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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K/A

(Amendment No. 2 to Form 10-K)



(Mark One)

|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2004



or



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



For the transition period fromto



Commission File Number 001-10415



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MCI, Inc.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 20-0533283                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                                |  |           
|----------------------------------------------- |  | ----------
|22001 Loudoun County Parkway, Ashburn, Virginia |  | 20147     
|(Address of principal executive offices)        |  | (Zip Code)



Registrants
telephone number, including area code: (703) 886-5600



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



None



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



Common Stock, $.01 Par Value



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



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  x    No ̈



The aggregate market value of common equity as of June 30, 2004, based on the average bid and asked prices of
MCI common stock on such date of $14.43 per share was approximately $4.6 billion.



Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to distribution of securities
confirmed by a court.    Yes  x    No ̈



Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act.): Yes ̈No  x



As of February 28, 2005, there
were 324,755,920 shares outstanding of MCI, Inc. common stock.



DOCUMENTS INCORPORATED BY REFERENCE:



Portions
of the Registrants Proxy Statement in connection with the 2005 Annual Meeting (Part III)



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Explanatory Note



The purpose of this Amendment No. 2 on this Form 10-K/A to the Annual Report on Form 10-K of MCI, Inc. for the year
ended December 31, 2004 is to update the Companys disclosure related to its Internal Controls and Procedures.



The following items have been amended as a result:



| |  |  | Part IIItem 8Consolidated Financial Statements
| | - |  | ------------------------------------------------



| |  |  | Part IIItem 9AControls and Procedures
| | - |  | ---------------------------------------



| |  |  | Part IIItem 15Exhibits and Financial Statement Schedules
| | - |  | ----------------------------------------------------------



In addition, this amendment includes the following exhibits:



| |  |  | Exhibit 23.1Consent of Independent Registered Public Accounting Firm
| | - |  | ---------------------------------------------------------------------



| |  |  | Exhibit 23.2Consent of Independent Registered Public Accounting Firm
| | - |  | ---------------------------------------------------------------------



| |  |  | Exhibit 31.1Chief Executive Officer Certification
| | - |  | --------------------------------------------------



| |  |  | Exhibit 31.2Chief Financial Officer Certification
| | - |  | --------------------------------------------------



| |  |  | Exhibit 32.1Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



No attempt has been made in this Form 10-K/A to modify or update the other
disclosures presented in the original report on Form 10-K. The Form 10-K/A does not reflect events occurring after the filing of the Form 10-K or modify or update those disclosures, including the exhibits to the Form 10-K affected by subsequent
events. Information not affected by the amendment described above is unchanged and has not been included herein. Accordingly, this Form 10-K/A should be read in conjunction with our filings made with the Securities and Exchange Commission including
our Form 10-K/A filed on August 30, 2005.











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TABLE OF CONTENTS



|                                           |  |                                            |  |     
|------------------------------------------ |  | ------------------------------------------ |  | ----
|                                           |  |                                            |  | Page
|                                           |  |                                           
|                                           |  | PART II                                    |  |     
|Item 8.                                    |  | Consolidated Financial Statements          |  | 1   
|Item 9A.                                   |  | Controls and Procedures                    |  | 1   
|                                           |  |                                           
|                                           |  | PART IV                                    |  |     
|                                           |  |                                           
|Item 15.                                   |  | Exhibits and Financial Statement Schedules |  | 4   
|Signatures                                 |  | 6                                         
|Index to Consolidated Financial Statements |  | F-1                                       



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ITEM 8.CONSOLIDATED FINANCIAL STATEMENTS



Our Consolidated Financial Statements and notes thereto are included elsewhere in this Annual Report on Form 10-K/A as described in Item 15.



ITEM 9A.CONTROLS AND PROCEDURES



1. Managements Report on Internal Control over Financial Reporting (as Restated)



The management of MCI, Inc. and subsidiaries (MCI or the Company) is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) of the Exchange Act. MCIs internal control system was designed to provide reasonable assurance to the Companys management and board of directors regarding the
preparation and fair presentation of published financial statements in accordance with U.S. generally accepted accounting principles.



As part of MCIs compliance efforts relative to Section 404 of the Sarbanes-Oxley Act of 2002, MCI management assessed the effectiveness of the
Companys internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework. Based on that assessment, management identified material weaknesses in the Companys internal control over accounting for income taxes and its Federal Universal Service Fund (FUSF) obligations.
The material weakness in internal control over accounting for income taxes related to a lack of personnel with adequate expertise in income tax accounting matters, a lack of documentation, insufficient historical analysis and ineffective
reconciliation procedures. Since the original 2004 Form 10-K was filed on March 16, 2005, an additional material weakness in the Companys internal control over financial reporting as of December 31, 2004 has been identified relating
to its accounting for FUSF obligations. The material weakness in internal control over accounting for FUSF obligations related to insufficient involvement, on a timely basis, of appropriately qualified personnel in determining the extent to which
products are subject to FUSF contributions. These deficiencies represent material weaknesses in internal control over financial reporting on the basis that there is more than a remote likelihood that a material misstatement in the Companys
interim or annual financial statements due to errors in accounting for income taxes or FUSF obligations could occur and would not be prevented or detected by its internal control over financial reporting. Because of these material weaknesses in
internal control over financial reporting, management concluded that, as of December 31, 2004, the Companys internal control over financial reporting was not effective based on the criteria set forth by COSO.



Management had previously concluded that the Company did not maintain
effective internal control over financial reporting as of December 31, 2004 because of the existence of the material weakness in accounting for income taxes as described above. Management has determined that the material weakness relating to
internal controls over accounting for FUSF obligations described above also existed as of December 31, 2004. Accordingly, management has restated this report on internal control over financial reporting to include this additional material
weakness. The financial statement impact from this internal control deficiency over accounting for FUSF obligations resulted in accounting errors that were determined to be not material to the financial statements for 2004 and prior fiscal years.



MCIs independent auditors, KPMG LLP, an independent
registered public accounting firm, have issued an audit report on our assessment of the Companys internal control over financial reporting (as restated). This report appears on page F-4.



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2. Managements Discussion on Material Weaknesses



a) Material weakness in accounting for income taxes



MCIs income tax accounting in 2004 had significant complexity due to
fresh start accounting, impairment of assets, cancellation of indebtedness, a significant reduction in the number of subsidiary legal entities and various tax contingencies described in Note 20 to the consolidated financial statements.



To address this complexity, the Company instituted other procedures, hired
additional tax accounting staff and outsourced the more complex areas of its income tax work to third party tax service providers.



While these steps have helped address some of the internal control deficiencies noted above, they have not been sufficient to conclude that the
Companys internal control over accounting for income taxes was effective as of December 31, 2004. Accordingly, the Company has, and will continue to, conduct significant remediation activity including:



| |  |  | the hiring, in March 2005, of a new Vice President of Tax;
| | - |  | ----------------------------------------------------------



| |  |  | hiring of additional full time tax accounting staff;
| | - |  | ----------------------------------------------------



| |  |  | increased use of third party tax service providers for the more complex areas of the Companys income tax accounting; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | increased formality and rigor of controls and procedures over accounting for income taxes.
| | - |  | ------------------------------------------------------------------------------------------



b) Material weakness in accounting for Federal Universal Service Fund obligations



With respect to its weakness over accounting for FUSF obligations,
identified in the fourth quarter of 2005, the Company has already conducted significant remediation activity in the fourth quarter of 2005 including:



| |  |  | redesign and documentation of a new and enhanced end-to-end process around FUSF obligations; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | required timely involvement and certification from all appropriate key personnel in determining the extent to which products are subject to FUSF contributions.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



As a consequence of the material weaknesses
noted above, the Company applied other procedures designed to improve the reliability of its accounting for income taxes and FUSF obligations. Based on these other procedures, management believes that the consolidated financial statements included
in this report, as well as the Companys financial statements for each quarter in 2004, as previously reported, are fairly stated in all material respects.



3. Changes in Internal Control over Financial Reporting



In 2003, MCI concluded that its internal control over financial reporting was not effective. Accordingly, the Company
applied other procedures to improve the reliability of its financial reporting processes.



Significant efforts were made to establish a framework to improve our internal control over financial reporting during 2004. We committed considerable resources to the design, implementation, documentation and testing
of the key internal controls of the Company. Additional efforts were required to remediate and retest certain internal control deficiencies. Management believes that these efforts have improved the Companys internal control over financial
reporting. While our internal control over financial reporting is significantly improved, management has identified certain areas (in addition to accounting for income taxes and FUSF obligations) that it believes should be further enhanced. With
respect to these areas, the Company has implemented compensating controls and procedures that are designed to prevent a material misstatement of the Companys consolidated financial statements as of December 31, 2004. Nevertheless, management
intends to continue improving the Companys internal control over financial reporting. Initiatives the Company has implemented to improve the Companys internal control over financial reporting in 2004 include, but are not limited to the
following:



| |  |  | increased the number and quality of our accounting personnel;
| | - |  | -------------------------------------------------------------



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| |  |  | increased the formality and rigor around the operation of key controls;
| | - |  | -----------------------------------------------------------------------



| |  |  | documentation of all key financial procedures;
| | - |  | ----------------------------------------------



| |  |  | implemented more stringent policies and procedures around our processes over accounting estimates; and
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | increased security surrounding, and limited access rights to, the most significant financial systems.
| | - |  | -----------------------------------------------------------------------------------------------------



Initiatives the Company has and will continue to implement to further enhance the Companys internal control over
financial reporting (in addition to those previously discussed relating to income taxes and FUSF obligations) include, but are not limited to, the following:



| |  |  | continue to recruit and train finance and accounting personnel;
| | - |  | ---------------------------------------------------------------



| |  |  | automate certain controls that are currently performed manually;
| | - |  | ----------------------------------------------------------------



| |  |  | simplify our back office systems; and
| | - |  | -------------------------------------



| |  |  | expand our introduction of increased security and limiting access rights to financial systems of lesser significance.
| | - |  | ---------------------------------------------------------------------------------------------------------------------



4. Evaluation of Disclosure Controls and Procedures



As of the end of the period covered by this report, we conducted an
evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to
the Securities Exchange Act Rules of 1934 (the Exchange Act) 13a-15(e) and 15d-15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of
December 31, 2004, due to the material weaknesses discussed under the heading, Managements Report on Internal Control over Financial Reporting (as Restated). Disclosure controls and procedures are controls and procedures
that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and completely and accurately reported within the time periods specified in the
Securities and Exchange Commissions rules and forms.



5. Limitations on the Effectiveness of Controls



The effectiveness of any system of internal control over financial reporting, including our own, is subject to certain inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the
controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, can only provide reasonable, not absolute, assurances. In addition, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.





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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES



Financial Statements



|                                                                                                                                                                                                          |  |     
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Registered Public Accounting Firm                                                                                                                                                   |  | F-2 
|Report of Independent Registered Public Accounting Firm                                                                                                                                                   |  | F-4 
|Report of Independent Registered Public Accounting FirmEmbratel Participações S.A.                                                                                                                       |  | F-6 
|Consolidated statements of operations for each of the years in the period ended December 31, 2004 (Successor), 2003 and 2002
(Predecessor)                                                                |  | F-7 
|Consolidated balance sheets as of December 31, 2004 and 2003 (Successor)                                                                                                                                  |  | F-8 
|Consolidated statements of changes in shareholders equity (deficit) and comprehensive (loss) income for each of the years in the period
ended December 31, 2004 (Successor), 2003 and 2002 (Predecessor) |  | F-9 
|Consolidated statements of cash flows for each of the years in the period ended December 31, 2004 (Successor), 2003 and 2002
(Predecessor)                                                                |  | F-10
|Notes to consolidated financial statements                                                                                                                                                                |  | F-11



Exhibits



|    |   |  |                                                                                                                                                                                                                                                                                                                                                                                       
|--- | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  
|2.1 |   |  | Modified Amended Second Joint Plan of Reorganization for WorldCom, Inc. (incorporated herein by reference to Exhibit 2.1 to WorldComs Current Report on Form 8-K dated October 31, 2003
(filed November 18, 2003))                                                                                                                                                                   
|    |  
|2.2 |   |  | Offer to Purchase for Cash All Outstanding Shares of Class A Common Stock of Digex, Incorporated by WorldCom, Inc., dated August 27, 2003, as amended September 23, 2003 (filed as Exhibit
99(a)(1) to WorldComs Schedule TO-T/A, dated September 23, 2003, and incorporated herein by reference)                                                                                    
|    |  
|2.3 | * |  | Agreement and Plan of Merger between WorldCom, Wildcat Acquisition Corp. and Intermedia Communications Inc. dated as amended May 14, 2001 (filed as Annex A to WorldComs Registration
Statement on Form S-4, Registration No. 333-60482 and incorporated herein by reference)                                                                                                        
|    |  
|2.4 |   |  | Stock Purchase Agreement dated as of March 12, 2004 between Telefonos de Mexico, S.A. de C.V., WorldCom, Inc., MCI International, Inc., MCI WORLDCOM International, Inc. and MCI WorldCom
Brazil, LLC (incorporated herein by reference to Exhibit 99.2 to WorldComs Current Report on Form 8-K dated March 12, 2004 (filed March 18, 2004) (File No. 001-10415))                    
|    |  
|2.5 |   |  | First Amendment to Stock Purchase Agreement dated as of April 7, 2004, by and among Telefonos de Mexico, S.A. de C.V., MCI, Inc., MCI International, Inc., MCI WorldCom International, Inc.,
and MCI WorldCom Brazil LLC (incorporated herein by reference to Exhibit 99.1 to MCI, Inc.s Current Report on Form 8-K dated April 22, 2004 (filed April 23, 2004) (File No. 001-10415))
|    |  
|2.6 |   |  | Second Amendment, dated as of April 20, 2004, by and among Telefonos de Mexico, S.A. de C.V., MCI, Inc., MCI International, Inc., MCI WorldCom International, Inc., and MCI WorldCom Brazil LLC
(incorporated herein by reference to Exhibit 99.2 to MCI, Inc.s Current Report on Form 8-K dated April 22, 2004 (filed April 23, 2004) (File No. 001-10415))                         
|    |  
|2.7 |   |  | Merger Agreement dated as of February 14, 2005 among Verizon Communications, Inc., Eli Acquisition, LLC and MCI, Inc. (incorporated by reference to Exhibit 99.1 to MCI, Inc. Current Report on
Form 8-K dated February 14, 2005 (filed February 17, 2005) (File No. 001-10415))                                                                                                      
|    |  
|3.1 |   |  | Amended and Restated Certificate of Incorporation of MCI, Inc. (incorporated herein by reference to Exhibit 3.1 to MCIs Form 8-A dated April 20, 2004 (File No.
000-11258))                                                                                                                                                                                                          
|    |  
|3.2 |   |  | Bylaws of MCI, Inc. incorporated herein by reference to Exhibit 3.2 to MCIs Form 8-A dated April 20, 2004 (File No. 000-11258)                                                                                                                                                                                                                                                       
|    |  
|4.1 |   |  | Indenture between MCI, Inc., and Citibank, N.A., as trustee, dated as of April 20, 2004, for Senior Notes due 2007 (incorporated by reference to Exhibit 4.2 to MCIs Annual Report on
Form 10-K for the year ended December 31, 2003 (filed April 29, 2004) (File No. 001-10415))                                                                                                    
|    |  
|4.2 |   |  | Indenture between MCI, Inc., and Citibank, N.A., as trustee, dated as of April 20, 2004, for Senior Notes due 2009 (incorporated by reference to Exhibit 4.3 to MCIs Annual Report on
Form 10-K for the year ended December 31, 2003 (filed April 29, 2004) (File No. 001-10415))                                                                                                    
|    |  
|4.3 |   |  | Indenture between MCI, Inc., and Citibank, N.A., as trustee, dated as of April 20, 2004, for Senior Notes due 2014 (incorporated by reference to Exhibit 4.4 to MCIs Annual Report on
Form 10-K for the year ended December 31, 2003 (filed April 29, 2004) (File No. 001-10415))                                                                                                    



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|        |  |                                                                                                                                                                                                                                                                                         
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.4     |  | Rights Agreement between MCI, Inc. and The Bank of New York, as Rights Agent, dated as of April 20, 2004 incorporated herein by reference to Exhibit 4.1 to MCIs Form 8-A dated April 20,
2004 (File No. 000-11258)                                                                    
|4.5     |  | Registration Rights Agreement, dated as of April 20, 2004, among MCI, Inc. and the security holders named therein (incorporated herein by reference to Exhibit 4.6 to MCIs Annual Report
on Form 10-K for the year ended December 31, 2003 (filed April 29, 2004) (File No. 001-10415))
|10.1    |  | MCI, Inc. 2003 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.64 to MCIs Annual Report on Form 10-K for the year ended December 31, 2003 (filed April 29,
2004) (File No. 001-10415))                                                                    
|10.2    |  | MCI, Inc. 2003 Management Restricted Stock Plan (incorporated herein by reference to Exhibit 10.65 to MCIs Annual Report on Form 10-K for the year ended December 31, 2003 (filed April
29, 2004) (File No. 001-10415))                                                                
|10.3    |  | MCI, Inc. Deferred Stock Unit Plan (incorporated herein by reference to Exhibit 10.66 to MCIs Annual Report on Form 10-K for the year ended December 31, 2003 (filed April 29, 2004)
(File No. 001-10415))                                                                             
|*10.4   |  | Form of Employment Agreement between MCI, Inc. and Michael Capellas (incorporated herein by reference to Exhibit 10.67 to MCIs Annual Report on Form 10-K for the year ended December 31,
2003 (filed April 29, 2004) (File No. 001-10415))                                            
|*10.5   |  | Employment Agreement between MCI, Inc. and Robert T. Blakely                                                                                                                                                                                                                            
|*10.6   |  | Employment Agreement between MCI, Inc. and Jonathan Crane                                                                                                                                                                                                                               
|*10.7   |  | Employment Agreement between MCI, Inc. and Wayne E. Huyard                                                                                                                                                                                                                              
|*10.8   |  | Employment Agreement between MCI, Inc. and Anastasia Kelly                                                                                                                                                                                                                              
|*10.9   |  | Form of Employment Agreement between MCI, Inc. and Richard R. Roscitt (incorporated herein by reference to Exhibit 10.68 to MCIs Annual Report on Form 10-K for the year ended December
31, 2003 (filed April 29, 2004) (File No. 001-10415))                                          
|10.10   |  | Supplemental Appendix to Employment Agreement of Richard R. Roscitt (incorporated herein by reference to Exhibit 10.69 to MCIs Annual Report on Form 10-K for the year ended December 31,
2003 (filed April 29, 2004) (File No. 001-10415))                                            
|10.11   |  | Separation Agreement between Richard R. Roscitt and WorldCom, Inc. dated March 24, 2004 (incorporated herein by reference to Exhibit 10.70 to MCIs Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004 (filed May 10, 2004) (File No. 001-10415))                       
|**10.12 |  | MCI, Inc. Corporate Valuable Pay Plan, as amended and restated effective February 11, 2005                                                                                                                                                                                              
|**10.13 |  | Amendment No. 1 to the MCI, Inc. 2003 Employee Stock Purchase Plan                                                                                                                                                                                                                      
|**10.14 |  | Amendment No. 2 to the MCI, Inc. 2003 Employee Stock Purchase Plan                                                                                                                                                                                                                      
|**10.15 |  | Amendment No. 3 to the MCI, Inc. 2003 Employee Stock Purchase Plan                                                                                                                                                                                                                      
|14.1    |  | MCI, Inc.s Code of Ethics and Business Conduct, The Way We Work. (incorporated herein by reference to Exhibit 14.1 to MCIs Annual Report on Form 10-K for the year
ended December 31, 2003 (filed April 29, 2004) (File No. 001-10415))                                             
|**21.1  |  | Subsidiaries of MCI, Inc.                                                                                                                                                                                                                                                               
|23.1    |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                
|23.2    |  | Consent of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                
|31.1    |  | Chief Executive Officer Certification                                                                                                                                                                                                                                                   
|31.2    |  | Chief Financial Officer Certification                                                                                                                                                                                                                                                   
|32.1    |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                  

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|* | The registrant hereby agrees to furnish supplementally a copy of any omitted schedules/appendices to this Agreement to the SEC upon request.
|- | --------------------------------------------------------------------------------------------------------------------------------------------

|** | These exhibits were filed under the original Annual Report on Form 10-K for the year ended December 31, 2004.
|-- | -------------------------------------------------------------------------------------------------------------



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SIGNATURES



Pursuant to the
requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment to the report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized.



MCI, INC./S/    ROBERT T. BLAKELYRobert T. BlakelyExecutive Vice President and Chief Financial Officer




Date: January 5, 2006





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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                                                                                                          |  |     
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                                                                                          |  | Page
|MCI, Inc. and subsidiaries                                                                                                                                                                                |  |     
|Report of Independent Registered Public Accounting Firm                                                                                                                                                   |  | F-2 
|Report of Independent Registered Public Accounting Firm                                                                                                                                                   |  | F-4 
|Report of Independent Registered Public Accounting FirmEmbratel Participações S.A.                                                                                                                       |  | F-6 
|Consolidated statements of operations for each of the years in the period ended December 31, 2004 (Successor), 2003 and 2002 (Predecessor)                                                                |  | F-7 
|Consolidated balance sheets as of December 31, 2004 and 2003 (Successor)                                                                                                                                  |  | F-8 
|Consolidated statements of changes in shareholders equity (deficit) and comprehensive (loss) income for each of the years in the period ended December 31, 2004 (Successor), 2003 and 2002 (Predecessor) |  | F-9 
|Consolidated statements of cash flows for each of the years in the period ended December 31, 2004 (Successor), 2003 and 2002 (Predecessor)                                                                |  | F-10
|Notes to consolidated financial statements                                                                                                                                                                |  | F-11



F-1



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders

MCI, Inc.:



We have audited the
accompanying consolidated balance sheets of MCI, Inc. and subsidiaries as of December 31, 2004 and 2003 (Successor Company), and the related consolidated statements of operations, changes in shareholders equity (deficit) and comprehensive
(loss) income and cash flows for the years ended December 31, 2004 (Successor Company), 2003 and 2002 (Predecessor Company) (collectively, the Company). These consolidated financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the consolidated financial statements of Embratel Participações S.A. and subsidiaries (Embratel),
a partially-owned subsidiary until July 2004, which statements reported in Brazilian Reals (R$) reflect total assets of R$13.7 billion (US$4.7 billion) as of December 31, 2003. Embratels net income (loss) of R$382 million (US$125 million) and
R$(678) million (US$(226) million) in 2003 and 2002, respectively, are included within discontinued operations for those years. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Embratel Participações S.A. and subsidiaries for 2003 and 2002, is based solely on the report of the other auditors.



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



The Companys
consolidated financial statements do not disclose earnings (loss) per common share information allocated between the Companys two series of separately traded tracking stocks for the years ended December 31, 2003 and 2002. Earnings per share
information is required by Statement of Financial Accounting Standards No. 128, Earnings Per Share. In our opinion, disclosure of this information is required by U.S. generally accepted accounting principles.



In our opinion, except for the omission of the information discussed in the
preceding paragraph, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MCI, Inc. and subsidiaries as of December 31,
2004 and 2003 (Successor Company), and the results of their operations and their cash flows for the years ended December 31, 2004 (Successor Company), 2003 and 2002 (Predecessor Company), in conformity with U.S. generally accepted accounting
principles.



As discussed in Note 5 to the consolidated
financial statements, on October 31, 2003, the United States Bankruptcy Court for the Southern District of New York confirmed the Companys Plan of Reorganization (the Plan). The Plan became effective on April 20, 2004 and the Company emerged
from Chapter 11 of Title 11 of the U.S. Bankruptcy Code (Chapter 11). In connection with its emergence from Chapter 11, the Company adopted fresh-start reporting pursuant to American Institute of Certified Public Accountants Statement of Position
90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,as of December 31, 2003 as further described in Note 4 to the consolidated financial statements. As a result, the consolidated financial statements of the
Successor Company are presented on a different basis than those of the Predecessor Company and, therefore, are not comparable in all respects.



As discussed in Note 2 to the accompanying consolidated financial statements, effective January 1, 2003, the Company adopted Statement of Financial
Accounting Standards No. 143, Accounting for Asset Retirement



F-2



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Obligations. Also, as discussed in Note 2, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, and Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 15, 2005, except as to the second, third and fourth paragraphs of Managements Report on Internal Control Over Financial Reporting (as restated), which are as of January 5, 2006,
expressed an unqualified opinion on managements assessment of, and an adverse opinion on the effective operation of, internal control over financial reporting.





KPMG LLP



McLean, Virginia



March 15, 2005, except for paragraphs 8 and 11 of

Note 17 as to which the date is June 21, 2005



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Stockholders

MCI, Inc.:



We have audited
managements restated assessment, included in Managements Report on Internal Control over Financial Reporting(as restated) at Item 9A.1., that MCI, Inc. and subsidiaries (the Company) did not maintain effective internal control
over financial reporting as of December 31, 2004, because of the effect of material weaknesses identified in managements assessment (as restated) that the Companys controls and procedures over accounting for income taxes and Federal
Universal Service Fund (FUSF) obligations were ineffective, based on the criteria established inInternal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on
managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.



A companys
internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in
managements assessment: In its assessment as of December 31, 2004, management identified that the Company had a material weakness in its internal control over accounting for income taxes due to a lack of personnel with adequate expertise in
income tax accounting matters, a lack of documentation, insufficient historical analysis and ineffective reconciliation procedures. Since the Companys original 2004 Form 10-K was filed on March 16, 2005, an additional material weakness in
the Companys internal control over financial reporting as of December 31, 2004 has been identified relating to its accounting for FUSF obligations. The material weakness in internal control over accounting for FUSF obligations related to
insufficient involvement, on a timely basis, of appropriately qualified personnel in determining the extent to which products are subject to FUSF contributions. Because of these deficiencies, there is more than a remote likelihood that a material
misstatement in the



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Companys annual or interim financial statements due to errors in accounting for income taxes or FUSF contributions could occur and not be prevented or
detected by its internal control over financial reporting.



We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of MCI, Inc. and subsidiaries as of December 31, 2004 and 2003 (Successor Company), and the related
consolidated statements of operations, changes in shareholders equity (deficit) and comprehensive (loss) income, and cash flows for the years ended December 31, 2004 (Successor Company), and 2003 and 2002 (Predecessor Company) (collectively,
the Company). The aforementioned material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2004 consolidated financial statements, and this report does not affect our report dated
March 15, 2005, except for paragraphs 8 and 11 of Note 17, as to which the date is June 21, 2005, which expressed a qualified opinion on those consolidated financial statements due to the absence of earnings per share information for 2003 and 2002.



In our opinion, managements restated assessment that
MCI, Inc. and subsidiaries did not maintain effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established inInternal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Also, in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, the
Company has not maintained effective internal control over financial reporting as of December 31, 2004, based on the criteria established inInternal ControlIntegrated Framework issued by the Committeeof Sponsoring Organizations of
the Treadway Commission (COSO).



Management and we
previously concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2004 because of the material weakness in accounting for income taxes described above. Management has determined
that the material weakness relating to internal controls over accounting for FUSF obligations described above also existed as of December 31, 2004. Accordingly, management and we have restated our respective reports on internal control over
financial reporting to include this additional material weakness.



We do not express an opinion or any other form of assurance on Managements Discussion on Material Weaknesses at Item 9A.2. or other matters included at Items 9A.3., 4., and 5.





KPMG LLP



McLean, Virginia



March 15, 2005 except as to the

second, third and fourth paragraphs

of Managements Report on Internal Control Over Financial

Reporting (as restated),
which are as of January 5, 2006



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholders of

Embratel Participações S.A.

Rio de Janeiro-RJ, Brazil



We
have audited the accompanying consolidated balance sheets of Embratel Participações S.A. and subsidiaries as of December 31, 2003 and the consolidated statements of operations, changes in shareholders equity and changes in
financial position for each of the two years in the period ended December 31, 2003, all expressed in Brazilian Reais. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.



Our audits were conducted in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of Embratel Participações S.A. and subsidiaries as of December 31, 2003, and the results of their operations, the changes in shareholders equity and
the changes in their financial position for each of the two years in the period ended December 31, 2003, in conformity with accounting practices adopted in Brazil.



Accounting practices adopted in Brazil vary in certain significant respects from accounting principles generally accepted in
the United States of America (U.S. GAAP). Information relating to the nature and effect of such differences is presented in Note 34 to the consolidated financial statements.



As discussed in Note 36, the Company has restated its statements of cash flows prepared in accordance with U.S. GAAP for the
years ended December 31, 2003 and 2002.



DELOITTE TOUCHE TOHMATSU





Auditores Independentes

Rio de Janeiro, Brazil



March 17, 2004 (except with respect to the matters discussed in Notes 34 and 35, as to which
the date is May 21, 2004 and Note 36, as to which the date is June 21, 2005).



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MCI, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(In Millions, Except Per Share Data)



|                                                                                                                                                          |  |                         |        |   |                    |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ------------------ | - | ------ | ---- |  | - | ------ | -
|                                                                                                                                                          |  | SuccessorCompany        |        |   | PredecessorCompany |  
|                                                                                                                                                          |  | Year Ended December 31, |       
|                                                                                                                                                          |  |                         |       
|                                                                                                                                                          |  | 2004                    |        |   | 2003               |   |        | 2002 | 
|Revenues                                                                                                                                                  |  | $                       | 20,690 |   |                    | $ | 24,266 |      |  | $ | 28,493 |  
|Operating expenses:                                                                                                                                       |  |                         |        |   |                    |   |        |      |  |   |        |  
|Access costs                                                                                                                                              |  |                         | 10,719 |   |                    |   | 11,997 |      |  |   | 13,304 |  
|Costs of services and products (excluding depreciation and amortization included below of $1,436, $1,938 and $2,356 in 2004, 2003 and 2002,
respectively) |  |                         | 2,506  |   |                    |   | 2,771  |      |  |   | 3,461  |  
|Selling, general and administrative                                                                                                                       |  |                         | 5,220  |   |                    |   | 6,479  |      |  |   | 8,062  |  
|Depreciation and amortization                                                                                                                             |  |                         | 1,924  |   |                    |   | 2,316  |      |  |   | 2,903  |  
|Unclassified, net                                                                                                                                         |  |                         |       |   |                    |   |       |      |  |   | (35    | )
|(Gain) loss on property dispositions                                                                                                                      |  |                         | (1     | ) |                    |   | 43     |      |  |   | 123    |  
|Impairment charges related to property, plant and equipment                                                                                               |  |                         | 2,775  |   |                    |   |       |      |  |   | 4,599  |  
|Impairment charges related to intangible assets                                                                                                           |  |                         | 738    |   |                    |   |       |      |  |   | 400    |  
|                                                                                                                                                          |  |                         |        |   |                    |   |        |      |  |   |        |  
|Total operating expenses                                                                                                                                  |  |                         | 23,881 |   |                    |   | 23,606 |      |  |   | 32,817 |  
|Operating (loss) income                                                                                                                                   |  |                         | (3,191 | ) |                    |   | 660    |      |  |   | (4,324 | )
|                                                                                                                                                          |  |                         |       
|Other income (expense), net:                                                                                                                              |  |                         |        |   |                    |   |        |      |  |   |        |  
|Interest expense (contractual interest of $2,425 in 2003 and $2,360 in 2002)                                                                              |  |                         | (402   | ) |                    |   | (105   | )    |  |   | (1,354 | )
|Miscellaneous income (expense), net (includes a $2,250 SEC fine in 2002)                                                                                  |  |                         | 85     |   |                    |   | 136    |      |  |   | (2,221 | )
|Reorganization items, net                                                                                                                                 |  |                         |       |   |                    |   | 22,087 |      |  |   | (802   | )
|                                                                                                                                                          |  |                         |        |   |                    |   |        |      |  |   |        |  
|(Loss) income from continuing operations before income taxes, minority interests and cumulative effects of changes in accounting
principles               |  |                         | (3,508 | ) |                    |   | 22,778 |      |  |   | (8,701 | )
|Income tax expense                                                                                                                                        |  |                         | 520    |   |                    |   | 313    |      |  |   | 258    |  
|Minority interests, net of tax                                                                                                                            |  |                         |       |   |                    |   | (4     | )    |  |   | (20    | )
|                                                                                                                                                          |  |                         |        |   |                    |   |        |      |  |   |        |  
|(Loss) income from continuing operations before cumulative effects of changes in accounting principles                                                    |  |                         | (4,028 | ) |                    |   | 22,469 |      |  |   | (8,939 | )
|Net income (loss) from discontinued operations                                                                                                            |  |                         | 26     |   |                    |   | (43    | )    |  |   | (202   | )
|                                                                                                                                                          |  |                         |        |   |                    |   |        |      |  |   |        |  
|(Loss) income before cumulative effects of changes in accounting principles                                                                               |  |                         | (4,002 | ) |                    |   | 22,426 |      |  |   | (9,141 | )
|Cumulative effects of changes in accounting principles                                                                                                    |  |                         |       |   |                    |   | (215   | )    |  |   | (32    | )
|                                                                                                                                                          |  |                         |        |   |                    |   |        |      |  |   |        |  
|Net (loss) income                                                                                                                                         |  |                         | (4,002 | ) |                    |   | 22,211 |      |  |   | (9,173 | )
|                                                                                                                                                          |  |                         |       
|Distributions on preferred securities (contractual distributions of $31 in 2003 and $35 in 2002)                                                          |  |                         |       |   |                    |   |       |      |  |   | (19    | )
|                                                                                                                                                          |  |                         |        |   |                    |   |        |      |  |   |        |  
|Net (loss) income attributable to common shareholders                                                                                                     |  | $                       | (4,002 | ) |                    | $ | 22,211 |      |  | $ | (9,192 | )
|                                                                                                                                                          |  |                         |        |   |                    |   |        |      |  |   |        |  
|Basic and diluted (loss) income per share:                                                                                                                |  |                         |        |   |                    |   |        |      |  |   |        |  
|Continuing operations                                                                                                                                     |  | $                       | (12.56 | ) |                    |   |        |      |  |   |        |  
|Discontinued operations                                                                                                                                   |  |                         | 0.08   |   |                    |   |        |      |  |   |        |  
|                                                                                                                                                          |  |                         |        |   |                    |   |        |      |  |   |        |  
|Loss per share                                                                                                                                            |  | $                       | (12.48 | ) |                    |   |        |      |  |   |        |  
|                                                                                                                                                          |  |                         |        |   |                    |   |        |      |  |   |        |  
|Basic and diluted shares used in calculation                                                                                                              |  |                         | 320.8  |   |                    |   |        |      |  |   |        |  
|                                                                                                                                                          |  |                         |        |   |                    |   |        |      |  |   |        |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(In Millions, Except Share Data)



|                                                                                                                                                                                    |  |                    |        |   |      |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ---- | - | ------ | -
|                                                                                                                                                                                    |  | Successor Company  |       
|                                                                                                                                                                                    |  | As of December 31, |       
|                                                                                                                                                                                    |  | 2004               |        |   | 2003 |  
|ASSETS                                                                                                                                                                              |  |                    |        |   |      |   |        |  
|Current assets                                                                                                                                                                      |  |                    |        |   |      |   |        |  
|Cash and cash equivalents                                                                                                                                                           |  | $                  | 4,449  |   |      | $ | 6,178  |  
|Marketable securities                                                                                                                                                               |  |                    | 1,055  |   |      |   | 15     |  
|Accounts receivable, net of allowance for doubtful accounts of $729 for 2004 and $1,762 for 2003                                                                                    |  |                    | 2,855  |   |      |   | 4,348  |  
|Prepaid expenses                                                                                                                                                                    |  |                    | 287    |   |      |   | 377    |  
|Deferred income taxes                                                                                                                                                               |  |                    |       |   |      |   | 990    |  
|Other current assets                                                                                                                                                                |  |                    | 437    |   |      |   | 444    |  
|Assets held for sale                                                                                                                                                                |  |                    | 10     |   |      |   | 176    |  
|                                                                                                                                                                                    |  |                    |        |   |      |   |        |  
|Total current assets                                                                                                                                                                |  |                    | 9,093  |   |      |   | 12,528 |  
|Property, plant and equipment, net                                                                                                                                                  |  |                    | 6,259  |   |      |   | 11,538 |  
|Investments                                                                                                                                                                         |  |                    | 116    |   |      |   | 238    |  
|Intangible assets, net                                                                                                                                                              |  |                    | 991    |   |      |   | 2,085  |  
|Deferred income taxes                                                                                                                                                               |  |                    | 456    |   |      |   | 608    |  
|Other assets                                                                                                                                                                        |  |                    | 145    |   |      |   | 473    |  
|                                                                                                                                                                                    |  |                    |        |   |      |   |        |  
|                                                                                                                                                                                    |  | $                  | 17,060 |   |      | $ | 27,470 |  
|                                                                                                                                                                                    |  |                    |        |   |      |   |        |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                |  |                    |        |   |      |   |        |  
|Current liabilities                                                                                                                                                                 |  |                    |        |   |      |   |        |  
|Accounts payable                                                                                                                                                                    |  | $                  | 784    |   |      | $ | 1,722  |  
|Accrued access costs                                                                                                                                                                |  |                    | 1,491  |   |      |   | 2,349  |  
|Current portion of long-term debt                                                                                                                                                   |  |                    | 24     |   |      |   | 330    |  
|Accrued interest                                                                                                                                                                    |  |                    | 93     |   |      |   | 25     |  
|Deferred income taxes                                                                                                                                                               |  |                    | 598    |   |      |   |       |  
|Other current liabilities                                                                                                                                                           |  |                    | 3,198  |   |      |   | 4,361  |  
|Liabilities of assets held for sale                                                                                                                                                 |  |                    | 15     |   |      |   | 23     |  
|                                                                                                                                                                                    |  |                    |        |   |      |   |        |  
|Total current liabilities                                                                                                                                                           |  |                    | 6,203  |   |      |   | 8,810  |  
|Long-term debt, excluding current portion                                                                                                                                           |  |                    | 5,909  |   |      |   | 7,117  |  
|Deferred income taxes                                                                                                                                                               |  |                    | 18     |   |      |   | 1,207  |  
|Other liabilities                                                                                                                                                                   |  |                    | 700    |   |      |   | 714    |  
|Commitments and contingencies (Notes 18 and 19)                                                                                                                                     |  |                    |        |   |      |   |        |  
|Minority interests                                                                                                                                                                  |  |                    |       |   |      |   | 1,150  |  
|                                                                                                                                                                                    |  |                   
|Shareholders equity:                                                                                                                                                               |  |                    |        |   |      |   |        |  
|MCI common stock, par value $0.01 per share; authorized: 3,000,000,000 shares in 2004 and 2003; issued and outstanding: 319,557,905 shares for
2004 and 314,856,250 shares for 2003 |  |                    | 3      |   |      |   | 3      |  
|Additional paid-in capital                                                                                                                                                          |  |                    | 8,365  |   |      |   | 8,639  |  
|Deferred stock-based compensation                                                                                                                                                   |  |                    | (114   | ) |      |   | (170   | )
|Accumulated deficit                                                                                                                                                                 |  |                    | (4,002 | ) |      |   |       |  
|Accumulated other comprehensive loss                                                                                                                                                |  |                    | (22    | ) |      |   |       |  
|                                                                                                                                                                                    |  |                    |        |   |      |   |        |  
|Total shareholders equity                                                                                                                                                          |  |                    | 4,230  |   |      |   | 8,472  |  
|                                                                                                                                                                                    |  |                    |        |   |      |   |        |  
|                                                                                                                                                                                    |  | $                  | 17,060 |   |      | $ | 27,470 |  
|                                                                                                                                                                                    |  |                    |        |   |      |   |        |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIT) AND COMPREHENSIVE (LOSS) INCOME

