intensive national
and multinational corporations in global financial centers, primarily in
Western Europe, by providing a full range of local, long distance,
international and data communications services as permitted by regulation
in the relevant jurisdiction.

. MFS Global Network Services expands and manages the Company's
International Network Platform which consists of the Company's own
facilities and switching platform as well as capacity leased from other
service providers.

. After the Merger, through UUNET the Company will provide a wide range of
Internet-related services tailored to the needs of business and
government users, including a comprehensive range of dial-up and
dedicated Internet access options, consulting services and Web server
hosting and integration services.

Network Systems Integration

MFS Network Technologies provides network systems integration for MFS and
third parties which desire to deploy sophisticated networks, including
intelligent transportation systems, voice and data networks, interactive
distance learning networks, security systems and combined cable television-
telephone networks.

RECENT DEVELOPMENTS

The pace of regulatory and technical change in the telecommunications
industry has continued to accelerate. The Telecommunications Act of 1996 (the
"Telecom Act") was signed into law on February 8, 1996, effectively creating,
among other things, a national template under which the Company's services may
be provided on a more equal basis with incumbent local telephone companies once
the Telecom Act is implemented. Technical change has also been dramatic,
particularly with respect to Internet-related products and services, as a
rapidly growing amount of information available on both the Internet and on
privately managed "intranets" is made increasingly accessible with advanced
software and hardware. MFS has responded to these developments with several new
initiatives.

The Telecommunications Act of 1996

The Telecom Act has a number of provisions that affect the Company's
operations in ways that are difficult to predict with precision. The Company
believes that the Telecom Act is generally pro-competitive and will, on
balance, benefit the Company by, among other things, opening local exchange
markets to competition, preempting anti-competitive state laws and granting the
Company regulatory status more equal with that of the incumbent local telephone
companies. The Company believes the following attributes of the Telecom Act
will have certain positive effects on the Company's operations.

. Market access. Opening all U.S. markets to local competition.

. Network interconnections. Enabling the Company to more fully interconnect
its networks with incumbent local telephone companies and other carriers
to allow the Company to reach customers not physically connected to its
own networks in a more cost effective manner.

. Number portability. Enabling business customers to retain their existing
phone numbers in the event they choose to switch local service providers.
The Company considers number portability to be a significant factor which
can positively influence a customer's decision to purchase service from
MFS.

. Reciprocal compensation. Ensuring that other carriers, both local and
long distance, compensate the Company for calls made to its customers or,
in the alternative, not charge the Company for calls made by its
customers to the customers of other carriers. The Company expects such
reciprocal compensation arrangements to improve its operating margins
over time.

5
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The Company has moved quickly to capitalize on the anticipated benefits of
the Telecom Act. MFS has contacted 21 LECs to initiate the process of
implementing the "co-carrier" provisions of the Telecom Act as quickly as
possible and has established a co-carrier task force consisting of
approximately 100 personnel dedicated to facilitate the negotiation and
implementation of co-carrier arrangements with the LECs. On May 22, 1996, MFS
announced that it and Ameritech Corp. ("Ameritech") had entered into a
comprehensive co-carrier agreement which involves the networks of the
respective companies in the entire Ameritech marketing region, including
Illinois, Indiana, Michigan, Ohio and Wisconsin.

New Infrastructure Initiatives

In response to the regulatory developments embodied in the Telecom Act and
the Company's success in its previous business development initiatives, MFS
announced on May 7, 1996 a series of initiatives which, when implemented, will
expand the Company's geographic presence and service offerings in a large
number of United States metropolitan areas and certain international financial
centers. The Company anticipates that implementation of these initiatives,
including certain of the Internet-related initiatives discussed below, will,
together with currently anticipated expenditures, result in total average
annual capital expenditures of approximately $1.0 billion to $1.3 billion over
the period of implementation, which the Company expects to be up to four years.
Since a significant portion of the Company's capital expenditures are success-
based (that is, related directly to revenue growth), actual capital
expenditures may vary significantly from the above range depending on the level
of incremental sales. This range is also subject to the Company's review of a
number of factors including regulatory developments, technological developments
and market conditions. In addition, each initiative may be implemented in whole
or in part and independently of any other initiative, ensuring that the Company
retains maximum financial and operating flexibility.

Construction and Expansion of Networks. The Company plans to expand the
number of U.S. metropolitan areas served to approximately 85 over the next four
years, an increase from the previously planned target of approximately 65
metropolitan areas, 45 of which are currently in operation or under active
development. In addition, the Company plans to construct approximately 35 major
expansions of existing networks. The actual number of new metropolitan areas
and network expansions constructed may vary materially from these targets.
Taken together with the aforementioned regulatory developments, MFS believes
that, upon completion, these initiatives will enable the Company to sell its
services in metropolitan areas currently containing approximately 70% of the
non-farm business employment in the United States.

The Company also intends to increase the number of international financial
centers served to 45, an increase from its previously planned target of 25,
seven of which are currently operational or under active development. A number
of the financial centers are expected to be developed in Asian countries where
regulatory reform has recently created opportunities to serve the needs of
communications intensive business customers. The pace of international
development is dependent on a number of factors, many of which are beyond the
Company's control, including the speed of regulatory reform.

6
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built will depend on a number of factors, including availability of rights-of-
way, market conditions, and the availability of certain high speed SONET
services from other carriers, which could serve as an alternative to the
construction of such connections. The Company currently leases certain medium
bandwidth long distance connections from other providers, the cost of which
represents a significant portion of the Company's network expense.

Central Office Interconnection and Switch Deployment. The Company plans to
interconnect at LEC central offices in all its metropolitan area networks and
plans to deploy approximately 25 additional switches over the 25 previously
planned. The Telecom Act mandates that incumbent LECs throughout the U.S. enter
into arrangements with competitors such as MFS for central office collocation
and unbundling of local services. The Company believes that implementing these
pro-competitive policies creates a unique opportunity to expand the Company's
offering of combined local and long distance services through interconnection
with local exchange carriers.

Internet-Related Initiatives

The Company believes the Internet is one of the most important developments
in the communications industry in decades. The recent rapid development of the
Internet, along with Internet-related technologies, products and services
(especially intranet applications), is expected to continue to stimulate
accelerated growth in demand for communications bandwidth. MFS believes IP
Packet switching will, over time, replace large portions of the circuit
switched voice network as the primary vehicle for business communications due
to the efficient use of bandwidth and the significantly lower transmission
costs associated with IP Packet switching. The amount of data transmitted over
the Internet backbone has grown very rapidly as a result of expanded Internet
use and the increasing complexity of information delivered via the Internet.
Currently, "Web pages" available on the Internet frequently include graphics
and, in some cases, sound and video, which require the transfer of more data to
the user's computer than do comparable text-only pages. See "Business--
Communications Industry Overview--Internet."

MFS believes that availability of local loop bandwidth is the greatest
barrier to Internet development. The Company believes that its ability to
provide end-to-end high capacity bandwidth, unimpeded by a bottleneck at any
point along the path, uniquely positions it to provide superior business-
oriented Internet-related services.

Given the Internet's rapid pace of growth, MFS believes that speed to market
will also be a major competitive advantage. On May 7, 1996, the Company
announced that it has undertaken several initiatives designed to augment its
Internet-related service offerings, including increasing and accelerating
network development and expansions, procurement of high-speed local loop
circuits, control of intercity high capacity fiber optic links discussed above
and, as announced on April 30, 1996, the Company's planned merger with UUNET.

In the United States, the acceleration of central office interconnection
arrangements and the availability of unbundled local loops is expected to
enable the Company to offer a variety of higher speed local Internet access
services based on ISDN (Integrated Service Digital Network) technology and, in
the future, on such technologies as ADSL (Asymmetric Digital Subscriber Loop)
and HDSL (High Speed Digital Subscriber Loop). In addition, the Company plans
to significantly expand its existing "Internet Hotel" space (that is,
facilities space specifically created to allow Internet service providers, Web
page hosting service providers and others to collocate with and utilize the
network services of the Company). Internationally, the Company intends to
pursue a range of new Internet initiatives similar to those planned for the
United States as regulatory reform and other factors allow, and to expand its
"Internet Hotel" space and international transport service in both Europe and
Asia.

7
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THE PROPOSED MERGER

On April 29, 1996, the Company entered into the Merger Agreement with UUNET,
pursuant to which UUNET will become a wholly owned subsidiary of MFS (the
"Merger"). Pursuant to the Merger, each outstanding share of UUNET common stock
will be converted into and represent the right to receive 1.777776 shares (the
"Exchange Ratio") of the common stock, par value $.01 per share of MFS (the
"MFS Common Stock"). Consummation of the Merger is subject to various
conditions, including the approval of a majority of the outstanding shares of
the common stock, par value $.001 per share (the "UUNET Common Stock"), at a
special meeting of the stockholders of UUNET (the "UUNET Special Meeting") and
the approval by the affirmative vote of a majority of votes cast by the holders
of the outstanding shares of the capital stock of MFS at a meeting at which a
quorum is present. See "Description of the Merger."

UUNET is a leading worldwide provider of a comprehensive range of Internet
access options, applications and consulting services to businesses,
professionals and on-line service providers. MFS believes that the Merger will
(i) allow the Company to expand its communications service offerings to include
UUNET's existing array of Internet-related services oriented toward the needs
of business and government customers, (ii) provide the Company with additional
technical expertise in configuring and managing complex, IP Packet switched
networks and (iii) over time, allow the Company to offer new services
(including voice and video communications services) utilizing UUNET's Internet
technology expertise and MFS' broadband, end-to-end networks. In addition, MFS
believes that the combined entity can, over time, improve profitability as a
result of (a) reduction in UUNET's "local loop" network costs (which UUNET
estimates to be approximately 40% of its "cost of revenues" in North America
for 1996) by utilizing available capacity on MFS' local networks, (b) receipt
of terminating access payments, or a reduction in cost of providing dial-up
Internet access, as mandated by the Telecom Act, (c) reduced cost of intercity
transport capacity purchased or leased from others as a result of increased
volume and migration of UUNET traffic to Company-owned facilities and (d)
incremental sales from offering UUNET services combined with MFS services to
the customers of UUNET. See "Risk Factors--Risk That Merger May Not Be
Consummated."

Based on the number of shares of UUNET Common Stock outstanding at April 26,
1996, the Company expects to issue an aggregate of approximately 57.3 million
shares of MFS Common Stock in the Merger. Based on the closing price of the MFS
Common Stock on the day preceding the announcement of the Merger, the
stockholders of UUNET will receive shares of MFS Common Stock in the Merger
valued at approximately $2 billion.

As a condition to entering into the Merger Agreement, MFS required certain
UUNET stockholders to enter into an agreement (the "Stock Option Agreement")
pursuant to which such stockholders agreed to vote their shares of UUNET Common
Stock in favor of the approval of the Merger Agreement and granted irrevocable
proxies in favor of MFS to vote all of such stockholders' shares of UUNET
Common Stock (equal to approximately 60% of the shares of UUNET Common Stock).
Accordingly, the proposal to adopt the Merger Agreement will be adopted without
the need of the vote of any other stockholders. As a condition to entering into
the Merger Agreement, UUNET required certain MFS directors owning approximately
12% of the shares of MFS Common Stock prior to the Offerings, to enter into an
agreement (the "MFS Voting Agreement") pursuant to which such MFS stockholders
granted irrevocable proxies to vote all of such stockholders' shares of MFS
Common Stock in favor of the issuance (the "MFS Share Proposal") of MFS Common
Stock in connection with the Merger. See "Description of the Merger."

MFS and UUNET expect to consummate the Merger after the Offerings have been
completed as soon as the conditions to consummation of the Merger set forth in
the Merger Agreement have been

8
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satisfied. There can be no assurance that the conditions to the consummation of
the Merger will be satisfied and, accordingly, that the Merger ultimately will
be consummated. See "Risk Factors--Risk That Merger May Not Be Consummated."

As used in this Prospectus, the term "MFS" or the "Company" refers to MFS
Communications Company, Inc. and its subsidiaries, unless the context otherwise
requires. The principal executive offices of MFS are located at 11808 Miracle
Hills Drive, Omaha, Nebraska 68154; its telephone number is (402) 231-3000.

9
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MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA

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<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------- ---------------------------------------------------------------
1996 1995 1995 1994(1) 1993 1992 1991
------------ ------------ ------------ ------------ ------------ ----------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Telecommunications
services.............. $ 165,590 $ 103,788 $ 498,225 $ 228,707 $ 70,048 $ 47,585 $ 23,158
Network systems
integration........... 20,726 14,552 84,969 58,040 71,063 61,122 14,065
------------ ------------ ------------ ------------ ------------ ----------- --------
Total.................. 186,316 118,340 583,194 286,747 141,111 108,707 37,223
Costs and expenses:
Operating expenses..... 174,173 119,882 562,300 273,431 102,905 76,667 33,963
Depreciation and
amortization.......... 44,609 29,073 142,496 73,869 34,670 20,544 11,761
General and
administrative
expenses.............. 34,892 25,941 117,703 75,576 34,989 23,267 18,429
------------ ------------ ------------ ------------ ------------ ----------- --------
Total.................. 253,674 174,896 822,499 422,876 172,564 120,478 64,153
------------ ------------ ------------ ------------ ------------ ----------- --------
Loss from operations.... (67,358) (56,556) (239,305) (136,129) (31,453) (11,771) (26,930)
Other income (expense)
net.................... (18,766) (7,252) (27,993) (17,175) 8,464 (792) (1,314)
------------ ------------ ------------ ------------ ------------ ----------- --------
Loss before income
taxes.................. (86,124) (63,808) (267,298) (153,304) (22,989) (12,563) (28,244)
Income tax benefit
(expense).............. (100) (100) (600) 2,103 7,220 (566) --
------------ ------------ ------------ ------------ ------------ ----------- --------
Net loss................ (86,224) (63,908) (267,898) (151,201) (15,769) (13,129) (28,244)
Dividends on preferred
stock(2)............... (7,072) -- (15,064) -- -- -- --
------------ ------------ ------------ ------------ ------------ ----------- --------
Net loss applicable to
common stockholders.... $ (93,296) $ (63,908) $ (282,962) $ (151,201) $ (15,769) $ (13,129) $(28,244)
============ ============ ============ ============ ============ =========== ========
Loss per share
applicable to common
stockholders(3)........ $ (0.75) $ (0.50) $ (2.21) $ (1.21) $ (0.15) $ (0.15)
============ ============ ============ ============ ============ ===========
Number of shares(3)..... 125,017,000 128,729,000 127,786,000 124,874,000 105,764,000 88,170,000
============ ============ ============ ============ ============ ===========
OTHER DATA:
EBITDA(4)............... $(19,408) $(27,483) $(96,809) $(62,260) $3,217 $8,773 $(15,169)
Capital expenditures,
including acquisitions
of businesses, net of
cash acquired.......... 153,294 114,426 523,727 576,711 128,651 110,171 92,411
STATISTICAL DATA(5):
Circuits in service(6).. 3,304,345 1,964,872 2,960,766 1,713,430 947,391 589,130 465,420
Buildings connected(7).. 7,420 3,284 5,720 2,754 1,583 1,101 695
Route miles(8).......... 3,320 2,616 3,183 2,405 1,298 858 373
Fiber miles(9).......... 213,149 122,074 199,726 107,919 62,154 38,595 22,982
Switches................ 16 12 16 12 1 -- --
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------------------------
AS PRO PRO FORMA AS
ACTUAL ADJUSTED(10) FORMA(11) ADJUSTED(12)
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Networks and equipment......... $1,466,254 $1,466,254 $1,559,515 $1,559,515
Total assets................... 2,347,211 3,322,971 4,537,298 5,513,058
Long-term debt, less current
portion....................... 1,255,256 1,255,256 1,273,301 1,273,301
Stockholders' equity........... 754,582 1,730,342 2,856,075 3,831,835
</TABLE>
- --------
(Footnotes appear on following page.)

10
<PAGE>

(1) Reflects the acquisition of Centex Telemanagement, Inc. ("Centex") as of
May 18, 1994, Cylix Communications Corporation ("Cylix") as of November 1,
1994 and RealCom Office Communications, Inc. ("RealCom") as of November 14,
1994.
(2) Represents dividends paid on shares of Series A Preferred Stock in shares
of MFS Common Stock and dividends accrued on shares of Series B Preferred
Stock. No cash dividends have been paid by the Company. See "Dividends."
(3) See Note 2 to the Consolidated Financial Statements, which describes the
calculation of loss per share.
(4) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation, amortization and non cash stock-based compensation. EBITDA is
commonly used in the communications industry to analyze companies on the
basis of operating performance. EBITDA is not intended to represent cash
flow for the periods. See Consolidated Statements of Cash Flows.
(5) Information presented as of the end of the period indicated and derived
from non-financial records prepared by the Company which are not audited.
(6) All circuits have been expressed as voice grade equivalent circuits.
(7) Number of buildings connected by Company-owned physical facilities or by
interconnection with another carrier utilizing a leased facility.
(8) Route miles refers to the number of miles of the telecommunications path
in which the fiber optic cables are installed.
(9) Fiber miles refers to the number of route miles installed (excluding
pending installations) along a telecommunications path multiplied by the
number of fibers along that path.
(10) Adjusted to give effect to the receipt of the estimated net proceeds of
the Offerings (at an assumed Price to Public of $36.00 per share), without
giving effect to the Merger. See "Use of Proceeds."
(11) Pro Forma to give effect to the Merger as though it had occurred as of
March 31, 1996, without giving effect to the Offerings. See Note 3 to the
Unaudited Pro Forma Consolidated Condensed Financial Statements for
adjustments applicable in the event that the Merger is not consummated. The
following table presents certain statement of operations and other data pro
forma for the Merger:

<TABLE>
<CAPTION>
PRO FORMA
THREE MONTHS
ENDED MARCH 31, YEAR ENDED
------------------ DECEMBER 31,
1996 1995 1995
-------- -------- ------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Total revenue........................... $228,007 $131,899 $671,810
Loss from operations.................... (172,894) (162,854) (683,476)
Net loss applicable to common
stockholders........................... (198,970) (170,095) (725,321)
Loss per share applicable to common
stockholders........................... (1.09) (0.91) (3.92)
EBITDA.................................. (18,430) (26,849) (109,030)
</TABLE>

(12) Adjusted to give effect to the receipt of the estimated net proceeds of
the Offerings (at an assumed Price to Public of $36.00 per share), giving
effect to the Merger. See "Use of Proceeds."

11
<PAGE>

THE OFFERINGS

<TABLE>
<S> <C> <C>
Common Stock offered by the Company:
U.S. Offering............................................ 22,400,000 shares
International Offering................................... 5,600,000 shares
-----------
Total(1)............................................... 28,000,000 shares
Common Stock to be outstanding after the
Offerings(1)(2).......................................... 153,619,662 shares
Use of Proceeds............................ Primarily to fund the expansion
of the Company's International
Network Platform and its
Internet-related business. See
"Use of Proceeds."
Nasdaq National Market symbol............................. MFST
</TABLE>
- --------
(1) Does not include up to an aggregate of 4,200,000 shares of MFS Common Stock
subject to over-allotment options granted to the U.S. Underwriters and
International Underwriters. See "Underwriting."
(2) Based on shares outstanding as of March 31, 1996, and excludes (i)
approximately 57.3 million shares of MFS Common Stock and options to
acquire approximately 5.7 million shares of MFS Common Stock issuable in
connection with the Merger, (ii) approximately 28.6 million shares of MFS
Common Stock issuable pursuant to the Company's stock plans and (iii)
approximately 21.2 million shares of MFS Common Stock issuable upon the
exercise of warrants and the conversion of outstanding shares of preferred
stock.

RISK FACTORS

PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY CERTAIN FACTORS RELATING TO AN
INVESTMENT IN THE SHARES. SEE "RISK FACTORS."

12
<PAGE>

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business,"
including statements regarding the development of the Company's businesses,
the markets for the Company's services and products, anticipated capital
expenditures, regulatory reform and the effects of the Merger, and other
statements contained herein regarding matters that are not historical facts,
are forward-looking statements (as such term is defined in the Private
Securities Litigation Reform Act of 1995). Because such statements include
risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include, but are not limited to,
those discussed under "Risk Factors."

RISK FACTORS

Prospective investors should consider carefully, together with the other
information contained in, or incorporated by reference into, this Prospectus,
the following factors:

OPERATING LOSSES

A substantial portion of the expenditures relating to the development of the
Company's businesses, the installation and expansion of its domestic and
international networks and the recently proposed linking of these networks
through the acquisition or construction of facilities will be incurred before
the realization of revenues. These expenditures, together with the associated
up front operating expenses, result in negative cash flow until an adequate
customer base is established. MFS reported losses from operations of
approximately $31.5 million, $136.1 million and $239.3 million for the three
years ended December 31, 1993, 1994 and 1995, respectively, and $67.4 million
for the three months ended March 31, 1996. Although its revenues have
increased substantially in each of the last three years and for the three
months ended March 31, 1996, MFS has incurred significant increases in
expenses associated with the development and expansion of its fiber optic
networks, services and customer base, which expenses are expected to continue
to grow for the foreseeable future. There can be no assurance that MFS will
achieve or sustain profitability.

The Merger will be treated as a purchase for accounting purposes and the
excess of the purchase price over the net book value of the net tangible
assets acquired will be recorded as goodwill and amortized over five years. As
a result, upon consummation of the Merger, there will be a substantial
increase in the amount of goodwill on the balance sheet of MFS, which will
result in substantially increased amortization charges. On a pro forma basis
for the Merger, MFS would have had an additional charge of approximately
$423.6 million relating to amortization for the year ended December 31, 1995.
As a result of these additional charges and operating losses currently being
generated by UUNET, if the Merger is consummated, MFS expects to continue to
report net losses for the foreseeable future.

SIGNIFICANT CAPITAL REQUIREMENTS

The development of the Company's businesses, the installation and expansion
of its domestic and international networks and the recently proposed linking
of these networks through the acquisition or construction of facilities
require significant capital expenditures. During the first quarter of 1996,
MFS' capital expenditures, which are primarily for the construction of
networks and the purchase of related equipment, were $153.0 million, including
acquisitions and deferred costs. On May 7, 1996, MFS announced that it intends
to undertake certain initiatives designed to take advantage of opportunities
created by changes in telecommunications laws and the rapid development of
Internet technology-based communications networks. These initiatives involve
increasing the number of metropolitan areas served, expanding its networks in
existing metropolitan areas, constructing or acquiring its own intercity high
capacity network, accelerating central office interconnection, deploying
additional switches, providing high-speed local Internet access and, if the
Merger is consummated, implementing UUNET's plan to expand its international
presence and acquiring complementary businesses, technologies or products.
Expenditures for the initiatives are subject to MFS' review of a number of
factors including

13
<PAGE>

cost of any additional capital required, technological developments and market
conditions. In addition, each initiative may be implemented in whole or in
part, and independently of any other initiative, ensuring that MFS retains
maximum financial and operating flexibility.

The Company anticipates that implementation of these initiatives, including
certain of the Internet-related initiatives, will, together with currently
anticipated expenditures, result in total average annual capital expenditures
of approximately $1.0 billion to $1.3 billion over the period of
implementation, which the Company expects to be up to four years. Since a
significant portion of the Company's capital expenditures are success-based
(that is, related directly to revenue growth), actual capital expenditures may
vary significantly from the above range depending on the level of incremental
sales. This range is also subject to a number of factors, including pace and
extent of network development, levels of incremental sales, as well as
regulatory actions by state, federal and international authorities, which,
individually or in the aggregate, could cause material changes in capital
expenditure requirements.

The Company expects to fund its capital requirements through additional debt
or equity financing, existing resources and internally generated funds as
appropriate. There can be no assurance, however, that MFS will be successful
in producing sufficient cash flow or raising sufficient debt or equity capital
on terms that it will consider acceptable. Failure to generate or raise
sufficient funds may require the Company to delay or abandon some of its
future expansion or expenditures, which could have a material adverse effect
on the growth of the Company.

COMPETITION

Traditional Telecommunications Services

Virtually all markets for telecommunications services are extremely
competitive, and MFS expects that competition will intensify in the future. In
each of the markets in which it offers telecommunications services, MFS faces
significant competition from larger, better financed incumbent carriers. MFS
competes, both domestically and internationally, with incumbent providers,
which have historically dominated their local telecommunications markets, and
long distance carriers, for the provision of long distance services. In
certain markets, especially international markets, the incumbent provider
offers both local and long distance services. The incumbent LECs presently
have numerous advantages as a result of their historic monopoly control of the
local exchange market. A continuing trend toward business combinations and
alliances in the telecommunications industry may create significant new
competitors to MFS. Many of MFS' existing and potential competitors have
financial, personnel and other resources significantly greater than those of
MFS. MFS also faces competition in most markets in which it operates from one
or more competitors, including competitive access providers ("CAPs") operating
fiber optic networks, in some cases in conjunction with the local cable
television operator. Each of AT&T Corp. ("AT&T"), MCI Communications
Corporation ("MCI") and Sprint Corporation ("Sprint") has indicated its
intention to offer local telecommunications services in major U.S. markets
using its own facilities or by resale of the LECs' or other providers'
services. Other potential competitors include cable television companies,
wireless telephone companies, electric utilities, microwave carriers and
private networks of large end users. In addition, MFS competes with equipment
vendors and installers and telecommunications management companies with
respect to certain portions of its business.

Under the Telecom Act and ensuing federal and state regulatory initiatives,
barriers to local exchange competition are being removed. The introduction of
such competition, however, also establishes the predicate for the Bell
Operating Companies (the "BOCs") to provide in-region interexchange long
distance services. The BOCs are currently allowed to offer certain
"incidental" long distance service in-region and to offer out-of-region long
distance services. Once the BOCs are allowed to offer in-region long distance
services, both they and the three largest long distance carriers (AT&T, MCI
and Sprint) will be in a position to offer single source local and long
distance service similar to that being offered by MFS. The Company expects
that the increased competition made possible by regulatory reform will result
in certain pricing and margin pressures in the domestic telecommunications
services business.

14
<PAGE>

MFS competes in three international markets: international services from the
United States; international services from certain countries in continental
Europe and Hong Kong; and domestic services within, and international services
from, the United Kingdom and Sweden. MFS offers private line, high-speed LAN
interconnect data and voice services in each of these markets, subject to
varying governmental authorizations. MFS faces competition in international
service originating in the United States from, among others, AT&T, MCI, Sprint
and WorldCom, Inc., which conducts business under the name "LDDS WorldCom"
("WorldCom"). These companies own significant international transmission
capacity and have established operating agreements with governmental and
private telecommunications providers in Europe, Asia and elsewhere, which
greatly reduce their cost of providing service. In international markets, MFS
competes with the incumbent telecommunications carrier, which generally offers
both local and long distance services and benefits from its status as an
incumbent provider.

Internet-Related Services

The market for data communications services, including Internet access and
on-line services, is extremely competitive. There are no substantial barriers
to entry, and the Company expects that competition will intensify in the
future. The Company believes that its ability to compete successfully depends
on a number of factors, including: market presence; the ability to execute a
rapid expansion strategy; the capacity, reliability and security of its
network infrastructure; ease of access to and navigation of the Internet; the
pricing policies of its competitors and suppliers; the timing of the
introduction of new products and services by the Company and its competitors;
the Company's ability to support industry standards; and industry and general
economic trends. The Company's success in this market will depend heavily upon
its ability to provide high quality Internet connectivity and value-added
Internet services at competitive prices. See "Business--Competition."

Network Systems Integration Services

MFS Network Technologies' primary network systems integration competitors
are the BOCs, long distance carriers, equipment manufacturers and major
independent telephone companies. In certain circumstances, MFS Network
Technologies may also compete with regional and local systems integration and
construction firms for integration and installation projects. In the automatic
vehicle identification market, MFS Network Technologies competes with specific
manufacturers and several of the aerospace defense contractors that have
indicated an intention to shift to commercial markets.

REGULATION

MFS is subject to varying degrees of federal, state, local and international
regulation. In the United States, MFS is most heavily regulated by the states,
especially for the provision of local exchange services. MFS must be
separately certified in each state to offer local exchange and intrastate long
distance services. No state, however, subjects MFS to price cap or rate of
return regulation, nor is MFS currently required to obtain FCC authorization
for installation or operation of its network facilities used for domestic
services. FCC approval is required, however, for the installation and
operation of its international facilities and services. Both the states and
the FCC have determined that non-dominant carriers, such as MFS, are required
to file interstate tariffs on an ongoing basis, setting forth the carrier's
rates and operating procedures. Challenges to these tariffs by third parties
may cause MFS to incur substantial legal and administrative expenses. The FCC
has initiated a rulemaking to eliminate this requirement for all nondominant
carriers such as the Company. In addition, MFS is subject to varying degrees
of regulation in the foreign jurisdictions in which it conducts operations
including authorization for the installation and operation of its network
facilities. Although the trend in federal, state and international regulation
appears to favor increased competition, no assurance can be given that changes
in current or future regulations adopted by the FCC, state or foreign
regulators or legislative initiatives in the United States and abroad would
not have a material adverse effect on MFS. See "Business--Government
Regulation."

15
<PAGE>

Internet-related services are not currently subject to direct regulation by
the FCC or any other U.S. agency, other than regulation applicable to
businesses generally. The FCC recently requested comments on a petition filed
by the America's Carriers Telecommunication Association which requests that
the FCC regulate certain voice transmissions over the Internet as
telecommunications services. Changes in the regulatory environment relating to
the telecommunications or Internet-related services industry could have an
adverse effect on the Company's Internet-related services business. The
Telecom Act may permit telecommunications companies, BOCs or others to
increase the scope or reduce the cost of their Internet access services. The
Company cannot predict the effect that the Telecom Act or any future
legislation, regulation or regulatory changes may have on its business.

RISKS OF EXPANSION AND IMPLEMENTATION

MFS is engaged in the expansion and development of its networks and
services. The expansion and development of its networks will depend on, among
other things, its ability to assess markets, design fiber optic network
backbone routes, install facilities and obtain rights-of-way, building access
and any required government authorizations and/or permits, all in a timely
manner, at reasonable costs and on satisfactory terms and conditions, as well
as its ability to expand, train and manage its growing employee base. Such
expansion has placed, and is expected to continue to place, significant
demands on MFS' management and operational and financial resources. As a
result, there can be no assurance that MFS will be able to expand its existing
networks or install new networks. If MFS is not able to expand its networks or
install or acquire new networks, there will be a material adverse effect on
its growth.

Foreign operations or investment may be adversely affected by local
political and economic developments, exchange controls, currency fluctuations,
royalty and tax increases, retroactive tax claims, expropriation, import and
export regulations and other foreign laws or policies as well as by laws and
policies of the United States affecting foreign trade, taxation and
investment. In addition, in the event of a dispute arising from foreign
operations, MFS may be subject to the exclusive jurisdiction of foreign courts
or may not be successful in subjecting foreign persons to the jurisdiction of
courts in the United States. MFS may also be hindered or prevented from
enforcing its rights with respect to a governmental instrumentality because of
the doctrine of sovereign immunity.

There can be no assurance that laws or administrative practice relating to
taxation, foreign exchange or other matters of countries within which the
Company operates or will operate will not change. Any such change could have a
material adverse effect on the Company's business, financial condition and
results of operations.

RAPID TECHNOLOGICAL CHANGES; DEPENDENCE UPON PRODUCT DEVELOPMENT

The telecommunications industry is subject to rapid and significant changes
in technology. While MFS believes that, for the foreseeable future, these
changes will neither materially and adversely affect the continued use of
fiber optic cable nor materially hinder its ability to acquire necessary
technologies, the effect of technological changes, including changes relating
to emerging wireline and wireless transmission and switching technologies, on
the businesses of MFS cannot be predicted.

The market for the Company's Internet-related products and services is
characterized by rapidly changing technology, evolving industry standards,
emerging competition and frequent new product and service introductions. There
can be no assurance that the Company will successfully identify new product
and service opportunities and develop and bring new products and services to
market in a timely manner. The Company is also at risk from fundamental
changes in the way Internet access services are marketed and delivered. The
Company's Internet service strategy assumes that the TCP/IP protocol,
utilizing fiber optic or copper-based telecommunications infrastructures, will
continue

16
<PAGE>

to be the primary protocol and transport infrastructure for Internet-related
services. Emerging transport alternatives include cable modems and satellite
delivery of Internet information; alternative open protocol and proprietary
protocol standards have been or are being developed. The Company's pursuit of
necessary technological advances may require substantial time and expense, and
there can be no assurance that the Company will succeed in adapting its
Internet services business to alternate access devices, conduits and
protocols.

DEPENDENCE ON KEY PERSONNEL

MFS' business is managed by a number of key executive officers, the loss of
certain of whom, particularly James Q. Crowe, the Company's Chairman of the
Board and Chief Executive Officer, could have a material adverse effect on the
Company. MFS believes that its future success will depend in large part on its
continued ability to attract and retain highly skilled and qualified
personnel. MFS does not have employment agreements with any of its key
executive officers.

RISK THAT MERGER MAY NOT BE CONSUMMATED

The consummation of the Merger is subject to a number of conditions,
including but not limited to (i) the approval by the UUNET stockholders of the
Merger, (ii) the approval by the MFS stockholders of the MFS Share Proposal,
(iii) the absence of any preliminary or permanent injunction or other order by
any federal or state court in the United States which prevents the
consummation of the Merger, (iv) the performance by each party to the Merger
Agreement in all material respects of all of its obligations in the Merger
Agreement, (v) the representations and warranties of each party in the Merger
Agreement being true and correct in all material respects, and (vi) the
receipt of certain specified third party consents. In the event one or more of
the conditions is not satisfied, the Merger may be delayed or the Merger
Agreement may be terminated. In addition, under certain other circumstances,
the Merger Agreement may be terminated by either MFS or UUNET, and may be
terminated at any time by mutual consent of the Boards of Directors of MFS and
UUNET. There can be no assurance that the conditions to consummation of the
Merger will be satisfied, that the Merger will not be delayed or that the
Merger Agreement will not be terminated in accordance with its terms. See
"Description of the Merger."

INTEGRATION OF MFS AND UUNET

MFS believes that the Merger will result in certain benefits. Achieving
these benefits will depend in part upon the integration of the businesses of
UUNET and MFS in an efficient manner, and there can be no assurance that this
will occur. The transition to a combined company will require substantial
attention from management. Neither company's management has experience in
integrating operations on the scale represented by the Merger. The diversion
of management attention and any difficulties encountered in the transition
process could have an adverse effect on the revenues and operating results of
the Company. In addition, there can be no assurance that management of the two
companies will be compatible and the process of combining the two
organizations could cause the interruption of, or a disruption in, the
activities of either or both of the companies' businesses, which could have an
adverse effect on their combined operations. There can be no assurance that
the Company will realize any of the anticipated benefits of the Merger.

ACQUISITION STRATEGY

Both MFS and UUNET have acquired complementary businesses as part of their
business strategies. UUNET is in the process of integrating certain of the
operations, research and development, sales and marketing, finance and
administrative functions of Unipalm Group plc ("Unipalm") and UUNET Canada,
Inc. ("UUNET Canada"). In addition, UUNET has recently acquired 40% of the
equity ownership of EUnet Deutschland GmbH ("EUnet Germany").

17
<PAGE>

After the Merger, it is likely that MFS will continue to acquire
complementary businesses, and any future acquisitions will be accompanied by
the risks commonly associated with acquisitions. These risks include potential
exposure to unknown liabilities of acquired companies or to acquisition costs
and expenses, the difficulty and expense of integrating the operations and
personnel of the companies, the potential disruption to the business of the
Company and potential diversion of management time and attention, the
impairment of relationships with and the possible loss of key employees and
customers as a result of changes in management, incurring amortization
expenses if an acquisition is accounted for as a purchase and dilution to the
stockholders of the Company if the acquisition is made for stock of the
Company. There can be no assurance that products, technologies or businesses
of acquired companies will be effectively assimilated into the business or
product offerings of the Company. In addition, the Company may incur
significant expense to complete acquisitions and to support the acquired
products and businesses. There can be no assurance that any acquired products,
technologies or businesses will contribute to the Company's revenues or
earnings to any material extent. Further, the challenge of managing the
integration of future acquisitions may distract management and may interfere
with the successful integration of MFS and UUNET.

POTENTIAL LIABILITY OF ON-LINE SERVICE PROVIDERS

The law in the United States relating to the liability of on-line services
providers and Internet access providers for information carried on,
disseminated through or hosted on their systems is currently unsettled.
Several private lawsuits seeking to impose such liability are currently
pending. In one case brought against an Internet access provider, Religious
Technology Center v. Netcom On-Line Communication Services, Inc., the United
States District Court for the Northern District of California ruled in a
preliminary phase that under certain circumstances Internet access providers
could be held liable for copyright infringement. The case has not reached
final judgment. The Telecom Act prohibits and imposes criminal penalties and
civil liability for using an interactive computer service for transmitting
certain types of information and content, such as indecent or obscene
communications. This provision has been stayed pending a determination of its
constitutionality. In addition, numerous states have adopted or are currently
considering similar types of legislation. The imposition upon Internet access
providers or Web hosting sites of potential liability for materials carried on
or disseminated through their systems could require the Company to implement
measures to reduce its exposure to such liability, which may require the
expenditure of substantial resources or the discontinuation of certain product
or service offerings. The Company believes that it is currently unsettled
whether the Telecom Act prohibits and imposes liability for any services
provided by the Company should the content or information transmitted be
subject to the statute.

The law relating to the liability of on-line service providers and Internet
access providers in relation to information carried, disseminated or hosted
also is being developed in the United Kingdom and other jurisdictions. The
scope of authority of various regulatory bodies in relation to on-line
services is at present uncertain. The Office of Telecommunications in the
United Kingdom has recently published a consultative document setting out a
number of issues for discussion, including the roles of traditional
telecommunications and broadcasting regulators with respect to on-line
services. The Securities Investment Board is investigating the status of on-
line services and the transmission of investment information over networks
controlled by access providers. Such transmissions may make an access provider
liable for any violation of securities and other financial services
legislation and regulations. Decisions regarding regulation, enforcement,
content liability and the availability of Internet access in other countries
may significantly affect the ability to offer certain services worldwide and
the development and profitability of companies offering Internet and on-line
services in the future. For example, CompuServe Corporation recently removed
certain content from its services worldwide in reaction to law enforcement
activities in Germany, and it has been reported that an Internet access
provider in Germany has been advised by prosecutors that it may have liability
for disseminating neo-Nazi writings by providing access to the Internet where
these materials are available.

18
<PAGE>

The increased attention focused upon liability issues as a result of these
lawsuits, legislation and legislative proposals could affect the growth of
Internet use. While UUNET has insurance and MFS intends to continue such
insurance coverage if the Merger is consummated, it may not be adequate to
compensate the Company in the event UUNET becomes liable for information
carried on or disseminated through its systems. Any costs not covered by
insurance incurred as a result of such liability or asserted liability could
have a material adverse effect on the Company's business, financial condition
and results of operations.

DEPENDENCE UPON NETWORK INFRASTRUCTURE; RISK OF SYSTEM FAILURE; SECURITY RISKS

MFS' success in marketing its services to business and government users
requires that the Company provide superior reliability, capacity and security
via its network infrastructure. The Company's networks are subject to physical
damage, power loss, capacity limitations, software defects, breaches of
security (by computer virus, break-ins or otherwise) and other factors,
certain of which have caused, and will continue to cause, interruptions in
service or reduced capacity for MFS customers. Similarly, UUNET's business
relies on the availability of its network infrastructure for the provision of
Internet access services. Interruptions in service, capacity limitations or
security breaches could have a material adverse effect on the Company's
business, financial condition and results of operations.

VARIABILITY OF QUARTERLY OPERATING RESULTS

As a result of the significant expenses associated with the expansion and
development of its networks and services, MFS anticipates that its operating
results could vary significantly from period to period and such variability
could adversely affect MFS' results of operations. Additional factors
contributing to variability of operating results include the pricing and mix
of services and products sold by the Company, customer terminations of
service, the timing of the expansion of the Company's network infrastructure
domestically and internationally, the timing and costs of marketing and
advertising efforts, and the timing and costs of any acquisitions of
businesses, products or technologies. In addition, MFS' network systems
integration revenues are, and generally will continue to be, dependent upon a
small number of large projects. Accordingly, these revenues are likely to vary
significantly from period to period, and such variability could adversely
affect MFS' results of operations.

STRATEGIC RELATIONSHIP BETWEEN UUNET AND MICROSOFT

In December 1994, UUNET and Microsoft Corporation ("Microsoft") entered into
a strategic relationship for the development, operation and maintenance of a
large-scale high speed dial-up and ISDN TCP/IP access network which is the
primary Internet dial-up network and infrastructure for Microsoft, including
The Microsoft Network. The parties entered into a TCP/IP Local Access Network
Agreement (the "Microsoft Agreement") and a loan agreement under which
Microsoft agreed to lend UUNET up to $26.0 million to cover the anticipated
capital cost of the network equipment. Revenues from Microsoft totaled
approximately 20% and 37% of UUNET's consolidated revenues during the year
ended December 31, 1995 and the quarter ended March 31, 1996, respectively.
The Company expects that UUNET will continue to derive a significant portion
of its revenues from Microsoft for at least the next several years, and the
Microsoft Agreement limits UUNET's ability to enter into similar agreements
for the development of other large-scale dial-up networks prior to March 1997.
Although UUNET has met Microsoft's needs through March 31, 1996, there can be
no assurance that the Company will be able to meet all future deployment
commitments to Microsoft after the Merger. After September 1996, Microsoft may
terminate the Microsoft Agreement if UUNET breaches certain material terms of
the Microsoft Agreement and is unable to cure, thereby causing a sustained
operational failure of the dial-up network. Termination of the Microsoft
Agreement by Microsoft for any reason could result in the loss of all future
revenues from Microsoft and the acceleration of UUNET's obligation to pay to
Microsoft amounts due under the loan agreement. Any such termination, loss or
acceleration or imposition of penalties would have a materially adverse effect
on UUNET's business.

19
<PAGE>

In addition, any regulatory or private party legal challenges to The Microsoft
Network, including those in the United States and Europe which have been
threatened to date, could result in termination or restructuring of the
strategic relationship with Microsoft, which would have a material adverse
effect on the Company. The terms of construction, maintenance and operation
(including the allocation of costs and payment of fees) of international
gateway hubs beyond the initial 14 such hubs are subject to future agreement
between Microsoft and UUNET. UUNET expects that the terms of any funding or
revenues from Microsoft relating to additional international hubs, if any,
will be different from those of the Microsoft Agreement. In addition, UUNET
and Microsoft have an understanding that providers of Internet access services
(such as Post, Telephone and Telegraph Administrations ("PTTs")) will begin to
bear certain of the costs of the 14 international gateway hubs. As this
begins, Microsoft's share of such costs will decrease, and UUNET will become
more dependent upon such providers and their customers for revenues to support
such costs. Microsoft continues to evolve its international strategy for The
Microsoft Network, and its final strategy may differ materially from that
originally anticipated. Although UUNET is Microsoft's primary Internet access
provider, there can be no assurance that Microsoft will obtain additional
Internet network infrastructure or capacity it may require from UUNET, other
than that specified in the Microsoft Agreement. Microsoft has announced a
relationship with MCI under which MCI will resell The Microsoft Network,
Microsoft's Internet Explorer Web browser software and other Microsoft
Internet-related software. Although the terms of the relationship have not
been fully disclosed, this relationship with MCI may allow access to The
Microsoft Network through MCI's dial-up network. Further, Microsoft is
developing relationships with other Internet service providers to resell The
Microsoft Network and the Internet Explorer. As originally planned, Microsoft
is developing relationships with foreign and domestic telecommunications
companies and Internet access providers to resell access to The Microsoft
Network. If Microsoft fully develops these resale relationships, the Company's
revenues may not receive revenues from Microsoft beyond Microsoft's guaranteed
minimum payments. Any failure of such revenues to increase could have a
material adverse effect on UUNET's business, financial condition or results of
operations. See "Business--Internet-Related Services--Microsoft Relationship."

