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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

         [X]      Annual Report Pursuant to Section 13 or 15(d) of the
                  Securities Exchange Act of 1934 For the fiscal year ended
                  December 31, 1998
                                       OR
         [ ]      Transition Report Pursuant to Section 13 or 15(d) of the
                  Securities Exchange Act of 1934 For the transition period from
                  _____________ to _________________

                         Commission File Number 0-11258
                    -----------------------------------------

                               MCI WORLDCOM, INC.

             (Exact name of registrant as specified in its charter)
                    -----------------------------------------

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                           Georgia                                                 58-1521612
(State or other jurisdiction of incorporation or organization)        (I.R.S. Employer Identification No.)

           515 East Amite Street, Jackson, Mississippi                             39201-2702
             (Address of principal executive offices)                              (Zip Code)
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Registrant's telephone number, including area code: (601) 360-8600 
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
              SERIES B CONVERTIBLE PREFERRED STOCK, $.01 PAR VALUE
                         PREFERRED STOCK PURCHASE RIGHTS

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. [ ]

         The aggregate market value of the voting stock held by non-affiliates
of the registrant as of February 28, 1999 was:

                 Common Stock, $.01 par value: $ 150,382,327,343
               Series B Convertible Preferred Stock: $ 93,385,462

There were 1,851,374,214 shares of the registrant's common stock outstanding as
of February 28, 1999.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement of the registrant for the
registrant's 1999 Annual Meeting of Shareholders, which definitive proxy
statement will be filed with the Securities and Exchange Commission not later
than 120 days after the registrant's fiscal year end of December 31, 1998, are
incorporated by reference into Part III.

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                                    GLOSSARY

AT&T DIVESTITURE DECREE -- Entered on August 24, 1982, by the United States
District Court for the District of Columbia. The AT&T Divestiture Decree, among
other things, ordered AT&T to divest its wholly owned BOCs from its long lines
division and manufacturing operations and generally prohibited BOCs from
providing long distance telephone service between LATAs.

ACCESS CHARGES -- Expenses incurred by an IXC and paid to LECs and CAPs for
accessing the local networks of the LECs in order to originate and terminate
long distance calls and provide the customer connection for private line
services.

BOC -- BELL SYSTEM OPERATING COMPANY -- A local exchange carrier owned by any of
the remaining five RBOCs, which are holding companies established following the
AT&T Divestiture Decree to serve as parent companies for the BOCs.

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

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

CAP -- COMPETITIVE ACCESS PROVIDER -- A company that provides its customers with
an alternative to the BOC for local transport of private line and special access
telecommunications services.

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

DS-3 -- A data communications circuit capable of transmitting data at 45
megabits per second (sometimes called a T-3).

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

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

IXC -- INTEREXCHANGE CARRIER -- A long distance carrier providing services
between local exchanges.

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

LANS -- LOCAL AREA NETWORKS -- The interconnection of computers for the purpose
of sharing files, programs and various devices such as printers and high-speed
modems. LANs may include dedicated computers or file servers that provide a
centralized source of shared files and programs.

LATAS -- LOCAL ACCESS AND TRANSPORT AREAS -- The approximately 200 geographic
areas defined pursuant to the AT&T Divestiture Decree. The BOCs are generally
prohibited from providing long distance service between the LATA in which they
provide local exchange services, and any other LATA.

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LEC -- LOCAL EXCHANGE CARRIER -- A company providing local telephone services.
Each BOC is a LEC.

LINE COSTS -- Primarily includes the sum of access charges and transport
charges.

LOCAL EXCHANGE -- A geographic area generally determined by a PUC, in which
calls generally are transmitted without toll charges to the calling or called
party.

LOCAL NUMBER PORTABILITY -- The ability of an end user to change LECs while
retaining the same telephone number.

NETWORK SWITCHING CENTER -- A location where installed switching equipment
routes long distance calls and records information with respect to calls such as
the length of the call and the telephone numbers of the calling and called
parties.

OC-12 -- OPTICAL CARRIER LEVEL 12 SIGNAL -- A transmission rate for SONET, a
high speed data transport service used on fiber optic cabling, at 622 megabits
per second.

OC-48 -- OPTICAL CARRIER LEVEL 48 SIGNAL -- A transmission rate for SONET, a
high speed data transport service used on fiber optic cabling, at 2,488 megabits
per second.

PUC -- PUBLIC UTILITY COMMISSION -- A state regulatory body empowered to
establish and enforce rules and regulations governing public utility companies
and others, such as the Company, within the state (sometimes referred to as
Public Service Commissions, or PSCs).

RBOC -- REGIONAL BELL OPERATING COMPANY -- Any of the remaining regional bell
holding companies which the AT&T Divestiture Decree established to serve as
parent companies for the BOCs.

RECIPROCAL COMPENSATION -- The same compensation of a competitive LEC for
termination of a local call by the BOC on its network, as the competitor pays
the BOC for termination of local calls on the BOC network.

SETTLEMENT RATES -- The rates paid to foreign carriers by United States
international carriers to terminate certain outbound (from the United States)
switched traffic and by foreign carriers to United States international carriers
to terminate certain inbound (to the United States) switched traffic.

SONET -- SYNCHRONOUS OPTICAL NETWORK -- A standard way to interconnect high
speed traffic from multiple vendors.

TCP/IP -- TRANSMISSION CONTROL PROTOCOL/INTERNET PROTOCOL -- A suite of network
protocols that allows computers with different architectures and operating
system software to communicate with other computers on the Internet.

T-1 -- A data communications circuit capable of transmitting data at 1.5
megabits per second.

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

TARIFF -- The schedule of rates and regulations set by communications common
carriers and filed with the appropriate federal and state regulatory agencies;
the published official list of charges, terms and conditions governing provision
of a specific communications service or facility, which functions in lieu of a
contract between the subscriber or user and the supplier or carrier.

TRANSPORT CHARGES -- Expenses paid to facilities-based carriers for transmission
between or within LATAs.

WORLD WIDE WEB OR WEB -- A collection of computer systems supporting a
communications protocol that permits multi-media presentation of information
over the Internet.

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                               TABLE OF CONTENTS

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Cautionary Statement Regarding Forward-looking Statements................................................1

                                             PART I
Item 1.  Business........................................................................................1

Item 2.  Properties.....................................................................................19

Item 3.  Legal Proceedings..............................................................................20

Item 4.  Submission of Matters to a Vote of Security Holders............................................21

                                             PART II

Item 5.  Market for Registrant's Common Equity and Related Shareholder Matters..........................21

Item 6.  Selected Financial Data........................................................................22

Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations..........................................................................24

Item 7A. Quantitative and Qualitative Disclosure About Market Risk......................................47

Item 8.  Financial Statements and Supplementary Data....................................................48

Item 9.  Changes in and Disagreements with Accountants on  Accounting
         and Financial Disclosure.......................................................................49

                                            PART III

Item 10. Directors and Executive Officers of the Registrant.............................................49

Item 11. Executive Compensation.........................................................................49

Item 12. Security Ownership of Certain Beneficial Owners and Management.................................49

Item 13. Certain Relationships and Related Transactions.................................................50

                                            PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................50

Signatures..............................................................................................51

Index to Financial Statements and Financial Statement Schedule.........................................F-1

Exhibit Index     .....................................................................................E-1
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            CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The following statements are or may constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995:

(i) any statements contained or incorporated herein regarding possible or
assumed future results of operations of MCI WorldCom's business, anticipated
cost savings or other synergies, the markets for MCI WorldCom's services and
products, anticipated capital expenditures, the outcome of year 2000
uncertainties, or euro conversion efforts, regulatory developments or
competition;

(ii) any statements preceded by, followed by or that include the words
"intends," "estimates," "believes," "expects," "anticipates," "should," "could,"
or similar expressions; and

(iii) other statements contained or incorporated by reference herein regarding
matters that are not historical facts.

Because such statements are subject to risks and uncertainties, actual results
may differ materially from those expressed or implied by such forward-looking
statements; factors that could cause actual results to differ materially
include, but are not limited to, those discussed under Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Item 7A. "Quantitative and Qualitative Disclosure about Market Risk." Potential
purchasers of MCI WorldCom common stock are cautioned not to place undue
reliance on such statements, which speak only as of the date thereof.

The cautionary statements contained or referred to in this section should be
considered in connection with any subsequent written or oral forward-looking
statements that may be issued by MCI WorldCom or persons acting on its behalf.
MCI WorldCom does not undertake any obligation to release publicly any revisions
to such forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.

                                     PART I

ITEM 1.           BUSINESS

GENERAL

MCI WORLDCOM, Inc., a Georgia corporation ("MCI WorldCom" or the "Company"), is
one of the largest telecommunications companies in the United States, serving
local, long distance and Internet customers domestically and internationally.
Organized in 1983, the Company provides telecommunications services to business,
government, telecommunications companies and consumer customers through its
networks of primarily fiber optic cables, digital microwave, and fixed and
transportable satellite earth stations. Prior to September 15, 1998, the Company
was named WorldCom, Inc. ("WorldCom").

MCI WorldCom is one of the first major facilities-based telecommunications
companies with the capability to provide consumers and businesses with high
quality local, long distance, Internet, data and international communications
services over its global networks. With service to points throughout the nation
and the world, the Company provides telecommunications products and services
including: switched and dedicated long distance and local products, dedicated
and dial-up Internet access, wireless services, 800 services, calling cards,
private lines, broadband data services, debit cards, conference calling,
messaging and mobility services, advanced billing systems, enhanced fax and data
connections, high speed data communications, facilities management, local access

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to long distance companies, local access to asynchronous transfer mode
("ATM")-based backbone service, Web server hosting and integration services,
dial-up networking services and interconnection via Network Access Points
("NAPs") to Internet service providers ("ISPs").

The Company's core business is communications services, which includes voice,
data, Internet, and international services. During each of the last three years,
more than 90% of operating revenues were derived from communications services.

The Company serves as a holding company for its subsidiaries' operations.
References herein to the Company include the Company and its subsidiaries,
unless the context otherwise requires. Additionally, information in this
document has been revised to reflect the stock splits of the Company's common
stock.

BUSINESS COMBINATIONS

MCI. On September 14, 1998, the Company acquired MCI Communications Corporation
("MCI"), for approximately $40 billion, pursuant to the merger (the "MCI
Merger") of MCI with and into TC Investments Corp. ("Acquisition Subsidiary"), a
wholly owned subsidiary of the Company. Upon consummation of the MCI Merger, the
Acquisition Subsidiary was renamed MCI Communications Corporation. Through the
MCI Merger, the Company acquired one of the world's largest and most advanced
digital networks, connecting local markets in the United States to more than 280
countries and locations worldwide.

As a result of the MCI Merger, each outstanding share of MCI common stock was
converted into the right to receive 1.2439 shares of MCI WorldCom common stock,
par value $.01 per share (the "MCI WorldCom Common Stock"), or approximately 755
million MCI WorldCom common shares in the aggregate, and each share of MCI Class
A common stock outstanding (all of which were held by British Telecommunications
plc ("BT")) was converted into the right to receive $51.00 in cash or
approximately $7 billion in the aggregate. The funds paid to BT were obtained by
the Company from (i) available cash as a result of the Company's $6.1 billion
public debt offering in August 1998; (ii) the sale of MCI's Internet backbone
facilities and wholesale and retail Internet business (the "iMCI Business") to
Cable and Wireless plc ("Cable & Wireless") for $1.75 billion in cash on
September 14, 1998; (iii) the sale of MCI's 24.9% equity stake in Concert
Communications Services ("Concert") to BT for $1 billion in cash on September
14, 1998; and (iv) availability under the Company's commercial paper program and
credit facilities. See Note 5 of Notes to Consolidated Financial Statements.

Upon effectiveness of the MCI Merger, the then outstanding and unexercised
options exercisable for shares of MCI common stock were converted into options
exercisable for an aggregate of approximately 83 million shares of MCI WorldCom
Common Stock having the same terms and conditions as the MCI options, except
that the exercise price and the number of shares issuable upon exercise were
divided and multiplied, respectively, by 1.2439. The MCI Merger was accounted
for as a purchase; accordingly, operating results for MCI have been included
from the date of acquisition. See Note 2 of Notes to Consolidated Financial
Statements.

EMBRATEL. On August 4, 1998, MCI acquired a 51.79% voting interest and a 19.26%
economic interest in Embratel Participacoes S.A. ("Embratel"), Brazil's only
facilities-based national communications provider, for approximately R$2.65
billion (US$2.3 billion). The purchase price will be paid in local currency
installments, of which R$1.06 billion (US$916) million, was paid on August 4,
1998 with the remaining R$1.59 billion (US$1.32 billion at December 31, 1998) to
be paid in two equal installments over the next two

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years. Embratel provides interstate long distance and international
telecommunications services in Brazil, as well as over 40 other communications
services, including leased high-speed data, satellite, Internet, frame relay and
packet-switched services. Operating results for Embratel are consolidated in the
accompanying Consolidated Financial Statements and are included from the date of
the MCI Merger.

COMPUSERVE. On January 31, 1998, MCI WorldCom acquired CompuServe Corporation
("CompuServe"), for approximately $1.3 billion, pursuant to the merger (the
"CompuServe Merger") of a wholly owned subsidiary of the Company, with and into
CompuServe. Upon consummation of the CompuServe Merger, CompuServe became a
wholly owned subsidiary of MCI WorldCom.

As a result of the CompuServe Merger, each share of CompuServe common stock was
converted into the right to receive 0.40625 shares of MCI WorldCom Common Stock
or approximately 37.6 million MCI WorldCom common shares in the aggregate. Prior
to the CompuServe Merger, CompuServe operated primarily through two divisions:
Interactive Services and Network Services. Interactive Services offered
worldwide online and Internet access services for consumers, while Network
Services provided worldwide network access, management and applications, and
Internet service to businesses. The CompuServe Merger was accounted for as a
purchase; accordingly, operating results for CompuServe have been included from
the date of acquisition.

ANS. On January 31, 1998, the Company also acquired ANS Communications, Inc.
("ANS") from America Online, Inc. ("AOL") for approximately $500 million, and
has entered into five year contracts with AOL under which MCI WorldCom and its
subsidiaries will provide network services to AOL (collectively, the "AOL
Transaction"). As part of the AOL Transaction, AOL acquired CompuServe's
Interactive Services division and received a $175 million cash payment from MCI
WorldCom. MCI WorldCom retained the CompuServe Network Services division. ANS
provides Internet access to AOL and AOL's subscribers in the United States,
Canada, the United Kingdom, Sweden and Japan. The AOL Transaction was accounted
for as a purchase; accordingly, operating results for ANS have been included
from the date of acquisition.

BROOKS FIBER PROPERTIES. On January 29, 1998, MCI WorldCom acquired Brooks Fiber
Properties, Inc. ("BFP"), pursuant to the merger (the "BFP Merger") of a wholly
owned subsidiary of MCI WorldCom, with and into BFP. Upon consummation of the
BFP Merger, BFP became a wholly owned subsidiary of MCI WorldCom. BFP is a
leading facilities-based provider of competitive local telecommunications
services, commonly referred to as a competitive local exchange carrier ("CLEC"),
in selected cities within the United States. BFP acquires and constructs its own
state-of-the-art fiber optic networks and facilities and leases network capacity
from others to provide long distance carriers ("IXCs"), ISPs, wireless carriers
and business, government and institutional end users with an alternative to the
incumbent local exchange carriers ("ILECs") for a broad array of high quality
voice, data, video transport and other telecommunications services.

As a result of the BFP Merger, each share of BFP common stock was converted into
the right to receive 1.85 shares of MCI WorldCom Common Stock or approximately
72.6 million MCI WorldCom common shares in the aggregate. The BFP Merger was
accounted for as a pooling-of-interests; and accordingly, the Company's
financial statements for periods prior to the BFP Merger have been restated to
include the results of BFP for all periods presented.

Upon effectiveness of the BFP Merger, the then outstanding and unexercised
options and warrants exercisable for shares of BFP common stock were converted
into options and warrants, respectively, exercisable for shares of MCI WorldCom
Common Stock having the same terms and conditions as the BFP options and
warrants, except that the exercise price and the number of shares issuable upon
exercise were divided and multiplied, respectively, by 1.85.

MFS COMMUNICATIONS. On December 31, 1996, MCI WorldCom, through a wholly owned
subsidiary, merged with MFS Communications Company, Inc. ("MFS"). Through the
acquisition of MFS (the "MFS Merger"), valued at approximately $12.5 billion,
the Company acquired local network access facilities via digital fiber optic






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cable networks installed in and around major United States cities, and in
several major European cities. The Company also acquired a network platform,
which consists of Company-owned transmission and switching facilities, and
network capacity leased from other carriers primarily in the United States and
Western Europe.

As a result of the MFS Merger, each share of MFS common stock was converted into
the right to receive 2.1 shares of MCI WorldCom Common Stock or approximately
471 million MCI WorldCom common shares in the aggregate. Each share of MFS
Series A 8% Cumulative Convertible Preferred Stock (the "MFS Series A Preferred
Stock") was converted into the right to receive one share of Series A 8%
Cumulative Convertible Preferred Stock of MCI WorldCom ("MCI WorldCom Series A
Preferred Stock"), or 94,992 shares of MCI WorldCom Series A Preferred Stock in
the aggregate. Each share of MFS Series B Convertible Preferred Stock was
converted into the right to receive one share of Series B Convertible Preferred
Stock of MCI WorldCom ("MCI WorldCom Series B Preferred Stock"), or
approximately 12.7 million shares of MCI WorldCom Series B Preferred Stock in
the aggregate. In addition, each depositary share representing 1/100th of a
share of MFS Series A Preferred Stock was exchanged for a depositary share
representing 1/100th of a share of MCI WorldCom Series A Preferred Stock.

In May 1998, the Company exercised its option to redeem all of the outstanding
MCI WorldCom Series A Preferred Stock and related Depositary Shares. Prior to
the redemption date, substantially all of the holders of MCI WorldCom Series A
Preferred Stock elected to convert the preferred stock into MCI WorldCom Common
Stock, resulting in the issuance of approximately 32.7 million shares of MCI
WorldCom Common Stock.

UUNET TECHNOLOGIES. On August 12, 1996, MFS acquired UUNET Technologies, Inc.
("UUNET"), through a merger of a subsidiary of MFS with and into UUNET (the
"UUNET Acquisition"). UUNET is a leading worldwide provider of a comprehensive
range of Internet access options, applications, and value added services to
businesses, other telecommunications companies and online services providers.

WILTEL. On January 5, 1995, MCI WorldCom completed the acquisition of the
network services operations of Williams Telecommunications Group, Inc.
("WilTel"), a subsidiary of The Williams Companies, Inc., for approximately $2.5
billion in cash (the "WilTel Acquisition"). Through this purchase, the Company
acquired a nationwide transmission network of approximately 11,000 miles of
fiber optic cable and digital microwave facilities.

IDB. On December 30, 1994, MCI WorldCom, through a wholly owned subsidiary,
merged with IDB Communications Group, Inc. ("IDB"). Through this merger (the
"IDB Merger"), the Company acquired a domestic and international communications
network providing private line and public switched long distance
telecommunications services, facsimile and data connections, television and
radio transmission services, and mobile satellite communications capabilities.
As a result of the IDB Merger, each share of common stock of IDB was converted
into the right to receive 0.953758 shares of MCI WorldCom Common Stock,
resulting in the issuance of approximately 71.8 million shares of MCI WorldCom
Common Stock. In addition, MCI WorldCom assumed, on a subordinated basis,
jointly and severally with IDB, the obligations of IDB to pay the principal of
and interest on $195.5 million 5% convertible subordinated notes due 2003,
issued by IDB. In 1996, MCI WorldCom exercised its option to redeem all of the
outstanding IDB notes. A majority of the holders of the IDB notes elected to
convert their notes into MCI WorldCom Common Stock prior to the redemption,
resulting in the issuance of approximately 10.3 million shares of MCI WorldCom
Common Stock. The IDB Merger was accounted for under the pooling-of-interests
method.



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COMPANY STRATEGY

The Company's strategy is to further develop as a fully integrated
telecommunications company positioned to take advantage of growth opportunities
in global telecommunications. Consistent with this strategy, the Company
believes that transactions such as the MCI Merger, the CompuServe Merger and the
AOL Transaction enhance the combined entity's opportunities for future growth,
create a stronger competitor in the changing telecommunications industry and 
allow provision of end-to-end bundled service over global networks, which will
provide new or enhanced capabilities for the Company's customers.

SERVICES

GENERAL. The Company is one of the largest telecommunications companies in the
United States, serving local, long distance and Internet customers domestically
and internationally. The products and services provided by the Company include
switched and dedicated long distance and local products, dedicated and dial-up
Internet access, wireless services, 800 services, calling cards, private lines,
broadband data services, debit cards, conference calling, messaging and mobility
services, advanced billing systems, enhanced fax and data connections, high
speed data communications, facilities management, local access to long distance
companies, local access to ATM-based backbone service, Web server hosting and
integration services, dial-up networking services and interconnection via NAPs
to ISPs. Based on Federal Communications Commission ("FCC") statistics as of
December 31, 1997 (the most recent statistics available), the Company's pro
forma share (including MCI) of total domestic toll service revenues for 1997 was
26%.

DOMESTIC LONG DISTANCE AND LOCAL SERVICE. The Company provides a single source
for integrated local and long distance telecommunications services and
facilities management services to business, government, other telecommunications
companies and consumer customers.

There are several ways in which the customer can access the Company's network
for domestic long distance services. Generally, a customer who has selected the
Company as its IXC can utilize the Company's network for inter-LATA long
distance calls through "one plus" dialing of the desired call destination.
Customers who do not select the Company as their IXC can utilize the Company's
network for all their long distance calls through two methods of "dial-up
access." They can dial a local telephone number to access the Company's
computerized switching equipment and then enter a personal authorization code
and the area code and telephone number of the desired call destination.
Customers may also access the Company's network by dialing 10-10 plus the three
digit Carrier Identification Code belonging to the Company and the area code and
telephone number of the desired call location. Additionally, consumers may
access the Company's services through dial around services, such as
1-800-COLLECT. Regardless of the method used, dial-up customers can access the
Company's network for all of their long distance calls, both intra-LATA and
interLATA. High volume customers can access the Company's network through the
use of high-capacity dedicated circuits. Increasingly, Digital Subscriber Line
("DSL") connections are expected to offer high speed connectivity for a broader
mix of customers on an economical basis.

Customer billing is generated internally and through a facilities management
agreement under which Electronic Data Systems Corporation ("EDS") performs
significant data processing functions. See Notes 9 and 17 of Notes to
Consolidated Financial Statements.

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




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Unlike the RBOCs and other large LECs which were organized geographically in
response to the regulatory environment that existed before the AT&T Divestiture
Decree, the Company is organized around its customers to take advantage of
ongoing technological, competitive and regulatory changes. This better positions
the Company to serve its customers' growing demands for advanced communications.

The Company offers a broad range of related services which enhance customer
convenience, add value and provide additional revenue sources. Advanced "800"
service offers features for caller and customer convenience, including a variety
of call routing and call blocking options, customer reconfiguration, termination
overflow to switched or dedicated lines, Dialed Number Identification Service,
real-time Automatic Number Identification, and flexible after-hours call
handling services. The Company's travel cards offer worldwide calling services,
caller-friendly voice mail with message waiting signal, message storage and
delivery, conference calling, personal greetings, speed dialing, customer
deactivation and reactivation of cards, customer card, and private-label card
options. The Company is also a market leader for the prepaid calling card which
allows a purchaser to pay in advance for a specific number of long distance
minutes.

INTERNET. The Company provides a comprehensive range of Internet access and
value-added options, applications and value added services tailored to meet the
needs of businesses and other telecommunications providers. The Internet
products and services offered by the Company include Internet access (dial-up
and dedicated, for both retail and wholesale), fax-over-the-Internet, managed
networking services and applications (such as virtual private networks,
Intranets and Extranets), Web hosting and electronic commerce and transaction
services (such as credit card transaction processing).

INTERNATIONAL SERVICES. The Company offers international public switched voice,
private line and data services to other carriers and to business, government and
consumer customers. The Company has over 200 operating agreements with foreign
carriers to provide switched voice and/or private line services, thereby making
the Company a leading participant in the international telecommunications
market.

The Company offers public switched international telecommunications services
worldwide and provides direct services to approximately 160 foreign countries.
The Company sells public switched telecommunications services to corporate and
residential customers, and to domestic long distance carriers that lack
transmission facilities to locations served by the Company or need more
transmission capacity. Customers can access the Company's international
switching centers to make international telephone calls via dedicated
connections or dial-up access.

The Company both delivers and receives international traffic pursuant to its
operating agreements. Historically, the terms of most switched voice operating
agreements, as well as established 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 WorldCom, in proportion to the
percentage of United States outbound traffic routed by that United States
international carrier to the foreign carrier. New FCC policies authorizing
alternative traffic routing arrangements and overseas liberalization are having
the effect of gradually breaking down the exchange of international traffic
pursuant to traditional operating agreements and proportionate return.

The Company also provides permanent and temporary international private line
services to customers for a number of applications. These applications generally
involve establishing private, international point-to-point communications links
for customers with high traffic volumes or special needs, such as greater
security or route diversity.




                                       6
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MCI WorldCom also provides switched voice, private line and/or value-added data
services over its own facilities and leased facilities in the United Kingdom,
Germany, France, the Netherlands, Sweden, Switzerland, Belgium, Italy, Ireland
and other European countries. The Company operates metropolitan digital fiber
optic networks in London, Paris, Frankfurt, Hamburg, Dusseldorf, Amsterdam,
Rotterdam, Stockholm, Brussels and Zurich. During 1998, the Company completed
the construction of a high capacity digital fiber optic network to interconnect
its metropolitan networks in Europe. In addition, MCI WorldCom, together with
its joint venture partner Cable & Wireless, placed into service in the first
quarter of 1998 a high capacity digital fiber optic undersea cable between the
United States and the United Kingdom. The Company also offers certain
international services over a combination of leased and owned facilities in
certain Asian markets, including Australia, Japan, Hong Kong and Singapore. The
Company was granted authority in the first quarter of 1998 to be a local and
international facilities based carrier in Australia and Japan. In Japan, the
Company is now classified as a Type I carrier. The Company now operates
metropolitan digital fiber optic networks in Sydney and Tokyo. Such operations
are subject to certain risks including licensing requirements, changes in
foreign government regulations and telecommunications standards, interconnection
and leased line charges, taxes, fluctuating exchange rates, various trade
barriers, and political and economic instability.