For Each of the Years in the Three-Year Period Ended December 31, 2004

(In Millions)



|                                                                                        |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   |         |  
|--------------------------------------------------------------------------------------- |  | ------------ | --- | - | -------------------------- | - | ------- | ------------------------------- |  | - | ------------------- | - |  | ------------- | ------- | - | -------------------------------------------- | - | ---- | ----------------------------------- |  | - | ---- | - |  | - | ------- | -
|                                                                                        |  | Common Stock |     |   | Additional Paid-In Capital |   |         | DeferredStock-BasedCompensation |  |   | Accumulated Deficit |   |  | TreasuryStock |         |   | Accumulated Other Comprehensive(Loss) Income |   |      | Total Shareholders Equity(Deficit) | 
|Balance at January 1, 2002 (Predecessor Company)                                        |  | $            | 31  |   |                            | $ | 56,330  |                                 |  | $ |                    |   |  | $             | (68,975 | ) |                                              | $ | (185 | )                                   |  | $ | (142 | ) |  | $ | (12,941 | )
|Net loss                                                                                |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               | (9,173  | ) |                                              |   |      |                                     |  |   |      |   |  |   | (9,173  | )
|Currency translation adjustments                                                        |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   | (156 | ) |  |   | (156    | )
|Unrealized loss on marketable securities                                                |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   | (3   | ) |  |   | (3      | )
|Reclassification adjustment for gains included in net loss                              |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   | (19  | ) |  |   | (19     | )
|Minimum pension liability adjustment                                                    |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   | (38  | ) |  |   | (38     | )
|                                                                                        |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   |         |  
|Comprehensive loss                                                                      |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   | (9,389  | )
|Distributions on preferred securities                                                   |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               | (19     | ) |                                              |   |      |                                     |  |   |      |   |  |   | (19     | )
|Issuance of common stock for preferred dividends                                        |  |              |     |   |                            |   | 9       |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   | 9       |  
|Exercise of stock options                                                               |  |              |     |   |                            |   | 15      |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   | 15      |  
|Conversion of preferred stock to common                                                 |  |              |     |   |                            |   | 28      |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   | 28      |  
|Other                                                                                   |  |              |     |   |                            |   | 2       |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   | 2       |  
|                                                                                        |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   |         |  
|Balance at December 31, 2002 (Predecessor Company)                                      |  |              | 31  |   |                            |   | 56,384  |                                 |  |   |                    |   |  |               | (78,167 | ) |                                              |   | (185 | )                                   |  |   | (358 | ) |  |   | (22,295 | )
|Net income                                                                              |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               | 22,211  |   |                                              |   |      |                                     |  |   |      |   |  |   | 22,211  |  
|Currency translation adjustments                                                        |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   | 15   |   |  |   | 15      |  
|Unrealized gains on marketable securities                                               |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   | 12   |   |  |   | 12      |  
|Reclassification adjustment for gains included in net income                            |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   | (5   | ) |  |   | (5      | )
|                                                                                        |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   |         |  
|Comprehensive income                                                                    |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   | 22,233  |  
|Conversion of preferred stock to common                                                 |  |              |     |   |                            |   | 58      |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   | 58      |  
|Other                                                                                   |  |              |     |   |                            |   | 2       |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   | 2       |  
|Application of fresh-start reporting (Note 4):                                          |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   |         |  
|Cancellation of Predecessor common stock                                                |  |              | (31 | ) |                            |   | (56,444 | )                               |  |   |                     |   |  |               |         |   |                                              |   | 185  |                                     |  |   |      |   |  |   | (56,290 | )
|Elimination of Predecessor accumulated deficit and accumulated other comprehensive loss |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               | 55,956  |   |                                              |   |      |                                     |  |   | 336  |   |  |   | 56,292  |  
|Issuance of MCI common stock                                                            |  |              | 3   |   |                            |   | 8,639   |                                 |  |   | (170                | ) |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   | 8,472   |  
|                                                                                        |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   |         |  
|Balance at December 31, 2003 (Successor Company)                                        |  |              | 3   |   |                            |   | 8,639   |                                 |  |   | (170                | ) |  |               |        |   |                                              |   |     |                                     |  |   |     |   |  |   | 8,472   |  
|Net loss                                                                                |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               | (4,002  | ) |                                              |   |      |                                     |  |   |      |   |  |   | (4,002  | )
|Currency translation adjustments                                                        |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   | (18  | ) |  |   | (18     | )
|Reclassification of foreign currency translation gains included in net loss             |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   | 17   |   |  |   | 17      |  
|Unrealized gains on marketable securities                                               |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   | 2    |   |  |   | 2       |  
|Minimum pension liability                                                               |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   | (23  | ) |  |   | (23     | )
|                                                                                        |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   |         |  
|Comprehensive loss                                                                      |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   | (4,024  | )
|Dividends declared on common stock                                                      |  |              |     |   |                            |   | (254    | )                               |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   | (254    | )
|Amortization of deferred stock-based compensation                                       |  |              |     |   |                            |   |         |                                 |  |   | 36                  |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   | 36      |  
|Deferred stock-based compensation forfeited                                             |  |              |     |   |                            |   | (20     | )                               |  |   | 20                  |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   |        |  
|                                                                                        |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   |         |  
|Balance at December 31, 2004 (Successor Company)                                        |  | $            | 3   |   |                            | $ | 8,365   |                                 |  | $ | (114                | ) |  | $             | (4,002  | ) |                                              | $ |     |                                     |  | $ | (22  | ) |  | $ | 4,230   |  
|                                                                                        |  |              |     |   |                            |   |         |                                 |  |   |                     |   |  |               |         |   |                                              |   |      |                                     |  |   |      |   |  |   |         |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Millions)



|                                                                                                   |  |                         |        |   |                    |   |         |      |  |   |        |  
|-------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ------------------ | - | ------- | ---- |  | - | ------ | -
|                                                                                                   |  | SuccessorCompany        |        |   | PredecessorCompany |  
|                                                                                                   |  | Year Ended December 31, |       
|                                                                                                   |  | 2004                    |        |   | 2003               |   |         | 2002 | 
|OPERATING ACTIVITIES                                                                               |  |                         |        |   |                    |   |         |      |  |   |        |  
|Net (loss) income                                                                                  |  | $                       | (4,002 | ) |                    | $ | 22,211  |      |  | $ | (9,173 | )
|                                                                                                   |  |                         |       
|Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: |  |                         |        |   |                    |   |         |      |  |   |        |  
|Depreciation and amortization                                                                      |  |                         | 1,924  |   |                    |   | 2,316   |      |  |   | 2,903  |  
|Impairment charges related to property, plant and equipment, goodwill and intangible assets        |  |                         | 3,513  |   |                    |   |        |      |  |   | 4,999  |  
|Impairment charges related to investments                                                          |  |                         | 1      |   |                    |   | 12      |      |  |   | 25     |  
|Cumulative effects of changes in accounting principles                                             |  |                         |       |   |                    |   | 215     |      |  |   | 32     |  
|Minority interests, net of tax                                                                     |  |                         |       |   |                    |   | (4      | )    |  |   | (20    | )
|Net realized gain on sale of investments                                                           |  |                         | (10    | ) |                    |   | (2      | )    |  |   | (24    | )
|(Gain) loss on sale of property, plant and equipment                                               |  |                         | (1     | ) |                    |   | 43      |      |  |   | 123    |  
|Bad debt provision                                                                                 |  |                         | 554    |   |                    |   | 880     |      |  |   | 1,271  |  
|Deferred income tax (benefit) expense                                                              |  |                         | (84    | ) |                    |   | (26     | )    |  |   | 95     |  
|Reserve for employee loan                                                                          |  |                         |       |   |                    |   |        |      |  |   | 332    |  
|Effect of the plan of reorganization and revaluation of assets and liabilities                     |  |                         |       |   |                    |   | (22,674 | )    |  |   |       |  
|Non-cash reorganization items, net                                                                 |  |                         |       |   |                    |   | 383     |      |  |   | 688    |  
|Accretion expense related to SFAS No. 143 liability                                                |  |                         | 27     |   |                    |   | 21      |      |  |   |       |  
|Amortization of debt discount                                                                      |  |                         | 114    |   |                    |   |        |      |  |   |       |  
|Other                                                                                              |  |                         | 12     |   |                    |   | 264     |      |  |   | 121    |  
|Changes in assets and liabilities:                                                                 |  |                         |        |   |                    |   |         |      |  |   |        |  
|Accounts receivable                                                                                |  |                         | 377    |   |                    |   | (169    | )    |  |   | (3,061 | )
|Other current assets                                                                               |  |                         | 118    |   |                    |   | 96      |      |  |   | 407    |  
|Non current assets                                                                                 |  |                         | 13     |   |                    |   | 277     |      |  |   |       |  
|Accounts payable and accrued access costs                                                          |  |                         | (1,053 | ) |                    |   | (151    | )    |  |   | (1,015 | )
|Other current liabilities                                                                          |  |                         | (762   | ) |                    |   | (360    | )    |  |   | (867   | )
|Other liabilities                                                                                  |  |                         | 51     |   |                    |   | 196     |      |  |   | 3,062  |  
|                                                                                                   |  |                         |        |   |                    |   |         |      |  |   |        |  
|Net cash provided by (used in) operating activities                                                |  |                         | 792    |   |                    |   | 3,528   |      |  |   | (102   | )
|INVESTING ACTIVITIES                                                                               |  |                         |        |   |                    |   |         |      |  |   |        |  
|Additions to property, plant and equipment                                                         |  |                         | (982   | ) |                    |   | (756    | )    |  |   | (1,040 | )
|Proceeds from sale of property, plant and equipment                                                |  |                         | 43     |   |                    |   | 257     |      |  |   | 48     |  
|Purchases of investments                                                                           |  |                         | (1,055 | ) |                    |   |        |      |  |   |       |  
|Proceeds from sale of investments                                                                  |  |                         | 56     |   |                    |   | 8       |      |  |   | 792    |  
|Proceeds from disposition of assets and assets held for sale                                       |  |                         | 585    |   |                    |   |        |      |  |   | 53     |  
|Cash paid for acquisitions, net of cash received                                                   |  |                         | (13    | ) |                    |   | (39     | )    |  |   |       |  
|                                                                                                   |  |                         |        |   |                    |   |         |      |  |   |        |  
|Net cash used in investing activities                                                              |  |                         | (1,366 | ) |                    |   | (530    | )    |  |   | (147   | )
|FINANCING ACTIVITIES                                                                               |  |                         |        |   |                    |   |         |      |  |   |        |  
|Principal borrowings on debt                                                                       |  |                         |       |   |                    |   |        |      |  |   | 2,851  |  
|Principal repayments on debt                                                                       |  |                         | (43    | ) |                    |   | (93     | )    |  |   | (1,031 | )
|Proceeds from exercise of stock options                                                            |  |                         |       |   |                    |   |        |      |  |   | 15     |  
|Dividends paid on common and preferred stock                                                       |  |                         | (254   | ) |                    |   |        |      |  |   | (159   | )
|Debt issuance costs                                                                                |  |                         |       |   |                    |   |        |      |  |   | (50    | )
|Cash restricted for letters of credit                                                              |  |                         | (144   | ) |                    |   |        |      |  |   |       |  
|Other                                                                                              |  |                         | (112   | ) |                    |   | 112     |      |  |   |       |  
|                                                                                                   |  |                         |        |   |                    |   |         |      |  |   |        |  
|Net cash (used in) provided by financing activities                                                |  |                         | (553   | ) |                    |   | 19      |      |  |   | 1,626  |  
|Net change in cash and cash equivalents                                                            |  |                         | (1,127 | ) |                    |   | 3,017   |      |  |   | 1,377  |  
|Net change in cash and cash equivalents from discontinued operations                               |  |                         | (602   | ) |                    |   | 341     |      |  |   | 153    |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                   |  |                         | 6,178  |   |                    |   | 2,820   |      |  |   | 1,290  |  
|                                                                                                   |  |                         |        |   |                    |   |         |      |  |   |        |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                         |  | $                       | 4,449  |   |                    | $ | 6,178   |      |  | $ | 2,820  |  
|                                                                                                   |  |                         |        |   |                    |   |         |      |  |   |        |  
|SUPPLEMENTAL CASH FLOW INFORMATION:                                                                |  |                         |        |   |                    |   |         |      |  |   |        |  
|Cash paid (refunds received) for income taxes, net                                                 |  | $                       | 97     |   |                    | $ | 28      |      |  | $ | (471   | )
|Cash paid for interest, net of amounts capitalized                                                 |  |                         | 223    |   |                    |   | 178     |      |  |   | 1,306  |  
|Cash paid for reorganization items                                                                 |  |                         |       |   |                    |   | 204     |      |  |   | 114    |  
|Non cash items:                                                                                    |  |                         |        |   |                    |   |         |      |  |   |        |  
|Conversion of preferred stock to common stock                                                      |  |                         |       |   |                    |   | 58      |      |  |   | 28     |  
|Minimum pension liability adjustment                                                               |  |                         | 23     |   |                    |   |        |      |  |   | 38     |  
|Unrealized holding (gain) loss on investments                                                      |  |                         | (2     | ) |                    |   | (7      | )    |  |   | 22     |  
|Reclassification of pre-petition liabilities to liabilities subject to compromise                  |  |                         |       |   |                    |   |        |      |  |   | 2,890  |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(1)
The Organization and Description of Business



MCI, Inc., a
state of Delaware corporation, (formerly known as WorldCom, Inc., (the Predecessor Company or WorldCom) a public corporation organized in 1983 under the laws of Georgia) serves as a holding company for its direct and indirect
domestic subsidiaries and foreign affiliates (collectively, the Company, Successor Company or MCI). Prior to and including December 31, 2003, all operations of the business resulted from the operations of the
Predecessor Company. All conditions required for adoption of fresh-start reporting were met on December 23, 2003 and the Company selected December 31, 2003 as the date to adopt the accounting provisions of fresh-start reporting. As a result, the
fair value of the Predecessor Companys assets became the new basis for the Successor Companys consolidated balance sheet as of December 31, 2003, and all results of operations beginning January 1, 2004 are those of the Successor Company.



The Company is one of the worlds leading global
telecommunications companies, providing a broad range of communication services. The Company serves thousands of businesses and government entities throughout the world and provides voice, data and Internet communication services for millions of
consumer customers. The Company operates one of the most extensive telecommunications networks in the world, comprising network connections linking metropolitan centers and various regions across North America, Europe, Asia, Latin America, the
Middle East, Africa and Australia. The Company began doing business as MCI in 2003.



In March 2004, the Company realigned its operations into three new business segments and began operating under these segments in the second quarter of 2004. Effective with the realignment, the Companys business
segments are as follows:



| |  |  | Enterprise Markets serves Global Accounts, Government Markets, and System Integrators. Global Accounts provides communications and network solutions to large multinational
corporations requiring complex international network services. Government Accounts provides similar services to various government agencies. System Integrators serve customers through partnerships with third-party network solutions providers. In all
cases, these services include local-to-global business data, Internet, voice services and managed network services.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | U.S. Sales & Service serves small, mid-sized and corporate customers. In addition, U.S. Sales & Service comprises the Companys consumer operation
which includes telemarketing, customer service and direct response marketing.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | International & Wholesale Markets serves businesses, government entities and telecommunications carriers outside the United States as well as wholesale accounts.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



The Predecessor Company restated its previously
reported consolidated financial statements for the years ended December 31, 2001 and 2000. In conjunction with the Predecessor Companys restatement and through December 31, 2002, a number of balances or entries recorded in the historical
accounting records could not be supported or their propriety otherwise determined. Certain accrued liabilities, other liabilities and other asset balances were found to have inadequate support to establish existence of an asset or a liability.
Certain intercompany balances could not be reconciled and the propriety of certain entries recorded in consolidation could not be determined due to lack of supporting documentation. As a result of these findings, it was determined that appropriate
adjustments should be recorded to properly state the historical accounting records. Because there was no documentary support related to these items, the Predecessor Company was unable to determine the appropriate statement of operations line item to
which such amounts should be applied. As a result, 2002 amounts have been included within operating expenses and noted as Unclassified, net in the consolidated statement of operations for the year ended December 31, 2002.



On July 21, 2002 (the Petition Date), WorldCom, Inc. and
substantially all of its domestic subsidiaries (Debtors) filed voluntary petitions for relief in the U.S. Bankruptcy Court for the Southern District of



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



New York (the Bankruptcy Court) under Chapter 11 of Title 11 of the U.S. Bankruptcy Code (the Bankruptcy Code or Chapter
11). The Debtors continued to operate their businesses and manage their properties as debtors-in-possession through the close of business on April 19, 2004. The Predecessor Company filed a plan of reorganization (the Plan) with the
Bankruptcy Court and, on October 31, 2003, the Bankruptcy Court confirmed the Plan. The Predecessor Company emerged from Chapter 11 on April 20, 2004 (the Emergence Date) and changed its legal name to MCI.



(2) Summary of Significant Accounting Policies



Use of Estimates



The Company uses estimates and assumptions in the preparation of its
consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements 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 consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates. Estimates are used when accounting for impairment charges, revenues and related allowances, allowance for doubtful accounts, accrued access costs, depreciation and amortization of property, plant and
equipment and intangible assets, income taxes, acquisition related assets and liabilities, accrued and contingent liabilities and fresh-start reporting. The Company evaluates and updates its assumptions and estimates on an ongoing basis and may
employ outside experts to assist in its evaluations.



During
2004, the Company recorded benefits for changes in estimates totaling $302 million. The Company recorded $121 million as a reduction to selling, general, and administrative expenses for a change in estimate of $62 million related to its reserve for
outstanding claims, which amount was included in total gains on settlements (see Note 5) and a $59 million change in estimate related to bad debt assumptions. Additionally, the Company increased revenue by $86 million for a change in estimate
related to its billing adjustment assumptions, and reduced access costs by $95 million (of which $68 million related to 2003) for a change in estimate related to its contributions to the Universal Service Fund. Additionally, the Company recognized
an increase to income tax expense of $275 million relating to changes in estimates of U.S. federal, state, and foreign tax contingencies of $210 million and $65 million that reduced the carrying value of the Companys intangible assets during
the second quarter of 2004.



Basis of Financial Statement
Preparation



For the period subsequent to the Petition
Date through December 31, 2003, the accompanying consolidated financial statements have been prepared in accordance with American Institute of Certified Public Accountants Statement of Position (SOP) 90-7, Financial Reporting by
Entities in ReorganizationUnder the Bankruptcy Code (SOP 90-7). Accordingly, all pre-petition liabilities subject to compromise were adjusted to the estimated amounts of allowable claims prior to the application of
fresh-start reporting. Interest has not been accrued on debt subject to compromise subsequent to the Petition Date. Reorganization items include the expenses, realized gains and losses, and provisions for losses resulting from the reorganization
under the Bankruptcy Code, and are reported separately as reorganization items in the Predecessor Companys consolidated statements of operations. Cash used for reorganization items is disclosed separately in the consolidated statements of cash
flows.



Fresh-Start Reporting



Although the Company emerged from bankruptcy on April 20, 2004, the
Predecessor Company adopted fresh-start reporting effective at the close of business on December 31, 2003 under the provisions of SOP 90-7, which resulted in a new reporting entity for accounting purposes (Successor Company). The consolidated
balance sheet as of December 31, 2003 gives effect to adjustments to the carrying value of assets or amounts and classifications of liabilities that were necessary when adopting fresh-start reporting. The statements of operations



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



and cash flows for the two-year period ended December 31, 2003 reflect the operations of the Predecessor Company, which included a gain in 2003 from the
application of fresh-start reporting (see Note 4). The adoption of fresh-start reporting had a material effect on the consolidated financial statements as of December 31, 2003. As a result, the consolidated financial statements of the Successor
Company are presented on a different basis than those of the Predecessor Company and, therefore, are not comparable in all respects. Changes in estimates and preconfirmation contingencies are reflected in the statements of operations as they are
determined, whereas changes in the allocation of fair values resulted in adjustments to the assets and liabilities.



In addition, the Successor Company was required to adopt changes in accounting principles that were required in the consolidated financial statements of
the emerging entity within the twelve months following the adoption of fresh-start reporting. The Successor Company completed a review of these accounting pronouncements and there was no material impact on its consolidated results of operations,
financial position or cash flows.



In connection with
fresh-start reporting, the Successor Companys new debt obligations included in the Successor Companys consolidated balance sheet were adjusted as of December 31, 2003 to a value based on an imputed interest rate. The difference between
the December 31, 2003 obligation in the consolidated balance sheet and the face value of the obligations issued on April 20, 2004 was estimated to be $114 million, using an imputed rate of interest of approximately 6.7% which represented the
estimated weighted average rate for the debt issued on the Emergence Date. The amount was recorded in the consolidated balance sheet as a discount. The debt obligations were accreted to the face value of the Companys obligations beginning
January 1, 2004 through the Emergence Date.



Consolidation



The consolidated
financial statements include the accounts of all controlled subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.



Foreign Currency Translation



The Companys functional currency is the U.S. dollar. Embratel Participações S.A. and subsidiaries
(Embratel) assets and liabilities included in the consolidated balance sheet as of December 31, 2003 were recorded in Embratels functional currency, the Brazilian Real, and were translated at the exchange rate as of the balance
sheet date. Embratels revenue and expense accounts included in discontinued operations were translated at a weighted-average exchange rate in effect during the reporting period. Translation adjustments were recorded as a component of
accumulated other comprehensive (loss) income within shareholders equity as of December 31, 2003.



Transaction gains and losses arise from exchange rate fluctuations on transactions denominated in a currency other than an entitys functional
currency. The consolidated statements of operations include as a component of miscellaneous income (expense), net foreign currency transaction gains (losses) of $22 million, $15 million and $(146) million for the years ended December 31, 2004, 2003,
and 2002, respectively.



Cash and Cash Equivalents



The Company considers all highly liquid investments
with maturities of three months or less at the time of purchase to be cash equivalents.



Marketable Securities



All investments in debt and equity securities with readily determinable fair values are recorded as available-for-sale securities. The available-for-sale securities are carried at fair value, with unrealized holding gains or



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



losses reported in accumulated other comprehensive (loss) income, which is a separate component of shareholders equity, net of tax. Marketable
securities are included in current assets in the consolidated balance sheet as management has identified these securities as available to fund current operations. The Company reviews declines in the fair value of each individual available-for-sale
investment security to determine whether the decline is other-than-temporary. The Company considers all available evidence in this decision, including changes in general market conditions, specific industry and individual company data, the length of
time and the extent to which the market value has been less than the amortized cost, and the Companys intent and ability to hold the security. The cost basis of the investments in the available-for-sale category is determined using either the
specific identification or average cost method.



Property, Plant and Equipment



Property, plant and equipment are stated at cost net of depreciation and impairment. Plant and equipment under capital leases are stated at the present value of minimum lease payments. Depreciation is provided for financial reporting
purposes using the straight-line method over the lesser of the estimated useful life of the assets or life of the lease. Useful lives are as follows:



|                                           |  |              
|------------------------------------------ |  | -------------
|Transmission equipment (including conduit) |  | 4 to 30 years
|Telecommunications equipment               |  | 5 to 9 years 
|Furniture, fixtures, buildings and other   |  | 4 to 39 years
|Software                                   |  | 3 to 6 years 



Maintenance and
repairs on property and equipment are expensed as incurred. Replacements and betterments which increase the useful lives or functionality of the assets are capitalized. The cost and related accumulated depreciation of assets sold or retired are
removed from the accounts, and any resulting gain or loss is reflected as a separate component on the consolidated statements of operations.



The Company constructs certain transmission systems and related facilities for use. Certain costs directly related to the construction of such facilities,
including interest and internal labor costs, are capitalized. Such capitalized costs were $51 million (of which $28 million was interest), $2 million (of which none was interest), and $243 million (of which $10 million was interest) for the years
ended December 31, 2004, 2003 and 2002, respectively.



Also
included in property, plant and equipment are costs incurred to develop software for internal use. Certain direct development costs and software enhancements associated with internal-use software are capitalized, including external direct costs of
material and service, and internal labor costs devoted to these software projects under Statement of Position 98-1, Accounting for Costs of Computer Software Developed or Obtained for Internal Use. Costs incurred during the
preliminary project stage, as well as maintenance and training costs, are expensed as incurred. Such capitalized costs were $319 million, $314 million and $489 million for the years ended December 31, 2004, 2003 and 2002, respectively.



Asset Retirement Obligations



On January 1, 2003, the Predecessor Company adopted Statement of Financial
Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143). This standard requires that obligations, which are legally enforceable, unavoidable and associated with the
retirement of tangible long-lived assets, be recorded as liabilities when those obligations are incurred, with the amount of the liability initially measured at the estimated fair value. The offset to each initial asset retirement obligation is an
increase in the carrying amount of the related long-lived asset and is depreciated over its estimated useful life. The



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



liability is accreted over time to a projected disposal date. Upon settlement of the liability, the Company will record a gain or loss in its consolidated
statement of operations for the difference between the estimate provided and the actual settlement amount to be paid.



The Company evaluated its long-lived assets and determined that legal asset retirement obligations existed for the removal of a limited number of these
assets as of January 1, 2003 and recorded the cumulative effect of a change in accounting principle in its 2003 statement of operations of $215 million, which represents the difference between the increase in net asset value of $60 million and the
estimated liability of $275 million. The majority of these obligations related to specific lease restoration requirements of leased buildings, obligations related to removal and restoration of international fiber optic cable, towers and antennae,
and obligations related to other long-lived assets.



Subsequent
to adoption of SFAS No. 143 on January 1, 2003, operating expenses increased as a result of the accretion of the Companys legal asset retirement obligations by approximately $21 million per year and depreciation expense increased by
approximately $6 million per year, which in total is approximately $3 million lower than the combined amounts for 2002. These items have no impact on the Companys cash flows until such time as these long-lived assets are retired and the
related obligations are settled. See Note 7 for a reconciliation of the beginning and ending aggregate recorded amount of the asset retirement obligations. The following pro forma table illustrates the effect on the Predecessor Companys
statements of operations had SFAS No. 143 been applied in 2002 (in millions):



|                                                       |  |                              |        |  
|------------------------------------------------------ |  | ---------------------------- | ------ | -
|                                                       |  | Predecessor Company          |       
|                                                       |  | Year Ended December 31, 2002 |       
|Net loss attributable to common shareholders           |  | $                            | (9,192 | )
|Deduct: Additional accretion and depreciation expense  |  |                              | (30    | )
|                                                       |  |                              |        |  
|Pro forma net loss attributable to common shareholders |  | $                            | (9,222 | )
|                                                       |  |                              |        |  



Intangible
Assets



The Company accounts for its indefinite-lived
intangible assets in accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). Indefinite-lived intangibles are reviewed for impairment using a variety of methods at least annually, and
impairments, if any, are charged to the Companys results of operations. The Company has selected an annual impairment test date for these assets of October 1. Intangible assets that have definite lives are amortized over their useful lives
which range from three years to 25 years and are reviewed for impairment, as discussed in Valuation of Long-Lived Assets below.



Upon adoption of SFAS No. 142 on January 1, 2002, the Predecessor Company recognized a cumulative effect of the change in accounting principle of $32
million related to the impairment of indefinite-lived SkyTel Communications, Inc. (SkyTel) channel rights.



Valuation of Long-Lived Assets



The Company accounts for its definite-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets,(SFAS No. 144) which requires that long-lived assets be evaluated whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the total of the undiscounted future cash flows
is less than the carrying amount of the asset or asset group, an impairment loss is recognized for the difference between the estimated fair value and the carrying value of the asset or asset group.



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company operates an integrated telecommunications network. All assets comprising the integrated
telecommunications network and the related identifiable cash flows are aggregated for the purposes of the impairment review because this aggregated level is the lowest level for which identifiable cash flows are largely independent of the cash flows
of other groups of assets and liabilities.



Investments



Investments in entities where the Companys
ownership interest exceeds 20 percent or which provide the Company the ability to exercise significant influence over the entitys operations and management functions are accounted for using the equity method. Under the equity method, the
original investment is increased (decreased) for the Companys share of the investees net income (loss), increased by contributions made and reduced by distributions received. The Company records its equity in the income or losses of
these investees either in the current month, one month in arrears for some private companies or three months in arrears for some public companies.



All equity investments where the equity securities do not have readily determinable fair values and which do not provide the Company the ability to
exercise significant influence over the entitys operations and management functions are accounted for under the cost method. Under the cost method of accounting, private equity investments are carried at cost and are adjusted only for
other-than-temporary declines in fair value, dividends received in excess of earnings and additional investments.



The Company periodically reviews its investments to determine if a loss in value which is other-than-temporary has occurred. In these reviews, the Company
considers all available information, including the recoverability of its investment, the earnings and near-term prospects of the entity, factors related to the industry, financial and operating conditions of the entity and the Companys
ability, if any, to influence the management of the entity.



Acquisition Related Assets and Liabilities



Accounting for the acquisition of a business as a purchase transaction requires an allocation of the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective estimated fair values. The most
difficult estimations of individual fair values are those involving properties, equipment and identifiable intangible assets. The Company uses all available information to make these fair value determinations and, for significant business
acquisitions, engages independent third-party appraisal firms to assist in the fair value determinations of the acquired long-lived assets.



Assets and Liabilities Held for Sale



The Company classifies and reports separately assets and liabilities of operations held for sale when all of the following conditions are met: a formal
plan for disposal has been authorized by management with proper authority, the operations to be disposed of are available for immediate sale in its present condition, an active program to sell the operations at a reasonable price has been initiated,
the sale is expected to occur within one year, and it is unlikely that significant changes to the disposition plan will occur. Assets of operations held for sale are not depreciated, are recorded at the lower of their carrying amount or fair value
less estimated costs to sell, and are separately presented in the consolidated balance sheet. The operating results of assets held for sale that meet the requirements for discontinued operations presentation are separately reported as discontinued
operations in the consolidated statements of operations for all periods presented.



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Recognition of Revenues



The Company recognizes revenue when persuasive evidence of a sales arrangement exists, delivery has occurred or services
have been rendered, the sales price is fixed or determinable, and collectibility is reasonably assured. The Company records provisions against related revenue for service discounts, promotions, achievement credits and incentives related to
telecommunication services. These revenue allowances are based on estimates derived from factors that include, but are not limited to, historical results, analysis of credits issued, current economic trends and changes in demand. The provisions for
revenue adjustments are recorded as a reduction of revenue when incurred or ratably over a related contract period.



The Company derives revenue principally from long distance voice, local voice, data services, and Internet services. Long distance voice services are sold
to consumer, business, government and wholesale customers. Local voice services consist mostly of local toll and switched access services for residential and business customers. Revenues derived from long distance and local voice services are
recognized at the time of customer usage, and are based upon minutes of traffic carried and upon tariff or contracted fee schedules. Data services include domestic private lines, frame relay, and asynchronous transfer mode services. Revenues are
recorded at the time service is provided based on monthly service fees. Internet products and services include dedicated Internet access, managed networking services and applications, web hosting and electronic commerce and transaction services.
Revenue derived from Internet services is recognized at the time the service is provided. Advanced billings for monthly fees are deferred and recognized as revenue at the time the service is provided.



Additionally, a portion of the Companys revenue is related to the sale
and installation of telecommunications equipment, including central office based remote access equipment. Revenue from systems equipment sales is recognized when title, ownership, and risk of loss passes to the customer and other revenue recognition
criteria are met.



The Company has certain arrangements where
it recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition, which requires certain up front non-recurring service activation and installation fee revenue to be deferred over the average
customer life. Service activation and installation fee revenues are deferred and amortized over the average customer life, which ranges from one to three years, while costs directly related to these revenues are expensed as incurred.



The Company enters into operating agreements with telecommunications carriers
in foreign countries under which international long distance traffic is both delivered and received. The terms of some switched voice operating agreements, as established by Federal Communications Commission (FCC) policy, require that
inbound switched voice traffic from the foreign carrier to the United States be routed to United States international carriers, like MCI, in proportion to the percentage of United States outbound traffic routed by that United States international
carrier to the foreign carrier. Mutually exchanged traffic between the Company and foreign carriers is settled in cash through a formal settlement process that generally extends over a three-month or six-month period at an agreed upon settlement
rate. International settlements are accounted for as revenue for international in-bound calls terminating on the Companys domestic U.S. facilities and as access cost expense for international out-bound calls originating on the Companys
domestic U.S. facilities and terminating on another international carriers facilities.



Reciprocal compensation is the amount paid by one carrier to complete particular calls on a local exchange carriers network. Reciprocal compensation paid to and received from other carriers is based on
contractual fixed rate per minute charges. The Company recognizes the receipt of reciprocal compensation as revenue and the cost of reciprocal compensation as access cost expense.



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company enters into contracts with counter parties to provide telecommunications network
capacity, and grants rights to capacity on the basis of an indefeasible right of use (IRU). An IRU is a right to use a specified amount of capacity for a specified time period. The indefeasible right is one that cannot be
revoked or voided. An acquirer of an IRU has the exclusive right to use the capacity represented by the IRU. It may use the capacity, leave it idle or allow third parties to use some or all of it in return for payments or otherwise. Upon meeting
certain criteria, grants of IRUs of fiber or cable in exchange for cash are accounted for as sales type leases. IRUs that do not meet this criteria, which are the most common, are accounted for as operating leases and the related cash receipt is
recognized as revenue over the life of the IRU.



The Company
has entered into transactions such as buying, selling, swapping or exchanging capacity to complete and complement its network. In general, these transactions represent the exchange of productive assets not held for sale in the ordinary course of
business and, as such, do not result in the culmination of the earnings process. Accordingly, the Company does not recognize any revenue for these types of transactions. The Company accounts for the exchange of a non-monetary asset based on the
recorded amount of the non-monetary asset relinquished with no gain or loss recognized.



Primary interexchange carrier charges (PICC) are local carrier flat rate charges mandated by the FCC to connect the Companys customers to each customers local carrier facilities. Historically,
the local carrier billed PICC directly to the Company who in turn passed the charge on to its customers directly. Effective July 1, 2000, as a result of the FCCs Coalition for Affordable Local and Long Distance Services (CALLs)
order, the PICC fees for residential customers are billed directly to the customer by its local carrier. Subsequent to the CALLs order, the Company does not bill residential or very small business customers for PICC fees, or recognize revenue
associated with the charges. The Company does, however, continue to bill PICC fees to business customers.



Allowance for Doubtful Accounts and Revenue Adjustments



The Companys trade receivables are geographically dispersed and include customers in many different industries, but a
substantial amount of the Companys revenues is derived from services provided to others in the telecommunications industry, mainly resellers of long distance telecommunications service and Internet online services. The Company performs ongoing
credit analysis on its largest customers and, when warranted, requires collateral to support receivables. Collateral generally is given in the form of assignment to the Company of a customers receivables in the event of nonpayment. The Company
is exposed to concentrations of credit risk from customers which are other telecommunications service providers.



The allowance for doubtful accounts reflects managements best estimate of probable losses inherent in the accounts receivable balance from its trade
customers. Management primarily determines the allowance based on the aging of accounts receivable balances, historical write-off experience, customer concentrations, customer creditworthiness, and current industry and economic trends. The
Companys provisions for uncollectible receivables are included in selling, general and administrative expense in the consolidated statements of operations.



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following tables include the activity related to the Companys allowance for doubtful
accounts (in millions):



|     |  |                                |       |                              |   |                      |  |   |                  |   |  |                         |      |   |  |   |      
|---- |  | ------------------------------ | ----- | ---------------------------- | - | -------------------- |  | - | ---------------- | - |  | ----------------------- | ---- | - |  | - | -----
|     |  | Successor Company             
|     |  | Balance at Beginning of Period |       | Additions Charged to Expense |   | Accounts Written-Off |  |   | Other Changes(1) |   |  | Balance at End ofPeriod
|2004 |  | $                              | 1,762 |                              | $ | 554                  |  | $ | (920             | ) |  | $                       | (667 | ) |  | $ | 729  
|     | 
|     |  | Predecessor Company           
|     |  | Balance at Beginningof Period  |       | Additions Charged to Expense |   | Accounts Written-Off |  |   | Other Changes(2) |   |  | Balance at End ofPeriod
|2003 |  | $                              | 1,817 |                              | $ | 880                  |  | $ | (1,052           | ) |  | $                       | 117  |   |  | $ | 1,762
|2002 |  |                                | 2,023 |                              |   | 1,271                |  |   | (1,723           | ) |  |                         | 246  |   |  |   | 1,817

---

|(1) | Amount represents the reclassification of Embratels allowance for doubtful accounts to assets held for sale in the second quarter of 2004 when the
investment qualified for discontinued operations. Ultimately, the amount was removed from the consolidated balance sheet upon the disposal of Embratel (see Note 17).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Reflects the reclassification of bad debt expense from continuing operations to discontinued operations (see Note 17).
|--- | ----------------------------------------------------------------------------------------------------------------------



Direct Customer and Network Installation Related Costs



Direct customer and network installation related
costs generally consist of installation related labor costs and activation fees paid to other telecommunications companies for access to circuits. All direct customer and network installation related costs are expensed as incurred.



Access Costs



Access cost expenses are the costs incurred for the transmission of voice
and data over other carriers networks. These costs consist of both fixed payments and variable amounts based on actual usage and negotiated or regulated contract rates. The Company records access cost expenses as incurred. Accordingly, at each
balance sheet date the Company records its best estimate of the access cost expense incurred but not billed based on internal usage reports. Once the Company receives an invoice from a carrier, a process of reconciling that carriers invoice to
the Companys internal usage reports begins. In certain cases, this reconciliation process can take many months to complete. Once the reconciliation is complete, the Company and the carrier agree on the final amount due. In most cases, this
process does not result in significant adjustments to the Companys estimates. Accordingly, at each balance sheet date, the Company has accrued access costs for estimated expenses related to amounts that have been billed but are not yet due,
amounts that have not yet been billed by the other carriers and amounts for which the reconciliation of the carriers invoices to the Companys internal usage reports has not been completed.



Advertising and Promotional Costs



The Company expenses the costs of advertising and promotions as incurred and
these amounts are reported in selling, general and administrative expenses. Advertising and promotional expenses were $152 million, $579 million and $459 million for the years ended December 31, 2004, 2003, and 2002, respectively.



Income Taxes



The Company recognizes deferred income tax assets and liabilities for the
expected future tax consequences of transactions and events. Under this method, deferred income tax assets and liabilities are determined based on



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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. Deferred income tax assets are reduced by a valuation allowance to record the deferred income tax assets at an amount expected to be more likely than not recoverable. Deferred income tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of enactment. In addition, tax reserves are based on significant estimates and assumptions as to the relative filing positions and potential audit and litigation exposures
related thereto.



Derivative Instruments



The Company accounts for its derivative instruments
under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities (SFAS No.
133). Derivatives are recognized as either assets or liabilities in the consolidated balance sheet at their fair values. The changes in the fair values of all derivative instruments, including embedded derivatives, are recorded in
miscellaneous income (expense) in the consolidated statements of operations as the Company has not sought hedge accounting treatment.



From time to time, the Company may also hold equity warrants in various companies, which meet the definition of a derivative under SFAS No. 133. In
addition, the Company may also hold investments in convertible preferred stock which may contain embedded derivatives that need to be bifurcated and carried on the consolidated balance sheet at fair value. Changes in fair value are recorded in
miscellaneous income (expense) in the consolidated statements of operations.



Benefit Accounting



The Company maintains various pension and postretirement benefit plans for its employees. Embratel maintained its own benefit and postretirement plans. The Companys plans represent a significant benefit for its employees and a
significant expense to the Company. In accordance with SFAS No. 87, Employers Accounting for Pensions, and SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions, certain
assumptions and estimates must be made in order to determine the costs and future benefit that will be associated with these plans. These assumptions include the estimated long-term rate of return to be earned by plan assets, the estimated discount
rate used to value the projected benefit obligations, estimated wage increases and the estimated healthcare cost trend rate. The Company uses a model portfolio of high quality bonds whose expected rate of return will match the plans expected
cash flows as a basis to determine the most appropriate discount rate. For the long-term rate of return, the Company uses a model portfolio based on the Companys targeted asset allocation.



Loss per Share



For 2004, basic loss per share is calculated based on the weighted average
shares outstanding during the period, including the weighted average shares contingently issuable to unsecured creditors. Diluted loss per share is calculated based on the basic shares calculation adjusted to include the weighted average shares
outstanding of unvested restricted stock and the weighted average shares to be issued under the MCI, Inc. 2003 Employee Stock Purchase Plan (ESPP) during the period, when the shares do not have an anti-dilutive effect.