UUNET'S DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY

UUNET relies on other companies to supply certain key components of its
network infrastructure, including telecommunications services and networking
equipment, which, in the quantities and quality demanded by UUNET, are
available only from sole or limited sources. UUNET is also dependent upon LECs
to provide telecommunications services to UUNET and its customers. UUNET has
from time to time experienced delays in receiving telecommunications services,
and there can be no assurance that UUNET will be able to obtain such services
on the scale and within the time frames required by UUNET at an affordable
cost, or at all. Any failure to obtain such services or additional capacity on
a timely basis at an affordable cost, or at all, would have a material adverse
effect on UUNET's business, financial condition and results of operations.
UUNET also is dependent on its suppliers' ability to provide necessary
products and components that comply with various Internet and
telecommunications standards, interoperate with products and components from
other vendors and function as intended when installed as part of the network
infrastructure. Any failure of UUNET's sole or limited source suppliers to
provide products or components that comply with Internet standards,
interoperate with other products or components used by UUNET in its network
infrastructure or by its customers or fulfill their intended function as a
part of the network infrastructure could have a material adverse effect on
UUNET's business, financial condition and results of operations. See
"Business--Internet-Related Services."

TAX NET OPERATING LOSS CARRYFORWARDS

As of December 31, 1995, MFS and UUNET had federal income tax net operating
loss carryforwards ("NOLs") of approximately $420 million and $12 million,
respectively, which expire primarily in years beginning in 2008.

20
<PAGE>

MFS believes that the Merger will cause an "ownership change" within the
meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code") with respect to both MFS and UUNET. Consequently, MFS' and UUNET's NOL
and credit carryovers from periods prior to the Merger will be subject to
annual limitations. Under Section 382, a corporation is only allowed to use a
portion of its NOL and credit carryovers from periods prior to an ownership
change to offset its income from periods subsequent to the ownership change
each year. This yearly limitation (the "Section 382 limitation") is generally
equal to the value of all of the outstanding stock of the corporation
immediately prior to the ownership change multiplied by the "applicable long
term rate" (the applicable rate for an ownership change occurring in May 1996
is 5.68%).

MFS will be required to pay federal income tax in any year in which its
taxable income exceeds the amount of each of the Section 382 limitation plus
any NOL and credit carryovers from years subsequent to the ownership change.
To the extent the Company does not use the full amount of its Section 382
limitation in any year, such unused portion can be used to increase the
Section 382 limitation for subsequent years. Based on the value of MFS and
UUNET prior to the Merger, the amount of NOLs of each company prior to the
Merger and the fact that MFS expects to have significant NOLs in 1996 and
1997, MFS believes that the Section 382 limitation will not have a material
effect on its federal income tax liability.

ANTI-TAKEOVER PROVISIONS IN MFS' CHARTER AND BY-LAWS

MFS' Restated Certificate of Incorporation and By-laws contain provisions
that could delay, defer or prevent a change in control without the approval of
its incumbent Board of Directors. These provisions, among other things, (i)
divide the MFS Board of Directors into three classes, with members of each
class to be elected in staggered three-year terms, (ii) prohibit stockholder
action by written consent in lieu of a meeting, (iii) limit the right to call
special meetings of stockholders and (iv) authorize the MFS Board of Directors
to issue preferred stock in one or more classes or series without any action
on the part of stockholders. Such provision could limit the price that
investors might be willing to pay in the future for shares of MFS Common Stock
and significantly impede the ability of the holders of MFS Common Stock to
replace management. In addition, MFS has adopted a Rights Agreement, dated as
of September 30, 1995, between MFS and Continental Stock Transfer & Trust
Company (the "MFS Rights Plan"), which has certain anti-takeover effects. The
MFS Rights Plan will cause substantial dilution to a person or group that
attempts to acquire MFS on terms not approved by MFS' Board of Directors.
Provisions and agreements that inhibit or discourage takeover attempts could
reduce the market value of the MFS Common Stock. See "Description of MFS
Capital Stock."

MFS has outstanding 15,000,000 shares of Series B Convertible Preferred
Stock (the "Series B Preferred Stock"). Each share of Series B Preferred Stock
is entitled to 10 votes with respect to any and all matters presented to the
MFS stockholders for their action and consideration. The Series B Preferred
Stock is presently convertible into approximately 695,692 shares of MFS Common
Stock. As a result of the special voting rights associated with the Series B
Preferred Stock, the holders of such shares (which would represent
approximately 0.5% of the shares of MFS Common Stock assuming conversion of
such shares) will have the right to exercise approximately 47% of the voting
power of the Company immediately after the Offerings (and approximately 40% of
the voting power of the Company immediately after the consummation of the
Offerings and the Merger). The shares of Series B Preferred Stock, however,
are held subject to an irrevocable proxy that has been granted to the
Secretary and Assistant Secretary of MFS to vote all shares of Series B
Preferred Stock on all matters, other than the election of directors and
matters as to which the holders of Series B Preferred Stock vote as a separate
class, in proportion to the vote of holders of MFS Common Stock. The non-
transferability of the shares of Series B Preferred Stock, as well as the
special voting rights of such shares, may deter or discourage takeover
attempts. See "Description of MFS Capital Stock."

21
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial numbers of shares of MFS Common Stock in the public
market following the Offerings could adversely affect the market price of the
Shares. In connection with the Merger, the Company has filed a registration
statement on Form S-4 with the Commission relating to up to approximately 57.3
million shares of Common Stock to be issued to stockholders of UUNET (the
"Merger Shares"), which shares will represent approximately 27% of the issued
and outstanding shares of MFS Common Stock after giving effect to the
Offerings. In connection with the Merger, following consummation of the
Merger, the Company will file with the Commission a registration statement on
Form S-8 covering approximately 5.7 million shares of MFS Common Stock which
will be issuable to holders of options to acquire UUNET Common Stock upon the
exercise of such options. Except for the Merger Shares acquired by affiliates
of UUNET, all of the Merger Shares will be freely tradable following
consummation of the Merger. Shares held by affiliates of UUNET will be
eligible for resale in accordance with the provisions of Rule 145 under the
Securities Act. Sales by affiliates under Rule 145 are subject to the volume
limitations under Rule 144 as well as certain other limitations under the
Securities Act (which generally limit sales by the affiliate during any 90-day
period to the greater of 1% of the outstanding shares or the average weekly
trading volume during the four calendar weeks preceding the sale). In the
event UUNET stockholders elect to sell a substantial number of the Merger
Shares following consummation of the Offerings, the market price of the Shares
could be adversely affected.

SUBSTANTIAL DILUTION

As a result of the Offerings, persons purchasing Shares in the Offerings
will experience an immediate dilution in net tangible book value per share of
MFS Common Stock. See "Dilution." In addition, the Merger will cause a
reduction in the net tangible book value of the shares of MFS Common Stock
purchased in the Offerings.

22
<PAGE>

USE OF PROCEEDS

The net proceeds from the Offerings are estimated to be $975.8 million
($1,122.4 million if the Underwriters' over-allotment options are exercised in
full) at an assumed Price to Public of $36.00. The Company intends to use
substantially all of the net proceeds from the Offerings to partially fund
certain new initiatives announced by the Company on May 7, 1996, including the
expansion of the Company's International Network Platform and its Internet-
related businesses. The Company does not expect that its capital requirements
will change materially if the Merger is not consummated.

The initiatives announced by the Company on May 7, 1996 consist of (i)
accelerating interconnection of MFS' networks at all LEC Central Offices in
MFS' metropolitan network locations, (ii) deploying 50, up from 25, local
switches, (iii) increasing the number of United States metropolitan areas
served from 65 to 85, (iv) increasing the number of international financial
centers served from 25 to 45, (v) expanding 35 of the Company's existing
metropolitan networks, (vi) constructing or acquiring high capacity intercity
optical fiber links, both domestically and internationally, (vii) offering
Internet protocol dedicated trunk circuits to private Intranet networks, and
(viii) providing local Internet access.

The Company anticipates that implementation of these initiatives including
certain of the Internet-related initiatives will, together with currently
anticipated expenditures, result in total average annual capital expenditures
of approximately $1.0 billion to $1.3 billion over the period of
implementation, which the Company expects to be up to four years. Since a
significant portion of the Company's capital expenditures are success-based
(that is, related directly to revenue growth), actual capital expenditures may
vary significantly from the above range depending on the level of incremental
sales. This range is also subject to a number of factors, including
technological developments, levels of incremental sales and the pace of
implementation, as well as regulatory actions by state, federal and
international authorities, which individually or in the aggregate, could cause
material changes in capital expenditure requirements. The Company cannot
approximate the amount of the proceeds which will be used for any particular
initiative.

If the Merger is terminated by UUNET because of the failure of MFS to meet
certain closing conditions, or if the MFS stockholders do not approve the MFS
Share Proposal, MFS will use a portion of the proceeds to pay UUNET a penalty
of $60.0 million and, at UUNET's option, to purchase 1,551,724 shares of UUNET
Common Stock at an aggregate cost of $90.0 million. See "Description of the
Merger--Termination; Fees and Expenses."

The Company intends to continue to pursue its expansion plans aggressively.
Consistent with its past experience, the Company expects that a significant
portion of its expansion may occur through acquisitions. The consideration for
any acquisition could consist of securities (including shares of MFS Common
Stock), cash or any combination thereof. The Company may acquire public or
private companies and, under appropriate circumstances, may consider the
acquisition of public companies on an unsolicited basis. Except for the
Merger, the Company has no agreement, agreement in principle, understanding or
arrangement with any person to acquire or effect any material acquisition.

Pending application as described above, the net proceeds to the Company will
be invested in short-term, investment grade securities.

23
<PAGE>

DILUTION

At March 31, 1996, the historical net tangible book value of the Company was
$350 million or $2.79 per share of Common Stock. "Historical net tangible book
value per share" represents the Company's net worth less intangible assets of
$405 million divided by 125.6 million shares of MFS Common Stock outstanding
on March 31, 1996. After giving effect to the sale by the Company of 28
million Shares pursuant to the Offerings at an assumed Price to Public of
$36.00 per share and after deducting the underwriting discount and expenses of
the Offerings, the pro forma net tangible book value of the Company at March
31, 1996, would have been $1,326 million, or $8.63 per share of MFS Common
Stock. Such amount represents an immediate increase in pro forma net tangible
book value of $5.84 per share of MFS Common Stock to the existing stockholders
and an immediate dilution to new investors of $27.37 per share of MFS Common
Stock. Purchasers of MFS Common Stock in the Offerings will experience
additional dilution in net tangible book value per share as a result of the
Merger. On a pro forma basis for the Offerings and the Merger at March 31,
1996, and assuming the issuance of approximately 57.3 million shares of MFS
Common Stock in the Merger, the pro forma net tangible book value of MFS
Common Stock after the Offerings and the Merger would have been $6.61 per
share. The following table illustrates the dilution in pro forma net tangible
book value per share to new investors:

<TABLE>
<S> <C> <C>
Public offering price per Share........................... $36.00
Historical net tangible book value per share at March 31,
1996..................................................... $ 2.79
Increase in net tangible book value per share attributable
to net proceeds of the Offerings......................... 5.84
Decrease in net tangible book value per share attributable (2.02)
to the Merger............................................ ------
Pro forma net tangible book value per share after the 6.61
Offerings and the Merger................................. ------
Dilution to new investors................................. $29.39
======
</TABLE>

The foregoing table assumes no exercise of the Underwriters' over-allotment
options to purchase an additional 4,200,000 shares at the Price to Public less
the underwriting discount, and further assumes no exercise of outstanding
options and warrants to acquire additional shares of MFS Common Stock or
conversion of convertible securities. To the extent such options and warrants
are exercised or convertible securities are converted, purchasers of MFS
Common Stock in the Offerings may experience additional dilution in net
tangible book value per share.

24
<PAGE>

CAPITALIZATION

The following table sets forth at March 31, 1996, the actual capitalization
of the Company and, such capitalization as adjusted to reflect the issuance of
the Shares pursuant to the Offerings at an assumed Price to Public of $36.00
per share, on a pro forma basis for the Merger and on such pro forma basis as
adjusted to reflect the issuance of the Shares pursuant to the Offerings and
the Merger. This table should be read in conjunction with the Selected
Consolidated Financial Data, the Consolidated Financial Statements and notes
thereto and Unaudited Pro Forma Consolidated Condensed Financial Statements
and notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------------------------
PRO FORMA
AS PRO AS
ACTUAL ADJUSTED FORMA(1) ADJUSTED
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)

<S> <C> <C> <C> <C>
Long-term debt, net of current
portion....................... $1,255,256 $1,255,256 $1,273,301 $1,273,301
Capital leases................. 31,098 31,098 31,098 31,098
Stockholders' equity
Preferred Stock, $.01 par
value. Authorized 25,000,000
shares:
Series A, 8% cumulative
convertible; issued 95,000
shares.................... 1 1 1 1
Series B, 7 3/4% cumulative
convertible; issued
15,000,000 shares......... 150 150 150 150
Common Stock, $.01 par value.
Authorized 400,000,000
shares; issued 125,619,662
shares actual, 153,619,662
shares as adjusted,
182,867,662 shares pro forma
and 210,867,662 shares pro
forma as adjusted(2)........ 1,255 1,536 1,828 2,109
Additional paid-in capital..... 1,482,442 2,457,921 3,583,362 4,558,841
Deferred charge................ (434) (434) (434) (434)
Foreign currency adjustment.... (875) (875) (875) (875)
Unrealized investment loss..... (647) (647) (647) (647)
Accumulated deficit............ (727,310) (727,310) (727,310) (727,310)
---------- ---------- ---------- ----------
Total stockholders' equity. 754,582 1,730,342 2,856,075 3,831,835
---------- ---------- ---------- ----------
Total capitalization....... $2,040,936 $3,016,696 $4,160,474 $5,136,234
========== ========== ========== ==========
</TABLE>
- --------
(1) Gives effect to the Merger as though it had occurred as of March 31, 1996.
See Note 3 to the "Unaudited Pro Forma Consolidated Condensed Financial
Statements" for adjustments applicable in the event that the Merger is not
consummated.
(2) Based on shares outstanding as of March 31, 1996, and excludes (i) except
for Pro Forma and Pro Forma As Adjusted, approximately 57.3 million shares
of MFS Common Stock issuable in connection with the Merger, (ii) options
to acquire 5.7 million shares of MFS Common Stock issuable in connection
with the Merger, (iii) approximately 28.6 million shares of MFS Common
Stock issuable pursuant to the Company's stock plans and (iv) 21.2 million
shares of MFS Common Stock issuable upon the exercise of warrants and the
conversion of all outstanding shares of preferred stock.

25
<PAGE>

PRICE RANGE OF COMMON STOCK

The MFS Common Stock trades on the Nasdaq National Market under the symbol
"MFST." The following table sets forth the high and low sale prices of the MFS
Common Stock as reported by the Nasdaq National Market for each of the
quarters in the two year period ended December 31, 1995 and for the first two
quarters of 1996, which prices give effect to a 2-for-1 stock split effected
in the form of a stock dividend paid on April 26, 1996.

<TABLE>
<CAPTION>
1994 HIGH LOW
---- ------- -------
<S> <C> <C>
First Quarter............................................ $20.625 $14.000
Second Quarter........................................... 17.000 10.250
Third Quarter............................................ 18.375 12.250
Fourth Quarter........................................... 20.750 16.250
1995
----
First Quarter............................................ 19.500 15.375
Second Quarter........................................... 18.625 14.375
Third Quarter............................................ 24.500 15.875
Fourth Quarter........................................... 26.875 19.125
1996
----
First Quarter............................................ 34.000 23.875
Second Quarter (to June 4, 1996)......................... 39.250 30.625
</TABLE>

On June 4, 1996, the last reported sale price of the MFS Common Stock on the
Nasdaq National Market was $34.75. As of June 4, 1996, there were
approximately 2,100 stockholders of record of the MFS Common Stock.

DIVIDEND POLICY

The Company has not paid any cash dividends on its capital stock. The
Company intends to retain future earnings, if any, to finance the development
and expansion of its businesses and, therefore, does not anticipate paying any
cash dividends in the foreseeable future on its capital stock. The decision
whether to pay cash dividends will be made by the Board of Directors in light
of conditions then existing, including the Company's results of operations,
financial condition and requirements, business conditions and other factors.
Because the Company's principal assets are its investments in the equity
securities of its subsidiaries, its cash flow and consequent ability to pay
cash dividends will be dependent on the earnings of its subsidiaries, the
distribution of those earnings to the Company and other business
considerations of the subsidiaries. In addition, certain agreements to which
the Company is a party limit the payment of dividends or other distributions
on any capital stock of the Company.

During 1995, the Company issued depositary shares, each representing a one
one-hundredth interest in a share of Series A 8% Cumulative Convertible
Preferred Stock, par value $.01 per share (the "Series A Preferred Stock").
Holders of shares of Series A Preferred Stock are entitled to receive
dividends, when, as and if they are declared by the Board of Directors,
accruing at the rate of $2.68 per share per annum, payable quarterly in
arrears on each February 28, May 31, August 31 and November 30. Dividends are
payable in cash or in shares of MFS Common Stock, at the election of the
Company. Certain of the Company's debt agreements restrict the Company's
ability to pay cash dividends, and as a result, the Company does not
anticipate that it will pay cash dividends on the Series A Preferred Stock for
the foreseeable future. The Company paid the dividend on August 31 and
November 30, 1995 and February 28, 1996 in shares of MFS Common Stock and has
announced that it will pay the May 31, 1996 dividend in shares of MFS Common
Stock.

26
<PAGE>

Also during 1995, the Company issued the Series B Preferred Stock. Dividends
on the Series B Preferred Stock accrue at the rate of 7 3/4% per annum and are
payable in cash. Dividends will be paid only when, as and if declared by the
Board of Directors of the Company. Certain of the Company's debt agreements
restrict the Company's ability to pay cash dividends, and as a result, the
Company anticipates that dividends on the Series B Preferred Stock will not be
declared but will continue to accrue. Upon conversion, accrued but unpaid
dividends are payable in cash or shares of MFS Common Stock at the Company's
election.

27
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data for each of the years in the period
1991 to 1995 have been derived from audited historical consolidated financial
statements. The selected consolidated financial data as of and for the three
months ended March 31, 1996 and 1995, have been derived from unaudited
consolidated financial statements of the Company. In the opinion of
management, the unaudited financial statements have been prepared on the same
basis as the MFS Consolidated Financial Statements and include all
adjustments, which consist only of normal recurring adjustments, necessary for
a fair presentation of the financial position and the results of operations
for these periods. Operating results for the three months ended March 31, 1996
are not necessarily indicative of the results that may be expected for the
full year. The development and acquisition by the Company of its networks and
services during the periods reflected materially affect the comparability of
that data from one period to another. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The following
selected consolidated data should be read in conjunction with the MFS
Consolidated Financial Statements and the notes thereto incorporated by
reference and included herein.

<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER 31,
--------------------------- --------------------------------------------------------
MARCH 31,1996 MARCH 31,1995 1995 1994(1) 1993 1992 1991
------------- ------------- ----------- ----------- ----------- ---------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
<CAPTION>
Revenue:
<S> <C> <C> <C> <C> <C> <C> <C>
Telecommunications
services.............. $ 165,590 $ 103,788 $ 498,225 $ 228,707 $ 70,048 $ 47,585 $ 23,158
Network systems
integration........... 20,726 14,552 84,969 58,040 71,063 61,122 14,065
----------- ----------- ----------- ----------- ----------- ---------- ---------
Total.................. 186,316 118,340 583,194 286,747 141,111 108,707 37,223
Costs and expenses:
Operating expenses..... 174,173 119,882 562,300 273,431 102,905 76,667 33,963
Depreciation and
amortization.......... 44,609 29,073 142,496 73,869 34,670 20,544 11,761
General and
administrative........ 34,982 25,941 117,703 75,576 34,989 23,267 18,429
----------- ----------- ----------- ----------- ----------- ---------- ---------
Total.................. 253,674 174,896 822,499 422,876 172,564 120,478 64,153
----------- ----------- ----------- ----------- ----------- ---------- ---------
Loss from operations.... (67,358) (56,556) (239,305) (136,129) (31,453) (11,771) (26,930)
Other income (expense)
net.................... (18,766) (7,252) (27,993) (17,175) 8,464 (792) (1,314)
----------- ----------- ----------- ----------- ----------- ---------- ---------
Loss before income
taxes.................. (86,124) (63,808) (267,298) (153,304) (22,989) (12,563) (28,244)
Income tax benefit
(expense).............. (100) (100) (600) 2,103 7,220 (566) --
----------- ----------- ----------- ----------- ----------- ---------- ---------
Net loss................ (86,224) (63,908) (267,898) (151,201) (15,769) (13,129) (28,244)
Dividends on preferred
stock(2)............... (7,072) -- (15,064) -- -- -- --
----------- ----------- ----------- ----------- ----------- ---------- ---------
Net loss applicable to
common stockholders.... $ (93,296) $ (63,908) $ (282,962) $ (151,201) $ (15,769) $ (13,129) $(28,244)
=========== =========== =========== =========== =========== ========== =========
Loss per share
applicable to common
stockholders(3)........ $ (0.75) $ (0.50) $ (2.21) $ (1.21) $ (0.15) $ (0.15)
=========== =========== =========== =========== =========== ==========
Number of shares(3)..... 125,017,000 128,729,000 127,786,000 124,874,000 105,764,000 88,170,000
=========== =========== =========== =========== =========== ==========
OTHER DATA:
EBITDA(4)............... $ (19,408) $ (27,483) $ (96,809) $ (62,260) $ 3,217 $ 8,773 $(15,169)
Capital expenditures,
including acquisitions
of businesses, net of
cash acquired.......... 153,294 114,426 523,727 576,711 128,651 110,171 92,411
STATISTICAL DATA(5):
Circuits in service(6).. 3,304,345 1,964,872 2,960,766 1,713,430 947,391 589,130 465,420
Buildings connected(7).. 7,420 3,284 5,720 2,754 1,583 1,101 695
Route miles(8).......... 3,320 2,616 3,183 2,405 1,298 858 373
Fiber miles(9).......... 213,149 122,074 199,726 107,919 62,154 38,595 22,982
Switches................ 16 12 16 12 1 -- --
</TABLE>
(Footnotes appear on following page.)

28
<PAGE>

<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------------------------
PRO FORMA AS
ACTUAL AS ADJUSTED (10) PRO FORMA (11) ADJUSTED(12)
---------- ---------------- -------------- ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Networks and equipment.. $1,466,254 $1,466,254 $1,559,515 $1,559,515
Total assets............ 2,347,211 3,322,971 4,537,298 5,513,058
Long-term debt, less
current portion........ 1,255,256 1,255,256 1,273,301 1,273,301
Stockholders' equity.... 754,582 1,730,342 2,856,075 3,831,835
</TABLE>
- --------
(1) Reflects the acquisition of Centex as of May 18, 1994, Cylix as of
November 1, 1994 and RealCom as of November 14, 1994.
(2) Represents dividends paid on shares of Series A Preferred Stock in shares
of MFS Common Stock and dividends accrued on shares of Series B Preferred
Stock. No cash dividends have been paid by the Company. See "Dividends."
(3) See Note 2 to the Consolidated Financial Statements, which describes the
calculation of loss per share.
(4) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation, amortization and non-cash stock-based compensation. EBITDA
is commonly used in the communications industry to analyze companies on
the basis of operating performance. EBITDA is not intended to represent
cash flow for the periods. See Consolidated Statements of Cash Flows.
(5) Information presented as of the end of the period indicated and derived
from non-financial records prepared by the Company which are not audited.
(6) All circuits have been expressed as voice grade equivalent circuits.
(7) Number of buildings connected by Company-owned physical facilities or by
interconnection with another carrier utilizing a leased facility.
(8) Route miles refers to the number of miles of the telecommunications path
in which the fiber optic cables are installed.
(9) Fiber miles refers to the number of route miles installed (excluding
pending installations) along a telecommunications path multiplied by the
number of fibers along that path.
(10) Adjusted to give effect to the receipt of the estimated net proceeds of
the Offerings (at an assumed Price to Public of $36.00 per share),
without giving effect to the Merger. See "Use of Proceeds."
(11) Pro Forma to give effect to the Merger as though it had occurred as of
March 31, 1996, without giving effect to the Offerings. See Note 3 to the
Unaudited Pro Forma Consolidated Condensed Financial Statements for
adjustments applicable in the event that the Merger is not consummated.
The following table presents certain statement of operations and other
data pro forma for the Merger:

<TABLE>
<CAPTION>
PRO FORMA
THREE
MONTHS ENDED
MARCH 31, YEAR ENDED
------------- DECEMBER 31,
1996 1995 1995
------ ------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Total reve-
nue......... $ 228,007 $ 131,899 $ 671,810
Loss from op-
erations.... (172,894) (162,854) (683,476)
Net loss
applicable
to common
stockholders. (198,970) (170,095) (725,321)
Loss per
share....... (1.09) (0.91) (3.92)
EBITDA....... (18,430) (26,849) (109,030)
</TABLE>

(12) Adjusted to give effect to the receipt of the estimated net proceeds of
the Offerings (at an assumed Price to Public of $36.00 per share), giving
effect to the Merger. See "Use of Proceeds."

29
<PAGE>

UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The following unaudited pro forma consolidated condensed financial
statements give effect to the Merger. 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 incorporated by reference or included elsewhere
herein. There is no assurance that the Merger will be consummated. See "Risk
Factors--Risk That Merger May Not Be Consummated."

PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
MFS UUNET
COMMUNICATIONS TECHNOLOGIES, PRO FORMA
COMPANY, INC INC. ADJUSTMENTS PRO FORMA
-------------- ------------- ----------- -----------
<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 amor-
tization............. 44,609 3,948 105,907/(1)/ 154,464
General and adminis-
trative 34,892 3,126 -- 38,018
expenses............. ----------- -------- ---------- -----------
253,674 42,642 104,585 400,901
----------- -------- ---------- -----------
Income (loss) from oper-
ations................. (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 (18,766) (138) -- (18,904)
(expense).......... ----------- -------- ---------- -----------
Income (loss) before in-
come 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 (7,072) -- -- (7,072)
stock.................. ----------- -------- ---------- -----------
Net income (loss) appli-
cable to common stock- $ (93,296) $ 233 $ (105,907) $ (198,970)
holders................ =========== ======== ========== ===========
Weighted average number 125,017,000 57,248,000/(9)/ 182,265,000
of shares outstanding.. =========== ========== ===========
Pro forma net loss per
share applicable to $ (0.75) $ (1.09)
common stockholders.... =========== ===========
</TABLE>

See accompanying notes to pro forma consolidated condensed financial
statements.

30
<PAGE>

PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
MFS UUNET
COMMUNICATIONS TECHNOLOGIES, PRO FORMA
COMPANY, INC. INC. ADJUSTMENTS PRO FORMA
-------------- ------------- ----------- -----------
<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 amor-
tization............. 142,496 8,322 423,628 /(1)/ 574,446
General and adminis-
trative
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 (27,993) 1,812 -- (26,181)
(expense).......... ----------- -------- ---------- -----------
Loss before income tax-
es..................... (267,298) (18,731) (423,628) (709,657)
Income tax (expense) (600) 474 (474)/(5)/ (600)
benefit................ ----------- -------- ---------- -----------
Net loss................ (267,898) (18,257) (424,102) (710,257)
Dividends on preferred (15,064) -- -- (15,064)
stock.................. ----------- -------- ---------- -----------
Net loss applicable to
common $ (282,962) $(18,257) $ (424,102) $ (725,321)
stockholders........... =========== ======== ========== ===========
Weighted average number
of shares outstanding 127,786,000 57,248,000/(6)/ 185,034,000
(after stock split).... =========== ========== ===========
Net loss per share ap-
plicable to $ (2.21) $ (3.92)
common stockholders.... =========== ===========
</TABLE>

See accompanying notes to pro forma consolidated condensed financial
statements.

31
<PAGE>

PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)

<TABLE>
<S> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
MFS UUNET
COMMUNICATIONS TECHNOLOGIES, PRO FORMA
COMPANY, INC. INC. ADJUSTMENTS PRO FORMA
ASSETS -------------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equiva-
lents................ $ 92,588 $ 45,413 $ -- $ 138,001
Marketable securities. 368,266 -- -- 368,266
Accounts receivable 260,860 28,525 -- 289,385
and other assets..... ---------- -------- ---------- ----------
Total current as-
sets............. 721,714 73,938 -- 795,652
Networks and equipment,
at cost................ 1,466,254 93,261 -- 1,559,515
Less accumulated de-
preciation and amor- (245,321) (17,384) -- (262,705)
tization............. ---------- -------- ---------- ----------
Networks and equip-
ment, 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
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable.......... $ 168,235 $ 17,824 $ -- $ 186,059
Other current liabilities. 99,421 38,325 14,400(/2/) 152,146
---------- -------- ---------- ----------
Total current liabili-
ties................. 267,656 56,149 14,400 338,205
Notes payable and long-term
debt,
less current portion....... 1,255,256 18,045 -- 1,273,301
Other liabilities and minor-
ity interest............... 69,717 -- -- 69,717
Stockholders' equity:
Preferred stock, $.01 par
value.
Series A, 8% cumulative
convertible.............. 1 -- -- 1
Series B, 7 3/4% cumula-
tive
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 $2,347,211 $156,278 $2,033,809 $4,537,298
stockholders' equity.... ========== ======== ========== ==========
</TABLE>

See accompanying notes to pro forma consolidated condensed financial
statements.

32
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA-UNAUDITED)

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 of MFS and UUNET 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 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 straight-line 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 in connection with the Merger. The MFS Common
Stock was valued at $34.69 per share for purposes of calculating the
Merger consideration.

NOTE 3: OTHER MATTERS

If the Merger Agreement is not approved, the Company may exercise the option
to purchase shares of UUNET Common Stock representing approximately 60% of the
UUNET Common Stock from certain holders of UUNET Common Stock. Should the
Company exercise the Option, the pro forma consolidated condensed balance
sheet at March 31, 1996, would include goodwill of $1,390,805 (rather than
$2,178,445), other assets of $214,901 (rather than $266,391), MFS Common Stock
of $1,610 (rather than $1,828) and additional paid-in capital of $2,713,258
(rather than $3,583,362).

Under certain conditions, which include the failure of MFS Stockholders to
approve the Merger, the Company may be required to pay a penalty of $60,000
and at UUNET's option, be required to purchase 1,551,724 shares of newly
issued UUNET Common Stock for $90,000, and, at UUNET's option, to provide a
maximum of $100,000 of certain data communications services to UUNET at MFS'
cost for five years. Should the Company be required to pay the penalty and
purchase the shares of newly issued UUNET Common Stock, the pro forma
consolidated condensed balance sheet at March 31, 1996, would include an
investment of $90,000 (subject to valuation at fair value), MFS Common Stock
of $1,255 (rather than $1,828), additional paid-in capital of $1,482,442
(rather than $3,583,362) and an increase in accumulated deficit of $60,000.

33
<PAGE>

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

OVERVIEW

The Company was founded in 1987 and commenced operations in 1988. The
Company operates through its subsidiaries in two business segments,
telecommunications services and network systems integration. The
telecommunications segment is comprised of the MFS Telecom Companies, which
provide services to large customers through MFS Telecom and MFS Datanet, the
MFS Intelenet Companies, which provide services to small and medium sized
customers through MFS Intelenet, MFS International, which provides services to
customers internationally and Global Network Services, which manages the
Company's network platform. The network systems integration segment provides
services primarily through MFS Network Technologies. Through December 31,
1995, the Company's growth, including its capital expenditure requirements,
acquisition financing and working capital, has been funded by two common stock
offerings in 1993, the offering of 9 3/8% Senior Discount Notes (the "1994
Senior Discount Notes") in 1994, a preferred stock offering in 1995 and, prior
to 1993, by capital contributions by Kiewit Diversified Group Inc., the
Company's former majority stockholder ("KDG"). In January 1996, the Company
issued 8 7/8% Senior Discount Notes (the "1996 Senior Discount Notes").

Telecommunications Services

The Company's telecommunications services predominately result in monthly
recurring revenues. The Company provides these services in an expanding number
of major metropolitan areas. As of February 1996, the Company provides
services on its networks, or through the resale of services, or has network
operations under development in 52 major metropolitan areas in the United
States, Europe and Asia.

The development of the Company's businesses and the installation and
expansion of its networks require significant expenditures, a substantial
portion of which is incurred before the realization of revenues. These
expenditures, together with the associated early operating expenses, result in
negative cash flow until an adequate customer base is established. As this
customer base grows, incremental revenues are added with minimal additional
expense, providing significant contributions to cash flow. The Company also
incurs ongoing capital expenditures with respect to both existing and new
networks which are directly related to the installation of new revenue
producing circuits. These costs vary based on the specific type of circuit
installed and the location of the customer.

The MFS Telecom Companies. Through MFS Telecom, the Company provides
dedicated special access and private line service to business and government
end users. These services are provided primarily over digital fiber optic
telecommunications networks that the Company has either installed or acquired
and subsequently expanded. The networks also establish a platform that can be
used to provide additional enhanced voice, data and video services to its
customers. MFS Telecom also offers local switched services to its customers in
New York utilizing the Company's integrated switching platform.

Through MFS Datanet, the Company provides high-speed data communications
services to business and government users over an international ATM network
which the Company believes to be the most advanced in the world. MFS Datanet
uses the Company's networks for customers located in buildings where the
Company already provides special access, private line or switched services,
requiring significantly less capital expenditures because data communications
customers can, to a certain extent, utilize existing fiber optic networks,
electronics and building equipment rooms. The Company will incur additional
capital costs for the installation of new revenue producing circuits. The
level of costs may vary based upon the type of circuit installed and the
location of the customer.

34
<PAGE>

The MFS Intelenet Companies. Through MFS Intelenet, the Company provides a
single source for integrated local and long distance telecommunications
services and facilities management to small and medium sized businesses. By
utilizing its existing networks and facilities, the Company minimizes capital
expenditures for transmission facilities. However, significant capital costs
have been and will be incurred for switching equipment, equipment maintained
at customer locations and additional building wiring costs.

MFS International. Through MFS International, the Company provides
telecommunication services to business and government users in several major
European metropolitan areas as well as outbound international service from the
United States and Europe. The Company is offering services over its networks,
or through resale of international telecommunications services in London,
England, Frankfurt, Germany, Paris, France, Stockholm, Sweden and Zurich,
Switzerland and Hong Kong.

Global Network Services. Through Global Network Services, the Company
manages the operation of its network and future network development in order
to offer the services described above in a cost effective manner.

The incurrence of significant initial development and roll out expenses in
advance of anticipated future revenues will continue to affect the operating
results of the Telecommunications Services segment. Anticipated sales growth
in the telecommunication services segment will also continue to drive
increasing deployment of electronic equipment required to initiate customer
service.

Network Systems Integration Services

The Company, primarily through MFS Network Technologies, designs, engineers,
develops and manages the installation of the Company's new fiber optic
networks and network expansions. In 1991, the Company began to offer network
systems integration services to third parties. These services have been
characterized by significant revenues concentrated in a relatively small
number of large projects for third parties. In 1993, the Company also began to
offer services related to Intelligent Transportation Systems ("ITS"). The
Company recognizes revenue based upon the amount of network systems
integration services performed. The amount of the Company's network systems
integration services performed can vary on a quarterly basis depending upon
individual customer contract requirements.

35
<PAGE>

RESULTS OF OPERATIONS

The following table presents revenue, income (loss) from operations and
EBITDA from each of the Company's reportable business segments for the periods
indicated:

<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------ ------------------------------
1996 1995 1995 1994 1993
-------- -------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue:
Telecommunications servic-
es....................... $165,590 $103,788 $ 498,225 $ 228,707 $ 70,048
Network systems integra- 20,726 14,552 84,969 58,040 71,063
tion..................... -------- -------- --------- --------- --------
Total................. $186,316 $118,340 $ 583,194 $ 286,747 $141,111
======== ======== ========= ========= ========
Income (loss) from opera-
tions:
Telecommunications servic-
es....................... $(65,994) $(55,349) $(234,055) $(131,216) $(34,933)
Network systems integra- (1,364) (1,207) (5,250) (4,913) 3,480
tion..................... -------- -------- --------- --------- --------
Total................. $(67,358) $(56,556) $(239,305) $(136,129) $(31,453)
======== ======== ========= ========= ========
EBITDA:(1)
Telecommunications servic-
es....................... $(18,838) $(26,872) $ (94,108) $ (59,006) $ (1,162)
Network systems integra- (570) (611) (2,701) (3,254) 4,379
tion..................... -------- -------- --------- --------- --------
Total................. $(19,408) $(27,483) $ (96,809) $ (62,260) $ 3,217
======== ======== ========= ========= ========
</TABLE>
- --------
(1) EBITDA consists of earnings (losses) before interest, income taxes,
depreciation, amortization and non cash stock-based compensation. EBITDA
is commonly used in the communications industry to analyze companies on
the basis of operating performance. EBITDA is not intended to represent
cash flows for the periods. See Consolidated Statements of Cash Flows.

THREE MONTHS ENDED MARCH 31, 1996 VS. THREE MONTHS ENDED MARCH 31, 1995

Telecommunications Services

Telecommunications services revenue increased to $165.6 million in the three
months ended March 31, 1996 from $103.8 in the three months ended March 31,
1995, an increase of $61.8 million, or 60%. Revenues in the three months ended
March 31, 1996 and March 31, 1995 for each of the key elements of the
telecommunications segment were as follows:

<TABLE>
<CAPTION>
1996 1995 INCREASE
------ ------ --------
<S> <C> <C> <C>
MFS Telecom Companies.............................. $ 62.9 $ 40.0 $22.9
MFS Intelenet Companies............................ 79.5 58.9 20.6
MFS International.................................. 23.2 4.9 18.3
------ ------ -----
$165.6 $103.8 $61.8
====== ====== =====
</TABLE>

The increases resulted from increased market penetration of all
telecommunications services of the Company. The especially large increase in
revenues, measured on a percentage basis, from MFS International reflects
strong sales in the United Kingdom and a growing revenue base in continental
Europe.

Since the end of 1993, the Company has separately tracked the MFS Telecom
results of operations for the 14 network cities and expansions that were
materially complete at year end 1993 (the "Base Cities Competitive Access
Operations"). These Base Cities Competitive Access Operations produced revenue
of $39.6 million in the three months ended March 31, 1996 and $28.8 million in
the three months ended March 31, 1995, an increase of $10.8 million, or 38%.
The increase in revenue from these operations resulted primarily from
increased market penetration in these cities. Due to a

36
<PAGE>

modification of the Company's internal organization within the
telecommunications services segment it will become increasingly less
meaningful to separate the Base Cities Competitive Access Operations from
other operations because of the increasing commonality of revenues and costs
within Base Cities Competitive Access Operations, expansions and types of
services. For this reason, the Company may discontinue separate disclosure for
these Base Cities Competitive Access Operations in the future. The Company
continues to review other modifications to its financial disclosures which the
Company believes will provide more meaningful information about its
activities.

Annualized monthly recurring revenue increased to approximately $700 million
at March 31, 1996 from approximately $430 million at March 31, 1995, an
increase of 63%. The increase reflects primarily the sales of additional
services to current and new customers in existing and new markets. Monthly
recurring revenue represents monthly service charges billable to
telecommunications services customers as of the last day of the period
indicated, but excludes non-recurring revenues for certain one-time services,
such as installation fees or equipment charges.

Telecommunications services operating expenses increased to $156.4 million
or 94% of segment revenue in the three months ended March 31, 1996 from $107.5
million or 104% of segment revenue in the three months ended March 31, 1995,
an increase of $48.9 million. The change includes an increase of $41.5 million
in circuit charges, including local and long distance service costs, and
personnel costs necessary to support the Company's growth. The remaining
increase of $7.4 million relates to increased rent, utilities, and other costs
incurred to support the increased revenue base. Telecommunications services
operating expenses consist of costs associated directly with network
operations, including salaries, sales commissions and related employee
benefits, rent expense, right-of-way fees, other network costs and local and
long distance service costs.

Telecommunications services depreciation and amortization expense increased
to $44.0 million in the three months ended March 31, 1996 from $28.5 million
in the three months ended March 31, 1995, an increase of $15.5 million or 54%.
The increase is primarily related to the expanded fixed asset base of the
Company's networks, which includes increasing amounts of electronic equipment
with depreciable lives that are shorter than the Company's other major fixed
asset categories.

Telecommunications services general and administrative expenses increased to
$31.2 million in the three months ended March 31, 1996 from $23.2 million in
the three months ended March 31, 1995, an increase of $8.0 million or 34%. The
change is primarily due to an increase of $7.2 million in personnel costs.
Management of the Company expects general and administrative services to
continue to increase during 1996 as the Company expands its services.

Telecommunications EBITDA loss decreased to $(18.8) million in the three
months ended March 31, 1996 from $(26.9) million in the three months ended
March 31, 1995. EBITDA in 1996 and 1995 for each of the key elements of the
telecommunications segment were as follows:

<TABLE>
<CAPTION>
1996 1995 CHANGE
------ ------ ------
<S> <C> <C> <C>
MFS Telecom Companies.............................. $ 11.9 $ 3.5 $8.4
MFS Intelenet Companies............................ (20.8) (21.1) 0.3
MFS International.................................. (9.9) (9.3) (0.6)
------ ------ ----
$(18.8) $(26.9) $8.1
====== ====== ====
</TABLE>

The increase at the MFS Telecom Companies reflects the high incremental
margins inherent in the dedicated special access and private line services
primarily provided over the Company's own facilities. The small decrease in
EBITDA loss at MFS Intelenet reflects the additional EBITDA margins provided
by increased revenues resulting from a sales strategy that emphasized the
provision of local switch services in advance of the implementation of the
Telecommunications Act of 1996 offset by the additional costs incurred to
expand the integrated local and long distance telecommunications service

37
<PAGE>

markets including normal increases in operating expenses. The small increase
in EBITDA loss at MFS International reflects the additional EBITDA margins
provided by increased revenues offset by the additional costs incurred to
expand the Company's international service, particularly in new markets.

The Base Competitive Access Operations produced EBITDA of $20.5 million
before parent company allocations in the three months ended March 31, 1996 and
$12.8 million in the three months ended March 31, 1995, an increase of $7.7
million, or 60%. For reasons noted earlier, the Company may discontinue
separate disclosure for these Base Cities Competitive Access Operations in the
future. The Company continues to review other modifications to its financial
disclosures which the Company believes will provide more meaningful
information about its activities.

Network Systems Integration Services

Third party revenue from services offered by the Company's network systems
integration services segment increased to $20.7 million in the three months
ended March 31, 1996 from $14.6 million in the three months ended March 31,
1995, an increase of $6.1 million or 42%. The increase is primarily due to an
increase in the amount of revenue recognized from projects involving ITS
services and to a lesser extent other network systems integration projects.