The Company derives substantial revenues by providing international
communications services to United States commercial and carrier customers. Such
operations are subject to certain risks such as changes in United States or
foreign government regulatory policies, disruption, suspension or termination of
operating agreements, and currency fluctuations. The rates that the Company can
charge its customers for international services may decrease in the future due
to the entry of new carriers with substantial resources and aggressiveness on
the part of new or existing carriers. In addition, the consummation of mergers,
joint ventures and alliances among large international carriers that facilitate
targeted pricing and cost reductions, and the availability of international
circuit capacity on new undersea fiber optic cables and new high capacity
satellite systems in the Atlantic, Pacific and Indian Ocean Regions may impact
rates.

The Company derives substantial revenues from providing services to customers in
overseas locations, particularly the United Kingdom and Germany. Such operations
are subject to certain risks such as changes in the legal and regulatory
policies of the foreign jurisdiction, local political and economic developments,
currency fluctuations, exchange controls, royalty and tax increases, retroactive
tax claims, expropriation, and import and export regulations and other laws and
policies of the United States affecting foreign trade, investment and taxation.
In addition, in the event of any dispute arising from foreign operations, the
Company may be subject to the exclusive jurisdiction of foreign courts and may
not be successful in subjecting foreign persons or entities to the jurisdiction
of the courts in the United States. MCI WorldCom may also be hindered or
prevented from enforcing its rights with respect to foreign governments because
of the doctrine of sovereign immunity. There can be no assurance that the laws,
regulations or administrative practices of foreign countries relating to MCI
WorldCom's ability to do business in that country will not change. Any such
change could have a material adverse effect on MCI WorldCom's financial
condition and results of operations.

EMBRATEL. MCI WorldCom's investment in Embratel further extends the Company's
local-to-global strategy. Embratel's business consists principally of providing
intra-regional long distance, inter-regional long distance and international
long distance telephone service as well as data communications, text, telex,
sound and image transmission, Internet services and mobile satellite and
maritime communications. Embratel operates under a domestic long distance
concession and an international long distance concession (together, the
"Concession") granted by Agencia Nacional de Telecomunicacoes ("Anatel") on May
26, 1998. Embratel's Concession has been granted under the public regime (the
"Public Regime").

SEGMENT AND GEOGRAPHIC INFORMATION. Certain financial information about
operations by segment and by geographic area for 1998, 1997 and 1996 is included
in Note 15 of the Notes to Consolidated Financial Statements and is incorporated
herein by reference.

OTHER SERVICES. Through MCI Systemhouse Corp. and SHL Systemhouse Co.
(collectively "SHL"), the Company offers information technology ("IT") services
including outsourcing, IT consulting, systems integration, private network
management, technology deployment and applications and systems development.




                                       7
<PAGE>   12

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

In February 1999, the Company and EDS announced the signing of a definitive
agreement to sell SHL to EDS for $1.65 billion in cash. In addition, both
companies agreed to significant outsourcing contracts which will capitalize on
the individual strengths of each company. The definitive agreements for these
outsourcing contracts will most likely be finalized in the second quarter of
1999. Both transactions are subject to customary closing conditions and
regulatory approvals.

The Company also designs, installs, and integrates "turnkey" transmission
facilities and communications networks primarily for international customers.
Services provided include fixed and transportable customer premise earth
stations, network management systems, systems integration consulting and project
management.

VENTURES AND DEVELOPING BUSINESS MARKETS. In connection with the MCI Merger, the
Company acquired an investment in The News Corporation Limited ("News Corp."),
valued at $1.38 billion at December 31, 1998. With News Corp., the Company would
form a Direct Broadcast Satellite ("DBS") joint venture in which the Company
would own a 19.9% interest. DBS is a point-to-multipoint broadcast service that
uses high-powered Ku band satellites placed in geosynchronous orbit. DBS service
is capable of delivering a wide range of services, including subscription
television, pay-per-view services, such as movies, concerts and sporting events,
and digitized content, such as magazines. The Company holds a DBS license from
the FCC which it will contribute to the joint venture. The DBS license grants
the Company the right to use 28 of 32 channels in the satellite slot located at
110 degrees west longitude, which provides coverage to all fifty states in the
U.S. and Puerto Rico. News Corp. and the Company would contribute to the joint
venture the other DBS related assets they each own.

In November 1998, the Company and News Corp. entered into an agreement with
EchoStar Communications Corp. ("EchoStar") for the sale and transfer of the
Company's and News Corp.'s DBS assets (the "EchoStar Transaction"). Concurrent
with the consummation of the EchoStar Transaction, the Company will acquire
preferred shares in a subsidiary of News Corp. for a face amount equal to the
Company's cost of obtaining the FCC license plus interest thereon. The Company
will also receive from EchoStar approximately 6.0 million shares of EchoStar
Class A Common Stock. The EchoStar Transaction is subject to approval by the FCC
and is expected to close in the second quarter of 1999.

During 1998, the Company entered into a strategic alliance with Telefonica de
Espana ("Telefonica") to create strategic business ventures which will enter the
telecommunications markets in Europe and the Americas. The joint venture was
formed to target fast growing Latin American communications markets, and to
establish a state-of-the-art Pan American network to provide customers a
portfolio of integrated communications services.

Avantel S.A. de C.V. ("Avantel") is a business venture between Grupo Financiero
Banamex-Accival, Mexico's largest financial group, and MCI WorldCom, in which
the Company owns a 44.5% equity interest. Avantel built Mexico's first
all-digital fiber-optic network. In 1996, Avantel became the first company to
provide alternative long-distance telecommunications service in Mexico in
competition with Telefonos de Mexico ("TelMex"). TelMex, the former monopoly






                                       8
<PAGE>   13

telecommunications provider, is Avantel's primary competitor. TelMex's financial
and other resources are substantially greater than Avantel's, and it has an
extensive existing customer base.

In March 1999, MCI WorldCom entered into an alliance with Bell Canada to provide
seamless North American and global telecommunications services. The agreement
with Bell Canada builds on a relationship dating back to 1992. The alliance
combines the benefits of MCI WorldCom's On-Net, a single, high-capacity,
end-to-end network, with Canada's leading communications provider, serving seven
million residential and business customers, including some of Canada's major
corporations. Through this alliance, Bell Canada's customers will have access to
MCI WorldCom's network, linking major commercial centers across North America
and the rest of the world.

TRANSMISSION FACILITIES

The Company's operating subsidiaries own domestic long distance, international
and multi-city local service fiber optic networks with access to additional
fiber optic networks through lease agreements with other carriers. Additionally,
the Company's operating subsidiaries own trans-oceanic cable capacity in the
Atlantic and Pacific Oceans.

Deployed in business centers throughout the United States, Western Europe, the
United Kingdom, Australia and Japan, the Company's local networks are
constructed using ring topology. Transmission networks are based on either
conventional asynchronous multiplexing or Synchronous Optical Network ("SONET")
equipment. European and Pacific Rim networks are based on Synchronous Digital
Hierarchy ("SDH") technology. Network backbones are installed in conduits owned
by the Company or leased from third parties such as utilities, railroads, long
distance carriers, state highway authorities, local governments and transit
authorities. Lease arrangements are generally executed under multi-year terms
with renewal options and are non-exclusive.

Buildings are connected to the Company's local networks using fiber extensions
(known as "laterals") which are then connected to a local distribution loop and
ultimately to a high speed fiber backbone which originates and terminates at one
of the Company's central nodes. Local transmission signals are generally sent
through the network simultaneously on both primary and secondary paths thereby
providing route diversity and disaster protection. Buildings served via a
Company-owned lateral have a discrete Company presence (referred to as a "remote
hub" or "building point-of-presence") located within the building. Generally,
Company-owned internal building wiring connects the remote hub to the customer
premises. Customer terminal equipment is connected to Company-provided
electronic equipment generally located in the remote hub where ongoing customer
transmission signals are digitized, combined and converted into optical signals
for transport to the central node. Signals are then reconfigured and routed to
their final destination.

The long distance network is protected by SONET/SDH rings and digital cross
connect systems that are capable of restoring backbone traffic in the event of
an outage in milliseconds and minutes, respectively. In addition, long distance
switched traffic is dynamically rerouted via switch software to any available
capacity to complete calls.

To serve customers in buildings that are not located directly on the fiber
network, the Company utilizes leased T-3s, T-1s or unbundled local loops
obtained from the LECs and CLECs.

Internationally, the Company owns or leases fiber optic capacity on most major
international undersea cable systems in the Pacific and Atlantic Ocean regions.
In the first quarter of 1998, the Company, together with its joint venture
partner Cable & Wireless, placed into service a high capacity digital fiber
optic undersea cable between the United States and the United Kingdom. The
Company also owns fiber optic capacity for services to the former Soviet Union
Republics, Central America, South America and the Caribbean. Furthermore, the
Company owns and operates 28 international gateway satellite earth stations,
which enable it to further extend public switched and private line voice and
data communications to and from locations throughout the world.




                                       9
<PAGE>   14

Embratel provides domestic and international telecommunications services through
its basic network, submarine cables, terrestrial fiber, microwave trunks,
switches and satellites. Embratel's present long distance infrastructure
consists of approximately 232,500 microwave channel kilometers and 415,750 fiber
kilometers, of which approximately 70% are digital and approximately 30% are
analog. A significant portion of international traffic is carried by satellites
of the International Telecommunications Satellite Organization System
("Intelsat"). Intelsat is an international organization with 142 members, and
Embratel owns 2.1% of its capital stock. Over 200 countries and territories use
the Intelsat system and are interlinked by its 25 satellites. Embratel is
presently focused on making improvements to the switches and other equipment in
its domestic and international infrastructure.

The Company's ability to generate profits is somewhat dependent upon its ability
to optimize the different types of transmission facilities used to provide
communications services. These facilities are complemented by a least cost
routing plan which is accomplished through digital switching technology and
network routing software. Calls can be routed over fixed cost transmission
facilities or variable cost transmission facilities. Fixed cost facilities,
including the Company's owned networks, are typically most cost effective for
routes that carry high volumes of traffic. In addition, a variety of lease
agreements for fixed and variable cost (usage sensitive) services ensures
diversity and quality of service in processing calls.

The telecommunications industry is subject to rapid and significant changes in
technology. While MCI WorldCom does not believe that, for the foreseeable
future, these changes will either materially or adversely affect the continued
use of fiber optic cable or materially hinder its ability to acquire necessary
technologies, the effect of technological changes, including changes relating to
emerging wireline and wireless transmission and switching technologies, on the
businesses of MCI WorldCom cannot be predicted.

The market for data communications and Internet access and related products, is
characterized by rapidly changing technology, evolving industry standards,
emerging competition and frequent new product and service introductions. There
can be no assurance that the Company will successfully identify new product and
service opportunities and develop and bring new products and services to market
in a timely manner. The Company is also at risk from fundamental changes in the
way data communications, including Internet access, services are marketed and
delivered. The Company's Internet service strategy assumes that the Transmission
Control Protocol/Internet Protocol ("TCP/IP"), utilizing fiber optic or
copper-based telecommunications infrastructures, will continue to be the primary
protocol and transport infrastructure for Internet-related services. Emerging
transport alternatives include wireless cable modems and satellite delivery of
Internet information. Alternative open protocol and proprietary protocol
standards have been or are being developed. The Company is participating in
trials of next generation technologies. However, the Company's pursuit of
necessary technological advances may require substantial time and expense, and
there can be no assurance that the Company will succeed in adapting its data
communications services business to alternate access devices, conduits and
protocols.

NETWORK SWITCHING

The Company owns or leases computerized network switching equipment that routes
its customers' local and long distance calls. The Company's digital switching
equipment is interconnected with digital transmission lines. The Company's
switching networks utilize SS7 common channel signaling, which increases
efficiencies by eliminating connect time delays and provides "look ahead"
routing. In addition to networking, the Company's switching equipment verifies
customers' pre-assigned authorization codes, records billing data and monitors
system quality and performance.




                                       10
<PAGE>   15

In addition to the switching centers, the Company has a number of other network
facility locations known as points of presence ("POPs"). These POPs allow the
Company to concentrate customers' traffic at locations where the Company has not
installed switching equipment. The traffic is carried to switching centers from
POPs over the Company's digital transmission network.

The Company's domestic switches are capable of providing both local and long
distance call functions while the gateway switches have the specific purpose of
transferring domestically originated calls to the rest of the world.

The Company's ATM network utilizes the Company's intracity fiber connections to
customers, Companyowned ATM switches and MCI WorldCom's high capacity fiber
optic networks. ATM is a switching and transmission technology based on
encapsulation of information in short (53-byte) fixed-length packets or "cells."
ATM switching was specifically developed to allow switching and transmission of
mixed voice, data and video (sometimes referred to as "multimedia" information).
In addition, certain characteristics of ATM switching allow switching
information to be directly encoded in integrated circuitry rather than in
software.

MCI WorldCom's frame relay network utilizes Company-owned and maintained frame
relay switches and MCI WorldCom's high capacity fiber optic networks to provide
data networking services to commercial customers. Networking equipment at
customer sites connects to the Company's frame relay switches which in turn are
connected to each other via the extensive MCI WorldCom fiber optic networks.
Frame relay utilizes variable length frames to transport customer data from one
customer location across MCI WorldCom networks to another customer location.
Customers utilize the frame relay technology to support traditional business
applications such as connecting local networks and financial applications.

INTERNET NETWORK INFRASTRUCTURE

The Company's Internet infrastructure is based on its own OC-48, OC-12 and DS-3
network which uses a combination of ATM, frame relay and router technologies at
the transport layer for both metropolitan and inter-regional connectivity. This
network infrastructure enables customers to access the Internet through
dedicated lines or by placing a local telephone call (dial-up) through a modem
to the nearest equipment location for the Company. Once connected, the
customer's traffic is routed through the Company's networks to the desired
Internet location, whether on the Company's networks or elsewhere on the
Internet.

NETWORK STATISTICS

Global network statistics of the Company, excluding Embratel, on a pro forma
basis, are as follows:


<TABLE>
<CAPTION>
                                                                        AS OF DECEMBER 31,
                                                            ------------------------------------------

                                                                    1998                 1997
                                                            --------------------  --------------------

<S>                                                                   <C>                   <C>   
Domestic long distance route miles                                        47,529                44,943
Local domestic and international fiber miles                             797,550               679,598
Local domestic and international route miles                               8,811                 8,304
Local circuits in service (voice grade equivalents)                   17,700,822            10,702,851
Buildings connected                                                       39,550                27,785
Active voice switches-local and long distance                                273                   262
Telco Collocations                                                           367                   345
</TABLE>



                                       11
<PAGE>   16

RATES AND CHARGES

The Company charges switched customers on the basis of a fixed rate per line
prescribed to the Company plus minutes or partial minutes of usage at rates that
vary with the distance, duration and time of day of the call. For local service,
customers are billed a fixed charge plus usage or flat rated charges depending
on the plan chosen by the customer. The rates charged are not affected by the
particular transmission facilities selected by the Company's switching centers
for transmission of the call. Additional discounts are available to customers
who generate higher volumes of monthly usage.

Domestic and international business services originating in the United States
are primarily billed in six- second increments; others are billed in partial
minutes rounded to the next minute. Switched voice services originating in
international markets are billed in increments subject to local market
conditions and interconnect agreements. Switched long distance and local
services are billed in arrears, with monthly billing statements itemizing date,
time, duration and charges. Data services are generally billed on a fixed per
line and variable trunk rate. These rates are based on speed of transmission
purchased from the Company. Depending on the service type, these charges may be
billed in arrears or in advance. Private line services are billed monthly in
advance, with the invoice indicating applicable rates by circuit.

The Company's rates are generally designed to be competitive with those charged
by other long distance and local carriers. The rates offered by the Company may
be adjusted in the future if other IXCs, LECs and CAPs continue to adjust their
rates. To date, continued improvement in the domestic and international cost
structures have allowed the Company to offer competitive rates while maintaining
acceptable margins.

The Company's Internet access options are sold in the United States and in many
foreign countries for both domestic and global Internet services. Prices vary,
based on service type. Due to various factors, such as available
telecommunications technology, foreign government regulation and market demand,
the service options offered outside of the United States vary as to speed, price
and suitability for various purposes.

Embratel's rates for most telecommunications services are subject to final
approval of Anatel, to which Embratel submits requests for rate adjustments. See
"Regulation-Embratel" below. Embratel's rates for domestic and international
long distance service are established by Anatel and are uniform throughout
Brazil. The majority of Embratel's revenues from data communications are
provided by monthly line rental charges for private leased circuits. The balance
consists mainly of normal charges to customers for access to the data
transmission network and measured charges based on the amount of data
transmitted.

MARKETING AND SALES

The Company markets its business voice, data, Internet and international
services primarily through a direct sales force targeted at specific geographic
markets. The Company's commercial sales force of approximately 6,500 people also
provides advanced data specialization for the domestic and international
marketplaces, including private line services.

In each of its geographic markets, the Company employs full service support
teams that provide its customers with prompt and personal attention. MCI
WorldCom's localized management, sales and customer support are designed to
engender a high degree of customer loyalty and service quality.

For its consumer services, the Company markets through telemarketing, affinity
relationships and television, radio and print advertising.




                                       12
<PAGE>   17

COMPETITION

GENERAL. Virtually every aspect of the telecommunications industry is extremely
competitive, and MCI WorldCom expects that competition will intensify in the
future. MCI WorldCom competes domestically with incumbent providers, which have
historically dominated local telecommunications, and with long distance
carriers, for the provision of long distance services. Some incumbent providers
offer both local and long distance services. The ILECs presently have numerous
advantages as a result of their historic monopoly control over local exchanges.
A continuing trend toward business combinations and alliances in the
telecommunications industry may create significant new competitors to MCI
WorldCom. Some of the Company's existing and potential competitors have
financial, personnel and other resources significantly greater than those of MCI
WorldCom. MCI WorldCom also faces competition from one or more competitors in
every area of its business, including competitive access providers operating
local fiber optic networks, in conjunction with, in some cases, the local cable
television operator. Several competitors have announced the deployment of
nationwide fiber networks using advanced state-of-the-art technologies. AT&T
Corp. ("AT&T") and Sprint Corporation ("Sprint") have indicated their intention
to offer local telecommunications services in major United States markets using
their own facilities, including in AT&T's case, the acquisition of the
facilities and business of Teleport Communications Group, Inc. and
Tele-Communications, Inc., or through resale of the local exchange carriers' or
other providers' services. In addition, MCI WorldCom competes with equipment
vendors and installers and telecommunications management companies with respect
to certain portions of its business.

Overseas, MCI WorldCom competes with incumbent providers, some of which still
have special regulatory status and the exclusive rights to provide certain
services, and virtually all of which have historically dominated their local,
domestic long distance and international services business. These incumbent
providers have numerous advantages including existing facilities, customer
loyalty, and substantial financial resources. MCI WorldCom may be dependent upon
obtaining facilities from these incumbent providers. MCI WorldCom also competes
with other service providers, many of which are affiliated with incumbent
providers in other countries. Typically, MCI WorldCom must devote extensive
resources to obtain regulatory approvals necessary to operate overseas, and then
to obtain access to and interconnection with the incumbent's network on a
non-discriminatory basis.

MCI WorldCom may also be subject to additional competition due to the
development of new technologies and increased availability of domestic and
international transmission capacity. For example, even though fiber optic
networks, such as that of MCI WorldCom, are now widely used for long distance
transmission, it is possible that the desirability of such networks could be
adversely affected by changing technology. The telecommunications industry is in
a period of rapid technological evolution, marked by the introduction of new
product and service offerings and increasing satellite and fiber optic
transmission capacity for services similar to those provided by MCI WorldCom.
The Company cannot predict which of many possible future product and service
offerings will be important to maintain its competitive position or what
expenditures will be required to develop and provide such products and services.
For most of MCI WorldCom's communications services, the factors critical to a
customer's choice of a service provider are cost, ease of use, speed of
installation, quality, reputation and in some cases, geography and network size.

Under the Telecommunications Act of 1996 (the "Telecom Act") and ensuing federal
and state regulatory initiatives, barriers to local exchange competition are
being removed. The introduction of such competition, however, also establishes,
in part, the predicate for the Bell Operating Companies (the "BOCs") to provide
in-region interexchange long distance services. The BOCs are currently allowed
to offer certain "incidental" long distance service in-region and to offer
out-of-region long distance services. Once the BOCs are allowed to offer
in-region long distance services, they could be in a position to offer single
source local and long distance service 





                                       13
<PAGE>   18

similar to that being offered by MCI WorldCom. The Company expects that the
increased competition made possible by regulatory reform will result in certain
additional pricing and margin pressures in the domestic telecommunications
services business.

The Company also competes in offering data communications services, including
Internet access and related services. This is also an extremely competitive
business and MCI WorldCom expects that competition will intensify in the future.
The Company believes that the ability to compete successfully in this arena
depends on a number of factors, including: industry presence; the ability to
execute a rapid expansion strategy; the capacity, reliability and security of
its network infrastructure; ease of access to and navigation on the Internet;
the pricing policies of its competitors and suppliers; the timing of the
introduction of new products and services by the Company and its competitors;
the Company's ability to support industry standards; and industry and general
economic trends. The success of MCI WorldCom will depend heavily upon its
ability to provide high quality data communication services, including Internet
connectivity and value-added Internet services at competitive prices.

Major telecommunications and data communications companies have expanded their
current services to compete fully in offering data communication services,
including Internet access and value-added and data communications services; MCI
WorldCom expects additional telecommunications companies to continue to compete
in this arena. The Company believes that new competitors, including large
computer hardware, software, media and other technology and communications
companies will also offer data communications services, resulting in even
greater competition for MCI WorldCom. Certain companies, including AT&T, GTE
Corporation, Intermedia Communications, Inc., Qwest Communications, Global
Crossing Ltd., PSINet, Inc., IXC Communications, Inc. and Williams
Communications, have obtained or expanded their Internet access products and
services as a result of network deployment, acquisitions and strategic
investments. Such acquisitions may permit MCI WorldCom's competitors to devote
greater resources to the development and marketing of new competitive products
and services and to the marketing of existing competitive products and services.
MCI WorldCom expects these acquisitions and strategic investments to increase,
thus creating significant new competitors to the Company. In addition, the
Company expects new companies, such as Level 3 Communications, to enter this
arena and to compete with MCI WorldCom's service offerings.

As the Company continues to expand voice and data communications operations
outside of the United States, MCI WorldCom will be forced to compete with and
buy services from incumbent providers, some of which are government-owned and/or
still have special regulatory status and the exclusive rights to provide certain
essential services. The Company will also encounter competition from companies
whose operating styles are substantially different from those that it usually
encounters. For example, in Europe, MCI WorldCom's subsidiaries compete directly
with: (1) telecommunications companies, such as BT, Deutsche Telekom AG and
others; (2) global telecommunications alliances such as Global One (Deutsche
Telekom AG, France Telecom and Sprint), Unisource/Uniworld (AT&T, Telia AB of
Sweden, PTT Telecom Netherlands and Swisscom) and others; and (3) other Internet
access providers, such as Demon Internet Limited. Foreign competitors may also
possess a better understanding of their local areas and may have better working
relationships with, or control of, local telecommunications companies. Despite
the Company's policy of hiring local employees in each market that it operates,
there can be no assurance that the Company can obtain similar levels of local
knowledge. Failure to obtain that knowledge could place MCI WorldCom at a
competitive disadvantage.

EMBRATEL. Until July 29, 1998, Embratel was the exclusive provider of
inter-state and international long distance services in Brazil, although it was
subject to indirect competition from a number of sources. The companies
organized under Telecomunicacoes Brasileiras S.A., Telebras ("Telebras") were
the exclusive providers of intrastate and local telephone services. However,
since 1995, Brazil has been adopting sweeping regulatory changes intended to
open the telecommunications market to competition.




                                       14
<PAGE>   19

Under the 1996 General Telecommunications Law (the "General Law") and the
General Grant Plan (the "Grant Plan"), the Ministry of Communications was
required to conduct the privatization of the Telebras system. According to the
privatization model, the Brazilian states were divided among three regions and
the Telebras companies, which provided services in each of these states, were
grouped under three holding companies (collectively, "Teles" and individually,
"Tele") and granted concessions to provide local and intra-regional long
distance services within one of the three regions. Embratel was granted
concessions to provide domestic long distance (intra-regional and
inter-regional) and international services. The privatization occurred on July
29, 1998 and Embratel became subject to competition in the intra-regional long
distance markets.

The General Law and the General Grant Plan also required Anatel, promptly after
the privatization, to auction: (1) the mirror authorizations for the provision
of local and intra-regional long distance telephone services in each of the
three regions and (2) one mirror authorization for the provision of
intra-regional, inter-regional and international long distance telephone
services. The authorizations are considered "mirrors" because the service
coverage areas for the competitive entrants exactly match those of the incumbent
concessionaires.

The expected result of the mirror authorization auction was to have two
companies competing in each local service market (one Tele and one mirror
authorization holder), four companies competing in each of the three
intra-regional long distance service markets (one Tele, Embratel and two mirror
authorization holders) and two companies competing in the inter-regional and
international long distance markets (Embratel and mirror Embratel). On December
11, 1998, the bidding process for the mirror authorizations occurred and only
the authorizations for the north east region and for national and international
long distance services were granted due to the lack of participants in the
bidding.

Therefore, Embratel has today (1) in the north east region, three competitors
for the provision of intra-regional long distance services (the north east
Tele, the north east mirror authorization holder (Canbra), and the national long
distance mirror authorization holder (Bonari)), (2) in the south region and in
the Sao Paulo State Region, two competitors for the provision of the
intra-regional long distance services (the south and the Sao Paulo State Teles
and Bonari) and (3) in the inter-regional and international long distance
markets, one competitor (Bonari).

Beginning in 2002, Anatel may grant an unlimited number of additional
authorizations for the provision of local and intra-regional, inter-regional and
international long distance telephone services.