For periods prior to 2004, historical earnings (loss) per share information
of the Predecessor Company has not been presented. The Company does not believe that this information is relevant in any material respect for users of its financial statements because all existing equity interests, including the interests of both
the WorldCom group common stockholders and the MCI group common stockholders, were eliminated (without a distribution) upon the consummation of the plan of reorganization. In addition, the creation of the two class common stock structure (WorldCom
group common stock and MCI group common stock) by the Predecessor Company in July 2001 would require it to determine the net income or loss generated by the WorldCom group and MCI group separately in order to present earnings per share information.
Primarily as a result of the



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



extensive recreation of many of the Predecessor Companys historical financial entries that was required in order to complete its restatement process,
many of its revenue and expense items cannot be allocated to the appropriate group, making a determination of separate net income or loss information for each group impracticable.



Stock-Based Compensation



The Predecessor Company had various stock-based compensation plans that provide for the granting of stock-based compensation
to certain employees and directors. The Predecessor Company accounted for these stock-based compensation plans in accordance with the intrinsic value method of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, (APB Opinion No. 25) and had adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). Under the intrinsic value method,
compensation expense is recorded on the date of grant if the current market price of the underlying stock exceeded the exercise price of the stock-based award.



In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure, (SFAS No. 148) which became effective for fiscal years ended after December 15, 2002. SFAS No. 148 requires that certain pro forma information assuming the Company recognized expense
for its stock-based compensation using the fair value method be presented in the summary of significant accounting policies note to the consolidated financial statements. The Predecessor Company did not grant any options in 2003. The fair value of
stock-based compensation was estimated at the date of grant using the Black-Scholes option-pricing model and the following assumptions for 2002: volatility of 114%, risk-free interest rate of 4.0%, 5-year expected life and no dividend yield. The
fair value of Embratel options was calculated using the assumptions described in Note 15. The fair value of the stock-based compensation for the ESPP (initiated in 2004) was estimated at the beginning of the offering period using the Black-Scholes
option-pricing model and the following assumptions: volatility of 55%, risk-free interest rate of 1.79%, 0.41 year expected life and dividend yield of 10.81%. The Companys 2003 Management Restricted Stock Plan (MRSP) was initiated
in 2004 and was not included in the Black-Scholes calculation as the fair value of the compensation expense related to the plan has been expensed in the Companys 2004 consolidated statement of operations.



If compensation costs had been recognized based on the fair value recognition
provisions of SFAS No. 123, the pro forma amounts of the Companys net (loss) income attributable to common shareholders for the years ended December 31, 2004, 2003 and 2002 would have been as follows (in millions):



|                                                                                                                    |  |                         |        |   |                     |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ------------------- | - | ------ | ---- |  | - | ------ | -
|                                                                                                                    |  | SuccessorCompany        |        |   | Predecessor Company |  
|                                                                                                                    |  | Year Ended December 31, |       
|                                                                                                                    |  | 2004                    |        |   | 2003                |   |        | 2002 | 
|Net (loss) income attributable to common shareholders, as reported                                                  |  | $                       | (4,002 | ) |                     | $ | 22,211 |      |  | $ | (9,192 | )
|Add: Stock-based employee compensation expense recorded, net of tax                                                 |  |                         | 36     |   |                     |   | 2      |      |  |   | 1      |  
|Deduct: Stock-based employee compensation expense determined under the fair value method for all awards, net of tax |  |                         | (42    | ) |                     |   | (272   | )    |  |   | (304   | )
|                                                                                                                    |  |                         |        |   |                     |   |        |      |  |   |        |  
|Pro forma net (loss) income attributable to common shareholders                                                     |  | $                       | (4,008 | ) |                     | $ | 21,941 |      |  | $ | (9,495 | )
|                                                                                                                    |  |                         |        |   |                     |   |        |      |  |   |        |  
|Basic and diluted loss per share:                                                                                   |  |                         |        |   |                     |   |        |      |  |   |        |  
|As reported                                                                                                         |  | $                       | (12.48 | ) |                     |   |        |      |  |   |        |  
|Pro forma                                                                                                           |  | $                       | (12.49 | ) |                     |   |        |      |  |   |        |  



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company has not provided pro forma disclosures of income (loss) per share as defined by SFAS No.
148 for 2003 or 2002 as it does not believe that this information for any compensation plan that was terminated on the Emergence Date is relevant in any material respect for users of its consolidated financial statements because all equity interests
existing in 2003 and 2002, including the interests of the Predecessor Companys WorldCom group common stockholders and MCI group common stockholders, were eliminated (without a distribution) on the Emergence Date.



Reclassifications



Certain prior year amounts have been reclassified to conform to current year
presentation, including marketable securities on the consolidated balance sheets, deferred compensation on the consolidated balance sheets and the statements of shareholders equity (deficit) and comprehensive (loss) income, and other financing
activities on the statements of cash flows.



Adjustment
to Previously Issued Financial Statements



During
2004, the Company determined that it had recorded in error a restatement entry which had the effect of reducing accounts receivable by $301 million through a charge to expense in the year ended December 31, 2000. The reported 2000 net loss of $48.9
billion should have been $48.6 billion, or 0.5% lower, and the Companys assets of $44.2 billion should have been $44.5 billion, or 0.6% higher. In 2001, $35 million of the amount reversed and left a remaining $266 million understatement of
accounts receivable as of December 31, 2001. This situation remained unchanged until, as a result of the application of fresh-start reporting as of December 31, 2003, the previously expensed $266 million was reversed in the Companys statement
of operations as a component of the $22.3 billion reorganization gain (see Note 5). Without this expense reversal, the Companys 2003 net income of $22.2 billion would have been $21.9 billion, or 1.2% lower. As a result of the reversal of the
expense in 2003, the cumulative impact to the Companys December 31, 2003 consolidated retained earnings was zero. The Company has assessed the impact on the 2000, 2001 and 2003 statements of operations as well as the consolidated balance
sheets as of December 31, 2000, 2001, 2002 and 2003 and determined that the impact was not material to any period.



The impact of this reduction of accounts receivable in the consolidated balance sheet as of December 31, 2003 resulted in a misclassification of $266
million between accounts receivable and long-lived assets in the Companys allocation of reorganization value under fresh-start reporting. To properly reflect the allocation of reorganization value as of December 31, 2003, the Company has
reflected a reclassification entry in its consolidated balance sheet as of December 31, 2003, as presented herein, to reflect an increase of $266 million to its accounts receivable balance and reductions in its property, plant and equipment and
intangible assets.



The adjustment of this item also resulted
in a decrease of $6 million to the Companys long-term deferred tax liability which has been reflected in the consolidated balance sheet as of December 31, 2003.



New Accounting Standards



In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4(SFAS No. 151).SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage), and requires that these costs be recognized as current period
charges. The provisions of SFAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company has completed its evaluation of the impact of SFAS No. 151, and does not expect any material impact
on its consolidated results of operations, financial condition and cash flows.



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29(SFAS No. 153). SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets in eliminating the exception from fair value measurement for nonmonetary exchanges of similar productive
assets and replacing it with an exception for exchanges that do not have commercial substance. SFAS No. 153 indicates a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a
result of the exchange. The provisions of SFAS No. 153 will be effective for nonmonetary asset exchanges in fiscal years beginning after June 15, 2005, with earlier application permitted.



In December 2004, the FASB issued SFAS No. 123 (revised 2004), Accounting for Stock-Based Compensation
(SFAS No. 123 (R)). SFAS No. 123 focuses primarily on accounting for transactions in which an employee is compensated for services through share-based payment transactions. SFAS No. 123 (R) requires the cost of employee services received
in exchange for an award of equity instruments to be measured based on the grant-date fair value of the award. The provisions of SFAS No. 123 (R) are effective as of the beginning of the first interim or annual reporting period that begins after
June 15, 2005. The Company has not completed evaluating the impact of SFAS No. 123 (R), but does not expect any material impact on its consolidated results of operations, financial condition and cash flows.



(3) Impairment Charges



The Company assesses recoverability of its indefinite-lived and long-lived assets to be held and used whenever events or
changes in circumstances indicate that their carrying amount may not be recoverable. Impairment analyses of long-lived and indefinite-lived assets are performed in accordance with SFAS Nos. 144 and 142. Impairment evaluations are performed at the
lowest asset or asset group level for which identifiable cash flows are largely independent of the cash flows of other assets or asset groups. The Company generates most of its cash flows from products and services that are principally delivered to
customers over its integrated telecommunications network (Integrated Network) and related intangible assets. Therefore, evaluations are performed at the entity level, excluding discontinued operations and assets held for sale, as a
single group. During 2003 and 2004, all stand alone entities that were reviewed independently in prior years were integrated into the Companys network and tested for impairment as part of the Integrated Network.



Year Ended December 31, 2004



The industry is in a state of transition where traditional business lines
are facing significant overcapacity in the marketplace, pricing pressures, changes in product mix, and customers continued efforts to reconfigure and consolidate their networks in order to achieve lower overall costs and improved efficiencies.
Concurrently, the industry is migrating to more advanced network technologies primarily focused around IP based platforms, and customers are requiring more advanced network services including network monitoring, traffic analysis, and comprehensive
security solutions. The industry has also seen a general migration of customers from dial-up services to broadband and various wireless services. Additionally, the Companys regulatory climate deteriorated due to a decision by the U.S. Court of
Appeals for the D.C. Circuit (D.C. Circuit) that invalidated the FCCs February 2003 Triennial Review Order local competition rules, which set prices that incumbent providers could charge competitive providers such as the
Company for unbundled network element platforms (UNE-P), an essential component of the Companys Mass Market local phone service. Although several petitions were filed at the Supreme Court seeking review of the D.C. Circuits
decision, the Solicitor General and the FCC declined to seek such review, and the Supreme Court subsequently denied the petitions. As of the date of the Companys impairment test, the FCC had adopted interim unbundling rules (effective
September 13, 2004) to maintain certain incumbent local exchange carrier (ILEC) unbundling obligations under interconnection agreements as they existed prior to the D.C Circuits mandate. As a result, the Companys costs for
providing



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



this service was expected to increase significantly in 2005. Some of the Companys competitors announced their intentions to exit from this market, and
the cost increases may force the Company to reduce efforts to acquire new customers and withdraw from certain markets. The Company therefore anticipated that revenues from that segment would continue to decline.



Given the market, business and regulatory conditions, the Company reevaluated
its financial forecasts and strategy in the third quarter of 2004 when it became apparent that these trends would continue into the future. Updated cash flow and profitability projections and forecasts were developed taking into account both the
2004 changes in the competitive landscape and the regulatory issues facing the Company. The Companys executives reviewed these projections with the Audit Committee of the Board of Directors during the third quarter.



Based on the revised projections, the Company determined that an impairment
analysis of its indefinite-lived and long-lived assets was required during the third quarter of 2004. In connection with this analysis, the Company evaluated its property, plant and equipment and definite and indefinite-lived intangible assets,
including customer lists. The Company developed estimates of future undiscounted cash flows to test the recoverability of its long-lived and indefinite-lived assets. These estimates were compared to the carrying values of the assets, which resulted
in the conclusion that the Company could not recover its carrying values through projected future operations. To determine the impairment amount, the Company first calculated an enterprise value. The Company calculated the enterprise value using
certain assumptions and revised management projections of revenues and profitability under various operating scenarios from September 1, 2004 through 2009. As indicated above, both projected revenues and net cash flow decreased significantly from
those used in the determination of reorganization enterprise value in fresh-start reporting. These revised projections used a weighted average cost of capital between 10%-14%, a 2% terminal growth rate, certain working capital assumptions and total
entity value assumptions. The scenarios indicated average annual revenue declines of approximately 5% (compared to an assumed 1% annual growth at the time the reorganization enterprise value was established in 2003). In addition, the scenarios
varied in the assumed cost efficiencies that could be achieved due to regulatory and technology changes that would allow increases in the return on current invested capital. This resulted in varying potential cash flows for each scenario. The
scenarios were weighted approximately equally.



After
enterprise value was determined, the Company concluded that the carrying values of its long-lived assets exceeded their estimated fair values by approximately $3.3 billion ($2.8 billion related to property, plant and equipment and $478 million
related to definite-lived intangible assets) and the carrying value of an indefinite-lived asset exceeded its estimated fair value by approximately $260 million. These amounts represented the difference between the calculated fair values of the
assets and their associated carrying values, and were recorded as a separate component of operating expenses in the consolidated statement of operations for the year ended December 31, 2004. The Companys management reviewed the results of the
impairment analysis with the Board of Directors, and the Board of Directors approved the impairment charges on October 15, 2004.



As a result of the impairment charge of approximately $260 million to an indefinite-lived intangible asset, the Company recognized a $99 million tax
benefit which reduced its long-term deferred tax liability as the impairment reduced the difference between the book and tax bases. The impairment charges, after taxes, contributed approximately $3.4 billion to the Companys net loss for year
ended December 31, 2004 (loss per share of $(10.64)).



The
impairment recorded in 2004 was calculated as of August 31, 2004. The Company did not identify any additional trigger events, or make any significant changes to the projections used in the impairment test, between August 31 and December 31, 2004.
Therefore, the Company concluded that the August impairment test related to its indefinite-lived intangibles served as its annual assessment required to be performed as of October 1 in accordance with its policy.



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MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Year Ended December 31, 2002



Integrated Network and Related Goodwill and Other Intangible Assets



During the second quarter of 2002, impairment indicators
occurred, including continued competitive pressures, the discovery of accounting irregularities in June that led to the Predecessor Companys impending bankruptcy, and the resignation of senior officers. These factors dramatically impaired
asset recoverability and the Predecessor Companys ability to finance operations, resulting in a further reduction in projected cash flows. These events precipitated a lack of access to the capital markets, a lack of confidence from its
customers and overall uncertainties about the Predecessor Companys economic viability. As a result, the Predecessor Company reviewed its Integrated Network, which had a collective carrying value of $15.9 billion for impairment. Based on the
results of an assessment of expected cash flows over a period of 5 years discounted at 14% with a 2% terminal growth rate, and Company comparative market valuation metrics, the Predecessor Company concluded that the carrying value of the Integrated
Network exceeded its estimated fair value by $4.9 billion. Accordingly, the Predecessor Company recorded impairment charges of $45 million for goodwill, comprised primarily of reclassification of definite-lived assets related to the Predecessor
Companys workforce, and $353 million for other intangible assets. In addition, a $4.5 billion property, plant and equipment impairment charge was recorded in 2002. As a result of these impairment charges, the carrying value of goodwill
associated with the Integrated Network was reduced to zero.



Digex



Digex, Incorporated (Digex)
is a provider of advanced hosting services, including value added products such as monitoring, security, reporting, performance and application hosting for companies conducting business on the Internet. In the second quarter of 2002, Digex performed
an undiscounted cash flow analysis related to its long-lived assets. The result of that analysis indicated that an impairment of the carrying value of its property, plant and equipment and other intangible assets existed as of June 30, 2002, and the
carrying value of the Digex long-lived assets was reduced to fair value. This resulted in the Predecessor Company recording a $2 million and a $55 million impairment charge related to other intangible assets and property, plant and equipment,
respectively.



SkyTel



SkyTel is a leading messaging service provider, with products such as
traditional one-way paging, two-way paging and wireless email. Upon the adoption of SFAS No. 142 as of January 1, 2002, the Predecessor Company evaluated the indefinite-lived channel rights intangibles of SkyTel and determined that the net book
value of $33 million was impaired. Accordingly, the Predecessor Company reduced the carrying value of these intangible assets to their estimated fair value of $1 million. This impairment was recognized as of January 1, 2002 as the cumulative effect
of a change in accounting principle in accordance with the provisions of SFAS No. 142.



During 2002, the Predecessor Company determined that it would dispose of SkyTels operations and engaged an investment banking firm to evaluate and assess the interest of potential buyers. While it was
subsequently determined that the Predecessor Company would not dispose of SkyTel, the intent to sell caused the Predecessor Company to evaluate the recoverability of the SkyTel long-lived assets, which had a carrying value of $142 million. The
review concluded that SkyTels long-lived assets were impaired. The assessment resulted in an estimated fair value of $68 million which resulted in the Predecessor Company recording an impairment charge of $74 million to property, plant and
equipment.



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Impairment charges recorded for the years ended December 31, 2004 and 2002 are as follows (in
millions):



|                                                                                                                 |  |                         |       |                    |   |      
|---------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----- | ------------------ | - | -----
|                                                                                                                 |  | SuccessorCompany        |       | PredecessorCompany
|                                                                                                                 |  | Year Ended December 31,
|                                                                                                                 |  | 2004                    |       | 2002              
|Definite-lived intangible assets:                                                                                |  |                         |       |                    |   |      
|Integrated Network                                                                                               |  | $                       | 478   |                    | $ | 353  
|Digex                                                                                                            |  |                         |      |                    |   | 2    
|                                                                                                                 |  |                         |       |                    |   |      
|Total definite-lived intangible assets impairment                                                                |  |                         | 478   |                    |   | 355  
|Goodwill impairmentIntegrated Network                                                                           |  |                         |      |                    |   | 45   
|Indefinite-lived intangibles                                                                                     |  |                         | 260   |                    |   |     
|                                                                                                                 |  |                         |       |                    |   |      
|Total goodwill and other intangible assets impairment charges                                                    |  |                         | 738   |                    |   | 400  
|Property, plant and equipment:                                                                                   |  |                         |       |                    |   |      
|Integrated Network                                                                                               |  |                         | 2,775 |                    |   | 4,470
|SkyTel                                                                                                           |  |                         |      |                    |   | 74   
|Digex                                                                                                            |  |                         |      |                    |   | 55   
|                                                                                                                 |  |                         |       |                    |   |      
|Total property, plant and equipment impairment charges                                                           |  |                         | 2,775 |                    |   | 4,599
|                                                                                                                 |  |                         |       |                    |   |      
|Total impairment charges, excluding $32 million of cumulative effect related to adoption of SFAS No. 142 in 2002 |  | $                       | 3,513 |                    | $ | 4,999
|                                                                                                                 |  |                         |       |                    |   |      



(4) Fresh-Start Reporting



In accordance with SOP 90-7, the Predecessor Company
adopted fresh-start reporting as of the close of business on December 31, 2003. The consolidated balance sheet as of December 31, 2003 gives effect to allocations to the carrying value of assets or amounts and classifications of liabilities that
were necessary when adopting fresh-start reporting. As discussed below, these allocation adjustments recorded to the carrying amounts of assets and liabilities in the December 31, 2003 consolidated balance sheet were subject to adjustment as
estimated valuations were finalized.



The following
consolidated balance sheet reflects the implementation of the Plan as if the Plan had been effective on December 31, 2003. Reorganization adjustments have been recorded in the consolidated balance sheet to reflect the discharge of debt and the
adoption of fresh-start reporting in accordance with SOP 90-7. In August 2003, the Company determined a reorganization value as defined in SOP 90-7. The Companys approach to determining reorganization value was based on comparable public
company analysis and a discounted cash flow analysis. Comparable public company analysis is premised on the idea that the price that an investor is willing to pay in the public markets for similar publicly traded companies is a relevant measure to
determine what an investor is willing to pay today for the target company and its operating subsidiaries. For comparable public companies, criteria such as lines of business, business risks, growth prospects, maturity of business, market presence,
and size and scale of operations were considered. Cash flow multiples were relied upon when deriving reorganization value ranges to ensure consistent comparison with other telecommunications companies. These analyses are necessarily based on a
variety of estimates and assumptions which, though considered reasonable by management, may not be realized and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the
Companys control. Changes in these estimates and assumptions may have had a significant effect on the determination of the Companys reorganization value. The assumptions used in the calculations for the discounted cash flow analysis
regarding



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



projected revenue, costs, and cash flows, for the period 2003-2005 were provided by the Companys management based on their best estimate at the time
the analysis was performed. Managements estimates implicit in the cash flow analysis included increases in net revenue of 1.0% per year over the three-year period. In addition, the analysis included estimated cost reductions, primarily in
selling, general and administrative expenses through the Companys plans for headcount reductions and other access cost efficiencies. The analysis also included anticipated levels of reinvestment in the Companys operations through capital
expenditures ranging from $1.2 billion to $2.0 billion per year. The Company did not include in its estimates the potential effects of litigation, either on the Company or the industry. The foregoing estimates and assumptions were inherently subject
to uncertainties and contingencies beyond the control of the Company. Accordingly, there could be no assurance that the estimates, assumptions, and values reflected in the valuations would be realized, and actual results did vary materially from
those estimates and assumptions resulting in the Company recording impairment charges in its 2004 consolidated statement of operations (see Note 3).



The reorganization enterprise value of the Company was calculated to be within an approximate range of $10.0 billion to $12.9 billion. The Company
selected the midpoint of the range, $11.4 billion, to be used in the determination of reorganization value. Such value was confirmed by the Bankruptcy Court and the Creditors Committee on the confirmation date. The reorganization enterprise value of
the Successor Company was increased to $14.5 billion to reflect the expected increase in the Predecessor Companys cash balances in excess of requirements to fund claims, increase in working capital, and increase for certain previously excluded
non-core assets expected to be sold for $520 million. The equity value of $8.5 billion represented the reorganization value of $14.5 billion less $6.0 billion of post-emergence debt (including capital leases of approximately $314 million
and excluding Embratels $1.6 billion of debt).



The
reorganization enterprise value was allocated to assets and liabilities using either the market, income or cost approach to valuation. The selection of a particular method depended on the availability of reliable data as well as the nature of the
asset. Values derived by direct reference to market pricing (the market approach) are generally based on an analysis of recent sales of comparable property. This approach was used for the Companys real estate assets and other contractually
based assets such as capacity and rights-of-way agreements, leasehold interests and certain naming rights. The income approach was used for certain intangible assets such as customer lists and trademarks where the values of these assets are premised
upon the expected receipt of future economic benefits such as future earnings and cash flow. The indication of value was developed by discounting those benefits to their present worth at a discount rate that reflects both the current return
requirements of the market and the risks inherent in the specific asset. Where the market or income approach was not available or appropriate such as with tangible personal property, special use facilities, certain software assets and certain
patents, the cost approach was used. The cost approach estimates value by determining the current cost of replacing an asset with another of equivalent economic utility. The indication of value was developed by estimating the cost of reproduction or
replacement cost new for the property, less an allowance for loss in value due to depreciation or obsolescence.



Fresh-start adjustments reflected the allocation of fair value to the Successor Companys long-lived assets and the present value of liabilities to
be paid, and were calculated using a combination of one or more of the above valuation methodologies. Also considered were technical, functional, and economic obsolescence, including network utilization factors inherent in the Companys assets.
Technical obsolescence was applied to reflect reductions in value due to advances in technology in newer similar assets. Functional obsolescence was applied to reflect the estimated reduction in value due to the age of the asset. Inutility was
applied to tangible personal property and other assets such as enterprise license agreements (software licenses) to reflect excess capacity or redundancy in the network prior to the application of remaining economic obsolescence. In most cases,
market and income-based values include the effects of economic obsolescence. In limited cases, assets for



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



which market pricing included a buy-sell spread of values, such as with capacity and rights-of-way agreements, did the Company adjust for external or
remaining economic obsolescence. Key assumptions used in the valuation to determine the fair value of the Companys long-lived assets for the allocation included: (i) an income tax rate of 38.2%, (ii) a weighted average cost of capital of 13.5%
based on a ratio of debt (30%) to equity (70%), and (iii) an obsolescence factor on property, plant and equipment ranging from 0% to 60%. Certain intangible assets were subject to sensitive business factors of which only a portion were within
control of the Companys management.



These estimates of
fair value were reflected in the Successor Companys consolidated balance sheet as of December 31, 2003. During 2004, the Company adjusted the carrying value of certain assets and liabilities from the previously estimated values as information
became available and valuations were completed. As these adjustments were recorded in each quarter, associated year-to-date depreciation and amortization expense amounts were also adjusted for the effects of the changes in carrying values. As of
September 30, 2004, the Company completed its assessment of the fair values of its assets and liabilities.



In applying fresh-start reporting as of December 31, 2003, the Company followed these principles:



| |  |  | The reorganization value of the entity was allocated to the entitys assets in conformity with the procedures specified by SFAS No. 141, Business
Combinations. The sum of the amounts assigned to assets and liabilities exceeded the reorganization value. This excess, or negative goodwill, was allocated as a pro rata reduction of the amounts that otherwise would have been assigned to
the Successor Companys long-lived assets.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Each liability existing as of the fresh-start reporting date, other than deferred taxes, was stated at the present value of the amounts to be paid, determined at appropriate current
interest rates. Deferred revenue was adjusted to reflect the fair value of future costs of contractual performance obligations plus a normal profit margin.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Deferred taxes were reported in conformity with applicable income tax accounting standards, principally SFAS No. 109, Accounting for Income Taxes(SFAS No.
109). Deferred tax assets and liabilities were recognized for differences between the assigned values and the tax basis of the recognized assets and liabilities (see Note 20).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in existing accounting principles that otherwise would have been required in the consolidated financial statements of the emerging entity within the twelve months following
the adoption of fresh-start reporting were adopted at the time fresh-start reporting was adopted.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reversal of all items included in accumulated other comprehensive loss, including the recognition of the Predecessor Companys minimum pension liability, reflecting all
unrealized losses from available for sale securities under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities,to the underlying asset balances, and recognition of all previously unrecognized cumulative
translation adjustments (see Note 13).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Resetting property, plant and equipment assets and other long-lived assets to fair value and eliminating all of the accumulated depreciation and amortization.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Adjustment of the Companys pension plans to their projected benefit obligation by recognition of all previously unamortized actuarial gains and losses.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



During 2004, the Company determined that
approximately $132 million of property tax liabilities and $110 million of other liabilities that should not have been adjusted in fresh-start reporting were reduced by approximately $152 million in the Companys application of fresh-start
reporting as of December 31, 2003. Due



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



to the application of fresh-start reporting, these errors were offset by fresh-start adjustments and therefore had no impact on the Companys 2003 net
income. However, these errors caused both accounts payable and long-lived assets to be understated by approximately $152 million, representing 0.5% of the Companys total assets of $27.5 billion and approximately 0.8% of its $19.0 billion total
liabilities as of December 31, 2003, which it determined to be immaterial to its 2003 consolidated balance sheet. The Companys December 31, 2004 consolidated balance sheet reflects the correction of these immaterial errors. In the fourth
quarter of 2004, the Company identified errors primarily related to the application of the effects of the Plan (not in the fair values assigned to its assets) totaling $38 million and therefore reduced the value assigned to tangible and intangible
assets. Additionally, the Company cumulatively adjusted depreciation and amortization expense in its 2004 consolidated statement of operations. The Company expects that no further adjustments will be recorded, except for adjustments that may be
related to deferred tax assets and contingencies as discussed below. Refer to the pro forma table below for the impact of these items.



As of December 31, 2004, the Company had various net deferred tax assets which remain unresolved. Benefits realized from pre-confirmation net operating
loss carryforwards will be adjusted to intangible assets, until exhausted, and then to additional paid-in-capital and not through income.



The estimates and assumptions used in the valuations are inherently subject to uncertainties and contingencies beyond the control of the Company.
Accordingly, there can be no assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially.



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table identifies the adjustments recorded to the Predecessor Companys December
31, 2003 consolidated balance sheet as a result of implementing the Plan and applying fresh-start reporting. Additionally, it includes a pro forma disclosure which includes the impact of 2004 adjustments to the 2003 estimated valuations upon their
completion during 2004 (in millions):



|                                               |  |                                       |         |   |                 |   |         |                          |  |   |                                         |      |  |                                                |      |      |  |   |        |  
|---------------------------------------------- |  | ------------------------------------- | ------- | - | --------------- | - | ------- | ------------------------ |  | - | --------------------------------------- | ---- |  | ---------------------------------------------- | ---- | ---- |  | - | ------ | -
|                                               |  | Predecessor Company December 31, 2003 |         |   | Effects of Plan |   |         | Fresh-Start Valuation(e) |  |   | 2004 Fresh-StartValuationAdjustments(o) |      |  | Pro FormaSuccessorCompany December 31, 2003(p) |     
|ASSETS                                         |  |                                       |         |   |                 |   |         |                          |  |   |                                         |      |  |                                                |      |      |  |   |        |  
|Current assets:                                |  |                                       |         |   |                 |   |         |                          |  |   |                                         |      |  |                                                |      |      |  |   |        |  
|Cash and cash equivalents                      |  | $                                     | 6,178   |   |                 | $ |        |                          |  | $ |                                        |      |  | $                                              |     |      |  | $ | 6,178  |  
|Accounts receivable, net                       |  |                                       | 4,348   |   |                 |   |        |                          |  |   |                                        |      |  |                                                |     |      |  |   | 4,348  |  
|Deferred income taxes                          |  |                                       | 119     |   |                 |   | 921     | (a)                      |  |   | (50                                     | )(f) |  |                                                |     |      |  |   | 990    |  
|Other current assets                           |  |                                       | 1,029   |   |                 |   |        |                          |  |   | (17                                     | )(f) |  |                                                | (15  | )(q) |  |   | 997    |  
|                                               |  |                                       |         |   |                 |   |         |                          |  |   |                                         |      |  |                                                |      |      |  |   |        |  
|Total current assets                           |  |                                       | 11,674  |   |                 |   | 921     |                          |  |   | (67                                     | )    |  |                                                | (15  | )    |  |   | 12,513 |  
|Property, plant and equipment, net             |  |                                       | 12,277  |   |                 |   |        |                          |  |   | (739                                    | )(g) |  |                                                | 150  | (r)  |  |   | 11,688 |  
|Intangible assets, net                         |  |                                       | 1,229   |   |                 |   |        |                          |  |   | 856                                     | (h)  |  |                                                | 134  | (s)  |  |   | 2,219  |  
|Deferred income taxes                          |  |                                       | 608     |   |                 |   |        |                          |  |   |                                        |      |  |                                                |     |      |  |   | 608    |  
|Other assets                                   |  |                                       | 558     |   |                 |   |        |                          |  |   | 153                                     | (i)  |  |                                                | (226 | )(t) |  |   | 485    |  
|                                               |  |                                       |         |   |                 |   |         |                          |  |   |                                         |      |  |                                                |      |      |  |   |        |  
|                                               |  | $                                     | 26,346  |   |                 | $ | 921     |                          |  | $ | 203                                     |      |  | $                                              | 43   |      |  | $ | 27,513 |  
|                                               |  |                                       |         |   |                 |   |         |                          |  |   |                                         |      |  |                                                |      |      |  |   |        |  
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT) |  |                                       |         |   |                 |   |         |                          |  |   |                                         |      |  |                                                |      |      |  |   |        |  
|Current liabilities:                           |  |                                       |         |   |                 |   |         |                          |  |   |                                         |      |  |                                                |      |      |  |   |        |  
|Accounts payable and accrued access costs      |  | $                                     | 3,276   |   |                 | $ | 834     | (b)                      |  | $ | (39                                     | )(j) |  | $                                              | 106  | (u)  |  | $ | 4,177  |  
|Current portion of long-term debt              |  |                                       | 330     |   |                 |   |        |                          |  |   |                                        |      |  |                                                |     |      |  |   | 330    |  
|Other current liabilities                      |  |                                       | 3,710   |   |                 |   | 782     | (b)                      |  |   | (83                                     | )(k) |  |                                                | (133 | )(v) |  |   | 4,276  |  
|                                               |  |                                       |         |   |                 |   |         |                          |  |   |                                         |      |  |                                                |      |      |  |   |        |  
|Total current liabilities                      |  |                                       | 7,316   |   |                 |   | 1,616   |                          |  |   | (122                                    | )    |  |                                                | (27  | )    |  |   | 8,783  |  
|Liabilities subject to compromise              |  |                                       | 37,532  |   |                 |   | (37,532 | )(b)                     |  |   |                                        |      |  |                                                |     |      |  |   |       |  
|Long-term debt                                 |  |                                       | 1,600   |   |                 |   |        |                          |  |   | (35                                     | )(l) |  |                                                |     |      |  |   | 1,565  |  
|Long-term debtnew                             |  |                                       |        |   |                 |   | 5,552   | (b)                      |  |   |                                         |      |  |                                                |      |      |  |   | 5,552  |  
|Other liabilities                              |  |                                       | 762     |   |                 |   | 3       | (b)                      |  |   | (51                                     | )(m) |  |                                                | 72   | (w)  |  |   | 786    |  
|Deferred income taxes                          |  |                                       | 225     |   |                 |   | 921     | (a)                      |  |   | 61                                      | (m)  |  |                                                | (2   | )    |  |   | 1,205  |  
|Minority interests                             |  |                                       | 1,150   |   |                 |   |        |                          |  |   |                                        |      |  |                                                |     |      |  |   | 1,150  |  
|Preferred stock subject to compromise          |  |                                       | 436     |   |                 |   | (436    | )(b)                     |  |   |                                        |      |  |                                                |     |      |  |   |       |  
|Shareholders Equity (Deficit):                |  |                                       |         |   |                 |   |         |                          |  |   |                                         |      |  |                                                |      |      |  |   |        |  
|Common stockold (Predecessor)                 |  |                                       | 31      |   |                 |   | (31     | )(d)                     |  |   |                                        |      |  |                                                |     |      |  |   |       |  
|Common stocknew (Successor)                   |  |                                       |        |   |                 |   | 3       | (b)                      |  |   |                                        |      |  |                                                |     |      |  |   | 3      |  
|Additional paid-in capital                     |  |                                       | 56,444  |   |                 |   | (56,444 | )(d)                     |  |   |                                        |      |  |                                                |     |      |  |   |       |  
|                                               |  |                                       |         |   |                 |   | 8,639   | (b)                      |  |   |                                        |      |  |                                                |     |      |  |   | 8,639  |  
|Accumulated deficit                            |  |                                       | (78,629 | ) |                 |   |        |                          |  |   |                                        |      |  |                                                |     |      |  |   |       |  
|                                               |  |                                       |         |   |                 |   |        |                          |  |   | 350                                     | (c)  |  |                                                |     |      |  |   |        |  
|                                               |  |                                       |         |   |                 |   | 22,324  | (b)                      |  |   |                                         |      |  |                                                |      |      |  |   |        |  
|                                               |  |                                       |         |   |                 |   | 55,955  | (n)                      |  |   |                                         |      |  |                                                |      |      |  |   |        |  
|Deferred stock-based compensation              |  |                                       |        |   |                 |   | (170    | )(b)                     |  |   |                                        |      |  |                                                |     |      |  |   | (170   | )
|Treasury stock                                 |  |                                       | (185    | ) |                 |   | 185     | (d)                      |  |   |                                        |      |  |                                                |     |      |  |   |       |  
|Accumulated other comprehensive loss           |  |                                       | (336    | ) |                 |   | 336     | (n)                      |  |   |                                        |      |  |                                                |     |      |  |   |       |  
|                                               |  |                                       |         |   |                 |   |         |                          |  |   |                                         |      |  |                                                |      |      |  |   |        |  
|Total shareholders equity (deficit)           |  |                                       | (22,675 | ) |                 |   | 30,797  |                          |  |   | 350                                     |      |  |                                                |     |      |  |   | 8,472  |  
|                                               |  |                                       |         |   |                 |   |         |                          |  |   |                                         |      |  |                                                |      |      |  |   |        |  
|                                               |  | $                                     | 26,346  |   |                 | $ | 921     |                          |  | $ | 203                                     |      |  | $                                              | 43   |      |  | $ | 27,513 |  
|                                               |  |                                       |         |   |                 |   |         |                          |  |   |                                         |      |  |                                                |      |      |  |   |        |  



F-30



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



---

|(a) | To record adjustments to deferred tax assets and liabilities as a result of the impact of the estimated gain related to cancellation of indebtedness resulting from the application
of the effects of the Plan. The remaining net deferred tax liability relates primarily to financial accounting versus tax basis in indefinite-lived intangible assets.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | To record the discharge of the liabilities and preferred stock subject to compromise and the issuances of new MCI common stock with an agreed value of $8.5 billion and new long-term
debt of $5.6 billion (net of $114 million discount). Included in the additional paid-in capital portion of this adjustment is the effect of $170 million to reflect the increase for the issuance of approximately 8.6 million restricted stock unit
awards. Additionally, the Company recorded $170 million of deferred stock-based compensation. Additionally, the increase in accounts payable and other current liabilities represents the estimated cash payment of liabilities as a result of the
implementation of the Plan.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | To record the net change in equity value from historical basis to fresh-start basis of $350 million. This amount also represents the net difference in fair value of the adjustments
to the Companys historical basis in assets and liabilities.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | To record the extinguishment of old equity interest in accordance with the Plan.
|--- | --------------------------------------------------------------------------------

|(e) | To record the estimated fair value of the Predecessor Companys assets and liabilities upon completion of the Companys initial review as of December 31, 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(f) | An actuarial valuation was performed as of the fresh-start date on pension assets and the projected pension benefit obligation. The excess of the unrecognized portion of the plan
assets over the pension benefit obligation of ($24) million was eliminated at the fresh-start date. In addition, net current deferred tax assets were decreased ($50) million to represent the difference between the assigned book values and the tax
basis of the recognized assets and liabilities. Also, prepaid rights-of-way were valued using the market approach. Remaining economic obsolescence was applied to prepaid rights-of-way to reflect that forces external to the Company, such as
technological changes, resulted in the Company holding quantities of these assets that were not warranted by current market conditions. The current amortizable portion of the prepaid rights-of-way contracts was increased by $7 million to record
its fair value.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(g) | To record the Predecessor Companys tangible assets at their estimated fair value. Asset records were reviewed and adjusted primarily using replacement cost new as the basis.
Technical, functional and economic obsolescence was then applied to determine the fresh-start values at the asset record level.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(h) | To record the fair value of intangible assets. The largest identifiable intangible assets such as customer lists were valued using the income approach, while trademarks were valued
using a relief from royalty method, a subset of the income approach. Other intangible assets such as favorable leasehold interests, naming rights, wireless spectrum and certain patents were valued using the market approach. The balance of the
intangible assets was valued using the cost approach. Remaining economic obsolescence was applied to intangible assets valued on the cost approach only.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(i) | To record equity and cost method investments, primarily related to Avantel and other equity method investments, at fair value of $140 million. The investment in Avantel was valued
using managements best estimate of net realizable value, while other equity method investments were valued using the income approach. In addition, an adjustment of $101 million was made to the non-current amortizable portion of the fair value
of prepaid rights-of-way contracts, which were valued using the market approach. Additionally, the Company eliminated deferred customer credits of ($88) million as of the fresh-start date since this value was deemed inherent in the fair valuation of
customer lists.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(j) | To adjust deferred rent expense of the Predecessor Company to equal the present value of amounts to be paid as of the fresh-start date.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------

|(k) | To record the elimination of certain deferred revenues of the Predecessor Company for which no remaining contractual obligation exists. Other deferred revenues, primarily associated
with capacity sales agreements, were adjusted to estimated fair value. The fair value of capacity sales agreements was based primarily on analyses of recent agreements of comparable size and location and/or internally developed market estimates.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(l) | To record the elimination of certain capital lease obligations.
|--- | ---------------------------------------------------------------

|(m) | To adjust certain long-term deferred installation revenues of the Predecessor Company for which no remaining contractual obligation exists by ($46) million. The
Predecessor Companys accrued pension liability was reduced by ($5) million to reflect the actuarial valuation of the minimum pension benefit
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-31



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



| | obligation. Additionally, net non-current deferred tax liabilities were increased by $61 million to represent the difference between the assigned book values
and the tax basis of the recognized assets and the liabilities.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(n) | To record the elimination of the Predecessor Companys prior accumulated deficit and accumulated other comprehensive loss, which included the elimination of the Companys
$47 million minimum pension liability.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(o) | As certain components of the fresh-start valuation were incomplete as of December 31, 2003, this column represents adjustments to the carrying value of the Companys assets and
liabilities upon completion of the Companys fair value reviews during 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(p) | Reflects on a pro forma basis the amounts that would have been displayed on the Companys December 31, 2003 balance sheet if adjustments resulting from the fair value reviews
completed in 2004 and other adjustments had been known at that date.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(q) | Includes adjustments to decrease prepaid expenses by ($60) million, primarily related to the fair value of certain prepaid indefeasible rights of use agreements. These agreements
were valued based primarily on analyses of recent agreements of comparable size and location and/or internally developed market estimates. Remaining economic obsolescence was applied to indefeasible rights of use agreements to reflect that forces
external to the Company, such as technological changes, resulted in the Company holding quantities of these assets that were not justified by current market conditions. An increase of $35 million to net realizable value of certain asset carrying
values classified in assets held for sale was recorded as well as a reclassification from other assets of $7 million and intangible assets of $3 million.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(r) | Includes adjustments which increased property, plant and equipment by $183 million due to increases in the valuation of enterprise license agreements and a decrease in the valuation
of indefeasible rights of use, as well as changes in the allocation of the amount of economic obsolescence and negative goodwill. Enterprise license agreements were valued based primarily on analyses of recent comparable agreements, vendor quotes,
and/or internally developed market estimates. Inutility, a component of economic obsolescence, was applied to reflect an estimate of redundancy in the Companys software portfolio. This increase was partially offset by adjustments for errors
identified in the fourth quarter of 2004 primarily related to application of the effects of the Plan, which decreased property, plant and equipment by ($33) million.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(s) | Includes adjustments which increased intangible assets by $46 million due to indirect allocation adjustments from the application of economic obsolescence and negative goodwill. In
addition, the original right-of-way fair value adjustment of $101 million was reclassified from other assets. These increases were partially offset by decreases of ($5) million related to adjustments for errors identified in the fourth quarter
of 2004 primarily related to application of the effects of the Plan and reclassifications to other current assets and other assets of ($3) million and ($5) million, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(t) | Includes adjustments to reduce the carrying value of certain indefeasible rights of use agreements by ($123) million. These agreements were valued based primarily on analyses of
recent agreements of comparable size and location and/or internally developed market estimates. Remaining economic obsolescence was applied to indefeasible rights-of-use agreements to reflect that forces external to the Company, such as
technological changes, resulted in the Company holding quantities of these assets that were not justified by current market conditions. A reclassification of the original right-of-way fair value adjustment to intangible assets reduced other assets
by ($101) million. Additionally, there were reclassifications of ($7) million to other current assets and $5 million from intangible assets.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(u) | Includes adjustments increasing accounts payable and accrued access costs by $116 million due to property tax and other liabilities that should not have been adjusted in fresh-start
reporting. These increases were partially offset by a decrease of ($10) million related to adjustments for errors identified in the fourth quarter of 2004 primarily related to application of the effects of the Plan.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(v) | As more information became available, further adjustments were made, decreasing deferred revenues related to certain capacity sales agreements by ($144) million. Other current
liabilities were decreased by ($28) million due to adjustments for errors identified in the fourth quarter of 2004 primarily related to application of the effects of the Plan and a decrease of ($72) million related to the reclassification of
unfavorable lease accruals from short-term to long-term liabilities. These decreases were partially offset by an increase related to the recognition of an unfavorable lease accrual of $91 million. Also, increases to property tax and other
liabilities of $20 million were reflected that should not have been adjusted in fresh-start reporting.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(w) | Includes adjustments related to the reclassification of unfavorable leases of $72 million from short-term to long-term liabilities.
|--- | -----------------------------------------------------------------------------------------------------------------------------------



F-32



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(5) Voluntary Reorganization under Chapter 11



Bankruptcy Proceedings



On July 21, 2002, WorldCom, Inc. and substantially all of its direct and indirect domestic subsidiaries (the Initial
Filers) filed voluntary petitions for relief in the Bankruptcy Court under Chapter 11. On November 8, 2002, the Predecessor Company filed voluntary petitions for an additional 43 of its domestic subsidiaries (collectively with the Initial
Filers, the Debtors). Under Chapter 11, certain claims against the Debtors in existence prior to the filing of the petitions for relief under the federal bankruptcy laws were stayed while the Debtors continued business operations as
Debtors-In-Possession (DIP). Prior to the application of fresh-start reporting, the Predecessor Companys December 31, 2003 consolidated balance sheet included related balances subject to compromise. However, the adoption of
fresh-start reporting resulted in the settlement of such balances based on the estimated payment amounts pursuant to the Plan with the difference recorded as a reorganization gain in the consolidated statement of operations for 2003.