Network systems integration services operating expenses increased to $17.8
million in the three months ended March 31, 1996 from $12.4 million in the
three months ended March 31, 1995, an increase of $5.4 million or 44%. The
increase is primarily due to the increased level of operating expenses related
to the projects noted above, including the continuing development and
investments in ITS service projects. Network systems integration operating
expenses consist of direct costs associated with the network systems
integration projects.

Network systems integration services general and administrative expenses
increased to $3.7 million in the three months ended March 31, 1996 from $2.8
million in the three months ended March 31, 1995, an increase of $.9 million
or 32%. The increase reflects the increased third party work noted above.

Network systems integration services EBITDA loss was $(.6) million in the
three months ended March 31, 1996 which matches the EBITDA loss for the three
months ended March 31, 1995. This resulted from the increased operating and
general administrative expenses offsetting increased revenues.

Other Income (Expense)

Other income (expense) increased to $18.8 million in the three months ended
March 31, 1996 from $7.3 million of other expense in the three months ended
March 31, 1995. The increase in other expense resulted primarily from
additions to interest expense incurred in connection with the issuance of the
1996 Senior Discount Notes. This increase was partially offset by increased
interest income from the investment of the proceeds of the 1996 Senior
Discount Notes.

Income Taxes

The income tax expense of $.1 million in the three months ended March 31,
1996 and 1995, resulted from estimated state and foreign tax liabilities.

Net Loss

Net loss increased to $86.2 million in the three months ended March 31, 1996
from $64.0 million in the three months ended March 31, 1995, an increase of
$22.2 million. The increase resulted primarily from increased depreciation,
amortization and interest expense.

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<PAGE>

Backlog

The network systems integration and facilities management services segment
had third party backlog of approximately $198 million at March 31, 1996.
Backlog consists of firm contracts less revenue recognized to date by the
Company.

YEAR ENDED 1995 VS. YEAR ENDED 1994

Telecommunications Services

Telecommunications services revenue increased to $498.2 million in 1995 from
$228.7 in 1994, an increase of $269.5 million, or 118%. Revenues in 1995 and
1994 for each of the key elements of the telecommunications segment were as
follows:

<TABLE>
<CAPTION>
1995 1994 INCREASE
------ ------ --------
<S> <C> <C> <C>
MFS Telecom Companies.............................. $191.8 $109.5 $ 82.3
MFS Intelenet Companies............................ 266.0 115.8 150.2
MFS International.................................. 40.4 3.4 37.0
------ ------ ------
$498.2 $228.7 $269.5
====== ====== ======
</TABLE>

The increases resulted from increased market penetration of all
telecommunications services of the Company. The increase at MFS Intelenet
Companies is also related to the acquisitions of Centex Telemanagement, Inc.,
("Centex"), which was acquired in May 1994, and RealCom Office Communications,
Inc., ("RealCom"), which was acquired in November 1994. The increase at MFS
Telecom Companies is also related to the acquisition of Cylix Communications
Corporation ("Cylix"), which was acquired in November 1994.

During 1994 and 1995 the Company separately tracked the MFS Telecom results
of the Base Cities Competitive Access Operations. These Base Cities
Competitive Access Operations produced revenue of $129.7 million in 1995 and
$93.9 million in 1994, an increase of $35.8 million, or 38%. The increase in
revenue from these operations resulted primarily from increased market
penetration in these cities.

Annualized monthly recurring revenue increased to approximately $625 million
at December 31, 1995 from approximately $380 million at December 31, 1994, an
increase of 64%. The increase reflects primarily the sales of additional
services to current and new customers in existing and new markets and
additional market penetration resulting in new customers. Monthly recurring
revenue represents monthly service charges billable to telecommunications
services customers as of the last day of the period indicated, but excludes
non-recurring revenues for certain one-time services, such as installation
fees or equipment charges.

Telecommunications services operating expenses increased to $488.7 million
or 98% of segment revenue in 1995 from $225.5 million or 99% of segment
revenue in 1994, an increase of $263.2 million or 117%. The increase is
primarily due to an increase of $137.8 million in network operating expense
directly related to the increase in telecommunications service levels for
existing and new customers. Network operating expenses primarily represents
the portion of total operating expenses that are paid to third parties for
local and long distance service costs, including right-of-way fees. The
increase in total telecommunications services operating expenses also includes
an increase of $66.4 million in personnel costs necessary to support the
Company's revenue growth and expanded operations. The remaining increase of
$59.0 million in total telecommunications services operating expense relates
to increased rent, utilities and other costs incurred to support the Company's
growth. Telecommunications services operating expenses consist of local and
long distance service costs and costs associated directly with network
operations, including salaries, sales commissions and related employee
benefits, rent expense, right-of-way fees and other network costs.

39
<PAGE>

Telecommunications services depreciation and amortization expense increased
to $139.9 million in 1995 from $72.2 million in 1994, an increase of $67.7
million, or 94%. The increase is primarily related to the expanded fixed asset
base of the Company's networks, which includes increasing amounts of
electronic equipment with depreciable lives that are shorter than the
Company's other major fixed asset categories, and an increase of $13.4 million
in amortization of intangible assets resulting from the acquisitions of
Centex, RealCom and Cylix.

Telecommunications services general and administrative expenses increased to
$103.6 million in 1995 from $62.2 million in 1994, an increase of $41.4
million, or 67%. The increase is primarily due to increases of $14.3 million
in personnel costs and $8.9 million in legal and other professional services
costs necessary to support the Company's growth. The remaining increase of
$18.2 million related primarily to rents and other costs necessary to support
the expanding services of the Company.

Telecommunications services EBITDA decreased to $(94.1) million in 1995 from
$(59.0) million in 1994, a decrease of $35.1 million. EBITDA in 1995 and 1994
for each of the key elements of the telecommunications segment were as
follows:
<TABLE>
<CAPTION>
1995 1994 CHANGE
------ ------ ------
<S> <C> <C> <C>
MFS Telecom Companies............................ $ 25.9 $ 10.9 $ 15.0
MFS Intelenet Companies.......................... (78.5) (48.9) (29.6)
MFS International................................ (41.5) (21.0) (20.5)
------ ------ ------
$(94.1) $(59.0) $(35.1)
====== ====== ======
</TABLE>

The decrease reflects the increasing operating and general and administrative
costs noted earlier primarily caused by the Company's growth, including the
expansion of MFS Intelenet, MFS Datanet and MFS International. The Base
Competitive Access Operations produced EBITDA of $61.8 million before parent
company allocations in 1995 and $35.8 million in 1994, an increase of $26.0
million, or 73%.

Network Systems Integration Services

Third party revenue from services offered by the Company's network systems
integration services segment increased to $85.0 million in 1995 from $58.0
million in 1994, an increase of $27.0 million, or 47%. The increase is
primarily due to an increase in the amount of revenue recognized from the
network systems integration projects for Bay Area Rapid Transit and other
projects involving network systems integration and ITS services, which were
partially offset by decreases in revenue recognized from other network systems
integration projects. Services that the network systems integration segment
provided to MFS Telecom, which are eliminated from revenue and cost in the
Consolidated Financial Statements, amounted to $137.0 million in 1995 as
compared to $97.8 million in 1994.

Network systems integration services operating expenses increased to $73.6
million in 1995 from $48.0 million in 1994, an increase of $25.6 million, or
53%. The increase is primarily due to the increased level of operating
expenses for the network systems integration projects and to several projects
involving ITS services noted earlier. Network systems integration services
operating expenses consist of direct costs associated with the third party
network systems integration projects.

Network systems integration services general and administrative expenses
increased to $14.0 million in 1995 from $13.3 million in 1994, an increase of
$.7 million, or 5%. The increase reflects primarily an increase in costs
related to the increased third party work noted above.

Network systems integration services EBITDA increased to $(2.7) million in
1995 from $(3.3) million in 1994, an increase of $.6 million. The increase is
primarily due to the increased third party work noted above.

40
<PAGE>

Other Income (Expense)

Other income (expense) increased to $(28.0) million in 1995 from $(17.2)
million in 1994. The increase resulted primarily from decreased interest
income from investments, due primarily to lower investment balances during
1995.

Income Taxes

The income tax expense of $.6 million for 1995 resulted from state and
foreign tax liabilities. The income tax benefit of $2.1 million for 1994
resulted from the utilization of tax benefits recognized for losses incurred
during 1994 that reduced the net deferred tax liability.

Net Loss

Net loss increased to $267.9 million in 1995 from $151.2 million in 1994, an
increase of $116.7 million. The increase resulted primarily from increased
depreciation and amortization, the increased operating losses incurred in
expanding MFS Intelenet, MFS Datanet and MFS International and decreased
interest income.

Backlog

The network systems integration segment had backlog of approximately $163
million at December 31, 1995. Backlog consists of firm contracts less revenue
recognized to date by the Company.

YEAR ENDED 1994 VS. YEAR ENDED 1993

Telecommunications Services

Telecommunications services revenue increased to $228.7 million in 1994 from
$70.0 million in 1993, an increase of $158.7 million, or 227%. Over 70% of the
increase relates to the acquisitions of Centex, RealCom and Cylix during 1994.
The remaining increase resulted primarily from increased market penetration of
all other telecommunications services of the Company. The Base Competitive
Access Operations produced revenue of $18.7 million in the fourth quarter of
1993, $19.8 million in the first quarter of 1994, $22.3 million in the second
quarter, $25.0 million in the third quarter and $26.8 million in the fourth
quarter.

Annualized monthly recurring revenue increased to approximately $380 million
at December 31, 1994 from approximately $81 million at December 31, 1993, an
increase of 369%. The increase reflects primarily the operations of Centex,
RealCom and Cylix and the sales of additional services to current and new
customers in existing and new markets, and to a lesser extent, additional
market penetration resulting in new customers. Excluding acquisitions,
annualized monthly recurring revenue would have been approximately $150
million at December 31, 1994, an increase of 84% over the year end 1993
amount.

Telecommunications services operating expenses increased to $225.5 million
or 99% of segment revenue in 1994 from $47.7 million or 68% of segment revenue
in 1993, an increase of $177.8 million, or 373%. The increase is primarily due
to the operating expenses of the Centex, RealCom and Cylix operations which
were acquired in 1994. The remaining increase includes higher costs associated
with expansion activities of MFS Intelenet, MFS Datanet and MFS International
and higher costs associated with new and expanded networks.

Telecommunications services depreciation and amortization expense increased
to $72.2 million in 1994 from $33.8 million in 1993, an increase of $38.4
million, or 114%. The increase is primarily

41
<PAGE>

related to the expanded fixed asset base of the Company's networks and an
increase of $13.5 million in amortization of intangible assets resulting from
the acquisitions of Centex and RealCom in 1994. Depreciation and amortization
relating to MFS Datanet and MFS Intelenet also increased $6.0 million,
excluding acquisitions.

Telecommunications services general and administrative expenses increased to
$62.2 million in 1994 from $23.0 million in 1993, an increase of $39.2
million, or 170%. The increase is primarily due to the acquisitions of the
Centex, RealCom and Cylix operations which were acquired in 1994. The
remaining increase is related to higher costs associated with expanding MFS
Intelenet, MFS Datanet and MFS International.

Telecommunications services EBITDA decreased to ($59.0) million in 1994 from
($1.2) million in 1993. The decrease reflects the additional costs incurred
developing the services of MFS Datanet, MFS Intelenet and MFS International
offset by improving EBITDA generated by the MFS Telecom metropolitan area
networks. EBITDA for the Base Competitive Access Operations was $35.8 million
in 1994 before parent-company allocations. The Base Competitive Access
Operations produced EBITDA of $5.9 million before parent-company allocations
in the fourth quarter of 1993, $6.3 million in the first quarter of 1994, $8.0
million in the second quarter, $10.1 million in the third quarter and $11.4
million in the fourth quarter. EBITDA margin for these operations improved
from 31.7% for the last quarter of 1993 to 42.6% for the last quarter of 1994.
MFS Intelenet, MFS Datanet and MFS International generated EBITDA of ($87.2)
million in 1994 and ($22.4) million in 1993, a decrease of $64.8 million.

Network Systems Integration

Third party revenue from services offered by the Company's network system
integration segment decreased to $58.0 million in 1994 from $71.1 million in
1993, a decrease of $13.1 million, or 18%. The decrease is primarily due to a
decrease in the amount of revenue recognized from the network systems
integration project for the State of Iowa and to an increased focus on the
design and construction of the Company's own networks. Services that the
network systems integration segment provided to MFS Telecom, which are
eliminated from revenue and cost in the Consolidated Financial Statements,
amounted to $97.8 million in 1994 as compared to $44.9 million in 1993.

Network systems integration services operating expenses decreased to $48.0
million in 1994 from $55.2 million in 1993, a decrease of $7.2 million, or
13%. The decrease is primarily due to the decreased level of operating
expenses for the network systems integration project for the State of Iowa,
which was partially offset by increases in expenses recognized from other
network systems projects.

Network systems integration services general and administrative expenses
increased to $13.3 million in 1994 from $12.0 million in 1993, an increase of
$1.3 million, or 11%. The increase reflects primarily the costs of additional
employees, travel and consultants associated with the segment's increased
marketing and proposal activity, including activity related to ITS services.

Network systems integration services EBITDA decreased to ($3.3) million in
1994 from $4.4 million in 1993. The decrease is primarily due to decreased
operating margins from network system integration projects and to the
increased marketing and proposal activity related to ITS services.

Other Income (Expense)

Other income (expense) decreased to $17.2 million of other expense in 1994
from $8.5 million of other income in 1993. The decrease resulted primarily
from increased interest expense associated with the issuance of Senior
Discount Notes in January 1994, offset by increased interest income from the
investment of the proceeds of the debt issue.

42
<PAGE>

Income Taxes

The income tax benefit of $2.1 million in 1994 resulted from the utilization
of tax benefits recognized for losses incurred during 1994 that reduced the
net deferred tax liability.

Net Loss

Net loss increased to $151.2 million in 1994 from $15.8 million in 1993, an
increase of $135.4 million. The increase resulted primarily from the increased
operating losses incurred in developing single-source telecommunications
services and high-speed date communications, increased interest expense and
increased depreciation and amortization.

Backlog

The network systems integration segment had backlog of approximately $127
million at December 31, 1994.

LIQUIDITY AND CAPITAL RESOURCES

The Company's total assets have increased from $5.0 million at December 1988
to $2.3 billion at March 31, 1996. The Company's growth was funded by capital
contributions from its former majority stockholder, KDG, until an initial
public offering in 1993. Since that public offering, the Company has funded
its growth through a combination of debt and equity financing including, most
recently, a debt offering in January 1996 of the 1996 Senior Discount Notes.
As of March 31, 1996, the Company's current assets of $721.7 million,
including cash and marketable securities aggregating $460.9 million, exceeded
current liabilities of $267.7 million, providing working capital of $454.0
million. Network and equipment, net of depreciation, comprise $1.2 billion of
total assets.

The Company's operating activities used net cash of $52.4 million in the
three months ended March 31, 1996 and $21.3 million in the three months ended
March 31, 1995. The increase in cash used by operating activities was
primarily due to the increased loss from operations incurred expanding the
Company's services and an increase in cash used supporting increased levels of
accounts receivable and other assets which is partially offset by increased
depreciation, amortization and non-cash interest expense.

At March 31, 1996, the Company had approximately $840 million of available
liquidity, including cash, marketable securities and unused lines of credit.

During the first quarter of 1996, the Company's capital expenditures, which
are primarily for the construction of networks and the purchase of related
equipment, were $153 million, including acquisitions and deferred costs,
compared to $114 million in the first quarter of 1995.

On May 7, 1996, the Company announced that it intends to undertake certain
initiatives designed to take advantage of opportunities created by changes in
telecommunications laws and the rapid development of Internet-based
communications networks. These initiatives involve increasing the number of
cities served, expanding its networks in existing cities, constructing and
acquiring its own intercity high capacity network, accelerating central office
interconnection, deployment of additional switches, and providing high-speed
local Internet access.

Expenditures for the initiatives are subject to the Company's review of a
number of factors including cost of any additional capital required,
technological developments and market conditions. In addition, each initiative
may be implemented in whole or in part, and independently of any other
initiative, ensuring that the Company retains maximum financial and operating
flexibility. The Company anticipates that implementation of these initiatives
including certain of the Internet-related initiatives, will, together with
currently anticipated expenditures, result in total average annual capital
expenditures of approximately $1.0 billion to $1.3 billion over the period of
implementation, which the Company expects to be up to four years. Since a
significant portion of the Company's capital expenditures are success-based
(that is, related directly to revenue growth), actual capital expenditures may
vary

43
<PAGE>

significantly from the above range depending on the level of incremental
sales. This range is also subject to a number of factors, including the pace
and extent of network development, levels of incremental sales, as well as
regulatory actions by state, federal and international authorities, which,
individually or in the aggregate, could cause material changes in capital
expenditure requirements. The proceeds of the Offerings will be used to fund a
portion of these expenditures. See "Use of Proceeds." The Company expects to
fund capital requirements through existing resources, internally generated
funds and additional debt or equity financing as appropriate.

MERGER WITH UUNET

The Company announced that it has executed the Merger Agreement with UUNET.
Under the terms of the Merger Agreement, which includes a fixed conversion
ratio, each share of UUNET Common Stock will be converted into 1.777776 shares
of MFS Common Stock. The transaction value is approximately $2 billion based
on the Company's stock price at the date of the announcement. The Company
intends to utilize purchase accounting to record the transaction and, as a
result, will incur substantial amortization charges for the next five years.
The Merger Agreement was unanimously approved by the members of the Board of
Directors of each company present. In addition, stockholders of UUNET owning
approximately 60% of the outstanding shares of UUNET Common Stock and
stockholders of MFS owning approximately 12% of the outstanding shares of MFS
Common Stock prior to the Offerings have committed to vote in favor of the
Merger.

OTHER MATTERS

As evidenced by the Merger Agreement, the Company from time to time
evaluates acquisitions in pursuit of its business strategy, either as an
alternative to constructing networks, adding customers, or to the introduction
of services that complement existing and/or planned services. Such
acquisitions may be significant in size and could use a substantial portion of
the Company's available cash.

From time to time, the Company has had discussions with other communications
entities concerning the establishment of possible strategic relationships,
including transactions involving substantial acquisitions, combinations and
equity investments in the Company or one of its subsidiaries. In addition,
certain acquisitions may provide the Company with the opportunity to acquire
an established customer base. The Company intends to consider appropriate
opportunities to establish strategic relationships.

ACCOUNTING FOR STOCK-BASED COMPENSATION

In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting
for Stock-Based Compensation. SFAS 123 encourages entities to adopt a fair
value based method of accounting for employee stock compensation plans,
however it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting. Under the
intrinsic value based method, many companies, including MFS, have not
recognized compensation cost for many of their stock compensation plans.

The Company believes that the fair value method of accounting more
appropriately reflects the substance of the transaction between an entity that
issues stock options, or other stock-based instruments, and its employees;
that is, an entity has granted something of value to an employee (the stock
option or other instrument) generally in return for their continued employment
and services. The Company believes that the value of the instrument granted to
employees should be recognized in financial statements because nonrecognition
implies that either the instruments have no value or that they are free to
employees, neither of which is an accurate reflection of the substance of the
transaction. Although the recognition of the value of the instruments results
in compensation expense in an entity's financial statements, the expense
differs from other common compensation expenses in that these charges will not
be settled in cash, but rather through issuance of common stock.

44
<PAGE>

The Company has introduced certain changes to its stock-based compensation
plans, including a new option plan for key executive employees which
ultimately have value to the employee only if the Company's stock price
outperforms the S&P 500. The Company granted approximately 450,000 options
under the new option plan on January 1, 1996, and anticipates that additional
grants will be made on a quarterly basis. The Company believes that the
adoption of the standard will result in material non-cash charges to
operations in 1996 and thereafter. The amount of the non-cash charge will be
dependent upon a number of factors, including the number of options granted
and the fair value estimated at the time of grant.

EFFECTS OF INFLATION

Inflation has not had a significant effect on Company operations. However,
there can be no assurance that inflation will not have a material effect on
the Company's operations in the future.

45
<PAGE>

BUSINESS

INTRODUCTION

MFS is an integrated communications provider ("ICP") of local and long
distance telecommunications services and certain Internet-related services to
business and government end users. The Company provides services by utilizing
its International Network Platform in the United States, Western Europe and
Asia. As the first ICP to focus on business and government customers, the
Company believes it is uniquely positioned to take advantage of technical
regulatory and market changes which promote demand for an integrated set of
communications services.

The Company's strategy is to become the premier provider of communications
services to business and government end users. The Company believes business
and government end users have distinct communications service requirements,
including maximum reliability, consistent high quality, responsive customer
service and continuous attention to service enhancement and new service
development. The Company believes it has multiple advantages over its
competitors as a result of the Company's: (i) focus on business and government
end users; (ii) expertise in developing and operating highly reliable,
advanced digital fiber optic networks which offer substantial transmission
capacity; (iii) emphasis on providing comprehensive and responsive customer
service; (iv) International Network Platform that serves customers with
multiple offices in key international business centers; (v) network
development plan which helps assure an efficient evolution from a voice-
oriented, circuit switched network to an IP Packet switched network; (vi) plan
to develop new services, including voice service to be provided over an IP
Packet switched network; and (vii) ability to bundle local, long distance
telecommunications services and Internet-related services provided over an
end-to-end network controlled by the Company.

As part of the implementation of its IP Packet switched network and
Internet-based service offering plans, the Company entered into the Merger
Agreement with UUNET pursuant to which UUNET will become a wholly owned
subsidiary of MFS. See "Description of the Merger."

The Company is organized as a holding company and operates through its
subsidiaries in two business segments: telecommunications services and network
systems integration.

Telecommunications Services

. The MFS Intelenet Companies serve the needs of medium and small
businesses by providing integrated local and long distance switched
telecommunications and telecommunication management services and a variety
of value-added services including voice mail, calling card and specialized
call accounting.

. After the Merger, through UUNET the Company will provide a wide range of
Internet-related services tailored to the needs of business and government
users, including a comprehensive range of dial-up and dedicated Internet
access options, consulting services and Web server hosting and integration
services.

46
<PAGE>

Network Systems Integration

MFS Network Technologies provides network systems integration for MFS and
third parties, which desire to deploy sophisticated networks, including
intelligent transportation systems, voice and data networks, interactive
distance learning networks, security systems and combined cable television-
telephone networks.

RECENT DEVELOPMENTS

The pace of regulatory and technical change in the telecommunications
industry has continued to accelerate. The Telecom Act was signed into law on
February 8, 1996, effectively creating, among other things, a national
template under which the Company's services may be provided on a more equal
basis with incumbent local telephone companies once the Telecom Act is
implemented. Technical change has also been dramatic, particularly with
respect to Internet-related products and services, as a rapidly growing amount
of information available on both the Internet and on privately managed
"intranets" is made increasingly accessible with advanced software and
hardware. MFS has responded to these developments with several new
initiatives.

The Telecommunications Act of 1996

The Telecom Act has a number of provisions that affect the Company's
operations in ways that are difficult to predict with precision. The Company
believes that the Telecom Act is generally pro-competitive and will, on
balance, benefit the Company by, among other things, opening local exchange
markets to competition, preempting anti-competitive state laws and granting
the Company regulatory status more equal with that of the incumbent local
telephone companies. The Company believes the following attributes of the
Telecom Act will have certain positive effects on the Company's operations.

. Market access. Opening all U.S. markets to local competition.

. Reciprocal compensation. Ensuring that other carriers, both local and
long distance, compensate the Company for calls made to its customers or,
in the alternative, not charge the Company for calls made by its customers
to the customers of other carriers. The Company believes that such
reciprocal compensation arrangements will improve its operating margins
over time.

The Company has moved quickly to capitalize on the anticipated benefits of
the Telecom Act. MFS has contacted 21 LECs to initiate the process of
implementing the "co-carrier" provisions of the Telecom Act as quickly as
possible and has established a co-carrier task force consisting of
approximately 100 personnel dedicated to facilitate the negotiation and
implementation of co-carrier arrangements with the LECs. On May 22, 1996, MFS
announced that it and Ameritech had entered into a comprehensive co-carrier
agreement which involves the networks of the respective companies in the
entire Ameritech marketing region, including Illinois, Indiana, Michigan, Ohio
and Wisconsin.

New Infrastructure Initiatives

In response to the regulatory developments embodied in the Telecom Act,
increased demand for high bandwidth communications capacity, and the Company's
success in its previous business development initiatives, MFS announced on May
7, 1996 a series of initiatives which, when implemented, will expand the
Company's geographic presence and service offerings in a large number of U.S.
metropolitan areas and certain international financial centers. The Company
anticipates that

47
<PAGE>

implementation of these initiatives including certain of the Internet-related
initiatives discussed below, will, together with currently anticipated
expenditures, result in total average annual capital expenditures of
approximately $1.0 billion to $1.3 billion over the period of implementation,
which the Company expects to be up to four years. Since a significant portion
of the Company's capital expenditures are success-based (that is, related
directly to revenue growth), actual capital expenditures may vary
significantly from the above range depending on the level of incremental
sales. This range is also subject to a number of factors, including regulatory
developments, technological developments and market conditions. In addition,
each initiative may be implemented in whole or in part and independently of
any other initiative, ensuring that the Company retains maximum financial and
operating flexibility.

Construction and Expansion of Networks. The Company plans to expand the
number of U.S. metropolitan areas served to approximately 85 over the next
four years, an increase from the previously planned target of approximately 65
metropolitan areas, 45 of which are currently in operation or under active
development. In addition, the Company plans to construct approximately 35
major expansions of existing networks. The actual number of new metropolitan
areas and network expansions constructed may vary materially from these
targets. Taken together with the aforementioned regulatory developments, MFS
believes that, upon completion, these initiatives will enable the Company to
sell its services in metropolitan areas currently containing approximately 70%
of the non-farm business employment in the United States.

Intercity High Capacity Network. The Company intends to build or acquire a
significant portion of its U.S. and international high speed intercity and
transoceanic fiber optic networks, to be deployed over a two to four year
period. In accordance with this strategy, MFS has begun construction of
intercity connections along the Eastern seaboard with the intent of linking
the Company's metropolitan networks from Washington, D.C. to Boston.
Deployment of intercity networks with high speed SONET (or internationally,
the equivalent SDH standard) equipment is expected to lower the cost of long
distance connections and, in combination with MFS' high capacity local
networks, enable the Company to provide a range of new Internet-related
services including, over time, high quality voice and video communications
service. The pace of construction and number of connections actually built
will depend on a number of factors, including availability of rights-of-way,
market conditions, and the availability of certain high speed SONET services
from other carriers, which could serve as an alternative to the construction
of such connections. The Company currently leases certain medium bandwidth
(DS-3 or equivalent) international long distance connections from other
providers, the cost of which represents a significant portion of the Company's
network expense.

Central Office Interconnection and Switch Deployment. The Company plans to
interconnect at LEC central offices in all its network metropolitan areas and
plans to deploy approximately 25 additional switches over the 25 previously
planned. The Telecom Act mandates that incumbent LECs throughout the U.S.
enter into arrangements with competitors such as MFS for central office
collocation and unbundling of local services. The Company believes that
implementing these pro-competitive policies creates a unique opportunity to
expand the Company's offering of combined local and long distance services
through interconnection with local exchange carriers.

Internet-Related Initiatives

The Company believes the Internet is one of the most important developments
in the communications industry in decades. The recent rapid development of the
Internet, along with Internet-

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<PAGE>

related technologies, products and services (especially intranet
applications), will continue to stimulate accelerated growth in demand for
communications bandwidth. MFS believes IP Packet switching will, over time,
replace large portions of the circuit switched voice network as the primary
vehicle for business communications due to the efficient use of bandwidth and
the significantly lower transmission costs associated with IP Packet
switching. The amount of data transmitted over the Internet backbone has grown
very rapidly as a result of expanded Internet use and the increasing
complexity of information delivered via the Internet. Currently, Web pages
available on the Internet frequently include graphics and, in some cases,
sound and video, which require the transfer of more data to the user's
computer than do comparable text-only pages. See "Business--Communications
Industry Overview--Internet."

Given the Internet's rapid pace of growth, MFS believes that speed to market
also will be a major competitive advantage. On May 7, 1996, the Company
announced that it has undertaken several initiatives designed to augment its
Internet-related service offerings, including increasing and accelerating
network development and expansions, procurement of high-speed local loop
circuits, control of intercity high capacity fiber optic links discussed above
and, as announced on April 30, 1996, the Company's planned merger with UUNET.

The Proposed Merger. On April 29, 1996, MFS and UUNET entered into the
Merger Agreement. If the Merger is consummated, UUNET will become a wholly
owned subsidiary of MFS. See "Risk Factors--Risk that Merger May Not Be
Consummated" and "Description of the Merger Agreement."

UUNET is a leading worldwide provider of a comprehensive range of Internet
access options, applications and consulting services to businesses,
professionals and on-line service providers. MFS believes that the Merger will
(i) allow the Company to expand its communications service offerings to
include UUNET's existing array of Internet-related services oriented toward
the needs of business and government customers, (ii) provide the Company with
additional technical expertise in configuring and managing complex IP Packet
switched networks and (iii) over time, allow the Company to offer new services
(including voice and video communications services) utilizing UUNET's Internet
technology expertise and MFS' broadband, end-to-end networks. In addition, MFS
believes that the combined entity can, over time, improve profitability as a
result of (a) reduction in UUNET's "local loop" network costs (which UUNET
estimates to be approximately 40% of its "cost of revenues" in North America
for 1996) by utilizing available capacity on MFS' local networks, (b) receipt
of terminating access payments, or a reduction in cost of providing dial-up
Internet access, as mandated by the Telecom Act, (c) reduced cost of intercity
transport capacity purchased or leased from others as a result of increased
volume and migration of UUNET traffic to Company-owned facilities, and (d)
incremental sales from offering UUNET services combined with MFS services to
the customers of UUNET and the Company.

49
<PAGE>

Based on the number of shares of UUNET Common Stock outstanding at April 26,
1996, the Company expects to issue an aggregate of approximately 57.3 million
shares of MFS Common Stock in the Merger. Based on the closing price of the
MFS Common Stock on the day preceding the announcement of the Merger, the
stockholders of UUNET will receive shares of MFS Common Stock in the Merger
valued at approximately $2 billion.

As a condition to entering into the Merger Agreement, MFS required certain
UUNET stockholders to enter into the Stock Option Agreement pursuant to which
such stockholders agreed to vote their shares of UUNET Common Stock in favor
of the approval of the Merger Agreement and granted irrevocable proxies in
favor of MFS to vote all of such stockholders' shares of UUNET Common Stock
(equal to approximately 60% of the issued and outstanding shares of UUNET
Common Stock). These stockholders also granted MFS an option (the "Option") to
purchase, under certain circumstances, all of such stockholders' shares of
UUNET Common Stock for the Exchange Ratio. Such stockholders have sole voting
and investment power with respect to all the UUNET Common Stock held of record
by them and therefore have sufficient voting power, without the vote of any
other holder of UUNET Common Stock, to determine the outcome of the vote on
the proposal to approve the Merger Agreement and any related transactions that
may come before the UUNET Special Meeting. Accordingly, by virtue of such
stockholders' ownership of approximately 60% of the outstanding UUNET Common
Stock, the proposal to adopt the Merger Agreement will be adopted without the
need of the vote of any other stockholders. See "Description of the Merger."

As a condition to entering into the Merger Agreement, UUNET required certain
MFS stockholders, all of whom are directors of MFS, to enter into the MFS
Voting Agreement pursuant to which such MFS stockholders granted irrevocable
proxies in favor of UUNET to vote all of such stockholders' shares of MFS
Common Stock in favor of the MFS Share Proposal of MFS Common Stock in
connection with either the Merger or the Option. As of April 29, 1996, the
number of shares of MFS Common Stock subject to the irrevocable proxies equals
approximately 12% of the issued and outstanding shares of MFS Common Stock
prior to the Offerings. See "Description of the Merger."

COMMUNICATIONS INDUSTRY OVERVIEW

The communications industry can be divided into two categories: the
telecommunications industry and the Internet.

Telecommunications Industry

Prior to the settlement in 1982 of antitrust litigation which resulted in
the break-up of AT&T in 1984 (the "Divestiture"), AT&T, sometimes referred to
as the Bell System, largely monopolized telephone service in the United
States. After the Divestiture regulatory changes and technological
developments began to make it economically possible for companies (primarily
entrepreneurial enterprises) to compete for segments of the telephone
business.

As part of the Divestiture, seven local exchange holding companies were
created to offer services in geographically defined areas called local access
and transport areas ("LATAs"). These Regional Bell Operating Companies
("RBOCs") were separated from the long distance provider, AT&T, resulting in
the creation of two distinct market segments: local exchange and interexchange
long distance. The Divestiture provided for direct, open competition in the
interexchange long distance segment.

The terms of the Divestiture did not expressly address competition in the
local exchange market. Nonetheless, several factors served to promote the
emergence of competition in the local exchange market, including: (i) customer
desire for an alternative to the LEC monopoly, which desire grew rapidly and
was spurred in part by the development of competitive activities in the long
distance market; (ii) technological advances in the transmission of data and
video requiring greater capacity and reliability

50
<PAGE>

levels than copper-based LEC networks were able to accommodate; (iii) a
monopoly position and rate or pricing structure which provided little
incentive for the LECs to upgrade their networks; and (iv) the development of
fiber optics and digital electronic technology, (such as synchronous optical
network ("SONET")), which combined the ability to transmit data and video at
high speeds and greatly increased capacity.

The first competitors in the local exchange market, designated as
"competitive access providers" or "CAPs" by the FCC, were established in the
mid-1980s. In New York City, Chicago and Washington, D.C., newly formed
companies, provided non-switched services, known as special access and private
line, by installing fiber optic facilities connecting long distance carriers'
POPs within a metropolitan area and connecting end users (primarily large
businesses and government agencies) with long distance carriers. CAPs used the
substantial capacity and economies of scale inherent in fiber optic cable to
offer customer service that was generally less expensive and of higher quality
than could be obtained from the LECs due in part to the LECs' more antiquated
copper-based facilities. In addition, CAPs offered shorter installation and
repair intervals and improved reliability in comparison to the LECs.

Most of the early CAPs were entrepreneurial companies operating limited
networks in the central business districts of major cities in the United
States where the highest concentration of voice and data traffic, including
long distance carrier traffic, were found. Initially, CAPs offered three
varieties of special access and private line services:

. Long distance carrier to long distance carrier connections (special
access), which use high capacity lines to transmit traffic between
facilities of a long distance carrier or to transmit traffic from one long
distance carrier to another long distance carrier;

. End user to long distance carrier connections (special access), which
generally use medium to high capacity lines to connect businesses to long
distance carriers; and

. End user to end user connections (private line), which generally use low
to medium capacity lines to connect an end user's local offices.

As CAPs proliferated during the latter part of the 1980s, regulators in some
states and at the federal level issued rulings which favored increased
competition and sought to open markets to new entrants. These rulings allowed
CAPs to offer a number of new services, including, in certain states in the
early and mid-1990s, a broad range of local exchange services.

As certain companies deployed local circuit switches and began to offer a
limited set of local switched services, a new term, Competitive Local Exchange
Carriers ("CLEC") was created to distinguish these companies from CAPs, which
generally do not offer switched services. In order to offer reasonably
ubiquitous local switched services in a particular area, CLECs (and the
Company) must negotiate complex interconnection agreements with the incumbent
LEC, dealing with such issues as network interconnection, billing, directory
listing, number portability, provisioning, network signaling and many other
issues. Prior to the passage of the Telecom Act, MFS had reached such
agreements with several large telecommunications companies. The Telecom Act
mandates that more comprehensive and, from MFS' perspective, generally more
favorable, interconnection agreements be negotiated between competitors and
incumbent local phone companies. The Telecom Act further conditions Bell
Operating Company entry into long distance service within their existing
service territory on, among other things, successful completion of such
negotiations or failing successful negotiations, an arbitrated arrangement
mandated by state regulators.

The Company currently offers CLEC services in 14 metropolitan areas in seven
states. In addition, the Company has, for some time, combined long distance
service with its local offerings and intends to continue to offer a
comprehensive set of local and long distance services in additional
geographical markets as it is able to negotiate agreements successfully with
incumbent local phone companies.

51
<PAGE>

The Company refers to itself as an ICP to distinguish itself from CLECs that
do not offer long distance service.

Internet

The Internet is a global collection of computer networks cooperating to
enable commercial organizations, educational institutions, government agencies
and individuals to communicate electronically, access and share information
and conduct business. The Internet originated with the ARPAnet, a restricted
network started in 1969 by the United States Department of Defense Advanced
Research Projects Agency to provide efficient and reliable long-distance data
communications among the disparate computer systems used by government funded
researchers and organizations. Unlike the public and private
telecommunications networks that are managed by businesses, government
agencies and other entities, the Internet is a cooperative interconnection of
many such public and private networks. The networks that comprise the Internet
are connected in a variety of ways, including by the public switched telephone
network and by high speed, dedicated leased lines. Communications on the
Internet are enabled by TCP/IP, an inter-networking standard that enables
communication across the Internet regardless of the hardware and software
used.

Recent technological advances, including increases in microprocessor speed
and the development of easy-to-use graphical user interfaces, combined with
cultural and business changes, have led to the Internet being integrated into
the daily activities of individuals and the operations and strategies of
commercial organizations. For example, a growing number of employees within
organizations have access to corporate networks, thereby increasing the amount
of electronic communication both within and between organizations. In
addition, the rapid growth of the installed base of home PCs equipped with
communication devices such as modems has created the ability to communicate
electronically from home. These technological, cultural and business trends
have led to an increase in the number of on-line services and Internet access
providers. More recently, the development of World Wide Web technology and
associated easy-to-use software has made the Internet easier to navigate and
more accessible to a larger number of users and for a broader range of
applications.

While there has been significant media interest in use of the Internet by
consumers, the Company believes business and professional organizations
currently represent a more significant percentage of Internet use. These
organizations increasingly are recognizing that the Internet can enhance
communications, both among their geographically distributed locations and
employees, and with their business partners and customers. In addition,
businesses are realizing that the Internet can enable many applications which
were previously unavailable or cost-prohibited. For example, small and medium-
sized businesses can establish and maintain a global presence, and market and
distribute their products and services electronically.

Despite growing interest in the many commercial uses of the Internet, many
businesses have been deterred from purchasing Internet access services for a
number of reasons, including inconsistent quality of service, a lack of wide
availability of cost-effective high speed options, a limited number of local
access points for corporate users, inability to integrate business
applications on the Internet, the need to deal with multiple and frequently
incompatible vendors, inadequate protection of the confidentiality of stored
data and other information moving across the Internet and a lack of tools to
simplify Internet access and use.

COMMUNICATIONS SERVICES MARKET

The communications services market can be divided into two basic categories:
traditional, circuit switched and dedicated voice oriented services; and
packet switched services compatible with Internet standards. Traditional,
circuit switched and dedicated voice oriented services in the United States
can be further divided into long distance services and local exchange
services.

52
<PAGE>

Traditional Telecommunications Service Market

Long Distance Services. A long distance telephone call can be envisioned as
consisting of three segments. Starting with the originating customer, the call
generally travels along a local exchange network to a long distance carrier's
POP. At the POP, the call is combined with other calls and sent along a long
distance network to a POP on the terminating customer's local network. The
call is then sent from this POP along a local exchange network to the
terminating customer. Long distance carriers generally provide only the
connection between the two local exchange networks and pay access charges to
LECs for originating and terminating calls.

The following diagram illustrates the typical long distance call.

[INSERT DIAGRAM]

The long distance service market has experienced increased competition since
the late 1970s, and new entrants have obtained a combined market share of
approximately 40 percent. Certain services provided by the Company through MFS
Intelenet and MFS Datanet entail the resale of long distance switched and
private line service.

Local Exchange Services. A local call is one that by definition does not
require the services of a long distance carrier and does not cross exchange
boundaries. In general, the LECs connect end user customers within an exchange
and also provide the local portion of most long distance calls, and LECs
generate revenue from end user customers and from long distance carriers,
which must pay access charges for the use of local exchange networks. Before
the entrance of CAPs, the local exchange markets operated with virtually no
competition.

The market for local exchange services consists of a number of distinct
service components. These service components are defined by specific
regulatory tariff classifications including: (i) local network services, which
generally include basic dial tone charges and private line services; (ii)
network access services, which consist of access charges received by LECs from
long distance carriers for the local portion of long distance telephone calls;
(iii) long distance network services, which include the variable portion of
charges received by LECs for intraLATA long distance calls; and (iv)
additional value added services such as caller identification, voice mail and
call waiting.

Prior to the passage of the Telecom Act, the Company could compete
effectively for only certain of the service components listed in the preceding
paragraph and in only a limited number of states. However, the Company
currently believes that, over time, it will be able to offer a comprehensive
range of local and long distance services in any area it chooses to serve.

53
<PAGE>

The following diagram illustrates an ICP local and long distance network:

[INSERT DIAGRAM]

International. Historically, the European telecommunications environment was
a closed market consisting almost exclusively of government owned and operated
PTTs. Recently, however, the regulatory framework in Europe has begun to
change and European countries have begun to privatize their telecommunication
carriers. The European Union in 1990 issued a directive to its member states
to liberalize telecommunication services other than switched voice services by
opening their monopoly markets. The European Union further proposed that by
July 1996 most member states allow facilities based competition for
liberalized services.

Internet Services. The Company believes that the Internet services market is
growing very rapidly. However, the Company is unaware of any definitive
estimate of market size and is unable to make an estimate.

Network Systems Integration. The network systems integration market consists
of the design, engineering, development and installation of communications
networks and systems for a wide variety of end users, including
telecommunications companies and other business and government users. The
network systems integration market is an early stage, rapidly growing market
due to technological developments, primarily in fiber optic and electronics,
which allow for more efficient transmission of data, voice and video traffic.
While the Company believes that network systems integration provides
significant opportunities, the Company is unable to estimate with any degree
of certainty the size of the potential market.

INTERNATIONAL NETWORK PLATFORM

Communications networks can be divided into discrete categories by function,
with relatively well defined interfaces between each function. The
transmission function consists of physical media such

54
<PAGE>

as fiber optic cable coupled with transmission equipment to convert voice,
data or video traffic to an appropriate signal (e.g. optical signals in the
case of fiber optics) for transmission along the physical media. At the
terminus of the transmission path, the transmission equipment converts the
signal back to its original form. The transmission function (also sometimes
referred to as the transmission network) can be used to connect users in a
point-to-point dedicated fashion (called a dedicated circuit or private line)
or to connect switches.

Generically, the switching function is used to avoid the cost of connecting
every communication user to every other user with dedicated circuits. By
connecting each user to a device which, on demand, ensures that information is
switched or routed to the intended recipient, each user need only be served by
a single transmission path connected to the switching device.

In the U.S. and globally, communications users are connected by a relatively
uniform and standard transmission platform consisting of interconnected
transmission networks owned by a variety of entities, including MFS. However,
two different types of switching infrastructures have been relatively widely
deployed, the traditional voice oriented circuit switched network and newer
packet switched networks such as the Internet.

Transmission Network. The Company provides communications services by
utilizing a transmission network which consists of Company-owned facilities
and capacity leased from other carriers both in the United States and
internationally. The Company-owned portion of the transmission network
consists of metropolitan area networks of fiber optic cables, transmission
equipment and associated wiring and equipment. The Company's backbone
transmission equipment is generally based on a standard called SONET in the
United States or a comparable standard called Synchronous Digital Hierarchy
(SDH) in networks deployed internationally.