OTHER. Competitors in the IT business include Andersen Consulting, Computer
Sciences Corporation, EDS and International Business Machines Corporation, all
of which have substantial financial and other resources. SHL derives a material
amount of its IT revenues from a small number of customers. In addition, SHL
faces competition in the IT industry not only for contracts, but also for
personnel. There is a shortage of skilled employees and a high turnover rate
among skilled employees in the client/server portion of the IT business. See
"Services - Other Services" above for a description of the agreement to sell SHL
to EDS.

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




                                       15
<PAGE>   20

REGULATION

GENERAL. MCI WorldCom is subject to varying degrees of federal, state, local and
international regulation. In the United States, the Company's subsidiaries are
most heavily regulated by the states, especially for the provision of local
exchange services. The Company must be certified separately in each state to
offer local exchange and intrastate long distance services. No state, however,
subjects MCI WorldCom to price cap or rate of return regulation, nor is the
Company currently required to obtain FCC authorization for installation or
operation of its network facilities used for domestic services, other than
licenses for specific terrestrial microwave and satellite earth station
facilities that utilize radio frequency spectrum. FCC approval is required,
however, for the installation and operation of its international facilities and
services. MCI WorldCom is subject to varying degrees of regulation in the
foreign jurisdictions in which it conducts business including authorization for
the installation and operation of network facilities. Although the trend in
federal, state and international regulation appears to favor increased
competition, no assurance can be given that changes in current or future
regulations adopted by the FCC, state or foreign regulators or legislative
initiatives in the United States or abroad would not have a material adverse
effect on MCI WorldCom.

In implementing the Telecom Act, the FCC established nationwide rules designed
to encourage new entrants to participate in the local services markets through
interconnection with the ILECs, resale of ILEC's retail services and use of
individual and combinations of unbundled network elements. Appeals of the FCC
order adopting those rules were consolidated before the United States Court of
Appeals for the Eighth Circuit (the "Eighth Circuit"). Thereafter, the Eighth
Circuit held that constitutional challenges to various practices implementing
cost provisions of the Telecom Act that were ordered by certain Public Utility
Commissions ("PUCs") were premature; it vacated, however, significant portions
of the FCC's nationwide pricing rules and an FCC rule requiring that unbundled
network elements be provided on a combined basis. The United States Supreme
Court (the "Supreme Court") reviewed the decision of the Eighth Circuit and on
January 25, 1999, reversed the Eighth Circuit in part and reinstated, with one
exception, all of the FCC local competition rules. The Court vacated and
remanded to the FCC for reconsideration the rule determining which unbundled
network elements must be provided by incumbent local exchange carriers to new
entrants. The Eighth Circuit will now consider the ILECs' challenges to the
substance of pricing rules, which it previously had found to be premature.

Certain BOCs have also raised constitutional challenges to sections of the
Telecom Act restricting BOC provisioning of long distance services, and their
manufacturing of telecommunications equipment, electronic publishing and alarm
monitoring services. On December 31, 1997, the U.S. District Court for the
Northern District of Texas (the "District Court") ruled that these restrictions
violate the Bill of Attainder Clause of the U.S. Constitution. The decision only
applied to SBC Corporation ("SBC"), US WEST Communications Group ("US WEST") and
Bell Atlantic Corporation ("Bell Atlantic"). At the request of various parties,
on February 11, 1998, the District Court issued a stay of its decision pending
appeal. On September 4, 1998, the U.S. Court of Appeals for the Fifth Circuit
(the "Fifth Circuit") reversed the decision of the District Court and upheld the
constitutionality of the challenged provisions. On October 19, 1998, SBC, US
WEST and Bell Atlantic filed petitions requesting the Supreme Court review the
Fifth Circuit decision. On January 19, 1999, the Supreme Court denied these
petitions for review. BellSouth Corporation ("BellSouth") also raised the Bill
of Attainder issue in its appeal before the United States Court of Appeals for
the D.C. Circuit of the FCC's denial of BellSouth's application to provide
access long distance service in South Carolina. On December 22, 1998, the U.S.
Court of Appeals for the D.C. Circuit, in a 3-0 opinion, denied BellSouth's
constitutional challenges.

The FCC has denied applications filed by RBOCs seeking authority to provide
interLATA long distance service. In its denial of an Ameritech Corporation
("Ameritech") application and a BellSouth application, the FCC provided detailed
guidance to applicants regarding the obligations of the applicants, the format
of future applications, the content of future applications, and the review
standards that it will apply in evaluating any future applications. The National
Association of Regulatory Utility Commissioners and several state regulatory
commissions appealed jurisdictional aspects of that Ameritech application denial
to the Eighth Circuit. On 




                                       16
<PAGE>   21

January 22, 1998, the Eighth Circuit granted the various appeals and held that
the FCC does not have jurisdiction to consider pricing issues when deciding RBOC
interLATA long distance applications. On February 22, 1999, the Supreme Court
vacated the Eighth Circuit's decision, re-establishing the jurisdiction of the
FCC to use forward-looking pricing methodology when reviewing RBOC entry into
the long distance market.

Access charges, both interstate and intrastate, are a principal component of MCI
WorldCom's telecommunications expense. On the interstate side, the U.S. Court of
Appeals for the D.C. Circuit is presently considering multiple appeals of the
FCC's 1997 changes to the price cap system for regulating interstate access
charges. Several PUCs have initiated proceedings to address reallocation of
implicit subsidies contained in the access rate and retail service rates to
state universal service funds. In addition, the FCC is presently considering
further universal service reforms, access reform, and pricing flexibility for
ILEC access charges. MCI WorldCom cannot predict the outcome of these
proceedings or whether or not the result(s) will have a material adverse impact
upon its consolidated financial position or results of operations.

In August 1998, in response to petitions filed by several ILECs under the guise
of Section 706 of the Telecom Act, the FCC issued its Advanced Services Order.
This order clarifies that the interconnection, unbundling, and resale
requirements of Section 251(c) of the Telecom Act, and the interLATA
restrictions of Section 271 of this Act, apply fully to so-called "advanced
telecommunications services," such as DSL. In a companion notice, the FCC sought
comment on how to implement Section 706 of the Telecom Act, which directs the
FCC to (1) encourage the deployment of advanced telecommunications capability to
Americans on a reasonable and timely basis, and (2) complete an inquiry
concerning the availability of such services no later than February 8, 1999. The
Commission's rulemaking notice included a proposal that, if adopted, would allow
the ILECs the option of providing advanced services via a separate subsidiary
free from the unbundling and resale obligations of Section 251(c), as well as
other dominant carrier regulatory requirements.

In early February 1999, the FCC issued its report to Congress, concluding that
the deployment of advanced services is proceeding at a reasonable and timely
pace. The FCC has not yet issued its Section 706 rulemaking order.

On February 26, 1999, the FCC issued a Declaratory Ruling and Notice of Proposed
Rulemaking regarding the regulatory treatment of calls to ISPs. Prior to the
FCC's order, approximately thirty PUCs issued orders unanimously finding that
carriers, including MCI WorldCom, are entitled to collect reciprocal
compensation for completing calls to ISPs under the terms of their
interconnection agreements with ILECs. Many of these PUC decisions have been
appealed by the ILECs and, since the FCC's order, many have filed new cases at
the PUCs or in court. Moreover, MCI WorldCom has appealed the FCC's order to the
Court of Appeals for the D.C. Circuit. MCI WorldCom cannot predict either the
outcome of these appeals and the FCC's rulemaking proceeding or whether or not
the result(s) will have a material adverse impact upon its consolidated
financial position or results of operations.

INTERNATIONAL. In December 1996, the FCC adopted a new policy that makes it
easier for United States international carriers to obtain authority to route
international public switched voice traffic to and from the United States
outside of the traditional settlement rate and proportionate return regimes. In
August 1998, the FCC proposed to modify its rules to make it even easier for
U.S. international carriers to engage in alternative traffic routing. In
February 1997, the United States entered into a World Trade Organization
Agreement (the "WTO Agreement") that is designed to have the effect of
liberalizing the provision of switched voice telephone and other
telecommunications services in scores of foreign countries over the next several
years. The WTO Agreement became effective in February 1998. In light of the
United States commitments to the WTO Agreement, the FCC implemented new rules in
February 1998 that liberalize existing policies regarding (1) the services that
may be provided by foreign affiliated United States international common
carriers, including carriers controlled or more



                                       17
<PAGE>   22

than 25 percent owned by foreign carriers that have market power in their home
markets, and (2) the provision of alternative traffic routing. The new rules
make it much easier for foreign affiliated carriers to enter the United States
market for the provision of international services.

In August 1997, the FCC adopted mandatory settlement rate benchmarks. These
benchmarks are intended to reduce the rates that United States carriers pay
foreign carriers to terminate traffic in their home countries. The FCC will also
prohibit a United States carrier affiliated with a foreign carrier from
providing facilities-based service to the foreign carrier's home market until
and unless the foreign carrier has implemented a settlement rate at or below the
benchmark. The FCC also adopted new rules that will liberalize the provision of
switched services over private lines to WTO member countries. These rules allow
such services on routes where 50% or more of United States billed traffic is
being terminated in the foreign country at or below the applicable settlement
rate benchmark or where the foreign country's rules concerning provision of
international switched services over private lines are deemed equivalent to
United States rules. On January 12, 1999, the FCC's benchmark rules were upheld
in their entirety by the U.S. Court of Appeals for the D.C. Circuit. On March
11, 1999, the D.C. Circuit denied petitions for rehearing of the case.

Although the FCC's new policies and implementation of the WTO Agreement may
result in lower settlement payments by MCI WorldCom to terminate international
traffic, there is a risk that the payment that MCI WorldCom will receive from
inbound international traffic may decrease to an even greater degree. The
implementation of the WTO Agreement may also make it easier for foreign carriers
with market power in their home markets to offer United States and foreign
customers end-to-end services to the disadvantage of MCI WorldCom. The Company,
meanwhile, may continue to face substantial obstacles in obtaining from foreign
governments and foreign carriers the authority and facilities to provide such
end-to-end services.

EMBRATEL. The General Law provides a framework for telecommunications regulation
for Embratel. Article 8 of the General Law created Anatel to implement the
General Law through development of regulations and to enforce such regulations.
According to the General Law, companies wishing to offer telecommunications
services to consumers are required to apply to Anatel for a concession or an
authorization. Concessions are granted for the provision of services under the
Public Regime and authorizations are granted for the provision of services under
the private regime ("Private Regime"). The Public Regime is differentiated from
the Private Regime primarily by the obligations imposed on the companies rather
than the type of services offered by those companies. Service providers subject
to the Public Regime (concessionaires) are subject to obligations concerning
network expansion and continuity of service provision and are subject to rate
regulation. These obligations and the tariff conditions are provided in the
General Law and in each company's Concession contract. The network expansion
obligations (called universal service obligations) are also provided in the
Plano Geral de Universalizacao ("General Plan on Universal Service").

The only services provided under the Public Regime are the switched fixed
telephone services (local and national and international long distance) provided
by Embratel and the three regional Telebras holding companies. All other
telecommunications companies, including other companies providing switched fixed
telephone services ("SFTS"), operate in the Private Regime and, although they
are not subject to the Public Regime, individual authorizations may contain
certain specific expansion and continuity obligations.

Therefore, when providing SFTS, Embratel and the three Teles are subject to the
Public Regime obligations provided in the General Law, in their Concession
Contracts and in the General Plan on Universal Services, among other
regulations.




                                       18
<PAGE>   23

The main restriction imposed on these companies by the General Grant Plan, is
that, until December 31, 2003, the three Teles are prohibited from offering
inter-regional and international long distance service, while Embratel is
prohibited from offering local services. These companies can start providing the
mentioned services two years sooner if they meet their network expansion
obligations by December 31, 2001.

Embratel and the three Teles were granted their concessions at no fee, until
2005. After 2005, the concessions may be renewed for a period of 20 years, upon
the payment, every two years, of a fee equal to 2% of annual net revenues
calculated based on the provision of SFTS in the prior year, excluding taxes and
social contributions, during the 20-year renewal period.

Embratel also offers a number of ancillary telecommunications services pursuant
to authorizations granted in the Private Regime. The principal such services are
the provision of dedicated analog and digital lines, packet switched network
services, circuit switched network services, mobile marine telecommunications,
telex and telegraph, radio signal satellite retransmission and television signal
satellite retransmission. Some of these services are subject to some specific
continuity obligations and rate conditions, provided in the respective
authorization.

All providers of telecommunications services are subject to quality and
modernization obligations provided in the Plan Geral de Qualidade ("General Plan
on Quality").

OTHER. The Company is involved in other legal and regulatory proceedings
generally incidental to its business. In some instances, rulings by regulatory
authorities in some states may result in increased operating costs to the
Company. Except as indicated in Note 10 of the Notes to Consolidated Financial
Statements, which is incorporated herein by reference, and while the results of
these various legal and regulatory matters contain an element of uncertainty,
the Company believes that the probable outcome of these matters should not have
a material adverse effect on the Company's consolidated results of operations or
financial position.

EMPLOYEES

As of February 28, 1999, the Company, excluding Embratel, employed approximately
77,000 full-time persons.

ITEM 2.     PROPERTIES

The tangible assets of the Company include a substantial investment in
telecommunications equipment. The aggregate book value of the Company's
transmission equipment and communications equipment was $12.05 billion and $5.26
billion, respectively, at December 31, 1998. Approximately $6.6 billion is
currently anticipated for transmission and communications equipment,
construction and other capital expenditures in 1999 without regard to Embratel
or possible acquisitions or the redeployment of possible SHL proceeds into
additional capital spending opportunities.

The Company's railroad, utility and other rights-of-way for its fiber optic
cable and microwave transmission network are typically held under leases,
easements, municipal franchises, licenses or governmental permits. All other
major equipment and physical facilities are owned in fee and are operated,
constructed and maintained pursuant to rights-of-way, easements, permits,
licenses or consents on or across properties owned by others.

The Company also operates numerous tower sites, generally in rural areas, to
serve as repeater stations in its domestic microwave transmission system. Most
of these sites are leased, although the Company does own many of those which are
at an intersection of two or more routes of MCI WorldCom's transmission systems.





                                       19
<PAGE>   24

The Company's local services network includes a fiber optic transmission network
consisting of lighted (currently used) and dark (not currently used) fibers
which are either owned or leased under long-term leases. These fibers are
located in conduits which are either owned or leased under long-term leases.

The Company leases space for sales office and/or administrative facilities,
collector node, collocation sites, general storage space, and equipment rooms
for switches and other peripheral equipment. Such leased properties do not lend
themselves to description by character or location. The Company's fiber optic
networks include aerial and underground cable and conduit which are located on
public streets and highways or on privately owned land or facilities. The
Company has permission to use these lands or facilities pursuant to governmental
consent or lease, permit, easement, franchise or other agreement.

The Company attempts to structure its leases of space for its network switching
centers and rights-of-way for its fiber optic networks with initial terms and
renewal options so that the risk of relocation is minimized. The Company
anticipates that prior to termination of any of the leases, it will be able to
renew such leases or make other suitable arrangements.

The principal properties of Embratel consist of its basic network, satellite
earth stations, nodes, terrestrial and submarine cables, switches and certain
real estate. Embratel's properties are located throughout Brazil, providing both
the necessary infrastructure of a nationwide long distance telecommunications
and a support network. As of December 31, 1998, Embratel owned approximately 60
sites related to its telecommunications operations used for network equipment of
various types, such as telephone exchanges, transmission stations, microwave
radio equipment and digital switching nodes. Embratel conducts a majority of its
management activities from Rio de Janeiro, and owns and leases office space in
such other cities as Sao Paulo, Porto Alegre, Belo Horizonte, Curitiba,
Brasilia, Salvador, and Belem.

The Company believes that all of its facilities and equipment are in good
condition and are suitable for their intended purposes.

ITEM 3.     LEGAL PROCEEDINGS

The Company is involved in legal and regulatory proceedings generally incidental
to its business. In some instances, rulings by regulatory authorities in some
states may result in increased operating costs to the Company. Except as
indicated in Note 10 of the Notes to Consolidated Financial Statements, which is
incorporated herein by reference, and while the results of these various legal
and regulatory matters contain an element of uncertainty, the Company believes
that the probable outcome of these matters should not have a material adverse
effect on the Company's consolidated results of operations or financial
position.




                                       20
<PAGE>   25



ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None
                                     PART II

ITEM 5.           MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                  SHAREHOLDER MATTERS

The shares of MCI WorldCom Common Stock are quoted on The Nasdaq National Market
under the symbol "WCOM." The following table sets forth the high and low sales
prices per share of MCI WorldCom Common Stock as reported on The Nasdaq National
Market based on published financial sources, for the periods indicated.

<TABLE>
<CAPTION>
                                                               HIGH                 LOW
                                                               ----                 ---
1997                                                                 
----
<S>                                                          <C>                 <C>   
   First Quarter                                             $27.88              $21.75
   Second Quarter                                             32.97               21.25
   Third Quarter                                              37.75               29.88
   Fourth Quarter                                             39.88               28.50

1998                                                                 
----
   First Quarter                                             $44.88              $28.00
   Second Quarter                                             48.44               41.63
   Third Quarter                                              57.88               40.00
   Fourth Quarter                                             75.75               39.00
</TABLE>

As of February 28, 1999, there were 1,851,374,214 shares of MCI WorldCom Common
Stock issued and outstanding held by 58,662 shareholders of record.

The Company has never paid cash dividends on its common stock. The policy of the
Company's Board of Directors has been to retain earnings to provide funds for
the operation and expansion of the Company's business.

PREFERRED STOCK

The MCI WorldCom Series B Preferred Stock is convertible into shares of MCI
WorldCom Common Stock at any time at a conversion rate of 0.0973912 shares of
MCI WorldCom Common Stock for each share of MCI WorldCom Series B Preferred
Stock (an effective initial conversion price of $10.268 per share of MCI
WorldCom Common Stock). Dividends on the MCI WorldCom Series B Preferred Stock
accrue at the rate per share of $0.0775 per annum and are payable in cash.
Dividends will be paid only when, as and if declared by the Board of Directors.
The Company has not declared any dividends on the MCI WorldCom Series B
Preferred Stock to date and anticipates that future dividends will not be
declared but will continue to accrue. Upon conversion, accrued but unpaid
dividends are payable in cash or shares of MCI WorldCom Common Stock at the
Company's election. To date, the Company has elected to pay all accrued
dividends in cash, upon conversion.




                                       21
<PAGE>   26



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

The MCI WorldCom Series B Preferred Stock is entitled to one vote per share with
respect to all matters. The MCI WorldCom Series B Preferred Stock has a
liquidation preference of $1.00 per share plus all accrued and unpaid dividends
thereon to the date of liquidation. As of February 28, 1999, there were
11,622,662 shares of MCI WorldCom Series B Preferred Stock outstanding held by
746 shareholders of record. There is no established market for the MCI WorldCom
Series B Preferred Stock.

In May 1998, the Company exercised its option to redeem all of the outstanding
MCI WorldCom Series A Preferred Stock and related Depositary Shares. Prior to
the redemption date, substantially all of the holders of MCI WorldCom Series A
Preferred Stock elected to convert the preferred stock into MCI WorldCom Common
Stock, resulting in the issuance of approximately 32.7 million shares of MCI
WorldCom Common Stock.

RECENT SALE OF UNREGISTERED SECURITIES

On December 28, 1998, MCI WORLDCOM Synergies Management Company, Inc. ("SMC"), a
wholly owned subsidiary of the Company, issued 475 shares of an authorized 500
shares of 6.375% cumulative preferred stock, Class A ("SMC Class A Preferred
Stock") in a private placement. Each share of SMC Class A Preferred Stock has a
par value of $0.01 per share and a liquidation preference of $100,000 per share.
The SMC Class A Preferred Stock is mandatorily redeemable by SMC at the
redemption price of $100,000 per share plus accumulated and unpaid dividends on
January 1, 2019. Dividends on the SMC Class A Preferred Stock are cumulative
from the date of issuance and are payable quarterly commencing April 1, 1999 at
a rate per annum equal to 6.375% of the liquidation preference of $100,000 per
share when, as and if declared by the Board of Directors of SMC.

The SMC Preferred Stock was issued to a limited number of financial institutions
in reliance on the exemption from registration contained in Section 4(2) of the
Securities Act of 1933 and Rule 506 of Regulation D promulgated thereunder.

ITEM 6.           SELECTED FINANCIAL DATA

The following is a summary of selected financial data of the Company as of and
for the five years ended December 31, 1998. The historical financial data as of
December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and
1996 have been derived from the historical financial statements of the Company,
which financial statements have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report included elsewhere herein. The
report of Arthur Andersen LLP on the Consolidated Financial Statements of the
Company as of and for the three years ended December 31, 1998 refers to their
reliance on the report of other auditors in rendering an opinion in those
financial statements. This data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and the notes thereto appearing
elsewhere in this document.


                                       22
<PAGE>   27




<TABLE>
<CAPTION>
                                                                                        YEARS ENDED DECEMBER 31,
                                                                                   (In millions, except  per share data)
                                                                    ---------------------------------------------------------------

                                                                       1998         1997          1996         1995         1994
                                                                    ---------    ----------    ----------   ----------    ---------

<S>                                                                 <C>          <C>           <C>          <C>           <C>     
OPERATING RESULTS:
Revenues                                                            $  17,678    $    7,384    $    4,449   $    3,636    $  2,211
Operating income (loss)                                                  (975)        1,018        (1,875)         667          67
Income (loss) before extraordinary items                               (2,540)          247        (2,233)         257        (124)
Extraordinary items                                                      (129)          (3)           (24)           -           -
Net income (loss) applicable to common shareholders                    (2,700)          218        (2,258)         224        (152)
Preferred dividend requirement                                             13            26             1           33          28

EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary items -
  Basic                                                                 (2.02)         0.23         (5.02)        0.58       (0.48)
  Diluted                                                               (2.02)         0.22         (5.02)        0.56       (0.48)

Net income (loss) -
  Basic                                                                 (2.12)         0.23         (5.07)        0.58       (0.48)
  Diluted                                                               (2.12)         0.22         (5.07)        0.56       (0.48)

Weighted average shares -
  Basic                                                                 1,274           966           445          383         316
  Diluted                                                               1,274           997           445          439         316

FINANCIAL POSITION:
Total assets                                                        $  86,401    $   23,596    $   20,843   $    6,803    $  3,441
Long-term debt                                                         16,083         7,413         5,356        2,324         794
Subsidiary Trust and other mandatorily redeemable preferred 
  securities                                                              798            -              -            -           -
Shareholders' investment                                               45,003        13,801        13,252        2,281       1,827
</TABLE>

NOTES TO SELECTED FINANCIAL DATA:

(1)      On September 14, 1998, the Company completed the MCI Merger. The MCI
         Merger is being accounted for as a purchase; accordingly, the operating
         results of MCI are included from the date of acquisition.

(2)      In 1998, the Company recorded a pre-tax charge of $196 million in
         connection with the BFP Merger, the MCI Merger and certain asset
         write-downs and loss contingencies. Such charges included $21 million
         for employee severance, $17 million for BFP direct merger costs, $38
         million for conformance of BFP accounting policies, $56 million for
         exit costs under long-term commitments, $31 million for write-down of a
         permanently impaired investment and $33 million related to certain
         asset write-downs and loss contingencies. Additionally, in connection
         with business combinations, MCI WorldCom made allocations of the
         purchase price to acquired in-process research and development totaling
         $429 million in the first quarter of 1998, related to the CompuServe
         Merger and AOL Transaction, $3.1 billion in the third quarter of 1998
         related to the MCI Merger, and $2.14 billion in the fourth quarter of
         1996 related to the MFS Merger. See Note 3 of Notes to Consolidated
         Financial Statements.



                                       23
<PAGE>   28



(3)      Results for 1996 include other after-tax charges of $121 million for
         employee severance, employee compensation charges, alignment charges,
         and costs to exit unfavorable telecommunications contracts and $344
         million after-tax write-down of operating assets within MCI WorldCom's
         non- core businesses. On a pre-tax basis, these charges totaled $600
         million.

(4)      In connection with certain debt refinancings, MCI WorldCom recognized
         in 1998, 1997 and 1996 extraordinary items of $129 million, $3 million
         and $4 million, respectively, net of taxes, consisting of unamortized
         debt discount, unamortized issuance cost and prepayment fees.
         Additionally, in 1996 MCI WorldCom recorded an extraordinary item of
         $20 million, net of taxes, related to a write-off of deferred
         international costs.

(5)      In connection with the conversion of the Company's Series 1 $2.25
         Cumulative Senior Perpetual Convertible Preferred Stock (the "Series 1
         Preferred Stock"), MCI WorldCom made a non-recurring payment of $15
         million in 1995 to the holder of the stock, representing a discount to
         the minimum nominal dividends that would have been payable on the
         Series 1 Preferred Stock prior to the September 15, 1996 optional call
         date of approximately $26.6 million (which amount included an annual
         dividend requirement of $24.5 million plus accrued dividends to such
         call date).

(6)      As a result of the IDB Merger, the Company initiated plans to
         reorganize and restructure its management and operational organization
         and facilities to eliminate duplicate personnel, physical facilities
         and service capacity, to abandon certain products and marketing
         activities, and to take further advantage of the synergies available to
         the combined entities. Accordingly, in 1994, the Company charged $44
         million to operations for the estimated costs of such reorganization
         and restructuring activities, including employee severance, physical
         facility abandonment and duplicate service capacity.

         Also, during 1994, the Company incurred direct merger costs of $15
         million, related to the IDB Merger. These costs include professional
         fees, proxy solicitation costs, travel and related expenses and certain
         other direct costs attributable to the IDB Merger.

(7)      Revenues and line costs for prior periods reflect a classification
         change for inbound international settlements which are now being
         treated as an offset to line costs instead of revenues. Previously,
         both MCI and WorldCom classified foreign post telephone and telegraph
         administration settlements on a gross basis with the outbound
         settlement reflected as line cost expense and the inbound settlement
         reflected as revenues. This change better reflects the way in which the
         business is operated because MCI WorldCom actually settles in cash
         through a formal net settlement process that is inherent in the
         operating agreements with foreign carriers.