The Predecessor Company filed its second amendment to the Plan on October 21,
2003, and this Plan was confirmed by the Bankruptcy Court on October 31, 2003. The Debtors continued to operate their businesses and manage their properties as Debtors-In-Possession through April 20, 2004. On April 20, 2004, the Plan was consummated
at which time the Predecessor Company merged with and into MCI and the separate existence of the Predecessor Company ceased to exist.



The Plan also required pursuant to Section 5.07 that the Board of Directors conduct a reasonable review of the Companys cash needs, including
amounts that may be necessary to satisfy all claims to be paid in cash pursuant to the Plan. Accordingly, the Board of Directors commenced a comprehensive review and sought information and guidance from management and financial advisors to determine
the amount of excess cash greater than $1 billion. On August 5, 2004, the Board of Directors completed its review of the Companys excess cash pursuant to Section 5.07 of the Plan and declared the amount of excess cash to be $2.2 billion. The
Board of Directors decided to distribute a portion of the excess cash through a return of capital to shareholders and declared cash dividends of $0.40 per share payable on September 15, 2004 and December 15, 2004. On February 11, 2005, the Board of
Directors, pursuant to Section 5.07 of the Plan and continuing its distribution of the Companys excess cash as a return of capital to shareholders, declared another cash dividend of $0.40 per share payable on March 15, 2005 to shareholders of
record on March 1, 2005.



Impacts of the Application of
the Plan



Shares Issued as a result of the Plan



In accordance with the Plan, the Company issued
approximately 296 million shares of MCI common stock to settle claims of debt holders and 10 million shares to settle its Securities and Exchange Commission civil penalty. The Company also reserved approximately 11 million shares of MCI common stock
for issuance under the new MRSP, of which approximately 8.6 million shares of restricted stock were granted on the Emergence Date. As contemplated in the Plan, the Company expected to issue approximately 20 million shares of MCI common stock
pursuant to the Plan to settle claims of general unsecured creditors. This amount has been reduced from 20 million to 5.4 million during 2004 as a result of the issuance of approximately 5.7 million shares, 0.5 million shares that will not be issued
related to certain unsecured creditors receiving cash in lieu of stock, and a change in estimate of 8.4 million shares that are no longer expected to be issued.



Creditor Settlements



During 2004, the Company paid approximately $1.4 billion in cash, and issued a total of approximately 5.7 million shares of common stock to unsecured
creditors in addition to the 296 million shares issued to secured



F-33



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



creditors, to satisfy certain provisions of the Plan. The Company continues its settlement process of outstanding claims. During the year ended December 31,
2004, the Company recorded net settlement gains of $148 million, including $88 million as a decrease to selling, general and administrative expenses, $32 million as an increase to revenues, and $28 million as a decrease to access cost expenses in
its consolidated statement of operations. The net settlement gains reflect the differences between original estimated claim amounts and settlement amounts finalized in the period and a change in estimate of $62 million (see Note 2).



The Company estimates that $777 million remains to be paid related to
outstanding creditor claims (including interest on tax obligations). This estimate is based on various assumptions and reflects the Companys judgment based upon its prior pre-petition claims settlement history and the terms of its Plan. If
these assumptions prove incorrect, actual payments could differ from the estimated amounts.



Debt and Interest expense



On the Emergence Date, the Company issued new Senior Notes (see Note 11).



No interest expense related to pre-petition debt was accrued following the Petition Date as none of the allowed claims against the Predecessor Company had underlying collateral in excess of the principal amount of
debt. If the Company had recognized interest on the basis of the amounts it was contractually required to pay, additional interest expense of $701 million, $2.2 billion and $970 million would have been recorded in 2004, 2003 and 2002, respectively.
As the Company adopted fresh-start reporting as of December 31, 2003, and all of the Predecessor Companys obligations were removed from its December 31, 2003 consolidated balance sheet, contractual interest has not been disclosed on the face
of the Companys consolidated statement of operations for 2004.



Reorganization items, net



Following
the filing of the Chapter 11 cases, the Predecessor Company commenced a comprehensive reorganization process, together with its financial and legal advisors, to review and analyze its businesses, owned properties, contracts and leases to determine
if any of these owned assets should be divested and which contracts and leases should be rejected or assumed during the Chapter 11 cases. The reorganization efforts included asset dispositions, sale of businesses, rejection of leases and contracts
and other operational changes.



The Company continued to incur
reorganization costs during 2004 and will continue to experience reorganization expenses for professional fees and other bankruptcy costs. As the Company adopted the provisions of fresh-start reporting on December 31, 2003, for accounting purposes,
reorganization expenses and changes in estimates to reorganization items previously accrued have been included in the appropriate captions within the 2004 consolidated statement of operations, primarily selling, general, and administrative expenses.
For 2004, the amounts of such expenses were $42 million and were for professional services related to the Companys bankruptcy proceedings.



F-34



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Reorganization items consisted of the following for the years ended December 31, 2003 and 2002 (in
millions):



|                                                                |  |                         |        |   |      |   |      |  
|--------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ---- | -
|                                                                |  | Predecessor Company     |       
|                                                                |  | Year Ended December 31, |       
|                                                                |  | 2003                    |        |   | 2002 |  
|Contract rejections                                             |  | $                       | (237   | ) |      | $ | (363 | )
|Write-off of debt issuance costs and original issue discounts   |  |                         |       |   |      |   | (200 | )
|Employee retention, severance and benefits                      |  |                         | (121   | ) |      |   | (97  | )
|Loss on disposal of assets                                      |  |                         | (22    | ) |      |   | (56  | )
|Lease terminations                                              |  |                         | (178   | ) |      |   | (64  | )
|Professional fees                                               |  |                         | (125   | ) |      |   | (43  | )
|Gains on settlements with creditors                             |  |                         | 56     |   |      |   | 14   |  
|Effects of the plan of reorganization and fresh-start reporting |  |                         | 22,324 |   |      |   |     |  
|Increase to fresh-start basis of assets and liabilities         |  |                         | 350    |   |      |   |     |  
|Interest earned by debtor entities during reorganization        |  |                         | 40     |   |      |   | 7    |  
|                                                                |  |                         |        |   |      |   |      |  
|Income (expense) from reorganization items, net                 |  | $                       | 22,087 |   |      | $ | (802 | )
|                                                                |  |                         |        |   |      |   |      |  



Included in
reorganization items, net for the year ended December 31, 2003 was the Predecessor Companys gain recognized from the effects of the Plan. The gain resulted from the difference between the Predecessor Companys carrying value of remaining
pre-petition liabilities, minority interests and redeemable preferred stock subject to compromise and the amounts to be distributed pursuant to the Plan. The gain from the effects of the Plan and the application of fresh-start reporting was
comprised of the following (in millions):



|                                                                                         |  |                            |        |  
|---------------------------------------------------------------------------------------- |  | -------------------------- | ------ | -
|                                                                                         |  | PredecessorCompany         |       
|                                                                                         |  | Year EndedDecember 31,2003 |       
|Discharge of liabilities subject to compromise:                                          |  |                            |        |  
|Long-term debt                                                                           |  | $                          | 30,679 |  
|Accrued interest                                                                         |  |                            | 580    |  
|Pre-petition accounts payable and accrued access costs                                   |  |                            | 1,561  |  
|8% Junior Subordinated Deferrable interest debentures, Series A, due to affiliated trust |  |                            | 750    |  
|Subsidiary preferred shares subject to mandatory redemption                              |  |                            | 660    |  
|Other liabilities, primarily the $2,250 SEC penalty                                      |  |                            | 3,302  |  
|                                                                                         |  |                            |        |  
|Total                                                                                    |  |                            | 37,532 |  
|Discharge of preferred stock subject to compromise                                       |  |                            | 436    |  
|Issuance of new common stock                                                             |  |                            | (8,472 | )
|Issuance of new debt, net of a $114 discount                                             |  |                            | (5,552 | )
|Accrual of amounts to be settled in cash                                                 |  |                            | (1,620 | )
|                                                                                         |  |                            |        |  
|Gain from the effects of the Plan                                                        |  | $                          | 22,324 |  
|                                                                                         |  |                            |        |  



F-35



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(6) Loss per Share



The Successor Company adopted a new capital structure as of December 31, 2003 upon the adoption of fresh-start reporting. On the Emergence Date, the
Company issued approximately 315 million shares of new MCI common stock, which included approximately 8.6 million shares of restricted stock. Under fresh-start reporting, these shares were reflected as outstanding as of December 31, 2003. In
addition, on the Emergence Date, the Company expected to issue 20 million additional shares pursuant to the Plan to unsecured creditors, which were not reflected as outstanding as of December 31, 2003, however all conditions of distribution had been
met. These shares were considered contingently issuable under SFAS No. 128, Earnings per Share. During 2004, share issuances, changes in distribution and changes in estimate reduced the amount of contingently issuable shares to
approximately 5.4 million as of December 31, 2004. The Companys calculations of weighted average shares outstanding for the year ended December 31, 2004 follows (in millions):



|                                                                          |  |                            |  
|------------------------------------------------------------------------- |  | -------------------------- | -
|                                                                          |  | SuccessorCompany           |  
|                                                                          |  | Year EndedDecember 31,2004 |  
|Weighted average common shares outstanding                                |  | 316.8                      |  
|Add: Weighted average shares contingently issuable to unsecured creditors |  | 11.7                       |  
|Less: Weighted average unvested restricted stock(1)                       |  | (7.7                       | )
|                                                                          |  |                            |  
|Weighted average common shares outstanding used in basic calculation      |  | 320.8                      |  
|Add: Weighted average unvested restricted stock(2)                        |  |                           |  
|                                                                          |  |                            |  
|Weighted average common shares outstanding used in diluted calculation    |  | 320.8                      |  
|                                                                          |  |                            |  

---

|(1) | As these shares were not vested during the period, they have been excluded from the weighted average share calculation used to determine basic loss per share.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Calculation of diluted shares excludes the unvested shares of restricted stock and the unissued shares related to the ESPP that would be anti-dilutive.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------



The Companys calculations of basic and
diluted (loss) income per share for the year ended December 31, 2004 follows (in millions, except per share amounts):



|                                                                                 |  |                            |        |  
|-------------------------------------------------------------------------------- |  | -------------------------- | ------ | -
|                                                                                 |  | SuccessorCompany           |       
|                                                                                 |  | Year EndedDecember 31,2004 |       
|(Loss) income, as reported:                                                      |  |                            |        |  
|Continuing operations                                                            |  | $                          | (4,028 | )
|Discontinued operations                                                          |  |                            | 26     |  
|                                                                                 |  |                            |        |  
|Net loss                                                                         |  | $                          | (4,002 | )
|                                                                                 |  |                            |        |  
|Basic and diluted (loss) income per share:                                       |  |                            |        |  
|Continuing operations                                                            |  | $                          | (12.56 | )
|Discontinued operations                                                          |  |                            | 0.08   |  
|                                                                                 |  |                            |        |  
|Loss per share                                                                   |  | $                          | (12.48 | )
|                                                                                 |  |                            |        |  
|Weighted average common shares outstanding used in basic and diluted calculation |  |                            | 320.8  |  
|                                                                                 |  |                            |        |  



F-36



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(7) Property, Plant and Equipment and Asset Retirement Obligations



Property, plant and equipment consisted of the following at December 31,
2004 and 2003 (in millions):



|                                           |  |                    |       |      |   |       
|------------------------------------------ |  | ------------------ | ----- | ---- | - | ------
|                                           |  | Successor Company 
|                                           |  | As of December 31,
|                                           |  | 2004               |       | 2003
|Land                                       |  | $                  | 194   |      | $ | 198   
|Furniture, fixtures, buildings and other   |  |                    | 2,527 |      |   | 3,512 
|Transmission equipment (including conduit) |  |                    | 2,153 |      |   | 3,800 
|Software                                   |  |                    | 651   |      |   | 429   
|Telecommunications equipment               |  |                    | 593   |      |   | 3,020 
|Construction in progress                   |  |                    | 653   |      |   | 579   
|                                           |  |                    |       |      |   |       
|                                           |  |                    | 6,771 |      |   | 11,538
|Less: Accumulated depreciation             |  |                    | 512   |      |   |      
|                                           |  |                    |       |      |   |       
|Property, plant and equipment, net         |  | $                  | 6,259 |      | $ | 11,538
|                                           |  |                    |       |      |   |       



In 2004, the Company
recorded impairment charges related to long-lived assets of $2.8 billion (see Note 3) and removed from its consolidated balance sheet approximately $2.0 billion in long-lived assets related to its sale of Embratel. For the years ended December 31,
2004, 2003 and 2002, depreciation expense was $1.7 billion, $2.2 billion and $2.6 billion, respectively.



As a result of fresh-start reporting, the accumulated depreciation of property, plant and equipment was removed to adjust the basis in the Predecessor
Companys assets to their net book value. The asset carrying values were also adjusted to their fair values which was included in the Successor Companys December 31, 2003 consolidated balance sheet (see Note 4). Additionally, as a result
of the 2004 impairment charges, accumulated depreciation was removed to establish a new cost basis for the Companys long-lived assets.



The following table summarizes activities related to the Companys liabilities for asset retirement obligations for the years ended December 31, 2004
and 2003 (in millions):



|                                                    |  |   |     |  
|--------------------------------------------------- |  | - | --- | -
|Balance as of January 1, 2003 (Predecessor Company) |  | $ | 275 |  
|Accretion                                           |  |   | 21  |  
|Additions                                           |  |   | 20  |  
|Dispositions                                        |  |   | (17 | )
|Revisions                                           |  |   | (16 | )
|                                                    |  |   |     |  
|Balance as of December 31, 2003 (Successor Company) |  |   | 283 |  
|Accretion                                           |  |   | 27  |  
|Additions                                           |  |   | 22  |  
|Dispositions                                        |  |   | (20 | )
|Revisions                                           |  |   | (11 | )
|                                                    |  |   |     |  
|Balance as of December 31, 2004 (Successor Company) |  | $ | 301 |  
|                                                    |  |   |     |  



(8) Intangible Assets



Definite-lived intangibles consist primarily of patents
and customer lists. The Companys indefinite-lived intangible assets consist of channel rights and tradenames.



F-37



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



As of January 1, 2002, pursuant to the adoption of SFAS No. 142, the Predecessor Company reported a
$32 million expense as a cumulative effect of a change in accounting principle in its consolidated statement of operations to reduce the carrying value of SkyTels indefinite-lived channel rights intangible asset to its estimated fair value of
$1 million.



As a result of fresh-start reporting, the
accumulated amortization was removed to adjust the basis in the Predecessor Companys assets to their net book value. In 2004, the Company recorded impairment charges related to its definite-lived and indefinite-lived intangible assets reducing
the carrying value by $478 million and $260 million, respectively. Additionally, as a result of the 2004 impairment charges, accumulated amortization was removed to establish a new cost basis for the Companys intangible assets. In 2002, the
Predecessor Company recorded impairment charges of $400 million to reduce goodwill to zero and intangible assets to their fair value of $1.6 billion (see Note 3).



The following table reflects amounts related to the Companys intangible assets subject to amortization (in millions):



|                  |  |                      |     |                          |   |                                     |  |                      |  |   |      
|----------------- |  | -------------------- | --- | ------------------------ | - | ----------------------------------- |  | -------------------- |  | - | -----
|                  |  | Successor Company   
|                  |  | As of December 31,  
|                  |  | 2004                 |     | 2003                    
|                  |  | GrossCarrying Amount |     | Accumulated Amortization |   | WeightedAverage Useful Lifein Years |  | GrossCarrying Amount
|Customer lists    |  | $                    | 577 |                          | $ | 54                                  |  | 4.5                  |  | $ | 1,163
|Other intangibles |  |                      | 127 |                          |   | 5                                   |  | 10.3                 |  |   | 182  
|                  |  |                      |     |                          |   |                                     |  |                      |  |   |      
|                  |  | $                    | 704 |                          | $ | 59                                  |  |                      |  | $ | 1,345
|                  |  |                      |     |                          |   |                                     |  |                      |  |   |      



The following table
reflects the carrying value of the Companys intangible assets that are not subject to amortization (in millions):



|               |  |                    |     |      |   |    
|-------------- |  | ------------------ | --- | ---- | - | ---
|               |  | Successor Company 
|               |  | As of December 31,
|               |  | 2004               |     | 2003
|Tradenames     |  | $                  | 335 |      | $ | 630
|Channel rights |  |                    | 11  |      |   | 7  
|Other          |  |                    |    |      |   | 103
|               |  |                    |     |      |   |    
|               |  | $                  | 346 |      | $ | 740
|               |  |                    |     |      |   |    



Intangible asset
amortization expense was $216 million, $136 million and $260 million for the years ended December 31, 2004, 2003 and 2002, respectively.



The following table reflects the estimated amortization of existing intangible assets over the future periods indicated (in millions):



|                          |  |   |    
|------------------------- |  | - | ---
|Years Ending December 31, |  |   |    
|2005                      |  | $ | 166
|2006                      |  |   | 165
|2007                      |  |   | 66 
|2008                      |  |   | 66 
|2009                      |  |   | 64 
|Thereafter                |  |   | 118



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(9) Marketable Securities and Investments



As of December 31, 2004 and 2003, short-term available-for-sale debt securities were $1.1 billion and $15 million,
respectively. As of December 31, 2004 and 2003, long-term investments (including the long-term portion of available-for-sale securities) were $116 million and $238 million, respectively, and include available-for-sale securities, equity and cost
method investments and derivative instruments.



Available-for-Sale Securities



As of
and for the years ended December 31, 2004 and 2003, available-for-sale securities consisted of the following (in millions):



|                                  |  |                                                |       |                                                |   |                       |  |   |                    |   |      |   |                      |  |                       |    |  |                      |   |  |   |    |   |  |   |   
|--------------------------------- |  | ---------------------------------------------- | ----- | ---------------------------------------------- | - | --------------------- |  | - | ------------------ | - | ---- | - | -------------------- |  | --------------------- | -- |  | -------------------- | - |  | - | -- | - |  | - | --
|                                  |  | Successor Company                              |       | Predecessor Company                           
|                                  |  | As of and For the Year Ended December 31, 2004 |       | As of and For the Year Ended December 31, 2003
|                                  |  | Cost                                           |       | GrossUnrealizedGains                           |   | GrossUnrealizedLosses |  |   | EstimatedFairValue |   | Cost |   | GrossUnrealizedGains |  | GrossUnrealizedLosses |    |  | Estimated Fair Value
|Short-term marketable securities: |  |                                                |       |                                                |   |                       |  |   |                    |   |      |   |                      |  |                       |    |  |                      |   |  |   |    |   |  |   |   
|Commercial paper                  |  | $                                              | 119   |                                                | $ |                      |  | $ |                   |   |      | $ | 119                  |  | $                     | 15 |  | $                    |  |  | $ |   |   |  | $ | 15
|Certificates of deposit           |  |                                                | 95    |                                                |   |                      |  |   |                   |   |      |   | 95                   |  |                       |   |  |                      |  |  |   |   |   |  |   |  
|U.S. government securities        |  |                                                | 810   |                                                |   |                      |  |   | (1                 | ) |      |   | 809                  |  |                       |   |  |                      |  |  |   |   |   |  |   |  
|Corporate bonds                   |  |                                                | 32    |                                                |   |                      |  |   |                   |   |      |   | 32                   |  |                       |   |  |                      |  |  |   |   |   |  |   |  
|                                  |  |                                                |       |                                                |   |                       |  |   |                    |   |      |   |                      |  |                       |    |  |                      |   |  |   |    |   |  |   |   
|Total                             |  |                                                | 1,056 |                                                |   |                      |  |   | (1                 | ) |      |   | 1,055                |  |                       | 15 |  |                      |  |  |   |   |   |  |   | 15
|Long-term investments:            |  |                                                |       |                                                |   |                       |  |   |                    |   |      |   |                      |  |                       |    |  |                      |   |  |   |    |   |  |   |   
|Equity investments                |  |                                                | 27    |                                                |   | 4                     |  |   | (1                 | ) |      |   | 30                   |  |                       | 11 |  |                      | 6 |  |   | (1 | ) |  |   | 16
|                                  |  |                                                |       |                                                |   |                       |  |   |                    |   |      |   |                      |  |                       |    |  |                      |   |  |   |    |   |  |   |   
|Total available-for-sale          |  | $                                              | 1,083 |                                                | $ | 4                     |  | $ | (2                 | ) |      | $ | 1,085                |  | $                     | 26 |  | $                    | 6 |  | $ | (1 | ) |  | $ | 31
|                                  |  |                                                |       |                                                |   |                       |  |   |                    |   |      |   |                      |  |                       |    |  |                      |   |  |   |    |   |  |   |   



Contractual maturities
of available-for-sale debt securities at December 31, 2004 were as follows (in millions):



|                          |  |      |       |                     |   |      
|------------------------- |  | ---- | ----- | ------------------- | - | -----
|                          |  | Cost |       | EstimatedFair Value
|Due in less than one year |  | $    | 803   |                     | $ | 802  
|Due in 1 to 5 years       |  |      | 253   |                     |   | 253  
|                          |  |      |       |                     |   |      
|                          |  | $    | 1,056 |                     | $ | 1,055
|                          |  |      |       |                     |   |      



The components of
investment income (loss) for each of the years ended December 31, 2004, 2003, and 2002 were as follows (in millions):



|                                                                |  |                  |   |                     |   |      |  |   |     |  
|--------------------------------------------------------------- |  | ---------------- | - | ------------------- | - | ---- |  | - | --- | -
|                                                                |  | SuccessorCompany |   | Predecessor Company |  
|                                                                |  | 2004             |   | 2003                |   | 2002 | 
|Gross realized gain from sales of available-for-sale securities |  | $                |  |                     | $ | 3    |  | $ | 6   |  
|Impairment charges                                              |  |                  |  |                     |   |     |  |   | (17 | )
|Net unrealized holding gain (loss)                              |  |                  | 2 |                     |   | 7    |  |   | (22 | )
|                                                                |  |                  |   |                     |   |      |  |   |     |  
|Investment income (loss)                                        |  | $                | 2 |                     | $ | 10   |  | $ | (33 | )
|                                                                |  |                  |   |                     |   |      |  |   |     |  



The Company
realized proceeds from sale of available-for-sale securities of $5 million and $10 million in 2003 and 2002, respectively.



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Interest Rate Risk. Fixed-income securities are subject to interest rate risk. The
fixed-income portfolio consists primarily of relatively short-term investments to minimize interest rate risk. The weighted-average maturity of all fixed-income securities held does not exceed 18 months. The final legal maturities of U.S. Government
Securities and corporate bonds do not exceed 3 years and 1 year, respectively.



Investments also consist primarily of investment grade securities to minimize credit risk. Securities include those issued by banks and trust companies that have long-term debt rated at least A-3 or
A according to Moodys Investors Service (Moodys) and Standard & Poors Corporation (S&P), respectively. Investments in commercial paper issued by corporations are rated P-1 or
A-1 or higher according to Moodys and S&P, respectively.



The Company is subject to restrictions on its ability to invest in certain investments, as described in its Senior Notes (see Note 11).



Equity Method Investments



Income (loss) of equity method investments is recorded as miscellaneous income (expense) in the consolidated statements of
operations. (Loss) income from equity method investments was approximately $(39) million, $32 million and $(5) million for the years ended December 31, 2004, 2003 and 2002, respectively. Dividend income was $1 million for the year ended December 31,
2004 as the Company received a dividend from an entity whose investment was previously reduced to zero.



In 2002, the Company reduced its investment in General Communications, Inc. (GCI) from 23% to 18%, but continued to account for this
investment under the equity method of accounting as the Company continued to maintain significant control over the entity. In December 2004, the Company further reduced its interest in GCI from 18% to 13% and received $31 million. The Company
recognized a $1 million loss in the 2004 consolidated statement of operations. As a result of the reduction in ownership, the Company has classified this investment as an available-for-sale security as of December 31, 2004.



On June 30, 2000, the Company entered into a Sponsor Credit Agreement with
Avantel S.A. (Avantel) and Banco Nacional de Mexico S.A. whereby the Predecessor Company loaned $96 million to Avantel. Interest was payable quarterly at the rate of London Interbank Offered Rate (LIBOR) plus 3%. In June
2002, the Predecessor Company determined that a portion of the loan was not recoverable and reduced the receivable to estimated fair value of $48 million. The difference between the carrying value and estimated fair value was charged to selling,
general and administrative expense in the consolidated statement of operations. In 2003, the Predecessor Company decreased the note receivable by $30 million as a result of equity losses in excess of the Predecessor Companys initial investment
carrying value.



As part of Avantels financing
arrangement with various lenders, the Predecessor Company pledged to Avantels lenders the Predecessor Companys Avantel shares, representing approximately a 45% equity ownership in the issued common stock of Avantel. Upon the occurrence
of an event of default by Avantel, the lenders may exercise their right to take ownership of the Predecessor Companys pledged shares and exercise all voting and corporate rights and powers pertaining to those shares. The lenders recourse
to the Predecessor Company is limited to its pledged shares.



As part of a potential sale of Avantel, the potential acquirers agreed to settle the outstanding note, receivables and payables due between the parties by requiring Avantel to make a single payment to the Company of $4 million. As a result
of this settlement agreement, the Company reduced its note receivable reserve by $12 million, which resulted in a $4 million net carrying value for all its receivables and payables related to Avantel. The Company recognized a $12 million benefit
from adjustments to loans with Avantel and recorded the benefit



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



as a credit in selling, general and administrative expenses in the consolidated statement of operations. In November 2004, the parties discussed changes to
be made to the corporate structure of Avantel in order to meet regulatory requirements. This restructuring will require the parties to amend certain terms in the sales agreement to reflect the new corporate structure. Therefore, the transaction
completion date contained in the sales agreement has been extended to June 30, 2005.



Cost Method Investments



Dividend income recorded on cost investments for the years ended December 31, 2004, 2003 and 2002 was $1 million in each year and was recorded in miscellaneous income (expense) in the consolidated statements of operations. Proceeds from the
sale of cost method investments in 2004 were $19 million, and the Company recorded a gain in its 2004 consolidated statement of operations for $8 million.



In 2004, 2003 and 2002, the Company determined that the carrying values of certain cost method investments exceeded their fair values and were impaired.
As such, the Company reduced the carrying value of its cost method investments in 2004, 2003 and 2002 by $1 million, $12 million and $8 million, respectively.



Derivative Instruments



The Company holds warrants to purchase additional common shares of companies in which it invests as well as warrants in companies in which it has no
investment. In addition, certain holdings of convertible preferred stock contain embedded derivatives that are not clearly and closely related to the stock. As of December 31, 2004 and 2003, the Company had $2 million and $3 million, respectively,
in derivative instruments as defined by SFAS No. 133 related to these investments. These derivative instruments were recorded at fair value in the consolidated balance sheet with the changes in fair values recorded in miscellaneous income (expense)
in the consolidated statements of operations. The Company recognized losses related to derivative instruments of $2 million and $5 million in 2003 and 2002, respectively.



Investments and derivative instruments (excluding foreign currency derivative instruments) consisted of the following at
December 31, 2004 and 2003 (in millions):



|                                                 |  |                                              |      |  |                    |     |  |   |    
|------------------------------------------------ |  | -------------------------------------------- | ---- |  | ------------------ | --- |  | - | ---
|                                                 |  |                                              |      |  | Successor Company 
|Investment Type                                  |  | Ownership Percentage As of December 31, 2004 |      |  | As of December 31,
|                                                 |  |                                              | 2004 |  | 2003              
|Equity method investments:                       |  |                                              |      |  |                    |     |  |   |    
|Avantel                                          |  | 45                                           | %    |  | $                  | 78  |  | $ | 120
|General Communication, Inc.                      |  |                                             | (1)  |  |                    |    |  |   | 38 
|Comunicaciones Mtel, S.A.                        |  |                                             |      |  |                    | 1   |  |   | 7  
|Other                                            |  |                                             |      |  |                    |    |  |   | 27 
|                                                 |  |                                              |      |  |                    |     |  |   |    
|Total equity investments                         |  |                                              |      |  |                    | 79  |  |   | 192
|Cost method investments                          |  |                                             | (2)  |  |                    | 5   |  |   | 27 
|Available-for-sale equity securities (long-term) |  |                                             |      |  |                    | 30  |  |   | 16 
|Derivative instruments                           |  |                                             |      |  |                    | 2   |  |   | 3  
|                                                 |  |                                              |      |  |                    |     |  |   |    
|Total investments                                |  |                                              |      |  | $                  | 116 |  | $ | 238
|                                                 |  |                                              |      |  |                    |     |  |   |    

---

|(1) | As of December 31, 2004, the Company had a 13% voting interest and a 2% ownership interest in GCI. As noted above, as a result of the reduction in ownership during
2004, the Company has classified the investment, with a carrying value of $11 million, as an available-for-sale security as of December 31, 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|(2) | Includes entities in which the Companys investment in economic and voting interests is less than 20% and for which the Company has no significant influence on
the operations of the entities.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(10) Other Current
Liabilities



Other current liabilities consisted of the
following at December 31, 2004 and 2003 (in millions):



|                                      |  |                    |       |      |   |      
|------------------------------------- |  | ------------------ | ----- | ---- | - | -----
|                                      |  | Successor Company 
|                                      |  | As of December 31,
|                                      |  | 2004               |       | 2003
|Income tax liabilities                |  | $                  | 1,519 |      | $ | 1,228
|Advance billings and deferred revenue |  |                    | 382   |      |   | 507  
|Other taxes                           |  |                    | 368   |      |   | 469  
|Accrued salaries and bonuses          |  |                    | 269   |      |   | 453  
|Accrued expenses                      |  |                    | 306   |      |   | 375  
|Accrued reorganization expenses       |  |                    | 81    |      |   | 228  
|Accrued SEC penalty                   |  |                    |      |      |   | 500  
|Other                                 |  |                    | 273   |      |   | 601  
|                                      |  |                    |       |      |   |      
|Total                                 |  | $                  | 3,198 |      | $ | 4,361
|                                      |  |                    |       |      |   |      



(11) Debt



Debt consisted of the following at December 31, 2004 and 2003 (in millions):



|                                                 |  |                    |       |      |   |       |  
|------------------------------------------------ |  | ------------------ | ----- | ---- | - | ----- | -
|                                                 |  | Successor Company  |      
|                                                 |  | As of December 31, |      
|                                                 |  | 2004               |       | 2003 |  
|6.908% Senior Notes Due 2007                     |  | $                  | 1,983 |      | $ | 1,983 |  
|7.688% Senior Notes Due 2009                     |  |                    | 1,983 |      |   | 1,983 |  
|8.735% Senior Notes Due 2014                     |  |                    | 1,699 |      |   | 1,699 |  
|Embratel debt obligations                        |  |                    |      |      |   | 1,574 |  
|Capital leases and other (maturing through 2023) |  |                    | 268   |      |   | 322   |  
|Discount on Senior Notes                         |  |                    |      |      |   | (114  | )
|                                                 |  |                    |       |      |   |       |  
|Total                                            |  |                    | 5,933 |      |   | 7,447 |  
|Less: current portion                            |  |                    | 24    |      |   | 330   |  
|                                                 |  |                    |       |      |   |       |  
|Long-term portion                                |  | $                  | 5,909 |      | $ | 7,117 |  
|                                                 |  |                    |       |      |   |       |  



Senior Notes Due
2007, 2009 and 2014



Pursuant to the Plan, the Company
issued approximately $2.0 billion principal amount of Senior Notes due 2007 (the 2007 Senior Notes), approximately $2.0 billion principal amount of Senior Notes due 2009 (the 2009 Senior Notes) and approximately $1.7 billion
principal amount of Senior Notes due 2014 (the 2014 Senior Notes and, together with the 2007 Senior Notes and the 2009 Senior Notes, the Senior Notes or Indentures). The Senior Notes are senior unsecured
obligations of the Company and are guaranteed by all of the existing and future domestic restricted subsidiaries of the Company.



The 2007 Senior Notes, the 2009 Senior Notes and the 2014 Senior Notes mature on May 1, 2007, May 1, 2009 and May 1, 2014, respectively. Interest on the
Senior Notes is payable semi-annually in arrears. The initial



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



interest rates of the Senior Notes were 5.908%, 6.688% and 7.735%, respectively. The initial interest rates were subject to a one-time reset after the
Company applied for and received ratings for the Senior Notes from Moodys and S&P. In December 2004, the Company received B2 and B+ ratings from Moodys and S&P, respectively. As such, the interest on the Senior Notes was
increased by 1% effective December 15, 2004.



Commencing on May
1, 2005 with respect to the 2007 Senior Notes, May 1, 2006 with respect to the 2009 Senior Notes and May 1, 2009 with respect to the 2014 Senior Notes, the Company will have the right to redeem some or all of the Senior Notes. The initial call
prices equal 102.454%, 102.844% and 103.3675% of the principal amount, respectively, plus accrued and unpaid interest. In addition, the call prices for the 2007 Senior Notes, 2009 Senior Notes and the 2014 Senior Notes thereafter decline ratably for
a period of one year, two years and three years, respectively, until the call price equals 100% of the principal amount. Prior to the call dates applicable to the Senior Notes, the Company may redeem some or all of such Senior Notes by paying a
make-whole premium based on U.S. Treasury rates. At any time prior to May 1, 2007, the Company may redeem, with the net cash proceeds of an equity offering, up to 35% of the aggregate principal amount of each series of Senior Notes at a
price equal to 100% of the principal amount plus a premium.



Upon the occurrence of a change of control, the Company will be obligated to make an offer to purchase all of the outstanding Senior Notes at a price equal to 101% of par value plus accrued interest. Also, the Company will be required to
make an offer to purchase the outstanding Senior Notes at a price equal to 100% of par value plus accrued interest with excess proceeds related to certain asset sales.



The Senior Notes are subject to typical affirmative and negative covenants for securities of this type, including covenants
that limit the amount of debt the Company may incur and restrict the Companys ability to make cash distributions, to invest in third parties and to engage in asset sales or other specified transactions.



The Senior Notes are subject to customary events of default including any
failure to make timely payments of interest or principal on the Senior Notes, failure to comply with the affirmative and negative covenants, the occurrence of certain events of bankruptcy involving the Company or the acceleration of other
outstanding indebtedness of the Company in excess of $100 million.



The Senior Notes are subject to covenants that limit the Companys ability to make certain cash distributions based on its cumulative net income or loss since the Issue Date. The impairment charges recorded during the third quarter of
2004 will not affect the Companys ability or its current plans to continue to distribute excess cash pursuant to Section 5.07 of the plan of reorganization to its shareholders in the form of a quarterly dividend until such excess cash is fully
utilized. In addition, if the excess cash is fully paid out to shareholders, any further dividends will be limited by the covenants in the indentures for the Senior Notes, which generally restrict dividends and certain other payments to an amount
equal to 50% of cumulative adjusted net income since April 2004 (or minus 100% of cumulative losses) plus proceeds of equity offerings. Consequently, further dividends may not be possible as long as the Senior Notes or other debt instruments with
similar covenants remain outstanding. As of December 31, 2004, the Company did not have any retained earnings available for distribution.



Debtor-in-Possession Facility and Letter of Credit Facilities



On July 23, 2002, the Predecessor Company negotiated its Debtor-in-Possession Agreement (DIP Agreement) for $750
million in Debtor-in-Possession Financing (the DIP Facility). The DIP Facility was amended to the amount of $1.1 billion and was approved by the Bankruptcy Court on October 15, 2002. In January 2004, the Company reduced the size of the
DIP Facility to $300 million. As of December 31, 2003, there were no advances outstanding under the DIP Facility and the Company had $77 million of letters of credit



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



outstanding under the DIP Facility. Additionally, the Company had $47 million in undrawn letters of credit that were issued under a pre-petition $1.6 billion
credit facility that was terminated as of the Petition Date, and Digex had a letter of credit of $1 million under a separate credit facility as of December 31, 2003.