The fiber optic cable utilized in the Company's networks typically contains
from 12 to 144 optical fiber strands, each of which is capable of providing
multiple telecommunications channels or "circuits". Depending on transmission
electronics, a single pair of glass fibers on the Company's network currently
can transmit, utilizing available SONET and SDH transmission equipment, up to
129,024 simultaneous two way voice conversations. These transmission protocols
can also be used to carry data and video signals.

A pair of copper wires generally can carry a maximum of 24 simultaneous
voice conversations. Although the LECs and foreign telecommunications carriers
have traditionally used copper wire in their networks, they currently are
deploying fiber optic cable to supplement or upgrade portions of their copper-
based networks, particularly in areas served by the Company. The Company
expects that continuing developments in telecommunications equipment will
increase the capacity of each optical fiber, thereby providing even greater
capacity at relatively low incremental cost.

Customer building locations are connected to the Company's transmission
networks by extensions to one of a number of physical rings of fiber optic
cable, which originate and terminate at the Company's central nodes. Signals
are generally sent through the network simultaneously on both primary and
alternate protection paths. Most buildings served have a discrete Company
presence (referred to as a "remote hub") located in the building. Within each
building, Company-owned internal wiring generally connects the remote hub to
the customer premises. Customer equipment is connected to Company-provided
electronic equipment generally located in the remote hub where customer
transmissions are digitized, combined and converted to an optical signal. The
traffic is then transmitted through the network to the Company's central node
where originating traffic can be reconfigured for routing to its ultimate
destination.

55
<PAGE>

The following table illustrates the growth of the Company's transmission
network.

<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
MARCH 31, -----------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Circuits in Service(1)............ 3,304,345 2,960,766 1,713,430 947,391 589,130
Buildings Connected(2)............ 7,420 5,720 2,754 1,583 1,101
Route Miles(3).................... 3,320 3,183 2,405 1,298 858
Fiber Miles(4).................... 213,149 199,726 107,919 62,154 38,595
</TABLE>
- --------
(1) All circuits have been expressed as voice grade equivalent circuits.
(2) Number of buildings connected by Company-owned physical facilities or by
interconnection with another carrier utilizing a leased facility.
(3) Route miles refers to the number of miles of the telecommunications path
in which the fiber optic cables are installed.
(4) Fiber miles refers to the number of route miles installed (excluding
pending installations) along a telecommunications path multiplied by the
number of fibers along that path.

Circuit Switching Platform. Circuit switching is a relatively mature
technology which was originally developed to displace human operators who
manually connected users engaging in voice conversations. The connections are
made for the duration of the call and dedicate a fixed amount of capacity,
whether that capacity is utilized or not.

The amount of capacity dedicated is 4000 hertz or, if digitally encoded,
64,000 kbps. In recent times, circuit switched connections have been utilized
for a wide variety of applications beyond voice calling, including fax, data
transmission and Internet access. The vast majority of telecommunications
services revenues is derived from circuit switched traffic.

The Company has currently deployed 18 circuit switches, 16 of which are
combined local and long distance switches and two of which are international
gateway switches which enable voice grade connections between users in
countries utilizing different technical standards.

The Company intends to deploy a total of approximately 50 combined local and
long distance switches in the United States. Deployment of circuit switches in
other countries depends on regulatory developments which the Company is unable
to predict with any precision at this time.

Packet Switching Platform. Packet switching is, relative to circuit
switching, a fairly new technology. The most widely implemented version of
packet switching, which employs a standard called Transmission Control
Protocol/Internet Protocol (TCP/IP), is found in the Internet. Under this
standard, voice, data, or video information is divided into pieces and
additional information, including the network address of the recipient, is
attached. These strings of information are called "packets" and are of
variable length depending on the type of information transmitted. Packets are
sent from originator to recipient over the same kind of transmission network
used by circuit switching. However, unlike this older standard, packet
switching does not dedicate capacity to each connection between end users.
Instead, packet switching shares available transmission capacity among
multiple end users and end user packets are intermixed within that capacity.
Originating transmission paths are connected to devices called routers which
read the address attached to each packet. Packets are then sent along on an
available, uncongested transmission path in the general direction of the
recipient, in accordance with "rules" programmed into routers. Thus,
individual packets, even though part of the same communications to the same
user, may take different paths through the transmission network.

The Company believes that packet switching has certain advantages over
circuit switching including: the ability to mix voice, data and video; the
ability to transmit information which requires higher capacity connections
than available through the traditional circuit switched network; and the
potential to transmit information at lower costs.

56
<PAGE>

The following table illustrates the relative cost advantage of the IP Packet
switched Internet over other alternatives for certain business data
transmissions.

COST OF DELIVERY FOR A 42 PAGE DOCUMENT

<TABLE>
<CAPTION>
NEW YORK TO: NEW YORK LOS ANGELES TOKYO COMMENTS
- ------------ -------- ----------- ------ -----------------------------
<S> <C> <C> <C> <C>
Internet/(1)//(2)/... $0.095 $0.095 $0.095 2 minutes at 9600 baud
America Online/(1)/.. $0.147 $0.147 $0.147 2 minutes at 9600 baud
U.S. Mail............ $ 3.00 $ 3.00 $ 7.40 first class/air mail
Federal Express...... $15.50 $15.50 $26.25 overnight letter
AT&T (peak).......... n/a $ 9.86 $28.83 31 minute fax at 14,400 baud;
CustomeNet Service
AT&T (off-peak)...... n/a $ 6.88 $28.09 31 minute fax at 14,400 baud;
CustomeNet Service
NYNEX (peak)......... $ 0.44 n/a n/a 31 minute fax at 14,400 baud;
day rates
NYNEX (off-peak)..... $ 0.16 n/a n/a 31 minute fax at 14,400 baud;
night rates
</TABLE>
Source: North River Ventures--August 1995.
- --------

/(1)/ Includes the Company's estimate of $0.081 for New York City local metered
phone charges.

/(2)/ Based on 60 hours of Internet access at a flat rate of $25.00 per month.

While the costs presented above are shown with specificity, there are a
large number of factors which influence actual transmission costs. Among the
factors which could influence one or more of the above costs are the form of
the transmitted data, the amount of time required to transmit the data, the
type and cost of hardware utilized, software costs, local access charges, one-
time setup charges, monthly service charges, corporate discounts and other
related charges or discounts in effect at any given time. In addition, there
are other inherent differences between the alternatives, such as the form of
the information transmitted, reliability of transmission, and security. These
factors reduce the comparability of the alternatives and may result in
transmission costs which vary significantly from those noted above.

While the Company believes TCP/IP packet switching has certain advantages
over circuit switching, TCP/IP based networks currently have a number of
relative disadvantages including lack of quality of service guarantees,
potential security issues and difficulty in transmitting information such as
voice or video which must arrive at the recipient with little delay through
the network and with individual packets in order.

UUNET's Network Infrastructure

UUNET's network infrastructure is based on its own 45 Mbps, DS-3 leased
line, Frame Relay-based network of Cascade Communications Corporation
("Cascade") switches supporting Cisco Systems, Inc. ("Cisco") 7000 routers.
This network infrastructure enables customers to access the Internet through
dedicated lines or by placing a local telephone call (dial-up) through a modem
to the nearest UUNET POP. Once connected, the customer's traffic is routed
through UUNET's network infrastructure to the desired Internet location,
whether on UUNET's network or elsewhere on the Internet.

UUNET continues to upgrade its infrastructure in response to the increases
in the number of customers purchasing UUNET's Internet access services,
particularly UUNET's high-speed T-1 and T-3 access options. The Company
believes that this network infrastructure provides the higher bandwidth,
increased throughput and the reliability, capacity and the geographic coverage
that the Company believes is required by businesses and professionals at a
lower per unit cost than its previous infrastructure.

57
<PAGE>

The map below represents the cities in which local access is allowed by
UUNET's current network infrastructure and the international gateway hub in
Singapore, which was completed during May 1996. As of April 1, 1996, UUNET's
network infrastructure, including Unipalm, a 40 percent interest in EUnet
Germany, and a 51 percent interest in UUNET Canada, allowed local access to
users at 543 POPs, including 288 outside of the United States as of April 1,
1996.

[Insert map]

TELECOMMUNICATIONS SERVICES

Unlike the BOCs and other large LECs which were organized geographically in
response to the regulatory environment that existed before the Divestiture,
the Company is organized to take advantage of ongoing technological,
competitive and regulatory changes. As a part of the Company's strategy to be
the primary provider of telecommunications services to business and government
customers, MFS has developed a corporate structure which is organized around
specific market segments.

58
<PAGE>

The MFS Telecom Companies

Large users of telecommunications services typically have experienced staff
to help meet their growing need for data and video transmission in addition to
their traditional need for local and long distance voice service. Through MFS
Telecom, the Company provides dedicated special access and local private line
services to large users over fiber optic networks. MFS Telecom offers local
switched services to certain of its customers.

The Company organized MFS Datanet to provide services to data intensive
users that the Company believed were inadequately served by traditional
telecommunications networks. The Company provides various data transmission
services at a variety of LAN speeds and protocols, including high speed LAN
interconnect services such as Frame Relay, Ethernet, Token Ring and FDDI
utilizing the Company's ATM network. The Company also provides a variety of
lower speed data services.

The MFS Intelenet Companies

Small and medium sized businesses generally do not employ in-house
telecommunications specialists to manage their facilities and negotiate local
and long distance services with a number of different vendors. Through the MFS
Intelenet Companies, the Company provides a single source for integrated local
and long distance telecommunications services. Its customers enjoy a level of
convenience which has been largely unavailable to them since the Divestiture,
with a single point of contact, a single bill and rates which are frequently
at a discount from the combined rates charged by the BOCs and the long
distance carriers. In addition, the Company provides a wide range of value-
added services, including calling card, 800 number, voice mail, customized
billing and management reporting.

MFS International

MFS International provides international communications services designed to
better serve MFS' existing customer base of multinational companies and to
appeal to other business and government users abroad.

In London and Stockholm, MFS International provides a full range of voice,
data and video communications to businesses in greater London and Stockholm
either over its own networks or by reselling services of incumbent carriers.
MFS International also provides a growing range of communications services in
certain other key European business centers and anticipates that it will
continue to develop new markets throughout Europe as anticipated regulatory
liberalization proceeds.

MFS International provides international private line and enhanced services
to end users and is authorized by the FCC to provide the full range of
switched and private line voice and data services originating and terminating
in the United States.

In 1995, MFS International: (i) obtained government authorizations to
construct and operate the first alternative metropolitan area fiber network in
Frankfurt; (ii) was granted a full national and international operating
license in Sweden; (iii) entered into an agreement with Telecom Finland to
interconnect the two companies' data networks; (iv) received a license to
construct and operate the first alternative metropolitan area fiber optic
network in Paris; and (v) commenced offering non-facilities based services in
Zurich. The construction of the Frankfurt network has been completed, and
data, private line voice and closed user group switched voice service is now
being offered to business customers in that city. The Company has been
offering non-facilities based services in Paris since 1995. The installation
of a network in Paris commenced in the first quarter of 1996 and service
commenced in May 1996. In 1996, MFS began offering liberalized international
resale services in Hong Kong.

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Global Network Services

MFS Global Network Services manages the development and operations of MFS'
networks. MFS Global Network Services contracts with MFS Network Technologies,
which engineers and manages the construction of the fiber optic networks. As
each portion of a network is completed, MFS Global Network Services manages
the operation of the network.

INTERNET-RELATED SERVICES

The Company plays a major role in making the Internet available to users
through sales of dedicated circuits for local access and ATM-based backbone
service to Internet service providers. MFS Datanet is also one of several
companies that manage the operation of Network Access Points ("NAPs"), through
which significant amounts of traffic on the Internet pass. MFS developed and
manages NAPs that are known as MAE East in Washington, D.C., MAE West in San
Jose, California and MAE Chicago in Chicago, Illinois. Additional NAPs are
under development.

UUNET provides a comprehensive range of Internet access options,
applications and consulting services tailored to meet the needs of businesses
and professionals. UUNET's solution has been designed to address many of the
issues that have discouraged businesses and professionals from using the
Internet in the past. The UUNET solution is based upon UUNET's high
performance domestic and international network infrastructure designed
specifically to provide reliable Internet connectivity to businesses with
demanding throughput requirements.

As of March 31, 1996, UUNET's primary Internet access options included (i)
dedicated Internet access, with service ranging from high speed services (T-1
and above) for very large businesses with demanding throughput requirements to
medium speed service via dedicated lines or frame-relay for small to mid-size
businesses, and (ii) dial-up Internet access. These Internet access options
are sold in the United States and in many foreign countries, and are also
offered under varying names and different prices in the United Kingdom and
Germany.

UUNET also makes available to customers a variety of products and services,
including Web server hosting and content development services, client software
and security products and training, all of which can be integrated by UUNET
through its network integration and consulting services. UUNET enables
Internet users to purchase access, applications and services, including
integration services, through a single source. UUNET's products and services
are supported by a technical staff that is highly experienced in Internet
operations and services. UUNET's network operations center monitors traffic
across UUNET's network 24 hours per day, seven days per week.

UUNET provides additional related products and services that are often
required by UUNET's business customers, including: hardware, such as network
equipment from Cisco and Ascend and Instant Internet from Performance
Technology; digital modems and cabling; software, such as Chameleon from
NetManage, Internet in a Box from Spry (a division of CompuServe); tutorials,
such as seminars to educate current and potential customers about Internet
access options and applications available from UUNET; and various consulting
services, such as integrating various Internet access services and
applications.

The Company's objective is to be the leading supplier worldwide to
businesses and professionals of complete communications solutions using
Internet-related technologies. The acquisition of UUNET is a significant step
toward the achievement of this objective. Following consummation of the
Merger, the Company intends to focus on five key elements: (i) expanding
operations worldwide; (ii) expanding high performance infrastructure; (iii)
increasing focused marketing efforts; (iv) expanding and integrating product
and service offerings; and (v) building and leveraging relationships with
strategic partners.

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International Expansion Plan

UUNET initiated a major international expansion in 1995. UUNET has
established international gateway hubs in 14 countries (Australia, Belgium,
Canada, France, Germany, Hong Kong, Italy, Japan, The Netherlands, Singapore,
Spain, Sweden, Switzerland, the United Kingdom), which provide service in
seven cities in Canada (Calgary, Edmonton, Montreal, Ottawa, Toronto,
Vancouver, Winnipeg); nine cities in Europe (Amsterdam, Brussels, Cologne,
London, Madrid, Milan, Paris, Stockholm, Zurich); three cities in Asia (Hong
Kong, Singapore, Tokyo); and in Sydney, Australia. These hubs concentrate and
route data traffic from UUNET's dedicated and dial-up customers as well as
from the dial-up customers of The Microsoft Network. Microsoft has agreed to
pay an operating fee and a management fee in connection with these hubs. See
"--Microsoft Relationship."

The rate of growth of Internet use worldwide has accelerated in the past
year. In order to take advantage of worldwide growth of Internet use and
accelerate UUNET's international expansion, UUNET significantly expanded its
operations outside the United States during 1995. In November 1995, UUNET
acquired Unipalm, the largest Internet service provider in Europe and the
largest Internet access provider in the United Kingdom. In February 1996,
UUNET completed the acquisition of 40 percent of the shares of EUnet Germany
and, in April 1996, UUNET acquired the additional ownership interest in UUNET
Canada. UUNET intends to accelerate its geographic expansion and expects to
pursue various partnering arrangements to facilitate this expansion, including
joint ventures, acquisitions and commercial arrangements.

The Company intends to accelerate UUNET's international expansion begun in
1995 by pursuing several avenues, including acquiring other Internet service
providers and complementary businesses and technologies in various target
countries.

Microsoft Relationship

In December 1994, UUNET and Microsoft entered into a strategic relationship
for the development, operation and maintenance of a large-scale high speed
dial-up and ISDN TCP/IP access network which is the primary Internet dial-up
network and infrastructure for Microsoft, including The Microsoft Network.
This relationship provides UUNET with the opportunity to accelerate the
expansion of the geographic coverage and capacity of its network
infrastructure domestically and internationally. The access network is an
integral part of the dial-up and ISDN component of UUNET's upgraded network
infrastructure. As a result, the geographic coverage of the access network is
the same as that of UUNET's overall network infrastructure.

Microsoft and UUNET have agreed upon the schedule for deployment of the
network, and Microsoft is obligated to pay an operating fee equal to the cost
of constructing, maintaining and operating the U.S. and Canadian dial-up
network and the first 14 international gateway hubs and to pay a management
fee regardless of any delay by Microsoft in its use of the network. The terms
of construction, maintenance and operation (including the allocation of costs
and the payment of fees) of international gateway hubs beyond the initial 14
such hubs are subject to future agreement between Microsoft and UUNET. UUNET
expects that the terms of any funding or revenues from Microsoft relating to
additional international hubs, if any, will be different from those of the
Microsoft Agreement. In addition, UUNET and Microsoft have an understanding
that providers of Internet access services (such as the PTTs) will begin to
bear certain of the costs of the 14 international gateway hubs. As this
begins, Microsoft's share of such costs will decrease, and UUNET will become
more dependent upon such providers and other customers for revenues to support
such costs. Microsoft continues to evolve its international strategy for The
Microsoft Network, and its final strategy may differ materially from that
originally anticipated. Although UUNET is Microsoft's primary Internet access
provider, there can be no assurance that Microsoft will obtain additional
Internet network infrastructure or capacity it may require from UUNET, other
than that specified in the Microsoft Agreement. Microsoft has announced a

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relationship with MCI under which MCI will resell The Microsoft Network,
Microsoft's Internet Explorer Web browser software and other Microsoft
Internet-related software. Although the terms of the relationship have not
been fully disclosed, this relationship with MCI may allow access to The
Microsoft Network through MCI's dial-up network. Further, Microsoft is
developing relationships with other Internet service providers to resell The
Microsoft Network and the Internet Explorer. As originally planned, Microsoft
is developing relationships with foreign and domestic telecommunications
companies and Internet access providers to resell access to The Microsoft
Network. If Microsoft fully develops these resale relationships, UUNET may not
receive revenues from Microsoft beyond Microsoft's guaranteed minimum
payments. Any failure of such revenues to increase could have a material
adverse effect on UUNET's business, financial condition or results of
operations.

As part of its relationship with UUNET, Microsoft made an equity investment
in UUNET, which currently represents approximately 13 percent of the
outstanding UUNET Common Stock. Microsoft also agreed to lend UUNET up to
$26.0 million to finance the purchase of equipment used in construction of the
network; $3.2 million of this amount remained available for borrowing as of
March 31, 1996. UUNET owns the equipment and Microsoft retains a security
interest in the network equipment and in UUNET's revenues from the network.
Depending upon UUNET's success in meeting certain operational criteria agreed
upon between UUNET and Microsoft, the management fee payable by Microsoft to
UUNET varies between six percent and ten percent of the operating costs to be
funded by Microsoft (exclusive of interest on the loan) and may be temporarily
suspended in the event of a sustained operational failure of the network.
Revenues from Microsoft accounted for approximately 20%, 34% and 37% of
UUNET's consolidated revenues for the year ended December 31, 1995 and the
quarters ended December 31, 1995 and March 31, 1996, respectively.

The network-related agreement with Microsoft has an initial term ending in
March 2000, renewable by Microsoft for an additional five years. After
September 1996, Microsoft may terminate the agreement if UUNET breaches
certain material terms of the agreement and is unable to cure, thereby causing
a sustained operational failure of the dial-up access network and under
certain other circumstances. The terms of the agreement with Microsoft
restrict UUNET's ability, prior to March 1997, to enter into similar
agreements for the deployment of other large-scale dial-up networks with,
among others, on-line service providers intending to deploy a domestic or
international on-line service. The Company does not believe that the effect
those restrictions will have a material adverse effect on UUNET's business as
UUNET plans to focus on the domestic and international deployment, operation
and expansion of the Microsoft dial-up access network and UUNET's core
business (the provision of Internet access options, applications and
consulting services).

CUSTOMERS AND MARKETING

Telecommunications Services

The Company's marketing activities are directed toward business and
government customers. Sales and marketing activities are conducted by direct
sales and marketing forces in each business market and by national account
managers. In addition, the Company markets its services through
advertisements, trade journals, media relations, direct mail and participation
in trade conferences. The Company's customers include large corporations,
financial services companies, governmental departments and agencies, and
academic, scientific and other major institutions, as well as medium and small
businesses and long distance carriers.

The Company's customers typically enter into service agreements of at least
twelve months which usually convert into month-to-month agreements at the end
of the term. Certain customers have entered into longer term agreements.
Customer billings are divided into recurring and non-recurring charges
(including one-time installation charges).

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Internet-Related Services

UUNET's customers are businesses and professionals in many lines of
business. UUNET estimates that its customer base included over 22,000 business
and professional accounts as of March 31, 1996. In 1995, no customer other
than Microsoft accounted for more than one percent of UUNET's total revenues.
See " -- Microsoft Relationship."

Historically, UUNET has sold its Internet access and applications products
and services primarily through its direct telephone sales force. Call activity
is generated in response to a variety of promotional programs, including
advertising in general business and specialty periodicals, participation in
industry shows and public relations. The sales organization also includes the
installation group which is responsible for support for the first 30 days
after installation. In addition, UUNET engages in local promotional programs
to support newly opened service locations.

After the Merger, the Company intends to utilize its direct sales force to
expand the marketing of UUNET's Internet services and associated products.

Network Systems Integration Services

MFS Network Technologies' third party customers include major local and long
distance telecommunications carriers, public utilities, cable television
operators, agencies of federal, state and local government and large
corporations. The Company's network systems integration segment revenues are
and may continue to be dependent upon a small number of large projects.
Accordingly, these revenues are likely to vary significantly from period to
period.

COMPETITION

Telecommunications Services

Virtually all markets for telecommunications services are extremely
competitive. MFS expects that competition will intensify in the future. In
each of its markets, MFS faces significant competition from larger, better
financed incumbent providers. MFS competes domestically and internationally
with incumbent carriers, which have historically dominated their local
telecommunications markets. The incumbent LECs have established relationships
with their customers and provide those customers with various transmission and
switching services that the Company, in many cases, is not currently allowed
by regulators to offer or only recently began to offer such services. The
Company has sought and will continue to seek to achieve regulatory parity with
the LECs in order to provide local telecommunications services, including
reasonable and nondiscriminatory access to equipment rooms, rights-of-way and
comparable treatment with respect to the imposition of franchise fees. See "--
Government Regulation." Incumbent LECs, however, presently have numerous
advantages as a result of their historical monopoly of the local exchange
market. The Company continues to challenge, before federal and state
regulators, many inequities which exist because of the LECs' historical
status. The Company believes the Telecom Act may enhance its ability to
achieve parity with the LECs over time. However, the Telecom Act may also
increase the degree of competition the Company experiences.

A continuing trend toward business combinations and alliances in the
telecommunications industry may create significant new competitors to the
Company. Many of the Company's existing and potential competitors have
financial, personnel and other resources significantly greater than those of
the Company.

The Company also faces competition in most markets in which it operates from
one or more CAPs operating fiber optic networks, in many cases in conjunction
with the local cable television operator. AT&T, MCI and Sprint have each
indicated its intention to offer local telecommunication services in major
U.S. markets using their own facilities or by resale of the LECs, or other
providers' services. In

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addition to the LECs, CAPs and CLECs, competitors potentially capable of
offering private line, special access and switched services include cable
television companies, electric utilities, long distance carriers, microwave
carriers, wireless telephone system operators and private networks built by
large end users.

Under the Telecom Act and ensuing federal and state regulatory initiatives,
barriers to local exchange competition are being removed. Adoption of the co-
carrier checklist and introduction of facilities-based local competition,
however, is required before the BOCs may provide in-region interexchange long
distance services. The BOCs are currently allowed to offer certain
"incidental" long distance services in-region and to offer out-of-region long
distance services. Once the BOCs are allowed to offer widespread in-region
long distance services, both they and AT&T, MCI and Sprint will be in a
position to offer single source local and long distance services similar to
that being offered by MFS. The Company expects that the increased competition
made possible by regulatory reform will result in certain pricing and margin
pressures in the domestic telecommunications services business.

Because it believes it currently has certain advantages relating to quality
control, network maintenance and cost savings resulting from its use of the
Company's existing fiber optic network, MFS believes that it may enjoy certain
advantages with respect to certain of its competitors. There is no guarantee
that MFS will be able to maintain these advantages.

MFS Intelenet competes with the LECs, certain CAPs and CLECs, equipment
vendors and installers, long distance providers and telecommunications
management companies. Although MFS believes that no single competitor offers
integrated telecommunications services nationwide over its own local
facilities exclusively for business customers, each of these types of
competitors currently provides some or all of the services MFS Intelenet
offers or plans to offer. Because it believes it has certain advantages
relative to quality control, network maintenance and cost savings resulting
from its use of the Company's existing fiber optic networks, MFS believes that
MFS may enjoy certain advantages with respect to certain of its competitors.

The Company believes that the Telecom Act, as well as a recent series of
transactions and proposed transactions between telephone companies and cable
companies, increases the likelihood that barriers to local exchange
competition will be removed. The introduction of such competition, however,
also increases the possibility that BOCs will be authorized to provide
interexchange services. If BOCs are permitted to provide such services, they
will be in a position to offer single source service similar to that being
offered by MFS Intelenet.

Although the Company believes that no single competitor currently offers
high-speed end-to-end interstate LAN interconnection services over its own
local facilities, potential competitors for these services include stand-alone
data transmission entities, as well as LECs, other CAPs and cable television
companies.

Internet Related Services

The market for data communications services, including Internet access and
on-line services, is extremely competitive. In the case of non-facilities
based providers, there are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company believes
that its ability to compete successfully depends on a number of factors,
including market presence; the ability to execute a strategy of rapid
expansion; the capacity, reliability and security of its network
infrastructures; ease of access to and navigation of the Internet; the pricing
policies of its competitors and suppliers; the timing of the introduction of
new products and services by the Company and its competitors; the Company's
ability to support industry standards; and industry and general economic
trends. The Company's success in this market will depend heavily upon its
ability to provide high quality Internet connectivity and value added Internet
services at competitive prices.

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The Company's current and potential U.S.-based competitors generally may be
divided into the following three groups: (1) telecommunications companies,
such as AT&T, MCI, Sprint, WorldCom, BOCs and @Home; (2) other Internet access
providers, such as BBN Corporation ("BBN"), NETCOM On-Line Communication
Services, Inc., PSINet Inc. ("PSI"), and other national and regional
providers; and (3) on-line services providers, such as America Online Inc.
("America Online"), CompuServe Corporation ("CompuServe"), Intuit Inc.,
Microsoft, and Prodigy. Certain of these competitors have greater market
presence, engineering and marketing capabilities, and financial, technological
and personnel resources than those available to the Company. As a result, they
may be able to develop and expand their communications and network
infrastructures more quickly, adapt more swiftly to new or emerging
technologies and changes in customer requirements, take advantage of
acquisition and other opportunities more readily, and devote greater resources
to the marketing and sale of their services than can the Company.

The Company expects that all of the major on-line services providers will
expand their current services to compete fully in the Internet connectivity
market. In addition, the Company believes that new competitors, including
large computer hardware, software, media and other technology and
telecommunications companies, will enter the Internet connectivity market,
resulting in even greater competition for the Company. Certain companies,
including America Online, AT&T, BBN and PSI, have obtained or expanded their
Internet access products and services as a result of acquisitions and
strategic investments. Such acquisitions may permit the Company's competitors
to devote greater resources to the development and marketing of existing
competitive products and services. The Company expects these acquisitions and
strategic investments to increase, thus creating new competitors to MFS and
UUNET. In addition, the ability of some of the Company's competitors to bundle
other services and products with Internet connectivity services, such as the
Internet service offerings recently announced by AT&T and MCI, could place the
Company at a competitive disadvantage.

As a result of increased competition in the industry, the Company expects to
continue to encounter significant pricing pressure, which in turn could result
in significant reductions in the average selling price of the Company's
Internet-based services. For example, certain of the Company's competitors,
including AT&T and MCI, provide customers with low priced or free Internet
access services in connection with the purchase of telephone or other
communications services, significantly increasing price pressures on the
Company. UUNET has in the past reduced prices on certain of its Internet
access options and the Company may do so in the future. There can be no
assurance that the Company will be able to offset the effects of any such
price reductions through an increase in the number of its customers, higher
revenue from enhanced services, cost reductions or otherwise. In addition, the
Company believes that the data communications business, and in particular
Internet access and on-line services businesses, are likely to encounter
consolidation in the near future, which could result in increased price and
other competition in the industry. Increased price or other competition could
result in erosion of the Company's market share and could have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the Company will have the financial
resources, technical expertise, marketing and support capabilities or
expansion and acquisition possibilities to continue to compete successfully.

Network Systems Integration

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International Competition

The three international markets in which the Company competes are
international services from the United States, international services from
certain countries in continental Europe and Hong Kong and certain domestic
services within the United Kingdom, France, Germany and Sweden. The Company
offers private line, high-speed LAN interconnect data, and voice services in
each of these markets, subject to varying governmental authorizations.

The Company faces competition in international service originating in the
United States from, among others, AT&T, MCI, Sprint and WorldCom. These
companies own significant international cable capacity and have established
operating agreements with governmental and private telecommunications
providers in Europe, Asia and elsewhere which reduces their cost to provide
service. Each of these companies is larger and better financed than the
Company. In international markets, MFS competes with the incumbent
telecommunications carrier, which generally offers both local and long
distance service and benefits from its history as an incumbent provider.

The United Kingdom allows for direct facilities-based competition for
domestic services. The Company competes in the United Kingdom with British
Telecom ("BT") and other facilities-based licensed carriers. Currently, there
are fifteen direct competitors and forty-five licensed applicants in the
United Kingdom. These numbers may expand if the United Kingdom allows carriers
in addition to BT and Mercury Communications Limited ("Mercury") to provide
facilities based international services, which it may do in July 1996. Many
European countries are expected to allow facilities based competition for
liberalized services later this year. At this time it is unclear under what
terms and conditions these services will be allowed, if at all.

In continental Europe the PTTs, and other incumbent telecommunications
providers, generally retain their monopoly on public services. While the
Company operates on a limited basis as a facilities-based carrier in
Frankfurt, Germany and Paris, France and received a facilities based operating
license to service Stockholm, Sweden. With these limited exceptions, MFS must
compete with the monopoly PTTs based on resale of their private line and voice
services. Other companies which offer service on this resale basis include
AT&T, MCI, BT and Sprint.

As the Company expands its Internet-related services internationally, the
Company will be forced to compete with and buy services from government owned
or subsidized telecommunications providers, some of which may enjoy an
absolute monopoly on telecommunications service essential to the Company's
business. There can be no assurance that the Company will be able to purchase
such services at a reasonable price or at all. For example, in the United
Kingdom, the Company competes directly with: (1) telecommunications companies,
such as BT, Mercury and others; (2) other Internet access providers, such as
Demon Internet Limited ("Demon") and EUnet; and (3) on-line services
providers, such as CompuServe, America Online/Bertelsmann, Microsoft and AT&T.

In addition to the risks associated with the Company's previously described
competitors, these foreign competitors may possess a better understanding of
their local markets and may have better working relationships with local
telecommunications companies. There can be no assurance that the Company can
obtain similar levels of local knowledge and failure to obtain that knowledge
could place the Company at a serious competitive disadvantage.

GOVERNMENT REGULATION

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approval is required, however, for the installation and operation of its
international facilities and services. Both the states and the FCC have
determined that non-dominant carriers, such as MFS, are required to file
interstate tariffs on an ongoing basis, setting forth MFS' rates and operating
procedures. Challenges to these tariffs by third parties may cause MFS to
incur substantial legal and administrative expenses. The FCC has initiated a
rulemaking to eliminate this requirement for all nondominant carriers, such as
the Company. In addition, MFS is subject to varying degrees of regulation in
the foreign jurisdictions in which it conducts operations including
authorization for the installation and operation of its network facilities.
Although the trend in federal, state and international regulation appears to
favor increased competition and reduced regulation, no assurance can be given
that changes in current or future regulations adopted by the FCC, state or
foreign regulations or legislative initiatives in the United States and abroad
would not have a material adverse effect on MFS.

Legislation. On February 8, 1996, President Clinton signed into law the
Telecom Act, comprehensive federal telecommunications legislation affecting
all aspects of the telecommunications industry. The Telecom Act establishes a
national policy that promotes local exchange competition. At the heart of the
Telecom Act is the requirement that local and state barriers to entry into the
local exchange market be removed. The Telecom Act establishes uniform
standards under which the FCC and the state commissions are to implement local
competition and co-carrier arrangements in the local exchange market. The
Telecom Act also imposes significant obligations on the BOCs and other
incumbent local exchange carriers, including the obligation to interconnect
their networks with the networks of competitors. Each incumbent LEC would be
required not only to open its network but also to unbundle the network so
competitors may purchase only those portions of the network that they require.
The pricing of these unbundled network elements and services will determine
whether it is economically attractive to use these elements. Incumbent LECs
will be required to make available for resale to new entrants all services
they offer end user customers on a retail basis to non-telecommunications
carriers. The Telecom Act also imposes requirements on LECs, such as the
Company, to provide interconnections, reciprocal call termination, telephone
number portability and resale of its telecommunications services.

The Telecom Act provides, among other things, that the BOCs and other
incumbent LECs satisfy a competitive checklist, providing MFS and other
competitors the services and facilities necessary to offer local switched
services. Under the Telecom Act, the FCC is directed to interpret and clarify
these terms. The FCC is currently engaged in rulemaking proceedings to
establish these arrangements, which will ultimately be implemented by the
state telecommunications or regulatory commissions. The FCC is scheduled to
adopt these rules later this year. The following table summarizes the key
factors of the legislatively mandated competitive checklist, often referred to
as "co-carrier status," being pursued by the Company with the FCC and with
state regulators and the anticipated effect of these factors on the Company's
ability to provide fully competitive services on an economically efficient and
technically feasible basis.

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<TABLE>
<CAPTION>
ISSUE DEFINITION ANTICIPATED EFFECT
------------------ ----------------------------- ----------------------------
<C> <S> <C>
Interconnection Efficient network Allows MFS to terminate
interconnection to transfer traffic to LEC subscribers
calls back and forth between and to service to customers
LECs and competitive networks not directly connected to
(including local exchange its networks
services, private line, 911,
0+, directory assistance,
etc.)
Local Loop Allows competitors to Reduces MFS' capital and
Unbundling selectively gain access at operating costs to serve
cost-based rates to LEC wires customers not directly
from central offices to connected to its networks
customer premises not located
on MFS' network
Reciprocal Mandates reciprocal Improves MFS' margins for
Compensation compensation for local local service
traffic exchange between LECs
and competitors
Number Portability Allows customers to change Allows customers to switch
local carriers without to MFS-provided local
changing numbers; true service without changing
portability allows incoming phone numbers
calls to be routed directly
to the customer; interim
portability allows incoming
calls to be routed through
the LEC
Access to Phone Allows competitors to assign MFS can provide telephone
Numbers new telephone numbers to numbers to new customers on
their customers the same basis as the LEC
</TABLE>

The BOCs' incentive to comply with the Telecom Act's opening of the local
exchange market to competition derives from the Telecom Act's provisions
allowing the removal of the current ban on BOC provision of interLATA (local
access transport areas) toll service and equipment manufacturing. This ban
will only be removed after the BOC demonstrates to the FCC, in consultation
with the Department of Justice and the relevant state commissions, that the
BOC has met the requirements of the competitive checklist which details the
basic co-carrier requirements and the FCC concludes that BOC entry into long
distance is in the public interest. The BOC must also generally show that it
has entered into an approved interconnection agreement with at least one
unaffiliated, facilities-based competitor in some portion of a state before
offering long distance service in that jurisdiction.

While state-by-state regulatory activity has to date brought co-carrier
arrangements or initiatives to various degrees of completion in approximately
25 states, the Telecom Act is intended to accelerate the process and create a
competitive environment in all markets, eliminating state and local statutory
and regulatory barriers to entry. This preemption of state laws barring local
competition and the relaxation of regulatory restraints should enhance the
Company's ability to expand its service offerings nationwide.

The Company, as a facilities-based, multi-market competitive provider
already active in emerging co-carrier environments, is now given legislative
support to complement its co-carrier services in markets across the country.
In addition to providing the Company with a national framework to achieve co-
carrier status in local exchange markets, the Telecom Act permits MFS, as a
telecommunications carrier with less than 5% of nationwide prescribed access
lines, to continue to offer single source combined packages of local and long
distance services. AT&T, MCI and Sprint may not bundle in a BOC's territory
their local services resold from a BOC and long distance service until the BOC
is authorized to enter the interLATA long distance market or for three years,
whichever event occurs earlier.

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The Telecom Act, by removing barriers to entry into the local exchange
market and at the same time enabling multiple carriers to compete with the
Company in the provision of local and long distance services, ultimately
allowing the BOCs and large interexchange carriers to offer their own packages
of single source local/long distance services, substantially increases the
competition the Company will face.

The Telecom Act also creates a new Federal-State Joint Board for the purpose
of making recommendations to the FCC regarding the implementation of a largely
revised universal service program. All telecommunications carriers, including
the Company, that provide interexchange services are required to contribute,
on an equitable and nondiscriminatory basis, to the preservation and
advancement of universal service pursuant to a specific and predictable
universal service mechanism to be established by the FCC. The Company is
unable to predict the final formula for universal service contribution and its
own level of contribution.

The Telecom Act in some sections is self-executing, but in most cases the
FCC must issue regulations that identify specific requirements before the
Company and its competitors can proceed to implement the changes the Telecom
Act prescribes. The FCC already has commenced several of these rulemaking
proceedings. In addition, the Telecom Act retains the authority of individual
state utility commissions to impose their own regulation of local exchange
services so long as such regulation is not inconsistent with the requirements
of the Telecom Act. The Company is unable to predict the final form of such
regulation and its potential impact on the market.

Federal Regulation. The Company maintains an active profile before federal
regulators and has initiated and participated in many significant proceedings
before the FCC, influencing the development of interstate telecommunications.
As a result of rulings announced in September 1992 and August 1993 (the
"Interconnection Decisions") by the FCC, the Company is able to offer
interstate special access and switched access transport services to virtually
every business and government end user in the metropolitan areas which the
Company elects without being directly connected to such customers. The
Interconnection Decisions enabled CAPs to compete for transport of switched
long distance calls between LEC central offices and long distance carrier
POPs. At the same time the LECs were granted greater pricing flexibility for
those services. Portions of the Interconnection Decisions are currently
subject to further review at the FCC. These issues are also likely to further
be interpreted by the FCC as it construes the federal legislation.

In March 1995, MFS introduced an initiative before the FCC calling for the
nationwide unbundling of the "local loops" controlled by the LECs in order to
make those facilities available on a cost-based basis to all eligible local
service providers, including MFS, following initiation of local competition.
The local loop is the part of the LEC networks that physically connects the
customer's premises to the central office and is used to receive and originate
local and long distance calls. The Company is simultaneously pursuing similar
initiates before individual state regulatory commissions and has obtained
orders or entered into agreements with incumbent LECs to obtain unbundled
loops in a number of states. The FCC will address local loop unbundling and
related unbundling issues in connection with its interpretation of the Telecom
Act.

In July 1995, the FCC took two actions related to the assignment of
telephone numbers, first mandating that over the course of the next year
responsibility for administering and assigning local telephone numbers be
transferred from the BOCs and a few other LECs to a neutral entity, and
second, proposing a regulatory structure under which a wide range of number
portability issues would be resolved. The FCC is expected to address these and
other number portability issues in connection with its ongoing interpretation
of the Telecom Act. The Company envisions that the FCC will initiate many
additional proceedings, as a result of the enactment of federal legislation,
defining and construing the terms, conditions and prices of the various
components necessary for local competition.

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<PAGE>

State Regulation. Historically, certain of the Company's private line and
special access circuits were classified as intrastate and therefore subjected
to state regulation. As its local service business and product lines expand,
the Company will be offering more intrastate service and will increasingly be
subject to state regulation. In all states where certification is required,
except the District of Columbia, the Company's operating subsidiaries are
certificated as common carriers. In May 1996, the Company asked the FCC to
preempt the District of Columbia PSC in a manner which would authorize the
Company to provide local service in the District, irrespective of any action
or lack of action by the District of Columbia PSC regarding the Company's
pending application to offer local service. In all states, the Company
believes that it operates with the appropriate state regulatory authorization.
The Company currently is authorized to provide intrastate toll or a
combination of local and intrastate toll service in 48 states. These
authorizations vary in the scope of the intrastate services permitted. In most
of the jurisdictions where the Company has network facilities, it is
authorized to provide competitive local exchange services. Following passage
of the Telecom Act, the Company is in the process of seeking to expand and
improve upon the scope of its intrastate certifications to offer competitive
local switched services in all markets where it has network facilities.
Further, the Company is initiating or furthering local interconnection
discussions with LECs in all such markets.

In connection with passage of the Telecom Act, which provides the states
various opportunities to implement the Telecom Act, the Company continues to
support efforts at the state level to establish specific procedures
introducing competition in local markets and to permit MFS to operate on the
same basis and with the same rights as the incumbent LECs. Currently, a number
of state public utility commissions have both allowed local competition and
endowed MFS and other non-dominant carriers with varying degrees of co-carrier
status. These include a number of key states including California,
Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, New York,
Ohio, Oregon, Pennsylvania, Texas and Washington. These states, in
combination, represent a significant percentage of MFS' domestic customer
base. MFS is in the process of obtaining or improving upon co-carrier
arrangements in all jurisdictions where it has network facilities. As a result
of co-carrier status, MFS expects to realize lower costs for providing
switched local services, which is jurisdictionally intrastate and currently
subject to state regulation.

Under the Telecom Act, MFS has entered into interconnection discussions with
all LECs in areas where MFS conducts business. In January 1995, MFS entered
into an interim agreement with New York Telephone Company which addressed,
among other things, reciprocal compensation and number portability in the New
York market. The Company believes that the New York agreement was the first of
its kind, and combined with a previous agreement on interconnection, direct
assignment of numbers and local loop unbundling, served as a model for co-
carrier agreements with other LECs. A similar agreement was concluded with New
England Telephone and Telegraph Company. On November 20, 1995, the Company
announced that it entered into a comprehensive agreement with Pacific Bell.
The MFS-Pacific Bell agreement addresses number portability, reciprocal
compensation, unbundled local loops and other significant financial and
technical arrangements of co-carrier status with respect to Pacific Bell's
operating territory in California, the Company's largest state market. This
agreement, with modest modifications, has been approved by the PUC. The
Company believes that this agreement could provide a model for future co-
carrier arrangements with other LECs. On February 19, 1996, the Company
entered into a partial co-carrier agreement with GTE-Florida which is largely
modeled on the MFS-Pacific Bell agreement. On April 9, 1996, the Company
entered into a partial co-carrier agreement with GTE-California. The Company
also has interconnection agreements with other LECs. Under the Telecom Act,
the Company is seeking to expand the scope and improve the terms of its
various interconnection agreements.

Local Government Authorizations. The Company is required to obtain street
opening and construction permits to install and expand its fiber optic
networks. In some of the metropolitan areas where the Company provides network
services, the MFS Telecom Companies pay license or franchise

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fees based on a percent of gross revenues or other formulas. These fees are
often higher than those paid by incumbent LECs. Under the Telecom Act, the
Company may determine to challenge or re-negotiate certain of these
agreements.