ITEM 7.          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                 CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and Results of
Operations may be deemed to include forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that involve risk and
uncertainty, including financial, regulatory environment and trend projections,
estimated costs to complete or possible future revenues from in-process research
and development programs, the likelihood of successful completion of such
programs, and the outcome of year 2000 or euro conversion efforts, as well as
any statements preceded by, followed by, or that include the words "intends,"
"estimates," "believes," "expects," "anticipates," "should," "could," or similar
expressions; and other statements contained herein regarding matters that are
not historical facts.


                                       24
<PAGE>   29



Although the Company believes that its expectations are based on reasonable
assumptions, it can give no assurance that its expectations will be achieved.
The important factors that could cause actual results to differ materially from
those in the forward looking statements herein (the "Cautionary Statements")
include, without limitation: (1) uncertainties associated with the success of
acquisitions and the integration thereof; (2) risks of international business;
(3) the impact of technological change on the Company's business and dependence
on availability of transmission facilities; (4) regulation risks including the
impact of the Telecom Act; (5) contingent liabilities; (6) the impact of
competitive services and pricing; (7) risks associated with year 2000
uncertainties and euro conversion efforts; (8) risks associated with debt
service requirements and interest rate fluctuations; (9) the Company's degree of
financial leverage; and (10) other risks referenced from time to time in the
Company's filings with the SEC, including the Company's Form 10-K for the year
ended December 31, 1998. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements. The Company
does not undertake any obligation to release publicly any revisions to such
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.

The following discussion and analysis relates to the financial condition and
results of operations of the Company for the three years ended December 31,
1998, after giving effect to the BFP Merger, which was accounted for as a
pooling-of-interests. This information should be read in conjunction with the
"Selected Financial Data" and the Company's Consolidated Financial Statements
appearing elsewhere in this document.

GENERAL

The Company is one of the largest telecommunications companies in the United
States, serving local, long distance and Internet customers domestically and
internationally. The Company's operations have grown significantly in each year
of its operations as a result of internal growth, the selective acquisition of
telecommunications companies and international expansion.

On September 14, 1998, the Company, through a wholly owned subsidiary, merged
with MCI. Through the MCI Merger, the Company acquired one of the world's
largest and most advanced digital networks, connecting local markets in the
United States to more than 280 countries and locations worldwide.

As a result of the MCI Merger, each share of MCI common stock was converted into
the right to receive 1.2439 shares of MCI WorldCom Common Stock or approximately
755 million MCI WorldCom common shares in the aggregate, and each share of MCI
Class A common stock outstanding (all of which were held by BT) was converted
into the right to receive $51.00 in cash or approximately $7 billion in the
aggregate. The funds paid to BT were obtained by the Company from (i) available
cash as a result of the Company's $6.1 billion public debt offering in August
1998; (ii) the sale of MCI's iMCI Business to Cable & Wireless for $1.75 billion
in cash on September 14, 1998; (iii) the sale of MCI's 24.9% equity stake in
Concert to BT for $1 billion in cash on September 14, 1998; and (iv)
availability under the Company's credit facilities and commercial paper program.
The MCI Merger was accounted for as a purchase; accordingly, operating results
for MCI have been included from the date of acquisition.



                                       25
<PAGE>   30



On August 4, 1998, MCI acquired a 51.79% voting interest and a 19.26% economic
interest in Embratel, Brazil's only facilities-based national communications
provider, for approximately R$2.65 billion (US$2.3 billion). The purchase price
will be paid in local currency installments of which R$1.06 billion (US$916
million) was paid on August 4, 1998 with the remaining R$1.59 billion (US$1.32
billion at December 31, 1998) to be paid in two equal installments over the next
two years. Embratel provides interstate long distance and international
telecommunications services, as well as over 40 other communications services,
including leased high-speed data, satellite, Internet, frame relay and
packet-switched services. Operating results for Embratel are included from the
date of the MCI Merger.

On January 31, 1998, MCI WorldCom, through a wholly owned subsidiary, merged
with CompuServe. As a result of the CompuServe Merger, each share of CompuServe
common stock was converted into the right to receive 0.40625 shares of MCI
WorldCom Common Stock, or approximately 37.6 million MCI WorldCom common shares
in the aggregate. Prior to the CompuServe Merger, CompuServe operated primarily
through two divisions: Interactive Services and Network Services. Interactive
Services offered worldwide online and Internet access for consumers, while
Network Services provided worldwide network access, management and applications,
and Internet services to business. The CompuServe Merger was accounted for as a
purchase; accordingly, operating results for CompuServe have been included from
the date of acquisition.

On January 31, 1998, MCI WorldCom also acquired ANS from AOL, and has entered
into five year contracts with AOL under which MCI WorldCom and its subsidiaries
will provide network services to AOL. As part of the AOL Transaction, AOL
acquired CompuServe's Interactive Services Division and received a $175 million
cash payment from MCI WorldCom. MCI WorldCom retained the CompuServe Network
Services division. ANS provides Internet access to AOL and AOL's subscribers in
the United States, Canada, Europe and Japan. The AOL Transaction was accounted
for as a purchase, accordingly, operating results for ANS have been included
from the date of acquisition.

On January 29, 1998, MCI WorldCom, through a wholly owned subsidiary, merged
with BFP. BFP is a leading facilities-based provider of competitive local
telecommunications services, commonly referred to as a competitive local
exchange carrier, in selected cities within the United States. BFP acquires and
constructs its own state-of-the-art fiber optic networks and facilities and
leases network capacity from others to provide IXCs, ISPs, wireless carriers and
business, government and institutional end users with an alternative to the
ILECs for a broad array of high quality voice, data, video transport and other
telecommunications services.

As a result of the BFP Merger, each share of BFP common stock was converted into
the right to receive 1.85 shares of MCI WorldCom Common Stock or approximately
72.6 million MCI WorldCom common shares in the aggregate. The BFP Merger was
accounted for as a pooling-of-interests and, accordingly, the Company's
financial statements for periods prior to the BFP Merger have been restated to
include the results of BFP for all periods presented.

On December 31, 1996, MCI WorldCom, through a wholly owned subsidiary, merged
with MFS. Through this purchase, the Company acquired local network access
facilities via digital fiber optic cable networks installed in and around major
United States cities, and in several major European cities. The Company also
acquired a network platform, which consists of Company-owned transmission and
switching facilities, and network capacity leased from other carriers primarily
in the United States and Western Europe.

On August 12, 1996, MFS completed the UUNET Acquisition. UUNET is a leading
worldwide provider of a comprehensive range of Internet access options,
applications, and consulting services to businesses, telecommunications
companies and online service providers.



                                       26
<PAGE>   31
The Company's strategy is to further develop as a fully integrated
telecommunications company positioned to take advantage of growth opportunities
in global telecommunications. Consistent with this strategy, the Company
believes that transactions such as the MCI Merger, the CompuServe Merger and the
AOL Transaction enhance the combined entity's opportunities for future growth,
create a stronger competitor in the changing telecommunications industry and
allow provision of end-to-end bundled service over global networks, which will
provide new or enhanced capabilities for the Company's customers.

The Company's profitability is dependent upon, among other things, its ability
to achieve line costs that are less than its revenues. The principal components
of line costs are access charges and transport charges. With respect to access
charges on the interstate side, the U.S. Court of Appeals for the D.C. Circuit
is presently considering multiple appeals of the FCC's 1997 changes to the price
cap system for regulating interstate access charges. Several PUCs have initiated
proceedings to address reallocation of implicit subsidies contained in the
access rate and retail service rates to state universal service funds. In
addition, the FCC is presently considering further universal service reforms,
access reform, and pricing flexibility for ILEC access charges. MCI WorldCom
cannot predict the outcome of these proceedings or whether or not the result(s)
will have a material adverse impact upon its consolidated financial position or
results of operations. However, the Company's goal is to manage transport costs
through effective utilization of its network, favorable contracts with carriers
and network efficiencies made possible as a result of expansion of the Company's
customer base through acquisitions and internal growth.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated the Company's statement
of operations as a percentage of its operating revenues.

<TABLE>
<CAPTION>
                                                                               FOR THE YEAR ENDED DECEMBER 31,
                                                                              ---------------------------------

                                                                               1998          1997          1996
                                                                               ----          ----          ----

<S>                                                                           <C>           <C>           <C>   
Revenues                                                                      100.0%        100.0%        100.0%
Line costs                                                                     47.6          51.0          53.9
Selling, general and administrative                                            24.4          22.0          19.5
Depreciation and amortization                                                  12.4          13.2           7.2
In-process research and development and other charges                          21.1            --          61.6
                                                                              -----         -----         -----
Operating income (loss):                                                       (5.5)         13.8         (42.2)
Other income (expense):
  Interest expense                                                             (3.6)         (5.3)         (5.7)
  Miscellaneous                                                                 0.2           0.5           0.6
                                                                              -----         -----         -----
Income (loss) before income taxes, minority interests and extraordinary
  items                                                                        (8.9)          9.0         (47.3)
Provision for income taxes                                                      5.0           5.6           2.9
                                                                              -----         -----         -----
Income (loss) before minority interests and extraordinary items               (13.9)          3.4         (50.2)
Minority interests                                                             (0.5)           --            -- 
Extraordinary items                                                            (0.7)           --          (0.5)
                                                                              -----         -----         -----
Net income (loss)                                                             (15.1)          3.4         (50.7)
Preferred dividends and distributions on subsidiary trust mandatorily
  redeemable preferred securities                                               0.2           0.4            -- 
                                                                              -----         -----         -----
Net income (loss) applicable to common shareholders                           (15.3)          3.0         (50.7)
                                                                              =====         =====         =====   
</TABLE>



                                       27
<PAGE>   32


YEAR ENDED DECEMBER 31, 1998 VS.
  YEAR ENDED DECEMBER 31, 1997

Revenues for 1998 increased 139% to $17.68 billion as compared to $7.38 billion
for 1997. The increase in total revenues is attributable to the MCI Merger, the
CompuServe Merger and the AOL Transaction as well as internal growth. Results
for 1998 include MCI and Embratel operations from September 14, 1998. Excluding
Embratel, the Company's revenues increased 123% to $16.50 billion in 1998. Prior
year results have been restated to reflect the BFP Merger, which was accounted
for as a pooling-of-interests.

Actual reported revenues by category and associated revenue increases for the
year ended December 31, 1998 and 1997 reflect the following changes by category
(dollars in millions):


<TABLE>
<CAPTION>
                                      ACTUAL       ACTUAL        PERCENT
                                       1998         1997         CHANGE
                                     -------       -------       -------

<S>                                  <C>           <C>               <C>
REVENUES
   Voice                             $ 9,243       $ 4,062           128
   Data                                3,384         1,618           109
   Internet                            2,165           566           283
   International                       1,130           726            56
                                     -------       -------
COMMUNICATION SERVICES                15,922         6,972           128
   Other                                 574           412            39
                                     -------       -------
TOTAL REVENUES BEFORE EMBRATEL       $16,496       $ 7,384           123
   Embratel                            1,182            --            -- 
                                     -------       -------
TOTAL REPORTED REVENUES              $17,678       $ 7,384           139
                                     =======       =======
</TABLE>

                                                    
                                                    
                                                    
                                                    
                                                     

The following table provides supplemental pro forma detail for MCI WorldCom
revenues. Since actual results only reflect 108 days of operations for MCI and
Embratel, the pro forma results are more indicative of internal growth for the
combined company. The pro forma revenues, excluding Embratel, for the year ended
December 31, 1998 and 1997 reflect the following changes by category (dollars in
millions):

<TABLE>
<CAPTION>
                               PRO FORMA        PRO FORMA         PERCENT
                                 1998             1997            CHANGE
                                -------          -------          -------

<S>                             <C>              <C>                    <C>
REVENUES
  Voice                         $19,480          $17,932                9
  Data                            5,827            4,550               28
  Internet                        2,246            1,325               69
  International                   1,130              726               56
                                -------          -------         
COMMUNICATION SERVICES           28,683           24,533               17
  Other                           1,733            1,999              (13)
                                -------          -------          
TOTAL REVENUES                  $30,416          $26,532               15
                                =======          =======      
</TABLE>


Pro forma results for the prior periods reflect a classification change for
inbound international settlements which are now being treated as an offset to
line costs instead of revenues. Previously, both MCI and WorldCom classified
foreign post telephone and telegraph administration settlements on a gross basis
with the outbound settlement reflected as line cost expense and the inbound
settlement reflected as revenues. This change better reflects the way in which
the business is operated because the Company actually settles in cash through a
formal net settlement process that is inherent in the operating agreements with
foreign carriers.



                                       28
<PAGE>   33

The following discusses the pro forma revenue increases for the year ended
December 31, 1998 as compared to pro forma revenues for the comparable prior
year period. The pro forma revenues assume that the MCI Merger, CompuServe
Merger and the AOL Transaction occurred at the beginning of 1997. These pro
forma revenues do not include Embratel or the iMCI Business that was sold.
Changes in actual revenues are shown in the Consolidated Statements of
Operations and the foregoing tables and, as noted above, primarily reflect the
MCI Merger, CompuServe Merger, AOL Transaction and the internal growth of the
Company.

Pro forma voice revenues for 1998 experienced a 9% year-over-year increase
driven by a gain of 17% in traffic. Voice revenues include both long distance
and local domestic switched revenues. Strong long distance volume gains in
domestic commercial sales channels, combined with an increasing mix of local
services, were the primary contributors to this increase. Pro forma local voice
revenues grew 87% in 1998 versus the same period of the prior year. While the
Company continues to show significant percentage gains in switched local, it is
still a relatively small component of total Company revenues.

Pro forma data revenues for 1998 increased 28% year-over-year. Data revenues
include both long distance and local dedicated bandwidth sales. The revenue
growth for data services continues to be driven by significant commercial
end-user demand for high-speed data and by Internet-related growth on both a
local and long-haul basis. This growth is not only being fueled by connectivity
demands, but applications are becoming more strategic, far reaching and complex;
additionally, bandwidth consumption is driving an acceleration in growth for
higher capacity circuits. Rapidly growing demand for higher bandwidth services
has contributed to a 43% pro forma year-over-year local data revenue growth for
1998. As of December 31, 1998, the Company had approximately 17 million domestic
local voice grade equivalents and approximately 34,000 buildings in the U.S.,
connected over its high-capacity circuits. Domestic local route miles of
connected fiber are in excess of 7,800 and domestic long distance route miles
are in excess of 45,000.

Pro forma Internet revenues for 1998 increased 69% over the 1997 pro forma
amount. Growth is being driven by both dial-up and dedicated connectivity to the
Internet as more and more business customers migrate their data networks and
applications to Internet-based technologies. MCI's Internet revenues have been
excluded from the above table, due to the divestiture of the iMCI Business.




                                       29
<PAGE>   34



Pro forma international revenues - those revenues originating outside of the
United States, excluding Embratel, for 1998 were $1.13 billion, an increase of
56% as compared with $726 million for the same pro forma period of the prior
year. Significant percentage gains in international revenues are being achieved
in continental Europe in response to the Company's rapidly expanding networks
and sales effort. In July 1998, the Pan-European network was commissioned for
service and now provides MCI WorldCom the capability to connect from end-to-end
over 5,500 buildings in Europe all over its own high capacity circuits. In
Europe, the Company has over 900 route miles of local fiber and over 1,700 long
distance route miles.

The Pan-European networks and national networks in the U.K., France, Germany and
Belgium are driving higher growth of enhanced data sales internationally.
The resulting revenue mix shift is contributing to improved margins in spite of
the competitive pricing environment.

Pro forma other revenues for 1998 were $1.73 billion, down 13% as compared with
1997. Other revenues, which consists primarily of the operations of SHL, include
equipment deployment, consulting and systems integration and outsourcing
services. The year-over-year decline reflects the negative impact of eliminating
certain lines of operation and the Canadian currency translation effects.

In February 1999, the Company and EDS announced the signing of a definitive
agreement to sell SHL to EDS for $1.65 billion in cash. In addition, both
companies agreed to significant outsourcing contracts which will capitalize on
the individual strengths of each company. The definitive agreements for these
outsourcing contracts will most likely be finalized in the second quarter of
1999. Both transactions are subject to customary closing conditions and
regulatory approvals.

The following discusses the actual results of operations for the year ended
December 31, 1998 as compared to the year ended December 31, 1997.

LINE COSTS. Line costs as a percentage of revenues for 1998 were 47.6% as
compared to 51.0% reported for the same period of the prior year. Overall
decreases are attributable to changes in the product mix and synergies and
economies of scale resulting from network efficiencies achieved from the
assimilation of MCI, CompuServe Network Services and ANS into the Company's
operations and were offset in part by universal service fund costs recorded for
the 1998 year. Additionally, access charge reductions beginning in July 1997
reduced total line cost expense by approximately $200 million in 1998. While
access charge reductions were primarily passed through to the customer, line
costs as a percentage of revenues were positively affected by more than half a
percentage point for 1998. The Company anticipates that line costs as a
percentage of revenues will continue to decline as a result of further synergies
and economies of scale resulting from network efficiencies achieved from the
assimilation of the former MCI and WorldCom networks. Additionally, local
revenues are increasing rapidly and line costs related to local are primarily
fixed in nature - leading to lower line costs as a percentage of revenues.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for 1998 were $4.31 billion or 24.4% of revenues as compared to $1.63
billion or 22.0% of revenues for 1997. The increase in selling, general and
administrative expenses as a percentage of revenues for the year ended December
31, 1998, which includes MCI for 108 days, reflects the Company's expanding
operations, primarily through the MCI Merger. The Company's goal is to achieve
additional selling, general and administrative synergies in connection with the
MCI Merger through the assimilation of MCI into the Company's strategy of cost
control.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for 1998
increased to $2.2 billion or 12.4% of revenues from $976 million or 13.2% of
revenues for 1997. The increase reflects increased amortization associated with
the MCI Merger, CompuServe Merger and AOL Transaction and additional
depreciation related to capital expenditures. As a percentage of revenues, these
costs decreased due to the higher revenue base.




                                       30
<PAGE>   35
IN-PROCESS RESEARCH AND DEVELOPMENT AND OTHER CHARGES. In 1998, the Company
recorded a pre-tax charge of $196 million in connection with the BFP Merger, the
MCI Merger, and certain asset write-downs and loss contingencies. Such charges
included $21 million for employee severance, $17 million for BFP direct merger
costs, $38 million for conformance of BFP accounting policies, $56 million for
exit costs under long-term commitments, $31 million for write-down of a
permanently impaired investment, and $33 million related to certain asset
write-downs and loss contingencies. The $56 million related to long-term
commitments includes $33 million of minimum commitments over the next one to ten
years for leased facilities that the Company has or will abandon, $19 million
related to certain minimum contractual network lease commitments that expire
over the next one to three years, for which the Company will receive no future
benefit due to the migration of traffic to owned facilities, and $4 million of
other commitments. Additionally, the $33 million related to certain asset
write-downs and loss contingencies includes $9 million for the decommission of
certain information systems that have no alternative future use, $9 million for
the write-down to fair value of certain assets held for sale that were disposed
of in 1998 and $15 million related to legal costs and other items related to
BFP.

As of December 31, 1998, the Company's remaining unpaid liability related to the
above charges was $66 million, consisting of $7 million for severance, $50
million related to exit costs under long-term commitments and $9 million of
other loss contingencies. Cash outlays for the severance costs were paid in the
first quarter of 1999. The majority of the remaining liability will be paid
ratably over the next four quarters. Funding for this obligation will be
financed by cash flow from operations.

In connection with the recent business combinations, the Company made
allocations of the purchase price to acquired in-process research and
development ("R&D") totaling $429 million in the first quarter of 1998 related
to the CompuServe Merger and AOL Transaction and $3.1 billion in the third
quarter of 1998 related to the MCI Merger.

The Company used professional appraisal consultants to assess and allocate
values to the in-process research and development ("IPR&D"). These allocations
represent the estimated fair value based on risk-adjusted future cash flows
related to the incomplete projects. At the date of the respective business
combinations, the development of these projects had not yet reached
technological feasibility and the R&D in progress had no alternative future
uses. Accordingly, these costs were expensed as of the respective acquisition
dates.

Discounting the net cash flows back to their present value was based on the
weighted average cost of capital ("WACC"). The respective business enterprises
were comprised of various types of assets, each possessing different degrees of
investment risk contributing to the Company's overall WACC. Intangible assets
were assessed higher risk factors due to their lack of liquidity and poor
versatility for redeployment elsewhere in the business. In the MCI, CompuServe
Network Services and ANS analyses the implied WACC was 14%, 14.5% and 16.5%,
respectively, based on the purchase price paid, assumed liabilities, projected
cash flows, and each company's asset mix. Returns on monetary and fixed assets
were estimated based on then prevailing interest rates. The process for
quantifying intangible asset investment risk involved consideration of the
uncertainty associated with realizing discernible cash flows over the life of
the asset. A discount range of 15.5% to 19% was used for valuing the IPR&D.
These discount ranges were higher than the WACC due to the inherent
uncertainties surrounding the successful development of the purchased IPR&D, the
useful life of such technology, the profitability levels of such technology, and
the uncertainty of technological advances that were unknown at that time.


The value of the IPR&D projects was adjusted to reflect the relative value and
contribution of the acquired R&D. In doing so, consideration was given to the
R&D's stage of completion, the complexity of the work completed to date, the
difficulty of completing the remaining development, costs already incurred and
the projected cost to complete the projects.




                                       31
<PAGE>   36

The Company believes that the assumptions used in the forecasts were reasonable
at the time of the respective business combination. No assurance can be given,
however, that the underlying assumptions used to estimate expected project
sales, development costs or profitability, or the events associated with such
projects, will transpire as estimated. For these reasons, actual results may
vary from the projected results.

Management expects to continue supporting these R&D efforts and believes the
Company has a reasonable chance of successfully completing the R&D programs.
However, there is risk associated with the completion of the R&D projects and
the Company cannot give any assurance that any will meet with either
technological or commercial success.

If none of these R&D projects are successfully developed, the sales and
profitability of the Company may be adversely affected in future periods. The
failure of any particular individual project in-process would not materially
impact the Company's financial condition, results of operations or the
attractiveness of the overall investment of MCI, CompuServe Network Services or
ANS. Operating results are subject to uncertain market events and risks which
are beyond the Company's control, such as trends in technology, government
regulations, market size and growth, and product introduction or other actions
by competitors.

The integration and consolidation of MCI, CompuServe Network Services and ANS
requires substantial management and financial resources. While the Company
believes the early results of these efforts are encouraging, the MCI Merger,
CompuServe Merger and AOL Transaction necessarily involve a number of
significant risks, including potential difficulties in assimilating the
technologies and services of these companies and in achieving the expected
synergies and cost reduction.

A description of the acquired in-process technology and the estimates made by
the Company at the time each business combination was completed is set forth
below.

MCI. The in-process technology acquired in the MCI Merger consisted of seventy
significant R&D projects grouped into six categories. The aggregate value
assigned to MCI IPR&D was $3.1 billion. These projects were all targeted at: (1)
developing and deploying an all optical network, new architecture of the
telephone system using Internet Protocol ("IP") and developing the systems and
tools necessary to manage the voice and data traffic; (2) creating new products
and services; and (3) developing certain information systems that may enhance
the management of MCI WorldCom's products and service offerings.