On the Emergence Date, the DIP Facility was terminated. Approximately $100 million in letters of credit were rolled over to
new letter of credit facilities entered into on the Emergence Date with JPMorgan Chase Bank, Citibank, N.A. and Bank of America, N.A. (the Letter of Credit Facilities), including the remaining $17 million of undrawn letters of credit on
the pre-petition $1.6 billion credit facility. On October 12, 2004, the Commitment under the Letter of Credit Facilities was increased from $150 million to $300 million. In addition, the Company pays a facility fee under the Letter of Credit
Facilities equal to .05% per annum of the daily amount of the Commitment (whether used or unused). If any fee or other amount payable under any Letter of Credit Facility is not paid when due, additional interest equal to 2% per annum plus the
federal funds rate (determined in accordance with such Letter of Credit Facility) will be incurred on the overdue amount. The Letter of Credit Facilities mature in April 2005. As of December 31, 2004, under the Letter of Credit Facilities, the
Company had $137 million letters of credit outstanding, $162 million in availability, and $1 million reserved for issuance. During the year ended December 31, 2004, the Company pledged $144 million in cash as collateral for its outstanding letters
of credit that has been classified as restricted cash in other current assets in the consolidated balance sheet.



Other Debt



Prior to the Companys disposal of Embratel in 2004 (see Note 17), Embratels debt obligations were included in the Companys consolidated
balance sheet.



Embratels loans and financing were
principally comprised of credits from various banks and also from its suppliers of telecommunications equipment used to enhance domestic and international telecommunications services. The debt was mainly denominated in U.S. dollars, Brazilian Reais,
Japanese Yen and Euros and bore fixed interest rates ranging from 4% to 13% per annum, and variable interest rates ranging from 0.13% to 4% per annum over the LIBOR. The LIBOR rate at December 31, 2003 was 1.22%. Most of Embratels credit
agreements included cross-default provisions and cross-acceleration provisions that would permit the holders of such indebtedness to declare the indebtedness to be in default and to accelerate the maturity thereof if a significant portion of the
principal amount of Embratels debt was in default or accelerated. Embratels outstanding debt that contained such provisions totaled $1.1 billion as of December 31, 2003.



As described in Note 12, a portion of Embratels debt was partially hedged against the exchange variation of the
Brazilian Real as compared to the denomination of its outstanding debt through swap agreements.



The aggregate principal repayments required in each of the years ending December 31, 2005 through December 31, 2009 and thereafter related to the
Companys debt obligations are as follows (in millions):



|                          |  |   |      
|------------------------- |  | - | -----
|Years Ending December 31, |  |   |      
|2005                      |  | $ | 24   
|2006                      |  |   | 23   
|2007                      |  |   | 2,012
|2008                      |  |   | 26   
|2009                      |  |   | 2,008
|Thereafter                |  |   | 1,840
|                          |  |   |      
|Total                     |  | $ | 5,933
|                          |  |   |      



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(12) Financial Instruments



The Companys financial instruments include cash and cash equivalents, marketable securities, debt and equity
investments, trade payables, trade receivables, and long and short-term debt. The Company also holds derivative financial instruments which may be freestanding or embedded in another contract. The Companys derivative financial instruments
include derivatives embedded in the Companys holdings of redeemable preferred convertible stock, and warrants to purchase stock. Embratel had foreign currency swap agreements.



The carrying amount of the Companys cash and cash equivalents, marketable securities, trade receivables, trade
payables and cost method investments approximate fair value and are excluded from the table below. The Company estimates the fair value of its short and long-term debt and derivative instruments using prices quoted in active markets. For those short
and long-term debt instruments for which no active quoted market price is available, the fair value is estimated using current rates offered to the Company for debt of a similar maturity. Upon the Companys adoption of fresh-start reporting as
of December 31, 2003, carrying values were adjusted to fair value. The difference between carrying value and fair value of the Companys financial instruments as of December 31, 2003 relates to the inclusion of Embratels financial
instruments at that date. The carrying amount and fair values of financial instruments at December 31, 2004 and 2003 were as follows (in millions):



|                                                     |  |                    |       |            |   |                 |  |            |       |  |   |      
|---------------------------------------------------- |  | ------------------ | ----- | ---------- | - | --------------- |  | ---------- | ----- |  | - | -----
|                                                     |  | Successor Company 
|                                                     |  | As of December 31,
|                                                     |  | 2004               |       | 2003      
|                                                     |  | Carrying Amount    |       | Fair Value |   | Carrying Amount |  | Fair Value
|Short-term debt                                      |  | $                  | 24    |            | $ | 24              |  | $          | 330   |  | $ | 335  
|Long-term debt                                       |  |                    | 5,909 |            |   | 6,171           |  |            | 7,117 |  |   | 7,233
|Derivative assets excluding investments (see Note 9) |  |                    |      |            |   |                |  |            | 16    |  |   | 16   



Concentrations of
Credit RiskAs of December 31, 2004, the Company did not have any significant concentration of business transacted with a particular customer, supplier, lender or former affiliate that could, if suddenly adversely impacted, severely impact
its consolidated statements of operations. The Company is exposed to concentrations of credit risk from customers which are other telecommunications service providers. The Company invests its cash with several high-quality credit institutions.



Derivative Financial Instruments



The Company neither holds nor issues derivative financial instruments for
trading purposes nor does it account for any of its derivative instruments as hedges. The Company does hold certain convertible preferred stock securities that contain embedded derivatives that are not clearly and closely related to the stock. The
change in the fair value of the embedded derivatives has been recorded through earnings in miscellaneous income (expense). The Company holds warrants to purchase additional common shares of companies. The changes in fair value of the warrants, which
meet the definition of a derivative, have been recorded through earnings in miscellaneous income (expense).



The Predecessor Company issued $1.0 billion in dealer remarketable securities in 2000. These securities included an embedded written remarketing option
which met the definition of a derivative under SFAS No. 133 and required bifurcation. The remarketing option was cash settled in May 2002 for approximately $47 million with no impact to the consolidated statement of operations.



Embratel had loans denominated in currencies other than its functional
currency, primarily in U.S. dollars, and with variable rates of interest. Accordingly, Embratel was exposed to market risk from changes in foreign



F-45



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



exchange rates and interest rates. Embratel managed risk arising from fluctuations in currency exchange rates, which affected the amount of Brazilian Reais
necessary to pay the foreign currency denominated obligations, by using derivative financial instruments, primarily currency swaps. As of December 31, 2003, Embratel held outstanding currency swap contracts in the notional amount of $440 million to
reduce the impact on its obligations of devaluations of the Brazilian Real. All of Embratels currency swaps were recorded in the 2003 consolidated balance sheet at fair value with changes in fair value included in discontinued operations in
the Companys consolidated statements of operations.



Accounts Receivable Securitization Facility



On May 23, 2002, the Predecessor Company renewed its accounts receivable securitization program (the A/R Facility) which was an agreement to sell, on an ongoing basis, accounts receivable to a wholly-owned bankruptcy
remote subsidiary. The subsidiary subsequently sold receivables for proceeds of up to $1.5 billion. Prior to the renewal, the A/R Facility allowed the Company to sell receivables for proceeds of up to $2.2 billion. The Predecessor Company was
responsible for servicing the accounts receivable sold. The sale of the receivables was accounted for under SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. No amounts were sold or outstanding as of December 31, 2004 and 2003. The Predecessor Company recorded a loss on the sale of
accounts receivable of approximately $21 million for the year ended December 31, 2002, which was included in the consolidated statement of operations in other miscellaneous income (expense).



On June 28, 2002, the purchasing banks exercised their right to terminate the
A/R Facility and be paid amounts outstanding thereunder through collections of the receivables. All remaining amounts under the A/R Facility were paid in full after the Petition Date in July 2002 principally through collection of the receivables,
with the remaining balance paid as a requirement by the DIP Facility Lenders.



(13) Accumulated Other Comprehensive (Loss) Income



Accumulated other comprehensive (loss) income is comprised of foreign currency translation adjustments, unrealized gain (loss) on available-for-sale securities and the Companys minimum pension liability. The following table sets forth
the changes in accumulated other comprehensive (loss) income, net of tax, for each of the three years ended December 31, 2004 (in millions):



|                                                 |  |                                          |      |   |                                                             |   |     |                                      |  |   |                                                     |   |  |   |      |  
|------------------------------------------------ |  | ---------------------------------------- | ---- | - | ----------------------------------------------------------- | - | --- | ------------------------------------ |  | - | --------------------------------------------------- | - |  | - | ---- | -
|                                                 |  | Foreign Currency Translation Adjustments |      |   | Net Unrealized Gain (Loss) on Available-for-Sale Securities |   |     | Minimum Pension Liability Adjustment |  |   | Total Accumulated Other Comprehensive (Loss) Income |  
|Balance, January 1, 2002 (Predecessor Company)   |  | $                                        | (153 | ) |                                                             | $ | 20  |                                      |  | $ | (9                                                  | ) |  | $ | (142 | )
|Current year change                              |  |                                          | (156 | ) |                                                             |   | (22 | )                                    |  |   | (38                                                 | ) |  |   | (216 | )
|                                                 |  |                                          |      |   |                                                             |   |     |                                      |  |   |                                                     |   |  |   |      |  
|Balance, December 31, 2002 (Predecessor Company) |  |                                          | (309 | ) |                                                             |   | (2  | )                                    |  |   | (47                                                 | ) |  |   | (358 | )
|Current year change                              |  |                                          | 15   |   |                                                             |   | 7   |                                      |  |   |                                                    |   |  |   | 22   |  
|Application of fresh-start reporting (Note 4)    |  |                                          | 294  |   |                                                             |   | (5  | )                                    |  |   | 47                                                  |   |  |   | 336  |  
|                                                 |  |                                          |      |   |                                                             |   |     |                                      |  |   |                                                     |   |  |   |      |  
|Balance, December 31, 2003 (Successor Company)   |  |                                          |     |   |                                                             |   |    |                                      |  |   |                                                    |   |  |   |     |  
|Current year change                              |  |                                          | (1   | ) |                                                             |   | 2   |                                      |  |   | (23                                                 | ) |  |   | (22  | )
|                                                 |  |                                          |      |   |                                                             |   |     |                                      |  |   |                                                     |   |  |   |      |  
|Balance, December 31, 2004 (Successor Company)   |  | $                                        | (1   | ) |                                                             | $ | 2   |                                      |  | $ | (23                                                 | ) |  | $ | (22  | )
|                                                 |  |                                          |      |   |                                                             |   |     |                                      |  |   |                                                     |   |  |   |      |  



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MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(14) Shareholders Equity



Successor Company



The Predecessor Companys Plan became effective and it emerged from bankruptcy on April 20, 2004. The Predecessor Company applied fresh-start
reporting effective December 31, 2003 and, as a result, reflected all shares of WorldCom group and MCI group common stock, warrants to acquire WorldCom group common stock, Series D, E, and F Junior Convertible preferred stock and SMC Class A
preferred stock as cancelled (see Note 5). The equity structure of the Successor Company as of December 31, 2004 and 2003 is discussed below.



MCI Common Stock



On April 20, 2004, the Predecessor Company merged with and into the Successor Company and the separate existence of the Predecessor Company ceased to
exist. The Successor Company is a Delaware corporation and filed a new certificate of incorporation (New Articles). The New Articles authorized 3,000,000,000 shares of MCI common stock (common stock) with $0.01 par value.
During 2004, the Successor Company issued approximately 296 million shares of common stock to settle claims of debt holders, 10 million shares were issued to settle the SEC civil penalty, approximately 8.6 million shares were issued through the MCI,
Inc. 2003 Management Restricted Stock Plan and approximately 5.7 million shares were issued to unsecured creditors. Pursuant to the Plan, such stock had an agreed value of $8.5 billion. Accordingly, the Successor Company recorded common stock,
additional paid-in capital and deferred compensation of $3 million, $8.6 billion, and $170 million, respectively, in the consolidated balance sheet as of December 31, 2003 (see Note 4). In addition to any other approval required by law, any action
to effect a stock split or reverse stock split of the common stock within one year after April 20, 2004 shall require the approval of the holders of at least ninety-five percent (95%) of the shares of common stock then outstanding.



MCI Shareholder Rights Plan



On April 20, 2004, the Board of Directors of MCI declared a dividend of one
right (Right) for each outstanding share of MCI Common Stock to stockholders of record on that date. The Rights become exercisable upon the earlier of: (i) ten days following a public announcement by another person or group that it has
acquired beneficial ownership of 15% or more of the outstanding shares of common stock; or (ii) ten business days following the commencement of a tender offer or exchange offer to acquire beneficial ownership of 15% or more of the outstanding shares
of common stock. Certain qualifying tender offers made to all stockholders will not trigger the Rights. The Rights expire on the date of the 2007 annual meeting, unless earlier redeemed at a price of $.001 per Right. If the Rights become
exercisable, upon payment of the exercise price of the Right (which was initially set at $75.00 per right), holders may receive (a) MCI common stock with a market value equal to twice the exercise price or (b) common stock of an acquirer of MCI with
a market value equal to twice the exercise price.



Embratel Preferred and Common Stock



As
of December 31, 2003, there were 210 billion Embratel preferred shares outstanding and 124 billion common shares outstanding all without par value. The preferred shares were non-voting, except under limited circumstances, and were entitled to a
minimal non-cumulative dividend of 6% per annum resulting from the division of the subscribed capital by the number of shares or a dividend 10% higher than that paid to each ordinary share, whichever was higher. The preferred shares of Embratel had
a priority in relation to the common shares in the event of a liquidation of Embratel. The Embratel preferred shares and common shares not owned by the Company were classified as other minority interests in the Companys 2003 consolidated
balance sheet.



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Dividends



During 2004, the Company paid $254 million to shareholders pursuant to Section 5.07 of the Plan ($0.40 per share to
shareholders of record on September 1 and December 1). As the cash dividends were returns of shareholder capital, the dividends were recorded as reductions of additional paid-in capital in the shareholders equity section of the Companys
consolidated balance sheet.



Predecessor Company



The Predecessor Companys plan of reorganization became effective and
it emerged from bankruptcy on April 20, 2004. The Predecessor Company adopted fresh-start reporting effective December 31, 2003, at which time it effectively cancelled all shares of the following securities:



Common Stock



The Predecessor Company maintained two classes of common stock: WorldCom
group common stock and MCI group common stock. The rights of the holders of the WorldCom group common stock included one vote per share and one liquidation unit in the event of the dissolution of the Company. The MCI group common stock held variable
voting rights, was convertible to WorldCom group common stock at the option of the Board of Directors, and received 1/25of a liquidation unit in the event of dissolution. Neither class of common stock held the right to a dividend, although the Predecessor Company historically paid quarterly dividends on the MCI group common stock prior to the
Petition Date.



Dividends



The Predecessor Company did not declare nor pay any dividends in 2003.
Dividends paid or declared on both common and preferred securities during the year ended December 31, 2002 were as follows (in millions):



|                       |  |                              |     |                       |   |  
|---------------------- |  | ---------------------------- | --- | --------------------- | - | -
|                       |  | Predecessor Company         
|                       |  | Year Ended December 31, 2002
|Class of Stock         |  | CashDividendsPaid            |     | CashDividendsDeclared
|MCI group common stock |  | $                            | 142 |                       | $ | 
|Preferred Stock:       |  |                              |     |                       |   |  
|Series D               |  |                              | 5   |                       |   | 3
|Series E               |  |                              | 5   |                       |   | 3
|Series F               |  |                              | 7   |                       |   | 4



During July 2002, the
Predecessor Company paid dividends to existing holders of Series D, E, and F preferred securities in the form of common stock units. Each common stock unit included one share of WorldCom group common stock and 0.0515 shares of MCI group common
stock. The number of common stock units included in the dividend payment was determined based on a formula that considered average stock price and other factors. The amount declared in 2002 was $19 million of which $9 million was a stock dividend
and $10 million in cash. As a result of the Predecessor Companys bankruptcy filing, all preferred dividends to be paid after the Petition Date were stayed.



The Predecessor Companys Plan became effective and it emerged from bankruptcy on April 20, 2004. The Company adopted
fresh-start reporting effective December 31, 2003, at which time it effectively cancelled all shares of the Predecessor Companys redeemable preferred securities (see Note 4).



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Digex Series A Convertible Preferred Stock



On November 17, 2003, the Predecessor Company paid approximately $39 million
for the acquisition of the remaining interest in Digex. This payment included the purchase of the outstanding shares of Class A Common Stock of Digex not already owned for $1.00 per share. Also included in this payment was the purchase of the 50,000
outstanding shares of Series A Convertible Preferred Stock of Digex from Hewlett-Packard. Following the completion of the purchase, Digex became a wholly-owned subsidiary of the Predecessor Company.



WorldCom Shareholder Rights Plan



On March 7, 2002, the Board of Directors declared a dividend of one
preferred share purchase right (Group Right) for each outstanding share of WorldCom group common stock and for each outstanding share of MCI group common stock. Each Group Right entitled (i) the holder of WorldCom group common stock to
purchase one one-thousandth of a share of Series 4 Junior Participating Preferred Stock, par value $.01 per share, of the Predecessor Company at a price of $60.00, subject to adjustment, and (ii) the holder of MCI group common stock to purchase one
one-thousandth of a share of Series 5 Junior Participating Preferred Stock, par value $.01 per share, of the Predecessor Company at a price of $40.00, subject to adjustment. The Group Rights were cancelled on the Emergence Date.



(15) Stock-Based Compensation



Successor Company



MCI, Inc. 2003 Management Restricted Stock Plan



In connection with the confirmation of the Predecessor Companys bankruptcy, the Bankruptcy Court and the Predecessor
Companys creditors approved the adoption of the MRSP, which became effective on the Emergence Date. Under the MRSP, the Company is authorized to issue restricted stock and restricted stock unit awards with respect to up to 10,921,000 shares of
MCI Common Stock. The Company anticipated that restricted stock unit awards of 8,597,739 would be granted to employees on the Emergence Date, however, actual restricted stock awards granted totaled 8,533,988.



The MRSP is administered by the Compensation Committee of the Board of
Directors. The plan allows the Committee to make awards of restricted stock or restricted stock units to such officers and key employees of the Company as the Committee in its sole discretion determines to be responsible for the success and future
growth and profitability of the Company.



Awards under the MRSP
may be granted in any one or a combination of stock awards or stock units. Each type of grant is described below. The Compensation Committee will determine the vesting schedule for any stock awards and stock unit awards. The awards granted on the
Emergence Date vest quarterly over a period of three years. To the extent permitted by the Compensation Committee in award agreements, participants may exchange grants between stock units and stock awards.



Stock unit awards may be granted by the committee in its sole discretion. A
stock unit means a notional account representing one share of Common Stock. Recipients of stock unit awards will be eligible to receive dividend equivalents. A dividend equivalent is the right to receive the amount of any dividend paid
on the share of Common Stock underlying a stock unit, which will be payable in cash or in the form of additional stock units. On August 18, 2004, the individual award agreements under the MRSP were amended to allow for the conversion of restricted
stock units into shares of Restricted Stock (with one Stock Unit converting to one share of Restricted Stock) and the payment of dividends on unvested Restricted Stock shares. The conversion from Restricted Stock Units into shares of Restricted
Stock was not allowed for any units held by employees outside the U.S. or that had been deferred under the Deferred Stock Unit Plan.



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Stock awards may be granted by the committee in its sole discretion. A stock award is the transfer of
Common Stock with or without payment therefor. A stock award agreement will specify whether the participant will have, with respect to the shares of Common Stock subject to a stock award, all of the rights of a holder of shares of Common Stock of
the Company.



If there is any change in the Common Stock of the
Company through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, reverse stock split, split up, spin-off, combination of shares, exchange of shares, dividend in kind or other like change in capital structure or
distribution (other than normal cash dividends) to shareholders of the Company, an adjustment will be made to the shares available under the MRSP and to each outstanding stock unit such that each such award shall thereafter be exercisable for such
securities, cash and/or other property as would have been received in respect of the Common Stock subject to such stock unit had such award been exercised in full immediately prior to such change or distribution, and such an adjustment shall be made
successively each time any such change shall occur. In the event of any change or distribution described in the preceding sentence, in order to prevent dilution or enlargement of participants rights under the MRSP, the committee will have
authority to adjust, in an equitable manner, the number and kind of shares that may be issued under the MRSP, the number and kind of shares subject to outstanding awards, the purchase price applicable to outstanding awards, and the fair market value
of the Common Stock and other value determinations applicable to outstanding awards. Appropriate adjustments may also be made by the committee in the terms of any awards under the MRSP to reflect such changes or distributions and to modify any other
terms of outstanding awards on an equitable basis, including modifications of performance targets and changes in the length of performance periods, if applicable. In addition, the committee is authorized to make adjustments to the terms and
conditions of, and the criteria included in, awards in recognition of unusual or nonrecurring events affecting the Company or the consolidated financial statements of the Company, or in response to changes in applicable laws, regulations, or
accounting principles.



If there is a change in control of the
Company and any participant is terminated without cause (as such term is defined in the agreement pertaining to the award) within two years thereafter, all then outstanding stock units of such participant will immediately vest and become
settleable and any restrictions on stock awards of such participant will immediately lapse. Thereafter, all awards shall be subject to the terms of any agreement effecting the change in control. As of December 31, 2004, there were 3,358,222
restricted stock awards available for grant; however, on February 28, 2005, the Company granted 3,333,767 shares of restricted stock awards pursuant to the MRSP. The following table summarizes the activity for 2004 (shares in millions):



|                                       |  |                |   |  |                           |      
|-------------------------------------- |  | -------------- | - |  | ------------------------- | -----
|                                       |  | NumberofShares |   |  | WeightedAverageFair Value
|Awards outstanding, January 1, 2004(1) |  | 8.6            |   |  | $                         | 19.75
|Shares granted                         |  |               |   |  |                           |     
|Shares vested                          |  | (1.3           | ) |  |                           | 19.75
|Shares forfeited                       |  | (1.0           | ) |  |                           | 19.75
|                                       |  |                |   |  |                           |      
|Awards outstanding, December 31, 2004  |  | 6.3            |   |  | $                         | 19.75
|                                       |  |                |   |  |                           |      

---

|(1) | Initial awards granted on April 20, 2004 were considered outstanding as of December 31, 2003 as a result of fresh-start reporting (see Note 4).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------



The Company recorded $170 million of deferred
stock-based compensation upon the issuance of approximately 8.6 million shares of restricted stock that were granted on the Emergence Date based on the fair value of the Companys stock on the date of grant. The amount is being amortized over
the vesting period of three years on a straight-line basis. The Company recorded approximately $7 million and $29 million to costs of



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MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



services and products and selling, general and administrative expense, respectively, in its consolidated statement of operations for 2004. In addition, the
Company reversed approximately $20 million of deferred stock-based compensation related to shares that will not vest due to employee terminations during 2004.



MCI, Inc. Deferred Stock Unit Plan



Any participant may elect to defer receipt of all or a portion of the common stock subject to a stock award under the MRSP. Any such election must be made
in accordance with procedures established by the compensation committee and prior to the date the portion of the stock units to be deferred vests. Once an election to defer is made, it will be permanent and irrevocable. All distributions will be
made in the form of common stock.



A participants
deferred stock unit account will be credited with a number of notional shares of common stock equal to the number of stock units deferred as soon as practicable after the stock units would have been received by the participant absent the deferral
election. A participant will, at all times, be 100% vested in any amounts credited to his or her deferred stock unit account. The Company is not required to actually invest amounts credited to participants accounts in shares of common stock or
otherwise.



An amount equal to any regular cash dividend which
would have been received by a participant had the amounts credited to his or her deferred stock unit account actually been invested in shares of common stock will be paid to him or her.



MCI, Inc. 2003 Employee Stock Purchase Plan



The Companys bankruptcy plan included the establishment of the ESPP, which became effective on the Emergence Date.



Under the ESPP, which is a stock purchase plan qualified under
Section 423 of the Internal Revenue Code, up to 2,200,000 shares of Common Stock may be purchased by eligible employees of the Company through payroll deductions of up to 15% of their eligible compensation. The purchase price will be equal to the
lower of 85% of the market value of the stock at the beginning or at the end of each six-month offer period commencing July 1 and January 1 of each calendar year. The ESPP was modified in 2004 so that open market purchases were not required to fund
the plan as originally intended and the 2.2 million shares that were reserved upon emergence would be used.



If a participants employment with the Company or a participating subsidiary terminates, then unless the termination coincides with the last day of
an offering period, the payroll deductions allocated to his or her account for that offering period will be returned to him or her. All shares of common stock in the participants account will be distributed to him or her.



If the Company is a party to a sale of substantially all of its assets, or a
merger or consolidation, then the right to purchase shares of common stock under the ESPP will be subject to the agreement of sale, merger or other consolidation.



If there is a stock split, stock dividend or other change affecting the common stock, then the number and kind of securities
reserved under the ESPP will be appropriately adjusted by the Board of Directors. Appropriate adjustments will also be made to the purchase price for shares of common stock at the end of the offering period in which such an event occurs and other
terms of the ESPP.



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MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Contributions are held in escrow until the end of the offering period, when the accumulated
contributions will be applied to the distribution of shares. The ESPP is accounted for using the intrinsic-value-based method of APB Opinion No. 25 and no compensation expense was recorded. However, the ESPP does not meet the criteria as set forth
in SFAS No. 123 for noncompensatory plans and therefore is deemed compensatory for disclosure purposes only. During 2004, employees contributed $19 million to the ESPP, however, no shares were issued in 2004. The $19 million of employee
contributions was included in other current assets as restricted cash and is offset by $19 million in other current liabilities in the Companys consolidated balance sheet. As of December 31, 2004, the ESPP provided for the issuance of 2.2
million shares through open market purchases, from treasury shares and from authorized but unissued shares. In January 2005, the Company issued 1,531,531 shares to employees under the ESPP for the offering period ended December 31, 2004.



Embratel Plan



Embratel also maintained a separate stock option plan. The plan granted
Embratels directors and employees options to purchase Embratel preferred shares at the market value on the grant date. The options became exercisable over a three to four year period and expired ten years from the grant date. Until the third
quarter of 2001, options were granted with the exercise price adjusted for inflation until the exercise date using the General Market Price Index, became exercisable over a three-year period and expired 10 years after the date of grant. Pursuant to
the Embratel Plan, options granted could be exercised upon the occurrence of certain events, including a change in shareholder control of Embratel.



Summarized information relating to the Embratel Option Plan is as follows (in millions):



|                                                                           |  |                  |        |  
|-------------------------------------------------------------------------- |  | ---------------- | ------ | -
|                                                                           |  | Number ofOptions |       
|Balance January 1, 2002                                                    |  |                  | 6,265  |  
|Granted                                                                    |  |                  | 2,097  |  
|Expired or canceled                                                        |  |                  | (478   | )
|                                                                           |  |                  |        |  
|Balance December 31, 2002                                                  |  |                  | 7,884  |  
|Granted                                                                    |  |                  | 2,807  |  
|Exercised or sold                                                          |  |                  | (1,221 | )
|Expired or canceled                                                        |  |                  | (739   | )
|                                                                           |  |                  |        |  
|Balance December 31, 2003                                                  |  |                  | 8,731  |  
|                                                                           |  |                  |        |  
|Weighted average exercise price on December 31, 2002 (per thousand shares) |  | $                | 1.54   |  
|Weighted average exercise price on December 31, 2003 (per thousand shares) |  | $                | 2.06   |  



The fair values of the
Embratel Option Plan options granted during the years ended December 31, 2003 and 2002 have been estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:



|                        |  |                         |   |  |      |  
|----------------------- |  | ----------------------- | - |  | ---- | -
|                        |  | Year Ended December 31, |  
|                        |  | 2003                    |   |  | 2002 |  
|Expected volatility     |  | 57                      | % |  | 64   | %
|Risk free interest rate |  | 17                      | % |  | 27   | %
|Expected life (years)   |  | 5                       |   |  | 5    |  
|Dividend yield          |  |                        |   |  |     |  



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Predecessor Company



WorldCom Plans



The Predecessor Company adopted fresh-start reporting (see Note 4) as of December 31, 2003, at which time it effectively cancelled all common stock
options under the Predecessor Companys 1990 Stock Option Plan, the 1997 Stock Option Plan, the 1999 Stock Option Plan, and the MCI ESPP in addition to several other stock option plans assumed from various acquired companies, (collectively, the
Option Plans).



As of December 31, 2003 and 2002,
the Predecessor Company had authorized 1,025 million shares of WorldCom group common stock for issuance under the Option Plans, including the stock option plans assumed from various acquisitions. As of December 31, 2002, 611 million options were
available for issuance and approximately 414 million options had been granted under the Option Plans.



Effective with the recapitalization and issuance of the MCI group tracking stock in June 2001, each outstanding stock option under the Option Plans was
converted into a stock option to acquire shares of WorldCom group common stock having the same terms and conditions, except that the exercise price and the number of shares issuable upon exercise were divided and multiplied, respectively, by 1.0319.
The information presented below reflects this conversion ratio.



Information regarding options and warrants granted and outstanding is summarized below (in millions, except share price):



|                                                  |  |                               |   |  |                                |      
|------------------------------------------------- |  | ----------------------------- | - |  | ------------------------------ | -----
|                                                  |  | Number of Options andWarrants |   |  | Weighted AverageExercise Price
|Balance, January 1, 2002                          |  | 400                           |   |  | $                              | 29.85
|Granted                                           |  | 4                             |   |  |                                | 15.63
|Exercised                                         |  | (2                            | ) |  |                                | 6.94 
|Expired or canceled                               |  | (175                          | ) |  |                                | 37.99
|                                                  |  |                               |   |  |                                |      
|Balance, December 31, 2002                        |  | 227                           |   |  |                                | 23.49
|Granted                                           |  |                              |   |  |                                |     
|Exercised                                         |  |                              |   |  |                                |     
|Expired or canceled                               |  |                              |   |  |                                |     
|                                                  |  |                               |   |  |                                |      
|Balance, December 31, 2003 (Predecessor Company)  |  | 227                           |   |  | $                              | 23.49
|                                                  |  |                               |   |  |                                |      
|Application of fresh-start reporting (see Note 4) |  | (227                          | ) |  |                                |      
|                                                  |  |                               |   |  |                                |      
|Balance, December 31, 2003 (Successor Company)    |  |                              |   |  |                                |      
|                                                  |  |                               |   |  |                                |      



Approximately 114
million of the options expired or canceled in 2002 represent options cancelled as part of a voluntary exchange program in which employees could exchange previously granted stock options for options with new exercise prices, expiration dates and
vesting schedules to be issued at a future date that was to be six months and one day from the date of cancellation. The issuance of the new options never occurred due to the Companys bankruptcy filing. The options granted during 2002 were
granted at an average fair value of $3.24.



(16) Severance and Restructuring
Programs



The Company provides severance benefits to its
employees under its Severance Policy. These benefits vest when the employee is notified of his termination. The amount of benefit varies based on the employees term of



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



service. Severance benefits for employees who had been notified of termination on or before June 14, 2002 were paid in a lump-sum on the date of termination.
Severance benefits for terminations after that date are paid in equal bi-weekly payments for the duration of the severance benefits.



Throughout 2004, 2003 and 2002, the Company implemented workforce reductions on a company-wide basis, impacting all business segments. Amounts for
employee termination costs were recorded as announced to the affected employees and in accordance with the Companys Severance Policy. In 2004, 2003 and 2002, a total of 9,783, 4,194 and 15,774 employees were terminated; as of December 31,
2004, 247 employees included in the Companys terminations were still actively working. During 2004, approximately 2,300 employees voluntarily terminated their employment with the Company after receiving notification that their positions would
be eliminated. Terminations during 2003 and those completed after the Petition Date in 2002 were recorded in the consolidated statements of operations as reorganization items, net (see Note 5).



In 2004, 2003, and 2002, the Company identified certain properties related to
the closing of call centers which it planned to vacate and sublease, where possible. In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, the Company recorded charges of approximately
$20 million, $6 million, and $36 million as selling, general and administrative expenses in its consolidated statements of operations for the years ended December 31, 2004, 2003, and 2002, respectively.



The following table summarizes the Companys accrual of severance and
other restructuring expenses and payments during the years ended December 31, 2004, 2003 and 2002 (in millions):



|                                                      |  |           |      |   |       |   |     |  
|----------------------------------------------------- |  | --------- | ---- | - | ----- | - | --- | -
|                                                      |  | Severance |      |   | Other |  
|Balance as of January 1, 2002 (Predecessor Company)   |  | $         |     |   |       | $ | 65  |  
|Expenses                                              |  |           | 133  |   |       |   | 36  |  
|Cash payments during 2002                             |  |           | (101 | ) |       |   | (5  | )
|                                                      |  |           |      |   |       |   |     |  
|Balance as of December 31, 2002 (Predecessor Company) |  |           | 32   |   |       |   | 96  |  
|Expenses                                              |  |           | 58   |   |       |   | 6   |  
|Cash payments during 2003                             |  |           | (79  | ) |       |   | (10 | )
|                                                      |  |           |      |   |       |   |     |  
|Balance as of December 31, 2003 (Successor Company)   |  |           | 11   |   |       |   | 92  |  
|Expenses                                              |  |           | 163  |   |       |   | 20  |  
|Cash payments during 2004                             |  |           | (154 | ) |       |   | (4  | )
|                                                      |  |           |      |   |       |   |     |  
|Balance as of December 31, 2004 (Successor Company)   |  | $         | 20   |   |       | $ | 108 |  
|                                                      |  |           |      |   |       |   |     |  



(17) Discontinued Operations and
Assets Held for Sale



The Company has identified certain
non-core assets that it has determined are not part of its expected future operations. As such, these assets and businesses, once identified and qualifying for discontinued operations under SFAS No. 144, are reflected as discontinued operations in
the consolidated statements of operations and as assets held for sale in the consolidated balance sheet.



Discontinued Operations



In May 2002, the Predecessor Company committed to a plan to exit its WorldCom Wireless (Wireless) resale business because of continuing
operating losses. In July 2002, the Predecessor Company sold its wireless customer contracts, with no book value, to several wireless providers and resellers for a total of approximately $34 million, which was recognized as a gain in 2002. All
contracts were effectively transitioned to other providers by October 2002. During 2003, the Company recorded $12 million of revenue for amounts received during the period within discontinued operations.



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In June 2003, the Predecessor Company decided to dispose of its Multichannel Multipoint Distribution
Service (MMDS) business which included network equipment, licenses and leases utilized for the provision of wireless telecommunications services via Multichannel Multipoint Distribution Service. In June 2003, the Predecessor Company
received Bankruptcy Court approval to dispose of these assets, and this standalone entity was reclassified to discontinued operations under SFAS No. 144, and related revenues and expenses were reclassified to discontinued operations for all periods
presented.



On July 8, 2003, an Asset Purchase Agreement was
entered into with Nextel Spectrum Acquisition Corp. (Nextel) for the sale of substantially all of the assets of MMDS for $144 million in cash. In addition, the Company entered into a three-year extension of a customer contract between
subsidiaries of MCI and Nextel. The sale was approved by the Bankruptcy Court on July 22, 2003, as modified in certain respects. The Company completed the sale in May 2004 and received $144 million in cash for the assets, which was equal to their
carrying value which included a reserve for post-closing adjustments of $2 million. This reserve was subsequently settled for an immaterial amount resulting in the recognition of a gain on the sale of approximately $2 million.



In November 2003, the Board of Directors approved a plan to dispose of its
19% economic investment in Embratel, as well as other Latin American entities. On March 15, 2004, the Company announced that it had entered into a definitive agreement to sell its ownership interest in Embratel and other Latin American subsidiaries
to Telefonos de Mexico. On April 21, 2004, the agreement was amended which increased the cash purchase price to $400 million from $360 million. On April 27, 2004, these assets qualified as discontinued operations under SFAS No. 144 when the Company
received bankruptcy court approval for the sale. Accordingly, the Company has reclassified all revenues and expenses to discontinued operations for all periods presented. On July 23, 2004, the Company completed the divestiture for $400 million. As
of the sale date, all obligations under the Share Purchase Agreement were completed. The Company recognized a gain on the sale of approximately $12 million within discontinued operations in its consolidated statement of operations.



In June 2004, the Company decided to dispose of additional Latin American
operations and began the marketing of Proceda Tecnologia e Informatica S.A. (Proceda), an information technology outsourcing company in Brazil specializing in the following areas: data center services, mainframe services, hosting,
technical support, help desk management, integrated solutions, and e-business. These assets qualified as discontinued operations under SFAS No. 144 in June 2004 and, accordingly, the Company has reclassified all revenues and expenses to discontinued
operations for all periods presented. The operations were sold on December 2, 2004 for $3 million. The Company recognized an immaterial gain within discontinued operations in the consolidated statement of operations.



In June 2004, the Company commenced its internal evaluation related to
OzEmail Pty. Ltd (OzEmail), an Internet service provider providing dial-up, broadband and wireless products to Australian consumers and small business enterprises. In July 2004, the Company began to market OzEmail for sale. The related
assets qualified as discontinued operations under SFAS No. 144 in July 2004 and, accordingly, the Company has reclassified all revenues and expenses to discontinued operations for all periods presented and reclassified all assets and liabilities as
held for sale in the consolidated balance sheet as of December 31, 2004. On February 28, 2005, the Company completed the divestiture of OzEmail for approximately $86 million and will record a gain of approximately $80 million within
discontinued operations in its 2005 consolidated statement of operations.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The consolidated statements of operations reflect Wireless, MMDS, Embratel (and other companies
related to the transaction), Proceda, and OzEmail as discontinued operations for all periods presented. The combined operating results of these entities through the date of disposition and gains from the sale of assets are reflected in the
consolidated financial statements for the years ended December 31, 2004, 2003, and 2002 as follows (in millions):



|                                    |  |                         |        |   |                     |   |        |      |  |   |        |  
|----------------------------------- |  | ----------------------- | ------ | - | ------------------- | - | ------ | ---- |  | - | ------ | -
|                                    |  | SuccessorCompany        |        |   | Predecessor Company |  
|                                    |  | Year Ended December 31, |       
|                                    |  | 2004                    |        |   | 2003                |   |        | 2002 | 
|Revenues                            |  | $                       | 1,535  |   |                     | $ | 2,372  |      |  | $ | 3,574  |  
|Operating expenses                  |  |                         | (1,431 | ) |                     |   | (2,142 | )    |  |   | (3,597 | )
|Other expense                       |  |                         | (77    | ) |                     |   | (7     | )    |  |   | (556   | )
|Minority interests (expense) income |  |                         | (4     | ) |                     |   | (172   | )    |  |   | 173    |  
|Income tax (expense) benefit        |  |                         | (11    | ) |                     |   | (94    | )    |  |   | 204    |  
|Gain on sale of assets              |  |                         | 14     |   |                     |   |       |      |  |   |       |  
|                                    |  |                         |        |   |                     |   |        |      |  |   |        |  
|Net income (loss)                   |  | $                       | 26     |   |                     | $ | (43    | )    |  | $ | (202   | )
|                                    |  |                         |        |   |                     |   |        |      |  |   |        |  



Assets Held for
Sale



OzEmail



As of December 31, 2004, assets held for sale in the consolidated balance
sheet relate to OzEmail. Assets include cash and other assets, and liabilities represent accounts payable and accrued access costs. Additionally, related cumulative translation adjustments are included as part of shareholders equity.