International. Historically, the European telecommunications environments
was a closed market consisting almost exclusively of PTTs or other incumbent
monopoly operators. Recently, however, the regulatory framework in Europe has
begun to change. European countries are beginning to privatize their
telecommunications carriers. Other foreign markets are also experiencing
increased competition. The European Union in 1990 issued a directive to its
member states to liberalize telecommunications services other than switched
voice services by opening their monopoly markets. The European Council of
Ministers has established a January 1, 1998 deadline on liberalizing switched
voice services in most European countries. The European Union further proposed
that by July 1996, most member states allow facilities based competition for
liberalized services. Individual countries, like the United Kingdom and
Sweden, have determined to allow local competition and competitive
infrastructure prior to that prescribed deadline. Most countries have
announced their intent to meet the European Union's competitive goal no later
than January 1, 1998. The Company is seeking on a country-by-country basis to
accelerate those dates. There is no assurance that the Company will be
successful in these activities, and if it is, the specific terms and
conditions under which such services will be allowed.

Internet-related services are not currently subject to direct regulation by
the FCC or any other U.S. agency, other than regulation applicable to
businesses generally. The FCC recently requested comments on a petition filed
by the America's Carriers Telecommunication Association which requests that
the FCC regulate certain voice transmissions over the Internet as
telecommunications services. Changes in the regulatory environment relating to
the telecommunications or Internet-related services industry, could have an
adverse effect on the Company's Internet-related services business. The
Telecom Act may permit telecommunications companies, BOCs or others to
increase the scope or reduce the cost of their Internet access services. The
Company cannot predict the effect that the Telecom Act or any future
legislation, regulation or regulatory changes may have on its business.

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MANAGEMENT

Set forth below are the names, ages, positions with MFS, business
experience, directorships in other companies and Board committee memberships
of the directors and senior executive officers of MFS:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
James Q. Crowe.......... 46 Chairman of Board and Chief Executive Officer
Royce J. Holland........ 47 President, Chief Operating Officer and Director
R. Douglas Bradbury..... 45 Executive Vice President, Chief Financial Officer and Director
Ronald R. Beaumont...... 47 Executive Vice President
Kevin J. O'Hara......... 35 Executive Vice President
Kirby G. Pickle......... 39 Executive Vice President
Colin V.K. Williams..... 56 Executive Vice President
Terrence J. Ferguson.... 53 Senior Vice President, Secretary and General Counsel
Howard Gimbel........... 65 Director
William L. Grewcock..... 70 Director
Richard R. Jaros........ 44 Director
Robert E. Julian........ 57 Director
David C. McCourt........ 39 Director
Ronald W. Roskens....... 63 Director
Walter Scott, Jr........ 65 Director
Kenneth E. Stinson...... 53 Director
Michael B. Yanney....... 62 Director
</TABLE>

Mr. Crowe has been the senior executive officer of the Company since its
inception. He has served as Chairman of the Board of the Company since 1988,
Chief Executive Officer since November 1991 and was President (January 1988--
June 1989 and April 1990--January 1992). Mr. Crowe has also served as
President and Vice President of Kiewit Industrial Co., which is involved in
large industrial construction projects, such as independent power projects,
co-generation facilities, and, until 1988, telecommunications projects. Prior
to joining PKS in 1986, Mr. Crowe was employed by Morrison-Knudsen
Corporation, a major construction and engineering company based in Boise,
Idaho, where he held the position of Group Vice President with responsibility
for the electric power market. Mr. Crowe is a Director of Peter Kiewit Sons',
Inc. ("PKS"), KDG, RCN Corporation, a subsidiary of KDG ("RCN"), and CalEnergy
Company, Inc., a geothermal energy producer, which is partially owned by KDG
("CEC"). In addition, since October 1993, Mr. Crowe has been a Director of C-
TEC Corporation ("C-TEC"), a company controlled by RCN that, until MFS
acquired these operations from C-TEC on May 8, 1995 owned a competitive access
provider providing business services in Westchester County, New York. Mr.
Crowe is presently a member of the executive committee of the MFS Board of
Directors (the "Executive Committee").

Mr. Holland has been a Director and the President and Chief Operating
Officer of the Company since January 1992. He has been the Chairman of MFS
Intelenet since November 1992. He was the President and Chief Executive
Officer of MFS Telecom between April 1990 and November 1992. He was previously
the President (June 1989--April 1990) and Vice President (February 1988--May
1989) of the Company. Before joining the Company, Mr. Holland held various
management positions with Energy Factors, Inc., an independent power company
based in San Diego, California, and Morrison-Knudsen Corporation. Mr. Holland
is a Director of KDG. Mr. Holland is presently a member of the Executive
Committee.

Mr. Bradbury has been the Chief Financial Officer since January 1992 and
Executive Vice President since August 1995. Previously, Mr. Bradbury was
Senior Vice President of MFS from September 1992 to August 1995, and prior to
that, he was Senior Vice President--Corporate Affairs

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for MFS Telecom. Before joining MFS in 1988, he was Executive Vice President
and Chief Operation Officer at American Pioneer Telephone, Inc., a regional
long distance carrier based in Orlando, Florida, and a Vice President of
Manufacturers Hanover Trust Company in New York City and Milan, Italy.

Mr. Beaumont has been an Executive Vice President of the Company since
August 1995 and President and Chief Executive Officer of MFS North America
(responsible for MFS Telecom and MFS Intelenet) since May 1996. He was
President and Chief Executive Officer of MFS Telecom Companies from August
1995 to May 1996 and was President and Chief Executive Officer of MFS Telecom
from November 1992 to August 1995. From September 1992 to August 1995 he was a
Senior Vice President of the Company. He joined MFS Telecom as Senior Vice
President of Operations and Engineering and had general management
responsibilities over MFS Telecom's Southern Division, comprising seven
metropolitan area networks. From 1987, Mr. Beaumont was Executive Vice
President of Institutional Communications Company, the predecessor to
Metropolitan Fiber Systems of Washington, D.C., Inc. prior to its acquisition
by MFS Telecom in October 1991.

Mr. O'Hara has been an Executive Vice President of the Company and President
and Chief Executive Officer of Global Network Services since August 1995. From
October 1992 to August 1995, he was a Senior Vice President of the Company and
the President and Chief Executive Officer of MFS Development. From 1990 to
1992 he was a Vice President of MFS Telecom, with successive responsibilities
for engineering construction, network services and strategic development.
Prior to joining MFS Telecom, he was the area manager for MFS Network
Technologies with responsibility for the installation of the MFS Telecom
Networks. Prior to joining the Company, Mr. O'Hara held various construction
management positions with PKS.

Mr. Pickle has been an Executive Vice President of the Company since August
1995; previously, he was President and Chief Executive Officer of the MFS
Intelenet Companies from August 1995 to May 1996 and he was President and
Chief Executive Officer of MFS Intelenet from November 1992 until August 1995.
From September 1992 to August 1995 he was a Senior Vice President of the
Company. Previously, he was Senior Vice President of Sales and Marketing of
MFS Telecom, and had general management responsibilities over MFS Telecom's
Northern Division, comprising six metropolitan area networks. Prior to joining
MFS Telecom in January 1991, he was Vice President of Marketing/Business
Development for Sprint, and has held other sales, customer service and
marketing positions with Sprint, MCI and AT&T.

Mr. Williams has been Executive Vice President of the Company since August
1995, and was Senior Vice President of the Company from August 1993, and
President and Chief Executive Officer of MFS Communications Limited since
April 1993. From October 1988 to June 1992, Mr. Williams was a Corporate
Director of British Telecom responsible for international business
development. Mr. Williams held various other positions at British Telecom from
1982 to 1988.

Mr. Ferguson has been responsible for the legal affairs of the Company since
its inception. He was elected Senior Vice President in September 1992, General
Counsel in January 1992 and Secretary in November 1991. Before joining the
Company in October 1992, Mr. Ferguson was employed as an attorney by PKS. From
September 1976 to December 1981, Mr. Ferguson was an associate and then
partner in the law firm of Kutak Rock.

Mr. Gimbel has been a Director of the Company since January 1992, a Director
of MFS Telecom from 1989 to 1992 and a Director of Chicago Fiber Optic
Corporation (d/b/a Metropolitan Fiber Systems of Chicago, Inc., "MFS Chicago")
from 1988 to November 1993. Since 1988, Mr. Gimbel has been the Treasurer of
MFS Chicago and since April 1990 has performed real estate and building access
services under a consulting agreement with MFS Chicago. He served as Treasurer
of MFS Telecom from 1988 to 1989. He has been a partner at B. G. Management
Co., a real estate management and sales business, and President of Health
Consultants, Inc. since January 1988. Mr. Gimbel is presently a member of the
compensation committee of the Board (the "Compensation Committee").

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<PAGE>

Mr. Grewcock has been a Director of the Company since August 1995 and the
Vice Chairman of PKS and a member of the Board of Directors of PKS for more
than the last five years.

Mr. Jaros has been a Director of the Company since January 1992. Mr. Jaros
has been an Executive Vice President of PKS since June 1993. He was the
Chairman of the Board of CEC from April 1993 to April 1994 and the President
and Chief Operating Officer from January 1992 until April 1993. He was a Vice
President of PKS from September 1990 to August 1992. Mr. Jaros is a Director
of PKS, KDG, RCN, CEC and C-TEC. Mr. Jaros is presently a member of the
Compensation Committee.

Mr. Julian has been a Director of the Company since January 1992. For more
than the last five years, Mr. Julian has been a Director of PKS. For more than
the five years prior to January 1996, Mr. Julian was Chief Financial Officer
of PKS. Mr. Julian was elected Executive Vice President of PKS in 1991 and
prior to that served as a Vice President of PKS. Mr. Julian is a Director of
PKS, KDG, RCN, C-TEC and PKS Information Services, Inc. Mr. Julian is
presently a member of the audit committee of the Board (the "Audit
Committee").

Mr. McCourt has been Chairman of the Board and Chief Executive Officer of C-
TEC since October 1993. Mr. McCourt is also the President and Chief Executive
Officer, as well as a Director of RCN. He has been a Director of the Company
since January 1992, a Director of MFS Telecom from July 1990 to October 1992
and a Director and President of Metropolitan Fiber Systems/McCourt, Inc., a
subsidiary of MFS Telecom, since 1988. Mr. McCourt is presently a member of
the Compensation Committee.

Mr. Roskens has been a Director of the Company since March 1993. In February
of 1996 he became the President of Global Connections, Inc. which is engaged
in international business consulting. Previously he was the President of
Action International, Inc., a forum to promote international cooperation. Dr.
Roskens was the Administrator of the U.S. Agency for International
Development, Washington, D.C., from 1990 to 1992, and was President of the
University of Nebraska from 1977 to 1990. He is a Director of ConAgra, Inc.
Dr. Roskens is presently a member of the Compensation Committee and the
Chairman of the Audit Committee.

Mr. Scott has been a Director of the Company since January 1992. He has been
the Chairman of the Board and President of PKS for more than the last five
years. He also is a Director of Berkshire Hathaway Inc., Burlington Resources
Inc., CEC, ConAgra, Inc., First Bank System, Inc. and Valmont Industries, Inc.
Mr. Scott is a Director of KDG, RCN and C-TEC. Mr. Scott is presently a member
of the Executive Committee.

Mr. Stinson has been a Director of the Company since January 1992. He has
been an Executive Vice President of PKS since 1991 and a Director of PKS since
prior to 1988. He has been the Chairman and Chief Executive Officer of Kiewit
Construction Group Inc., an affiliate of PKS, since 1994 (and was President
from 1992 until that time) as well as Director of such company since prior to
1988. In addition, Mr. Stinson served as President of Kiewit Coal Properties,
an affiliate of PKS, from 1989 to 1992 and as a Director of such company since
prior to 1988. Mr. Stinson is a Director of KDG. Mr. Stinson is presently a
member of the Audit Committee.

Mr. Yanney has been a Director of the Company since March 1993. Mr. Yanney
has been the Chairman and Chief Executive Officer of America First Companies,
Omaha, Nebraska, since 1984. From 1977 until 1984, Mr. Yanney was principally
engaged in the ownership and management of commercial banks. Mr. Yanney also
serves as a Director of Burlington Northern Santa Fe Corp., Forest Oil
Corporation, MidAmerica Apartment Communities, Inc. and Lozier Corporation.
Mr. Yanney is presently the Chairman of the Compensation Committee and a
member of the Audit Committee.

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<PAGE>

Pursuant to the Merger Agreement, MFS has agreed to appoint John W. Sidgmore,
President and Chief Executive Officer of UUNET, Richard L. Adams, Jr., Chairman
of the Board of UUNET, and one other individual designated by UUNET and
acceptable to MFS, to the Board of Directors of MFS subject to the consummation
of the Merger. Mr. Sidgmore will remain the President, Chief Executive Officer
and a director of UUNET and will become the Co-President and Co-Chief Operating
Officer of MFS. Set forth below are the ages, positions with UUNET, business
experience and directorships in other companies of John W. Sidgmore and Richard
L. Adams, Jr.

Mr. Sidgmore, 44, has served as President, Chief Executive Officer and a
director of UUNET since June 1994. In 1989, he became President and Chief
Executive Officer of IntelicomSolutions Corporation (currently CSC Intelicom),
a telecommunications software company. In 1991, the company was sold to
Computer Sciences Corporation, and he remained President and Chief Executive
Officer until June 1994. From 1975 to 1989, Mr. Sidgmore was employed by GEIS,
where he was Vice President and General Manager of GEIS North America from 1985
to 1989. Mr. Sidgmore is a director of Saville Systems PLC, a provider of
billing software for the telecommunications industry. Mr. Sidgmore received his
B.A. in Economics from State University of New York.

Mr. Adams, 39, founded the business of UUNET in 1987, has been a director of
UUNET since its inception in May 1990, and has served as the Chief Technical
Officer of UUNET since June 1994. In addition, Mr. Adams served as President
and Chief Executive Officer of UUNET from inception to June 1994. Mr. Adams has
been active in data communications and networking since 1980 and designed
standard networking protocols, including SLIP (Serial Line Internet Protocol)
and the "t" protocol for running UUCP over TCP/IP connections. Mr. Adams is a
founder and a director of the Commercial Internet Exchange Association. Mr.
Adams received his B.S. and M.S. degrees in Computer Science from, and
performed postgraduate research in Mechanical Computer Aided Design at, Purdue
University.

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<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr. McCourt is a director and president of, and owns, directly or
indirectly, approximately 17.5% of the voting stock of Metropolitan Fiber
Systems/McCourt, Inc. ("MFS/McCourt"). In 1995, the amount owed by MFS/McCourt
to MFS Telecom, Inc., either in the form of preferential payments or shares of
preferred stock held by MFS Telecom, Inc. or indebtedness by MFS Telecom,
Inc., increased to $51.1 million from $44.9 million in 1994.

On May 5, 1995, MFS purchased Northeast Networks, Inc. a competitive access
provider providing service to Westchester County, New York from C-TEC, of
which Mr. McCourt is the Chairman and Chief Executive Officer, for a purchase
price of $6.2 million. An affiliate of MFS, Metropolitan Fiber Systems of New
Jersey, Inc. has a 66 2/3% interest in MFS/C-TEC, a New Jersey limited
partnership. The remaining 33 1/3% interest is held by an affiliate of C-TEC.
As of December 31, 1995, MFS had an outstanding cash advance to MFS/C-TEC of
$289,545.

Mr. Andrew Lipman, Senior Vice President of MFS, is a partner in the law
firm of Swidler & Berlin, Chartered, of Washington, D.C. The firm provides
legal services to MFS and was paid fees of approximately $2.9 million, $2.9
million and $6.1 million in 1993, 1994 and 1995, respectively. Mr. Lipman has
an arrangement with MFS under which he is expected to devote a substantial
portion of his time to legal/regulatory matters of MFS.

The PKS Executive Compensation Committee established a bonus pool to be
distributed among the senior management team of MFS and KDG. In recognition
for their extraordinary achievements in creating value for PKS stockholders
over a significant period ending with the distribution of MFS Common Stock to
certain PKS stockholders on September 30, 1995, Mr. James Q. Crowe was paid
$12 million, Mr. Royce J. Holland was paid $3 million and Mr. R. Douglas
Bradbury was paid $1 million from this bonus pool.

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DESCRIPTION OF THE MERGER

The following description of the Merger is necessarily a summary thereof and
is therefore qualified in its entirety by reference to the Merger Agreement,
the Stock Option Agreement and the MFS Voting Agreement.

THE MERGER AGREEMENT

The Merger Agreement provides that, subject to the approval by the
stockholders of each of UUNET and MFS and the satisfaction or waiver of the
other conditions to the Merger, a wholly owned subsidiary of MFS ("Sub") will
be merged with and into UUNET in accordance with Delaware law, with UUNET as
the surviving corporation of the Merger (the "Surviving Corporation"). On the
Effective Date (as defined in the Merger Agreement), the conversion of UUNET
Common Stock into MFS Common Stock will be effected as described below and
UUNET will become a wholly owned subsidiary of MFS. The directors of Sub
immediately prior to the Effective Date as well as John W. Sidgmore and
Richard L. Adams, Jr. will become the directors of the Surviving Corporation,
and the officers of UUNET immediately prior to the Effective Date will be the
officers of the Surviving Corporation, in each case until their respective
successors are duly elected and qualified.

EFFECTIVE DATE

Following the adoption of the Merger Agreement and the transactions
contemplated thereby by the stockholders of each of UUNET and the approval of
the MFS Share Proposal by the Stockholders of MFS and subject to satisfaction
or waiver of certain terms and conditions, including conditions to closing,
contained in the Merger Agreement, the Merger will become effective on such
date as the Certificate of Merger is duly filed with the Secretary of State of
Delaware or at such time thereafter as is provided in such Certificate. The
filing of the Certificate of Merger will be made as soon as practicable after
all conditions contemplated by the Merger Agreement have been satisfied or
waived.

TERMS OF THE MERGER

At the Effective Date each outstanding share of UUNET Common Stock (other
than shares of UUNET Common Stock held by UUNET or any subsidiary of UUNET or
held by MFS or any subsidiary of MFS on the Effective Date, which will be
cancelled without payment) will be converted into and represent the right to
receive 1.777776 shares of MFS Common Stock, with cash in lieu of fractional
shares. Each share of MFS Common Stock issued in connection with the Merger
will be accompanied by the right to purchase one one-thousandth of a share of
Series C Junior Participating Preferred Stock, par value $0.01 per share ("MFS
Rights").

As of the Effective Date, present holders of UUNET Common Stock will cease
to have any rights as holders of such shares, but will have the rights of
holders of MFS Common Stock. After the Effective Date, the stock transfer
books of UUNET will be closed and there will be no further transfers of UUNET
Common Stock.

STOCK OPTIONS AND STOCK PURCHASE PLAN

At or prior to the Effective Date, UUNET and MFS will take all action
necessary to cause the assumption by MFS as of the Effective Date of the
options to purchase UUNET Common Stock, whether vested or unvested, issued
under UUNET's 1995 Performance Option Plan, Incentive Stock Option Plan,
Equity Incentive Plan and Nonemployee Directors Stock Option Plan (the "Stock
Option Plans") or pursuant to separate option agreements outstanding as of the
Effective Date (collectively, the "Outstanding Options"). Each of the
Outstanding Options will be converted without any action on the part of the
holder thereof into an option to purchase shares of MFS Common Stock as of the

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Effective Date. The number of shares of MFS Common Stock that the holder of an
assumed Outstanding Option will be entitled to receive upon the exercise of
such option will be a number of whole shares determined by multiplying the
number of shares of UUNET Common Stock subject to such option, determined
immediately before the Effective Date, by the Exchange Ratio. The option price
of each share of MFS Common Stock subject to an Outstanding Option will be the
amount (rounded up to the nearest whole cent) obtained by dividing the
exercise price per share of UUNET 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 in the Merger Agreement
will 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 will be continued in effect by MFS
subject to amendment, modification, suspension, abandonment or termination as
provided therein, and the Stock Option Plans as so continued will relate only
to the issuance of MFS Common Stock as provided in the Merger Agreement. No
later than one day after the Effective Date of the Merger, MFS shall file a
Registration Statement on Form S-8 relating to the assumed Outstanding
Options.

Upon the earlier to occur of July 31, 1996 or the trading day immediately
preceding the Effective Date, all then outstanding rights to acquire shares of
UUNET Common Stock under UUNET's Employee Stock Purchase Plan (the "Stock
Purchase Plan") will be exercised for the purchase of shares of UUNET Common
Stock. No later than the close of the second trading day immediately preceding
the Effective Date (but not prior to the exercise mentioned in the preceding
sentence), the Board of Directors of UUNET will terminate the Stock Purchase
Plan and all outstanding options to purchase UUNET Common Stock under such
plan. All funds contributed to such Stock Purchase Plan that were not used to
purchase shares of UUNET Common Stock will be returned, in cash, to
participants of the Stock Purchase Plan as soon as administratively feasible
after such termination date, in accordance with the terms of the Stock
Purchase Plan.

CONDITIONS TO CONSUMMATION OF THE MERGER

The obligations of UUNET and MFS to consummate the Merger are subject to the
satisfaction of certain conditions, including: (i) the approval and adoption
of the Merger Agreement and the transactions contemplated thereby by a
majority of the outstanding shares of UUNET Common Stock; (ii) the MFS Share
Proposal shall have been approved by the requisite vote of the holders of MFS
capital stock; (iii) the authorization for listing on the Nasdaq National
Market upon official notice of issuance of the MFS Common Stock issuable to
UUNET stockholders pursuant to the Merger Agreement; (iv) the waiting period
applicable to the consummation of the Merger under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act") has expired or
been terminated; (v) the Registration Statement on Form S-4 becoming effective
in accordance with the provisions of the Securities Act and not being the
subject of any stop order suspending effectiveness issued by the Commission;
and (vi) the absence of any preliminary or permanent injunction or other order
by any federal or state court in the United States which prevents the
consummation of the Merger (each party agreeing to use its best efforts to
have any such injunction lifted).

The obligation of UUNET to consummate the Merger is also subject to the
satisfaction of the following further conditions (unless waived by UUNET): (i)
MFS and Sub having performed in all material respects all of their agreements
contained in the Merger Agreement required to be performed on or prior to the
Effective Date, and the representations and warranties of MFS and Sub
contained in the Merger Agreement are true in all material respects, when made
and on and as of the Effective Date, except to the extent they relate to a
specific date and; (ii) UUNET having received the opinion of

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Heller Ehrman White & McAuliffe, counsel to UUNET, to the effect that as of
the Effective Date, the Merger will be treated for federal income tax purposes
as a reorganization within the meaning of Section 368(a) of the Code; (iii)
receipt of certain specified third party consents; and (iv) MFS having taken
all action necessary to cause John W. Sidgmore, Richard L. Adams, Jr. and one
individual designated by UUNET and acceptable to MFS to become members of the
Board of Directors of MFS subject to consummation of the Merger.

The obligations of MFS and Sub to consummate the Merger are also subject to
the satisfaction of the following further conditions (unless waived by MFS):
(i) UUNET shall have performed in all material respects all of its obligations
contained in the Merger Agreement required to be performed by it on or prior
to the Effective Date, and the representations and warranties of UUNET
contained in the Merger Agreement are true in all material respects, when made
and on and as of the Effective Date, except to the extent they relate to a
specific date; (ii) MFS having received an opinion of Skadden, Arps, Slate,
Meagher & Flom, tax counsel to MFS, to the effect that the Merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(b) of the Code and that UUNET, MFS and Sub will each be a party
to that reorganization; (iii) receipt of certain specified third party
consents; and (iv) MFS having received the Affiliate Letters as defined in the
Merger Agreement.

REPRESENTATIONS AND WARRANTIES

The Merger Agreement contains various representations and warranties of MFS,
Sub and UUNET relating to, among other things, the following matters (which
representations and warranties are subject, in certain cases, to specified
exceptions): (i) the due organization, power and standing of, and similar
corporate matters with respect to, each of UUNET, MFS and Sub; (ii) each of
UUNET's and MFS' capitalization; (iii) the authorization, execution, delivery,
performance and enforceability of the Merger Agreement by each such party and
of the transactions contemplated thereby; (iv) the absence of any conflict
with each of UUNET, MFS' and Sub's Certificate of Incorporation, By-Laws and
material agreements and instruments and compliance with applicable laws; (v)
reports and other documents filed with the Commission and other regulatory
authorities and the accuracy of the information contained therein; (vi) the
absence of certain changes or events having a material adverse effect on the
financial condition, business or results of operations of UUNET and MFS; (vii)
the absence of any default under UUNET's and MFS' employee benefit plans and
compliance with the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"); and (viii) compliance with applicable laws.

CONDUCT OF BUSINESS PENDING THE MERGER

Prior to the Effective Date, unless MFS otherwise agrees in writing, UUNET
will, and will cause its subsidiaries to, carry on their respective businesses
in the usual, regular and ordinary course in substantially the same manner as
previously conducted, and will, and will 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 will be unimpaired at the Effective Date, except for any impairment
which would not have a material adverse effect. UUNET will, and will cause its
subsidiaries to: (i) maintain insurance coverages and its books, accounts and
records in the usual manner consistent with prior practices; (ii) comply in
all material respects with all laws, ordinances and regulations of
governmental entities applicable to UUNET and its subsidiaries; (iii) maintain
and keep its properties and equipment in good repair, working order and
condition, ordinary wear and tear excepted; and (iv) 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
have a material adverse effect on UUNET.

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Except as required or permitted by the Merger Agreement, UUNET will not and
will not propose to: (i) sell or pledge or agree to sell or pledge any capital
stock owned by it in any of its subsidiaries; (ii) amend its Certificate of
Incorporation or By-laws; (iii) 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 (iv) directly or indirectly redeem,
purchase or otherwise acquire or agree to redeem, purchase or otherwise
acquire any shares of UUNET capital stock except for the repurchase, at cost
of shares of UUNET Common Stock upon termination of certain employees',
consultants' or directors' relationship with UUNET pursuant to existing
contractual rights of repurchase in favor of UUNET.

UUNET will not, nor will it permit any of its subsidiaries to: (i) except as
required by the Merger Agreement, 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 UUNET Common Stock under the Stock Option
Plans on or after the date of the Merger Agreement to employees of UUNET or
its subsidiaries in the ordinary course of business and consistent with past
practice, other than to such employees who are executive officers of UUNET
("Permitted Options"), or issuances of UUNET Common Stock pursuant to certain
transactions proposed by UUNET, the Stock Purchase Plan or the exercise of
options outstanding on the date of the Merger Agreement or certain permitted
options; (ii) acquire, lease or dispose or agree to acquire, lease or dispose
of any capital assets or any other assets other than in the ordinary course of
business or in connection with any additional deployment or expansion of
network infrastructure requested by Microsoft; (iii) 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 (a) in the
ordinary course of business, (b) pursuant to any extension of credit by
Microsoft, or (c) pursuant to credit facilities not to exceed an aggregate of
$40 million; (iv) 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 (iv)
which are material, individually or in the aggregate, to UUNET and its
subsidiaries taken as a whole, except that UUNET may acquire or create new
wholly owned subsidiaries in the ordinary course of business and as
contemplated in certain proposed transactions; (v) authorize any capital
expenditures in excess of UUNET's 1996 capital expenditure budget, except for
capital expenditures funded by an increase in credit facilities with
Microsoft; or (vi) enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing.

Except as disclosed to MFS, UUNET will not, nor will it permit, any of its
subsidiaries to, except as required to comply with applicable law and except
as otherwise permitted by the Merger Agreement: (i) adopt, enter into,
terminate or amend any bonus, profit sharing, compensation, severance,
termination, stock option, pension, retirement, deferred compensation,
employment or other MFS 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; (ii) 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 UUNET and its subsidiaries relative to the level in
effect prior to such amendment and except for increases pursuant to UUNET's
pending 1996 salary increases, in an aggregate amount not to exceed 15% of the
base salary of current employees); (iii) pay any benefit not provided under
any existing plan or arrangement; (iv) grant any awards under any bonus,
incentive, performance or other compensation plan or arrangement or UUNET
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; (v)
take

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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 UUNET
benefit plan other than in the ordinary course of business consistent with
past practice; or (vi) adopt, enter into, amend or terminate any contract,
agreement, commitment or arrangement to do any of the foregoing.

UUNET will not, nor will it permit any of its subsidiaries to, make any
investments in non-investment grade securities exceeding $1 million; provided,
however, that UUNET will be permitted to create new wholly owned subsidiaries
in the ordinary course of its business or pursuant to certain proposed
transactions.

UUNET will not, nor will 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).

Prior to the Effective Date, unless UUNET otherwise agrees in writing: (i)
MFS will, and will cause its subsidiaries to, carry on their respective
businesses in the usual, regular and ordinary course in substantially the same
manner as heretofore conducted; (ii) MFS will, and will 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 will be unimpaired at the Effective Date; and (iii) from
the date of the Merger Agreement through the Effective Date, MFS will not pay
or declare any dividend or make any distribution with respect to MFS Common
Stock except as provided by the Merger Agreement.

COVENANTS

Each of UUNET and MFS and their respective subsidiaries will give the other
access throughout the period prior to the Effective Date to its properties,
books, contracts, commitments, records and personnel. UUNET and MFS have
further agreed to prepare and file with the Commission a registration
statement consisting of a joint proxy statement and a prospectus with respect
to the MFS Common Stock to be issued in connection with the Merger and MFS has
agreed to make all necessary filings with respect to the transactions
contemplated by the Merger under applicable state securities laws.

Prior to the Effective Date, UUNET has agreed to deliver to MFS a list
identifying all persons who were, in UUNET's reasonable judgment, "affiliates"
of UUNET as that term is used in Rule 145 under the Securities Act (the
"Affiliates"). UUNET agreed to use all reasonable efforts to obtain, and
deliver to MFS, agreements from all Affiliates that they will not sell MFS
Common Stock unless such sale has been registered under the Exchange Act, such
sale is effected in compliance with Rule 145, or in the opinion of counsel, or
pursuant to a "no action" letter obtained from the staff of the Commission,
such sale is exempt from registration under the Securities Act.

MFS has agreed to use its best efforts to list the MFS Common Stock issued
pursuant to the Merger on the Nasdaq National Market.

UUNET and MFS have filed notifications under the HSR Act in connection with
the Merger and the transactions contemplated thereby, and have agreed to
respond as promptly as practicable to any inquiries received from the Federal
Trade Commission (the "FTC") and the Antitrust Division of the Department of
Justice (the "Antitrust Division") for additional information and
documentation and to respond as promptly as possible to all inquiries and
requests from any State Attorney General or other governmental authority in
connection with antitrust matters.

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UUNET and MFS have agreed 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 the 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 MFS Share Proposal, to the appropriate vote of the
stockholders of UUNET and MFS. Notwithstanding the foregoing, there will be no
action required to be taken and no action will be taken in order to consummate
and make effective the transactions contemplated by the Merger Agreement if
such action, either alone or together with another action, would have a
material adverse effect on either UUNET or MFS.

Following the Effective Date, MFS will use its best efforts to conduct its
business, and will cause the Surviving Corporation to use its best efforts to
conduct its business, except as otherwise contemplated by the 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.

MFS agreed that from the date of the Merger Agreement until the Effective
Date, it would not participate in discussion or negotiations with, or enter
into any agreement pursuant to which MFS 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 part thereof where either (i)
the acquired business 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 the Merger Agreement.

EFFECT ON EMPLOYEE BENEFIT PLANS

MFS agreed to honor in accordance with their terms, all employment,
severance and similar agreements to which UUNET or any subsidiary is a party
and all accrued benefits that are vested as of the Effective Date under any
UUNET benefit plan or Stock Option Plan, except as provided by the terms of
such agreement. MFS agreed to provide employees of UUNET and its subsidiaries
with credit for all service with UUNET or its affiliates for purposes of
vesting and eligibility under any employee benefit plan, program or
arrangement of MFS or its affiliates, including all employee equity incentive
programs of MFS. MFS agreed that employees of UUNET and its subsidiaries who
continue to be employed by MFS or its subsidiaries after the Effective Date
may continue to participate in their current UUNET sponsored employee benefit
programs for twelve months following the Effective Date. After the Effective
Date, employees of UUNET and its subsidiaries will be eligible to participate
in the appropriate employee equity incentive programs of MFS, as determined by
MFS in its sole discretion.

NO SOLICITATION

Neither UUNET nor any of its subsidiaries will, directly or indirectly, take
(nor will UUNET 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 (as defined below), (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 UUNET or its Board of Directors may (a) furnish non-public
information to, or enter into discussions with any person or entity in
connection with an unsolicited bona fide written Acquisition Proposal by such
person or entity, if prior to furnishing such non-public information to, or
entering into discussions or negotiations with such person or entity, an
executed confidentiality agreement is received from such person or entity, (b)
withdraw UUNET's

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Board of Directors' recommendation of the Merger, if and only to the extent
that UUNET's Board of Directors believes in good faith (after consultation
with and based upon the advice of its financial advisor) that such Acquisition
Proposal would, if consummated, result in a transaction more favorable to
UUNET's stockholders than the Merger and the UUNET Board of Directors
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 UUNET
pursuant to Delaware law or the enforceability of the Stock Option Agreement
or (c) comply with Rule 14e-2(a)(2) or (3) promulgated under the Exchange Act
with regard to an Acquisition Proposal. UUNET will promptly communicate to MFS
any solicitation by UUNET 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" means any proposed (a) merger,
consolidation or similar transaction involving UUNET, (b) sale, lease or other
disposition directly or indirectly by merger, consolidation, share exchange or
otherwise of assets of UUNET or its subsidiaries representing 10% or more of
the consolidated assets of UUNET 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, such securities)
representing 10% or more of the voting power of UUNET or (d) transaction in
which any person will 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) will
have been formed which beneficially owns or has the right to acquire
beneficial ownership of 25% or more of the outstanding UUNET Common Stock.

INDEMNIFICATION

MFS and UUNET, as the Surviving Corporation, will jointly and severally
indemnify and hold harmless directors, officers, and agents of UUNET as
provided in UUNET's Certificate of Incorporation, By-laws or indemnification
agreements, in effect on the date of the Merger Agreement with respect to
matters occurring through the Effective Date. The Merger Agreement provides
that the By-laws and the Certificate of Incorporation of Sub will be amended
prior to the Effective Date to contain indemnification provisions identical to
those set forth in the By-laws and Certificate of Incorporation of UUNET as of
April 29, 1996, which provisions will continue in full force and effect for a
period of not less than six years from the Effective Date. The Merger
Agreement provides that, with respect to matters occurring prior to the
Effective Date, MFS will cause UUNET, as the Surviving Corporation, to
maintain directors' and officers' liability insurance policies as currently
maintained by UUNET for three years after the Effective Date to the extent
that such policies are obtainable at an annual cost of not greater than three
times UUNET's last annual premium prior to April 29, 1996; provided that if
such coverage is not available for such amount, UUNET, as the Surviving
Corporation will purchase as much coverage as possible for such amount.

The Merger Agreement provides that under certain circumstances, MFS will
indemnify and hold harmless each member of UUNET's Board of Directors that has
executed, or whose affiliate or employer executed, a Stock Option Agreement
insofar as any loss, claim, damage, liability or expense arises solely out of,
or is based solely upon, a claim that such Director's fiduciary duty as a
member of UUNET's Board of Directors under Delaware law was breached by the
execution by him or his affiliate or employer, in his or its capacity as a
UUNET stockholder, of the Stock Option Agreement.

TERMINATION; FEES AND EXPENSES

The obligations of UUNET and MFS to consummate the Merger are subject to
various conditions as described above under "--Conditions to Consummation of
the Merger."

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The Merger Agreement may be terminated at any time prior to the Effective
Date, whether before or after approval of the matters presented in connection
with the Merger by the stockholders of UUNET as follows: (i) by mutual consent
of the Boards of Directors of UUNET and MFS; (ii) by either MFS or UUNET if
the Merger has not been consummated on or before November 30, 1996; (iii) by
UUNET if any of the conditions to its obligations to consummate the Merger
have not been met or waived by UUNET at such time as such condition is no
longer capable of satisfaction; (iv) by MFS if any of the conditions to its
obligations to consummate the Merger have not been met or waived by MFS at
such time as such condition is no longer capable of satisfaction; (v) in the
event of a Purchase Event (as defined below) or (vi) by either MFS or UUNET,
if the approval of UUNET's stockholders to the Merger is not obtained at the
UUNET Special Meeting; or (vii) by either MFS or UUNET if the approval of MFS'
stockholders to the MFS Share Proposal is not obtained at the Annual Meeting
of stockholders of MFS and at any and all adjournments or postponements
thereof (the "MFS Annual Meeting").

If the Merger Agreement is terminated by MFS because of a failure by the
UUNET stockholders to approve the Merger, the failure of UUNET to perform in
all material respects its agreements contained in the Merger Agreement on or
prior to the Effective Date or the failure of the representations and
warranties of UUNET contained in the Merger Agreement to 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 within 18 months after the date of such termination, UUNET accepts or
recommends to its stockholders for approval an Acquisition Proposal that MFS
believes would result in a transaction more favorable to UUNET's stockholders
than the Merger and such Acquisition Proposal is consummated, UUNET is
obligated to pay MFS a fee of $60 million. If the Merger Agreement is
terminated by UUNET because of a failure by the MFS stockholders to approve
the MFS Share Proposal, the failure of MFS or Sub to perform in all material
respects their agreements contained in the Merger Agreement on or prior to the
Effective Date or the failure of the representations and warranties of MFS or
Sub contained in the Merger Agreement to be true in all material respects when
made 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, MFS is obligated to pay UUNET
a fee of $60 million and, at UUNET's option, purchase 1,551,724 shares of
UUNET Common Stock for $90 million and, at UUNET's option, provide up to $100
million of certain data communications services to UUNET at MFS' cost over
five years, with no more than $25 million in any one year.

Generally, all costs and expenses incurred in connection with the Merger
will be paid by the party incurring such expense.

AMENDMENT; WAIVER

The Merger Agreement provides that it may be amended by the parties thereto,
by or pursuant to action taken by the respective Boards of Directors, at any
time before or after approval thereof by the stockholders of UUNET and MFS,
but, after such approval, no amendment may be made which changes the Exchange
Ratio or which in any way materially adversely affects the rights of such
stockholders, without such further approval of such stockholders. The Merger
Agreement may not be amended except by an instrument in writing signed on
behalf of each of MFS, Sub and UUNET.

At any time prior to the Effective Date, the parties to the Merger
Agreement, 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 thereto; (ii) waive any
inaccuracies in the representations and warranties contained therein or in any
documents delivered pursuant thereto; and (iii) waive any compliance with any
of the agreements or conditions contained therein. Any agreement on the part
of a party to the Merger Agreement to any such extension or waiver will be
valid if set forth in an instrument in writing signed on behalf of such party.

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THE STOCK OPTION AGREEMENT

NUMBER OF SHARES; EXERCISE PRICE

Pursuant to the terms of the Stock Option Agreement, certain stockholders of
UUNET have granted to MFS an irrevocable option (the "Option") to acquire all
of such stockholders' shares of UUNET Common Stock (the "Option Shares")
representing approximately 60% of the issued and outstanding shares of the
UUNET Common Stock for the Exchange Ratio and cash in lieu of fractional
shares. Each share of new MFS Common Stock issued in connection with the
Option exercise will be accompanied by one MFS Right. The Option may only be
exercised following the occurrence of a Purchase Event (as defined below), and
may be exercised only once. The shares of UUNET Common Stock subject to the
Stock Option Agreement are held by the following stockholders (each a "UUNET
Stockholder and collectively the "UUNET Stockholders"): Richard L. Adams, Jr.;
John W. Sidgmore; Les B. Strauss; Daniel C. Lynch; Microsoft; Menlo Ventures
IV, L.P.; Menlo Evergreen V, L.P.; New Enterprise Associates V, Limited
Partnership, Accel IV L.P. and Accel Investors '93 L.P.

EXERCISE OF THE OPTION

The Option is exercisable, in whole but not in part, only upon the
occurrence of one of the following events (each a "Purchase Event"):

(i) any person (other than MFS or any subsidiary of MFS, having 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 UUNET Common Stock such
that, upon consummation of such offer, such person would own or control 50%
or more of the then outstanding UUNET Common Stock, and the Board of
Directors of UUNET, 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 MFS delivers a
written notice of termination to UUNET within (20) business days after the
expiration of such 10 day period;

(ii) UUNET or any subsidiary of UUNET having authorized, recommended,
proposed or publicly announced an intention to authorize, recommend or
propose, or entered into, an agreement with any person (other than MFS or
any subsidiary of MFS) to (i) effect a merger, consolidation or similar
transaction involving UUNET or any of its material subsidiaries, (ii) sell,
lease or otherwise dispose of assets of UUNET or its subsidiaries
representing 10% or more of the consolidated assets of UUNET and its
subsidiaries (other than in the ordinary course of business) or (iii)
issue, sell or otherwise dispose of (including by way of merger,
consolidation, share exchange or any similar 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 UUNET or any of its subsidiaries; or

(iii) any person (other than MFS, any subsidiary of MFS, UUNET or any of
its subsidiaries in a fiduciary capacity) has 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 UUNET Common Stock.

The Option shall terminate and be of no further force and effect upon the
earliest to occur of (i) the Effective Date, (ii) 20 business days after the
termination of the Merger Agreement other than by reason of an event described
in clause (iii) or (iv) below, (iii) exercise of UUNET's right to terminate
the Merger Agreement because of a breach by MFS or Sub of any covenant or
agreement set forth in the Merger Agreement or the failure of any
representation or warranty of MFS or Sub under the Merger

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Agreement or of MFS under the Stock Option Agreement to have been true in all
material respects when made or the failure of the stockholders of MFS to
approve the Merger at the MFS Annual Meeting, (iv) termination of the Merger
Agreement pursuant to mutual consent of MFS and UUNET or the failure to
consummate the Merger by November 30, 1996, or (v) the failure of the closing
of the purchase and sale pursuant to the Option to occur within 30 business
days of the date each stockholder is sent written notice of the exercise of
the Option unless (A) the reason for such failure relates to the inability to
satisfy the conditions to register the shares of MFS Common Stock pursuant to
the Securities Act or for the notification period under the HSR Act to have
expired, in either case, for reasons outside the control of MFS, and (B) MFS
is diligently pursuing the registration of such shares with the Commission or
promptly providing all necessary information to the FTC and the Antitrust
Division as the case may be. Notwithstanding the termination of the Option,
MFS will be entitled to purchase the Option Shares in accordance with the
terms hereof if it has exercised the Option prior to the termination date,
unless clause (iii) or (v) above has been triggered in which case the rights
to exercise this Option will immediately cease.

The consummation of a purchase or a repurchase pursuant to the Stock Option
Agreement is subject to, among other things, the registration of the Option
Shares of MFS Common Stock to be issued upon Option exercise and obtaining any
required regulatory approvals. In the event that prior notification to or
approval of any regulatory authority is required in connection with such
purchase, MFS and, if applicable, a UUNET stockholder will promptly file the
required notice or application for approval and will expeditiously process the
same (and such stockholder will cooperate with MFS in the filing of any such
notice or application and the obtaining of any such approval), and the period
of time that otherwise would run shall run instead from the date on which, as
the case may be, (i) any required notification period has expired or been
terminated or (ii) such approval has been obtained, and in either event, any
requisite waiting period has passed. MFS included the issuance of shares of
MFS Common Stock under the Stock Option Agreement in the notifications under
the HSR Act filed with respect to the Merger.