A brief description of the six categories of IPR&D projects purchased at the
time of the MCI Merger is set forth below:

o        R&D RELATED TO AN ALL OPTICAL NETWORK. These projects involved R&D
         related to the development of an all optical network. This structure is
         in contrast to current systems which employed a combination of optics
         and electronics. New technologies that were in development included:
         (a) an optical cross connect system for all optical packet transport
         and sub-second service restoration, (b) a wavelength channel plan for
         enabling multiple simultaneous transmission channels, (c) projects
         related to distortion elimination, and (d) next generation optical
         networking technologies related to the fiber infrastructure.
         Achievements as of the MCI Merger date included demonstration of
         limitedscope prototypes in the laboratory. Remaining efforts included:
         demonstration of the system on a large scale with commercial traffic,
         physics research in certain areas, development of algorithms to enable
         network management, and addressing technology issues related to
         switching. The amount of R&D costs incurred as of the MCI



                                       32
<PAGE>   37

         Merger for these projects totaled $7 million. Estimated costs to
         complete were $10 million, as follows: 15% during the last quarter of
         1998, 48% during the four quarters in 1999, 31% during the four
         quarters in 2000, and 6% during the four quarters in 2001. As of the
         MCI Merger date, the completion of these projects was considered
         difficult, and the risk of these technologies not being completed was
         rated as medium to high. Failure to complete the R&D would cause the
         Company's future revenues and profits attributable to the R&D not to
         materialize.

o        R&D RELATED TO DATA TRANSMISSION SERVICE / OTHER TRANSMISSION EFFORTS.
         At the MCI Merger date, MCI was working on a variety of significant
         efforts related to data management. These new technologies included:
         (a) new data services to satisfy new capacity requirements and Internet
         needs, (b) a next generation intelligent network to enable deployment
         of specific new telecommunications services across multiple networks,
         (c) a 16 wavelength bi-directional line amplifier to amplify optical
         signals, (d) multiservice and integrated access platforms and
         development of new methods for serving ISPs on the local services
         network, and (e) Andromedia, which is related to specific improvements
         to Internet operations. Achievements as of the MCI Merger date included
         methods for new high speed switching, multicasting, and offering a
         variety of service levels, as well as architectural design for next
         generation intelligent networks. Tasks to complete the new technologies
         included: engineering related to telephone systems to utilize IP;
         solving scalability issues across the infrastructure; and conducting
         extensive testing of the technologies under development. As of the MCI
         Merger date, $48 million had been expended to develop these R&D
         projects. Estimated costs to complete the projects were $132 million,
         as follows: 9% during the last quarter of 1998, 33% during the four
         quarters in 1999, 46% during the four quarters in 2000, and 12% during
         the four quarters in 2001. The completion of these projects was
         considered difficult and the risk of not completing these projects was
         characterized as medium to high. Failure to complete the R&D would
         cause the Company's future revenues and profits attributable to the R&D
         not to materialize.

o        NEXT GENERATION TOOLS. At the MCI Merger date, MCI's personnel were
         developing a variety of new tools designed to achieve specific
         reliability and quality objectives related to the network. Important
         new development technologies in this category included: (a) reliability
         and quality engineering tools relating to the reliability test and
         quality control, (b) network design development tools to enable
         end-to-end network design and modeling capabilities, (c) the Integrated
         Management Platform Advanced Communications Technology project to
         provide new network management for the networks, (d) the integrated
         test system to provide a new testing architecture for the Company's
         local, long distance, and international networks, and (e) an enhanced
         traffic system and security. Progress as of the MCI Merger date
         included: definition of architectural components, partial development
         of software algorithms, and limited prototypes for tasks. Remaining
         efforts included completion of algorithms, prototype development,
         validation, testing, and development of support systems. As of the MCI
         Merger date, $84 million had been spent on the R&D projects. Estimated
         costs to complete were $48 million, as follows: 22% during the last
         quarter of 1998, 46% during the four quarters in 1999, 23% during the
         four quarters in 2000, and 9% during the four quarters in 2001. At the
         MCI Merger date, there were significant risks of not being able to
         complete the prototypes and there was also uncertainty in the
         timeliness of completion. The aggregate risk level of this category of
         R&D projects was considered medium to high. Project failure would
         result in the elimination of the Company's future revenues and profits
         attributable to the R&D.

o        SPECIFIC NEW CUSTOMER CARE CAPABILITIES. These projects involve a
         series of efforts designed to provide customers with a suite of new
         services, including development of major technologies such as: (a) the
         virtual data delivery system to engineer new order processing and
         provisioning capabilities for data services, (b) network automation
         projects related to capacity and change management, (c) hyperlink to
         deploy private lines and frame relay circuits utilizing a new
         methodology, (d) common data platform 





                                       33
<PAGE>   38

         to create a depository of network management information, and (e) the
         Talisman project to develop data products for the networkMCI One Voice.
         Achievements as of the MCI Merger date included design, partial coding,
         and prototyping. Tasks to complete included: addition of significant
         features and functionality; additional design, testing and coding; and
         addressing scalability issues. As of the MCI Merger date, $67 million
         had been spent on developing this R&D. Estimated costs to complete were
         $76 million, as follows: 20% during the last quarter in 1998, 50%
         during the four quarters in 1999, 19% during the four quarters in 2000,
         and 11% during the four quarters in 2001. As of the MCI Merger date,
         there were significant risks in completing the algorithms successfully
         and on time. The aggregate risk level for this category of R&D projects
         was considered medium to high. Project failure would eliminate the
         Company's future revenues and profits attributable to the R&D.

o        R&D RELATED TO LOCAL SERVICES. This category involved a series of
         specific projects to create an offering of local services on a national
         basis. Efforts included: (a) electronic bonding for local service
         maintenance organizations, (b) elements of an order automation and
         tracking system, (c) access technology development, and (d) the
         substantial R&D related to the network optimization enhancement system.
         Achievements as of the MCI Merger date included: completion of system
         definitions, partial coding development, and base functionality
         developed on certain projects. Tasks to complete included adding
         features and functionality, module development and testing. As of the
         MCI Merger date, $53 million had been spent on developing the R&D
         projects. Estimated costs to complete were $38 million, as follows: 25%
         during the last quarter of 1998, 43% during the four quarters in 1999,
         21% during the four quarters in 2000, and 11% during the four quarters
         in 2001. There were significant risks related to developing the
         interfaces and the required technologies and the complex
         interconnections. The aggregate risk level for this category of R&D
         projects was considered medium to high. Failure of the R&D project
         would eliminate the Company's future revenues and profits attributable
         to the R&D.

o        NEW PRODUCTS AND SERVICES. A series of new products and services were
         being developed by MCI as of the MCI Merger date. These included: (a)
         video services to design and implement a new terrestrial video
         distribution network for real-time quality video, (b) distance learning
         services via an integrated multimedia network platform, (c) fractal
         compression technology for image compression and encoding to reduce
         data transmit time and bit losses, and (d) integrated messaging for one
         number service for telephone, fax, voicemail, Internet and paging.
         Progress as of the MCI Merger date included: definition, development
         and component testing; feasibility and analysis; and development of
         prototypes. Remaining development included: design and deployment;
         resolving issues related to product functionality; and addressing
         scalability issues across the Company's infrastructure. As of the MCI
         Merger date $37 million had been spent on developing the R&D in this
         category. Estimated costs to complete were $38 million, as follows: 24%
         during the last quarter of 1998, 43% during the four quarters in 1999,
         22% during the four quarters in 2000, and 11% during the four quarters
         in 2001. There were significant risks in completing the R&D projects,
         particularly developing the leading edge components, compression
         technologies, and developing operational support systems. The aggregate
         risk level for this category of R&D projects was considered medium to
         high. Project failure would eliminate the Company's future revenues and
         profits attributable to the R&D.



                                       34
<PAGE>   39

A summary of allocated values by technology/project is as follows (in millions):


<TABLE>
<CAPTION>
                                     DEVELOPED
                                     TECHNOLOGY                 IPR&D
                                     ----------                 -----

<S>                                      <C>                   <C>       
All Optical Network                      $  200                $  400    
Data Transmission Service/Other             200                   300    
Next Generation Tools                       100                   400    
New Customer Care Capabilities              800                 1,100    
Local                                       200                   700    
New Products and Services                   200                   200    
                                         ------                ------    
                                         $1,700                $3,100    
                                         ======                ======    
</TABLE>

The value assigned to purchased in-process technology was determined by
estimating the contribution of the purchased in-process technology to developing
commercially viable products, estimating the resulting net cash flows from the
expected product sales of such products, and discounting the net cash flows to
their present value using a risk-adjusted discount rate. Royalty rates used in
the valuation of IPR&D ranged from 1% to 3%. Funding for such projects is
expected to be obtained from internally generated sources.

Developed technology related to the MCI Merger will be depreciated over 10 years
on a straight-line basis. The remaining purchase price included allocations to
goodwill and tradename which will be amortized over 40 years on a straight-line
basis.

As of the allocation date, total MCI stand-alone revenues were projected to
exceed $34 billion within five years. This level of revenue implied a compound
annual growth rate ("CAGR") of approximately 12.3%. Estimated total revenues
from the acquired in-process technology peaked in the year 2001 and steadily
declined in 2002 through 2009 as other new product and service technologies were
expected to be introduced by the combined company. These projections were based
on management's estimates of market size and growth, expected trends in
technology, and the expected timing of new product introductions. These
projections, as well as the other statements above regarding estimated costs of
completion and the likelihood of successful completion and other aspects of the
IPR&D projects in the future, which were made as of the time of the MCI Merger,
constituted forward-looking statements, and were not made with a view to public
disclosure and were based on a variety of estimates and judgments. Actual
results may vary materially due to a number of significant risks, including,
without limitation, uncertainties regarding future business, economic,
competitive, regulatory and financial market conditions and future business
decisions, all of which are difficult to predict and many of which are beyond
the Company's control. No assurance can be given that such projections or other
statements will be realized. The Company does not intend to update or supplement
these projections or other statements in the future.

COMPUSERVE AND ANS. The in-process technology acquired in the CompuServe Merger
and the AOL Transaction consisted of three main R&D efforts underway at
CompuServe Network Services and two main R&D efforts underway at ANS. The
aggregate value assigned to CompuServe and ANS in-process technology was $429
million. These projects included next generation network technologies and new
value-added networking applications, such as applications hosting, multimedia
technologies and virtual private data networks.

A brief description of the IPR&D projects purchased at the time of the
CompuServe Merger and AOL Transaction is set forth below:



                                       35
<PAGE>   40

o        VIRTUAL PRIVATE DATA NETWORK ("VPDN"). These projects provided
         competitive VPDN products and services, including development of a new
         radius-roaming functionality. This capability was intended to allow
         remote VPDN users to "roam" the country, much like cellular phone
         users, and access their corporate network without regard for how to
         initiate a remote connection. Additionally, development of another VPDN
         adjunct product called the Phone Access Locator, if successful, would
         be used by CompuServe Network Services' remote customers to look up
         local network access point phone numbers. Other VPDN efforts underway
         at the date of the CompuServe Merger related to voluntary tunneling and
         development of new packet network technologies. Achievements leading up
         to the acquisition included completion of certain software
         specifications and design limited concept testing, and performance
         verification. Remaining efforts included large-scale design,
         performance testing, debugging, and quality assurance. Costs to
         complete this R&D project were projected to be approximately $3 million
         in 1998 and $4 million in 1999. The risk of not completing these
         efforts was rated as medium. Project failure would result in the
         elimination of the Company's future revenues and profits attributable
         to the R&D.

o        NETWORK TECHNOLOGIES. At the date of the CompuServe Merger, CompuServe
         Network Services had undertaken significant projects to develop new
         IP-based network technologies. These projects involved many separate
         efforts, including: researching the use of switching and multicast
         technologies; investigating and testing proprietary switching and
         routing technology; researching and developing Fast Ethernet and/or
         Gigabit Ethernet protocols; and developing and testing switches with
         routing functionality. CompuServe Network Services was also working on
         a significant effort to enhance workstation-based open systems
         technologies that contained new functions intended to allow the company
         to address new market needs. CompuServe Network Services' development
         work included the testing of new products and the development of new
         in-house network management solutions. Achievements leading up to the
         acquisition included completion of certain software and hardware
         specifications and design. Remaining efforts included large-scale
         design, performance testing and debugging. Costs to complete the R&D
         project were projected to be approximately $6 million in 1998 and $8
         million in 1999. The risk of not completing these efforts was rated as
         medium. Project failure would result in the elimination of the
         Company's future revenues and profits attributable to the R&D.

o        APPLICATION HOSTING. At the date of the CompuServe Merger, CompuServe
         Network Services had undertaken an effort to develop proprietary
         software, and identify and test third party Web hosting technology in
         order to provide complex Web and groupware hosting services. As part of
         this effort, CompuServe Network Services was attempting to develop a
         new capability in which it would host complex Web sites, without
         duplicating any development efforts. In addition, CompuServe Network
         Services was in the process of developing leading-edge electronic
         commerce solutions for its complex Web hosting product. CompuServe
         Network Services was also developing proprietary software and testing
         reporting tools. CompuServe Network Services was also in the process of
         making substantial enhancements that would result in a new e-mail
         gateway. Achievements leading up to the acquisition included completion
         of certain software specifications and design, limited concept testing,
         and performance verification. Remaining efforts included large-scale
         design and engineering, performance testing, and debugging. Costs to
         complete this R&D project were projected to be approximately $1 million
         in 1998 and $2 million in 1999. The risk of not completing these
         efforts was rated as medium. Project failure would result in the
         elimination of the Company's future revenues and profits attributable
         to the R&D.

o        SUPERCORE. At the date of the AOL Transaction, Supercore was a
         significant project involving R&D related to data transmission and VPDN
         technologies. The Supercore project was intended to provide for the
         differentiation of connectivity service based on the needs of the
         transmission. At the time of the acquisition, ANS had made significant
         progress on this important R&D effort. Achievements leading up to the
         acquisition included a completed design and limited performance
         evaluation. Remaining efforts



                                       36
<PAGE>   41

         involved large-scale testing and proof of concept. ANS estimated it
         would spend approximately $12 million in 1998 and $17 million in 1999
         to complete R&D projects related to Supercore. The risk of not
         completing these projects was considered medium to high risk. Failure
         to complete the R&D would cause the Company's future revenues and
         profits attributable to the R&D not to materialize.

o        VALUE ADDED APPLICATIONS (SECURITY SYSTEMS, APPLICATION HOSTING, AND
         MULTIMEDIA SYSTEMS). At the date of the AOL Transaction, ANS had a
         number of R&D projects underway related to security systems,
         application hosting and multimedia systems. In connection with a
         security system product called Interlock, ANS was developing
         next-generation capabilities to render multiple Local Area Network
         ("LAN") connections, Simple Network Management Protocol ("SNMP")
         support, and the selective use of Java and ActiveX protocols. Other R&D
         efforts were related to distributed firewalls, firewall farm
         technology, new encryption technologies, and multiple LAN interface
         capability. A Windows project involved substantially improving aspects
         of the server software intended to make it support a Domain Named
         System ("DNS") cache, firewall functionality, and remote
         administration. ANS also had several application R&D projects underway
         that were aimed at the development of a set of software tools, which
         would culminate in a new complex Web hosting product. ANS' complex Web
         hosting product was being developed to have near real-time database
         replication across geographic location, which would allow ANS, if
         successful, to maintain a company's Web site on several servers. As of
         the acquisition date, ANS did not offer multimedia services over its
         network. As a result, ANS was conducting R&D related to four multimedia
         services: fax over IP, video over IP, voice over IP, and call centers.
         R&D activity included system and software design, development of
         prototype systems, and systems testing. The most important R&D efforts
         related to multimedia systems were development of priority routing. In
         addition to ANS' security systems, application hosting, and multimedia
         R&D projects, ANS had undertaken a number of additional R&D efforts to
         develop technologies that would allow customers to access the system
         from any platform and to create a new data warehouse. In concert with
         these efforts, ANS was also addressing the customer's use of reporting,
         query, and On-line Analytical Processing ("OLAP") tools. Achievements
         on the value added applications R&D leading up to the acquisition
         included the design and development of certain software algorithms,
         unit testing, and limited system testing. Remaining efforts included
         additional design work, large-scale testing, significant performance
         enhancements, and debugging. ANS expected to spend approximately $4
         million in 1998 and $5 million in 1999 to complete the value added
         applications R&D. The risk of not completing these projects was
         considered to be medium to high risk. Failure to complete the R&D would
         cause the Company's future revenues and profits attributable to the R&D
         not to materialize.

The value assigned to purchased in-process technology was determined by
estimating the contribution of the purchased in-process technology to developing
commercially viable products, estimating the resulting net future cash flows
from the expected sales of such products, and discounting the net future cash
flows to their present value using a risk-adjusted discount rate. The Company
expected to begin generating the economic benefits from the ANS and CompuServe
Network Services projects in progress as they were completed. At the time of
valuation, the cost to complete all such projects was approximately $62 million.
Funding for completion of the in-process projects was expected to be obtained
from internally generated sources. Based on the cost incurred at the acquisition
dates and the milestones achieved by ANS and CompuServe Network Services, in
aggregate, ANS' projects were estimated to be approximately 80% complete, while
CompuServe Network Services's projects were estimated to be approximately 60%
complete.

The allocation of purchase price for the CompuServe Merger and the AOL
Transaction included allocations to developed technologies, assembled work
force, customer relationships and tradenames which will be amortized on a
straight-line basis over 10 years.




                                       37
<PAGE>   42

At the time of the allocation, total ANS and CompuServe Network Services
stand-alone revenues were projected to exceed $3.5 billion within five years.
This level of revenues implied a CAGR of approximately 32%. Estimated total
revenues from the acquired in-process technology related to CompuServe Network
Services peaked in the year 2002 and steadily declined through 2006 as other new
product and service technologies were expected to be introduced by the Company.
Estimated total revenues from the acquired in-process technology related to ANS
peaked in the year 2004 and steadily declined through 2006. These projections
were based on management's estimates of market size and growth, expected trends
in technology, and the expected timing of new product introductions. These
projections, as well as the statements above regarding estimated costs of
completion, the likelihood of successful completion, and other aspects of the
IPR&D projects in the future, which were made as of the time of the
acquisitions, constituted forward-looking statements, and were not made with a
view to public disclosure and were based on a variety of estimates and
judgements. Actual results may vary materially due to a number of significant
risks, including, without limitation, uncertainties regarding future business,
economic, competitive, regulatory and financial market conditions and future
business decisions, all of which are difficult to predict and many of which are
beyond the Company's control. No assurance can be given that such projections or
other statements will be realized. The Company does not intend to update or
supplement these projections or other statements in the future.

INTEREST EXPENSE. Interest expense for 1998 was $637 million or 3.6% of
revenues, as compared to $395 million or 5.3% of revenues reported for 1997. The
increase in interest expense is attributable to higher debt levels as the result
of higher capital expenditures, the 1998 and 1997 fixed rate debt financings and
the MCI Merger, offset by lower interest rates as a result of the BFP tender
offers, the 1998 fixed rate debt financings and slightly lower rates in effect
on the Company's variable rate long-term debt. For the twelve months ended
December 31, 1998 and 1997, weighted average annual interest rates on the
Company's long-term debt was 7.14% and 7.76%, respectively, while weighted
average annual levels of borrowing were $12.28 billion and $5.90 billion,
respectively.

PROVISION FOR INCOME TAXES. The Company recorded a tax provision of $876 million
for the year ended December 31, 1998, on a pretax loss of $1.57 billion.
Although the Company generated a consolidated pretax loss for the year ended
December 31, 1998, permanent non-deductible items aggregating approximately
$4.03 billion, resulted in the recognition of taxable income. Included in the
permanent non-deductible items was the $3.53 billion charge for IPR&D related to
the MCI Merger, CompuServe Merger and AOL Transaction.

EXTRAORDINARY ITEMS. In the first quarter of 1998, the Company recorded an
extraordinary item totaling $129 million, net of income tax benefit of $78
million. The charge was recorded in connection with the tender offers and
certain related refinancings of the Company's outstanding debt. In the second
quarter of 1997 the Company recognized an extraordinary loss of $3 million
related to the early extinguishment of secured indebtedness.

NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS. For the year ended December
31, 1998, the Company reported a net loss of $2.7 billion as compared to net
income of $218 million reported for the year ended December 31, 1998. Diluted
loss per common share was $2.12 compared to diluted earnings per common share of
$0.22 per share for the comparable 1997 period.



                                       38
<PAGE>   43



YEAR ENDED DECEMBER 31, 1997 VS.
  YEAR ENDED DECEMBER 31, 1996

Revenues for 1997 increased 66% to $7.38 billion as compared to $4.45 billion
for 1996. The increase in total revenues and minutes is primarily attributable
to the MFS Merger and internal growth of the Company, as outlined in the next
paragraph.

On a pro forma basis, as though the MFS Merger and the UUNET Acquisition
occurred at the beginning of 1996, revenues and traffic for 1997 increased 32%
and 70.4%, respectively, compared with pro forma revenues of $5.60 billion on
27.64 billion revenue minutes for 1996. The pro forma increase reflects the
internal growth of the Company in all core communications services. In spite of
the continuing impact of competitive pricing and access charge pass throughs,
the Company posted strong gains across all product lines due to increased usage
and greater demand for high speed data and Internet related growth.

The following table highlights the source of the Company's internal growth by
category. The pro forma and actual revenue increases for 1997 and 1996 reflect
the following increases by category (dollars in millions):

<TABLE>
<CAPTION>
                                                   MFS                                             ACTUAL
                                                PRO FORMA          PERCENT       ACTUAL            PERCENT
                              ACTUAL 1997          1996            CHANGE         1996             CHANGE
                              -----------          ----            ------         ----             ------
<S>                              <C>             <C>                 <C>          <C>                 <C>
REVENUES
  Voice                          $4,062          $3,343              21           $3,067              32
  Data                            1,618           1,184              37              956              69
  Internet                          566             253             124               --              --
  International                     726             391              86              225             223
                                 ------          ------                           ------
COMMUNICATIONS SERVICES           6,972           5,171              35            4,248              64
  Other                             412             429              (4)             201             105
                                 ------          ------                           ------
TOTAL REVENUES                   $7,384          $5,600              32           $4,449              66
                                 ======          ======                           ======  
</TABLE>

                           
The following discusses the results of operations for the year ended December
31, 1997 as compared to MFS pro forma results for the comparable prior year
period. Changes in actual results of operations are shown in the Consolidated
Statements of Operations and the foregoing tables and, as noted above, primarily
reflect the MFS Merger and the internal growth of the Company.

Voice revenues increased 21% in 1997 over the 1996 MFS pro forma amount. This
increase was primarily due to strong volume gains in both the retail and
wholesale segments. The Company's narrowing gap between revenue and volume
growth was driven by strong wholesale revenues, international settlement
reduction pass throughs, access charge pass throughs, and product mix.

Voice revenues includes both long distance and increasingly local switched
revenues. While the Company showed significant percentage gains in switched
local during 1997, it was a relatively small component of total Company
revenues.

Data revenues increased by 37% in 1997 over the 1996 MFS pro forma amount. The
strong revenue growth for private line and frame relay continues to be driven by
tremendous commercial end user demand for high speed data and by Internet
related growth. Data revenues includes both long distance and local bandwidth
sales.


Internet revenues for 1997 more than doubled to $566 million. The provisioning
constraints experienced in mid-1997 were significantly overcome in the latter
part of the third quarter of 1997, and the strong demand for both dedicated and
dial-up access contributed to the resumption of strong sequential gains in the
fourth quarter of 1997.



                                       39
<PAGE>   44

International revenues -- those revenues originating outside of the U.S. -- were
$726 million, for 1997, up 86% compared with the corresponding MFS pro forma
period for 1996. This strong performance was due to continuing strong traffic
growth in the United Kingdom and a growing presence in Continental Europe for
both switched services and, increasingly, high speed data services. Significant
effort was taken in 1996 to prepare for the opening of national markets in
European countries which provided additional growth and improved margins in
1997.

Other revenues for 1997 were $412 million. Other revenues include network
construction and system sales which each represent non-recurring contract
revenue streams that fluctuate from quarter to quarter. Operator services and
broadcast operations were sold in the third quarter of 1997. The operator
services and broadcast operations provided revenues of $110 million in 1997 and
$175 million in 1996.

The following discusses the actual results of operations for the year ended
December 31, 1997 as compared to the year ended December 31, 1996.

LINE COSTS. Line costs as a percentage of revenues for 1997 was 51.0% as
compared to 53.9% reported for the same period of the prior year. This decrease
was attributable to changes in the product mix and synergies and economies of
scale resulting from network efficiencies achieved from the assimilation of MFS
into the Company's operations. Additionally, access charge reductions beginning
in July 1997 reduced total line cost expense by approximately $60 million in
1997. While access charge reductions were primarily passed through to the
customer, line costs as a percentage of revenues was positively affected by
approximately one percentage point.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for 1997 increased to $1.63 billion or 22.0% of revenues as compared to
$867 million or 19.5% of revenues as reported for 1996. The increase in selling,
general and administrative expenses as a percentage of revenues on a reported
basis resulted from the Company's expanding operations, primarily through the
MFS Merger.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense for 1997
increased to $976 million or 13.2% of revenues from $320 million or 7.2% of
revenues for 1996. This increase reflects increased amortization associated with
the MFS Merger and additional depreciation related to capital expenditures.

IN-PROCESS RESEARCH AND DEVELOPMENT AND OTHER CHARGES. In 1996, the Company
recorded charges for employee severance, employee compensation charges,
alignment charges and costs to exit unfavorable telecommunications contracts.
Also in 1996, the Company incurred non-cash charges related to a write-down in
the carrying value of certain assets, including goodwill and equipment. Because
of events resulting from the passage of the Telecom Act and changes in
circumstances impacting certain non-core operations, management estimates of the
Company's fair value of operating assets within its core and non-core businesses
resulted in a non-cash charge of $344 million after-tax. On a pre-tax basis, the
write-down was $402 million and included $139 million for network facilities and
$263 million for non-core business, primarily operator services goodwill. Fair
value of the non-core business was determined by estimating the present value of
future cash flows to be generated from those operations while the majority of
the network facilities were recorded at net salvage value due to anticipated
early disposal.

In 1996, the Company recorded a $2.14 billion charge for IPR&D related to the 
MFS Merger. The charge was based upon a valuation analysis of the technologies 
of MFS' worldwide information system, the Internet network expansion system of 
UUNET, and certain other identified research and development projects 
purchased in the merger. At the date of the MFS Merger, the technological 
feasibility of the acquired technology had not yet been established and the 
technology had no future alternative uses. The expense includes $1.6 billion 
associated UUNET and $0.54 billion related to MFS.

INTEREST EXPENSE. For the year ended December 31, 1997, interest expense was
$395 million or 5.3% of revenues, as compared to $253 million or 5.7% of
revenues for the year ended December 31, 1996. The increase in interest expense
was attributable to higher debt levels as the result of additional debt acquired
with the MFS Merger, higher capital expenditures and the 1997 fixed rate debt
financings, offset by lower interest rates in effect on the Company's variable
rate long-term debt.

                                       40
<PAGE>   45

PROVISION FOR INCOME TAXES. The effective income tax rate for 1997 was 63% of
income before taxes. The 1997 rate of 63% is greater than the expected statutory
rate of 35% primarily due to the fact that amortization of the goodwill related
to the MFS Merger is not deductible for tax purposes and the placement of a
valuation allowance on certain net operating loss ("NOL") carryforwards
generated by BFP in 1997. Excluding the nondeductible amortization of goodwill
and the placement of the valuation allowance on certain BFP NOLs, the Company's
effective income tax rate would have been approximately 41%.

NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS. For the year ended December
31, 1997, net income applicable to common shareholders was $218 million, or
$0.22 per share compared with a net loss of $2.23 billion, or $5.02 per share,
before extraordinary items for the year ended December 31, 1996.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1998, the Company's total debt was $20.84 billion, an
increase of $13.42 billion from December 31, 1997 primarily due to the
acquisition of MCI debt, Embratel debt, the remaining Embratel note payments and
the financing of the approximately $7 billion payment to BT.

In connection with the BFP Merger, the Company announced in February 1998 that
it had commenced offers (the "Tender Offers") to purchase for cash various
series of outstanding BFP notes (the "BFP Notes"). Concurrently with the Tender
Offers, MCI WorldCom obtained the requisite consents to eliminate certain
restrictive covenants and amend certain other provisions of the respective
indentures of the BFP Notes. In March 1998, the Company accepted all BFP Notes
validly tendered. As of the expiration of the Tender Offers, MCI WorldCom had
received valid tenders and consents from holders of approximately $1.1 billion
of BFP Notes (over 99% of total outstanding). The funds required to pay all
amounts required under the Tender Offers were obtained by MCI WorldCom from
available working capital and lines of credit. In connection with the Tender
Offers and related refinancings, MCI WorldCom recorded an extraordinary item of
$129 million, net of income tax benefit of $78 million in the first quarter of
1998.