Douglas Lake



The Predecessor Company deemed Mr. Bernard J. Ebbers (Mr.
Ebbers), its former Chief Executive Officer, to be in default of the terms of a Promissory Note he signed to the Company dated April 29, 2002. The Promissory Note was secured by Predecessor Company stock as well as Mr. Ebbers equity
interests in certain enterprises. On May 29, 2003, the Predecessor Company entered into an agreement to sell one of Mr. Ebbers properties, Douglas Lake, and on July 1, 2003, the Bankruptcy Court approved the sale of the property. As a result,
the Predecessor Company reclassified the asset in its consolidated balance sheet as held for sale effective July 1, 2003 under SFAS No. 144. The carrying value of the property was $54 million as of December 31, 2003. The property was
sold in February 2004 for approximately $50 million, which was net of disposal costs. The Company received approximately $37 million in net proceeds in connection with the closing, and expects to receive additional proceeds of up to approximately
$13 million, pending the resolution of certain tax matters and the final determination of any indemnification claims made by the purchaser pursuant to the purchase agreement. The Company recorded the estimated loss of $4 million as selling, general
and administrative expenses in the 2004 consolidated statement of operations.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Embratel



During 2004, Embratel qualified for discontinued operations and was ultimately sold as noted above. The removal of these
assets in 2004 had a significant effect on the Companys consolidated balance sheet. As Embratel was removed from the consolidated balance sheet during 2004, actual amounts removed from the consolidated balance sheet would have reflected
current year operations through the date of disposal. The following condensed balance sheet of Embratel as of December 31, 2003 identifies the assets and liabilities included in the Successor Companys consolidated balance sheet as of December
31, 2003. These amounts represent the Companys basis in the investment and includes adjustments for U.S. GAAP, consolidation eliminations, and purchase accounting (in millions):



|                                                 |  |                         |      
|------------------------------------------------ |  | ----------------------- | -----
|                                                 |  | Successor Company      
|                                                 |  | As of December 31, 2003
|ASSETS                                           |  |                         |      
|Cash, cash equivalents and marketable securities |  | $                       | 595  
|Receivables                                      |  |                         | 556  
|Other current assets                             |  |                         | 125  
|                                                 |  |                         |      
|Total current assets                             |  |                         | 1,276
|Property, plant and equipment                    |  |                         | 1,986
|Non-current assets                               |  |                         | 958  
|                                                 |  |                         |      
|Total assets                                     |  | $                       | 4,220
|                                                 |  |                         |      
|LIABILITIES AND EQUITY                           |  |                         |      
|Current portion of long-term debt                |  | $                       | 289  
|Current liabilities                              |  |                         | 948  
|                                                 |  |                         |      
|Total current liabilities                        |  |                         | 1,237
|Long-term debt                                   |  |                         | 1,285
|Other long-term liabilities                      |  |                         | 149  
|Minority interest                                |  |                         | 1,149
|                                                 |  |                         |      
|Total liabilities                                |  |                         | 3,820
|MCIs investment                                 |  |                         | 400  
|                                                 |  |                         |      
|Total liabilities and equity                     |  | $                       | 4,220
|                                                 |  |                         |      



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(18) Leases and Commitments



The Company leases office facilities, office equipment and telecommunications equipment under non-cancelable operating
leases having initial terms of more than one year. Various facility leases include renewal options, and most leases include provisions for rent escalation to reflect increased operating costs or require the Company to pay certain maintenance and
utility costs. Included with telecommunication facilities are contractual commitments with incumbent local phone companies that provide ports to the Company and obligations under right-of-way and franchise agreements with various entities. At
December 31, 2004, future minimum payments under non-cancelable leases and commitments and capital lease obligations were as follows (in millions):



|                   |  |                                  |       |                               |   |       |  |   |       |  |   |      |  
|------------------ |  | -------------------------------- | ----- | ----------------------------- | - | ----- |  | - | ----- |  | - | ---- | -
|                   |  | Operating Leases and Commitments |       | Capital Leases                |  
|                   |  | Office Facilities and Equipment  |       | Telecommunications Facilities |   | Total | 
|As of December 31, |  |                                  |       |                               |   |       |  |   |       |  |   |      |  
|2005               |  | $                                | 806   |                               | $ | 319   |  | $ | 1,125 |  | $ | 49   |  
|2006               |  |                                  | 761   |                               |   | 135   |  |   | 896   |  |   | 49   |  
|2007               |  |                                  | 696   |                               |   | 99    |  |   | 795   |  |   | 52   |  
|2008               |  |                                  | 198   |                               |   | 85    |  |   | 283   |  |   | 41   |  
|2009               |  |                                  | 123   |                               |   | 76    |  |   | 199   |  |   | 38   |  
|Thereafter         |  |                                  | 390   |                               |   | 498   |  |   | 888   |  |   | 198  |  
|                   |  |                                  |       |                               |   |       |  |   |       |  |   |      |  
|Total              |  | $                                | 2,974 |                               | $ | 1,212 |  | $ | 4,186 |  |   | 427  |  
|                   |  |                                  |       |                               |   |       |  |   |       |  |   |      |  
|Interest           |  |                                  |       |                               |   |       |  |   |       |  |   | (159 | )
|                   |  |                                  |       |                               |   |       |  |   |       |  |   |      |  
|Total              |  |                                  |       |                               |   |       |  |   |       |  | $ | 268  |  
|                   |  |                                  |       |                               |   |       |  |   |       |  |   |      |  



Rental expense under
operating leases was $945 million, $1.1 billion and $1.8 billion for the years ended December 31, 2004, 2003 and 2002, respectively. The reduction in expense relates to the Companys reduction in leases due to rejections during the Chapter 11
proceedings.



Property, plant and equipment assets under
capital leases were $56 million and $91 million as of December 31, 2004 and 2003, respectively. Fresh-start reporting as of December 31, 2003 and the 2004 impairment charges eliminated the accumulated depreciation on these assets (see Note 7). As of
December 31, 2004, accumulated depreciation on these assets was $6 million. The Company recorded $9 million, $6 million, and $6 million in depreciation expense on these assets for the years ended December 31, 2004, 2003 and 2002, respectively.



The Company and Electronic Data Systems Corporation
(EDS) have negotiated dual outsourcing agreements. The Company has outsourced portions of its information technology operations to EDS, pursuant to which EDS has assumed responsibility for the Companys information technology system
operations at several locations. As of December 31, 2004, the contractual obligation associated with this contract was estimated to be approximately $1.6 billion in the aggregate and has been included with office facilities and equipment in the
table above.



The Company has contractual obligations to
utilize network facilities from local exchange carriers with terms greater than one year. The Company has assessed its minimum exposure related to penalties to exit the contracts and, as of December 31, 2004, the obligation associated with this
liability was estimated to be approximately $1.4 billion and has been excluded from the table above.



The Company is obligated to pay a portion of maintenance and repair costs for certain cable systems which it uses to transmit voice, data and Internet
traffic. As no minimum obligation is identified under these



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



agreements, the Company has excluded these obligations from the commitment table above. However, the Company estimates these obligations as of December 31,
2004 to be approximately $733 million over the contract period, which can exceed 20 years. During 2004, 2003, and 2002, the Company incurred expenses under these agreements of $40 million, $93 million, and $124 million, respectively.



As of December 31, 2004, the Company had various miscellaneous purchase
commitments for services in the aggregate amount of $137 million.



(19)
Contingencies



The filing of the Chapter 11 cases
automatically stayed proceedings in private lawsuits relating to the Debtors pre-petition claims. Claims arising after the Petition Date were not discharged on emergence.



Right-of-Way Litigation. Prior to the Petition Date, the Predecessor Company was named as a defendant in five
putative nationwide and twenty-five putative state class actions involving fiber optic cable on railroad, pipeline and utility rights-of-way. The complaints allege that the railroad, utility and/or pipeline companies from which the Predecessor
Company obtained consent to install its fiber optic cable held only an easement in the right-of-way, and that the consent of the adjoining landowners holding the fee interest in the right-of-way did not authorize installation. The complaints allege
that because such consent was not obtained, the fiber optic network owned and operated by the Predecessor Company trespasses on the property of putative class members. The complaints allege causes of action for trespass, unjust enrichment and
slander of title, and seek injunctive relief, compensatory damages, punitive damages and declaratory relief. By the Petition Date, twenty-two putative class actions remained pending. In the remaining eight cases, class certification had been denied
and/or the action had been dismissed. These cases were stayed as a result of the Predecessor Companys bankruptcy filing, initially as a result of the automatic stay provisions of the Bankruptcy Code, and presently by operation of the discharge
injunction incorporated into the modified Second Amended Joint Plan of Reorganization. To date, the Bankruptcy Court has denied all motions to lift the automatic stay or the discharge injunction.



Certain of the right-of -way plaintiffs filed individual and/or putative
class proofs of claim in the bankruptcy proceedings. To date, the Bankruptcy Court has denied all pending motions to certify classes with respect to these proofs of claim, and has declined to extend the bar date to allow the late-filing of claims by
unnamed class members. As a result of these rulings, the Companys exposure in these matters has been substantially reduced.



The Company also is litigating in the Bankruptcy Court, and in several federal appellate courts, the question of whether the discharge injunction
contained in the Modified Second Amended Joint Plan of Reorganization bars the initiation or continuation of actions outside of the Bankruptcy Court based on the continued presence of the fiber optic cable after the Companys discharge from
bankruptcy. To date, one federal appellate court has agreed with the Companys position, and the Bankruptcy Court recently issued decisions in two right-of-way cases finding that any further prosecution after the bankruptcy violates the
discharge injunction.



The Predecessor Company executed a
settlement agreement in February 2002 regarding all right-of-way litigation in Louisiana, and in June 2002 regarding all other railroad right-of-way litigation nationwide. However, following the Petition Date, the Predecessor Company opted out of
the nationwide settlement agreement because the Oregon court did not approve it, and the Predecessor Company did not elect to proceed to seek approval in Illinois. During the bankruptcy proceedings, the Predecessor Company rejected the Louisiana
right-of-way settlement agreement, but has since entered into an agreement in principle to implement the Louisiana agreement as a pre-petition claim against the Predecessor Company. The Company accrued for its estimate to settle the pre-petition
litigation as of December 31, 2004 and 2003.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



State Tax. In conjunction with the Predecessor Companys bankruptcy claims resolution
proceeding, certain states have filed claims concerning the Predecessor Companys state income tax filings and its approach to related-party charges. To date, various states have filed proofs of claims in the aggregate amount of approximately
$750 million. In addition, the State of Mississippi has filed a claim in the aggregate amount of approximately $2 billion. The Company is in discussions with the appropriate state taxing officials on these and other similar issues related to state
income taxes owed by the Company and its subsidiaries.



On
March 17, 2004, the Commonwealth of Massachusetts on behalf of itself and thirteen other states filed a motion to disqualify KPMG LLP (KPMG) from serving as the Companys accountant, auditor and tax advisor on the grounds that KPMG
is not disinterested as required by Section 327(a) of the Bankruptcy Code. The Company believes that the filing of this motion is merely a litigation tactic and that the motion has no merit. The bankruptcy court held hearings on the motion, at the
conclusion of which the bankruptcy court took the matter under advisement. On June 30, 2004, the bankruptcy court denied this motion and the states have appealed the order denying the motion.



Other. The Company provides indemnifications of varying scope and size
to certain customers against claims of intellectual property infringement made by third parties arising from the use of its products as are usual and customary in the Companys business. Additionally, the Company provides indemnifications in
certain lease agreements in which it agrees to absorb the increased cost to the lessor resulting from an adverse change in certain tax laws, which are usual and customary in leases of these types. The Company evaluates estimated losses for such
indemnifications under FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. In relation to the indemnifications in certain
lease agreements, as the indemnifications are contingent on tax law changes, the maximum amount of loss cannot be estimated until there is actually a change in tax law. To date, the Company has not incurred significant costs as a result of such
obligations and has not accrued any liabilities related to such indemnifications in the consolidated financial statements.



In the normal course of business, the Company is subject to other proceedings, lawsuits and claims, including proceedings under government laws and
regulations related to environmental and other matters. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, the Company is unable to ascertain the ultimate aggregate amount of monetary
liability or financial impact with respect to these matters at December 31, 2004. While these matters could affect operating results when resolved in future periods, based on current information, the Company does not believe any monetary liability
or financial impact would be material to its consolidated financial condition, results of operations, or cash flows. The Company, where appropriate, accrued for its estimates to settle outstanding litigation as of December 31, 2004 and 2003.



(20) Income Taxes



The Company is subject to U.S. federal, state, local and foreign income
taxes. The domestic and foreign components of (loss) income from continuing operations before provision for income taxes for the years ended December 31, 2004, 2003 and 2002 were as follows (in millions):



|                                                             |  |                         |        |   |                     |   |        |      |  |   |        |  
|------------------------------------------------------------ |  | ----------------------- | ------ | - | ------------------- | - | ------ | ---- |  | - | ------ | -
|                                                             |  | SuccessorCompany        |        |   | Predecessor Company |  
|                                                             |  | Year Ended December 31, |       
|                                                             |  | 2004                    |        |   | 2003                |   |        | 2002 | 
|Domestic                                                     |  | $                       | (2,652 | ) |                     | $ | 25,648 |      |  | $ | (9,213 | )
|Foreign                                                      |  |                         | (856   | ) |                     |   | (2,870 | )    |  |   | 512    |  
|                                                             |  |                         |        |   |                     |   |        |      |  |   |        |  
|(Loss) income from continuing operations before income taxes |  | $                       | (3,508 | ) |                     | $ | 22,778 |      |  | $ | (8,701 | )
|                                                             |  |                         |        |   |                     |   |        |      |  |   |        |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                                                                                                                                                                                                                                                                       |  |                         |       |    |                     |   |       |      |  |   |       |   
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | ----- | -- | ------------------- | - | ----- | ---- |  | - | ----- | --
|The significant components of the provision for (benefit from) income taxes related to
continuing operations for the years ended December 31, 2004, 2003 and 2002 were as follows (in millions):                                                                                                       | 
|                                                                                                                                                                                                                                                                                                       |  | Successor Company       |       |    | Predecessor Company |  
|                                                                                                                                                                                                                                                                                                       |  | Year Ended December 31, |      
|                                                                                                                                                                                                                                                                                                       |  | 2004                    |       |    | 2003                |   |       | 2002 | 
|Current:                                                                                                                                                                                                                                                                                               |  |                         |       |    |                     |   |       |      |  |   |       |   
|Federal                                                                                                                                                                                                                                                                                                |  | $                       | 116   |    |                     | $ |      |      |  | $ | (154  | ) 
|State and local                                                                                                                                                                                                                                                                                        |  |                         | 332   |    |                     |   | 80    |      |  |   | 78    |   
|Foreign                                                                                                                                                                                                                                                                                                |  |                         | 142   |    |                     |   | 343   |      |  |   | (89   | ) 
|                                                                                                                                                                                                                                                                                                       |  |                         |       |    |                     |   |       |      |  |   |       |   
|Total current expense (benefit)                                                                                                                                                                                                                                                                        |  |                         | 590   |    |                     |   | 423   |      |  |   | (165  | ) 
|Deferred:                                                                                                                                                                                                                                                                                              |  |                         |       |    |                     |   |       |      |  |   |       |   
|Federal                                                                                                                                                                                                                                                                                                |  |                         | (206  | )  |                     |   | 29    |      |  |   | 154   |   
|State and local                                                                                                                                                                                                                                                                                        |  |                         | 120   |    |                     |   | 2     |      |  |   | 11    |   
|Foreign                                                                                                                                                                                                                                                                                                |  |                         | 16    |    |                     |   | (141  | )    |  |   | 258   |   
|                                                                                                                                                                                                                                                                                                       |  |                         |       |    |                     |   |       |      |  |   |       |   
|Total deferred (benefit) expense                                                                                                                                                                                                                                                                       |  |                         | (70   | )  |                     |   | (110  | )    |  |   | 423   |   
|                                                                                                                                                                                                                                                                                                       |  |                         |       |    |                     |   |       |      |  |   |       |   
|Income tax expense related to continuing operations                                                                                                                                                                                                                                                    |  | $                       | 520   |    |                     | $ | 313   |      |  | $ | 258   |   
|                                                                                                                                                                                                                                                                                                       |  |                         |       |    |                     |   |       |      |  |   |       |   
|                                                                                                                                                                                                                                                                                                      
|A reconciliation of differences between the U.S. federal income tax statutory rate and the
effective income tax rates for (loss) income from continuing operations, which includes federal, state, local and foreign income taxes for the years ended December 31, 2004, 2003 and 2002, is as follows: | 
|                                                                                                                                                                                                                                                                                                       |  | SuccessorCompany        |       |    | Predecessor Company |  
|                                                                                                                                                                                                                                                                                                       |  | Year Ended December 31, |      
|                                                                                                                                                                                                                                                                                                       |  | 2004                    |       |    | 2003                |   |       | 2002 | 
|U.S. federal statutory tax (benefit) expense rate                                                                                                                                                                                                                                                      |  |                         | (35.0 | )% |                     |   | 35.0  | %    |  |   | (35.0 | )%
|Goodwill                                                                                                                                                                                                                                                                                               |  |                         |      |    |                     |   |      |      |  |   | 0.3   |   
|Foreign income inclusion                                                                                                                                                                                                                                                                               |  |                         | 0.3   |    |                     |   | 3.0   |      |  |   | 3.2   |   
|Penalties                                                                                                                                                                                                                                                                                              |  |                         |      |    |                     |   |      |      |  |   | 8.6   |   
|State income taxes (net of federal benefit)                                                                                                                                                                                                                                                            |  |                         | 11.7  |    |                     |   | 0.2   |      |  |   | 0.7   |   
|Valuation allowance                                                                                                                                                                                                                                                                                    |  |                         | 23.1  |    |                     |   | (43.3 | )    |  |   | 18.7  |   
|Foreign taxes                                                                                                                                                                                                                                                                                          |  |                         | 13.7  |    |                     |   | 4.9   |      |  |   | 1.7   |   
|Other                                                                                                                                                                                                                                                                                                  |  |                         | 1.0   |    |                     |   | 1.6   |      |  |   | 4.8   |   
|                                                                                                                                                                                                                                                                                                       |  |                         |       |    |                     |   |       |      |  |   |       |   
|Effective tax rate                                                                                                                                                                                                                                                                                     |  |                         | 14.8  | %  |                     |   | 1.4   | %    |  |   | 3.0   | % 
|                                                                                                                                                                                                                                                                                                       |  |                         |       |    |                     |   |       |      |  |   |       |   



The effective tax rate
is the provision for income taxes expressed as a percentage of (loss) income from continuing operations before income taxes. The 2004 effective rate is different than the expected federal statutory rate of 35% primarily due to the tax benefits of
losses from continuing operations offset by an increase in (i) the valuation allowance attributable to current year losses without benefit, (ii) the provision for state income taxes, including current accruals and changes in tax reserves, (iii)
the provision for foreign taxes, including changes in tax reserves and increases in dollar-denominated exposure due to the weakness of the U.S. dollar and the denomination of liabilities in local currencies, and (iv) the effect of interest expense
on tax contingencies. The increase in the Companys effective tax rate for 2004 as compared to 2003 and 2002 relates to increases in its provisions for state income taxes and foreign taxes based on revised estimates of exposures from on-going
negotiations with state taxing authorities and increases in the foreign tax reserves primarily for additional interest expense on existing contingencies, unfavorable foreign exchange fluctuation, and new contingencies. These increases were recorded
as current period expenses and resulted in higher income tax expense expressed as a percentage to arrive at the effective tax rate for 2004 together with lower pre-tax income/loss. See State Tax Claims and Other Tax
Contingencies for additional information.



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MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In accordance with fresh-start reporting, any future changes in income tax contingencies that existed
as of the fresh-start date would typically be adjusted to intangible assets, until exhausted, then to additional paid-in capital and not through income. As a result of the impairment of intangible assets in the third quarter of 2004, the Company
will record net increases in income tax contingencies existing at the fresh-start date, that would otherwise have served to increase the carrying value of intangible assets above their fair value, as additional income tax expense. The Company will
record any decreases in pre-acquisition valuation allowance (not offset with decreases in the related gross deferred tax asset) to intangible assets. For the fourth quarter of 2004, the Company recognized $189 million of net additional expense
attributable to changes in pre-fresh start federal, state and foreign tax contingencies, foreign exchange gains/losses and related interest. Additionally, the Company recognized $13 million of reductions of pre-fresh-start foreign income tax
valuation allowances which was offset to intangibles.



The
2003 effective rate is lower than the expected statutory rate of 35% primarily due to a decrease in the valuation allowance. The net amount of the valuation allowance decreased significantly in 2003 primarily as a result of the establishment of the
deferred tax liability for the effects of the Plan.



The 2002
effective rate is lower than the expected federal statutory rate of 35% primarily due to the tax benefits of losses from continuing operations offset by (i) an SEC civil penalty and other permanent items non-deductible for tax purposes, (ii) an
increase in the valuation allowance attributable to losses from operations for which no tax benefit was recorded, and (iii) the utilization of NOLs, which were carried back for five years as a result of a change in tax law.



Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes, and the impact of available NOL carryforwards. The components of the deferred tax assets and liabilities were as
follows as of December 31, 2004 and 2003 (in millions):

|                                                     |  |                    |        |   |      |   |        |  
|---------------------------------------------------- |  | ------------------ | ------ | - | ---- | - | ------ | -
|                                                     |  | Successor Company  |       
|                                                     |  | As of December 31, |       
|                                                     |  | 2004               |        |   | 2003 |  
|Deferred tax assets:                                 |  |                    |        |   |      |   |        |  
|Depreciation, amortization and impairment            |  | $                  | 1,988  |   |      | $ | 3,836  |  
|Intangibles                                          |  |                    | 639    |   |      |   | 905    |  
|Provision for doubtful accounts                      |  |                    | 216    |   |      |   | 420    |  
|Net operating loss carryforwards                     |  |                    | 308    |   |      |   | 2,824  |  
|Accrued liabilities                                  |  |                    | 376    |   |      |   | 523    |  
|Investments                                          |  |                    | 30     |   |      |   | 727    |  
|Embratel deferred tax assets                         |  |                    |       |   |      |   | 781    |  
|Tax credits                                          |  |                    |       |   |      |   | 306    |  
|Other                                                |  |                    | 311    |   |      |   | 722    |  
|                                                     |  |                    |        |   |      |   |        |  
|Total deferred tax assets                            |  |                    | 3,868  |   |      |   | 11,044 |  
|Less: valuation allowance                            |  |                    | (1,904 | ) |      |   | (1,150 | )
|                                                     |  |                    |        |   |      |   |        |  
|Net deferred tax assets                              |  | $                  | 1,964  |   |      | $ | 9,894  |  
|                                                     |  |                    |        |   |      |   |        |  
|Deferred tax liabilities:                            |  |                    |        |   |      |   |        |  
|Basis difference in subsidiary stock                 |  |                    | 1,005  |   |      |   |       |  
|Basis difference in trade accounts receivable        |  |                    | 444    |   |      |   |       |  
|Basis difference in intercompany accounts receivable |  |                    | 448    |   |      |   |       |  
|Basis difference in other assets                     |  |                    | 79     |   |      |   |       |  
|Embratel deferred tax liabilities                    |  |                    |       |   |      |   | 140    |  
|Effects of bankruptcy plan                           |  |                    |       |   |      |   | 9,113  |  
|Other                                                |  |                    | 148    |   |      |   | 250    |  
|                                                     |  |                    |        |   |      |   |        |  
|Total deferred tax liabilities                       |  | $                  | 2,124  |   |      | $ | 9,503  |  
|                                                     |  |                    |        |   |      |   |        |  
|                                                     |  |                   
|Net deferred tax (liabilities) assets                |  | $                  | (160   | ) |      | $ | 391    |  
|                                                     |  |                    |        |   |      |   |        |  



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MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In 2004, the Company estimated the effect of amending its returns for 1999 through 2003 to reflect
the impact of the restatement of the Companys previously issued consolidated financial statements. Additionally, the Company analyzed its deferred tax balances as of December 31, 2003 in light of its amended returns. Both the amended returns
and the analysis of the deferred tax balances resulted in a net decrease in deferred tax balances of $598 million as of December 31, 2003, offset by a corresponding decrease in valuation allowance. Changes to the December 31, 2003 deferred tax
balances included increases to (i) depreciation, amortization and impairment (including a reclassification of line installation costs from a deferred tax liability) of $2.3 billion, (ii) intangibles of $368 million, (iii) accrued liabilities of $382
million, and (iv) investments of $195 million. Additionally, changes to the December 31, 2003 deferred tax balances included decreases to (i) net operating loss of $3.1 billion, (ii) provision for doubtful accounts of $504 million, and (iii) net
other deferred taxes of $250 million. These changes have been reflected in the above table to facilitate comparability, however, reclassifications have not been reflected in the December 31, 2003 consolidated balance sheet.



During the third quarter of 2004, the Company impaired its indefinite-lived
intangible assets, recognizing an impairment charge of $260 million. As a result of the impairment charge, the Company recognized a $99 million tax benefit which reduced the Companys long-term deferred income tax liability as the impairment
reduced the difference between the book and tax basis.



Deferred tax assets are reduced by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all
evidence, both positive and negative, the Company determined that it is more likely than not that a portion of the Companys deferred tax assets will not be realized and that a valuation allowance of $1.9 billion, $1.2 billion and $11.4 billion
was deemed necessary as of December 31, 2004, 2003 and 2002, respectively. For the years ended December 31, 2004, 2003, and 2002, the Companys decision to establish a valuation allowance was primarily based on negative evidence of cumulative
losses in recent years.



The ability of the Company to use its
NOL carryforwards and other tax attributes may be subject to certain statutory and other limitations after the Emergence Date. One such limitation is the required reduction of certain tax attributes due to the cancellation of indebtedness. The
United States Treasury Department and the Internal Revenue Service (IRS) have issued temporary regulations that provide for tax attribute reduction when the debt of a member of a consolidated group is forgiven. Upon adoption of
fresh-start reporting, the Company established a deferred tax liability to account for the cancellation of indebtedness resulting on emergence. Following the application of the attribute reduction rules, the Company estimates all of its federal NOL,
capital loss and credit carryforwards and the majority of its state NOL and credit carryforwards will be eliminated and will not be available for use in future periods. Accordingly, the Company estimates (i) none of its federal NOLs, capital loss or
credit carryforwards and (ii) $557 million of state NOLs (which expire from 2008 through 2024) will remain following application of the attribute reduction rules. The Company also has $788 million of NOLs in foreign jurisdictions ($639 million of
NOLs which do not expire and $149 million of NOLs which expire between 2005 and 2012) which are not subject to the attribute reduction rules.



Additionally, as a result of the application of the attribute reduction rules, the Company estimates it will reduce its tax basis in current assets
(including trade accounts receivable, intercompany accounts receivable and other current assets) by $1.5 billion and non-current assets (including property, plant and equipment, intangibles and other long-term assets) by $5.7 billion. Furthermore,
due to certain federal income tax recapture provisions, the Company recorded a deferred income tax liability of $1.0 billion attributable to the future recognition of taxable gain on subsidiary stock. The Company further estimates an additional $1.1
billion would arise for the future recognition of taxable gain on subsidiary stock if certain of the Companys subsidiaries appreciate in value and the financial accounting basis exceeds the tax basis in such stock. These liabilities were
determined using estimates of fair market value and the Companys separate legal entity accounting records and are therefore



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MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



subject to limitations as set forth in the discussion of other tax contingencies below, including the risk of adjustments resulting from review by tax
authorities. If appreciation of the Companys subsidiaries occurs as described above, or adjustments result from review by taxing authorities, the additional tax liability of $1.1 billion may be required to be recorded either as an additional
deferred tax liability or as a reduction to deferred tax assets. This would also result in the reduction in the valuation allowance as shown in the table above by up to approximately $1.1 billion. Absent adjustments by taxing authorities, future
taxable gain would only become a current tax obligation in the event of the disposition or certain reorganizations of the appreciated subsidiaries by the Company.



Moreover, the Company expects that its future ability to utilize any remaining NOLs generated before the ownership
change that occurred with respect to the Company when it emerged from bankruptcy, and possibly its future ability to utilize built-in loss deductions, if any, that existed as of the Emergence Date, will be limited by Internal
Revenue Code Section 382 (Section 382). If certain requirements are met, the Company could qualify for a bankruptcy exception to the general Section 382 limitations. Under this exception, the Companys future ability to
utilize any remaining NOLs and built-in loss deductions would not be limited, but the amount of the Companys pre-Emergence Date NOLs would be reduced, prior to the tax attribute reduction described in the preceding paragraph, by an amount
equal to a specified portion of the Companys pre-change interest expense. In addition, if the Company were to undergo a second ownership change within two years after the Emergence Date, it would be prohibited from utilizing any
pre-change NOLs or built-in loss deductions. Even if the requirements for qualification for the bankruptcy exception are met, the Company may elect not to have the bankruptcy exception apply. Because it is unclear whether the Company will meet the
requirements to qualify for the bankruptcy exception, and because the Company currently expects in any event to elect out of the bankruptcy exception in order to avoid the effects of a second ownership change that would occur as a result
of the agreement entered into by the Company and Verizon (see Note 26), the Company currently expects to be subject to the Section 382 limitations. Such limitations are a significant reason for the Companys 2004 current federal tax expense of
$116 million and corresponding increase in taxes payable.



Prior to the Job Creation and Worker Assistance Act of 2002 (the JCWA Act), enacted by Congress on March 9, 2002, NOLs could be carried back to reclaim U.S. federal income taxes paid in the two years preceding the tax
year in which the NOLs were generated, and could be utilized to offset 90% of the alternative minimum tax liability. The JCWA Act extended the carryback period to the five years preceding the tax year in which the NOL was generated, and allowed
alternative minimum tax NOL to be carried back to reclaim up to 100 percent of alternative minimum tax liability. As a result of this legislation change, the Predecessor Company received a tax refund in 2002 and recognized $210 million of U.S.
federal income tax benefit due to the carryback of NOLs which were previously reduced by a valuation allowance.



On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the AJC Act). The AJC Act provided for nearly $137
billion in tax cuts over the next ten years. Significant provisions of the AJC Act included a repeal of the extraterritorial income tax provisions that were declared illegal by the World Trade Organization; relief for U.S. manufacturer; reform of
the taxation of multinational corporations; targeted tax cuts; and fairly broad anti-abuse and tax shelter disclosure rules and penalties. The Companys analysis of this legislation concludes that it will have no material impact on its
consolidated financial statements.



State Tax
Claims. In conjunction with the Predecessor Companys bankruptcy claims resolution proceeding, certain states have filed claims concerning the Predecessor Companys state income tax filings and its approach to related-party charges. To
date, various states have filed proofs of claims in the aggregate amount of approximately $750 million. In addition, the State of Mississippi has filed a claim in the aggregate amount of approximately $2 billion. The Company accrues for its income
tax contingencies when it determines that conditions exist that it is probable that a liability has been incurred and the amounts can be reasonably estimated.



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



As of December 31, 2004 and 2003, the Company had accrued income tax liabilities related to state income tax contingencies, including claims regarding
related-party charges and other state income tax matters, of $408 million and $220 million, respectively. The increase in accrual for state income tax contingencies from December 31, 2003 to December 31, 2004 was primarily due to revised estimates
of exposures from ongoing negotiations with state taxing authorities and interest accruals. These contingencies are subject to ongoing discussions with the appropriate state taxing officials on these and other issues related to state income taxes.
The outcome of these discussions could result in actual cash payments that differ from the amount accrued.



Other Tax Contingencies. As of December 31, 2004, the Companys management has determined the Company had a material weakness in its internal
controls around income tax accounting. A component of this material weakness was that the Company did not have adequate controls and procedures with respect to separate legal entity accounting records for the Company and its domestic subsidiaries
for 2004 and prior years. The Company will use its separate legal entity accounting records, which constitute the best available information, as a basis to comply with certain U.S. federal and state tax filing requirements for 2004 and prior years.
The Companys tax accruals are based on the aforementioned separate company financial information.



In addition to the state contingencies relating to the Predecessor Companys approach to related-party charges, the Company has reserved for
additional tax contingencies attributable to federal, state and foreign jurisdiction tax return filings. Such contingencies are for tax liabilities and related interest attributable to the ongoing audits of the Companys federal tax returns
(the Companys federal tax returns from 1992 through 2003 are still open and subject to IRS examination, as are numerous state, local and foreign income tax filings for recent years), as well as certain tax positions taken on federal, state and
foreign income tax returns for which the statutes remain open. The Companys reserves for these additional tax contingencies are based on the aforementioned separate company financial information. The Company accrues for its income tax
contingencies when it determines that conditions exist that it is probable that a liability has been incurred and the amounts can be reasonably estimated. These contingencies are subject to review and final settlements with federal and foreign tax
authorities, the outcome of which could result in actual cash payments that differ from the amount accrued. As of December 31, 2004, the Company had accrued liabilities for income tax contingencies of $137 million and $820 million for federal and
foreign income taxes, respectively. As of December 31, 2003, the Company had accrued liabilities for income tax contingencies of $164 million and $778 million for federal and foreign income taxes, respectively. Such amounts include changes in
estimates, accruals for interest, and in the case of foreign income tax contingencies, significant impacts of unfavorable foreign exchange fluctuation.



During 2004, the Company undertook a series of domestic and international restructurings to reduce the number of legal entities within the group, simplify
the Companys organizational structure and enhance operational efficiencies. Additional restructurings are planned for 2005. The majority of these restructurings have been effected through tax-free reorganizations. Where such transactions are
taxable, however, the Company has estimated and provided for such tax liability. The Companys provision for additional tax liabilities attributable to such reorganizations is based on the aforementioned separate company financial information.



The Companys tax filings and reserves for the
contingencies described in the preceding paragraphs including the aforementioned limitations on separate legal entity accounting records, are subject to audit, and the respective taxing authorities may contest the information on which these tax
filings are based and may make additional assessments beyond that which has already been provided for.



The Company considers earnings relating to remaining foreign subsidiaries and affiliates to be indefinitely reinvested outside of the United States and,
accordingly, no U.S. deferred income taxes have been recorded with respect to such earnings. Should the earnings be remitted as dividends, the Company may be subject to additional U.S. taxes, net of allowable foreign tax credits. The Company has
determined that it is not practicable to estimate the amount of any additional taxes which may be payable on the undistributed earnings.



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table includes the changes related to the Companys tax valuation allowances for
the years ended December 31, 2004, 2003 and 2002 (in millions):



|     |  |                                |        |           |   |            |  |   |              |   |  |                         |      |   |  |   |       
|---- |  | ------------------------------ | ------ | --------- | - | ---------- |  | - | ------------ | - |  | ----------------------- | ---- | - |  | - | ------
|     |  | Successor Company             
|     |  | Balance at Beginning of Period |        | Additions |   | Deductions |  |   | Otherchanges |   |  | Balance at End ofPeriod
|2004 |  | $                              | 1,150  |           | $ | 754        |  | $ |             |   |  | $                       |     |   |  | $ | 1,904 
|     | 
|     |  | Predecessor Company           
|     |  | Balance at Beginning of Period |        | Additions |   | Deductions |  |   | Otherchanges |   |  | Balance at End ofPeriod
|2003 |  | $                              | 11,445 |           | $ |           |  | $ | (9,958       | ) |  | $                       | (337 | ) |  | $ | 1,150 
|2002 |  |                                | 9,497  |           |   | 1,728      |  |   |             |   |  |                         | 220  |   |  |   | 11,445



Included in the 2003
Other changes are adjustments reflecting the Companys aforementioned estimated effect of amending its returns for 1999 through 2003 as well as the Companys analysis of certain deferred tax balances.



(21) Pension and Other Postretirement Benefit Plans



The Company maintains two defined benefit pension plans, the MCI
Communications Corporation Plan and WorldCom International Data Services, Inc. Plan (collectively, the MCI Plans), which cover substantially all MCI employees who became WorldCom employees as a result of the Predecessor Companys
merger with MCI Communications, Inc. and who work 1,000 hours or more in a year. Effective January 1, 1999, participants of the MCI Plans no longer earn future compensation credits, although interest accruals and benefit vesting continues. Annual
service cost for the MCI Plans is determined using the projected unit credit actuarial method, and prior service cost is amortized on a straight-line basis over the average remaining service period of the employees. As a result of fresh-start
reporting, all unamortized prior service costs were eliminated and the generation of any future amounts subsequent to December 31, 2003 will be amortized under the same method as discussed above. As of December 31, 2004, there were approximately
21,000 participants in these plans.



The accumulated benefit
obligation of the MCI Communications Corporation Plan exceeded the fair value of its assets by $99 million and $73 million at December 31, 2004 and 2003, respectively.



The WorldCom International Data Services, Inc. Plan held assets in excess of the accumulated benefit obligation of $15
million and $16 million as of December 31, 2004 and 2003, respectively.



In 2004 and 2003, the Company recorded net curtailment and settlement gains related to workforce reductions of $27 million and $39 million, respectively.



The Company also maintains a postretirement benefit plan that provides health and life insurance benefits to union members
who are either currently retired or in active employee status and have satisfied certain eligibility requirements. Actuarially determined postretirement benefit costs are accrued as active employees earn these benefits. As of December 31, 2004, the
Companys postretirement plan had approximately 300 participants. The postretirement plan offers a prescription drug benefit and as such is subject to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
Act) and has accounted for these benefits as required by FASB Staff Position Financial Accounting Standard 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization
Act of 2003.Measures of the APBO or net periodic postretirement benefit costs do not reflect any amount associated with the Medicare subsidy because the Company is unable to conclude if benefits provided by the plan are actuarially
equivalent to Medicare Part D under the Act.





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MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Additionally, Embratel sponsored a defined benefit plan and a postretirement medical assistance plan
(collectively, the Embratel Benefit Plans). Contributions to the defined benefit and postretirement medical assistance plans were based on actuarial studies prepared by independent actuaries under Brazilian regulations, and actuarial
studies were reviewed periodically to determine whether adjustments to the contributions were necessary. In addition, Embratel had a defined contribution plan to which it contributed.