ADJUSTMENT OF NUMBER OF SHARES SUBJECT TO OPTION

If on or after the date of the Stock Option Agreement there occurs any stock
dividend, stock split, recapitalization, combination or exchange of shares,
merger, consolidation, reorganization or other change or transaction of or by
UUNET, as a result of which shares of any class of stock, other securities,
cash or other property will be issued in respect of any Option Shares or if
any Option Shares shall be changed in the same or another class of stock or
other securities, then, upon exercise of the Option, MFS will receive for the
aggregate price payable upon exercise of the Option, all such shares of stock,
other securities, cash or other property issued, delivered or received with
respect to such Option Shares.

AGREEMENT TO VOTE

Each UUNET Stockholder agreed that from April 29, 1996, to the earlier to
occur of the termination of the Merger Agreement or the Effective Date, at any
meeting of the stockholders of UUNET, however called, and in any action by
consent of the stockholders of UUNET, such UUNET Stockholders will vote the
Option Shares, representing approximately 60% of the outstanding UUNET Common
Stock (a) in favor of the Merger, the Merger Agreement (as amended from time
to time) and the transactions contemplated by the Merger Agreement and (b)
against any proposal for any recapitalization, merger (other than the Merger),
sale of assets or other business combination between UUNET and any person or
entity (other than MFS or Sub) or any other action or agreement that would
result in a breach of any covenant, representation or warranty or any other
obligation or agreement of UUNET under the Merger Agreement or which would
result in any of the conditions to the Merger Agreement not being fulfilled.

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GRANT OF PROXY

Each UUNET Stockholder granted an irrevocable proxy in favor of MFS and Sub
to vote all of such UUNET stockholder's Option Shares: (i) in favor of the
Merger, the Merger Agreement (as amended from time to time) and the
transactions contemplated by the Merger Agreement; and (ii) against any
proposal for any recapitalization, merger (other than the Merger), sale of
assets or other business combination between UUNET and any person or entity
(other than MFS or Sub) or any other action or agreement that would result in
a breach of any covenant, representation or warranty or any other obligation
or agreement of UUNET under the Merger Agreement or which would result in any
of the conditions to the Merger Agreement not being fulfilled. The irrevocable
proxy granted by each UUNET Stockholder terminates upon the earlier to occur
of the Effective Date or the termination of the Merger Agreement.

RESTRICTIONS ON TRANSFER

Each UUNET Stockholder agreed that, from April 29, 1996 to the termination
of the rights of MFS under the Stock Option Agreement, it will not offer or
agree to sell, transfer, tender, assign, hypothecate or otherwise dispose of,
or create or permit to exist any encumbrance on the shares owned by such UUNET
Stockholder at any time prior to the Effective Date; provided that Mr. Adams
may sell, gift or otherwise transfer 325,000 shares of UUNET Common Stock.

MFS VOTING AGREEMENT

VOTING AGREEMENT

Pursuant to the Parent Voting and Proxy Agreement, dated as of April 29,
1996 (the "MFS Voting Agreement"), certain stockholders of MFS have agreed
that during the time the MFS Voting Agreement is in effect, at any meeting of
the MFS stockholders, however called, and in any action by written consent of
the MFS stockholders, such stockholders will vote in favor of the MFS Share
Proposal and have granted irrevocable proxies in favor of UUNET to vote all of
such stockholders' shares of MFS Common Stock held in favor of the MFS Share
Proposal.

The shares of MFS Common Stock subject to the terms the MFS Voting Agreement
and the irrevocable proxies, representing approximately 12% of the outstanding
shares of MFS Common Stock prior to the Offerings, are held by the following
MFS stockholders: James Q. Crowe, Howard Gimbel, William L. Grewcock, Royce J.
Holland, Richard R. Jaros, Robert E. Julian, Ronald W. Roskens, Walter Scott,
Jr., Kenneth E. Stinson and Michael B. Yanney.

NO DISPOSITION OR ENCUMBRANCE OF SHARES AND OPTIONS

Each stockholder agreed that, from April 29, 1996 until the termination of
the MFS Voting Agreement, he will not, and will not offer or agree to, sell,
transfer, tender, assign, hypothecate or otherwise dispose of, or create or
permit to exist any encumbrance on the shares of MFS Common Stock subject to
the terms of the MFS Voting Agreement at any time prior to the Effective Date.

TERMINATION

The MFS Voting Agreement terminates upon the earlier of the Effective Date
or November 30, 1996.

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DESCRIPTION OF MFS CAPITAL STOCK

The summary of the terms of the stock of MFS set forth below does not purport
to be complete and is subject to and qualified in its entirety by reference to
the Amended and Restated Certificate of Incorporation and By-laws of MFS.

GENERAL

The aggregate number of shares of capital stock of all classes which MFS has
authority to issue is 425,000,000, of which 400,000,000 shares are MFS Common
Stock, $.01 par value, and 25,000,000 shares are preferred stock, $.01 par
value (the "MFS Preferred Stock"). The issued and outstanding shares of MFS
Common Stock and MFS Preferred Stock, are duly authorized, validly issued,
fully paid and nonassessable.

The additional shares of authorized stock available for issuance by MFS might
be issued at such times and under such circumstances as to have a dilutive
effect on earnings per share and on the equity ownership of the holders of MFS
Common Stock. The ability of the MFS Board of Directors to issue additional
shares of stock could enhance the MFS Board of Directors' ability to negotiate
on behalf of the stockholders in a takeover situation and also could be used by
the MFS Board of Directors to make a change in control more difficult, thereby
denying stockholders the potential to sell their shares at a premium and
entrenching current management.

COMMON STOCK

Subject to the senior rights of Preferred Stock which may from time to time
be outstanding, holders of MFS Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. Upon dissolution and liquidation, holders of MFS Common
Stock are entitled to a ratable share of the net assets of MFS remaining after
payment to the holders of the MFS Preferred Stock of the full preferential
amounts to which they are entitled. All outstanding shares of MFS Common Stock
are fully paid and nonassessable.

The holders of MFS Common Stock are entitled to one vote per share for the
election of Directors and on all other matters submitted to a vote of
stockholders. Holders of Common Stock are not entitled to cumulative voting for
the election of Directors. They are not entitled to preemptive rights.

The transfer agent and registrar for the MFS Common Stock is Continental
Stock Transfer & Trust Company.

As of the date of this Prospectus, there are 125,804,234 shares of MFS Common
Stock outstanding after giving effect to a 2-for-1 stock split effected in the
form of a stock dividend which was payable on April 26, 1996. The MFS Common
Stock is traded on the Nasdaq National Market under the symbol "MFST."

PREFERRED STOCK

The MFS Preferred Stock has priority over the MFS Common Stock with respect
to dividends and to other distributions, including the distribution of assets
upon liquidation. The MFS Board of Directors is authorized to fix and determine
the terms, limitations and relative rights and preferences of the MFS Preferred
Stock, to establish series of MFS Preferred Stock and to fix and determine the
variations as among series. The MFS Board of Directors without stockholder
approval could issue MFS Preferred Stock with voting and conversion rights
which could adversely affect the voting power of the holders of MFS Common
Stock.

MFS currently has outstanding a series of MFS Preferred Stock consisting of
95,000 shares of Series A Preferred Stock, and a second series consisting of
15,000,000 shares of Series B Preferred Stock.

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<PAGE>

The Series A Preferred Stock was issued on May 23, 1995 in connection with
the sale of 9,500,000 Depositary Shares, each representing a one one-hundredth
interest in a share of Series A Preferred Stock and 15,000,000 shares of
Series B Preferred Stock. The liquidation preference of each share of Series A
Preferred Stock is an amount equal to the greater of (i) the sum of (a) $3,350
and (b) all accrued and unpaid dividends thereon to the date of liquidation,
dissolution or winding up and (ii) the value of the fraction of a share of MFS
Common Stock into which the Series A Preferred Stock is convertible on the
date of such liquidation, dissolution or winding up. Dividends on the Series A
Preferred Stock and the Depositary Shares representing such Series A Preferred
Stock are cumulative from the date of original issue and are payable quarterly
in arrears at the rate of $268.00 per annum per share of Series A Preferred
Stock (equivalent to $2.68 per annum per Depositary Share). Such dividends are
payable in cash or in shares of MFS Common Stock, at the election of the
Company. The Company has paid such dividends in shares of MFS Common Stock
since the issuance of the Series A Preferred Stock. The Depositary Shares
representing such Series A Preferred Stock may be redeemed for cash at the
option of MFS, in whole or in part, at a call price of the sum of (i) $34.170
on and after the Initial Redemption Date through August 30, 1998, $34.003 on
and after August 31, 1998 through November 29, 1998, $33.835 on and after
November 30, 1998 through February 27, 1999, $33.668 on and after February 28,
1999 through April 29, 1999, and $33.50 on and after April 30, 1999, until May
31, 1999, plus (ii) all accrued and unpaid dividends thereon to the date fixed
for redemption. On May 31, 1999 (the "Mandatory Conversion Date"), the Series
A Preferred Stock and the Depositary Shares representing such Series A
Preferred Stock are mandatorily convertible into an aggregate of 19,000,000
shares of MFS Common Stock. The shares of Series A Preferred Stock are
convertible, in whole or in part, at the option of the holder thereof, at any
time prior to the Mandatory Conversion Date, unless previously redeemed, into
shares of MFS Common Stock at a rate of 163.94 shares of Common Stock for each
share of Series A Preferred Stock (equivalent to a conversion price of $20.43
per share of Common Stock), in either case subject to certain adjustments. The
right to convert shares of Series A Preferred Stock called for redemption will
terminate at the close of business on the redemption date.

Each share of Series A Preferred Stock is entitled to 10 votes per share
with respect to the election of directors of MFS and each other matter coming
before any meeting of MFS stockholders. The holders of the Series A Preferred
Stock and the holders of MFS Common Stock will vote together as a single
class, unless otherwise provided by law or the Restated Certificate of MFS.
The approval of more than two-thirds of the votes entitled to be cast by the
holders of issued and outstanding shares of Series A Preferred Stock is
required to amend the Amended and Restated Certificate of MFS or to
materially, adversely changes the rights, preferences or privileges of the
Series A Preferred Stock. The holders of the outstanding shares of Series A
Preferred Stock shall also have the right, voting together with the holders of
any other outstanding shares of Voting Preferred Stock (as hereinafter
defined) as a separate voting group, to elect two members of the Board of
Directors of MFS at any time six or more quarterly dividends on any shares of
Voting Preferred Stock shall be in arrears and unpaid, in whole or in part,
whether or not declared and whether or not any funds shall be or have been
legally available for payment thereof. For this purpose, "Voting Preferred
Stock" shall mean the shares of Series A Preferred Stock and each other series
of Preferred Stock which shall have substantially similar voting rights
(including voting as one voting group with other shares of Voting Preferred
Stock) with respect to the election of directors upon substantially similar
arrearages of dividends. In such event, the number of Directors of MFS shall
be increased by two, and, unless a regular meeting of the stockholders of MFS
is to be held within 60 days thereof for the purpose of electing Directors,
within 30 days thereafter, MFS shall call a special meeting of the holders of
the outstanding shares of Voting Preferred Stock for the purpose of electing
such Directors. If such special meeting shall not have been so called by MFS,
or such regular meeting shall not be so held, a special meeting may be called
for such purpose at the expense of MFS by the holders of not less than 10% of
the outstanding shares of any series of Voting Preferred Stock; and notice of
any such special meeting shall be given by the person or persons calling the
same to the holders of the outstanding shares of the Voting Preferred

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Stock. At any such special meeting the holders of the outstanding shares of
Voting Preferred Stock (voting separately as a class with each share having
one vote) shall elect two members of the Board of Directors of MFS. If a
regular meeting of the stockholders of MFS for the purpose of electing
Directors is to be held within 60 days after the time the holders of the
outstanding shares of Voting Preferred Stock become so entitled to elect two
Directors, then at such regular meeting, the holders of the outstanding shares
of Voting Preferred Stock (voting separately as a class with each share having
one vote) shall elect two members of the Board of Directors. The right of the
holders of the Voting Preferred stock (voting separately as a class) to elect
two members of the Board of Directors of MFS shall continue until such time as
no dividends on any outstanding shares of Voting Preferred Stock are in
arrears and unpaid, in whole or in part, at which time (i) the voting power of
the holders of the outstanding shares of Voting Preferred Stock so to elect
two Directors shall cease, but always subject to the vesting of such voting
power upon the occurrence of each and every like arrearage of dividends, and
(ii) the term of office of each member of the Board of Directors who was
elected pursuant to this provision shall automatically expire.

The Series B Preferred Stock is convertible into shares of MFS Common Stock
at any time after the first anniversary of the date of issuance (September 30,
1996) at a conversion price of $21.563. Each share of Series B Preferred Stock
is convertible into .0463768 shares of MFS Common Stock, or an aggregate of
695,652 shares of MFS Common Stock. Dividends on the Series B Preferred Stock
accrue at the rate of 7% per annum and are payable in cash. Dividends will be
paid only when, as and if declared by the Board. The liquidation preference on
each share of Series B Preferred Stock is $1.00, plus all accrued and unpaid
dividends thereon to the date of liquidation, dissolution or winding up. The
Series B Preferred Stock cannot be redeemed by MFS prior to September 30,
2001. Each share of Series B Preferred Stock is entitled to 10 votes per share
with respect to any and all matters presented to the MFS stockholders for
their action and consideration. Holders of Series B Preferred Stock vote
together with the holders of MFS Common Stock as a single class unless
otherwise required by law or the proposed action amends, alters or repeals the
preferences, special rights or other powers of the Series B Preferred Stock.
The shares of Series B Preferred Stock, however, are held subject to an
irrevocable proxy that has been granted to the Secretary and Assistant
Secretary of MFS to vote all shares of Series B Preferred Stock on all
matters, other than the election of directors and matters as to which the
holders of Series B Preferred Stock vote as a separate class, in proportion to
the holders of MFS Common Stock.

The Series B Preferred Stock is non-transferable for a period of six years
from its issuance date, with limited exceptions, and is redeemable at the
option of MFS at the end of such six-year period. Accordingly, the Series B
Preferred Stock has no realizable resale value until the earlier of its
conversion into MFS Common Stock at the option of the holder or the expiration
of the six-year transfer restriction.

MFS has also authorized 75,000 shares to be issued as Series C Preferred
Stock. A description of the terms of the Series C Preferred Stock is set forth
below under "--Preferred Stock Purchase Rights."

PREFERRED STOCK PURCHASE RIGHTS

In September 1995, MFS adopted the MFS Rights Plan and in connection
therewith entered into the MFS Rights Agreement. To implement the MFS Rights
Plan, the MFS Board of Directors authorized the issuance of one MFS Right for
each share of MFS Common Stock outstanding as of October 2, 1995 and issued
thereafter until the Distribution Date (as defined in the MFS Rights
Agreement). Each MFS Right entitles the holder to purchase from MFS one one-
thousandth of a share of Series C Preferred Stock at an initial purchase price
of $300, subject to adjustment. The MFS Rights expire on September 30, 2005,
unless extended or earlier redeemed by MFS.

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The MFS Rights separate from the MFS Common Stock and a Distribution Date
occurs upon the earlier of 10 days following public disclosure that certain
persons or groups of persons have become a beneficial owner of 15% or more of
the outstanding MFS Common Stock (an "Acquiring Person") or 10 business days
following the commencement of a tender offer or exchange offer that would
result in certain persons or groups becoming an Acquiring Person. Upon the
occurrence of a Distribution Date, each holder of a MFS Right has the right to
receive, upon exercise of the right, MFS Common Stock having a value equal to
two times the exercise price of the MFS Right, except that all MFS Rights held
by an Acquiring Person become null and void.

In the event that a person becomes an Acquiring Person and MFS is acquired
in a merger or other business combination in which MFS is not the surviving
corporation or more than 50% of the assets or earning power of MFS' assets are
sold or transferred, each holder, except for Acquiring Persons, of a MFS Right
has the right to receive, upon exercise, common stock of the acquiring company
which has a value equal to two times the exercise price of the MFS Right.

The Series C Preferred Stock will be nonredeemable, and subordinate to all
other series of MFS Preferred. The liquidation preference of each share of
Series C Preferred Stock is an amount equal to (a) 1,000 times the aggregate
amount to be distributed per share to holders of MFS Common Stock and (b)
after the payments set forth in (a), a ratable and proportionate share with
the holders of MFS Common Stock of the remaining assets to be distributed.
Each share of Series C Preferred Stock will be entitled to receive, when, as
and if declared, a quarterly dividend at the rate equal to 1,000 times the
aggregate per share amount of all cash dividends and 1,000 the aggregate per
share amount of all non-cash dividends or other distributions (payable in
kind) (other than a dividends payable in of MFS equity securities). Each share
of Series C Preferred Stock will have 1,000 votes, subject to adjustment,
voting together with the MFS Common Stock and not as a separate class. If MFS
enters into any consolidation, merger, combination or other transaction in
which the shares of MFS Common Stock are exchanged, each share of Series C
Preferred Stock will be entitled to receive 1,000 times the amount received
per share of MFS Common Stock. The rights of the Series C Preferred Stock as
to dividends, voting rights and liquidation are protected by antidilution
provisions.

MFS may redeem the MFS rights in whole, but not in part, at any time until
ten days following the date on which there has been public disclosure that, or
facts indicating that, a person has become an Acquiring Person at a price (the
"Redemption Right") of $.01 per MFS Right (or such other consideration deemed
appropriate by the MFS Board of Directors) by resolution of the MFS Board of
Directors, subject to certain exceptions. The redemption of the MFS Rights may
be made effective at such time on such basis with such conditions as the MFS
Board of Directors in its sole discretion may establish. The MFS Rights
terminate immediately upon the action of the MFS Board of Directors ordering
redemption of the MFS Rights and thereafter the holders of MFS Rights will
only be able to receive the Redemption Price.

Other than provisions relating to the principal economic terms of the MFS
Rights, the MFS Rights Agreement may be amended by resolution of MFS' Board of
Directors, subject to certain exceptions, prior to the Distribution Date.
After the Distribution Date, the MFS Rights Agreement may be amended by
resolution of the MFS' Board of Directors, subject to certain exceptions, in
order to cure any ambiguity, to make changes which do not adversely affect the
interests of holders of MFS Rights (excluding the interests of any Acquiring
Person or its affiliates or associates), or to shorten or lengthen any time
period under the MFS Rights Agreement; provided, however, that no amendment to
adjust the time period governing redemption may be made at such time as the
MFS Rights are no redeemable.

The MFS Rights have certain anti-takeover effects. The MFS Rights will cause
substantial dilution to a person or group that attempts to acquire, or merge
with, MFS without conditioning the offer on the MFS Rights being rendered
inapplicable.

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UNDERWRITING

Subject to the terms and conditions set forth in an underwriting agreement
among the Company and the U.S. Underwriters (the "U.S. Underwriting
Agreement"), the Company has agreed to sell to each of the U.S. Underwriters
named below (the "U.S. Underwriters"), and each of the U.S. Underwriters, for
whom Salomon Brothers Inc, Goldman, Sachs & Co., Bear, Stearns & Co. Inc.,
Smith Barney Inc. and UBS Securities LLC are acting as the U.S.
representatives (the "U.S. Representatives"), has severally agreed to purchase
the number of Shares set forth opposite its name below:

<TABLE>
<CAPTION>
UNDERWRITING
U.S. UNDERWRITERS COMMITMENT
----------------- ------------
<S> <C>
Salomon Brothers Inc ...........................................
Goldman, Sachs & Co. ...........................................
Bear, Stearns & Co. Inc. .......................................
Smith Barney Inc. ..............................................
UBS Securities LLC..............................................

----------
Total......................................................... 22,400,000
==========
</TABLE>

The Company has been advised by the U.S. Representatives that the several
U.S. Underwriters initially propose to offer such Shares to the public at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
Share. The U.S. Underwriters may allow, and such dealers may re-allow, a
concession not in excess of $ per Share to other dealers. After the
Offerings, the public offering price and such concessions may be changed.

The Company has granted to the U.S. Underwriters and the international
underwriters (the "International Underwriters" and, collectively with the U.S.
Underwriters, the "Underwriters") options, exercisable during the 30-day
period after the date of this Prospectus, to purchase up to 4,200,000
additional shares of Common Stock from the Company at the price to public less
the underwriting discount, solely to cover over-allotments. To the extent that
the U.S. Underwriters and the International Underwriters exercise such
options, each of the U.S. Underwriters and the International Underwriters, as
the case may be, will be committed, subject to certain conditions, to purchase
a number of option shares proportionate to such U.S. Underwriter's or
International Underwriter's initial commitment.

The Company has entered into an International Underwriting Agreement with
the International Underwriters named therein, for whom Salomon Brothers
International Limited, Goldman Sachs International, Bear, Stearns
International Limited, Smith Barney Inc. and UBS Limited are acting as the
representatives (the "International Representatives"), providing for the
concurrent offer and sale of 5,600,000 Shares (in addition to the shares
covered by the over-allotment options described above) outside the United
States and Canada. Both the U.S. Underwriting Agreement and the International
Underwriting Agreement provide that the obligations of the U.S. Underwriters
and the International Underwriters are such that if any of the Shares are
purchased by the U.S. Underwriters pursuant to the U.S. Underwriting
Agreement, or by the International Underwriters pursuant to the International
Underwriting Agreement, all the Shares agreed to be purchased by either the
U.S. Underwriters or the International Underwriters, as the case may be,
pursuant to their respective agreements must be so purchased. The price to
public and underwriting discount per share for the U.S. Offering and the
International Offering will be identical. The closing of the International
Offering is a condition to the closing of the U.S. Offering and the closing of
the U.S. Offering is a condition to the closing of the International Offering.

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Each U.S. Underwriter has severally agreed that, as part of the distribution
of the 22,400,000 Shares offered by the U.S. Underwriters, (i) it is not
purchasing any Shares for the account of anyone other than a United States or
Canadian Person and (ii) it has not offered or sold, and will not offer or
sell, directly or indirectly, any Shares or distribute this Prospectus to any
person outside the United States or Canada or to anyone other than a United
States or Canadian Person. Each International Underwriter has severally agreed
that, as part of the distribution of the 5,600,000 Shares by the International
Underwriters, (i) it is not purchasing any Shares for the account of any
United States or Canadian Person, and (ii) it has not offered or sold, and
will not offer or sell, directly or indirectly, any Shares or distribute any
Prospectus relating to the International Offering to any person within the
United States or Canada or to any United States or Canadian person.

The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Agreement Between U.S.
Underwriters and International Underwriters. "United States" or "Canadian
Person" means any person who is a national or resident of the United States or
Canada, any corporation, partnership or other entity created or organized in
or under the laws of the United States or Canada or of any political
subdivision thereof, and any estate or trust which is subject to United States
or Canadian federal income taxation, regardless of the source of its income
(other than the foreign branch of any United States or Canadian Person), and
includes any United States or Canadian branch of a person other than a United
States or Canadian Person.

Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, sales may be made between the U.S. Underwriters and the
International Underwriters of such number of shares of MFS Common Stock as may
be mutually agreed. The price of any Shares so sold shall be the public
offering price, less an amount not greater than the concession to securities
dealers. To the extent that there are sales between the U.S. Underwriters and
the International Underwriters pursuant to the Agreement Between U.S.
Underwriters and International Underwriters, the number of Shares initially
available for sale by the U.S. Underwriters or by the International
Underwriters may be more or less than the amount specified on the cover page
of this Prospectus.

Any offer of the Shares in Canada will be made only pursuant to an exemption
from the registration and qualification requirements in any jurisdiction in
Canada in which such offer is made.

The U.S. Underwriting Agreement provides that the Company will indemnify the
U.S. Underwriters against certain liabilities and expenses, including
liabilities under the Securities Act, or contribute to payments the U.S.
Underwriters may be required to make in respect thereof.

The Company has agreed not to offer, sell, contract to sell or otherwise
dispose of, directly or indirectly, or announce the offering of any shares of
MFS Common Stock, including any such shares beneficially or indirectly owned
or controlled by the Company, or any securities convertible into, or
exchangeable or exercisable for, shares of MFS Common Stock, for 90 days from
the date of this Prospectus, without the prior written consent of the U.S.
Representatives, except for (i) shares issued and sold in connection with
acquisitions by the Company, including the Merger, subject to certain
limitations, (ii) shares issued in connection with any employee benefit or
incentive plans of the Company, (iii) shares issued in respect of obligations
existing before the date of this Prospectus and (iv) shares issued in
connection with the Offerings made hereby.

In connection with the U.S. Offering, certain U.S. Underwriters and selling
group members who are qualifying registered market makers on the Nasdaq
National Market may engage in passive market making transactions in the Shares
on the Nasdaq National Market in accordance with Rule 10b-6A under the
Exchange Act, during the two business day period before commencement of offers
or sales of the Shares offered hereby. Passive market making transactions must
comply with certain volume and price limitations and be identified as such. In
general, a passive market maker may display its bid at a price not in excess
of the highest independent bid for the security, and if all independent bids
are lowered below the passive market maker's bid, then such bid must be
lowered when certain purchase limits are exceeded.

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Goldman, Sachs & Co. ("Goldman Sachs") acted as financial advisor to UUNET
in connection with the Merger and rendered its opinion to the UUNET Board of
Directors regarding the fairness of the Merger consideration. UUNET agreed to
pay Goldman Sachs a success-based fee and to reimburse Goldman Sachs for its
out-of-pocket expenses in connection therewith, as well as agreeing to
indemnify Goldman Sachs against certain liabilities, including liabilities
under federal securities laws.

LEGAL MATTERS

Certain legal matters in connection with the securities offered hereby are
being passed upon for the Company by Willkie Farr & Gallagher, New York, New
York, counsel to the Company. Certain regulatory matters are being passed upon
for the Company by Swidler & Berlin Chartered, Washington, D.C. Andrew Lipman,
an executive officer of the Company, is a member of Swidler & Berlin
Chartered. Certain legal matters in connection with the Offerings are being
passed upon for the Underwriters by Akin, Gump, Strauss, Hauer & Feld, L.L.P.

EXPERTS

The Consolidated Financial Statements of MFS Communications Company, Inc. as
of December 31, 1995 and 1994 and for each of the three years in the period
ended December 31, 1995 included in this Prospectus and incorporated by
reference to the Annual Report on Form 10-K of MFS Communications Company,
Inc. for the year ended December 31, 1995, have been so included and
incorporated in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.

The Consolidated Financial Statements and schedule of UUNET Technologies,
Inc. as of December 31, 1995 and 1994 and for each of the three years in the
period ended December 31, 1995 included in this Prospectus, have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto and are included herein in reliance upon the
authority of said firm as experts in giving said reports.

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GLOSSARY

ATM (asynchronous transfer mode)--An information transfer standard that is
one of a general class of packet technologies that relay traffic by way of an
address contained within the first five bytes of a standard fifty-three byte
long packet or cell. The ATM format can be used by many different information
systems, including LANs, to deliver traffic at varying rates, permitting a mix
of data, voice and video.

Backbone--A centralized high-speed network that interconnects smaller,
independent networks.

Bandwidth--The number of bits of information which can move through a
communications medium in a given amount of time.

CAP (competitive access provider)--A company that provides its customers
with an alternative to the LEC for local transport of private line and special
access telecommunications services.

Central offices--The switching centers or central switching facilities of
the LECs.

Co-carrier status--A regulatory scheme under which the incumbent LEC is
required to integrate new, competing providers of local exchange service, such
as the Company, into the systems of traffic exchange, inter-carrier
compensation, and other inter-carrier relationships that already exist among
LECs in most jurisdictions.

Collocation--The ability of a CAP such as the Company to connect its network
to the LECs central offices. Physical collocation occurs when a CAP places its
network connection equipment inside the LEC's central offices. Virtual
collocation is an alternative to physical collocation pursuant to which the
LEC permits a CAP to connect its network to the LEC's central offices on
comparable terms, even though the CAP's network connection equipment is not
physically located inside the central offices.

DS-1--A data communications circuit capable of transmitting data at 1.5 Mbps
(sometimes called T-1).

DS-3--A data communications circuit capable of transmitting data at 45 Mbps
(sometimes called T-3).

Dedicated--Telecommunications lines dedicated or reserved for use by
particular customers.

Digital--A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies employ
a sequence of these pulses to represent information as opposed to the
continuously variable analog signal. The precise digital numbers minimize
distortion (such as graininess or snow in the case of video transmission, or
static or other background distortion in the case of audio transmission).

E-3--A data communications circuit capable of transmitting data at 34 Mbps
(typically used outside North America).

Ethernet--A local area network technology used for connecting computers,
printers, workstations, terminals, etc., within the same building. Ethernet
operates over twisted wire or coaxial cable at speeds up to 10 megabits per
second. Ethernet is the most popular LAN technology.

FCC--Federal Communications Commission.

FDDI (Fiber Distributed Data Interface)--Based on fiber optics, FDDI is a
100 megabit per second local area network technology used to connect
computers, printers, and workstations at very high speeds. FDDI is also used
as backbone technology to interconnect other LANs.

95
<PAGE>

Fiber mile--The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "route mile" below.

Firewall--A system placed between networks that filters data passing through
it and removes unauthorized traffic, thereby enhancing the security of the
network.

Frame relay--An information transfer standard for relaying traffic based on
an address contained in the six byte header of a variable length packet that
is up to 2,106 bytes long. Frame relay has less overhead than ATM but may be
difficult to implement at speeds greater than 45 Mps.

Graphical user interface--A means of communicating with a computer by
manipulating icons, menus and windows rather than using text commands.

Home page--An entry point for a collection of information presented through
the World Wide Web.

Interconnection Decisions--Rulings by the FCC announced in September 1992
and August 1993, which require the BOCs and most other large LECs to provide
interconnection in LEC central offices to any CAP, long distance carrier or
end user seeking such interconnection for the provision of interstate special
access and switched access transport services.

Internet--A global collection of interconnected computer networks which use
TCP/IP, a common communications protocol.

ISDN--Integrated Services Digital Network. An information transfer standard
for transmitting digital voice and data over telephone lines at speeds up to
128 Kbps.

Kbps--Kilobits per second. A transmission rate. One kilobit equals 1,024
bits of information.

LANs (local area networks)--The interconnection of computers for the purpose
of sharing files, programs and various devices such as printers and high-speed
modems. LANs may include dedicated computers or file servers that provide a
centralized source of shared files and programs.

Local exchange--A geographic area determined by the appropriate state
regulatory authority in which calls generally are transmitted without toll
charges to the calling or called party.

LECs (local exchange carrier)--A company providing local telephone services.

Long distance carriers (interexchange carriers)--Long distance carriers
provide services between local exchanges on an interstate or intrastate basis.
A long distance carrier may offer services over its own or another carrier's
facilities.

Mbps--Megabits per second. A transmission rate. One megabit equals 1,024
kilobits.

Modem--A device for transmitting digital information over an analog
telephone line.

Network systems integration--Involves the creation of turnkey
telecommunications networks and systems including: (i) route and site
selection, (ii) rights of way and legal authorizations and/or acquisition;
(iii) design and engineering of the system, including technology and vendor
assessment and selection, determining fiber optic circuit capacity, and
establishing reliability/flexibility standards; and (iv) project and
construction management, including contract negotiations, purchasing and
logistics, installation as well as testing and construction management.

96
<PAGE>

Number portability--The ability of an end user to change local exchange
carriers while retaining the same telephone number.

On-line services--Commercial information services that offer a computer user
access to a specified slate of information, entertainment and communications
menus on what appears to be a single system.

POPs (points of presence)--With respect to voice communication, locations
where a long distance carrier has installed transmission equipment in a
service area that serves as, or relays calls to, a network switching center of
that long distance carrier, and with respect to an Internet access services
network, geographic areas within which such network provides local access.

PPP--Point-to-Point-Protocol. An information transfer standard for
transmitting packets over data connections between two points.

PUC (public utility commission)--A state regulatory body, established in
most states, which regulates utilities, including telephone companies
providing intrastate services.

Private line--A dedicated telecommunications connection between end user
locations.

Public switched network--That portion of a LEC's network available to all
users generally on a shared basis (i.e., not dedicated to a particular user).
Traffic along the public switched network is generally switched at the LEC's
central offices.

Reciprocal compensation--The same compensation of a new competitive local
exchange carrier for termination of a local call by the BOC on its network, as
the new competitor pays the BOC for termination of local calls on the BOC
network.

Resale--The provision by a provider of telecommunications services of such
services to other providers or carriers on a wholesale basis for use by such
providers to provide telecommunication services to its own end user.

Route mile--The number of miles of the telecommunications path in which
fiber optic cables are installed.

Router--A system placed between networks that relays data to those networks
based upon a destination address contained in the data packets being routed.

SLIP--Serial Line Internet Protocol. An information transfer standard for
transmitting Internet Protocol packets over asynchronous data connections
between two points.

Special Access Services--The lease of private dedicated telecommunication
lines or circuits along the network of a LEC or a CAP, which lines run to or
from long distance carriers POPs.

Switch--A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.

Switched access transport services--Transportation of switched traffic along
dedicated lines between the LEC central offices and long distance carrier
POPs.

Switched traffic--Telecommunications traffic along the public switched
network. This traffic is generally switched at the LEC's central offices.

TCP/IP--Transmission Control Protocol/Internet Protocol. A suite of network
protocols that allow computers with different architectures and operating
system software to communicate with other computers on the Internet.

97
<PAGE>

T-1--A data communications circuit capable of transmitting data at 1.5 Mbps
(sometimes called DS-1).

T-3--A data communications circuit capable of transmitting data at 45 Mbps
(sometimes called DS-3).

Token Ring--A local area network technology used to interconnect personal
computers, file servers, printers, and other devices. Token Ring LANs
typically operate at either 4 megabits per second or 16 megabits per second.

Unbundled Access--Access by competitive telecommunication carriers to
unbundled elements of a telecommunication services provider's network
facilities, equipment, features, functions and capabilities, at any
technically feasible point within such network.

Unix--A computer operating system frequently found on workstations and PCs
and noted for its portability and communications functionality.

UUCP--Unix to Unix Copy Protocol. A transmission protocol usually found on
Unix systems that is commonly used to transfer electronic mail and news.

World Wide Web or Web--A collection of computer systems supporting a
communications protocol that permits multi-media presentation of information
over the Internet.

98
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Public Accountants.................................. F-3
Consolidated Statements of Operations for the Three Years Ended December
31, 1995................................................................. F-4
Consolidated Balance Sheets at December 31, 1995 and 1994................. F-5
Consolidated Statements of Changes in Stockholders' Equity for the Three
Years Ended
December 31, 1995........................................................ F-6
Consolidated Statements of Cash Flows for the Three Years Ended December
31, 1995................................................................. F-7
Notes to Consolidated Financial Statements................................ F-10
Consolidated Statements of Operations for the Three Months Ended March 31,
1996 and 1995 (unaudited)................................................ F-28
Consolidated Balance Sheet at March 31, 1996 (unaudited).................. F-29
Consolidated Statement of Changes in Stockholders' Equity for the Three
Months Ended March 31, 1996 (unaudited).................................. F-31
Consolidated Statements of Cash Flows for the Three Months Ended March 31,
1996 and 1995 (unaudited)................................................ F-32
Notes to Consolidated Financial Statements (unaudited).................... F-34
</TABLE>

F-1
<PAGE>

UUNET TECHNOLOGIES, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Public Accountants.................................. F-38
Consolidated Balance Sheets at December 31, 1994 and 1995................. F-39
Consolidated Statements of Operations for the Three Years Ended December
31, 1995................................................................. F-40
Consolidated Statements of Stockholders' Equity for the Three Years Ended
December 31, 1995........................................................ F-41
Consolidated Statements of Cash Flows for the Three Years Ended December
31, 1995................................................................. F-42
Notes to Consolidated Financial Statements................................ F-43
Report of Independent Public Accountants.................................. F-56
Valuation and Qualifying Accounts......................................... F-57
Consolidated Balance Sheets at December 31, 1995 and March 31, 1996 (unau-
dited)................................................................... F-58
Consolidated Statements of Operations for the Three Months Ended March 31,
1995 and 1996 (unaudited)................................................ F-59
Consolidated Statements of Cash Flows for the Three Months Ended March 31,
1995 and 1996 (unaudited)................................................ F-60
Notes to Consolidated Financial Statements (unaudited).................... F-61
</TABLE>

F-2
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------

To the Stockholders and Board of Directors
MFS Communications Company, Inc.

We have audited the accompanying consolidated balance sheets of MFS
Communications Company, Inc. and Subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of operations, changes in
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 the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MFS
Communications Company, Inc. and Subsidiaries as of December 31, 1995 and
1994, and the consolidated 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.

COOPERS & LYBRAND L.L.P.

Omaha, Nebraska
February 14, 1996, except for Note 20 as to which thedate is April 16, 1996.

F-3
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenue........................................ $ 583,194 $ 286,747 $141,111
Costs and expenses:
Operating expenses........................... 562,300 273,431 102,905
Depreciation and amortization................ 142,496 73,869 34,670
General and administrative expenses.......... 117,703 75,576 34,989
--------- --------- --------
Total costs and expenses................... 822,499 422,876 172,564
--------- --------- --------
Loss from operations........................... (239,305) (136,129) (31,453)
Other income (expense):
Interest income.............................. 13,188 24,769 8,868
Interest expense............................. (38,606) (40,879) (75)
Other........................................ (2,575) (1,065) (329)
--------- --------- --------
Total other income (expense)............... (27,993) (17,175) 8,464
--------- --------- --------
Loss before income taxes....................... (267,298) (153,304) (22,989)
Income tax benefit (expense)................... (600) 2,103 7,220
--------- --------- --------
Net loss....................................... (267,898) (151,201) (15,769)
Dividends on preferred stock................... (15,064) -- --
--------- --------- --------
Net loss applicable to common stockholders..... $(282,962) $(151,201) $(15,769)
========= ========= ========
Net loss per share applicable to common stock-
holders....................................... $ (2.21) $ (1.21) $ (0.15)
========= ========= ========
</TABLE>

The accompanying notes are an integral part of the Consolidated Financial
Statements.

F-4
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AT DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1994
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 51,182 $ 21,518
Marketable securities................................ 85,715 362,261
Accounts receivable.................................. 140,302 72,032
Costs and earnings in excess of billings on uncom-
pleted contracts.................................... 45,142 24,397
Prepaid expenses and other current assets............ 51,703 33,456
---------- ----------
Total current assets............................... 374,044 513,664
Networks and equipment, at cost........................ 1,315,952 787,453
Less accumulated depreciation and amortization......... (213,548) (113,863)
---------- ----------
Networks and equipment, net........................ 1,102,404 673,590
Other assets, net...................................... 390,686 397,292
---------- ----------
Total assets....................................... $1,867,134 $1,584,546
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable and long-term debt.. $ 1,995 $ 16,973
Current portion of capital lease obligations......... 1,922 --
Accounts payable..................................... 172,407 127,163
Accrued costs and billings in excess of revenue on
uncompleted contracts............................... 28,686 28,141
Accrued compensation................................. 6,119 12,719
Other current liabilities............................ 63,328 45,841
---------- ----------
Total current liabilities.......................... 274,457 230,837
Notes payable and long-term debt, less current portion. 692,059 548,333
Capital lease obligations, less current portion........ 31,412 --
Other liabilities...................................... 27,902 25,725
Minority interest...................................... 10,972 9,548
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $.01 par value. Authorized
25,000,000 shares:
Series A, 8% cumulative convertible;
issued 95,000 in 1995, variable liquidation pref-
erence............................................ 1 --
Series B, 7 3/4% cumulative convertible;
issued 15,000,000 in 1995, liquidation preference
$1.00 per share plus unpaid
dividends......................................... 150 --
Common stock, $.01 par value. Authorized 400,000,000
shares; issued 130,260,228 in 1995 and 128,306,436
in 1994........................................... 651 642
Additional paid-in capital........................... 1,512,394 1,050,339
Deferred charge...................................... (1,017) (3,351)
Foreign currency adjustment.......................... 45 288
Unrealized investment gain (loss).................... 204 (5,265)
Accumulated deficit.................................. (555,221) (272,550)
---------- ----------
957,207 770,103
Treasury stock, 5,800,000 shares, at cost............ (126,875) --
---------- ----------
Total stockholders' equity......................... 830,332 770,103
---------- ----------
Total liabilities and stockholders' equity......... $1,867,134 $1,584,546
========== ==========
</TABLE>

The accompanying notes are an integral part of the Consolidated Financial
Statements.

F-5
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
SERIES A SERIES B ADDITIONAL FOREIGN UNREALIZED
PREFERRED PREFERRED COMMON PAID-IN DEFERRED CURRENCY INVESTMENT ACCUMULATED TREASURY
STOCK STOCK STOCK CAPITAL CHARGE ADJUSTMENT GAIN (LOSS) DEFICIT STOCK TOTAL
--------- --------- ------ ---------- -------- ---------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at Janu-
ary 1, 1993.... $-- $-- $ 10 $ 404,033 $ -- $ 53 $ -- $(105,580) $ -- $298,516
Recapitalization. -- -- 407 (407) -- -- -- -- -- --
Contribution
from parent.... -- -- -- 30,000 -- -- -- -- -- 30,000
Issuances of
stock.......... -- -- 192 492,032 -- -- -- -- -- 492,224
Stock options
exercised...... -- -- 5 5,571 -- -- -- -- -- 5,576
Issuance of com-
mon stock war-
rants.......... -- -- -- 7,000 (7,000) -- -- -- -- --
Amortization of
deferred
charge......... -- -- -- -- 1,316 -- -- -- -- 1,316
Foreign currency
adjustment..... -- -- -- -- -- (488) -- -- -- (488)
Change in
unrealized in-
vestment gain
(loss)......... -- -- -- -- -- -- (270) -- -- (270)
Net loss........ -- -- -- -- -- -- -- (15,769) -- (15,769)
---- ---- ---- ---------- ------- ----- ------ --------- --------- --------
Balance at De-
cember 31,
1993........... -- -- 614 938,229 (5,684) (435) (270) (121,349) -- 811,105
Issuance of
stock for ac-
quisitions..... -- -- 23 81,985 -- -- -- -- -- 82,008
Stock options
exercised...... -- -- 5 5,611 -- -- -- -- -- 5,616
Settlement of
deferred pur-
chase price ad-
justments...... -- -- -- 24,514 -- -- -- -- -- 24,514
Amortization of
deferred
charge......... -- -- -- -- 2,333 -- -- -- -- 2,333
Foreign currency
adjustment..... -- -- -- -- -- 723 -- -- -- 723
Change in
unrealized in-
vestment gain
(loss)......... -- -- -- -- -- -- (4,995) -- -- (4,995)
Net loss........ -- -- -- -- -- -- -- (151,201) -- (151,201)
---- ---- ---- ---------- ------- ----- ------ --------- --------- --------
Balance at De-
cember 31,
1994........... -- -- 642 1,050,339 (3,351) 288 (5,265) (272,550) -- 770,103
Issuances of
stock for ac-
quisitions and
other.......... -- -- 2 6,910 -- -- -- -- -- 6,912
Issuance of pre-
ferred stock... 1 -- -- 306,454 -- -- -- -- -- 306,455
Exchange of com-
mon stock for
preferred
stock.......... -- 150 -- 126,725 -- -- -- -- (126,875) --
Stock options
exercised...... -- -- 4 5,844 -- -- -- -- -- 5,848
Stock compensa-
tion plans ad-
ditions........ -- -- -- 1,352 -- -- -- -- -- 1,352
Amortization of
deferred
charge......... -- -- -- -- 2,334 -- -- -- -- 2,334
Foreign currency
adjustment..... -- -- -- -- -- (243) -- -- -- (243)
Change in
unrealized in-
vestment gain
(loss)......... -- -- -- -- -- -- 5,469 -- -- 5,469
Stock dividend
on Series A
Preferred
Stock.......... -- -- 3 14,770 -- -- -- (14,773) -- --
Net loss........ -- -- -- -- -- -- -- (267,898) -- (267,898)
---- ---- ---- ---------- ------- ----- ------ --------- --------- --------
Balance at De-
cember 31, $ 1 $150 $651 $1,512,394 $(1,017) $ 45 $ 204 $(555,221) $(126,875) $830,332
1995........... ==== ==== ==== ========== ======= ===== ====== ========= ========= ========
</TABLE>

The accompanying notes are an integral part of the Consolidated Financial
Statements.