On August 6, 1998, MCI WorldCom replaced its existing $3.75 billion and $1.25
billion revolving credit facilities (the "Old Credit Facilities") with $12.0
billion in credit facilities consisting of $3.75 billion Amended and Restated
Facility A Revolving Credit Agreement ("Facility A Loans"), a $1.25 billion
Amended and Restated Facility B Term Loan Agreement ("Facility B Loans") and a
new $7 billion 364-Day Revolving Credit and Term Loan Agreement ("Facility C
Loans"). In the fourth quarter of 1998, the Company elected to repay the
Facility B Loans and cancel the facility commitment of $1.25 billion. The funds
used to repay Facility B Loans were obtained by the Company from availability
under the Facility A Loans and Facility C Loans (collectively, the "Credit
Facilities") and the commercial paper program. The Credit Facilities provide
liquidity support for the Company's commercial paper program and will be used
for other general corporate purposes. The Facility A Loans mature on June 30,
2002. The Facility C Loans have a 364-day term, which may be extended for up to
two successive 364-day terms thereafter to the extent of the committed amounts
from those lenders consenting thereto, with a requirement that lenders holding
at least 51% of the committed amounts consent. Additionally, effective as of the
end of such 364-day term, the Company may elect to convert up to $4 billion of
the principal debt outstanding under the Facility C Loans from revolving loans
to term loans with a maturity date no later than one year after the conversion.
The Credit Facilities bear interest payable in varying periods, depending on the
interest period, not to exceed six months, or with respect to any Eurodollar
Rate borrowing, 12 months if available to all lenders, at rates selected by the
Company under the terms of the Credit Facilities, including a Base


                                       41
<PAGE>   46

Rate or Eurodollar Rate, plus the applicable margin. The applicable margin for
the Eurodollar Rate borrowing varies from 0.35% to 0.75% as to Facility A Loans
and from 0.25% to 0.45% as to Facility C Loans, in each case based upon the
better of certain debt ratings. The Credit Facilities are unsecured but include
a negative pledge of the assets of the Company and its subsidiaries (subject to
certain exceptions). The Credit Facilities require compliance with a financial
covenant based on the ratio of total debt to total capitalization, calculated on
a consolidated basis. The Credit Facilities require compliance with certain
operating covenants which limit, among other things, the incurrence of
additional indebtedness by the Company and its subsidiaries, sales of assets and
mergers and dissolutions, which covenants are generally less restrictive than
those contained in the Old Credit Facilities and which do not restrict
distributions to shareholders, provided the Company is not in default under the
Credit Facilities. The Facility A Loans and the Facility C Loans are subject to
annual commitment fees not to exceed 0.25% and 0.12%, respectively, of any
unborrowed portion of the facilities.

In 1998, the Company approved the issuance of commercial paper notes in the
aggregate principal amount not to exceed $10.0 billion, which notes have a
maturity not to exceed 364 days from the date of issuance. The Company maintains
unused credit facilities equal to 100% of the commercial paper notes
outstanding. As of December 31, 1998, $2.59 billion was outstanding under the
commercial paper program.

As of December 31, 1998, the Company had available liquidity of $7.8 billion
under its Credit Facilities and commercial paper program and from available
cash.

On August 11, 1998, the Company completed a public debt offering of $6.1 billion
principal amount of debt securities. The net proceeds of $6.04 billion were used
to pay down commercial bank debt, finance a portion of the approximately $7
billion payment to BT and for general corporate purposes.

The public debt offering consisted of $1.5 billion principal amount of 6.125%
Notes Due 2001 (the "Notes Due 2001"), which mature August 15, 2001, $600
million principal amount of 6.25% Notes Due 2003 (the "Notes Due 2003"), which
mature on August 15, 2003, $2.25 billion principal amount of 6.40% Notes Due
2005 (the "Notes Due 2005"), which mature August 15, 2005 and $1.75 billion
principal amount of 6.95% Notes Due 2028 (the "Notes Due 2028" and collectively
with Notes Due 2001, the Notes Due 2003 and the Notes Due 2005, the "Notes"),
which mature August 15, 2028. The Notes bear interest payable semiannually in
arrears on February 15 and August 15 of each year, commencing February 15, 1999.

The Notes are redeemable, as a whole or in part, at the option of the Company,
at any time or from time to time, at respective redemption prices equal to the
greater of (i) 100% of the principal amount of the Notes to be redeemed or (ii)
the sum of the present values of the Remaining Scheduled Payments (as defined
therein) plus (a) 10 basis points for the Notes Due 2001, (b) 15 basis points
for the Notes Due 2003 and the Notes Due 2005, or (c) 20 basis points for the
Notes Due 2028, plus in the case of each of clause (i) and (ii) accrued interest
to the date of redemption.

At the time of the MCI Merger, MCI had outstanding $1.44 billion of MCI Senior
Debentures with rates ranging from 7.125% to 8.25% and maturing from January
2023 through June 2027, and $2.65 billion of MCI Senior Notes with rates ranging
from 6.125% to 7.5% and maturing from March 1999 through April 2012.
Additionally, MCI had outstanding a note payable in annual local currency
installments (US$1.32 billion at December 31, 1998) as a result of MCI's
purchase of Embratel on August 4, 1998, and other debt including, without
limitation, capital leases.

As noted below, the Brazilian real has experienced significant devaluation
against the U.S. dollar since MCI invested in Embratel in August 1998. The
Company has designated the remaining $1.32 billion note payable in local
currency installments, resulting from the Embratel investment, as a hedge of its
investment in Embratel. As of December 31, 1998, the Company recorded the change
in value of the note as a reduction of the note payable with the offset through
foreign currency translation adjustment in shareholders' investment.




                                       42
<PAGE>   47
As of December 31, 1998, Embratel had $552 million of long-term debt
outstanding, of which approximately $496 million was denominated in U.S. dollars
and $56 million denominated in other currencies including the French Franc,
Deutsche Mark and Japanese Yen. The effective cost to Embratel of borrowing in
foreign currencies, such as the U.S. dollar, depends principally on the exchange
rate between the Brazilian real and the currencies in which its borrowings are
denominated. During the first quarter of 1999, the Brazilian real devalued
against the U.S. dollar by as much as 78%. If this devaluation is sustained, or
worsens, Embratel would record a charge to their earnings equal to the increase
in the U.S. dollar liability resulting from such devaluation. The net effect to
the Company's operations would be 19.26% of such charge after elimination of
minority interests.

In January 1999, the Company and one of its wholly owned subsidiaries redeemed
all of its outstanding 9.375% Senior Notes due January 15, 2004 (the "Senior
Notes"). Holders of the Senior Notes received 103.52% of the principal amount
plus accrued and unpaid interest to January 15, 1999 of $46.875 per $1,000
aggregate principal amount of such Senior Notes. The total redemption cost of
$743 million was obtained from available liquidity under the Company's Credit
Facilities and commercial paper program.

In connection with the MCI Merger, the Company also acquired $750 million
aggregate principal amount of 8% Cumulative Quarterly Income Preferred
Securities, Series A, representing 30 million shares outstanding ("preferred
securities") due June 30, 2026 which were previously issued by MCI Capital I, a
wholly owned Delaware statutory business trust (the "Trust"). The Trust exists
for the sole purpose of issuing the preferred securities and investing the
proceeds in the Company's Subordinated Debt Securities due June 30, 2026, the
only assets of the Trust. The Company and MCI have unconditionally guaranteed,
on a subordinated basis, all of the Trust's obligations under the preferred
securities.

For the year ended December 31, 1998, the Company's cash flow from operations
was $4.09 billion, increasing 224% from $1.26 billion in 1997. The increase in
cash flow from operations was primarily attributable to internal growth,
synergies and economies of scale resulting from network efficiencies and
selling, general and administrative cost savings achieved from the assimilation
of recent acquisitions, including the MCI Merger into the Company's operations.

In 1998, the Company's existing receivables purchase agreement generated
additional proceeds of $83 million, bringing the total amount outstanding to
$500 million. The Company used these proceeds to reduce outstanding debt under
the Company's existing credit facilities. As of December 31, 1998, the purchaser
owned an undivided interest in a $1.25 billion pool of receivables.

Cash used in investing activities for the year ended December 31, 1998 totaled
$9.43 billion and included capital expenditures of $5.42 billion and acquisition
and related costs of $3.40 billion. Primary capital expenditures include
purchases of switching, transmission, communication and other equipment.
Approximately $6.6 billion is currently anticipated for transmission and
communications equipment, construction and other capital expenditures in 1999
without regard to Embratel or possible future acquisitions or the redeployment
of possible SHL proceeds into additional spending opportunities. Acquisition and
related costs includes the costs associated with the MCI Merger, CompuServe
Merger and AOL Transaction.

Included in cash flows from financing activities are payments of $13 million for
dividends on the Company's Series A and Series B preferred dividend
requirements. The Company has never paid cash dividends on its Common Stock.
Dividends on the MCI WorldCom Series B Preferred Stock accrue at the rate per
share of 




                                       43
<PAGE>   48

$0.0775 per annum and are payable in cash. Dividends will be paid only when, as
and if declared by the Board of Directors of the Company. The Company
anticipates that dividends on the MCI WorldCom Series B Preferred Stock will not
be declared but will continue to accrue. Upon conversion, accrued but unpaid
dividends are payable in cash or shares of MCI WorldCom Common Stock at the
Company's election.

In May 1998, the Company exercised its option to redeem all of the outstanding
MCI WorldCom Series A Preferred Stock and related Depositary Shares. Prior to
the redemption date, substantially all of the holders of Series A Preferred
Stock elected to convert the preferred stock into MCI WorldCom Common Stock,
resulting in the issuance of approximately 32.7 million shares of MCI WorldCom
Common Stock.

In connection with the MCI Merger, MCI WorldCom paid BT $51.00 in cash without
interest for each of the shares of MCI Class A Common Stock it owned, or
approximately $7 billion in the aggregate. Additionally, MCI WorldCom paid BT a
fee of $465 million to induce BT to terminate the previously signed BT/MCI
Merger Agreement and to enter into the BT Agreement. MCI WorldCom funded the
commitment through a combination of available cash from the August 1998 public
debt offering and proceeds from the sale of the iMCI Business and MCI's
investment in Concert and availability under the Company's Credit Facilities and
commercial paper program.

Increases in interest rates on MCI WorldCom's variable rate debt would have an
adverse effect upon MCI WorldCom's reported net income and cash flow. The
Company believes that it will generate sufficient cash flow to service MCI
WorldCom's debt and capital requirements; however, economic downturns, increased
interest rates and other adverse developments, including factors beyond MCI
WorldCom's control, could impair its ability to service its indebtedness. In
addition, the cash flow required to service MCI WorldCom's debt may reduce its
ability to fund internal growth, additional acquisitions and capital
improvements.

The development of the businesses of MCI WorldCom and the installation and
expansion of its domestic and international networks will continue to require
significant capital expenditures. Failure to have access to sufficient funds for
capital expenditures on acceptable terms or the failure to achieve capital
expenditure synergies may require MCI WorldCom to delay or abandon some of its
plans, which could have a material adverse effect on the success of MCI
WorldCom. The Company has historically utilized a combination of cash flow from
operations and debt to finance capital expenditures and a mixture of cash flow,
debt and stock to finance acquisitions.

Absent significant capital requirements for other acquisitions, the Company
believes that cash flow from operations and available liquidity, including the
Company's Credit Facilities and commercial paper program and available cash will
be sufficient to meet the Company's capital needs for the remainder of 1999.
However, the Company believes that funding needs in excess of internally
generated cash flow and availability under the Company's Credit Facilities and
commercial paper program could be met by accessing the debt markets.




                                       44
<PAGE>   49


RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. This
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
a company to formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. This statement is effective for
fiscal years beginning after June 15, 1999 and cannot be applied retroactively.
SFAS No. 133 must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997 (and, at the Company's
election, before January 1, 1998). The Company believes that the adoption of
this standard will not have a material effect on the Company's consolidated
results of operations or financial position.

YEAR 2000 READINESS DISCLOSURE

Due to extensive use of computer technology, both MCI and WorldCom began
developing strategic plans in 1996 to address their respective year 2000 issues.
Since the MCI Merger, the Company has consolidated these strategies into a
single program. The Company's year 2000 compliance plan is an ongoing program in
which remediation strategies are being implemented by the Company's business
organizations to address noncompliant computer and network systems and
technology. The Company has a central project management organization that has
overall responsibility for coordinating the implementation of this strategy.

The remediation strategies followed by the Company's business organizations
generally involve a sequence of steps that include (i) identifying computer
hardware, software and network components and equipment potentially impacted by
year 2000 problems; (ii) analyzing the date sensitivity of those elements; (iii)
developing plans for remediation where necessary; (iv) converting non-compliant
code or equipment (or, in some cases, replacing or decommissioning systems); (v)
testing, and (vi) deploying and monitoring remediation solutions. These steps
will vary to meet the particular needs of a business organization and, in some
cases, will overlap. Testing, for example, may be performed at several stages of
the remediation process.

The Company has substantially completed its efforts to identify and assess year
2000 computer issues, and its business organizations are in the process of
developing remediation plans, converting noncompliant code or equipment, and
replacing or decommissioning systems, and testing. The Company has targeted year
2000 compliance for the majority of its mission-critical systems, including
network and customer interfacing systems, on or before March 31, 1999. The
remaining mission-critical systems, and non-mission critical systems, are
targeted for compliance by June 30, 1999, with full deployment of the remediated
solutions throughout the Company's network targeted for completion by September
30, 1999.

The Company is continuing to develop new systems and services that are expected
to be implemented as year 2000 compliant throughout the year. Selected
international, enhanced service platform systems and internal
security/scheduling/mail systems are also expected to be implemented as year
2000 compliant in the third and fourth quarters of 1999.

As part of its year 2000 plan, the Company is seeking confirmation from its
domestic and foreign interconnecting carriers (collectively, the
"Interconnecting Carriers") and major communications equipment vendors (the
"Primary Vendors") that they are developing and implementing plans to become
year 2000 compliant. The Company has contacted these carriers and vendors, and
will continue to do so, but has not yet received enough 





                                       45
<PAGE>   50

information from certain domestic and foreign carriers to assess their year 2000
readiness. The Company has received information from its Primary Vendors
regarding their year 2000 readiness. This information indicates the Primary
Vendors have documented plans to become year 2000 compliant. Like all major
telecommunication carriers, the Company's ability to provide service is
dependent on its Interconnecting Carriers and Primary Vendors.

The Company is participating in industry efforts to test interoperability of
networks for industry segments as well as multiple carriers. The ATIS and
Network Reliability and Interoperability Council ("NRIC") testing are examples
of this effort to assess the readiness of Interconnecting Carriers for both data
and voice services.

The Company is preparing contingency plans to address potential year 2000
related business interruptions that may occur on January 1, 2000 or thereafter.
The Company anticipates that these contingency plans will primarily address
potential year 2000 problems due to failures to remediate major systems
successfully, or potential failure of the Company's Interconnecting Carriers'
and Primary Vendors' year 2000 compliance efforts. The Company is incorporating
many of the recommendations of the NRIC into the contingency planning process.
The Company plans to complete preparation and implementation of its contingency
plans by December 31, 1999. Failure to meet this target could materially impact
the Company's operations.

To achieve its year 2000 compliance plan, the Company is utilizing both internal
and external resources to identify, correct or reprogram, and test its systems
for year 2000 compliance. The Company expects to incur internal labor as well as
consulting and other expenses related to infrastructure and facilities
enhancements necessary to prepare its systems for the year 2000. The Company's
use of internal resources to achieve its year 2000 compliance plan has not had a
material adverse effect on its ability to develop new products and services or
to maintain and upgrade, if necessary, its existing products and services.

The year 2000 costs incurred by MCI and WorldCom through December 31, 1998,
which have been included in selling, general and administrative expenses for
that period, were approximately $200 million. This level of expenditures is
consistent with the planned expenditures for the period. The Company expects to
incur approximately $360 million expenses during 1999 to support its year 2000
compliance initiatives. The costs of the Company's year 2000 remediation efforts
are based upon management's best estimates, which require assumptions about
future events, availability of resources and personnel, third-party remediation
actions, and other factors. There are no assurances that these estimates will be
accurate, and actual amounts may differ materially based on a number of factors,
including the availability and cost of resources to undertake remediation
activities and the scope and nature of the work required to complete
remediation.

The Company is unable to determine at this time whether the consequences of year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition due to the general uncertainty
inherent in the year 2000 problem, resulting in part from the uncertainty of the
year 2000 readiness of its Interconnecting Carriers and Primary Vendors, and
other suppliers, as well as uncertainties related to the Company's ongoing
remediation program. The Company's year 2000 compliance plan is expected to
reduce significantly the Company's level of uncertainty about the year 2000
problem and, in particular, about the year 2000 compliance and readiness of its
Interconnecting Carriers and Primary Vendors. The Company believes that, with
the implementation of new business systems, its Interconnecting Carriers and
Primary Vendors year 2000 readiness, and completion of the year 2000 compliance
plan as scheduled, it will maintain normal operations.




                                       46
<PAGE>   51

Embratel's year 2000 program began in 1997 and is managed separately from the
other MCI WorldCom year 2000 programs. The Embratel year 2000 program is
intended to address all its systems, infrastructure, networks and applications
and have them compliant by June 30, 1999.

Embratel has spent $12 million of an estimated $14 million on the year 2000
program and expects to come within the estimated costs. Embratel may, however,
be affected by year 2000 problems to the extent that other entities are
unsuccessful in achieving compliance. Despite preventive measures taken by
Embratel, no assurances can be given that the year 2000 issue will not have an
effect on the financial condition and results of operations of Embratel.
Embratel is active in developing contingency plans and working with the
International Telecommunications Union on interoperability testing.

Statements concerning year 2000 issues which contain more than historical
information may be considered forward-looking statements (as that term is
defined in the Private Securities Litigation Reform Act of 1995), which are
subject to risks and uncertainties. Actual results may differ materially from
those expressed in the forward-looking statements, and readers are cautioned
that the Company's year 2000 discussion should be read in conjunction with the
Company's statement on forward-looking statements which appears at the beginning
of this Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

EURO CONVERSION

On January 1, 1999, certain member countries of the European Union established
fixed conversion rates between their existing currencies and the European
Union's common currency ("Euro"). The transition period for the introduction of
the Euro will be between January 1, 1999 to July 1, 2002. All of the final rules
and regulations have not yet been identified by the European Commission with
regard to the Euro. The Company is currently evaluating methods to address the
many issues involved with the introduction of the Euro, including the conversion
of information technology systems, recalculating currency risk, recalibrating
derivatives and other financial instruments, strategies concerning continuity of
contracts, and impacts on the processes for preparing taxation and accounting
records. At this time, the Company has not yet determined the cost related to
addressing this issue and there can be no assurance as to the effect of the Euro
on the consolidated financial statements.

ITEM 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURE
                  ABOUT MARKET RISK

The Company is exposed to the impact of interest rate changes, foreign currency
fluctuations and changes in market values of its investments.

The Company's policy is to manage interest rates through use of a combination of
fixed and variable rate debt. Currently, the Company does not use derivative
financial instruments to manage its interest rate risk. The Company has no cash
flow exposure due to general interest rate changes for its fixed long-term debt
obligations. The table below provides information about the Company's risk
exposure associated with changing interest rates on long-term debt obligations
that impact the fair value of these obligations.



                                       47
<PAGE>   52

<TABLE>
<CAPTION>
                              LONG-TERM DEBT (IN MILLIONS OF DOLLARS):

                                     AVERAGE                  AVERAGE   FOREIGN        AVERAGE
     EXPECTED                        INTEREST   VARIABLE      INTEREST  CURRENCY       INTEREST
     MATURITY          FIXED RATE    RATE (%)     RATE        RATE (%)  DENOMINATED    RATE (%)
-------------------    ----------    -------    --------      --------  -----------    --------

<S>                     <C>            <C>         <C>          <C>           <C>       <C>  
1999                    $ 1,384        8.26        2,586        5.70          786       11.44
2000                        432        8.06           --          --          742       11.61
2001                      1,593        6.34           --          --           81        8.53
2002                         67        9.74           --          --           79        8.54
2003                        632        6.44        2,000        6.03           62        8.42
Thereafter               10,276        7.20           --          --          119        7.82
                        -------                  -------                  -------       
Total                   $14,384                  $ 4,586                  $ 1,869            
                        =======                  =======                  =======       
Fair Value,
  December 31, 1998     $15,210                  $ 4,586                  $ 2,112             
                        =======                  =======                  =======       
</TABLE>


The Company is exposed to foreign exchange rate risk primarily due to Embratel's
holding of approximately $496 million in U.S. dollar denominated debt, and
approximately $56 million of indebtedness indexed in other foreign currencies
which includes French Franc, Deutsche Mark and Japanese Yen. The potential
immediate loss to the Company that would result from a hypothetical 10% change
in foreign currency exchange rates based on this position would be approximately
$11 million (after elimination of minority interests). In addition, if such
change were to be sustained, the Company's cost of financing would increase in
proportion to the change. During January 1999, the Brazilian government allowed
its currency to trade freely against other currencies resulting in an immediate
devaluation of the Brazilian real. During the first quarter of 1999, the
Brazilian real devalued against the U.S. dollar by as much as 78%. If this
devaluation is sustained, or worsens, the net impact to the Company's results of
operations could be significant.

The Company is also subject to risk from changes in foreign exchange rates for
its international operations which use a foreign currency as their functional
currency and are translated into U.S. Dollars. Additionally, the Company has
designated the remaining $1.32 billion note payable in local currency
installments, resulting from the Embratel investment, as a hedge of its
investment in Embratel. As of December 31, 1998, the Company recorded the change
in value of the note as a reduction to the note payable with the offset through
foreign currency translation adjustment in shareholders' investment.

At December 31, 1998, marketable equity securities of the Company were recorded
at a fair value of $2.42 billion. The fair value of marketable equity securities
is based on quoted market prices. The marketable equity securities held by the
Company have exposure to price risk, which is estimated as the potential loss in
fair value due to a hypothetical 10% adverse change in quoted market prices, and
would amount to a decrease in the recorded value of marketable equity securities
of approximately $242 million.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's Consolidated Financial Statements and notes thereto are included
elsewhere in this Annual Report on Form 10-K as follows:




                                       48
<PAGE>   53


<TABLE>
<CAPTION>
                                                                        Page
                                                                        ----
<S>                                                                      <C>

Reports of independent public accountants                                F-2

Consolidated balance sheets - December 31, 1998 and 1997                 F-4

Consolidated statements of operations for the three years
  ended December 31, 1998                                                F-5

Consolidated statements of shareholders' investment for
  the three years ended December 31, 1998                                F-6

Consolidated statements of cash flows for the three years
ended December 31, 1998                                                  F-7

Notes to consolidated financial statements                               F-8

Financial statement schedule                                             F-40
</TABLE>

ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE

None
                                    PART III

The information required by this Part III will be provided in the Company's
definitive proxy statement for the Company's 1999 annual meeting of the
shareholders (involving the election of directors), which definitive proxy
statement will be filed pursuant to Regulation 14A not later than 120 days
following the Company's fiscal year ended December 31, 1998, and is incorporated
herein by this reference to the following extent:

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information under the captions "ELECTION OF DIRECTORS - Information about
Nominees and Executive Officers" and "EXECUTIVE COMPENSATION - Section 16(a)
Beneficial Ownership Reporting Compliance."

ITEM 11.          EXECUTIVE COMPENSATION

The information under the captions "INFORMATION CONCERNING BOARD OF DIRECTORS -
Compensation of Directors" and "- Employment Agreements" and "EXECUTIVE
COMPENSATION."

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                  AND MANAGEMENT

The information under the Captions "PRINCIPAL HOLDERS OF VOTING SECURITIES" and
"SECURITY OWNERSHIP OF MANAGEMENT."




                                       49
<PAGE>   54



ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information under the caption "EXECUTIVE COMPENSATION-Certain Relationships
and Related Transactions" and "INFORMATION CONCERNING BOARD OF DIRECTORS - 
Employment Agreements."

                                    PART IV

ITEM 14.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
                  ON FORM 8-K

(a) 1 and 2

Financial statements and financial statement schedule

See Index to Consolidated Financial Statements and Financial Statement Schedule.

All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.

(a) 3

Exhibits required by Item 601 of Regulation S-K

See Exhibit Index for the exhibits filed as part of or incorporated by reference
into this Report. There are omitted from the exhibits filed with or incorporated
by reference into this Annual Report on Form 10-K certain promissory notes and
other instruments and agreements with respect to long-term debt of the Company,
none of which authorizes securities in a total amount that exceeds 10% of the
total assets of the Company on a consolidated basis. Pursuant to Item
601(b)(4)(iii) of Regulation S-K, the Company hereby agrees to furnish to the
Securities and Exchange Commission copies of any such omitted promissory notes
or other instruments or agreements as the Commission requests.

(b) Reports on Form 8-K

(i) Current report on Form 8-K/A dated September 14, 1998 (filed November 16,
1998) reporting information required to be reported under Item 7(b) Pro Forma
Financial Information, the following pro forma financial statements:

         Pro Forma Condensed Combined Financial Statements
         Pro Forma Condensed Combined Balance Sheet as of June 30, 1998
         Pro Forma Condensed Combined Statement of Operations for the six months
          ended June 30, 1998
         Pro Forma Condensed Combined Statement of Operations for the year ended
           December 31, 1997
         Notes to Pro Forma Condensed Combined Financial Statements

(ii) Current Report on Form 8-K dated December 23, 1998 (filed December 23,
1998) reporting under Item 5, Other Events, the acquisition by a wholly owned
subsidiary of MCI WorldCom of a minority interest in OzEmail Limited, an
Australian corporation, and the intention to commence a tender offer to acquire
the remaining shares.



                                       50
<PAGE>   55



                                   SIGNATURES

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

                                           MCI, WORLDCOM, Inc.

                                           By:   /s/ Scott D. Sullivan     
                                              --------------------------------
                                                 Chief Financial Officer

Date: March 29, 1999

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


<TABLE>
<CAPTION>
Name                                                     Title                              Date
----                                                     -----                              ----

<S>                                                      <C>                                <C> 
/s/ Clifford L. Alexander, Jr.                           Director                           March 29, 1999
-------------------------------------------------
Clifford L. Alexander, Jr.