Benefit Obligations



The following table sets forth changes in the accumulated benefit obligations for the MCI Plans and Embratel Benefit Plans for the years ended December
31, 2004 and 2003 (in millions):



|                                                             |  |                 |     |   |                        |   |    |                 |  |   |               |   |  |   |     |  
|------------------------------------------------------------ |  | --------------- | --- | - | ---------------------- | - | -- | --------------- |  | - | ------------- | - |  | - | --- | -
|                                                             |  | MCI Plans       |     |   | Embratel Benefit Plans |  
|                                                             |  | PensionBenefits |     |   | OtherBenefits          |   |    | PensionBenefits |  |   | OtherBenefits |  
|Change in Benefit Obligations                                |  |                 |     |   |                        |   |    |                 |  |   |               |   |  |   |     |  
|Benefit obligations at January 1, 2003 (Predecessor Company) |  | $               | 444 |   |                        | $ | 31 |                 |  | $ | 253           |   |  | $ | 79  |  
|Interest cost                                                |  |                 | 28  |   |                        |   | 2  |                 |  |   | 33            |   |  |   | 11  |  
|Actuarial loss (gain)                                        |  |                 | 25  |   |                        |   | 5  |                 |  |   | 18            |   |  |   | (2  | )
|Benefits paid                                                |  |                 | (11 | ) |                        |   | (3 | )               |  |   | (28           | ) |  |   | (3  | )
|Foreign currency exchange                                    |  |                 |    |   |                        |   |   |                 |  |   | 57            |   |  |   | 17  |  
|Settlement gain                                              |  |                 | (39 | ) |                        |   |   |                 |  |   |              |   |  |   |    |  
|Assumption changes                                           |  |                 | 6   |   |                        |   |   |                 |  |   | 15            |   |  |   |    |  
|                                                             |  |                 |     |   |                        |   |    |                 |  |   |               |   |  |   |     |  
|Benefit obligations at December 31, 2003 (Successor Company) |  | $               | 453 |   |                        | $ | 35 |                 |  | $ | 348           |   |  | $ | 102 |  
|                                                             |  |                 |     |   |                        |   |    |                 |  |   |               |   |  |   |     |  
|Interest cost                                                |  |                 | 27  |   |                        |   | 1  |                 |  |   |               |   |  |   |     |  
|Actuarial loss (gain)                                        |  |                 | 3   |   |                        |   | (3 | )               |  |   |               |   |  |   |     |  
|Benefits paid                                                |  |                 | (12 | ) |                        |   | (2 | )               |  |   |               |   |  |   |     |  
|Curtailment loss                                             |  |                 | 3   |   |                        |   |   |                 |  |   |               |   |  |   |     |  
|Settlement gain                                              |  |                 | (30 | ) |                        |   |   |                 |  |   |               |   |  |   |     |  
|Assumption changes                                           |  |                 | 27  |   |                        |   |   |                 |  |   |               |   |  |   |     |  
|                                                             |  |                 |     |   |                        |   |    |                 |  |   |               |   |  |   |     |  
|Benefit obligations at December 31, 2004 (Successor Company) |  | $               | 471 |   |                        | $ | 31 |                 |  |   |               |   |  |   |     |  
|                                                             |  |                 |     |   |                        |   |    |                 |  |   |               |   |  |   |     |  



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Plan Assets and Funded Status



The following table presents both the change in the value of pension plan
assets and the funded status of each plan for the years ended and as of December 31, 2004 and 2003 (in millions):



|                                                              |  |                 |     |   |                        |   |     |                 |  |   |               |   |  |   |     |  
|------------------------------------------------------------- |  | --------------- | --- | - | ---------------------- | - | --- | --------------- |  | - | ------------- | - |  | - | --- | -
|                                                              |  | MCI Plans       |     |   | Embratel Benefit Plans |  
|                                                              |  | PensionBenefits |     |   | OtherBenefits          |   |     | PensionBenefits |  |   | OtherBenefits |  
|Change in Plan Assets                                         |  |                 |     |   |                        |   |     |                 |  |   |               |   |  |   |     |  
|Fair value of assets at January 1, 2003 (Predecessor Company) |  | $               | 378 |   |                        | $ |    |                 |  | $ | 271           |   |  | $ | 16  |  
|Actual return on plan assets                                  |  |                 | 54  |   |                        |   |    |                 |  |   | 47            |   |  |   | 5   |  
|Foreign currency exchange                                     |  |                 |    |   |                        |   |    |                 |  |   | 60            |   |  |   | 3   |  
|Employer contributions                                        |  |                 | 14  |   |                        |   |    |                 |  |   |              |   |  |   |    |  
|Benefits paid                                                 |  |                 | (11 | ) |                        |   |    |                 |  |   | (28           | ) |  |   | (3  | )
|Effect of settlements and transfers                           |  |                 | (39 | ) |                        |   |    |                 |  |   |              |   |  |   |    |  
|                                                              |  |                 |     |   |                        |   |     |                 |  |   |               |   |  |   |     |  
|Fair value of assets at December 31, 2003 (Successor Company) |  | $               | 396 |   |                        | $ |    |                 |  | $ | 350           |   |  | $ | 21  |  
|                                                              |  |                 |     |   |                        |   |     |                 |  |   |               |   |  |   |     |  
|Actual return on plan assets                                  |  |                 | 31  |   |                        |   |    |                 |  |   |               |   |  |   |     |  
|Employer contributions                                        |  |                 | 2   |   |                        |   |    |                 |  |   |               |   |  |   |     |  
|Benefits paid                                                 |  |                 | (12 | ) |                        |   |    |                 |  |   |               |   |  |   |     |  
|Effect of settlements and transfers                           |  |                 | (30 | ) |                        |   |    |                 |  |   |               |   |  |   |     |  
|                                                              |  |                 |     |   |                        |   |     |                 |  |   |               |   |  |   |     |  
|Fair value of assets at December 31, 2004 (Successor Company) |  | $               | 387 |   |                        | $ |    |                 |  |   |               |   |  |   |     |  
|                                                              |  |                 |     |   |                        |   |     |                 |  |   |               |   |  |   |     |  
|As of December 31, 2003:                                      |  |                 |     |   |                        |   |     |                 |  |   |               |   |  |   |     |  
|(Underfunded) funded status                                   |  | $               | (57 | ) |                        | $ | (35 | )               |  | $ | 2             |   |  | $ | (81 | )
|Unrecognized net actuarial (gain) loss                        |  |                 |    |   |                        |   |    |                 |  |   | (19           | ) |  |   | 26  |  
|Unrecognized transition liability                             |  |                 |    |   |                        |   |    |                 |  |   | 1             |   |  |   |    |  
|                                                              |  |                 |     |   |                        |   |     |                 |  |   |               |   |  |   |     |  
|Net amount recognized (Successor Company)                     |  | $               | (57 | ) |                        | $ | (35 | )               |  | $ | (16           | ) |  | $ | (55 | )
|                                                              |  |                 |     |   |                        |   |     |                 |  |   |               |   |  |   |     |  
|As of December 31, 2004:                                      |  |                 |     |   |                        |   |     |                 |  |   |               |   |  |   |     |  
|Underfunded status                                            |  | $               | (84 | ) |                        | $ | (31 | )               |  |   |               |   |  |   |     |  
|Unrecognized net actuarial loss                               |  |                 | 28  |   |                        |   | 1   |                 |  |   |               |   |  |   |     |  
|                                                              |  |                 |     |   |                        |   |     |                 |  |   |               |   |  |   |     |  
|Net amount recognized (Successor Company)                     |  | $               | (56 | ) |                        | $ | (30 | )               |  |   |               |   |  |   |     |  
|                                                              |  |                 |     |   |                        |   |     |                 |  |   |               |   |  |   |     |  



Balance Sheet
Recognition



Amounts recognized in the consolidated
balance sheets as of December 31, 2004 and 2003 are as follows (in millions):



|                                                                |  |                 |     |   |                        |   |     |                 |  |   |               |   |  |   |     |  
|--------------------------------------------------------------- |  | --------------- | --- | - | ---------------------- | - | --- | --------------- |  | - | ------------- | - |  | - | --- | -
|                                                                |  | MCI Plans       |     |   | Embratel Benefit Plans |  
|                                                                |  | PensionBenefits |     |   | OtherBenefits          |   |     | PensionBenefits |  |   | OtherBenefits |  
|As of December 31, 2003:                                        |  |                 |     |   |                        |   |     |                 |  |   |               |   |  |   |     |  
|Accrued benefit cost, net amount recognized (Successor Company) |  | $               | (57 | ) |                        | $ | (35 | )               |  | $ | (16           | ) |  | $ | (55 | )
|                                                                |  |                 |     |   |                        |   |     |                 |  |   |               |   |  |   |     |  
|As of December 31, 2004:                                        |  |                 |     |   |                        |   |     |                 |  |   |               |   |  |   |     |  
|Accrued benefit cost                                            |  | $               | (79 | ) |                        | $ | (30 | )               |  |   |               |   |  |   |     |  
|Accumulated other comprehensive loss                            |  |                 | 23  |   |                        |   |    |                 |  |   |               |   |  |   |     |  
|                                                                |  |                 |     |   |                        |   |     |                 |  |   |               |   |  |   |     |  
|Net amount recognized (Successor Company)                       |  | $               | (56 | ) |                        | $ | (30 | )               |  |   |               |   |  |   |     |  
|                                                                |  |                 |     |   |                        |   |     |                 |  |   |               |   |  |   |     |  



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MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The weighted-average asset allocations for the Companys pension plans by asset category
(excluding Embratel) were as follows:



|                  |  |                                            |   |  |                         |   |  |    |  
|----------------- |  | ------------------------------------------ | - |  | ----------------------- | - |  | -- | -
|                  |  | Successor Company                          |   |  |                         |  
|                  |  | Actual Asset Allocation As of December 31, |   |  | Target Asset Allocation |  
|                  |  | 2004                                       |   |  | 2003                    |   | 
|Equity securities |  | 51                                         | % |  | 52                      | % |  | 43 | %
|Debt securities   |  | 40                                         | % |  | 45                      | % |  | 49 | %
|Real estate       |  | 8                                          | % |  |                        |   |  | 8  | %
|Other             |  | 1                                          | % |  | 3                       | % |  |   |  



The Company has
established and maintains an investment policy for assets held in each MCI Defined Benefit Pension trust. The investment strategies are long-term in nature and designed to meet the following objectives:



| |  |  | Ensure that funds are available to pay benefits as they become due;
| | - |  | -------------------------------------------------------------------



| |  |  | Maximize the trusts total returns subject to prudent risk taking; and
| | - |  | ----------------------------------------------------------------------



| |  |  | Preserve and/or improve the funded status of the trusts over time.
| | - |  | ------------------------------------------------------------------



The current investment strategy, as adopted by the Company, provides for the following asset allocation policies:



|                          |  |                                                                       |   |  |        |   |  |         |  
|------------------------- |  | --------------------------------------------------------------------- | - |  | ------ | - |  | ------- | -
|                          |  | Percent of Total Fund MCI Communications Corporation Plan             |  
|                          |  | Minimum                                                               |   |  | Target |   |  | Maximum |  
|U.S. equities             |  | 33                                                                    | % |  | 38     | % |  | 43      | %
|Non-U.S. equities         |  | 10                                                                    | % |  | 12     | % |  | 15      | %
|                          |  |                                                                       |   |  |        |   |  |         |  
|Total equities(1)         |  | 43                                                                    | % |  | 50     | % |  | 58      | %
|Fixed income              |  | 35                                                                    | % |  | 40     | % |  | 45      | %
|Real estate(2)            |  |                                                                      |   |  | 10     | % |  | 15      | %
|Cash and cash equivalents |  |                                                                      |   |  |       |   |  | 10      | %
|                          | 
|                          |  | Percent of Total Fund WorldCom International Data Services, Inc. Plan |  
|                          |  | Minimum                                                               |   |  | Target |   |  | Maximum |  
|U.S. equities             |  | 30                                                                    | % |  | 40     | % |  | 45      | %
|Fixed income              |  | 55                                                                    | % |  | 60     | % |  | 70      | %
|Cash and cash equivalents |  |                                                                      |   |  |       |   |  | 10      | %

---

|(1) | Minimums and maximums for equities do not equal sums of minimums and maximums for each portfolio, but rather reflect constraints for overall equity exposure.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Allocations to real estate will occur over multiple time periods. Assets targeted to real estate, but not yet allocated, will be invested in fixed income securities
with corresponding adjustments to fixed income rebalancing guidelines.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company reviews the asset mix of the funds on a regular basis. Generally, each funds asset mix will be rebalanced to the target mix as individual portfolios approach their minimum or maximum levels. The
effective asset mix of all portfolios will be measured considering all futures and options positions. Securities convertible into common stock, or which provide for equity participation, are considered to be equities.



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MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



To meet its asset allocation objective, the Company has developed an investment manager structure
that is based on the current asset allocation policies and investment guidelines. Each investment manager is engaged to manage a specific asset class portfolio. Periodically, the Company may make changes to the investment managers and allocations,
as considered appropriate. In general, investment manager performance will be evaluated over a three to five year time horizon. Investments in certain telecommunication companies securities, including those of the Company, either directly or
through controlled affiliates, are to be excluded from portfolio holdings unless held through commingled or mutual funds. Performance objectives set out for each manager are net of investment management fees.



Futures contracts may be used as a substitute for holding the underlying
asset related to the futures contract. All deliverable long futures contracts must be fully backed by cash equivalent holdings in the portfolio so that the portfolio is not leveraged. Futures contracts, if any, will be marked to market daily.
Regarding mortgage derivatives, the investment manager is prohibited from investing in securities with a high sensitivity to changes in interest rates and prepayment spreads. The purchase, sale, or any other dealings with put or call option
securities is limited to a maximum of 10% of portfolio value based on the notional value of the securities. Investment managers who fail to observe the above restrictions will be liable for any investment losses. As of December 31, 2004 and 2003,
the fund did not have investments in any derivative instruments.



Actuarial Assumptions



The measurement
dates used to determine pension and other postretirement benefit measurements for the plans are December 31, 2004, 2003, and 2002. The actuarial assumptions used to compute the net periodic pension cost, non-qualified pension benefit cost and
postretirement benefit cost are based upon information available as of the beginning of each year, specifically, market interest rates, past experience and managements best estimate of future economic conditions. Changes in these assumptions
may impact future benefit costs and obligations. In computing future costs and obligations, the Company must make assumptions about such things as employee mortality and turnover, expected salary and wage increases, discount rate, expected long-term
rate of return on plan assets, and expected future cost increases. Two of these items generally have the most significant impact on the level of cost: (1) discount rate and (2) expected long-term rate of return on plan assets.



Annually, the Company sets its discount rate based upon the yields on
high-quality fixed-income investments available at the measurement date and expected to be available during the period to maturity of the pension benefits. In making this determination, the Company considers, among other things, the yields on
S&Ps high-quality non-callable AA corporate bonds as of year-end.



The expected rate of return on plan assets is the long-term rate of return the Company expects to earn on trust assets. The rate of return is determined by the investment composition of the plan assets and the
long-term risk and return forecast for each asset category. The forecasts for each asset class are generated using historical information as well as an analysis of current and expected market conditions. The expected risk and return characteristics
for each asset class are reviewed annually and revised, as necessary, to reflect changes in the financial markets. To compute the expected return on plan assets, the Company applies an expected rate of return to the fair value of the plan assets.



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The weighted average assumptions used in determining benefit obligations (excluding Embratel) were as
follows:



|                              |  |                       |   |  |                               |   |  |      |   |  |      |  
|----------------------------- |  | --------------------- | - |  | ----------------------------- | - |  | ---- | - |  | ---- | -
|                              |  | Defined Benefit Plans |   |  | Other Postretirement Benefits |  
|                              |  | As of December 31,    |   |  | As of December 31,            |  
|                              |  | 2004                  |   |  | 2003                          |   |  | 2004 |   |  | 2003 |  
|Discount rate                 |  | 5.90                  | % |  | 6.25                          | % |  | 5.90 | % |  | 6.25 | %
|Rate of compensation increase |  |                      |   |  |                              |   |  | 5.00 | % |  | 5.00 | %



The weighted average
assumptions used in determining net periodic pension cost (excluding Embratel) were as follows:



|                                                 |  |                         |   |  |                               |   |  |      |   |  |      |   |  |      |   |  |      |  
|------------------------------------------------ |  | ----------------------- | - |  | ----------------------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                                                 |  | Defined Benefit Plans   |   |  | Other Postretirement Benefits |  
|                                                 |  | Year Ended December 31, |   |  | Year Ended December 31,       |  
|                                                 |  | 2004                    |   |  | 2003                          |   |  | 2002 |   |  | 2004 |   |  | 2003 |   |  | 2002 |  
|Discount rate                                    |  | 6.25                    | % |  | 6.75                          | % |  | 7.25 | % |  | 6.25 | % |  | 6.75 | % |  | 7.25 | %
|Expected long-term rate of return on plan assets |  | 8.50                    | % |  | 8.50                          | % |  | 8.90 | % |  |     |   |  |     |   |  |     |  
|Rate of compensation increase                    |  |                        |   |  |                              |   |  |     |   |  | 5.00 | % |  | 5.00 | % |  | 5.00 | %



For the Embratel
Benefit Plans, the weighted average assumptions used in determining the expense and benefit obligations as of and for the years ended December 31, 2003 and 2002 were as follows: discount rate and expected rate of return on plan assets of 11.3%;
average salary increases and social security increases of 5%.



For the MCI Plans, the postretirement benefit obligation was calculated assuming that health-care costs increased by 13.00% in 2004 and 6.75% in 2003, and the rate of increase in the per capita cost of covered health-care benefits
thereafter (the health-care cost trend rate) was assumed to decrease to 5.00% by 2009 and remain at that level thereafter.



For the Embratel Benefit Plans, the postretirement benefit obligation was calculated assuming that health-care costs increased by inflation plus 4% in
2003, and the rate of increase in the per capita cost of covered health-care benefits thereafter was assumed to decrease gradually to inflation plus 2.7% in 2046 and remain at that level thereafter.



F-71



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MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Net Periodic Cost



The components of the net postretirement benefit and pension costs for the years ended December 31, 2004, 2003 and 2002 were
as follows (in millions):



|                                                                       |  |                 |     |   |                            |   |    |                 |  |   |               |   |  |   |    |  
|---------------------------------------------------------------------- |  | --------------- | --- | - | -------------------------- | - | -- | --------------- |  | - | ------------- | - |  | - | -- | -
|                                                                       |  | MCI Plans (1)   |     |   | Embratel Benefit Plans (1) |  
|                                                                       |  | PensionBenefits |     |   | OtherBenefits              |   |    | PensionBenefits |  |   | OtherBenefits |  
|Year Ended December 31, 2002: (Predecessor Company)                    |  |                 |     |   |                            |   |    |                 |  |   |               |   |  |   |    |  
|Interest cost on accumulated pension/postretirement benefit obligation |  | $               | 31  |   |                            | $ | 2  |                 |  | $ | 28            |   |  | $ | 9  |  
|Expected return on plan assets                                         |  |                 | (40 | ) |                            |   |   |                 |  |   | (37           | ) |  |   | (2 | )
|Amortization of prior service cost                                     |  |                 | 1   |   |                            |   |   |                 |  |   |              |   |  |   |   |  
|Curtailment loss                                                       |  |                 | 26  |   |                            |   |   |                 |  |   |              |   |  |   |   |  
|Settlement loss                                                        |  |                 | 7   |   |                            |   |   |                 |  |   |              |   |  |   |   |  
|Amortization of net actuarial (gain) loss                              |  |                 |    |   |                            |   |   |                 |  |   | (1            | ) |  |   | 1  |  
|                                                                       |  |                 |     |   |                            |   |    |                 |  |   |               |   |  |   |    |  
|Net periodic pension/postretirement benefit expense (income)           |  | $               | 25  |   |                            | $ | 2  |                 |  | $ | (10           | ) |  | $ | 8  |  
|                                                                       |  |                 |     |   |                            |   |    |                 |  |   |               |   |  |   |    |  
|Year Ended December 31, 2003: (Predecessor Company)                    |  |                 |     |   |                            |   |    |                 |  |   |               |   |  |   |    |  
|Interest cost on accumulated pension/postretirement benefit obligation |  | $               | 28  |   |                            | $ | 2  |                 |  | $ | 33            |   |  | $ | 11 |  
|Expected return on plan assets                                         |  |                 | (29 | ) |                            |   |   |                 |  |   | (36           | ) |  |   | (2 | )
|Amortization of prior service cost                                     |  |                 | 1   |   |                            |   |   |                 |  |   |              |   |  |   |   |  
|Settlement loss                                                        |  |                 | 5   |   |                            |   |   |                 |  |   |              |   |  |   |   |  
|Amortization of net actuarial loss                                     |  |                 | 2   |   |                            |   | 1  |                 |  |   |              |   |  |   | 1  |  
|                                                                       |  |                 |     |   |                            |   |    |                 |  |   |               |   |  |   |    |  
|Net periodic pension/postretirement benefit expense (income)           |  | $               | 7   |   |                            | $ | 3  |                 |  | $ | (3            | ) |  | $ | 10 |  
|                                                                       |  |                 |     |   |                            |   |    |                 |  |   |               |   |  |   |    |  
|Year Ended December 31, 2004: (Successor Company)                      |  |                 |     |   |                            |   |    |                 |  |   |               |   |  |   |    |  
|Interest cost on accumulated pension/postretirement benefit obligation |  | $               | 27  |   |                            | $ | 1  |                 |  |   |               |   |  |   |    |  
|Expected return on plan assets                                         |  |                 | (32 | ) |                            |   |   |                 |  |   |               |   |  |   |    |  
|Curtailment loss                                                       |  |                 | 3   |   |                            |   |   |                 |  |   |               |   |  |   |    |  
|Settlement loss                                                        |  |                 | 2   |   |                            |   |   |                 |  |   |               |   |  |   |    |  
|Amortization of net actuarial loss (gain)                              |  |                 | 1   |   |                            |   | (3 | )               |  |   |               |   |  |   |    |  
|                                                                       |  |                 |     |   |                            |   |    |                 |  |   |               |   |  |   |    |  
|Net periodic pension/postretirement benefit expense (income)           |  | $               | 1   |   |                            | $ | (2 | )               |  |   |               |   |  |   |    |  
|                                                                       |  |                 |     |   |                            |   |    |                 |  |   |               |   |  |   |    |  

---

|(1) | Service costs were not material due to the MCI Plans being frozen in 1999 and the limited
amount of participants in the Embratel Benefit Plans.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------



Assumed health-care cost trend rates have a significant effect on the amounts reported for the costs each year as well as on the accumulated postretirement benefit obligation. A one-percentage-point change in assumed health-care cost trend
rates would have the following effects (in millions):



|                                                                     |  |                               |   |                               |   |    |  
|-------------------------------------------------------------------- |  | ----------------------------- | - | ----------------------------- | - | -- | -
|                                                                     |  | One Percentage-Point Increase |   | One Percentage-Point Decrease |  
|Increase (decrease) in total of service and interest cost components |  | $                             |  |                               | $ |   |  
|Increase (decrease) in accumulated postretirement benefit obligation |  |                               | 3 |                               |   | (3 | )



Cash Flows



In 2005, the Company expects to contribute
approximately $1 million to its defined benefit pension plans. In 2004, the Company contributed $2 million to its pension plans.



F-72



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MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The estimated future benefit payments are as follows (in millions):



|             |  |                       |     |                               |   |   
|------------ |  | --------------------- | --- | ----------------------------- | - | --
|             |  | Defined Benefit Plans |     | Other Postretirement Benefits
|2005         |  | $                     | 35  |                               | $ | 2 
|2006         |  |                       | 29  |                               |   | 2 
|2007         |  |                       | 29  |                               |   | 3 
|2008         |  |                       | 28  |                               |   | 3 
|2009         |  |                       | 28  |                               |   | 3 
|2010 to 2014 |  |                       | 137 |                               |   | 13



Defined
Contribution Plans



The Company has a defined
contribution retirement plan qualifying under the provisions of Section 401(k) of the Internal Revenue Code. Employees are eligible to participate in the 401(k) plan immediately upon hire. For the years ended December 31, 2004, 2003 and 2002,
participants could contribute up to $13,000, $12,000 and $11,000, respectively, of annual earnings on a tax-deferred basis. Upon the completion of one year of service, the Company matches 100 percent of the first 5% of employee contributions. This
matching is done retroactively to the beginning of the calendar year in which each employee has reached his one-year anniversary. Employees are immediately vested in all contributions to the plan. The Companys matching contributions were $75
million, $78 million and $100 million for the years ending December 31, 2004, 2003 and 2002, respectively. Effective August 8, 2002, WorldCom group and MCI group common stocks were no longer available as investment options under the 401(k) plan.



(22) Business Segments and Geographic Area Information



As of December 31, 2003 and through the first quarter of 2004, the
Companys business segments represented strategic business units based on the types of customers each segment served. These segments consisted of Business Markets, Mass Markets, International and Embratel. These segments were determined in
accordance with how the Companys executive management analyzed, evaluated and operated the Companys entire global operations.



In March 2004, the Company changed its segment reporting by realigning its previous business segments into three new business segments: Enterprise
Markets, U.S. Sales & Service, and International & Wholesale Markets. Enterprise Markets serves the following customers which had been served by Business Markets in the past: global accounts, government accounts, conferencing and MCI
Solutions customers. U.S. Sales & Service serves the previous Mass Markets accounts and certain commercial accounts. International & Wholesale Markets serves customers internationally, as well as the Companys wholesale accounts that
were previously included in Business Markets. The Company began operating under these new segments in the second quarter of 2004.



In addition, the Company developed methodologies to fully allocate indirect costs that were previously reported in Corporate and Other to the new business
segments. These costs include expenses associated with the operation of the Companys network, access costs and costs of services and products, indirect selling, general and administrative expenses, depreciation and amortization, impairment
charges, and corporate functions. The Company allocated the 2004 impairment charges using the same methodology used for depreciation and amortization expense. The allocation methodologies are based on statistical and operational data that is
generated from the Companys continuing operations. These amounts can fluctuate based upon the performance of the individual segments.



F-73



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



As a result of the realignment of its segments and the allocation of indirect costs on a segment
basis, the Company changed the way it manages its business to utilize operating (loss) income information to evaluate the performance of its business segments and to allocate resources to them.



Embratels results of operations, which were previously reported in a
separate business segment, have been reclassified to discontinued operations for all periods, and therefore have been excluded from this business segment information for all years presented.



Current Business Segments



The following is a description of the Companys business segments:



| |  |  | Enterprise Markets includes Global and Government Accounts, as well as Conferencing and MCI Solutions businesses. Global Accounts provides telecommunications services to large
global customers requiring international and complex network services. Government Accounts provides similar services to various government agencies. In both cases, these services include local-to-global business data, Internet, voice services and
managed network services.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | U.S. Sales & Service segment serves Mass Markets accounts which include subscription-based residential and very small business accounts, and transactional products including
10-10-987, 10-10-220, 1-800-COLLECT, MCI Prepaid card, as well as Commercial Accounts which serves small to medium-size business accounts. Commercial Accounts also includes the Companys SkyTel business, which provides wireless email,
interactive two-way messaging, wireless telemetry services and traditional text and numeric paging to customers throughout the United States.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | International & Wholesale Markets provides telecommunications services to business customers and telecommunications carriers in Europe, the Middle East and Africa (collectively
EMEA), the Asia Pacific region, Latin America and Canada. These services include voice telecommunications, data services, Internet and managed network services. This segment also serves the Companys domestic and international
wholesale accounts.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



All revenues for the
Companys products and services are generated through external customers. The Company has three main product and service categories: Voice, Data and Internet.



F-74



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MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company determined that it was impracticable to restate its 2002 results into the current
business segment structure, as much of the information required to generate the segment data was not available. As such, the Company has included segment data for 2004 and 2003 under the current segment structure, and for 2004, 2003 and 2002 under
the previous segment structure. Financial information for each reportable business segment and revenue product line under the current segment structure follows (in millions):



|                                                                                                                                      |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  |   |        |    
|------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------- | ----- | - | -------------------- | - | ------ | -------------------------------- |  | - | ------ | - |  | - | ------ | ---
|                                                                                                                                      |  | Year Ended December 31, 2004 (Successor Company)   |      
|                                                                                                                                      |  | EnterpriseMarkets                                  |       |   | U.S. Sales & Service |   |        | International &Wholesale Markets |  |   | Total  |  
|Revenues:                                                                                                                             |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  |   |        |    
|Voice                                                                                                                                 |  | $                                                  | 1,830 |   |                      | $ | 6,728  |                                  |  | $ | 4,105  |   |  | $ | 12,663 |    
|Data                                                                                                                                  |  |                                                    | 2,316 |   |                      |   | 1,610  |                                  |  |   | 1,446  |   |  |   | 5,372  |    
|Internet                                                                                                                              |  |                                                    | 665   |   |                      |   | 738    |                                  |  |   | 1,252  |   |  |   | 2,655  |    
|                                                                                                                                      |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  |   |        |    
|Total revenues                                                                                                                        |  |                                                    | 4,811 |   |                      |   | 9,076  |                                  |  |   | 6,803  |   |  |   | 20,690 |    
|Costs of sales and services                                                                                                           |  |                                                    | 2,950 |   |                      |   | 4,910  |                                  |  |   | 5,365  |   |  |   | 13,225 |    
|Selling, general and administrative expenses                                                                                          |  |                                                    | 1,028 |   |                      |   | 3,007  |                                  |  |   | 1,185  |   |  |   | 5,220  |    
|Depreciation and amortization expenses                                                                                                |  |                                                    | 460   |   |                      |   | 841    |                                  |  |   | 623    |   |  |   | 1,924  |    
|Loss (gain) on property dispositions                                                                                                  |  |                                                    | 3     |   |                      |   | (3     | )                                |  |   | (1     | ) |  |   | (1     | )  
|Impairment charges                                                                                                                    |  |                                                    | 870   |   |                      |   | 1,627  |                                  |  |   | 1,016  |   |  |   | 3,513  |    
|                                                                                                                                      |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  |   |        |    
|Operating loss                                                                                                                        |  | $                                                  | (500  | ) |                      | $ | (1,306 | )                                |  | $ | (1,385 | ) |  |   | (3,191 | )  
|                                                                                                                                      |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  |   |        |    
|Interest expense                                                                                                                      |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  |   | (402   | )  
|Miscellaneous income                                                                                                                  |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  |   | 85     |    
|                                                                                                                                      |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  |   |        |    
|Loss from continuing operations before income tax                                                                                     |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  | $ | (3,508 | )  
|                                                                                                                                      |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  |   |        |    
|Segment assets                                                                                                                        |  | $                                                  | 2,447 |   |                      | $ | 4,335  |                                  |  | $ | 4,200  |   |  | $ | 10,982 | (1)
|                                                                                                                                      |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  |   |        |    
|                                                                                                                                      | 
|                                                                                                                                      |  | Year Ended December 31, 2003 (Predecessor Company) |      
|                                                                                                                                      |  | EnterpriseMarkets                                  |       |   | U.S. Sales & Service |   |        | International &Wholesale Markets |  |   | Total  |  
|Revenues:                                                                                                                             |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  |   |        |    
|Voice                                                                                                                                 |  | $                                                  | 1,893 |   |                      | $ | 8,354  |                                  |  | $ | 4,387  |   |  | $ | 14,634 |    
|Data                                                                                                                                  |  |                                                    | 2,577 |   |                      |   | 2,012  |                                  |  |   | 1,892  |   |  |   | 6,481  |    
|Internet                                                                                                                              |  |                                                    | 859   |   |                      |   | 749    |                                  |  |   | 1,543  |   |  |   | 3,151  |    
|                                                                                                                                      |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  |   |        |    
|Total revenues                                                                                                                        |  |                                                    | 5,329 |   |                      |   | 11,115 |                                  |  |   | 7,822  |   |  |   | 24,266 |    
|Costs of sales and services                                                                                                           |  |                                                    | 3,201 |   |                      |   | 5,755  |                                  |  |   | 5,812  |   |  |   | 14,768 |    
|Selling, general and administrative expenses                                                                                          |  |                                                    | 1,123 |   |                      |   | 3,887  |                                  |  |   | 1,469  |   |  |   | 6,479  |    
|Depreciation and amortization expenses                                                                                                |  |                                                    | 649   |   |                      |   | 821    |                                  |  |   | 846    |   |  |   | 2,316  |    
|Loss on property dispositions                                                                                                         |  |                                                    | 15    |   |                      |   | 16     |                                  |  |   | 12     |   |  |   | 43     |    
|                                                                                                                                      |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  |   |        |    
|Operating income (loss)                                                                                                               |  | $                                                  | 341   |   |                      | $ | 636    |                                  |  | $ | (317   | ) |  |   | 660    |    
|                                                                                                                                      |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  |   |        |    
|Interest expense                                                                                                                      |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  |   | (105   | )  
|Miscellaneous income                                                                                                                  |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  |   | 136    |    
|Reorganization items, net                                                                                                             |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  |   | 22,087 |    
|                                                                                                                                      |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  |   |        |    
|Income from continuing operations before income taxes, minority interests and a cumulative effect of a change in accounting
principle |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  | $ | 22,778 |    
|                                                                                                                                      |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  |   |        |    
|Segment assets                                                                                                                        |  | $                                                  | 3,744 |   |                      | $ | 6,753  |                                  |  | $ | 8,904  |   |  | $ | 19,401 | (1)
|                                                                                                                                      |  |                                                    |       |   |                      |   |        |                                  |  |   |        |   |  |   |        |    



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



---

|(1) | Excludes certain assets that are not attributable to an individual segment since the asset is monitored by, accounted for, or is generated from a central
corporate-wide program. As such, the Company has excluded $6.1 billion from its asset allocation in 2004 primarily related to its $5.5 billion in cash, cash equivalents and marketable securities and $574 million related to deferred income taxes and
investments. In 2003, the Company has excluded $8.1 billion from its asset allocation primarily related to its $6.2 billion in cash, cash equivalents and marketable securities and $1.9 billion related to deferred income taxes and investments.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of December 31, 2003, the Predecessor
Companys business segments represented strategic business units based on the types of customers each segment served. These segments consisted of Business Markets, Mass Markets, International and Embratel (excluded from segment information
since the business was reclassified to discontinued operations for all periods presented). These segments were determined in accordance with how the Predecessor Companys executive management, as of the end of 2003, analyzed, evaluated and
operated the Predecessor Companys entire global operations.



The Predecessor Company evaluated the performance of its segments and allocated resources to them based on revenues and direct selling, general and administrative expenses. Expenses associated with the operation of the Predecessor
Companys network, indirect selling, general and administrative expenses and corporate functions were evaluated based on their respective costs and, therefore, were included in Corporate and Other. Revenue and expenses were measured in
accordance with the policies and procedures described in Note 2. The following is a description of each of the business segments prior to the Companys realignment in 2004.



Previous Business Segments



The following is a description of the Predecessor Companys business segments as they existed as of December 31, 2003:



| |  |  | Business Markets provides telecommunications services to large domestic and multinational businesses, government agencies and other communication carriers in the United States.
These services include local-to-global business data, Internet, voice services and managed network services to businesses and governments.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Mass Markets provides local, long distance and international voice telephone service and Internet telecommunications services to residential and small business customers in the
United States.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | International provides telecommunications services to business customers and telecommunications carriers in EMEA, the Asian Pacific region, Latin America and Canada. These services
include voice telecommunications, data services, Internet and managed network services.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



All revenues for the Predecessor Companys products and services are generated through external
customers. The Predecessor Company had three main product and service categories: Voice, Data, and Internet. Financial information for each reportable business segment and revenue product line under the previous segment structure follows (in
millions):



|                                                    |  |                                                  |        |             |   |                         |  |                    |       |  |       |        |   |  |   |        |  
|--------------------------------------------------- |  | ------------------------------------------------ | ------ | ----------- | - | ----------------------- |  | ------------------ | ----- |  | ----- | ------ | - |  | - | ------ | -
|                                                    |  | Year Ended December 31, 2004 (Successor Company) |       
|                                                    |  | BusinessMarkets                                  |        | MassMarkets |   | InternationalOperations |  | Corporateand Other |       |  | Total |       
|Revenues:                                           |  |                                                  |        |             |   |                         |  |                    |       |  |       |        |   |  |   |        |  
|Voice                                               |  | $                                                | 5,111  |             | $ | 5,056                   |  | $                  | 2,496 |  | $     |       |   |  | $ | 12,663 |  
|Data                                                |  |                                                  | 5,035  |             |   | 17                      |  |                    | 320   |  |       |       |   |  |   | 5,372  |  
|Internet                                            |  |                                                  | 1,780  |             |   | 15                      |  |                    | 860   |  |       |       |   |  |   | 2,655  |  
|                                                    |  |                                                  |        |             |   |                         |  |                    |       |  |       |        |   |  |   |        |  
|Total revenues                                      |  |                                                  | 11,926 |             |   | 5,088                   |  |                    | 3,676 |  |       |        |   |  |   | 20,690 |  
|                                                    |  |                                                  |        |             |   |                         |  |                    |       |  |       |        |   |  |   |        |  
|Access costs and costs of services and products     |  |                                                  |        |             |   |                         |  |                    |       |  |       | 13,225 |   |  |   | 13,225 |  
|                                                    |  |                                                  |        |             |   |                         |  |                    |       |  |       |        |   |  |   |        |  
|Gross profit                                        |  |                                                  |        |             |   |                         |  |                    |       |  |       |        |   |  |   | 7,465  |  
|Selling, general and administrative expenses        |  |                                                  | 1,117  |             |   | 1,478                   |  |                    | 610   |  |       | 2,015  |   |  |   | 5,220  |  
|Depreciation and amortization expenses              |  |                                                  |        |             |   |                         |  |                    |       |  |       | 1,924  |   |  |   | 1,924  |  
|Gain on property dispositions                       |  |                                                  |        |             |   |                         |  |                    |       |  |       | (1     | ) |  |   | (1     | )
|Impairment charges                                  |  |                                                  |        |             |   |                         |  |                    |       |  |       | 3,513  |   |  |   | 3,513  |  
|                                                    |  |                                                  |        |             |   |                         |  |                    |       |  |       |        |   |  |   |        |  
|Operating loss                                      |  |                                                  |        |             |   |                         |  |                    |       |  |       |        |   |  |   | (3,191 | )
|Interest expense                                    |  |                                                  |        |             |   |                         |  |                    |       |  |       |        |   |  |   | (402   | )
|Miscellaneous income                                |  |                                                  |        |             |   |                         |  |                    |       |  |       |        |   |  |   | 85     |  
|                                                    |  |                                                  |        |             |   |                         |  |                    |       |  |       |        |   |  |   |        |  
|Loss from continuing operations before income taxes |  |                                                  |        |             |   |                         |  |                    |       |  |       |        |   |  | $ | (3,508 | )
|                                                    |  |                                                  |        |             |   |                         |  |                    |       |  |       |        |   |  |   |        |  



|                                                                                                                                      |  |                                                    |        |             |   |                         |  |                    |       |       |   |        |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------- | ------ | ----------- | - | ----------------------- |  | ------------------ | ----- | ----- | - | ------ |  | - | ------ | -
|                                                                                                                                      |  | Year Ended December 31, 2003 (Predecessor Company) |       
|                                                                                                                                      |  | BusinessMarkets                                    |        | MassMarkets |   | InternationalOperations |  | Corporateand Other |       | Total |  
|Revenues:                                                                                                                             |  |                                                    |        |             |   |                         |  |                    |       |       |   |        |  |   |        |  
|Voice                                                                                                                                 |  | $                                                  | 5,846  |             | $ | 6,353                   |  | $                  | 2,435 |       | $ |       |  | $ | 14,634 |  
|Data                                                                                                                                  |  |                                                    | 6,081  |             |   | 22                      |  |                    | 378   |       |   |       |  |   | 6,481  |  
|Internet                                                                                                                              |  |                                                    | 2,205  |             |   | 3                       |  |                    | 943   |       |   |       |  |   | 3,151  |  
|                                                                                                                                      |  |                                                    |        |             |   |                         |  |                    |       |       |   |        |  |   |        |  
|Total revenues                                                                                                                        |  |                                                    | 14,132 |             |   | 6,378                   |  |                    | 3,756 |       |   |        |  |   | 24,266 |  
|                                                                                                                                      |  |                                                    |        |             |   |                         |  |                    |       |       |   |        |  |   |        |  
|Access costs and costs of services and products                                                                                       |  |                                                    |        |             |   |                         |  |                    |       |       |   | 14,768 |  |   | 14,768 |  
|                                                                                                                                      |  |                                                    |        |             |   |                         |  |                    |       |       |   |        |  |   |        |  
|Gross profit                                                                                                                          |  |                                                    |        |             |   |                         |  |                    |       |       |   |        |  |   | 9,498  |  
|Selling, general and administrative expenses                                                                                          |  |                                                    | 1,397  |             |   | 2,132                   |  |                    | 708   |       |   | 2,242  |  |   | 6,479  |  
|Depreciation and amortization expenses                                                                                                |  |                                                    |        |             |   |                         |  |                    |       |       |   | 2,316  |  |   | 2,316  |  
|Loss on property dispositions                                                                                                         |  |                                                    |        |             |   |                         |  |                    |       |       |   | 43     |  |   | 43     |  
|                                                                                                                                      |  |                                                    |        |             |   |                         |  |                    |       |       |   |        |  |   |        |  
|Operating income                                                                                                                      |  |                                                    |        |             |   |                         |  |                    |       |       |   |        |  |   | 660    |  
|Interest expense                                                                                                                      |  |                                                    |        |             |   |                         |  |                    |       |       |   |        |  |   | (105   | )
|Miscellaneous income                                                                                                                  |  |                                                    |        |             |   |                         |  |                    |       |       |   |        |  |   | 136    |  
|Reorganization items, net                                                                                                             |  |                                                    |        |             |   |                         |  |                    |       |       |   |        |  |   | 22,087 |  
|                                                                                                                                      |  |                                                    |        |             |   |                         |  |                    |       |       |   |        |  |   |        |  
|Income from continuing operations before income taxes, minority interests and a cumulative effect of a change in accounting
principle |  |                                                    |        |             |   |                         |  |                    |       |       |   |        |  | $ | 22,778 |  
|                                                                                                                                      |  |                                                    |        |             |   |                         |  |                    |       |       |   |        |  |   |        |  



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MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                                                                                                    |  |                                                    |        |             |   |                         |  |                    |       |  |       |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------- | ------ | ----------- | - | ----------------------- |  | ------------------ | ----- |  | ----- | ------ | - |  | - | ------ | -
|                                                                                                                                    |  | Year Ended December 31, 2002 (Predecessor Company) |       
|                                                                                                                                    |  | BusinessMarkets                                    |        | MassMarkets |   | InternationalOperations |  | Corporateand Other |       |  | Total |       
|Revenues:                                                                                                                           |  |                                                    |        |             |   |                         |  |                    |       |  |       |        |   |  |   |        |  
|Voice                                                                                                                               |  | $                                                  | 6,219  |             | $ | 7,462                   |  | $                  | 2,313 |  | $     |       |   |  | $ | 15,994 |  
|Data                                                                                                                                |  |                                                    | 7,560  |             |   | 21                      |  |                    | 358   |  |       |       |   |  |   | 7,939  |  
|Internet                                                                                                                            |  |                                                    | 3,687  |             |   |                        |  |                    | 873   |  |       |       |   |  |   | 4,560  |  
|                                                                                                                                    |  |                                                    |        |             |   |                         |  |                    |       |  |       |        |   |  |   |        |  
|Total revenues                                                                                                                      |  |                                                    | 17,466 |             |   | 7,483                   |  |                    | 3,544 |  |       |        |   |  |   | 28,493 |  
|                                                                                                                                    |  |                                                    |        |             |   |                         |  |                    |       |  |       |        |   |  |   |        |  
|Access costs and costs of services and products                                                                                     |  |                                                    |        |             |   |                         |  |                    |       |  |       | 16,765 |   |  |   | 16,765 |  
|                                                                                                                                    |  |                                                    |        |             |   |                         |  |                    |       |  |       |        |   |  |   |        |  
|Gross profit                                                                                                                        |  |                                                    |        |             |   |                         |  |                    |       |  |       |        |   |  |   | 11,728 |  
|Selling, general and administrative expenses                                                                                        |  |                                                    | 1,901  |             |   | 2,217                   |  |                    | 1,050 |  |       | 2,894  |   |  |   | 8,062  |  
|Depreciation and amortization expenses                                                                                              |  |                                                    |        |             |   |                         |  |                    |       |  |       | 2,903  |   |  |   | 2,903  |  
|Unclassified, net                                                                                                                   |  |                                                    |        |             |   |                         |  |                    |       |  |       | (35    | ) |  |   | (35    | )
|Loss on property dispositions                                                                                                       |  |                                                    |        |             |   |                         |  |                    |       |  |       | 123    |   |  |   | 123    |  
|Impairment charges                                                                                                                  |  |                                                    |        |             |   |                         |  |                    |       |  |       | 4,999  |   |  |   | 4,999  |  
|                                                                                                                                    |  |                                                    |        |             |   |                         |  |                    |       |  |       |        |   |  |   |        |  
|Operating loss                                                                                                                      |  |                                                    |        |             |   |                         |  |                    |       |  |       |        |   |  |   | (4,324 | )
|Interest expense                                                                                                                    |  |                                                    |        |             |   |                         |  |                    |       |  |       |        |   |  |   | (1,354 | )
|Miscellaneous expense                                                                                                               |  |                                                    |        |             |   |                         |  |                    |       |  |       |        |   |  |   | (2,221 | )
|Reorganization items, net                                                                                                           |  |                                                    |        |             |   |                         |  |                    |       |  |       |        |   |  |   | (802   | )
|                                                                                                                                    |  |                                                    |        |             |   |                         |  |                    |       |  |       |        |   |  |   |        |  
|Loss from continuing operations before income taxes, minority interests and a cumulative effect of a change in accounting
principle |  |                                                    |        |             |   |                         |  |                    |       |  |       |        |   |  | $ | (8,701 | )
|                                                                                                                                    |  |                                                    |        |             |   |                         |  |                    |       |  |       |        |   |  |   |        |  



Information about
Geographic Areas



The Companys revenues by
geographic area represent the location that the sale originated and not specifically the segment that reflects the revenue, as some international revenues are included in Enterprise Markets. Information about the Companys revenues by
geographic area follows (in millions):



|              |  |                         |        |                     |   |        |  |   |       
|------------- |  | ----------------------- | ------ | ------------------- | - | ------ |  | - | ------
|              |  | SuccessorCompany        |        | Predecessor Company
|              |  | Year Ended December 31,
|              |  | 2004                    |        | 2003                |   | 2002  
|Revenue:      |  |                         |        |                     |   |        |  |   |       
|United States |  | $                       | 16,719 |                     | $ | 20,186 |  | $ | 24,849
|EMEA          |  |                         | 3,261  |                     |   | 3,275  |  |   | 2,844 
|Asia Pacific  |  |                         | 458    |                     |   | 473    |  |   | 552   
|Other         |  |                         | 252    |                     |   | 332    |  |   | 248   
|              |  |                         |        |                     |   |        |  |   |       
|Total         |  | $                       | 20,690 |                     | $ | 24,266 |  | $ | 28,493
|              |  |                         |        |                     |   |        |  |   |       



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Information about the Companys property, plant and equipment assets by geographic area follows
(in millions):



|                                    |  |                    |       |      |   |       
|----------------------------------- |  | ------------------ | ----- | ---- | - | ------
|                                    |  | Successor Company 
|                                    |  | As of December 31,
|                                    |  | 2004               |       | 2003
|Property, plant and equipment, net: |  |                    |       |      |   |       
|United States                       |  | $                  | 5,155 |      | $ | 7,637 
|EMEA                                |  |                    | 949   |      |   | 1,678 
|Brazil                              |  |                    |      |      |   | 1,987 
|Asia Pacific                        |  |                    | 129   |      |   | 188   
|Other                               |  |                    | 26    |      |   | 48    
|                                    |  |                    |       |      |   |       
|Total                               |  | $                  | 6,259 |      | $ | 11,538
|                                    |  |                    |       |      |   |       



(23) Related Party Transactions



Ebbers Loan Arrangements



From shortly after the Predecessor Companys inception until April 29,
2002, Bernard J. Ebbers served as the Predecessor Companys President and Chief Executive Officer. Beginning on or about September 1995, Mr. Ebbers and companies under his control entered into various loan agreements with Bank of America, N.A.
(or its predecessors in interest). Between 1995 and 2000, Mr. Ebbers or companies under his control borrowed certain amounts from Bank of America under these loan agreements, and became obligated under a Bank of America letter of credit in the
amount of $45.6 million issued in connection with a donation to his alma mater, Mississippi College. In connection with these transactions, Mr. Ebbers pledged shares of the Predecessor Companys common stock. In addition, to secure his
obligations incurred in connection with acquisitions of interests in outside businesses and other transactions, Mr. Ebbers pledged several million shares of the Predecessor Companys common stock and certain assets to an affiliate of Citicorp.