F-6
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................... $(267,898) $(151,201) $ (15,769)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization............ 142,496 73,869 34,670
Non cash interest expense................ 35,503 40,212 --
Non cash compensation expense............ 1,352 -- --
Deferred income taxes.................... -- (2,163) (7,816)
(Gain) loss on sales of securities....... 1,271 822 (207)
Changes in assets and liabilities, net of
acquisitions:
Accounts receivable and other assets... (94,890) (43,807) (6,800)
Other liabilities...................... 61,458 71,846 28,868
--------- --------- ----------
Net cash provided by (used in) operating (120,708) (10,422) 32,946
activities.............................. --------- --------- ----------
Cash flows from investing activities:
Purchases of network and equipment......... (506,866) (363,376) (127,351)
Proceeds from sale-leaseback of equipment.. 40,111 -- --
Acquisition of businesses, excluding cash
acquired.................................. (15,289) (207,531) (1,300)
Acquisition of minority interest in
subsidiaries.............................. (1,572) (5,804) --
Maturities of marketable securities........ 220,497 281,071 378,906
Proceeds from sales of marketable
securities................................ 348,771 446,429 262,982
Purchases of marketable securities......... (295,873) (621,569) (1,052,591)
Additions to deferred costs and other...... (25,432) (16,215) (8,686)
--------- --------- ----------
Net cash used in investing activities.... (235,653) (486,995) (548,040)
--------- --------- ----------
Cash flows from financing activities:
Proceeds from issuance of Series A
Preferred Stock........................... 306,455 -- --
Proceeds from issuance of long term debt
and notes payable......................... 75,475 483,500 --
Payments on long-term debt................. (4,974) (647) (21)
Capital contributions from parent.......... -- -- 30,000
Issuances of common stock.................. 1,000 -- 492,424
Proceeds from exercise of stock options.... 5,848 5,616 5,576
Other...................................... 2,221 -- 4,756
--------- --------- ----------
Net cash provided by financing 386,025 488,469 532,735
activities.............................. --------- --------- ----------
Net increase (decrease) in cash and cash
equivalents................................. 29,664 (8,948) 17,641
Cash and cash equivalents, beginning of year. 21,518 30,466 12,825
--------- --------- ----------
Cash and cash equivalents, end of year....... $ 51,182 $ 21,518 $ 30,466
========= ========= ==========
</TABLE>

The accompanying notes are an integral part of the Consolidated Financial
Statements.

F-7
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)

SUPPLEMENTAL CASH FLOW DISCLOSURES:
<TABLE>
<CAPTION>
1995 1994 1993
------ ---- ----
<S> <C> <C> <C>
Cash paid during the year for interest..................... $2,744 $607 $ 23
Cash paid during the year for income taxes................. $ 618 $492 $923
</TABLE>

SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING AND INVESTING ACTIVITIES:

In 1995, the Company purchased the stock of companies that provide
telecommunications services in Richmond, Virginia, Denver, Colorado, and White
Plains, New York for $12,655 in cash and the issuance of stock. In connection
with the acquisitions, liabilities were assumed as follows:

<TABLE>
<S> <C>
Fair value of tangible assets acquired.......................... $ 11,328
Fair value of intangible assets acquired........................ 13,226
Cash paid for stock............................................. (12,655)
Stock issued.................................................... (5,912)
--------
Liabilities assumed............................................. $ 5,987
========
</TABLE>

The Company issued dividends of common stock valued at $14,773 on its Series
A Preferred Stock in 1995. The Company also issued 15,000,000 shares of Series
B Preferred Stock in exchange for 5,800,000 shares of the Company's common
stock during 1995. The Company recognized undeclared dividends of $291 on its
Series B Preferred Stock in 1995.

The Company capitalized non-cash interest expense of $18,796 in 1995 and
$5,450 in 1994 on network construction projects.

The Company incurred capital lease obligations of $34,593 in 1995 by
entering into sale-leaseback transactions for certain telecommunications
equipment which had previously been acquired.

In 1994, the Company recorded $24,514 of goodwill and additional paid in
capital related to the settlement of deferred purchase price adjustments from
acquisitions of stock of Chicago Fiber Optic Corporation in 1990 and 1991. The
liability for adjustments had been assumed by the Company's former majority
owner in 1993 (see Note 16).

In 1994, the Company purchased the common stock and all stock options of
Centex Telemanagement, Inc. for $202,083. In connection with the acquisition,
liabilities were assumed as follows:

<TABLE>
<S> <C>
Fair value of tangible assets acquired......................... $ 79,483
Fair value of intangible assets acquired....................... 193,719
Cash paid for stock............................................ (202,083)
---------
Liabilities assumed............................................ $ 71,119
=========
</TABLE>

F-8
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

FOR THE THREE YEARS ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)

SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING AND INVESTING ACTIVITIES:--
(CONTINUED)

In 1994, the Company purchased the common stock of Cylix Communications
Corporation for $2,250 in cash and the issuance of stock. In connection with
the acquisition, liabilities were assumed as follows:

<TABLE>
<S> <C>
Fair value of tangible assets acquired........................... $ 9,417
Fair value of intangible assets acquired......................... 4,843
Cash paid for stock.............................................. (2,250)
Stock issued..................................................... (5,990)
-------
Liabilities assumed.............................................. $ 6,020
=======
</TABLE>

In 1994, the Company purchased the common stock of RealCom Office
Communications, Inc. for $7,250 in cash and the issuance of stock. In
connection with the acquisition, liabilities were assumed as follows:

<TABLE>
<S> <C>
Fair value of tangible assets acquired.......................... $ 33,629
Fair value of intangible assets acquired........................ 56,075
Cash paid for stock............................................. (7,250)
Stock issued.................................................... (53,052)
--------
Liabilities assumed............................................. $ 29,402
========
</TABLE>

The Company issued common stock with a value of $11,954 for other
acquisitions during 1994. In connection with these acquisitions, the Company
assumed liabilities of approximately $6,000, acquired networks and equipment
of approximately $5,000 and recorded goodwill and other intangibles.

The Company issued common stock with a value of $11,012 to acquire the
minority interest of two of its subsidiaries during 1994.

The accompanying notes are an integral part of the Consolidated Financial
Statements.

F-9
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

1. ORGANIZATION:

The consolidated financial statements include the accounts of MFS
Communications Company, Inc. ("MFS"), and its majority owned subsidiaries (the
"Company"). MFS was incorporated on July 17, 1987 in Delaware and, prior to
its initial public offering in May 1993, was a wholly owned subsidiary of
Kiewit Diversified Group Inc. ("KDG"), which is a wholly owned subsidiary of
Peter Kiewit Sons', Inc. ("PKS"). In 1995, pursuant to a planned
restructuring, all of PKS' remaining interest in the Company's capital stock
was distributed to certain PKS stockholders.

The Company operates through its subsidiaries in two business segments,
telecommunications services and network systems integration. The
telecommunications segment is comprised of the MFS Telecom Companies, which
provides services to large business and government customers through MFS
Telecom and MFS Datanet, the MFS Intelenet Companies, which provides services
to small and medium sized business customers through MFS Intelenet, MFS
International, which provides services to business and government customers
internationally and Global Network Services, which manages the Company's
international network platform. The network systems integration segment
provides services primarily through MFS Network Technologies.

Where appropriate, items within the consolidated financial statements and
notes thereto have been reclassified from previous years to conform to current
year presentation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

(a) Principles of Consolidation:

The consolidated financial statements of the Company include the accounts of
all of its majority owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.

(b) Recognition of Revenue:

The Company recognizes revenue on telecommunications services in the month
the related service is provided. Network systems integration revenue is
recognized on the percentage-of-completion method of accounting. Under the
percentage-of-completion method, an estimated percentage for each contract, as
determined by the Company's engineering estimate based on the amount of work
performed, is applied to total estimated profit. Provisions for losses are
recognized on uncompleted contracts when they become known. Claims for
additional revenue are recognized in the period when settled. Revisions in
cost and profit estimates, which are always reasonably possible to occur in
the near term under the percentage-of-completion method, are reflected in the
accounting period in which the facts which require the revision become known.

In accordance with industry practice, amounts realizable and payable under
network systems integration contracts which may extend beyond one year are
includable in current assets and liabilities. A one-year time period is used
as the basis for classification of all other current assets and liabilities.

(d) Networks and Equipment

The networks and equipment are stated at cost. Various costs are capitalized
during the installation and expansion of the networks. Provisions for
depreciation are computed using straight-line methods over estimated useful
lives beginning in the year an asset is put into service.

Electronic and related equipment, leasehold improvements, furniture and
office equipment and land and buildings are stated at cost. Leasehold
improvements primarily consist of extensions off the network to customer
locations. Depreciation is computed using primarily straight-line methods over
the estimated useful lives of the assets or, for capital leases, the term of
the related leases.

F-10
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Costs of purchased software and certain costs to modify and improve certain
of the Company's computer software are recorded at cost and are being
amortized using the straight-line method over their estimated useful lives.

(e) Intangible Assets:

Costs incurred in developing new networks or expanding existing networks,
including network design, negotiation of rights-of-way and obtaining
legal/regulatory authorizations are deferred and amortized over five years.

Costs incurred to obtain access to buildings are deferred by the Company and
amortized over 15 years. Costs incurred to obtain city franchises are deferred
by the Company and amortized over the initial term of the franchise.

Pre-operating costs represent substantially all nondevelopment costs
incurred during the pre-operating phase of a newly-constructed network and are
amortized over five-year periods commencing with the start of operations.

Goodwill is being amortized primarily over periods of 40 years from the
dates of acquisition. The Company reviews the carrying amount of goodwill for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Measurement of any impairment would
include a comparison of estimated future operating cash flows anticipated to
be generated during the remaining life of the goodwill to the net carrying
value of the goodwill.

The costs of rights-of-way and customer lists obtained in business
acquisitions are being amortized over estimated useful lives of 20 to 25 years
and three years, respectively.

(f) Income Taxes:

Prior to the Company's initial public offering in May 1993, the Company was
included in the consolidated income tax returns of PKS. Income taxes were
recognized as if the Company filed its own income tax returns on a separate
return basis.

The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.

(g) Minority Interest:

The Company has recorded the entire loss of other than wholly owned
subsidiaries where the loss applicable to the minority interest exceeds the
minority interest in such subsidiaries' equity.

(h) Translation of Foreign Financial Statements:

Assets and liabilities are translated into U.S. dollars at year-end exchange
rates. Revenues and expenses are translated using the average rates of
exchange for the period. Gains or losses resulting from foreign currency
translation are recorded as adjustments to stockholders' equity.

F-11
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):

Cash equivalents generally consist of highly liquid debt instruments
purchased with a maturity of three months or less.

(j) Marketable Securities:

Marketable securities are being carried at fair value.

(k) Financial Instruments:

Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of marketable securities and accounts
receivable. Concentrations of credit risk of marketable securities is limited
due to investments in short-term, investment grade securities. Concentrations
of credit risk with respect to accounts receivable are limited due to the
dispersion of the Company's customer base among different industries and
geographic areas and remedies provided by terms of contracts and statutes.

(l) Loss Per Share:

Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, stock options granted with exercise prices below the assumed initial
public offering price of $10.00 per share during the twelve-month period
preceding the date of the initial filing of the Registration Statement have
been included in the calculation of common stock equivalent shares, using the
treasury stock method, as if they were outstanding for the first quarter ended
March 31, 1993. The number of shares used in computing loss per share was as
follows:

<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Common stock............................... 127,786,000 124,874,000 104,572,000
Common stock equivalents Stock options
using the initial public offering price... -- -- 1,192,000
----------- ----------- -----------
127,786,000 124,874,000 105,764,000
=========== =========== ===========
</TABLE>

(m) Estimates in Financial Statements:

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

3. FINANCIAL INSTRUMENTS:

The following methods and assumptions were used to determine the
classification and fair value of each class of financial instruments for which
it is practicable to estimate that value:

(a) Cash and cash equivalents:

Cash equivalents generally consist of highly liquid debt instruments
purchased with a maturity of three months or less and are carried at fair
value which approximates cost due to the short maturities.

F-12
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

3. FINANCIAL INSTRUMENTS (CONTINUED):
(b) Marketable Securities:

The Company has classified all marketable securities other than cash
equivalents as available-for-sale. The amortized costs of the securities used
in computing unrealized and realized gains and losses are determined by
specific identification. Fair values are estimated based on quoted market
prices. Net unrealized gains and losses are reported as a separate component
of stockholders' equity. The Company has not invested in derivative financial
instruments.

Marketable securities at December 31, 1995 and 1994 are as follows:

<TABLE>
<CAPTION>
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED HOLDING HOLDING FAIR
1995 COST GAIN LOSS VALUE
---- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S. govern-
ment corporations and agencies debt
securities.......................... $ 48,652 $204 $ -- $ 48,856
Corporate debt securities............ 36,859 6 6 36,859
-------- ---- ------ --------
Total marketable securities.......... $ 85,511 $210 $ 6 $ 85,715
======== ==== ====== ========
1994
----
U.S. Treasury debt securities........ $274,191 $ -- $3,299 $270,892
Corporate debt securities............ 93,335 -- 1,966 91,369
-------- ---- ------ --------
Total marketable securities.......... $367,526 $ -- $5,265 $362,261
======== ==== ====== ========
</TABLE>

The amortized costs and estimated fair value of investments in debt
securities at December 31, 1995, by contractual maturity are as follows:

<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
<S> <C> <C>
Due within 1 year..................................... $ 43,546 $43,541
Due after 1 year through 5 years...................... 37,936 38,140
Due after 5 years through 10 years.................... -- --
Due after 10 years.................................... 4,029 4,034
-------- -------
$ 85,511 $85,715
======== =======
</TABLE>

Sales activity in available-for-sale securities is summarized as follows:

<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Proceeds from sale of available-for-sale secu-
rities....................................... $348,771 $446,429 $262,982
Gross realized gains.......................... -- 137 662
Gross realized losses......................... 1,271 959 455
</TABLE>

The fair value of the Company's long-term debt is estimated based on the
quoted market price for the same or similar issues or on borrowing rates
currently available to the Company for debt with similar terms and maturities.
The fair market value of the Company's long-term debt was $732,003 and
$496,359 at December 31, 1995 and 1994, respectively.

F-13
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

4. NETWORKS AND EQUIPMENT:

Networks and equipment consist of the following:

<TABLE>
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Telecommunications networks........................... $ 287,719 $171,770
Electronic and related equipment...................... 628,609 370,788
Leasehold improvements................................ 106,012 76,328
Furniture, office equipment and other................. 36,225 27,838
Land and buildings.................................... 11,656 1,202
Computer software..................................... 37,516 29,417
Capitalized lease assets, primarily electronic equip-
ment................................................. 34,593 --
Networks-in-progress.................................. 173,622 110,110
---------- --------
$1,315,952 $787,453
========== ========
</TABLE>

Amortization expense for 1995 and accumulated amortization at December 31,
1995 for capitalized lease assets was $254.

5. OTHER ASSETS:

Other assets consist of the following:

<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred development and preoperating costs............ $ 56,635 $ 35,604
Goodwill............................................... 297,970 286,533
Rights-of-way.......................................... 15,069 15,080
Customer list.......................................... 67,200 72,100
Deferred financing costs............................... 23,699 18,899
Other noncurrent assets................................ 989 4,478
-------- --------
461,562 432,694
Less accumulated amortization.......................... (70,876) (35,402)
-------- --------
$390,686 $397,292
======== ========
</TABLE>

Amortization of intangible assets and deferred costs was $41,946 in 1995,
$25,419 in 1994 and $6,547 in 1993.

F-14
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. NOTES PAYABLE AND LONG-TERM DEBT:

At December 31, 1995 and 1994, notes payable and long-term debt consist of
the following:

<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
9 3/8% Senior Discount Notes, due January 15, 2004..... $596,648 $544,413
Credit Facilities, including interest at a variable
rate (approximately 7.4% at December 31, 1995)........ 65,000 --
Vendor Credit Facilities, including interest at a vari-
able rate (approximately 7.0% at December 31, 1995)... 4,400 --
Notes Payable to bank, including interest at prime plus
1.85% (7.85% at December 31, 1995) maturing in 1999,
collateralized by certain equipment of a subsidiary... 20,000 16,210
Note Payable to credit corporation, with quarterly pay-
ments including interest at LIBOR + 2.5% (8.56% at De-
cember 31, 1995) through March 31, 2000............... 3,967 --
Equipment Finance Agreement with monthly payments
including interest at 9.27% through March 31, 1999,
collateralized by certain subsidiary assets........... 3,988 4,670
Other.................................................. 51 13
-------- --------
694,054 565,306
Less: Current portion.................................. (1,995) (16,973)
-------- --------
$692,059 $548,333
======== ========
</TABLE>

Aggregate annual principal maturities as of December 31, 1995 are as
follows:

(a) The Senior Discount Notes:

The Company issued the Senior Discount Notes (the "1994 Senior Discount
Notes") on January 19, 1994 and recorded the net proceeds, exclusive of
transaction costs, of approximately $500,000 as long-term debt. The Company is
accruing to the principal amount of the 1994 Senior Discount Notes of $788,320
through January 1999. Cash interest will not accrue on the 1994 Senior
Discount Notes prior to January 15, 1999, however, the Company may elect to
commence the accrual of cash interest at any time prior to that date.
Commencing July 15, 1999 cash interest will be payable semi-annually.

On or after January 15, 1999, the 1994 Senior Discount Notes will be
redeemable at the option of the Company, in whole or in part from time to
time, at the following prices (expressed in percentages of the principal
amount at the stated maturity), if redeemed during the twelve months beginning
January 15 of the years indicated below, in each case together with interest
accrued to the redemption date.

<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
1999.............................. 103.52%
2000.............................. 102.34%
2001.............................. 101.17%
2002 and thereafter............... 100.00%
</TABLE>

F-15
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

6. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED):

In addition, under certain conditions related to a change in control of the
Company, the Company may be required to repurchase all or any part of the 1994
Senior Discount Notes as stipulated in the note agreement. The 1994 Senior
Discount Notes are senior unsecured obligations of the Company and are
subordinated to all current and future indebtedness of the Company's
subsidiaries, including trade accounts payable. The 1994 Senior Discount Notes
contain certain covenants which, among other things, restrict the Company's
ability to incur additional debt, create liens, enter into sale and leaseback
transactions, pay dividends, make certain restricted payments, enter into
transactions with affiliates, and sell assets or merge with another company.

(b) The Credit Facilities:

In April 1995, the Company reached agreement with a syndicate of commercial
banks for an aggregate of $250,000 of revolving credit facilities (the "Credit
Facilities" or the "MFS Credit Facility" and the "MFS Telecom Credit
Facility"). The Credit Facilities provide for borrowings of $150,000 by MFS
Communications Company, Inc. and $100,000 by MFS Telecom. The commitments of
the banks under the Credit Facilities shall be reduced quarterly starting July
31, 1998 through April 30, 2000. The obligations of the Company under the MFS
Credit Facility have been guaranteed by substantially all of the Company's
subsidiaries and collateralized by a security interest in the capital stock of
substantially all of the Company's U.S. subsidiaries and a security interest
in several franchise agreements held by certain of the Company's subsidiaries.
The obligations of MFS Telecom under the Telecom Credit Facility have been
guaranteed by the Company and certain of the Company's subsidiaries and
collateralized by a security interest in the capital stock of substantially
all of MFS Telecom's U.S. operating subsidiaries. The Company may repay any
amounts borrowed under the Credit Facilities without premium or penalty at any
time.

The Credit Facilities provide for interest at a variable rate and a variable
commitment fee on any unused balances. The Credit Facilities contain certain
financial covenants and certain restrictions on the Company's ability to incur
debt, sell assets, pay cash dividends and enter into transactions with
affiliates, among other things. Borrowings under the MFS Telecom Credit
Facility are to be used only for the construction and acquisition of
telecommunications assets, as defined in the agreement.

In July 1995, the Company established two credit facilities to borrow up to
an aggregate of $120 million for purchases of switching equipment through mid-
1997 (the "Vendor Credit Facilities"). The facilities are collateralized by
the purchased equipment and partially guaranteed by the Swedish Export Credits
Guarantee Board and the equipment manufacturer. Borrowings under the Vendor
Credit Facilities will be repaid under various schedules, through 2002. The
Company may repay any amounts borrowed under the facilities without premium or
penalty at any time.

The Vendor Credit Facilities provide for interest at a variable rate and a
commitment fee on any unused balances. The Vendor Credit Facilities contain
certain financial covenants and other restrictions similar to the Credit
Facilities.

(d) The Notes Payable:

In April 1995, the Company extended the maturity dates on the Notes Payable
to bank from 1995 to 1999. In addition, in connection with an acquisition in
1995, the Company assumed the Note Payable to credit corporation.

F-16
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

6. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED):

(e) Other Debt:

Subsequent to year end, the Company entered into a $20,000 loan agreement
with an equipment manufacturer and a bank. The loan, which includes interest
at a variable rate, must be used to purchase equipment supplied by the
manufacturer. The loan must be repaid in semi-annual installments of $2,000
starting June 20, 1996, and is collateralized by the equipment purchased. The
agreement contains certain financial covenants and restrictions similar to the
Credit Facilities.

Subsequent to year end the Company issued Senior Discount Notes (the "1996
Senior Discount Notes") and recorded the net proceeds, exclusive of
transaction costs, of approximately $600 million as long-term debt. The
Company will accrue to the principal amount of the 1996 Senior Discount Notes
of $924,000 through January 2006. Cash interest will not accrue on the 1996
Senior Discount Notes prior to January 15, 2001 however, the Company may elect
to commence the accrual of cash interest at any time prior to that date.
Commencing July 15, 2001, cash interest will be payable semi-annually. The
Company utilized a portion of the proceeds from the 1996 Senior Discount Notes
to repay the outstanding balances under the Credit Facilities and a portion of
the Notes Payable to bank. In connection with the issuance of the 1996 Senior
Discount Notes, certain amendments to the financial covenants of the Credit
Facilities and the Vendor Credit Facilities were made which, among other
things, allowed the Company to issue the 1996 Senior Discount Notes.

7. LEASES:

Capitalized leases consist of leases of electronic telecommunications
equipment. The Company is also leasing premises under various operating leases
which, in addition to rental payments, require payments for insurance,
maintenance, property taxes and other executory costs related to the leases.
Certain leases provide for adjustments in lease cost based upon adjustments in
the consumer price index and increases in the landlord's management costs. The
lease agreements have various expiration dates and renewal options through
2009.

Future minimum payments by year and in the aggregate, under the capital
leases and non cancelable operating leases with initial or remaining terms of
one year or more consist of the following at December 31, 1995:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1996........................................................ $ 5,188 $28,422
1997........................................................ 5,660 27,095
1998........................................................ 5,660 24,055
1999........................................................ 5,793 19,819
2000........................................................ 6,451 16,310
Subsequent to 2000.......................................... 21,524 84,100
--------
Total minimum lease payments.............................. 50,276
Amounts representing interest............................... (16,942)
--------
Present value of future minimum lease payments.............. 33,334
Less amounts due in one year................................ (1,922)
--------
$ 31,412
========
</TABLE>

Rent expense under lease agreements was $27,150 in 1995, $17,789 in 1994 and
$8,724 in 1993.

F-17
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

8. COMMITMENTS AND CONTINGENCIES:

Under the terms of stockholder agreements, from time to time, minority
stockholders in certain subsidiaries have the option to put shares to the
Company at a purchase price equal to an appraised value of such shares.

The Company has issued standby letters of credit to various city
governmental agencies and building lessors, amounting to approximately $10,341
at December 31, 1995. It is management's belief that the underlying
obligations will be met in the normal course of business without material
adverse effect on the Company's financial position.

The Company is also obligated under rights-of-way and franchise agreements
with various entities for the use of their rights-of-way for the installation
of its telecommunications systems.

In 1994, several former stockholders of MFS Telecom, a subsidiary of the
Company, filed a lawsuit against the Company, KDG, and the Company's chief
executive officer regarding the sale of their shares of MFS Telecom to the
Company in September 1992. The plaintiffs allege that certain information was
concealed from them, which caused them to sell their shares at an inadequate
price. KDG has agreed to indemnify the Company against any claims asserted by
the former stockholders.

The Company is also involved in various other claims and regulatory
proceedings incidental to its business. Management believes that any resulting
liability beyond that provided should not materially affect the Company's
financial position, results of operations or cash flows.

9. INCOME TAXES:

Prior to the Company's initial public offering in May 1993 the Company was
included in the consolidated income tax returns of PKS. Income taxes were
recognized on a separate return basis as if the Company filed its own income
tax returns.

The Company and its parent entered into the Tax Sharing Agreement pursuant
to which the parent has agreed to indemnify the Company against federal, state
or local income tax liabilities of the consolidated or combined group of which
the parent is the common parent for taxable periods beginning on or after
January 1, 1993 during which the Company was a member of such group. In
addition, pursuant to the Tax Sharing Agreement, for all taxable periods
beginning on or after January 1, 1993, the Company would pay to the parent
amounts equal to the taxes that the Company would otherwise have to pay if it
were to file separate federal, state or local income tax returns, except that
the Company will not be entitled to carry forward certain net operating losses
generated prior to January 1, 1993. As a result of the Company's initial
public offering in 1993, the Tax Sharing Agreement applies only to the
January-May 1993 period for federal income tax purposes. The Company will
recognize tax benefits on losses incurred subsequent to January 1, 1993 only
to the extent the Company can utilize those benefits.

Loss before income taxes is comprised of a loss of approximately $251,000
and $139,000 from domestic operations and approximately $16,000 and $14,000
from foreign operations in 1995 and 1994, respectively. Substantially all of
the Company's loss before income taxes prior to 1994 was derived from domestic
operations.

F-18
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

9. INCOME TAXES (CONTINUED):

Income tax benefit (expense) consists of the following:

<TABLE>
<CAPTION>
1995 1994 1993
------- ------- ------
<S> <C> <C> <C>
Current
U.S. Federal..................................... $ -- $ -- $ --
State and other.................................. (600) (60) (596)
------- ------- ------
(600) (60) (596)
------- ------- ------
Deferred
U.S. Federal..................................... -- 2,163 7,816
State............................................ -- -- --
------- ------- ------
-- 2,163 7,816
------- ------- ------
$ (600) $ 2,103 $7,220
======= ======= ======

The actual income tax benefit (expense) differs from the "expected" income
tax benefit (computed by applying the U.S. federal corporate tax rate of 35% in
1995, 1994 and 1993 to loss before income taxes) as follows:

<CAPTION>
1995 1994 1993
------- ------- ------
<S> <C> <C> <C>
Federal income tax benefit at statutory rate....... $93,554 $53,656 $8,046
Unutilized tax benefit due to net operating loss... (91,157) (49,680) --
Goodwill amortization.............................. (2,713) (1,676) (627)
State income taxes and other....................... (284) (197) (199)
------- ------- ------
$ (600) $ 2,103 $7,220
======= ======= ======
</TABLE>

At December 31, 1995, the Company had net operating loss carryforwards for
income tax purposes of approximately $444,000 which expire in years 1997
through 2010. A valuation reserve has been recognized to offset the related
deferred tax assets due to the uncertainty of realizing the benefit of the
loss carryforwards.

The components of deferred taxes were as follows:

<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
Deferred tax assets:
Net operating losses.................................. $ 155,338 $ 78,692
Other................................................. 14,523 14,771
--------- --------
Total deferred tax assets........................... 169,861 93,463
--------- --------
Deferred tax liabilities:
Deferred charges...................................... 8,552 6,861
Accumulated depreciation.............................. 13,880 19,150
Acquisition intangibles, other than goodwill.......... 11,621 21,280
--------- --------
Total deferred tax liabilities...................... 34,053 47,291
--------- --------
Net deferred tax assets................................. 135,808 46,172
Less: Valuation allowance............................... (135,808) (46,172)
--------- --------
Net deferred tax liabilities............................ $ -- $ --
========= ========
</TABLE>

F-19
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

10. SERIES A PREFERRED STOCK:

In May 1995, the Company issued 9,500,000 Depositary Shares (the "Depositary
Shares"), each representing a one one-hundredth interest in a share of Series
A 8% cumulative convertible preferred stock (the "Series A Preferred Stock"),
in a public offering. The proceeds of the offering, net of expenses, was
$306,455. The Depositary Shares are mandatorily convertible into an aggregate
of 19,000,000 shares of common stock. The Depositary Shares are also
redeemable at the option of the Company into shares of common stock on or
after May 31, 1998 at a ratio that will vary depending upon certain factors,
including the market price of the common stock at the time of redemption and
the status of dividend payments. The Depositary Shares are also convertible at
the option of the holder at any time at a rate of 163.94 shares of common
stock for each share of Series A Preferred Stock (equivalent to a conversion
price of $20.43 per share of common stock), subject to certain adjustments.

The Depositary Shares are entitled to receive dividends, when, as, and if
they are declared by the Board of Directors, accruing at the rate of $2.68 per
share per annum, payable quarterly in arrears on each February 28, March 31,
August 31 and November 30. Dividends are payable in cash or in shares of
common stock, at the election of the Company. Certain of the Company's debt
agreements restrict the Company's ability to pay cash dividends, and as a
result, the Company does not anticipate that it will pay cash dividends on the
Series A Preferred Stock for the foreseeable future. The Company paid the
dividends on August 31 and November 30, 1995 in common stock valued at
$14,773.

The Depositary Shares are entitled to vote on the basis of .1000 of a vote
for each Depositary Share held (equivalent to 10 votes for each share of
Series A Preferred Stock). The Series A Preferred Stock has a liquidation
preference equal to the greater of (i) the sum of (a) $3,350 per share and (b)
all accrued and unpaid dividends thereon to the date of liquidation and (ii)
the value of the shares of the Company's common stock into which such Series A
Preferred Stock are convertible on the date of liquidation.

11. SPIN-OFF:

Pursuant to a planned restructuring of PKS' ownership in the Company's
capital stock, on September 30, 1995, the Company issued 15,000,000 shares of
Series B, 7 3/4% cumulative convertible preferred stock (the "Series B
Preferred Stock") to a wholly owned subsidiary of PKS in exchange for
5,800,000 shares of the Company's common stock, which are being held in
treasury. Also pursuant to that restructuring, PKS purchased $1,000 of the
Company's common stock and then distributed all of its shares of the Company's
common stock and the shares of Series B Preferred Stock to certain of its
stockholders. The Series B Preferred Stock received by PKS' stockholders are
subject to certain restrictions regarding sale or transfer through September
30, 2001. The common stock received and the Series B Preferred Stock issued in
the exchange have been accounted for based upon the market value of the common
stock on September 30, 1995.

The Series B Preferred Stock is convertible into shares of common stock at
any time after the first anniversary of the date of issuance at a conversion
price of $21.563 (an effective conversion rate of 0.0463768 shares of common
stock for each share of Series B Preferred Stock). Dividends on the Series B
Preferred Stock accrue at the rate of 7 3/4% per annum and are payable in
cash. Dividends will be paid only when, as and if declared by the Board of
Directors of the Company. Certain of the Company's debt agreements restrict
the Company's ability to pay cash dividends, and as a result the Company
anticipates that, in the near future, dividends on the Series B Preferred
Stock will not be declared but will continue to accrue. Upon conversion,
accrued but unpaid dividends are payable in cash or shares of common stock at
the Company's election. At December 31, 1995, the Company has recognized
undeclared dividends of $291, or $.02 per Series B preferred share.

Shares of Series B Preferred Stock are also redeemable at the option of the
Company at any time after September 30, 2001 at a redemption price of $1.00
per share, plus accrued and unpaid dividends. The redemption price will be
payable in cash or shares of the Company's common stock at the Company's
election.

F-20
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

11. SPIN-OFF (CONTINUED):

Each share of Series B Preferred Stock has the right to ten votes on all
matters presented to the Company's stockholders, however the shares are
subject to an irrevocable proxy that has been granted to the Secretary and
Assistant Secretary of the Company on all matters other than the election of
directors and matters as to which holders of the Series B Preferred Stock vote
as a separate class. That proxy requires the Secretary and Assistant Secretary
of the Company to vote all of the shares of Series B Preferred Stock in
proportion to the vote of the holders of the Company's common stock. The
Series B Preferred Stock has a liquidation preference over Junior Stock, as
defined, of $1.00 per share, plus an amount equal to unpaid dividends thereon,
including accrued dividends, whether or not declared.

12. COMMON STOCK WARRANTS:

The Company entered into an agreement on June 8, 1993 to issue 1,500,000
common stock warrants to an investment bank in consideration for the provision
of financial advisory services to the Company over a three-year period. The
warrants vest quarterly through June 7, 1996, and are exercisable at $13.125
per share during the five-year period following the date each portion vests
and becomes exercisable. The fair value of the warrants as of June 8, 1993 has
been accounted for within stockholders' equity as additional paid-in capital,
with an offsetting deferred charge to equity and will be amortized over the
three-year vesting period. In the event of a change in control as defined in
the agreement, the warrants immediately vest and become exercisable.

13. STOCKHOLDER RIGHTS PLAN:

In September 1995, the Company executed a Rights Agreement that provides for
the issuance of preferred stock purchase rights which expire in October 2005.
The rights generally will be exercisable and transferable apart from the
common stock only after the tenth day following public disclosure that a
person or group has acquired beneficial ownership of 15% or more of the common
stock or, the tenth business day after the date on which a person commences a
tender or exchange offer upon consummation of which such person or group would
beneficially own 15% or more of the common stock of the Company.

If any person becomes the beneficial owner of 15% or more of the Company's
common stock other than pursuant to an offer for all shares which is fair to
and otherwise in the best interests of the Company and its subsidiaries, then
each right not owned by a 15% or more stockholder or certain related parties
will entitle the holder to purchase shares of common stock of the Company (or,
in certain circumstances as determined by the Board of Directors of the
Company, cash, other property, or other securities) having a value equal to
twice the right's exercise price. The rights may not be exercised while they
are redeemable . The Company is generally entitled to redeem the rights at
$.01 per right at any time until the tenth day following public disclosure
that a person or group has become the beneficial owner of 15% or more of the
Company's common stock.

In addition, if, after any person has become a 15%-or-more stockholder, the
Company is involved in a merger or other business combination transaction with
another person in which its common stock is changed or converted, or sells 50%
or more of its assets or earning power to another person, each right will
entitle its holder to purchase, at the right's then-current exercise price,
shares of common stock of such other person having a value of twice the
right's exercise price.

14. SHELF REGISTRATION:

The Company has filed a shelf Registration Statement on Form S-3 with the
Securities and Exchange Commission for the sale, from time to time, of one or
more series of unsecured debt or equity securities having an aggregate value
of $1.0 billion. In January 1996, the Company issued the 1996 Senior Discount
Notes which represented a partial drawdown of approximately $600 million on
the shelf registration.

F-21
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

15. EMPLOYEE BENEFIT PLANS:

(a) 401(k) Plan:

The Company administers a 401(k) Plan whereby eligible employees may
voluntarily contribute a percentage of compensation. The Company has not
contributed to the plan. Full-time employees who have attained 21 years of age
are eligible to participate.

(b) Stock Option Plans:

On November 23, 1992, the Board of Directors adopted the 1992 Stock Plan,
which authorizes, among other things, the grant of options at not less than
100% of the fair market value at the date of the option grant. On that date an
aggregate of 12,000,000 shares of common stock were reserved for the exercise
of nonqualified stock options. Effective August 31, 1993, the Board of
Directors adopted the 1993 Stock Plan, which authorizes the grant of options
at not less than 100% of the fair market value at the date of the option
grant. The Company has registered 20,000,000 shares of common stock for the
grant of options under the 1993 plan. The Compensation Committee of the Board
of Directors administers the stock plans. Options vest over a five-year
period. Certain non-executive employees have received credit for years of past
service under the 1992 stock plan.

Information regarding the Company's stock option plans is summarized below:

<TABLE>
<CAPTION>
1993 1992
PLAN PLAN TOTAL
--------------- -------------- --------------
<S> <C> <C> <C>
Shares under option:
Outstanding December 31, 1992... -- 12,000,000 12,000,000
Granted......................... 2,320,000 -- 2,320,000
Exercised....................... -- (925,416) (925,416)
Cancelled....................... -- (381,488) (381,488)
--------------- -------------- --------------
Outstanding December 31, 1993... 2,320,000 10,693,096 13,013,096
Granted......................... 4,801,606 363,790 5,165,396
Exercised....................... -- (935,452) (935,452)
Cancelled....................... (313,562) (210,894) (524,456)
--------------- -------------- --------------
Outstanding December 31, 1994... 6,808,044 9,910,540 16,718,584
Granted......................... 5,704,850 79,146 5,783,996
Exercised....................... (96,980) (720,482) (817,462)
Cancelled....................... (602,414) (140,436) (742,850)
--------------- -------------- --------------
Outstanding December 31, 1995... 11,813,500 9,128,768 20,942,268
=============== ============== ==============
Option price range per share:
At December 31, 1993............ $ 16.25 $ 6.025 $ 6.025-$16.25
At December 31, 1994............ $ 12.375-$18.00 $6.025-$16.375 $ 6.025-$18.00
At December 31, 1995............ $12.375-$26.625 $ 6.025-$17.50 $6.025-$26.625
Options price range for shares
exercised:
During the year ended December
31, 1993....................... -- $6.025 $6.025
During the year ended December
31, 1994....................... -- $6.025 $6.025
During the year ended December
31, 1995....................... $12.375-$17.125 $6.025 $6.025-$17.125
</TABLE>

F-22
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

15. EMPLOYEE BENEFIT PLANS (CONTINUED):

<TABLE>
<S> <C> <C> <C>
Options exercisable:
At December 31, 1993............................ -- 1,999,602 1,999,602
At December 31, 1994............................ 432,806 4,513,794 4,946,600
At December 31, 1995............................ 1,751,756 5,110,706 6,862,462
</TABLE>

Effective October 1995, the Company implemented a new employee benefit plan
which is comprised of a grant plan and a match plan jointly known as
Shareworks. The plan was offered to each domestic employee hired after
September 1, 1995, and also made available to all current employees that
choose to be ineligible for future grants under the Company's Stock Option
Plans. The grant plan enables the Company to grant shares of the Company's
common stock to eligible employees based upon a percentage of the employee's
eligible pay, up to 5%. The original grant will vest after three years with
any additional grants vesting immediately once the initial three year period
has been met.

The match plan allows eligible employees to defer between 1% and 10% of
eligible pay to purchase common stock of the Company at the stock price on
each pay period date. The Company will match the shares purchased by the
employee on a one-for-one basis. The stock which is credited to each
employee's account to match the employee's purchase during any calendar
quarter, vests three years after the end of that quarter. The amount deferred
by employees for purchases of stock through December 31, 1995 was $1,352.

(d) Shareworks Plus:

Subsequent to year end the Company implemented a new employee stock
compensation plan which grants stock options to certain key executive
employees under a plan known as Shareworks Plus. Under this plan, the value
received by the employee upon exercise is determined by the rate of increase
in the Company's stock compared to the rate of increase in the S&P 500, a
common composite measurement of the stock price of a group of companies. If
the stock price of the Company's common stock does not increase faster than
the S&P, or if the Company's stock price decreases, the value to be received
by the employee upon exercise is $0. If the stock price of the Company's
common stock increases at a rate faster than the S&P 500 the value received by
the employee upon exercise, which will normally be paid in common stock of the
Company, increases. The first grant of approximately 450,000 options under
Shareworks Plus, which are immediately vested, was made on January 1, 1996.
Subject to the approval of the Company's Compensation Committee of the Board
of Directors, additional grants will be made quarterly.

(e) Accounting for Stock-Based Compensation:

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-
Based Compensation. SFAS 123 encourages entities to adopt a fair value based
method of accounting for employee stock compensation plans, however it also
allows an entity to continue to measure compensation cost for those plans
using the intrinsic value based method of accounting. Under the intrinsic
value based method, many companies, including MFS, have not recognized
compensation cost for many of their stock compensation plans. Under the fair
value based method, many companies would recognize compensation costs for
those same plans.

The Company plans to adopt SFAS 123 in the first quarter of 1996. While the
Company has not yet determined the total effect of adopting SFAS 123, it
believes that the adoption of the standard will result in material non-cash
charges to operations in 1996 and thereafter. The amount of the non-cash
charge will be dependent upon a number of factors, including the number of
options granted and the fair value estimated at the time of grant.

F-23
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

16. ACQUISITIONS:

In 1995, the Company acquired all of the issued and outstanding shares of
capital stock of companies that provide telecommunications services in
Richmond, Virginia, Denver, Colorado and White Plains, New York. The total
cost of the acquisitions was approximately $18,567, excluding transaction
costs and liabilities assumed. The cost of one of these acquisitions included
the issuance of 342,720 shares of the Company's common stock valued at $5,912.
These operations have been integrated into MFS Telecom. The effect on the
Company's operations as a result of these acquisitions was not significant.

Effective November 14, 1994, the Company purchased all the outstanding stock
of RealCom Office Communications, Inc. ("RealCom"). RealCom was a Shared
Tenant Services company that provides telecommunications services, including
long distance, equipment and outsourcing. The total cost of the acquisition
was approximately $60,302, excluding transaction costs and liabilities
assumed. Included in the cost of the acquisition were 2,720,606 shares of the
Company's common stock valued at $53,052. RealCom operations have been
integrated into MFS Intelenet.

Effective November 1, 1994, the Company purchased all the outstanding stock
of Cylix Communications Corporation ("Cylix"). Cylix provides data
communications services by providing connectivity for IBM compatible hosts to
remote sites. The total cost of the acquisition was approximately $8,240,
excluding transaction costs and liabilities assumed. Included in the cost of
the acquisition were 355,490 shares of the Company's common stock valued at
$5,990. Cylix operations have been integrated into MFS Datanet.

Effective May 18, 1994, the Company purchased the common stock and all stock
options of Centex Telemanagement, Inc. ("Centex"). Centex provides
telecommunications management services for small and medium-sized businesses.
The total cost of the acquisition was approximately $202,083, excluding
transaction costs and liabilities assumed. Centex operations have been
integrated into MFS Intelenet.

In the first quarter of 1994, the Company acquired all of the issued and
outstanding shares of a company that provided telecommunications services in
Rochester, Albany and Buffalo, New York and acquired cable and various rights-
of-way agreements from a company which provided the base for the Company's
network in St. Louis, Missouri. These operations have been integrated into MFS
Telecom.

These acquisitions have been accounted for as purchases and accordingly, the
acquired assets and liabilities were recorded at their estimated fair values
at the date of the acquisition, and the results of operations have been
included in the accompanying financial statements since the dates of
acquisition. The total purchase price in excess of the fair market value of
the net assets acquired was recorded as goodwill. The goodwill is being
amortized on a straight-line basis over a 40-year life.