/s/ James C. Allen                                       Director                           March 29, 1999
-------------------------------------------------
James C. Allen

/s/ Judith Areen                                         Director                           March 29, 1999
-------------------------------------------------
Judith Areen

/s/ Carl J. Aycock                                       Director                           March 29, 1999
-------------------------------------------------
Carl J. Aycock

/s/ Max E. Bobbitt                                       Director                           March 29, 1999
-------------------------------------------------
Max E. Bobbitt

/s/ Stephen M. Case                                      Director                           March 29, 1999
-------------------------------------------------
Stephen M. Case

/s/ Bernard J. Ebbers                                    Director, President and            March 29, 1999
-------------------------------------------------        Chief Executive Officer
Bernard J. Ebbers                                        

/s/ Francesco Galesi                                     Director                           March 29, 1999
-------------------------------------------------
Francesco Galesi

/s/ Stiles A. Kellett, Jr.                               Director                           March 29, 1999
-------------------------------------------------
Stiles A. Kellett, Jr.

/s/ Gordon S. Macklin                                    Director                           March 29, 1999
-------------------------------------------------
Gordon S. Macklin

/s/ John A. Porter                                       Director                           March 29, 1999
-------------------------------------------------
John A. Porter

/s/ Timothy F. Price                                     Director                           March 29, 1999
-------------------------------------------------
Timothy F. Price
</TABLE>



                                       51
<PAGE>   56


<TABLE>
<CAPTION>
Name                                                     Title                              Date
----                                                     -----                              ----

<S>                                                      <C>                                <C> 
/s/ Bert C. Roberts, Jr.                                 Chairman of the Board              March 29, 1999
-------------------------------------------------
Bert C. Roberts, Jr.

/s/ John W. Sidgmore                                     Director                           March 29, 1999
-------------------------------------------------
John W. Sidgmore

/s/ Scott D. Sullivan                                    Director, Principal                March 29, 1999
-------------------------------------------------        Financial Officer and
Scott D. Sullivan                                        Principal Accounting
                                                         Officer

/s/ Gerald H. Taylor                                     Director                           March 29, 1999
-------------------------------------------------
Gerald H. Taylor

/s/ Lawrence C. Tucker                                   Director                           March 29, 1999
-------------------------------------------------
Lawrence C. Tucker

/s/ Juan Villalonga                                      Director                           March 29, 1999
-------------------------------------------------
Juan Villalonga
</TABLE>





                                       52

<PAGE>   57
                        INDEX TO FINANCIAL STATEMENTS AND
                          FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----

<S>                                                                        <C>
Reports of independent public accountants                                  F-2

Consolidated balance sheets as of December 31, 1998 and 1997               F-4

Consolidated statements of operations for the three years ended
      December 31, 1998                                                    F-5

Consolidated statements of shareholders' investment for the three
      years ended December 31, 1998                                        F-6

Consolidated statements of cash flows for the three years ended
      December 31, 1998                                                    F-7

Notes to consolidated financial statements                                 F-8

Financial statement schedule                                              F-40
</TABLE>




                                       F-1


<PAGE>   58



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of MCI WORLDCOM, Inc.:

We have audited the accompanying consolidated balance sheets of MCI WORLDCOM,
Inc. (a Georgia corporation) and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations, shareholders' investment
and cash flows for each of the years in the three-year period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Brooks Fiber Properties, Inc., a company acquired during 1998 in a transaction
accounted for as a pooling-of-interests, as discussed in Note 2, as of December
31, 1997 and 1996, and for each of the years in the two-year period ended
December 31, 1997. Such statements are included in the consolidated financial
statements of MCI WORLDCOM, Inc. and reflect total assets and total revenues of
two percent and five percent, respectively, of the related consolidated totals
in 1997 and one percent and four percent, respectively, of the related
consolidated totals in 1996. These statements were audited by other auditors
whose report has been furnished to us and our opinion, insofar as it relates to
amounts included for Brooks Fiber Properties, Inc. is based solely upon the
report of the other auditors.

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

In our opinion, based on our audit and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of MCI WORLDCOM, Inc. and subsidiaries as of December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1998, in conformity
with generally accepted accounting principles.


ARTHUR ANDERSEN LLP

Jackson, Mississippi,
February 10, 1999.



                                       F-2


<PAGE>   59

 

                          INDEPENDENT AUDITORS' REPORT



The Board of Directors
Brooks Fiber Properties, Inc.:

      We have audited the consolidated balance sheet of Brooks Fiber Properties,
Inc. and subsidiaries (the Company) as of December 31, 1997 and the related
consolidated statements of operations, changes in shareholder's equity, and cash
flows for each of the years in the two-year period ended December 31, 1997 (not
included herein). 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Brooks Fiber
Properties, Inc. and subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.


                                                              KPMG LLP


St. Louis, Missouri
February 18, 1998



                                       F-3


<PAGE>   60
 

                       MCI WORLDCOM, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                        (In Millions, Except Share Data)

<TABLE>
<CAPTION>
                                                                                                   December 31,
                                                                                              ----------------------
                                                                                                1998          1997
                                                                                              --------      --------
<S>                                                                                           <C>           <C>     
ASSETS
Current assets:
  Cash and cash equivalents                                                                   $  1,710      $    155
  Marketable securities                                                                             --            54
  Accounts receivable, net of allowance for bad debts of $897 in 1998
    and $203 in 1997                                                                             5,226         1,241
  Deferred tax asset                                                                             2,523            -- 
  Other current assets                                                                           1,180           424
                                                                                              --------      --------
         Total current assets                                                                   10,639         1,874
                                                                                              --------      --------
Property and equipment:
  Transmission equipment                                                                        12,052         3,688
  Communications equipment                                                                       5,256         2,493
  Furniture, fixtures and other                                                                  5,986           920
  Construction in progress                                                                       3,080           468
                                                                                              --------      --------
                                                                                                26,374         7,569
  Accumulated depreciation                                                                      (2,067)         (855)
                                                                                              --------      --------
                                                                                                24,307         6,714
                                                                                              --------      --------
Goodwill and other intangible assets                                                            47,018        13,882
Deferred tax asset                                                                                  --           405
Other assets                                                                                     4,437           721
                                                                                              --------      --------
                                                                                              $ 86,401      $ 23,596
                                                                                              ========      ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
  Short-term debt and current maturities of long-term debt                                    $  4,756      $     11
  Accounts payable                                                                               1,737           470
  Accrued line costs                                                                             3,903           868
  Accrued interest                                                                                 505           119
  Other current liabilities                                                                      5,128           606
                                                                                              --------      --------
         Total current liabilities                                                              16,029         2,074
                                                                                              --------      --------
Long-term liabilities, less current portion:
  Long-term debt                                                                                16,083         7,413
  Deferred tax liability                                                                         2,960            -- 
  Other liabilities                                                                              1,852           308
                                                                                              --------      --------
         Total long-term liabilities                                                            20,895         7,721
                                                                                              --------      --------


Commitments and contingencies

Minority interests                                                                               3,676            -- 


Company obligated mandatorily redeemable preferred securities of subsidiary
  trust holding solely junior subordinated deferrable interest debentures of the
  Company and other redeemable preferred securities                                                798            --

Shareholders' investment:
  Series A preferred stock, par value $.01 per share; authorized, issued and
    outstanding: none in 1998 and 94,992 shares in 1997                                             --            --
  Series B preferred stock, par value $.01 per share; authorized, issued and
    outstanding: 11,643,002 shares in 1998 and 12,421,858 shares in 1997 (liquidation
    preference of $1.00 per share plus unpaid dividends)                                            --            --
  Preferred stock, par value $.01 per share; authorized: 34,905,008 shares
    in 1998 and 1997; none issued                                                                   --            --
  Common stock, par value $.01 per share; authorized: 2,500,000,000 shares; issued
    and outstanding: 1,840,280,479 shares in 1998 and 981,615,661 shares in 1997                    18            10
  Additional paid-in capital                                                                    49,521        15,530
  Retained earnings (deficit)                                                                   (4,473)       (1,773)
  Unrealized holding gain on marketable equity securities                                          122            34
  Treasury stock, at cost, 4,510,211 shares in 1998 and none in 1997                              (185)           --
                                                                                              --------      --------
        Total shareholders' investment                                                          45,003        13,801
                                                                                              --------      --------
                                                                                              $ 86,401      $ 23,596
                                                                                              ========      ========
</TABLE>


        The accompanying notes are an integral part of these statements.

 








                                       F-4


<PAGE>   61
 


                       MCI WORLDCOM, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In Millions, Except Per Share Data)




<TABLE>
<CAPTION>
                                                                                  For the Years Ended December 31,
                                                                                  ------------------------------------
                                                                                    1998          1997          1996
                                                                                  --------      --------      --------


<S>                                                                               <C>           <C>           <C>     
Revenues                                                                          $ 17,678      $  7,384      $  4,449
                                                                                  --------      --------      --------
Operating expenses:
  Line costs                                                                         8,416         3,764         2,397
  Selling, general and administrative                                                4,312         1,626           867
  Depreciation and amortization                                                      2,200           976           320
  In-process research and development and other charges                              3,725            --         2,740
                                                                                  --------      --------      --------
        Total                                                                       18,653         6,366         6,324
                                                                                  --------      --------      --------
Operating income (loss)                                                               (975)        1,018        (1,875)
Other income (expense):
  Interest expense                                                                    (637)         (395)         (253)
  Miscellaneous                                                                         41            40            25
                                                                                  --------      --------      --------
Income (loss) before income taxes, minority interests and extraordinary items       (1,571)          663        (2,103)
Provision for income taxes                                                             876           416           130
                                                                                  --------      --------      --------
Income (loss) before minority interests and extraordinary items                     (2,447)          247        (2,233)
Minority interests                                                                     (93)           --            -- 
                                                                                  --------      --------      --------
Income (loss) before extraordinary items                                            (2,540)          247        (2,233)
Extraordinary items (net of income taxes of $78, $0 and $16, respectively)            (129)           (3)          (24)
                                                                                  --------      --------      --------
Net income (loss)                                                                   (2,669)          244        (2,257)
Distributions on subsidiary trust mandatorily redeemable preferred securities           18            --            -- 
Preferred dividend requirement                                                          13            26             1
                                                                                  --------      --------      --------
Net income (loss) applicable to common shareholders                               $ (2,700)     $    218      $ (2,258)
                                                                                  ========      ========      ========

Earnings (loss) per common share:
  Net income (loss) applicable to common shareholders before
    extraordinary items:
      Basic                                                                       $  (2.02)     $   0.23      $  (5.02)
                                                                                  ========      ========      ========
      Diluted                                                                     $  (2.02)     $   0.22      $  (5.02)
                                                                                  ========      ========      ========

  Extraordinary items                                                             $  (0.10)     $     --      $  (0.05)
                                                                                  ========      ========      ========

  Net income (loss) applicable to common shareholders:
      Basic                                                                       $  (2.12)     $   0.23      $  (5.07)
                                                                                  ========      ========      ========
      Diluted                                                                     $  (2.12)     $   0.22      $  (5.07)
                                                                                  ========      ========      ========
</TABLE>
 
        The accompanying notes are an integral part of these statements.    
                                                                           



                                       F-5


<PAGE>   62


                       MCI WORLDCOM, INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
                   For the Three Years Ended December 31, 1998
                                  (In Millions)


<TABLE>
<CAPTION>
                                                                                 Additional   Retained 
                                                          Preferred    Common      Paid-in    Earnings    
                                                            Stock      Stock       Capital    (Deficit)    
                                                          ---------   --------   ----------   ---------    

<S>                                                        <C>        <C>        <C>          <C>         
Balances, December 31, 1995                               $     107   $      4   $    1,903   $     267    
Exercise of stock options (9 million shares)                     --         --           48          --    
Tax adjustment resulting from exercise
 of stock options                                                --         --           33          --    
Conversion of IDB convertible notes (10 million shares)          --         --          191          --    
Issuance of common stock (44 million shares)                   (107)        --          291          --    
Shares issued for acquisitions (485 million shares)              --          5       12,739          --    
Other comprehensive income (loss) (net of taxes and
  reclassifications):
Net loss                                                         --         --           --      (2,257)   
Cash dividends on preferred stock                                --         --           --          (1)   
Net change in unrealized holding gain on
  marketable equity securities                                   --         --           --          --    
                                                                                                       
     Total comprehensive income                                                                        
                                                          ---------   --------   ----------   ---------    
Balances, December 31, 1996                                      --          9       15,205      (1,991)   
Exercise of stock options (25 million shares)                    --          1          143          --    
Tax adjustment resulting from exercise
 of stock options                                                --         --           24          --    
Issuance of common stock in connection with
  secondary equity offering (2 million shares)                   --         --           23          --    
Shares issued for acquisitions (12 million shares)               --         --          159          --    
Other comprehensive income (net of taxes and
  reclassifications):
Net income                                                       --         --           --         244    
Cash dividends on preferred stock                                --         --           --         (26)   
Net change in unrealized holding gain on
  marketable equity securities                                   --         --           --          --    
Foreign currency adjustment                                      --         --          (24)         --    
                                                                                                       
     Total comprehensive income                                                                        
                                                          ---------   --------   ----------   ---------    
Balances, December 31, 1997                                      --         10       15,530      (1,773)   
Exercise of stock options (33 million shares)                    --         --          463          --    
Tax adjustment resulting from exercise
 of stock options                                                --         --          208          --    
Shares issued for acquisitions (788 million shares)              --          8       33,318          --    
Other comprehensive income (loss) (net of taxes and
  reclassifications):
Net loss                                                         --         --           --      (2,669)   
Cash dividends on preferred stock and distributions
  on Trust securities                                            --         --           --         (31)   
Net change in unrealized holding gain on
  marketable equity securities                                   --         --           --          --    
Foreign currency adjustment                                      --         --            2          --    
                                                                                                       
     Total comprehensive income                                                                        
                                                          ---------   --------   ----------   ---------    
Balances, December 31, 1998                               $      --   $     18   $   49,521   $  (4,473)   
                                                          =========   ========   ==========   =========    


</TABLE>


<TABLE>
<CAPTION>
                                                                                             Total
                                                            Unrealized       Treasury    Shareholders'
                                                           Holding Gain        Stock       Investment
                                                           ------------      --------    -------------

<S>                                                        <C>               <C>         <C>     
Balances, December 31, 1995                                          --            --     $   2,281
Exercise of stock options (9 million shares)                         --            --            48
Tax adjustment resulting from exercise
 of stock options                                                    --            --            33
Conversion of IDB convertible notes (10 million shares)              --            --           191
Issuance of common stock (44 million shares)                         --            --           184
Shares issued for acquisitions (485 million shares)                  --            --        12,744
Other comprehensive income (loss) (net of taxes and
  reclassifications):
Net loss                                                             --            --        (2,257)
Cash dividends on preferred stock                                    --            --            (1)
Net change in unrealized holding gain on
  marketable equity securities                                       29            --            29
                                                                                           --------
     Total comprehensive income                                                              (2,229)
                                                           ------------      --------      --------
Balances, December 31, 1996                                          29            --        13,252
Exercise of stock options (25 million shares)                        --            --           144
Tax adjustment resulting from exercise
 of stock options                                                    --            --            24
Issuance of common stock in connection with
  secondary equity offering (2 million shares)                       --            --            23
Shares issued for acquisitions (12 million shares)                   --            --           159
Other comprehensive income (net of taxes and
  reclassifications):
Net income                                                           --            --           244
Cash dividends on preferred stock                                    --            --           (26)
Net change in unrealized holding gain on
  marketable equity securities                                        5            --             5
Foreign currency adjustment                                          --            --           (24)
                                                                                           --------
     Total comprehensive income                                                                 199
                                                           ------------      --------      --------
Balances, December 31, 1997                                          34            --        13,801
Exercise of stock options (33 million shares)                        --            --           463
Tax adjustment resulting from exercise
 of stock options                                                    --            --           208
Shares issued for acquisitions (788 million shares)                  --          (185)       33,141
Other comprehensive income (loss) (net of taxes and
  reclassifications):
Net loss                                                             --            --        (2,669)
Cash dividends on preferred stock and distributions
  on Trust securities                                                --            --           (31)
Net change in unrealized holding gain on
  marketable equity securities                                       88            --            88
Foreign currency adjustment                                          --            --             2
                                                                                           --------
     Total comprehensive income                                                              (2,610)
                                                           ------------      --------      --------
Balances, December 31, 1998                                $        122      $   (185)     $ 45,003
                                                           ============      ========      ========
</TABLE>





The accompanying notes are an integral part of these statements.




                                       F-6


<PAGE>   63


                       MCI WORLDCOM, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (In Millions)




<TABLE>
<CAPTION>
                                                                For the Year Ended December 31,
                                                              -----------------------------------
                                                                1998          1997         1996
                                                              ---------    ---------    ---------
<S>                                                           <C>          <C>          <C>       
Cash flows from operating activities:
Net income (loss)                                             $  (2,669)   $     244    $  (2,257)
Adjustments to reconcile net income (loss) to net cash
  provided by operating activities:
    Extraordinary items                                             129            3           24
    Minority interests                                               93           --           --
    In-process research and development and other charges         3,725           --        2,740
    Depreciation and amortization                                 2,200          976          320
    Provision for losses on accounts receivable                     374          111           58
    Provision for deferred income taxes                             787          368           59
    Accreted interest on debt                                        25          122           30
    Change in assets and liabilities, net of
        effect of business combinations:
        Accounts receivable                                        (698)        (453)        (216)
        Other current assets                                       (248)        (174)         (54)
        Accrued line costs                                         (330)          97           (1)
        Accounts payable and other current liabilities              741          (25)          79
    Other                                                           (44)          (9)          (1)
                                                              ---------    ---------    ---------
Net cash provided by operating activities                         4,085        1,260          781
                                                              ---------    ---------    ---------
Cash flows from investing activities:
  Capital expenditures                                           (5,418)      (3,066)        (875)
  Sale (purchase) of short-term investments, net                     54          890         (182)
  Acquisitions and related costs                                 (3,400)      (1,144)         112
  Increase in intangible assets                                    (351)        (141)         (71)
  Proceeds from disposition of long-term assets                     146           93           22
  Increase in other assets                                         (320)        (291)        (152)
  Decrease in other liabilities                                    (144)         (42)         (42)
                                                              ---------    ---------    ---------
Net cash used in investing activities                            (9,433)      (3,701)      (1,188)
                                                              ---------    ---------    ---------
Cash flows from financing activities:
  Principal borrowings on debt, net                               6,424        1,978          568
  Common stock issuance                                             463          164          233
  Distributions on subsidiary trust
        mandatorily redeemable preferred securities                 (18)          --           --
  Dividends paid on preferred stock                                 (13)         (26)          (1)
  Other                                                              47           (5)         (10)
                                                              ---------    ---------    ---------
Net cash provided by financing activities                         6,903        2,111          790
                                                              ---------    ---------    ---------

Net increase (decrease) in cash and cash equivalents              1,555         (330)         383
Cash and cash equivalents at beginning of period                    155          485          102
                                                              ---------    ---------    ---------
Cash and cash equivalents at end of period                    $   1,710    $     155    $     485
                                                              =========    =========    =========
</TABLE>


The accompanying notes are an integral part of these statements.




                                       F-7


<PAGE>   64



                       MCI WORLDCOM, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

(1)      THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES-

DESCRIPTION OF BUSINESS AND ORGANIZATION:

MCI WORLDCOM, Inc., a Georgia corporation ("MCI WorldCom" or the "Company"), is
one of the largest telecommunications companies in the United States, serving
local, long distance and Internet customers domestically and internationally.
Organized in 1983, the Company provides telecommunications services to business,
government, telecommunications companies and consumer customers through its
networks of primarily fiber optic cables, digital microwave, and fixed and
transportable satellite earth stations. Prior to September 15, 1998, the Company
was named WorldCom, Inc. ("WorldCom").

MCI WorldCom is one of the first major facilities-based telecommunications
companies with the capability to provide consumers and businesses with high
quality local, long distance, Internet, data and international communications
services over its global networks. With service to points throughout the nation
and the world, the Company provides telecommunications products and services
including: switched and dedicated long distance and local products, dedicated
and dial-up Internet access, wireless services, 800 services, calling cards,
private lines, broadband data services, debit cards, conference calling,
messaging and mobility services, advanced billing systems, enhanced fax and data
connections, high speed data communications, facilities management, local access
to long distance companies, local access to asynchronous transfer mode
("ATM")-based backbone service, Web server hosting and integration services,
dial-up networking services and interconnection via Network Access Points
("NAPs") to Internet service providers ("ISPs").

The Company's core business is communications services, which includes voice,
data, Internet and international services. During each of the last three years,
more than 90% of operating revenues were derived from communications services.

The Company serves as a holding company for its subsidiaries' operations.
References herein to the Company include the Company and its subsidiaries,
unless the context otherwise requires.

PRINCIPLES OF CONSOLIDATION:

The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation. Generally, investments in joint ventures and
other equity investments in which the Company owns a 20% to 50% ownership
interest, are accounted for by the equity method while investments of less than
20% ownership are accounted for under the cost method.

FAIR VALUE OF FINANCIAL INSTRUMENTS:

The carrying amounts for cash, marketable securities, accounts receivable, notes
receivable, accounts payable and accrued liabilities approximate their fair
value. The fair value of long-term debt is determined based on quoted market
rates or the cash flows from such financial instruments discounted at the
Company's estimated current interest rate to enter into similar financial
instruments. The carrying amounts and fair values of the Company's debt were
$20.84 billion and $21.91 billion, respectively, at December 31, 1998; and $7.42
billion and $7.65 billion, respectively, at December 31, 1997.


                                       F-8


<PAGE>   65



CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES:

The Company considers cash in banks and short-term investments with original
maturities of three months or less as cash and cash equivalents. The Company has
classified all marketable securities other than cash equivalents as
available-for-sale. Proceeds from the sale of marketable securities approximated
$54 million, $1.04 billion and $176 million; respectively, for the years ended
December 31, 1998, 1997 and 1996. Realized gains and losses on marketable
securities for the years ended December 31, 1998, 1997 and 1996 were not
material.

PROPERTY AND EQUIPMENT:

Property and equipment are stated at cost. Depreciation is provided for
financial reporting purposes using the straight-line method over the following
estimated useful lives:

               Transmission equipment (including conduit)        5 to 45 years 
               Communications equipment                          5 to 20 years 
               Furniture, fixtures, buildings and other          4 to 40 years

The Company evaluates the recoverability of property and equipment when events
and circumstances indicate that such assets might be impaired. The Company
determines impairment by comparing the undiscounted future cash flows estimated
to be generated by these assets to their respective carrying amounts.

Maintenance and repairs are expensed as incurred. Replacements and betterments
are capitalized. The cost and related reserves of assets sold or retired are
removed from the accounts, and any resulting gain or loss is reflected in
results of operations.

The Company constructs certain of its own transmission systems and related
facilities. Internal costs directly related to the construction of such
facilities, including interest and salaries of certain employees, are
capitalized. Such internal costs were $305 million ($195 million in interest),
$212 million ($82 million in interest), and $33 million ($10 million in
interest), in 1998, 1997 and 1996, respectively.

GOODWILL AND OTHER INTANGIBLE ASSETS:

The major classes of intangible assets as of December 31, 1998 and 1997 are
summarized below (in millions):

<TABLE>
<CAPTION>
                                                   AMORTIZATION
                                                       PERIOD               1998             1997
                                                   -------------          -------          -------

<S>                                                <C>                    <C>              <C>    
Goodwill                                           5 to 40 years          $44,076          $13,336
Tradename                                          40 years                 1,100               --
Developed technology                               5 to 10 years            2,100              400
Other intangibles                                  5 to 10 years            1,290              951
                                                                          -------          -------
                                                                           48,566           14,687
Less: accumulated amortization                                              1,548              805
                                                                          -------          -------
Goodwill and other intangible assets, net                                 $47,018          $13,882
                                                                          =======          =======
</TABLE>


Intangible assets are amortized using the straight-line method for the periods
noted above.




                                       F-9


<PAGE>   66



Goodwill is recognized for the excess of the purchase price of the various
business combinations over the value of the identifiable net tangible and
intangible assets acquired. Realization of acquisition-related intangibles,
including goodwill, is periodically assessed by the management of the Company
based on the current and expected future profitability and cash flows of
acquired companies and their contribution to the overall operations of MCI
WorldCom.

Also included in other intangibles are costs incurred to develop software for
internal use. Such costs were $561 million, $91 million, and $43 million for the
years ended December 31, 1998, 1997 and 1996, respectively.

UNREALIZED HOLDING GAIN ON MARKETABLE EQUITY SECURITIES:

The Company's equity investment in certain publicly traded companies is
classified as available-for-sale securities. Accordingly, these investments are
included in other assets at their fair value of approximately $2.42 billion and
$113 million at December 31, 1998 and 1997, respectively. The unrealized holding
gain on these marketable equity securities, net of taxes, is included as a
component of shareholders' investment in the accompanying consolidated financial
statements. As of December 31, 1998, the gross unrealized holding gain on these
securities was $183 million. Proceeds from the sale of marketable equity
securities totaled $14 million for the year ended December 31, 1998. Gross
realized gains and losses on marketable equity securities, which represent
reclassification adjustments to other comprehensive income, were $13 million and
$31 million, respectively, for the year ended December 31, 1998. There was no
sales activity for the years ended December 31, 1997 and 1996.

RECOGNITION OF REVENUES:

The Company records revenues for telecommunications services at the time of
customer usage. Service discounts and incentives are accounted for as a
reduction of revenues when granted or, where a service continuation contract
exists, ratably over the contract period. Revenues from information technology
services is recognized, depending on the service provided, on a percentage of
completion basis or as services and products are furnished or delivered.

ACCOUNTING FOR INTERNATIONAL LONG DISTANCE TRAFFIC:

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 most switched voice operating agreements,
as well as established 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 WorldCom, 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 policy that generally extends over a six-month period at an
agreed upon settlement rate.

Revenues and line costs for prior periods reflect a classification change for
inbound international settlements which are now being treated as an offset to
line costs instead of revenues. Previously, both MCI Communications Corporation
("MCI") and WorldCom classified foreign post telephone and telegraph
administration settlements on a gross basis with the outbound settlement
reflected as line cost expense and the inbound settlement reflected as revenues.
This change better reflects the way in which the business is operated because
MCI WorldCom actually settles in cash through a formal net settlement process
that is inherent in the operating agreements with foreign carriers.