Commencing in 2000 and continuing through April 2002, Mr.
Ebbers requested from time to time that the Predecessor Company loan funds to him and/or guarantee loans he had received from other institutions in response to margin calls being made by such institutions following declines in the value of the
Predecessor Companys common stock. In response to his requests, the Compensation and Stock Option Committee (the Compensation Committee) of the Predecessor Companys former Board of Directors approved direct loans to Mr.
Ebbers of $100 million in 2000 and an additional $65 million on January 30, 2002, for a total of $165 million. The Compensation Committee also approved a guarantee by the Predecessor Company of a $150 million loan from Bank of America to
Mr. Ebbers and the $45.6 million Bank of America letter of credit noted above. The Compensation Committee approved these loans and guarantees following a determination that it was in the best interest of WorldCom and its shareholders to avoid forced
sales by Mr. Ebbers of his common stock. The Predecessor Companys former Board of Directors subsequently ratified the loans and guarantees. The Predecessor Company determined that the interest rate charged to Mr. Ebbers was below market rates
and that a more appropriate rate of interest for the period from 2000, when the loans were first provided, until March 31, 2002, was 11.11% (reflecting that while interest rates declined over that period, the risk of non-payment of the loans
increased). The Predecessor Company recorded interest income of $8 million in 2002, of which $7 million was imputed interest on the loans. The amount imputed was recorded as a reduction to selling, general and administrative expenses to recognize
that this interest was not charged to Mr. Ebbers and was considered additional compensation to Mr. Ebbers.



F-79



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Following further declines in the trading price of the Predecessor Companys common stock
through early February 2002, the Predecessor Company made aggregate payments to Bank of America of approximately $198.7 million to repay all of the outstanding debt guaranteed by the Predecessor Company and deposited approximately $36.5 million with
Bank of America (of which approximately $2 million was remitted to the Predecessor Company as of March 2003) to collateralize the letter of credit.



On April 2, 2002, the Predecessor Company and Mr. Ebbers entered into a letter agreement (the Ebbers Letter Agreement) whereby Mr. Ebbers (i)
indemnified the Predecessor Company against any losses incurred in respect of the loans and guarantees provided by the Predecessor Company and (ii) pledged 9,287,277 shares of WorldCom group common stock and 575,149 shares of MCI group common stock
(representing all of Mr. Ebbers unencumbered shares in WorldCom, Inc.) to secure his obligations. In addition, on April 18, 2002, the Predecessor Company and Mr. Ebbers entered into a pledge and security agreement (the Ebbers Pledge and
Security Agreement), whereby Mr. Ebbers granted the Predecessor Company security interests in all of his interest in BC Yacht Sales, Inc., a yacht sales company wholly-owned by Mr. Ebbers, and BCT Holdings, LLC, a shipyard in which Mr. Ebbers
held a 99.8% interest (collectively, Intermarine) and Douglas Lake. In addition, Mr. Ebbers owned an 86.25% interest in Joshua Holdings LLC (Joshua), the majority shareholder in Joshua Timberlands LLC (Joshua
Timberlands), a timber venture located in several southeastern states. Due to restrictions set forth in a credit agreement between Joshua Timberlands and The Travelers Insurance Company, Mr. Ebbers only granted a security interest totaling
21.25% of the capital stock of Joshua. The Predecessor Company also received a pledge by the other two interest holders in Joshua relating to an additional 13.75% of its capital stock. Under agreements between the Predecessor Company and Mr. Ebbers
dated April 17, 2002, the Predecessor Company became entitled to exercise sole and exclusive control of Mr. Ebbers pledged property interests, including voting interests upon notice to the relevant company (the Control Agreements).



On April 29, 2002, in connection with Mr. Ebbers
resignation as President, Chief Executive Officer and Director of WorldCom, the Predecessor Company consolidated these various demand loan and guaranty arrangements into a single promissory term note in the principal amount of approximately $408.2
million (the Ebbers Note). Pursuant to the terms of the Ebbers Note, in addition to accrued and unpaid interest as described below, the principal amount was subject to payment over five years on the following schedule: $25 million on
April 29, 2003, $25 million on April 29, 2004, $75 million on April 29, 2005, $100 million on April 29, 2006, and all remaining principal on April 29, 2007. The Ebbers Note also provided for the payment of interest on the outstanding balance,
compounded monthly, on each repayment date at a fluctuating interest rate equal to that under one of the Predecessor Companys credit facilities, which was 2.31875% per annum as of April 29, 2002. The Ebbers Note further provided that all
principal and accrued interest would become immediately due and payable (1) upon the death of Mr. Ebbers, (2) upon demand in the case of certain events of default, or (3) automatically without notice in the case of certain events of bankruptcy by or
against Mr. Ebbers.



On April 30, 2003, the Predecessor Company
served Mr. Ebbers with a notice of event of default under the Ebbers Note due to his failure to make the scheduled $25 million principal payment on April 29, 2003. As a consequence, all principal and accrued interest under the Ebbers Note became
immediately due and payable. Mr. Ebbers disputes that he is in default under the Ebbers Note due to the receipt of proceeds of asset sales discussed below. To date, Mr. Ebbers has not made any payment with respect to his obligations under the
Ebbers Note. After giving consideration to various factors, including what the Predecessor Company considered to be a default of the Ebbers Note and managements knowledge and estimates of Mr. Ebbers financial condition, the Predecessor
Company concluded that the collectibility of the Ebbers Note was remote. Accordingly, the Predecessor Company established a valuation reserve, reflected as of March 2002, which the Predecessor Company recorded as bad debt expense (a component of
selling, general and administrative expenses) in an amount equal to the outstanding principal and accrued interest balance under the Ebbers Note less the amount anticipated to be realized by the Predecessor Company in connection with the disposition
of the Intermarine,



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Douglas Lake and Joshua Timberlands collateral. Subsequent to the March 2002 filing, the Joshua Timberlands properties had a value less than the balance of
the senior debt. In addition, the Predecessor Company was able to secure sales contracts for the Intermarine and Douglas Lake properties. Accordingly, as of June 2002, the Predecessor Company increased the reserve to include the entire amount of the
note, net of the ultimate selling prices of the Intermarine and Douglas Lake properties.



The Predecessor Company has exercised certain of its rights under the Ebbers Pledge and Security Agreement and the Control Agreements to require the sale of Intermarine and Douglas Lake, and to apply the proceeds to
reduce the principal amount outstanding under the Ebbers Note. In October 2002, the Predecessor Company acquired Mr. Ebbers interests in Intermarine through a strict foreclosure action. In December 2002, the Predecessor Company sold a yacht
and, in February 2003, sold substantially all of the remaining assets of Intermarine. The net proceeds of these sales plus the proceeds of prior sales of other yachts contained in the bank account of Yacht Sales totaled approximately $17.4 million.
In January 2003, the Predecessor Company exercised certain control rights with respect to Mr. Ebberss interests in Douglas Lake which was sold in 2004 (see Note 17). Based on the appraised net value of the Joshua Timberlands property, the
Predecessor Company has elected not to exercise its right to foreclose on the Joshua Timberlands assets at this time. The Company will continue in its efforts to recover all amounts due and payable under the Ebbers Note.



On July 9, 2004, the Company initiated an action in the United States
Bankruptcy Court for the Southern District of New York seeking a judgment for all amounts due under the Ebbers Note. On December 9, 2004 the Company filed a motion for partial summary judgment for the Ebbers Note balance. The Bankruptcy Court has
extended the time for Ebbers to respond to the motion due to Ebbers criminal trial.



Ebbers Separation Agreement



The Predecessor Company also entered into a separation agreement with Mr. Ebbers as of April 29, 2002, which provided for his resignation from all directorships, offices and positions with the Predecessor Company, and
for his appointment to serve the Predecessor Companys Board of Directors as non-executive Chairman Emeritus at the pleasure of the Board. Pursuant to the separation agreement, Mr. Ebbers agreed to remain available for a period of
five years to provide consulting services from time to time. The agreement also provided for the Predecessor Company to make an annual pension payment of $1.5 million to Mr. Ebbers for the remainder of his life and an annual pension benefit of
$750,000 to his current spouse for the remainder of her life, should she survive him. In addition, the Predecessor Company agreed to continue in effect its indemnification of him and to provide continued medical and life insurance benefits for Mr.
Ebbers lifetime at the Predecessor Companys expense and limited use of the Predecessor Companys aircraft, subject to reimbursement to the Predecessor Company by Mr. Ebbers on the same basis as is currently in effect with the
Predecessor Company for personal usage. Mr. Ebbers was also granted the right to lease office space from the Predecessor Company. The separation agreement further provided that all of Mr. Ebbers outstanding options to purchase WorldCom group
common stock or MCI group common stock became fully vested and exercisable as of April 29, 2002, and would generally remain exercisable for a period of five years following that date (or, if earlier, the expiration of the original term). As of April
29, 2002, Mr. Ebbers held (i) unvested options to acquire 1,788,627 shares of WorldCom group common stock at a weighted-average exercise price of $30.90 per share, (ii) vested options to acquire 9,510,678 shares of WorldCom group common stock at a
weighted-average exercise price of $21.25 per share, and (iii) no vested or unvested options to acquire MCI group common stock. Under the separation agreement, Mr. Ebbers further agreed to be subject to a number of restrictive covenants, including a
five-year non-competition covenant in favor of the Predecessor Companys affiliates and the Predecessor Company. The Predecessor Company and Mr. Ebbers also agreed to and executed a mutual release of actual or potential claims, subject to
certain exceptions. Finally, the separation agreement provided that, in the event of



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



any breach of the separation agreement by Mr. Ebbers, default by Mr. Ebbers with respect to any of his obligations under the Ebbers Note and related
arrangements or the filing of bankruptcy by him, the payment of pension benefits described above would be permanently discontinued and all outstanding amounts due to the Predecessor Company by him would be accelerated as provided in the Ebbers Note.



The Predecessor Company has not made any of the pension
payments under the separation agreement nor provided any of the other benefits under the agreement except health benefits. Additionally, the Predecessor Company ceased providing health benefits on March 31, 2003. The Predecessor Company believes
that Mr. Ebbers had breached the separation agreement. However, Mr. Ebbers asserts that he has not breached the separation agreement and that the Predecessor Company breached the separation agreement prior to any alleged breach by Mr. Ebbers.



Mr. Ebbers has filed proofs of claim in the Predecessor
Companys Chapter 11 cases seeking, among other things, payment of benefits under the separation agreement. On September 30, 2003, the Predecessor Company filed a notice of rejection of the separation agreement in its Chapter 11 case. The
notice indicated it was merely a protective measure, as the Predecessor Company believes the separation agreement is not an executory contract on account of the prior breach by Mr. Ebbers. On October 15, 2003, Mr. Ebbers objected to the notice of
rejection. Additionally, in the complaint filed against Ebbers on July 9, 2004, the Company asserted that Ebbers was in default of the Ebbers note and consequently the Company had no further obligations to Ebbers under the separation agreement.



Other Transactions with Ebbers



During 2002, the Predecessor Company provided office space and Internet
access at no charge to the Jackson Bandits, a minor league hockey team owned in part by Mr. Ebbers. The cost associated with the 1,300 square foot office space and the T-1 Internet connection totaled approximately $160,000. Additionally, Mr. Ebbers
was an owner of KLLM Transportation, Inc. (KLLM), for which the Predecessor Company provided voice telecommunications services in the amount of $122,000. There was no receivable from KLLM as of December 31, 2002. During 2002, the
Predecessor Company also provided telecommunications services to other companies owned by Mr. Ebbers. The total revenue generated in 2002 by the sale of such services to these companies was approximately $22,000.



Mr. Ebbers individually provided Ronald Beaumont, the Predecessor
Companys Chief Operating Officer of WorldCom Group from December 2000 until May 2002, with a $650,000 personal loan that accrued interest at a rate of 10% per annum. The loan from Mr. Ebbers was provided in two installments, with $250,000
loaned in 2000 and an additional $400,000 loaned in 2002.



Transactions with Ronald Beaumont



During 2002, the Predecessor Company purchased services from three companies owned by Mr. Beaumont (Beaumont Events Company, Beaumont Ranch Company and Beaumont Key Services). The companies were engaged by the Predecessor Company to host
certain events. The total cost of these services provided during 2002 totaled $21,000.



Kellett Airplane Arrangements



In 2001, the Predecessor Company leased a Falcon 20 airplane to Kellett Investment Corporation (KIC), controlled by Stiles Kellett Jr., who at the time was a member of the Predecessor Companys Board
of Directors and chairman of the Compensation Committee. Pursuant to the terms of the Predecessor Companys lease to



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



KIC, the Predecessor Company leased the Falcon 20 aircraft to KIC for a nominal monthly fee with a term expiring on June 15, 2002. KIC was also responsible
under the lease for the costs of the insurance on the airplane, the pilots, the hangar expense, fuel, and payment to the Predecessor Company of a $400 per hour flight fee. The Predecessor Company retained responsibility under the lease for
reimbursing KIC for the costs of the maintenance for the airplane.



In 2002, Mr. Breeden, the Corporate Monitor, conducted an investigation of the airplane arrangement. On September 6, 2002, Mr. Breeden sent a summary of his investigation of the lease arrangement to the Predecessor Companys Board of
Directors, which concluded that the terms of the lease arrangement were below fair market value and the lease should have been disclosed to the Board of Directors and on Mr. Kelletts annual directors and officers
questionnaire. Mr. Breeden recommended, among other things, that the Predecessor Company seek to obtain additional amounts owed to the Predecessor Company under the lease arrangement, and that the Board of Directors remove Mr. Kellett as a
director. In October 2002, the Predecessor Company entered into a settlement agreement with Mr. Kellett pursuant to which Mr. Kellett paid to the Predecessor Company the balance necessary for reimbursement for his use of the airplane under the lease
at a rate of $3,000 per hour, offset by amounts the Predecessor Company owed him which totaled $148,000 in 2002. Under the settlement agreement, Mr. Kellett also resigned from the Board of Directors.



Roberts Airplane Arrangements



From 2000 to 2002, the Predecessor Company incurred air transportation costs
for Bert C. Roberts, Jr. (the Chairman of the Board of Directors from 1998 until his resignation in December 2002 and a member of the Compensation Committee) and other WorldCom employees. Such transportation was provided by BR Ventures
(BRV), a wholly-owned company held by Mr. Roberts. The Predecessor Company paid BRV for use of the aircraft for WorldCom business at a rate of approximately $1,600 per flight hour. The Predecessor Company paid BRV for Mr. Robertss
personal use of the aircraft using an Internal Revenue Service formula, which amounts were imputed as income to Mr. Roberts. The Predecessor Company paid approximately $159,000 to BRV under this arrangement in 2002.



Transactions with Brown Brothers & Harriman (BB &
H)



Lawrence Tucker, a member of the Predecessor
Companys Board of Directors from 1998 through October 2000 and an Advisory Director from November 2000 through October 2002, was a General Partner of BB & H. During 2002, the Predecessor Company provided telecommunications services to BB
& H in the amount of $533,000.



Transactions with
Companies Related to John Sidgmore



John Sidgmore, the
Predecessor Companys interim President and Chief Executive Officer from April 2002 through December 2002 and a member of the Predecessor Companys Board of Directors from 1998 through October 2002, was a venture partner of New Enterprise
Associates (NEA) since October 2001. During 2002, the Predecessor Company provided voice and data services to NEA in the amount of $170,000.



Mr. Sidgmore was also Chairman and Chief Executive Officer of eCommerce Industries, Inc. (ECI). During 2002, the Predecessor Company provided
various telecommunications services to ECI in the amounts of $275,000. The Predecessor Company also provided telecommunications services to United Business Computers, a subsidiary of ECI, during 2002 in the amounts of $196,000.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Legal Services from Patton Boggs



Mr. Laurence Harris, a director of the Company, was a partner in the law
firm Patton Boggs LLP (Patton Boggs) during 2004. As of December 31, 2004, Mr. Harris was of counsel for the firm. The total cost of various legal services provided by Patton Boggs in 2004 was approximately $1 million. As of
December 31, 2004, the amount payable to Patton Boggs was approximately $86,000. Mr. Harris does not share in any of the fees received by Patton Boggs from the Company.



Transactions with Telefonos de Mexico, S.A. de C.V.



During the year ended December 31, 2004, the Company entered into numerous
transactions with Telefonos de Mexico, S.A. de C.V. and its subsidiaries (Telmex), a company controlled by Mr. Carlos Slim Helu, a significant shareholder of the Company. Telmex is a leading provider of telecommunications services,
primarily in Mexico. As a result of these transactions, the Company recognized revenues of approximately $31 million and incurred expenses of approximately $197 million during the year ended December 31, 2004. The services provided to Telmex include
telecommunication services. As of December 31, 2004, receivables for services due to the Company from Telmex were approximately $7 million, and approximately $34 million was payable to Telmex.



Transactions with Embratel



Daniel Crawford, Acting PresidentInternational & Wholesale Markets
during 2004, was, until July 23, 2004, Chairman of the Board of Directors of Embratel. When the Company sold its ownership interest in Embratel in July, 2004, Mr. Crawford resigned from the Board of Directors of Embratel and has no further
relationship with Embratel as an officer or director. During the period in which Mr. Crawford was on the Board of Directors of Embratel, all intercompany transactions were eliminated in consolidation. The Company has continued to maintain a
commercial relationship with Embratel since the sale, and continues to utilize Embratel to serve its customers communication needs in Brazil. During 2004, the total costs of services provided by Embratel were approximately $29 million and the
total revenues for services provided to Embratel by the Company were approximately $15 million. As of December 31, 2004, receivables for services due to the Company from Embratel totaled approximately $6 million, and approximately $11 million was
payable to Embratel.



Other Transactions



Certain directors of the Company are affiliated with
various entities that purchase the Companys voice, data, and Internet telecommunications services. These purchases are made in the ordinary course of business and the directors do not have any involvement in the selection of the Company as a
provider of these services.





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(24) Condensed Combined Financial Statements (Unaudited)



In accordance with SOP 90-7, the following unaudited condensed combined
financial statements of the Debtors, consisting of substantially all of the Predecessor Companys direct and indirect domestic subsidiaries, represents the unaudited results of operations for the Debtor entities for the years ended December 31,
2003 and 2002. These statements have been prepared on the same basis as the Predecessor Companys consolidated financial statements. The application of fresh-start reporting effectively eliminated the debtor companies for accounting purposes
and as such, no statement of financial position has been presented as of December 31, 2003.



Debtors Unaudited Condensed Combined Statements of Operations

Years Ended December 31, 2003 and
2002

(In Millions)



|                                                                                                                                            |  |                        |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                                                            |  | Predecessor Company    |       
|                                                                                                                                            |  | Year EndedDecember 31, |       
|                                                                                                                                            |  | 2003                   |        |   | 2002 |  
|Revenues(1)                                                                                                                                 |  | $                      | 21,010 |   |      | $ | 28,182 |  
|Operating expenses(1)                                                                                                                       |  |                        | 19,573 |   |      |   | 31,475 |  
|                                                                                                                                            |  |                        |        |   |      |   |        |  
|Operating income (loss)                                                                                                                     |  |                        | 1,437  |   |      |   | (3,293 | )
|Other expense, net                                                                                                                          |  |                        | (797   | ) |      |   | (4,736 | )
|Reorganization items, net(2)                                                                                                                |  |                        | 22,087 |   |      |   | (802   | )
|                                                                                                                                            |  |                        |        |   |      |   |        |  
|Income (loss) from continuing operations before income taxes, minority interests and cumulative effects of changes in accounting
principles |  |                        | 22,727 |   |      |   | (8,831 | )
|Income tax expense                                                                                                                          |  |                        | (264   | ) |      |   | (129   | )
|Minority interests, net of tax                                                                                                              |  |                        | 6      |   |      |   | 21     |  
|                                                                                                                                            |  |                        |        |   |      |   |        |  
|Income (loss) from continuing operations before cumulative effects of changes in accounting principles                                      |  |                        | 22,469 |   |      |   | (8,939 | )
|Loss from discontinued operations                                                                                                           |  |                        | (43    | ) |      |   | (202   | )
|Cumulative effects of changes in accounting principles                                                                                      |  |                        | (215   | ) |      |   | (32    | )
|                                                                                                                                            |  |                        |        |   |      |   |        |  
|Net income (loss)                                                                                                                           |  |                        | 22,211 |   |      |   | (9,173 | )
|Distributions on preferred securities                                                                                                       |  |                        |       |   |      |   | (19    | )
|                                                                                                                                            |  |                        |        |   |      |   |        |  
|Net income (loss) attributable to common shareholders(3)                                                                                    |  | $                      | 22,211 |   |      | $ | (9,192 | )
|                                                                                                                                            |  |                        |        |   |      |   |        |  

---

|(1) | Included revenues and associated costs of the Predecessor Companys non-debtor international subsidiaries that were subject to transfer pricing agreements with
one of the Predecessor Companys debtor subsidiaries, which effectively transferred the revenues and expenses of the non-debtor international subsidiaries to a debtor entity.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | All reorganization gains and losses were related to the Debtors operations during the Chapter 11 period.
|--- | ---------------------------------------------------------------------------------------------------------

|(3) | The net loss attributable to common shareholders of the Debtors was equal to the Predecessor Companys consolidated net loss attributable to common shareholders
because WorldCom, Inc. (ultimate Parent company of all consolidated subsidiaries) was a debtor and all non-debtor subsidiaries were accounted for on the equity method of accounting in these unaudited condensed combined financial statements of the
debtor entities. Equity in earnings (losses) were included in other income (expense), net.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



(25) Selected Quarterly Financial Information (Unaudited)



The following represents the Companys quarterly results for 2004 and
2003 (in millions, except per share amounts):



|                                             |  |                    |       |   |            |   |       |              |  |   |             |      |  |   |       |     
|-------------------------------------------- |  | ------------------ | ----- | - | ---------- | - | ----- | ------------ |  | - | ----------- | ---- |  | - | ----- | ----
|                                             |  | Successor Company  |      
|                                             |  | Quarter ended 2004 |      
|                                             |  | March 31(6)        |       |   | June 30(6) |   |       | September 30 |  |   | December 31 |     
|Revenues                                     |  | $                  | 5,418 |   |            | $ | 5,222 |              |  | $ | 5,076       |      |  | $ | 4,974 |     
|Operating (loss) income                      |  |                    | (270  | ) |            |   | 37    | (1)          |  |   | (3,392      | )(2) |  |   | 434   | (3) 
|Loss from continuing operations              |  |                    | (386  | ) |            |   | (70   | )            |  |   | (3,400      | )    |  |   | (172  | )   
|Net loss attributable to common shareholders |  |                    | (388  | ) |            |   | (71   | )            |  |   | (3,398      | )    |  |   | (145  | )(4)
|Loss per share:                              |  |                    |       |   |            |   |       |              |  |   |             |      |  |   |       |     
|Basic                                        |  |                    | (1.19 | ) |            |   | (0.22 | )            |  |   | (10.65      | )    |  |   | (0.45 | )   
|Diluted                                      |  |                    | (1.19 | ) |            |   | (0.22 | )            |  |   | (10.65      | )    |  |   | (0.45 | )   



|                                                      |  |                     |       |            |   |       |                 |  |   |                |   |  |   |        |    
|----------------------------------------------------- |  | ------------------- | ----- | ---------- | - | ----- | --------------- |  | - | -------------- | - |  | - | ------ | ---
|                                                      |  | Predecessor Company |      
|                                                      |  | Quarter ended 2003  |      
|                                                      |  | March 31(6)         |       | June 30(6) |   |       | September 30(6) |  |   | December 31(6) |  
|Revenues                                              |  | $                   | 6,592 |            | $ | 6,159 |                 |  | $ | 5,969          |   |  | $ | 5,546  |    
|Operating income (loss)                               |  |                     | 598   |            |   | 317   |                 |  |   | 77             |   |  |   | (332   | )  
|Income (loss) from continuing operations              |  |                     | 271   |            |   | (2    | )               |  |   | (45            | ) |  |   | 22,245 | (5)
|Net income (loss) attributable to common shareholders |  |                     | 51    |            |   | 9     |                 |  |   | (55            | ) |  |   | 22,206 |    

---

|(1) | Included a $95 million reduction in access costs for a change in estimate regarding contributions to the Universal Service Fund for 2003 and the first quarter of
2004, as well as $62 million in gains from creditor settlements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Included $3.5 billion of impairment charges related to the Companys long-lived and indefinite-lived assets (see Note 3).
|--- | -------------------------------------------------------------------------------------------------------------------------

|(3) | Included the effects of a total of $100 million in gains from creditor settlements, a $76 million benefit related to property tax adjustments and value added tax
settlements, a $61 million reduction in bad debt expense including a change in estimate, and a $66 million increase to revenue including a change to billing adjustment assumptions, offset by an increase to access costs of $25 million related to
vendor settlements and other increases of $8 million.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Included the effects of income tax expense related to changes in estimates of $275 million regarding the Companys pre-confirmation contingencies and current
year provision for state income taxes.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Included the Predecessor Companys gain of approximately $22.3 billion from the effects of its Plan which were recorded on December 31, 2003 upon the adoption
of fresh-start reporting (see Note 5).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|(6) | Amounts have been reclassified from previously reported amounts to reflect Embratel, Proceda
and OzEmail as discontinued operations as follows (in millions):
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                         |  |                    |       |   |         |   |       |  
|-------------------------------------------------------- |  | ------------------ | ----- | - | ------- | - | ----- | -
|                                                         |  | Successor Company  |      
|                                                         |  | Quarter ended 2004 |      
|                                                         |  | March 31           |       |   | June 30 |  
|Revenues, as reported                                    |  | $                  | 6,295 |   |         | $ | 5,236 |  
|Reclassified to discontinued operations                  |  |                    | (877  | ) |         |   | (14   | )
|                                                         |  |                    |       |   |         |   |       |  
|Revenues, as restated                                    |  | $                  | 5,418 |   |         | $ | 5,222 |  
|                                                         |  |                    |       |   |         |   |       |  
|                                                         |  |                   
|Operating (loss) income, as reported                     |  | $                  | (205  | ) |         | $ | 41    |  
|Reclassified to discontinued operations                  |  |                    | (65   | ) |         |   | (4    | )
|                                                         |  |                    |       |   |         |   |       |  
|Operating (loss) income, as restated                     |  | $                  | (270  | ) |         | $ | 37    |  
|                                                         |  |                    |       |   |         |   |       |  
|                                                         |  |                   
|Loss from continuing operations, as reported             |  | $                  | (383  | ) |         | $ | (66   | )
|Reclassified to discontinued operations                  |  |                    | (3    | ) |         |   | (4    | )
|                                                         |  |                    |       |   |         |   |       |  
|Loss from continuing operations, as restated             |  | $                  | (386  | ) |         | $ | (70   | )
|                                                         |  |                    |       |   |         |   |       |  
|                                                         |  |                   
|Loss per share from continuing operations, as reported   |  | $                  | (1.17 | ) |         | $ | (0.21 | )
|Loss per share from continuing operations, as restated   |  |                    | (1.18 | ) |         |   | (0.22 | )
|                                                         |  |                   
|Loss per share from discontinued operations, as reported |  |                    | (0.02 | ) |         |   | (0.01 | )
|Loss per share from discontinued operations, as restated |  |                    | (0.01 | ) |         |   | (0.00 | )

|                                                      |  |                     |       |   |         |   |       |              |  |   |             |   |  |   |        |  
|----------------------------------------------------- |  | ------------------- | ----- | - | ------- | - | ----- | ------------ |  | - | ----------- | - |  | - | ------ | -
|                                                      | 
|                                                      |  | Predecessor Company |      
|                                                      |  | Quarter ended 2003  |      
|                                                      |  | March 31            |       |   | June 30 |   |       | September 30 |  |   | December 31 |  
|Revenues, as reported                                 |  | $                   | 7,228 |   |         | $ | 6,900 |              |  | $ | 6,780       |   |  | $ | 6,407  |  
|Reclassified to discontinued operations               |  |                     | (636  | ) |         |   | (741  | )            |  |   | (811        | ) |  |   | (861   | )
|                                                      |  |                     |       |   |         |   |       |              |  |   |             |   |  |   |        |  
|Revenues, as restated                                 |  | $                   | 6,592 |   |         | $ | 6,159 |              |  | $ | 5,969       |   |  | $ | 5,546  |  
|                                                      |  |                     |       |   |         |   |       |              |  |   |             |   |  |   |        |  
|                                                      |  |                     |       |  
|Operating income (loss), as reported                  |  | $                   | 634   |   |         | $ | 366   |              |  | $ | 180         |   |  | $ | (272   | )
|Reclassified to discontinued operations               |  |                     | (36   | ) |         |   | (49   | )            |  |   | (103        | ) |  |   | (60    | )
|                                                      |  |                     |       |   |         |   |       |              |  |   |             |   |  |   |        |  
|Operating income (loss), as restated                  |  | $                   | 598   |   |         | $ | 317   |              |  | $ | 77          |   |  | $ | (332   | )
|                                                      |  |                     |       |   |         |   |       |              |  |   |             |   |  |   |        |  
|                                                      |  |                     |       |  
|Income (loss) from continuing operations, as reported |  | $                   | 266   |   |         | $ | 13    |              |  | $ | (48         | ) |  | $ | 22,213 |  
|Reclassified to discontinued operations               |  |                     | 5     |   |         |   | (15   | )            |  |   | 3           |   |  |   | 32     |  
|                                                      |  |                     |       |   |         |   |       |              |  |   |             |   |  |   |        |  
|Income (loss) from continuing operations, as restated |  | $                   | 271   |   |         | $ | (2    | )            |  | $ | (45         | ) |  | $ | 22,245 |  
|                                                      |  |                     |       |   |         |   |       |              |  |   |             |   |  |   |        |  



(26) Subsequent Events



Merger Agreement



On February 14, 2005, Verizon Communications Inc. (Verizon), the
Company and a wholly-owned subsidiary (Merger Sub) of Verizon entered into an Agreement and Plan of Merger (the Merger Agreement). The Merger Agreement provides that, upon the terms and subject to the conditions set forth in
the Merger Agreement, the Company will merge with and into the Verizon subsidiary (the Merger), with Merger Sub continuing as the surviving person (or, in certain situations, as provided in the Merger Agreement, a wholly-owned corporate
subsidiary of Verizon will merge with and into the Company, with the Company as the surviving person.)



At the effective time and as a result of the Merger, the Company will become a wholly-owned subsidiary of Verizon and each share of the Companys
common stock will be converted into the right to receive (x) 0.4062 shares of Verizon common stock and (y) cash in the amount of $1.50 per share, which amount of cash and



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MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



number of shares may be reduced pursuant to a purchase price adjustment based on the Companys bankruptcy-claims and for certain tax liabilities, on the
terms specified in the Merger Agreement. The Merger Agreement also provides for payment of a special cash dividend in the amount of $4.10 per share (less the per share amount of any dividend declared by the Company during the period beginning
February 14, 2005 and ending on the closing date of the merger) of MCI common stock after the Merger Agreement is approved by the shareholders. All outstanding Company stock-based awards at the effective time will be replaced by a grant of Verizon
stock-based awards.



Consummation of the Merger is subject to
customary conditions, including (i) approval of the shareholders of the Company, (ii) expiration or termination of the applicable Hart-Scott-Rodino waiting period and receipt of certain other federal, state or international regulatory approvals,
(iii) absence of any law or order prohibiting the closing, (iv) subject to certain exceptions, the accuracy of representations and warranties and the absence of any Material Adverse Effect (as defined in the Merger Agreement) with respect to each
partys business. In addition, Verizons obligation to close is subject to other conditions, including (i) absence of any pending U.S. governmental litigation with a reasonable likelihood of success seeking to prohibit the closing or to
impose certain limitations, (ii) receipt of a bankruptcy order issued by the Unites States Bankruptcy Court for the Southern District allowing for the substitution of shares of Verizon common stock for shares of MCI common stock to satisfy certain
bankruptcy-related claims, and (iii) receipt of an order issued by the United States District Court for the Southern District of New York relating to the Companys Corporate Monitor and certain affirmative obligations imposed by prior order of
the United States District Court for the Southern District of New York. The Merger Agreement contains certain termination rights for both the Company and Verizon, and further provides that, upon termination of the Merger Agreement under specified
circumstances, the Company may be required to pay Verizon a termination fee of $200 million.



Consummation of the Merger will constitute a Change of Control under the Companys outstanding Senior Notes, which will obligate the surviving person to make an offer to purchase such Notes within 30
days after the effective time at a purchase price equal to 101% of principal amount plus accrued interest.



On February 15, 2005, the Company received notice that an individual shareholder filed a putative class action on behalf of himself and all shareholders
of the Company against the Company and all of the individual members of the Board of Directors in Chancery Court in the State of Delaware. Subsequently, Plaintiff filed an amended complaint that added among other things, Verizon as a defendant in
the case. Plaintiff alleges that the Company and the Board of Directors breached their fiduciary duties to shareholders in entering into the Merger Agreement with Verizon rather than accepting the merger proposal propounded by Qwest Communications
International, Inc. As a remedy, Plaintiff requests that the Chancery Court issue an injunction prohibiting consummation of the Merger Agreement. Additionally, the Company has received notice that three additional putative class actions containing
similar allegations were filed on February 18, 2005 against the Company and the Board of Directors in the Chancery Court in the State of Delaware. The Company will aggressively defend itself in these cases.



On February 24, 2005, the Company received a revised proposal from Qwest
Communications International, Inc. (Qwest) to acquire it. The Companys board of directors announced that it would conduct a thorough review of the Qwest proposal. On March 2, 2005, the Company announced its intention to engage with
Qwest to review their February 24, 2005 proposal. This decision was made with the concurrence of Verizon. Subsequently, MCI and Qwest have been in ongoing discussions regarding Qwests proposal. These discussions are continuing.



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##### Table of Contents

MCI, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Other



On January 20, 2005, the Company announced its acquisition of Network Security Technologies, Inc., a privately-held provider
of managed security services, for approximately $105 million in cash. The acquisition was completed on February 25, 2005.



On February 15, 2005, the Company announced that it entered into a sales agreement to sell OzEmail for approximately $86 million. The Company completed
the divestiture on February 28, 2005 and will record a gain of approximately $80 million in discontinued operations in its 2005 consolidated statement of operations.



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