F-24
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

16. ACQUISITIONS (CONTINUED):

The following unaudited pro forma information shows the results of the
Company as though the acquisitions in 1994 occurred as of the beginning of
each period indicated. These results include certain adjustments consistent
with the Company's accounting policies related to revenue recognition and
amortization of intangible assets. These results are not necessarily
indicative of the results that actually would have been attained if the
acquisitions had been in effect at the beginning of each period or which may
be attained in the future.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1993
----------- -----------
<S> <C> <C>
Revenue.......................................... $ 421,925 $ 400,371
Net loss......................................... (176,483) (56,054)
Loss per common and common equivalent share...... (1.38) (0.51)
</TABLE>

In 1994, the Company recorded $24,514 of additional goodwill relating to the
settlement of a deferred purchase price adjustment that arose prior to 1994.
In April 1990, the Company acquired 80% of the voting stock of Chicago Fiber
Optic Corporation, now doing business as Metropolitan Fiber Systems of
Chicago, Inc. ("MFS Chicago"). The acquisition was accounted for as a
purchase. A portion of the purchase price of the stock acquired was to be
based upon the fair market value of MFS Chicago in April 1993. During 1991,
the Company acquired an additional 10% of the voting stock of MFS Chicago for
a deferred purchase price based upon the MFS Chicago fair market value as of
April 1993. The deferred purchase price associated with these purchases of MFS
Chicago stock was assumed by KDG, the Company's majority stockholder, without
recourse to the Company in 1993 and was settled in the first quarter of 1994.
The Company recorded the settlement as goodwill and a capital contribution by
KDG.

The Company also acquired the interest of certain minority shareholders of
its subsidiaries during 1995 and 1994.

17. RELATED PARTY TRANSACTIONS:

The Company incurred expense for services provided by a former affiliate as
follows:

<TABLE>
<CAPTION>
1995 1994 1993
---- ------ ----
<S> <C> <C> <C>
Administrative services.................................. $600 $1,200 $900
Office lease expense..................................... 365 364 357
Aircraft expense......................................... 325 477 516
Insurance expense........................................ 125 287 364
</TABLE>

An officer of the Company is a partner in a law firm that provides legal
services to the Company. The Company paid legal fees to this firm of
approximately $6,063 in 1995, $2,854 in 1994 and $2,900 in 1993.

A director of the Company was the chairman of a company that received $35
for management services in 1993 for a network systems integration project in
the United Kingdom. In 1993, the Company acquired the director's company for
$1,300.

F-25
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

18. SEGMENT INDUSTRY DATA:

The Company operates in two reportable segments primarily within the United
States: telecommunications services and network systems integration services.
A summary of the Company's operations by industry follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenue:
Telecommunications services................ $ 498,225 $ 228,707 $ 70,048
Network systems integration................ 221,986 155,869 115,942
Intersegment activity...................... (137,017) (97,829) (44,879)
---------- ---------- --------
Total.................................... $ 583,194 $ 286,747 $141,111
========== ========== ========
Operating income (loss):
Telecommunications services................ $ (234,055) $ (131,216) $(35,379)
Network systems integration................ (5,250) (4,913) 3,478
---------- ---------- --------
Total.................................... (239,305) (136,129) (31,901)
Interest income (expense) net................ (25,418) (16,110) 8,793
Unallocated income (expense)................. (2,575) (1,065) 119
---------- ---------- --------
Loss before income taxes..................... $ (267,298) $ (153,304) $(22,989)
========== ========== ========
Identifiable assets:
Telecommunications services................ $1,793,958 $1,540,675 $864,932
Network systems integration................ 106,088 81,053 54,232
Intersegment activity...................... (32,912) (37,182) (12,227)
---------- ---------- --------
Total.................................... $1,867,134 $1,584,546 $906,937
========== ========== ========
Capital expenditures:
Telecommunications services................ $ 504,568 $ 359,188 $126,491
Network systems integration................ 2,298 4,188 860
---------- ---------- --------
Total.................................... $ 506,866 $ 363,376 $127,351
========== ========== ========
Depreciation and amortization:
Telecommunications services................ $ 139,947 $ 72,209 $ 33,771
Network systems integration................ 2,549 1,660 899
---------- ---------- --------
Total.................................... $ 142,496 $ 73,869 $ 34,670
========== ========== ========
</TABLE>

The Company generated 30% of its revenue during 1993 from a contract with
the Department of General Services-State of Iowa, relative to a network
systems integration project.

F-26
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

19. QUARTERLY SUMMARY OF OPERATIONS (UNAUDITED):

The following table presents unaudited quarterly operating results for the
first quarter of 1994 through the fourth quarter of 1995. The Company believes
that all necessary adjustments have been included in the amounts stated below
to present fairly the quarterly results when read in conjunction with the
Consolidated Financial Statements and notes thereto. Results of operations for
any particular quarter are not necessarily indicative of results of operations
for a full year or predictive of future periods.
<TABLE>
<CAPTION>
1994 1995
---------------------------------- --------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
------- ------- ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Telecommunications
services.............. $22,068 $46,646 $72,880 $87,113 $103,788 $117,079 $131,432 $145,926
Network systems inte-
gration............... 12,440 14,786 16,099 14,715 14,552 22,926 22,285 25,206
------- ------- ------- ------- -------- -------- -------- --------
Total................ 34,508 61,432 88,979 101,828 118,340 140,005 153,717 171,132
Loss from operations.... (18,588) (27,495) (37,010) (53,036) (56,556) (58,561) (60,846) (63,342)
Other expense, net...... (859) (4,326) (5,819) (6,171) (7,252) (6,167) (6,143) (8,431)
Loss before income tax-
es..................... (19,447) (31,821) (42,829) (59,207) (63,808) (64,728) (66,989) (71,773)
Income tax benefit (ex-
pense)................. 972 156 975 -- (100) (100) (250) (150)
Net loss................ (18,475) (31,665) (41,854) (59,207) (63,908) (64,828) (67,239) (71,923)
Loss per share applica-
ble to common stock-
holders................ (.15) (.26) (.34) (.47) (.50) (.51) (.58) (.64)
EBITDA(1)............... (6,927) (11,575) (16,024) (27,734) (27,483) (26,913) (22,861) (19,553)
</TABLE>
- --------
(1) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation and amortization. EBITDA is commonly used in the
communications industry to analyze companies on the basis of operating
performance. EBITDA is not intended to represent cash flows for the
periods. See Consolidated Financial Statements of Cash Flows.

20. STOCK SPLIT:

On April 1, 1996 the Board of Directors declared a two-for-one common stock
split. The stock split was effected in the form of a stock dividend that was
payable to stockholders of record on April 16, 1996. The conversion features
of the Company's Series A and Series B Preferred stock were adjusted pursuant
to their terms to maintain the proportionate rights of those preferred stocks.
In this report, all per share amounts and numbers of shares have been restated
to reflect the stock split.

F-27
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Revenue.................................................... $186,316 $118,340
Costs and expenses:
Operating expenses....................................... 174,173 119,882
Depreciation and amortization............................ 44,609 29,073
General and administrative expenses...................... 34,892 25,941
-------- --------
253,674 174,896
-------- --------
Loss from operations....................................... (67,358) (56,556)
Other income (expense):
Interest income.......................................... 5,644 3,292
Interest expense......................................... (23,626) (9,628)
Other.................................................... (784) (916)
-------- --------
Total other income (expense)........................... (18,766) (7,252)
-------- --------
Loss before income taxes................................... (86,124) (63,808)
Income tax expense......................................... (100) (100)
-------- --------
Net loss................................................... (86,224) (63,908)
Dividends on preferred stock............................... (7,072) --
-------- --------
Net loss applicable to common stockholders................. $(93,296) $(63,908)
======== ========
Net loss per share applicable to common stockholders....... $ (0.75) $ (0.50)
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-28
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1996
----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 92,588
Marketable securities............................................ 368,266
Accounts receivable.............................................. 155,702
Costs and earnings in excess of billings on uncompleted
contracts....................................................... 48,837
Other current assets............................................. 56,321
----------
Total current assets........................................... 721,714
Networks and equipment, at cost.................................... 1,466,254
Less accumulated depreciation and amortization................... (245,321)
----------
Networks and equipment, net........................................ 1,220,933
Goodwill, net...................................................... 279,970
Other assets, net.................................................. 124,594
----------
Total assets................................................... $2,347,211
==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-29
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
MARCH 31,
1996
----------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable and long-term debt.............. $ 1,819
Current portion of capital lease obligations..................... 2,079
Accounts payable................................................. 168,235
Accrued costs and billings in excess of revenue on uncompleted
contracts....................................................... 30,808
Accrued compensation............................................. 8,505
Other current liabilities........................................ 56,210
----------
Total current liabilities...................................... 267,656
Notes payable and long-term debt, less current portion............. 1,255,256
Capital lease obligations, less current portion.................... 31,098
Other liabilities.................................................. 27,328
Minority interest.................................................. 11,291
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 25,000,000 shares:
Series A, 8% cumulative convertible; issued 95,000 in 1996,
variable liquidation preference............................... 1
Series B, 7 3/4% cumulative convertible; issued 15,000,000 in
1996, liquidation preference $1.00 per share plus unpaid
dividends..................................................... 150
Common stock, $.01 par value. Authorized 400,000,000 shares; is-
sued 125,619,662 in 1996 (Note 3)............................... 1,255
Additional paid-in capital....................................... 1,482,442
Deferred charge.................................................. (434)
Foreign currency adjustment...................................... (875)
Unrealized investment gain (loss)................................ (647)
Accumulated deficit.............................................. (727,310)
----------
Total stockholders' equity..................................... 754,582
----------
Total liabilities and stockholders' equity..................... $2,347,211
==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-30
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
SERIES A SERIES B ADDITIONAL FOREIGN
PREFERRED PREFERRED COMMON PAID-IN DEFERRED CURRENCY
STOCK STOCK STOCK CAPITAL CHARGE ADJUSTMENT
--------- --------- ------ ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... $ 1 $150 $ 651 $1,512,394 $(1,017) $ 45
Stock dividend on Series
A Preferred Stock...... -- -- 1 7,071 -- --
Stock options exercised. -- -- 4 7,138 -- --
Amortization of deferred
charge................. -- -- -- -- 583 --
Foreign currency adjust-
ment................... -- -- -- -- -- (920)
Change in unrealized in-
vestment gain (loss)... -- -- -- -- -- --
Retirement of treasury
stock.................. -- -- (29) (48,053) -- --
Stock compensation plan
additions.............. -- -- -- 4,520 -- --
Two-for-one stock split. -- -- 628 (628) -- --
Net loss................ -- -- -- -- -- --
--- ---- ------ ---------- ------- ------
Balance at March 31,
1996................... $ 1 $150 $1,255 $1,482,442 $ (434) $ (875)
=== ==== ====== ========== ======= ======
</TABLE>

<TABLE>
<CAPTION>
UNREALIZED
INVESTMENT ACCUMULATED TREASURY
GAIN (LOSS) DEFICIT STOCK TOTAL
----------- ----------- --------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1996........ $ 204 $(555,221) (126,875) $830,332
Stock dividend on Series A Pre-
ferred Stock..................... -- (7,072) -- --
Stock options exercised........... -- -- -- 7,142
Amortization of deferred charge... -- -- -- 583
Foreign currency adjustment....... -- -- -- (920)
Change in unrealized investment
gain (loss)...................... (851) -- -- (851)
Retirement of treasury stock...... -- (78,793) 126,875 --
Stock compensation plan additions. -- -- -- 4,520
Two-for-one stock split........... -- -- -- --
Net loss.......................... -- (86,224) -- (86,224)
------ --------- --------- --------
Balance at March 31, 1996......... $ (647) $(727,310) $ -- $754,582
====== ========= ========= ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-31
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................... $ (86,224) $ (63,908)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................ 44,609 29,073
Non cash interest expense............................ 21,145 9,123
Non cash compensation expense........................ 3,341 --
Loss on sale of securities........................... -- 749
Changes in assets and liabilities, net of effects of
acquisitions:
Accounts receivable and other current assets....... (28,174) (6,548)
Other liabilities.................................. (7,114) 10,256
--------- ---------
Net cash used in operating activities................ (52,417) (21,255)
--------- ---------
Cash flows from investing activities:
Purchases of networks and equipment.................... (148,440) (102,212)
Proceeds from maturities and sales of marketable secu-
rities 106,000 154,931
Purchases of marketable securities..................... (386,602) --
Acquisitions of businesses, excluding cash acquired.... -- (7,761)
Additions to deferred costs and other.................. (4,854) (4,453)
--------- ---------
Net cash provided by (used in) investing activi- (433,896) 40,505
ties.............................................. --------- ---------
Cash flows from financing activities:
Proceeds from issuance of long term debt and notes pay-
able.................................................. 619,713 4,575
Payments of debt financing costs....................... (18,672) --
Payments on long term debt............................. (80,464) (2,663)
Proceeds from exercise of stock options................ 7,142 1,256
--------- ---------
Net cash provided by financing activities............ 527,719 3,168
--------- ---------
Net change in cash and cash equivalents.................. 41,406 22,418
Cash and cash equivalents at beginning of period......... 51,182 21,518
--------- ---------
Cash and cash equivalents at end of period............... $ 92,588 $ 43,936
========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-32
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

Supplemental schedule of non cash financing and investing activities.

The Company recognized a common stock dividend valued at $7,072 on its
preferred stock in the first quarter of 1996.

The Company capitalized non-cash interest expense of $3,609 and $3,800 in the
three months ended March 31, 1996 and 1995 respectively, on network
construction projects.

In the first quarter of 1995, the Company purchased the stock of companies
that provide telecommunications services in Richmond, Virginia and Denver,
Colorado for $5,369 in cash and the issuance of stock. In connection with the
acquisitions, liabilities were assumed as follows:

<TABLE>
<S> <C>
Fair value of tangible assets acquired............................ $ 6,365
Fair value of intangible assets acquired.......................... 5,715
Cash paid for stock............................................... (5,369)
Stock issued...................................................... (5,912)
-------
Liabilities assumed............................................... $ 799
=======
</TABLE>

See accompanying notes to consolidated financial statements.

F-33
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

1. BASIS OF PRESENTATION:

All financial statements contained herein are unaudited and, in the opinion
of management, contain all adjustments necessary for a fair presentation of
financial position and results of operations and cash flows for the periods
presented. Such adjustments consist only of normal recurring items. The
Company's accounting policies and certain other disclosures are set forth in
the notes to the annual consolidated financial statements.

Where appropriate, items within the consolidated financial statements have
been reclassified from the previous year to conform to current year
presentation.

2. INCOME TAXES:

The income tax expense of $100 for the three months ended March 31, 1996 and
1995 resulted from estimated state and foreign tax liabilities.

3. CAPITAL STOCK:

In the first quarter of 1996, the Company retired the shares of common stock
that were held in treasury. The value of the treasury shares reduced common
stock, paid in capital and increased the accumulated deficit upon retirement.
In addition, the Company's stockholders approved an amendment to the Company's
restated certificate of incorporation to increase the number of authorized
shares of common stock to 400,000,000.

On April 1, 1996 the Board of Directors declared a two-for-one common stock
split. The stock split was effected in the form of a stock dividend that was
payable to stockholders of record on April 16, 1996. The conversion features
of the Company's Series A and Series B preferred stock were adjusted pursuant
to their terms to maintain the proportionate rights of those preferred stocks.
In this report, all per share amounts and numbers of shares have been restated
to reflect the stock split. In addition, an amount equal to the $.01 par value
of the shares outstanding at March 31, 1996 has been transferred from
additional paid in capital to common stock.

4. LOSS PER SHARE:

Loss per common share has been computed using the weighted average number of
shares outstanding for each period. The number of shares used in computing
loss per share, which have been adjusted due to the two-for-one stock split,
was 125,017,000 for the three months ended March 31, 1996 and 128,729,000 for
the three months ended March 31, 1995.

5. LONG TERM DEBT:

(a) Loan Agreement:

On January 2, 1996, the Company entered into a $20,000 loan agreement with
an equipment manufacturer and a bank. The loans under the agreement, which
include interest at a variable rate, will be used to purchase equipment
supplied by the manufacturer. The loans must be repaid in semi-annual
principal installments of $2,000 starting June 20, 1996, subject to certain
adjustments, and are collateralized by the equipment purchased. The agreement
contains certain covenants and restrictions similar to the Company's Credit
Facilities. The Company may prepay any amounts under the agreement without
premium or penalty at any time.

F-34
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
5. LONG TERM DEBT (CONTINUED):

(b) The 1996 Senior Discount Notes:

The Company issued 8 7/8% Senior Discount Notes on January 18, 1996 (the
"1996 Senior Discount Notes") and recorded the net proceeds, exclusive of
transaction costs, of approximately $600,000 as long-term debt. The Company is
accruing to the principal amount of the 1996 Senior Discount Notes of $924,000
through January 15, 2001. Cash interest will not accrue on the 1996 Senior
Discount Notes prior to January 15, 2001, however, the Company may elect to
commence the accrual of cash interest at any time prior to that date.
Commencing July 15, 2001, cash interest will be payable semi-annually.

The 1996 Senior Discount Notes mature on January 15, 2006. On or after
January 15, 2001, the 1996 Senior Discount Notes will be redeemable at the
option of the Company, in whole at any time or in part from time to time, at
the following prices (expressed in percentages of the principal amount thereof
at stated maturity) if redeemed during the twelve months beginning January 15
of the years indicated below, in each case together with interest accrued to
the redemption date:

<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001.............................. 103.32%
2002.............................. 102.21%
2003.............................. 101.11%
2004 and thereafter............... 100.00%
</TABLE>

In addition, under certain conditions related to a change in control of the
Company, the Company may be required to repurchase all or any part of the 1996
Senior Discount Notes as stipulated in the note agreement. The 1996 Senior
Discount Notes are senior unsecured obligations of the Company, with a ranking
equal to the 1994 Senior Discount Notes, and are subordinated to all current
and future indebtedness of the Company's subsidiaries, including trade
payables. The 1996 Senior Discount Notes contain certain covenants which,
among other things, restrict the ability of the Company to incur debt, create
liens, enter into sale and leaseback transactions, pay dividends, make certain
restricted payments, enter into transactions with affiliates, and sell assets
or merge with or into another company.

6. STOCK COMPENSATION PROGRAMS:

The Company has three stock based compensation programs at March 31, 1996.
The programs are described as follows:

(a) Stock Option Plans:

The 1992 and 1993 Stock Plans authorize, among other things, the grant of
options at not less than 100% of the fair market value at the date of the
option grant. The Compensation Committee of the Board of Directors administers
the stock plans. Options vest over a five-year period and are generally
exercisable up to five years after the grant is completely vested. No options
were granted under the 1992 and 1993 plans during the first quarter of 1996.

(b) Shareworks:

In 1995 the Company implemented an employee benefit plan which is comprised
of a grant plan and a match plan jointly known as Shareworks. The grant plan
enables the Company to grant shares of the Company's common stock to eligible
employees based upon a percentage of the employee's eligible pay, up to 5%.
The original grant vests after three years with any additional grants vesting

F-35
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
6. STOCK COMPENSATION PROGRAMS (CONTINUED):

immediately once the initial three year period has been met. On December 29,
1995, the Company granted approximately 64,000 shares of stock under this part
of the plan.

The match plan allows eligible employees to defer between 1% and 10% of
eligible pay to purchase common stock of the Company at the stock price on
each pay period date. The Company matches the shares purchased by the employee
on a one-for-one basis. The stock which is credited to each employee's account
to match the employee's purchase during any calendar quarter, vests three
years after the end of that quarter. The amount deferred by employees for
purchases of stock from January 1, 1996 through March 31, 1996 was $1,179.

In 1996 the Company implemented a new employee stock compensation program
which grants stock options with a four-year life and immediate vesting to
certain key executive employees under a program known as Shareworks Plus.
Under this program, the value received by the employee upon exercise is
determined by the rate of increase in the Company's stock price compared to
the rate of increase in the S&P 500 index, measured from the grant date. If
the Company's common stock price performance is at or below the price
performance of the S&P 500 index, or under certain other circumstances defined
in the program, the value to be received by the employee upon exercise is $0.
If the Company's common stock price performance is above the price performance
of the S&P 500 index the value received by the employee upon exercise, which
will normally be paid in common stock of the Company, increases. In the first
quarter, the first grant of options under Shareworks Plus was made. Subject to
the approval of the Company's Compensation Committee of the Board of
Directors, additional grants will be made quarterly. Terms of the Shareworks
Plus program may be modified from time to time by the Compensation Committee
of the Board of Directors.

In the first quarter of 1996, the Company adopted the accounting provisions
of Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation (SFAS 123). SFAS 123 encourages entities to adopt the fair
value method of accounting for their stock-based compensation plans. Under the
fair value based method, compensation cost for stock based compensation plans
is measured at the grant date based on the fair value of the award and is
recognized over the service period, which for the Company is the vesting
period. For the Company's Shareworks Plus program, the fair value was
determined using option-pricing models that take into account the stock price
at the grant date, the exercise price, a two year expected life for the
option, an estimated volatility of 30% for the Company's stock price, no
expected dividends, and a risk-free interest rate of 5.27% over the expected
life of the options. For the Company's other stock compensation plan,
Shareworks, the fair value of the match shares was determined by reference to
the market value of the stock that was purchased by the employee and the fair
value of the grant shares was determined by the market value of the stock at
the grant date.

The Company recognized compensation expense of $396 related to the
Shareworks plan and $2,945 related to the Shareworks Plus program in the first
quarter of 1996. The pro forma impact of adopting the fair value method of
accounting in the first quarter of 1995 was immaterial primarily because the
number of options granted in the first quarter of 1995 under the 1992 and 1993
Stock Option Plans were not material and the fact that the Shareworks and
Shareworks Plus programs were not yet implemented. During the initial phase-in
period, the effects of applying SFAS 123 for recognizing compensation cost may
not be representative of the effects on reported net loss or income

F-36
<PAGE>

MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

6. STOCK COMPENSATION PROGRAMS (CONTINUED):

for future quarters or years because the options in the Stock Option Plans and
the match and grant shares made under the Shareworks program vest over several
years and additional awards will be made in the future.

Under the Company's Shareworks Plus program, the Company granted 453,004
options during the first quarter of 1996, at an initial exercise price of
$26.62. A total of 55,930 options were exercised during the quarter. The fair
value of the options granted was estimated to be $6.50 per share.

7. COMMITMENTS AND CONTINGENCIES:

In 1994, several former stockholders of MFS Telecom, a subsidiary of the
Company, filed a lawsuit against the Company, the Company's former majority
stockholder, Kiewit Diversified Group Inc. ("KDG"), and the Company's chief
executive officer regarding the sale of their shares of MFS Telecom to the
Company in September 1992. The plaintiffs allege that certain information was
concealed from them, which caused them to sell their shares at an inadequate
price. KDG has agreed to indemnify the Company against any claims asserted by
the former stockholders.

8. SUBSEQUENT EVENT--MERGER AGREEMENT:

On April 30, 1996, the Company announced that it had executed a merger
agreement with UUNET Technologies, Inc. ("UUNET"). Under the terms of the
agreement, which includes a fixed conversion ratio, each share of UUNET stock
will be converted into 1.777776 shares of the Company's common stock on a
post-split basis. The transaction value is approximately $2 billion based on
the Company's stock price at the date of the announcement. The merger
agreement was unanimously approved by the Board of Directors of each company
and the transaction will be recommended by each board to its shareholders. In
addition, shareholders of UUNET owning approximately 62 percent of the
outstanding shares and shareholders of the Company owning approximately 12
percent of the outstanding shares have committed to vote in favor of the
transaction.

The Company anticipates that a substantial portion of the purchase price
will be allocated to intangible assets including goodwill and expects to
amortize those intangible assets over a period of up to five years. The actual
allocation of the purchase price and determination of useful lives will be
made after further evaluation.

F-37
<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-38
<PAGE>

UUNET TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- --------
<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-39
<PAGE>

UUNET TECHNOLOGIES, INC.

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- --------
<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-40
<PAGE>

UUNET TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

<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)
-------- -------- ------ ------ ---------- ------------ ------------ ----------- ------------
<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
Unipalm (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 Unipalm
Preferred Stock........ (200) (314) -- -- -- -- -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- (342) --
Unipalm 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 Unipalm, net of
issuance costs of $880
(Note 1)............... -- -- 918 1 7,995 -- -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- 388 --
Dividends distributed
by Unipalm............. -- -- -- -- -- -- -- -- (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 Unipalm
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-41
<PAGE>

UUNET TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- --------
<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--
Unipalm 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 activi-
ties........................................... 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 Unipalm.................. -- (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-42
<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 in this Prospectus.

Acquisition of Unipalm

On November 15, 1995, UUNET acquired Unipalm Group plc ("Unipalm"), 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, Unipalm shareholders received 0.1543 of a share of
UUNET Common Stock for each Unipalm share. Each holder of a Unipalm 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
Unipalm stock and options to acquire shares of Unipalm 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 Unipalm for all periods presented.

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

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

F-43
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED):

Unipalm previously had an April 30 fiscal year-end. In order to conform
Unipalm's fiscal year-end to UUNET's calendar year-end, the statement of
operations for Unipalm 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 Unipalm 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, Unipalm completed an initial public offering, with net
proceeds of approximately $8.0 million.

F-44
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES--(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-45
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES--(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-46
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES--(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-47
<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-48
<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.

F-49
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

5. STOCKHOLDERS' EQUITY--(CONTINUED):

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.

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>

F-50
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

5. STOCKHOLDERS' EQUITY--(CONTINUED):

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

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, Unipalm 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-51
<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 Unipalm's 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.

F-52
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7. RELATED PARTY TRANSACTIONS--(CONTINUED):

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- 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.

F-53
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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 $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
====== ======== ========

Significant components of the Company's deferred tax assets (liabilities) are
as follows (in thousands):

<CAPTION>
DECEMBER 31,
------------------
1994 1995
-------- --------
<S> <C> <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>

F-54
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)

10. INCOME TAXES--(CONTINUED):

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
foreign 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>

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-55
<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-56
<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-57
<PAGE>

UUNET TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<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-58
<PAGE>

UUNET TECHNOLOGIES, INC.

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-59
<PAGE>

UUNET TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
<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-60
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 this Prospectus and 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-61
<PAGE>

UUNET TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)

3. PROPERTY AND EQUIPMENT:

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

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
(DOLLARS IN THOUSANDS)
<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 62 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. See "Description of the Merger."

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"), 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 Unipalm. 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-62
<PAGE>

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF
THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 3
Incorporation of Documents By Reference................................... 3
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 13
Use of Proceeds........................................................... 23
Dilution.................................................................. 24
Capitalization............................................................ 25
Price Range of Common Stock............................................... 26
Dividend Policy........................................................... 26
Selected Consolidated Financial Data...................................... 28
Unaudited Pro Forma Consolidated Condensed Financial Statements........... 30
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 34
Business.................................................................. 46
Management................................................................ 72
Certain Relationships and Related Transactions............................ 76
Description of the Merger................................................. 77
Description of MFS Capital Stock.......................................... 88
Underwriting.............................................................. 92
Legal Matters............................................................. 94
Experts................................................................... 94
Glossary.................................................................. 95
Index to MFS Consolidated Financial Statements............................ F-1
Index to UUNET Consolidated Financial Statements.......................... F-2
</TABLE>

28,000,000 SHARES

MFS COMMUNICATIONS
COMPANY, INC.

COMMON STOCK

(PAR VALUE $.01 PER SHARE)

[MFS LOGO APPEARS HERE]

SALOMON BROTHERS INC

GOLDMAN, SACHS & CO.

BEAR, STEARNS & CO. INC.

SMITH BARNEY INC.

UBS SECURITIES

PROSPECTUS

DATED , 1996
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION
JUNE 5, 1996
PROSPECTUS

28,000,000 SHARES

[LOGO MFS APPEARS HERE]
MFS COMMUNICATIONS COMPANY, INC.

COMMON STOCK

(PAR VALUE $.01 PER SHARE)

All of the shares of Common Stock offered hereby (the "Shares") are being sold
by MFS Communications Company, Inc. (the "Company" or "MFS"). Of the 28,000,000
shares of Common Stock offered (the "Shares"), 5,600,000 shares are being
offered hereunder by the International Underwriters (as defined herein) outside
the United States and Canada (the "International Offering") and 22,400,000
shares are being offered by the U.S. Underwriters (as defined herein), in a
concurrent offering in the United States and Canada (the "U.S. Offering" and
together with the International Offering, the "Offerings"), subject to
transfers between the U.S. Underwriters and the International Underwriters
(collectively, the "Underwriters"). The public offering price and the aggregate
underwriting discount per share will be identical for the Offerings. See
"Underwriting." The Common Stock is listed on The Nasdaq Stock Market's
National Market (the "Nasdaq National Market") under the symbol "MFST." On June
4, 1996, the last reported sale price for the Common Stock as reported by the
Nasdaq National Market was $34.75 per share. See "Price Range of Common Stock".

PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY MATTERS DISCUSSED UNDER THE
CAPTION "RISK FACTORS" BEGINNING ON PAGE 13.

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS
PRICE TO UNDERWRITING TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.......................................... $ $ $
Total(3)........................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $ .
(3) The Company has granted to the U.S. Underwriters and International
Underwriters 30-day options to purchase up to 4,200,000 additional Shares,
at the Price to Public, less the Underwriting Discount, solely to cover
over-allotments, if any. If the Underwriters exercise these options in
full, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $ , $ and $ , respectively. See "Underwriting."

SALOMON BROTHERS INTERNATIONAL LIMITED
GOLDMAN SACHS INTERNATIONAL
BEAR, STEARNS INTERNATIONAL LIMITED
SMITH BARNEY INC.
UBS LIMITED

The date of this Prospectus is , 1996.
<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in an underwriting agreement
among the Company and the International Underwriters (the "International
Underwriting Agreement"), the Company has agreed to sell to each of the
International Underwriters named below (the "International Underwriters"), and
each of the International Underwriters, for whom Salomon Brothers
International Limited, Goldman Sachs International, Bear, Stearns
International Limited, Smith Barney Inc. and UBS Limited are acting as
representatives (the "International Representatives"), has severally agreed to
purchase the number of Shares set forth opposite its name below:

<TABLE>
<CAPTION>
UNDERWRITING
INTERNATIONAL UNDERWRITERS COMMITMENT
-------------------------- ------------
<S> <C>
Salomon Brothers International Limited..........................
Goldman Sachs International.....................................
Bear, Stearns International Limited.............................
Smith Barney Inc. ..............................................
UBS Limited.....................................................
---------
Total......................................................... 5,600,000
=========
</TABLE>

The Company has been advised by the International Representatives that the
several International Underwriters initially propose to offer such Shares to
the public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $ per Share. The International Underwriters may allow, and such
dealers may re-allow, a concession not in excess of $ per Share to other
dealers. After the Offerings, the price to public and such concessions may be
changed.

The Company has granted to the International Underwriters and the U.S.
Underwriters (the "U.S. Underwriters" and, collectively with the International
Underwriters, the "Underwriters") options, exercisable during the 30-day
period after the date of this Prospectus, to purchase up to 4,200,000
additional shares of MFS Common Stock from the Company at the price to public
less the underwriting discount, solely to cover over-allotments. To the extent
that the International Underwriters and the U.S. Underwriters exercise such
options, each of the International Underwriters and the U.S. Underwriters, as
the case may be, will be committed, subject to certain conditions, to purchase
a number of option shares proportionate to such International Underwriter's or
U.S Underwriter's initial commitment.

The Company has entered into a U.S. Underwriting Agreement with the U.S.
Underwriters named therein, for whom Salomon Brothers Inc, Goldman, Sachs &
Co., Bear, Stearns & Co. Inc., Smith Barney Inc. and UBS Securities LLC are
acting as the representatives (the "U.S. Representatives"), providing for the
concurrent offer and sale of 22,400,000 Shares (in addition to the shares
covered by the over-allotment options described above) in the United States
and Canada. Both the International Underwriting Agreement and the U.S.
Underwriting Agreement provide that the obligations of the International
Underwriters and the U.S. Underwriters are such that if any of the Shares are
purchased by the International Underwriters pursuant to the International
Underwriting Agreement, or by the U.S. Underwriters pursuant to the U.S.
Underwriting Agreement, all the Shares agreed to be purchased by either the
International Underwriters or the U.S. Underwriters, as the case may be,
pursuant to their respective agreements must be so purchased. The price to
public and underwriting discount per share for the International Offering and
the U.S. Offering will be identical. The closing of the U.S. Offering is a
condition to the closing of the International Offering and the closing of the
International Offering is a condition to the closing of the U.S. Offering.

92
<PAGE>

Each International Underwriter has severally agreed that, as part of the
distribution of the 5,600,000 Shares offered by the International
Underwriters, (i) it is not purchasing any shares of MFS Common Stock for the
account of any United States or Canadian Person and (ii) it has not offered or
sold, and will not offer or sell directly or indirectly, any shares of MFS
Common Stock or distribute this Prospectus to any person within the United
States or Canada or to any United States or Canadian Person. Each U.S.
Underwriter has severally agreed that, as part of the distribution of the
Shares by the U.S. Underwriters, (i) it is not purchasing any shares of MFS
Common Stock for the account of anyone other than a United States or Canadian
Person, and (ii) it has not offered or sold, and will not offer or sell,
directly or indirectly, any shares of MFS Common Stock or distribute any
Prospectus relating to the U.S. Offering to any person outside the United
States or Canada or to anyone other than a United States or Canadian Person.

Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, sales may be made between the International Underwriters and the
U.S. Underwriters of such number of shares of MFS Common Stock as may be
mutually agreed. The price of any shares of MFS Common Stock so sold shall be
the public offering price, less an amount not greater than the concession to
securities dealers. To the extent that there are sales between the
International Underwriters and the U.S. Underwriters pursuant to the Agreement
Between U.S. Underwriters and International Underwriters, the number of shares
of MFS Common Stock initially available for sale by the International
Underwriters or by the U.S. Underwriters may be more or less than the amount
specified on the cover page of this Prospectus.

Each International Underwriter has severally represented and agreed that:
(i) it has not offered or sold and, prior to the date six months after the
closing date of the offering, will not offer to sell any shares of MFS Common
Stock to persons in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995 (the "Regulations"); (ii) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 and the Regulations with respect to anything done by it in
relation to the MFS Common Stock in, from or otherwise involving the United
Kingdom; and (iii) it has only issued or passed on or will only issue or pass
on in the United Kingdom any document received by it in connection with the
issue of the MFS Common Stock, to a person who is of a kind described in
Article 11 (3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1995, or is a person to whom the document may otherwise
lawfully be issued or passed on.

Purchasers of the shares of MFS Common Stock offered hereby may be required
to pay stamp taxes and other charges in accordance with the laws and practices
of the country of purchase in addition to the offering price set forth on the
cover page thereof.

The International Underwriting Agreement provides that the Company will
indemnify the International Underwriters against certain liabilities and
expenses, including liabilities under the Securities Act, or contribute to
payments the International Underwriters may be required to make in respect
thereof.

93
<PAGE>

The Company has agreed not to offer, sell, contract to sell or otherwise
dispose of, directly or indirectly, or announce the offering of any shares of
MFS Common Stock, including any such shares beneficially or indirectly owned
or controlled by the Company, or any securities convertible into, or
exchangeable or exercisable for, shares of MFS Common Stock, for 90 days from
the date of this Prospectus, without the prior written consent of the
International Representatives, except for (i) shares issued and sold in
connection with acquisitions by the Company, including the Merger, subject to
certain limitations, (ii) shares issued in connection with any employee
benefit or incentive plans of the Company, (iii) shares issued in respect of
obligations existing before the date of this Prospectus and (iv) shares issued
in connection with the Offerings made hereby.

In connection with the Offerings, certain Underwriters and selling group
members who are qualifying registered market makers on the Nasdaq National
Market may engage in passive market making transactions in the MFS Common
Stock on the Nasdaq National Market in accordance with Rule 10b-6A under the
Exchange Act, during the two business day period before commencement of offers
or sales of the Shares offered hereby. Passive market making transactions must
comply with certain volume and price limitations and be identified as such. In
general, a passive market maker may display its bid at a price not in excess
of the highest independent bid for the security, and if all independent bids
are lowered below the passive market maker's bid, then such bid must be
lowered when certain purchase limits are exceeded.

CERTAIN UNITED STATES TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS

The following is a discussion of certain United States federal income and
estate tax consequences of the acquisition, ownership and disposition of
Shares applicable to Non-United States Holders of MFS Common Stock. In
general, a "Non-U.S. Holder" is any person other than (i) a citizen or
resident of the United States, (ii) a corporation or partnership created or
organized in the United States or under the laws of the United States or of
any State of (iii) an estate or trust whose income is includable in gross
income for United States federal income tax purposes regardless of its source.
The discussion is based on current law and is for general information only.
The discussion assumes that the MFS Common Stock will continue to be included
in the Nasdaq National Market. The discussion does not address aspects of
taxation other than federal income and estate taxation and does not address
all aspects of federal income and estate taxation. The discussion does not
consider any specific facts or circumstances that may apply to a particular
Non-U.S. Holder. Moreover, the discussion does not address legislation which
is currently being considered by Congress or has been proposed by the Treasury
Department that could adversely effect a Non-U.S. Holder. Accordingly,
prospective investors are urged to consult their tax advisors regarding the
United States federal, state, local, non-United States income and other tax
consequences of acquiring, holding and disposing of shares, and whether such a
prospective investor would be treated as a resident of the United States for
federal income tax purposes.

Dividends. In general, dividends paid to a Non-U.S. Holder that are not
effectively connected with a trade or business carried on by the Non-U.S.
Holder within the United States will be subject to United States withholding
tax at a rate of 30% of the gross amount thereof. Dividends effectively
connected with a United States trade or business of a Non-U.S. Holder
generally will not be subject to

94
<PAGE>

withholding (if the Non-U.S. Holder files certain forms with the payor of the
dividend) and generally will be subject to United States federal income tax at
the same rates and in the same manner as if the income had been received by a
domestic taxpayer. In the case of Non-U.S. Holder corporations, such
effectively connected income also may be subject to the branch profits tax
(which generally is imposed on a foreign corporation upon the repatriation
from the United States of effectively connected earnings and profits). Non-
U.S. Holders should consult any applicable income tax treaties, which may
provide for reduced withholding or other rules different from those described
above. A Non-U.S. Holder may be required to satisfy certain certification
requirements in order to claim treaty benefits or to otherwise claim a
reduction of or exemption from withholding under the foregoing rules.

Sale of MFS Common Stock. Generally, a Non-U.S. Holder will not be subject
to United States federal income tax on any gain realized upon the disposition
of his MFS Common Stock unless (i) the Company is or has been during the five-
year period ending on the date of disposition, a "United States real property
holding corporation" for federal income tax purposes (which the Company has
not been, is not and is not likely to become) and the Non-U.S. Holder held,
directly or indirectly at anytime during the five-year period ending on the
date of disposition, more than 5% of the MFS Common Stock, (ii) the gain is
effectively connected with a trade or business carried on by the Non-U.S.
Holder within the United States or, if a tax treaty applies, is attributable
to a permanent establishment (generally an office or other fixed place of
business maintained by the Non-U.S. Holder in the United States), or (iii) the
Non-U.S. Holder is an individual who holds the MFS Common Stock as a capital
asset and is present in the United States for 183 days or more in the taxable
year of the disposition and either (a) such Non-U.S. Holder individual has a
tax home as specially defined for United States federal income tax purposes)
in the United States and either the gain from the disposition is not
attributable to an office or other fixed place of business maintained by the
Non-U.S. Holder individual in a foreign country or an income tax equal to 10%
of the gain is not actually paid to a foreign country or (b) the gain from the
disposition is attributable to an office or other fixed place of business
maintained in the United States by such Non-U.S. Holder individual. Gain that
is effectively connected with the conduct of a trade or business within the
United States by a Non-U.S. Holder will be subject to United States federal
income tax on net income that applies to United States persons (and, with
respect to corporate holders under certain circumstances, the branch profits
tax) but will not be subject to withholding. An individual described in (iii)
above generally will be subject to tax at a 30% rate on any gain recognized on
such disposition. Individual Non-U.S. Holders also may be subject to tax
pursuant to provisions of United States federal income tax law applicable to
expatriates. Non-U.S. Holders should consult applicable treaties, which may
provide for different rules.

Estate Tax. MFS Common Stock, owned or treated as owned by an individual who
is not a citizen or resident (as specially defined for United States federal
estate tax purposes) of the United States at the time of death will be
includable in the individual's gross estate for United States federal estate
tax purposes, unless an applicable tax treaty provides otherwise. Such
individual's estate may be subject to United States federal estate tax on the
property includable in the estate for United States federal estate tax
purposes. Estates of nonresident aliens are generally allowed a credit that is
equivalent to an exclusion of $60,000 of assets from the estate for United
States federal estate tax purposes; however, applicable tax treaties may
provide for an increased estate tax credit.

Backup Withholding and Information Reporting. The Company must report
annually to the Internal Revenue Service (the "IRS") and to each Non-U.S.
Holder the amount of dividends paid to, and the tax withheld with respect to,
each Non-U.S. Holder. These information reporting requirements apply
regardless of whether withholding was reduced or eliminated by an applicable
tax treaty. Copies of these information returns also may be made available
under the provisions of a specific treaty or agreement to the tax authorities
in the country in which the Non-U.S. Holder resides. United States information
reporting and backup withholding tax (which generally is a withholding tax
imposed at the rate of 31% on certain payments to United States persons that
fail to furnish the information required

95
<PAGE>

under the United States information reporting requirements) generally will not
apply to dividends paid on MFS Common Stock to a Non-U.S. Holder either at an
address outside the United States (provided that the payor does not have
definite knowledge that the payee is a United States person) or if the
dividends are subject to withholding at the 30% rate (or lower treaty rate).

The payment of the proceeds from the disposition of MFS Common Stock to or
through the United States office of a broker will be subject to information
reporting and backup withholding unless the owner, under penalties of perjury,
certifies, among other things, as to its status as a Non-U.S. Holder or
otherwise establishes an exemption (and the broker has no actual knowledge to
the contrary). The payment of the proceeds from the disposition of MFS Common
Stock to or through a non-United States office of a broker generally will not
be subject to information reporting or backup withholding. However,
information reporting (but not backup withholding) will apply to a payment of
the proceeds from a sale of MFS Common Stock if the payment is made through a
non-United States office of a United States broker or through a non-United
States office of a non-United States broker that is (i) a controlled foreign
corporation as to the United States or (ii) a person 50% or more of whose
gross income for a certain three-year period is effectively connected with a
United States trade or business, unless the broker has documentary evidence in
its records that the holder is a Non-U.S. Holder and certain conditions are
met, or the holder otherwise establishes an exemption.

Backup withholding tax is not an additional tax and may be credited against
a holder's United States federal income tax liability, provided that required
information is furnished to the IRS. Non-U.S. Holders generally may obtain a
refund of any excess amount withheld under the backup withholding rules by
filing the appropriate refund claim with the IRS.

The Treasury Department has issued proposed regulations that would modify
the information and backup withholding rules as they apply to Non-U.S.
Holders. The proposed regulations would unify the current certification
procedures and forms and would, in certain circumstances, require additional
information from Non-U.S. Holders claiming treaty benefits. The proposed
regulations are scheduled to take effect January 1, 1997, and are subject to
further changes.