                                      F-10


<PAGE>   67



EXTRAORDINARY ITEMS:

In the first quarter of 1998, the Company recorded an extraordinary item
totaling $129 million, net of income tax benefit of $78 million. The charge was
recorded in connection with the tender offers and certain related refinancings
of the Company's outstanding debt.

In 1997, the Company recognized an extraordinary loss of $3 million related to
the early extinguishment of secured indebtedness.

In the second quarter of 1996, the Company recorded charges for extraordinary
items totaling $24 million, net of income tax benefit of $16 million. The items
consisted of $4 million in connection with the Company's debt refinancing, and
$20 million related to a write-off of deferred international costs. Previously,
a portion of the outbound call fee due the foreign carrier was deferred and
accounted for as a cost attributable to the revenue associated with the inbound
call. Currently, the outbound call fee due the foreign carrier is expensed as
incurred. This change in accounting for international line costs was immaterial
to the results of operations.

INCOME TAXES:

The Company recognizes current and deferred income tax assets and liabilities
based upon all events that have been recognized in the consolidated financial
statements as measured by the provisions of the enacted tax laws.

EARNINGS PER SHARE:

The following is a reconciliation of the numerators and the denominators of the
basic and diluted per share computations (in millions, except per share data):


<TABLE>
<CAPTION>
                                                                       1998        1997          1996
                                                                     -------      -------      -------

<S>                                                                  <C>          <C>          <C>     
Basic
Income (loss) before extraordinary items                             $(2,540)     $   247      $(2,233)
Preferred stock dividends and distributions on Trust  securities         (31)         (26)          (1)
                                                                     -------      -------      -------
Net income (loss) applicable to common shareholders before
   extraordinary items                                               $(2,571)     $   221      $(2,234)
                                                                     =======      =======      =======
Weighted average shares outstanding                                    1,274          966          445
                                                                     =======      =======      =======
Basic earnings (loss) per share before extraordinary items           $ (2.02)     $  0.23      $ (5.02)
                                                                     =======      =======      =======


Diluted
Net income (loss) applicable to common shareholders before
   extraordinary items                                               $(2,571)     $   221      $(2,234)
Add back:
   Preferred stock dividends                                              --            1           -- 
                                                                     -------      -------      -------
Net income (loss) applicable to common shareholders                  $(2,571)     $   222      $(2,234)
                                                                     =======      =======      =======
Weighted average shares outstanding                                    1,274          966          445
Common stock equivalents                                                  --           30           -- 
Common stock issuable upon conversion of:
  Preferred stock                                                         --            1           -- 
                                                                     -------      -------      -------
Diluted shares outstanding                                             1,274          997          445
                                                                     =======      =======      =======
Diluted earnings (loss) per share before extraordinary items         $ (2.02)     $  0.22      $ (5.02)
                                                                     =======      =======      =======
</TABLE>

                                                                             
                                                                             
                                                                             
                                                                             
                                                                             
                                                                             
                                      F-11

<PAGE>   68


STOCK SPLITS:

On May 23, 1996, the Board of Directors authorized a 2-for-1 stock split in the
form of a 100% stock dividend which was distributed on July 3, 1996 to
shareholders of record on June 6, 1996. All per share data and numbers of common
shares have been retroactively restated to reflect this stock split.

CONCENTRATION OF CREDIT RISK:

A portion 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. As a result, the
Company has some concentration of credit risk among its customer base. The
Company performs ongoing credit evaluations of its larger customer's financial
condition and, at times, requires collateral from its customers to support its
receivables, usually in the form of assignment of its customers' receivables to
the Company in the event of nonpayment.

RECENTLY ISSUED ACCOUNTING STANDARDS:

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. This
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
a company to formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. This statement is effective for
fiscal years beginning after June 15, 1999 and cannot be applied retroactively.
SFAS No. 133 must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued, acquired,
or substantively modified after December 31, 1997 (and, at the Company's
election, before January 1, 1998). The Company believes that the adoption of
this standard will not have a material effect on the Company's consolidated
results of operation or financial position.

USE OF ESTIMATES:

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the period reported. Actual results could differ
from those estimates. Estimates are used when accounting for long-term
contracts, allowance for doubtful accounts, accrued line costs, depreciation and
amortization, taxes, restructuring accruals and contingencies.

RECLASSIFICATIONS:

Certain consolidated financial statement amounts have been reclassified for
consistent presentation.




                                      F-12
<PAGE>   69

(2)      BUSINESS COMBINATIONS -

The Company has acquired other telecommunications companies offering similar or
complementary services to those offered by the Company. Such acquisitions have
been accomplished through the purchase of the outstanding stock or assets of the
acquired entity for cash, notes, shares of the Company's common stock, or a
combination thereof. The cash portion of acquisition costs has generally been
financed through the Company's bank credit facilities. In addition to the
business combinations described below, the Company or its predecessors completed
smaller acquisitions during the three years ended December 31, 1998.

On September 14, 1998, the Company acquired MCI for approximately $40 billion,
pursuant to the merger (the "MCI Merger") of MCI with and into TC Investments
Corp. ("Acquisition Subsidiary"), a wholly owned subsidiary of the Company. Upon
consummation of the MCI Merger, the Acquisition Subsidiary was renamed MCI
Communications Corporation. Through the MCI Merger, the Company acquired one of
the world's largest and most advanced digital networks, connecting local markets
in the United States to more than 280 countries and locations worldwide.

As a result of the MCI Merger, each outstanding share of MCI common stock was
converted into the right to receive 1.2439 shares of MCI WorldCom common stock,
par value $.01 per share (the "MCI WorldCom Common Stock"), or approximately 755
million MCI WorldCom common shares in the aggregate, and each share of MCI Class
A common stock outstanding (all of which were held by British Telecommunications
plc ("BT")) was converted into the right to receive $51.00 in cash or
approximately $7 billion in the aggregate. The funds paid to BT were obtained by
the Company from (i) available cash as a result of the Company's $6.1 billion
public debt offering in August 1998; (ii) the sale of MCI's Internet backbone
facilities and wholesale and retail Internet business (the "iMCI Business") to
Cable and Wireless plc ("Cable & Wireless") for $1.75 billion in cash on
September 14, 1998; (iii) the sale of MCI's 24.9% equity stake in Concert
Communications Services ("Concert") to BT for $1 billion in cash on September
14, 1998; and (iv) availability under the Company's commercial paper program and
credit facilities.

Upon effectiveness of the MCI Merger, the then outstanding and unexercised
options exercisable for shares of MCI common stock were converted into options
exercisable for an aggregate of approximately 83 million shares of MCI WorldCom
Common Stock having the same terms and conditions as the MCI options, except
that the exercise price and the number of shares issuable upon exercise were
divided and multiplied, respectively, by 1.2439. The MCI Merger was accounted
for as a purchase; accordingly, operating results for MCI have been included
from the date of acquisition.

The purchase price in the MCI Merger was allocated based on estimated fair
values at the date of acquisition. This resulted in an excess of purchase price
over net assets acquired of which $3.1 billion was allocated to in-process
research and development ("IPR&D") and $1.7 billion to developed technology,
which will be depreciated over 10 years on a straight-line basis. The remaining
excess of $29.7 billion, as of December 31, 1998, has been allocated to goodwill
and tradename, which are being amortized over 40 years on a straight-line basis.

On August 4, 1998, MCI acquired a 51.79% voting interest and a 19.26% economic
interest in Embratel Participacoes S.A. ("Embratel"), Brazil's only
facilities-based national communications provider, for approximately R$2.65
billion (US$2.3 billion). The purchase price will be paid in local currency
installments, of which R$1.06 billion (US$916 million) was paid on August 4,
1998 with the remaining R$1.59 billion (US$1.32 billion at December 31, 1998) to
be paid in two equal installments over the next two years. Embratel provides
interstate long distance and international telecommunications services in
Brazil, as well as over 40 other communications services, including leased
high-speed data, satellite, Internet, frame relay and packet-switched services.
Operating results for Embratel are consolidated in the accompanying consolidated
financial statements and are included from the date of the MCI Merger.




                                      F-13
<PAGE>   70

On January 31, 1998, MCI WorldCom acquired CompuServe Corporation
("CompuServe"), for approximately $1.3 billion, pursuant to the merger (the
"CompuServe Merger") of a wholly owned subsidiary of the Company with and into
CompuServe. Upon consummation of the CompuServe Merger, CompuServe became a
wholly owned subsidiary of MCI WorldCom.

As a result of the CompuServe Merger, each share of CompuServe common stock was
converted into the right to receive 0.40625 shares of MCI WorldCom Common Stock,
or approximately 37.6 million MCI WorldCom common shares in the aggregate. Prior
to the CompuServe Merger, CompuServe operated primarily through two divisions:
Interactive Services and Network Services. Interactive Services offered
worldwide online and Internet access services for consumers, while Network
Services provided worldwide network access, management and applications, and
Internet service to businesses. The CompuServe Merger was accounted for as a
purchase; accordingly, operating results for CompuServe have been included from
the date of acquisition.

On January 31, 1998, the Company also acquired ANS Communications, Inc. ("ANS"),
from America Online, Inc. ("AOL"), for approximately $500 million, and has
entered into five year contracts with AOL under which MCI WorldCom and its
subsidiaries provide network services to AOL (collectively, the "AOL
Transaction"). As part of the AOL Transaction, AOL acquired CompuServe's
Interactive Services division and received a $175 million cash payment from MCI
WorldCom. MCI WorldCom retained the CompuServe Network Services division. ANS
provides Internet access to AOL and AOL's subscribers in the United States,
Canada, the United Kingdom, Sweden and Japan. The AOL Transaction was accounted
for as a purchase; accordingly, operating results for ANS have been included
from the date of acquisition.

The purchase price in the CompuServe Merger and AOL Transaction was allocated
based on estimated fair values at the date of acquisition. This resulted in an
excess of purchase price over net assets acquired of which $429 million was
allocated to IPR&D. The remaining excess of $994 million, as of December 31,
1998, has been recorded as goodwill, which is being amortized over 10 years on a
straight-line basis.

On January 29, 1998, MCI WorldCom acquired Brooks Fiber Properties, Inc.
("BFP"), pursuant to the merger (the "BFP Merger") of a wholly owned subsidiary
of MCI WorldCom, with and into BFP. Upon consummation of the BFP Merger, BFP
became a wholly owned subsidiary of MCI WorldCom. BFP is a leading
facilities-based provider of competitive local telecommunications services,
commonly referred to as a competitive local exchange carrier, in selected cities
within the United States. BFP acquires and constructs its own state-of-the-art
fiber optic networks and facilities and leases network capacity from others to
provide long distance carriers, ISPs, wireless carriers and business, government
and institutional end users with an alternative to the incumbent local exchange
carriers ("ILECs") for a broad array of high quality voice, data, video
transport and other telecommunications services.

As a result of the BFP Merger, each share of BFP common stock was converted into
the right to receive 1.85 shares of MCI WorldCom Common Stock or approximately
72.6 million MCI WorldCom common shares in the aggregate. The BFP Merger was
accounted for as a pooling-of-interests and, accordingly, the Company's
financial statements for periods prior to the BFP Merger have been restated to
include the results of BFP for all periods presented.

On December 31, 1996, MCI WorldCom, through a wholly owned subsidiary, merged
with MFS Communications Company, Inc. ("MFS"). Through the acquisition of MFS
(the "MFS Merger"), valued at approximately $12.5 billion, the Company acquired
local network access facilities via digital fiber optic cable networks installed
in and around major United States cities, and in several major European cities.
The Company also acquired a network platform, which consists of Company-owned
transmission and switching facilities, and 





                                      F-14
<PAGE>   71

network capacity leased from other carriers primarily in the United States and
Western Europe. The excess purchase price over net tangible assets acquired was
allocated as follows: $2.14 billion to IPR&D projects, $8.9 billion to goodwill,
$400 million to developed technology and $42 million to assembled workforce.
Goodwill is being amortized on a straight-line basis over 5 to 40 years. The MFS
Merger was accounted for as a purchase; accordingly, operating results for MFS
have been included from the date of acquisition.

As a result of the MFS Merger, each share of MFS common stock was converted into
the right to receive 2.1 shares of MCI WorldCom Common Stock or approximately
471 million MCI WorldCom common shares in the aggregate. Each share of MFS
Series A 8% Cumulative Convertible Preferred Stock ("MFS Series A Preferred
Stock") was converted into the right to receive one share of Series A 8%
Cumulative Convertible Preferred Stock of MCI WorldCom ("MCI WorldCom Series A
Preferred Stock"), or 94,992 shares of MCI WorldCom Series A Preferred Stock in
the aggregate. Each share of MFS Series B Convertible Preferred Stock was
converted into the right to receive one share of Series B Convertible Preferred
Stock of MCI WorldCom ("MCI WorldCom Series B Preferred Stock"), or
approximately 12.7 million shares of MCI WorldCom Series B Preferred Stock in
the aggregate. In addition, each depositary share representing 1/100th of a
share of MFS Series A Preferred Stock was exchanged for a depositary share
representing 1/100th of a share of MCI WorldCom Series A Preferred Stock.

On August 12, 1996, MFS acquired UUNET Technologies, Inc. ("UUNET"), through a
merger of a subsidiary of MFS with and into UUNET. UUNET is a leading worldwide
provider of a comprehensive range of Internet access options, applications, and
value added services to businesses, other telecommunications companies and
online services providers. 

During 1998 and 1997, the Company recorded other liabilities of $2.18 billion
and $461 million, respectively, related to estimated costs of unfavorable
commitments of acquired entities, and other non-recurring costs arising from
various acquisitions and mergers. At December 31, 1998 and 1997, other 
liabilities related to these accounts totaled $2.02 billion and $412 million, 
respectively.

The initial purchase price allocations for the 1998 business combinations are
based on current estimates. The Company will make final purchase price
allocations based upon final values for certain assets and liabilities and plans
for exiting certain activities of MCI. As a result, the final purchase price
allocations may differ from the presented estimate.

The following unaudited pro forma combined results of operations for the Company
assumes that the MCI Merger was completed on January 1, 1997 (in millions,
except per share data):


<TABLE>
<CAPTION>
                                                                   FOR THE YEAR ENDED
                                                                       DECEMBER 31,
                                                               ---------------------------
                                                                 1998               1997
                                                               --------           --------
<S>                                                            <C>                <C>     
Revenues                                                       $ 31,968           $ 25,773
Income (loss) before extraordinary items                         (2,543)                 2
Net income (loss) attributable to common shareholders            (2,672)                (1)
Dilutive income (loss) per common share:
Income (loss) before extraordinary items                       $  (1.42)          $   0.00
Net income (loss)                                                 (1.49)              0.00
</TABLE>



                                      F-15
<PAGE>   72

These pro forma amounts represent the historical operating results of MCI
combined with those of the Company with appropriate preliminary adjustments
which give effect to an in-process research and development charge of $3.1
billion in 1998, depreciation, amortization, interest and the common shares
issued. These pro forma amounts do not include amounts with respect to the
CompuServe Merger, AOL Transaction or Embratel prior to their respective
business combination dates because they are individually, and in the aggregate,
not material to MCI WorldCom. These pro forma amounts are not necessarily
indicative of operating results which would have occurred if MCI had been
operated by current management during the periods presented because these
amounts do not reflect cost savings related to full network optimization and the
redundant effect on operating, selling, general and administrative expenses.

(3)     IN-PROCESS RESEARCH AND DEVELOPMENT AND OTHER CHARGES - 

The following table reflects the components of the significant items included in
in-process research and development ("IPR&D") and other charges in 1998 and 1996
(in millions):


<TABLE>
<CAPTION>
                                                                 1998           1996
                                                            --------------  --------------

<S>                                                         <C>             <C>          
In-process R&D                                              $        3,529  $       2,140
Provision to reduce the carrying value of certain assets                49            402
Severance and other employee related costs                              21             58
BFP direct merger costs                                                 17              -
Alignment and other exit activities                                    109            140
                                                            --------------  --------------
                                                            $        3,725  $       2,740
                                                            --------------  --------------
</TABLE>


In 1998, the Company recorded a pre-tax charge of $196 million in connection
with the BFP Merger, the MCI Merger and certain asset write-downs and loss
contingencies. Such charges included $21 million for employee severance, $17
million for BFP direct merger costs, $38 million for conformance of BFP
accounting policies, $56 million for exit costs under long-term commitments, $31
million for write-down of a permanently impaired investment and $33 million
related to certain asset write-downs and loss contingencies. The $56 million
related to long-term commitments includes $33 million of minimum commitments
over the next one to ten years for leased facilities that the Company has or
will abandon, $19 million related to certain minimum contractual network lease
commitments that expire over the next one to three years, for which the Company
will receive no future benefit due to the migration of traffic to owned
facilities, and $4 million of other commitments. Additionally, the $33 million
related to certain asset write-downs and loss contingencies includes $9 million
for the decommission of certain information systems that have no alternative
future use, $9 million for the write-down to fair value of certain assets held
for sale that were disposed of in 1998 and $15 million related to legal costs
and other items related to BFP. The Company completed its plans for alignment
and exit activities in the first quarter of 1999. In connection with the above
charges, $35 million ($7 million related to severance), $16 million and $15
million are included in other current liabilities, accrued line costs and other
liabilities, respectively, in the accompanying consolidated financial statements
as of December 31, 1998.

In 1996, the Company recorded charges for employee severance, employee
compensation charges, alignment charges and costs to exit unfavorable
telecommunications contracts. Also in 1996, the Company incurred non-cash
charges related to a write-down in the carrying value of certain assets,
including goodwill and equipment. Because of events resulting from the passage
of the Telecommunications Act of 1996 (the "Telecom Act"), and changes in
circumstances impacting certain non-core operations, management estimates of the
Company's fair value of operating assets within its core and non-core businesses
resulted in a non-cash charge of $344 million after-tax. On a pre-tax basis, the
write-down was $402 million and included $139 million for network facilities and
$263 million for non-core businesses, primarily operator services goodwill. Fair
value of the non-core business was determined by estimating the present value of
future cash flows to be generated from those operations while the majority of
the network facilities were recorded at net salvage value due to anticipated
early disposal.




                                      F-16
<PAGE>   73

CHARGE FOR IN-PROCESS RESEARCH AND DEVELOPMENT:

In connection with certain business combinations, the Company made allocations
of the purchase price to acquired IPR&D totaling $429 million in the first
quarter of 1998 related to the CompuServe Merger and AOL Transaction and $3.1
billion in the third quarter of 1998 related to the MCI Merger.

The Company used professional appraisal consultants to assess and allocate
values to the in-process research and development. These allocations represent
the estimated fair value based on risk-adjusted future cash flows related to the
incomplete projects. At the date of the respective business combinations, the
development of these projects had not yet reached technological feasibility and
the R&D in progress had no alternative future uses. Accordingly, these costs
were expensed as of the respective acquisition dates.

In the fourth quarter of 1996, the Company recorded a $2.14 billion charge for
IPR&D related to the MFS Merger. The charge was based upon a valuation analysis
of the technologies of MFS' worldwide information system, the Internet network
expansion system of UUNET, and certain other identified research and development
projects purchased in the merger. At the date of the MFS Merger, the
technological feasibility of the acquired technology had not yet been
established and the technology had no future alternative uses. The expense
includes $1.6 billion associated with UUNET and $0.54 billion related to MFS.

(4)    INVESTMENTS-

In connection with the MCI Merger, the Company acquired a 44.5% investment in
Avantel, S.A. de C.V. ("Avantel"), a business venture with Grupo Financiero
Banamex-Accival formed to provide competitive domestic and international
telecommunications services in Mexico. At December 31, 1998, the net investment
in Avantel was approximately $506 million. The Company's share of Avantel's net
losses, recorded since the MCI Merger date, was approximately $25 million. The
Company and Avantel conduct business through the exchange of domestic and
international interconnection services at prevailing market rates in the
ordinary course of business. During 1998, the amounts associated with these
transactions were not material.

In connection with the MCI Merger, the Company acquired an investment in The
News Corporation Limited ("News Corp."), valued at $1.38 billion at December 31,
1998, comprised of cumulative convertible preferred securities and warrants. The
Company recorded dividend income of approximately $17 million in 1998, on its
News Corp. investment.

With News Corp., the Company would form a Direct Broadcast Satellite ("DBS")
joint venture in which the Company would own at 19.9% interest. DBS is a
point-to-multipoint broadcast service that uses highpowered Ku band satellites
placed in geosynchronous orbit. DBS service is capable of delivering a wide
range of services, including subscription television, pay-per-view services,
such as movies, concerts and sporting events, and digitized content, such as
magazines. The Company holds a DBS license from the FCC which it will contribute
to the joint venture. The DBS license grants the Company the right to use 28 of
32 channels in the satellite slot located at 110 degrees west longitude, which
provides coverage to all fifty states in the U.S. and Puerto Rico. News Corp.
and the Company would contribute to the joint venture the other DBS related
assets they each own.




                                      F-17
<PAGE>   74
In November 1998, the Company and News Corp. entered into an agreement with
EchoStar Communications Corp. ("EchoStar") for the sale and transfer of the
Company's and News Corp.'s DBS assets (the "EchoStar Transaction"). Concurrent
with the consummation of the EchoStar Transaction, the Company will acquire
preferred shares in a subsidiary of News Corp. for a face amount equal to the
Company's cost of obtaining the FCC license, plus interest thereon. The Company
will also receive from EchoStar approximately 6.0 million shares of EchoStar
Class A Common Stock. The EchoStar Transaction is subject to approval by the FCC
and is expected to close in the second quarter of 1999. As of December 31, 1998,
the Company's investment in DBS was approximately $886 million.

(5)    LONG-TERM DEBT-

Outstanding debt as of December 31, 1998 and 1997 consists of the following (in
millions):


<TABLE>
<CAPTION>
                                                                                      1998                            1997
                                                               ---------------------------------------------       -----------

                                                               EXCLUDING
                                                                EMBRATEL        EMBRATEL        CONSOLIDATED
                                                               ----------       ---------       ------------      

<S>                                                            <C>              <C>             <C>                <C>        
Commercial paper and credit facilities                         $    4,586       $       -       $      4,586       $     3,208
6.13% - 6.95% Notes Due 2001 - 2028                                 6,100               -              6,100                 -
7.55% - 7.75% Notes Due 2004 - 2027                                 2,000               -              2,000             2,000
8.88% - 9.38% Senior Notes Due 2004 - 2006                          1,358               -              1,358             1,358
7.13% - 8.25% MCI Senior Debentures Due 2023 - 2027                 1,441               -              1,441                 -
6.13% - 7.50% MCI Senior Notes Due 1999 - 2012                      2,653               -              2,653                 -
15% note payable due in annual installments through 2000                -           1,317              1,317                 -
10.00% - 10.88% BFP Notes Due 2006-2007                                 9               -                  9               811
Capital lease obligations, 7.00% - 11.00%                                                                          
     (maturing through 2002)                                          639               -                639                33
Other debt (maturing through 2008)                                    184             552                736                14
                                                               ----------       ---------       ------------       -----------
                                                                   18,970           1,869             20,839             7,424     
Short-term debt and current maturities of long-term debt           (3,970)           (786)            (4,756)              (11)     
                                                               ----------       ---------       ------------       -----------
                                                               $   15,000       $   1,083       $     16,083       $     7,413     
                                                               ==========       =========       ============       ===========
</TABLE>




In connection with the BFP Merger, the Company announced in February 1998 that
it had commenced offers (the "Tender Offers") to purchase for cash various
series of BFP outstanding notes (the "BFP Notes"). Concurrently with the Tender
Offers, MCI WorldCom obtained the requisite consents to eliminate certain
restrictive covenants and amend certain other provisions of the respective
indentures of the BFP Notes. In March 1998, the Company accepted all BFP Notes
validly tendered. As of the expiration of the Tender Offers, MCI WorldCom had
received valid tenders and consents from holders of approximately $1.1 billion
of BFP Notes (over 99% of total outstanding). The funds required to pay all
amounts required under the Tender Offers were obtained by MCI WorldCom from
available working capital and lines of credit. In connection with the Tender
Offers and related refinancings, MCI WorldCom recorded an extraordinary item of
$129 million, net of income tax benefit of $78 million, in the first quarter of
1998.

On August 6, 1998, MCI WorldCom replaced its existing $3.75 billion and $1.25
billion revolving credit facilities (the "Old Credit Facilities") with $12.0
billion in credit facilities consisting of a $3.75 billion Amended and Restated
Facility A Revolving Credit Agreement ("Facility A Loans"), a $1.25 billion
Amended and Restated Facility B Term Loan Agreement ("Facility B Loans") and a
new $7 billion 364-Day Revolving Credit and Term Loan Agreement ("Facility C
Loans"). In the fourth quarter of 1998, the Company elected to repay the
Facility B Loans and cancel the facility commitment of $1.25 billion. The funds
used to repay the Facility B Loans were 





                                      F-18
<PAGE>   75

obtained by the Company from availability under the Facility A Loans and
Facility C Loans (collectively, the "Credit Facilities") and the commercial
paper program. The Credit Facilities provide liquidity support for the Company's
commercial paper program and will be used for other general corporate purposes.
The Facility A Loans mature on June 30, 2002. The Facility C Loans have a
364-day term, which may be extended for up to two successive 364-day terms
thereafter to the extent of the committed amounts from those lenders consenting
thereto, with a requirement that lenders holding at least 51% of the committed
amounts consent. Additionally, effective as of the end of such 364-day term, the
Company may elect to convert up to $4 billion of the principal debt outstanding
under the Facility C Loans from revolving loans to term loans with a maturity
date no later than one year after the conversion. The Credit Facilities bear
interest payable in varying periods, depending on the interest period, not to
exceed six months, or with respect to any Eurodollar Rate borrowing, 12 months
if available to all lenders, at rates selected by the Company under the terms of
the Credit Facilities, including a Base Rate or Eurodollar Rate, plus the
applicable margin. The applicable margin for the Eurodollar Rate borrowing
varies from 0.35% to 0.75% as to Facility A Loans and from 0.25% to 0.45% as to
Facility C Loans, in each case based upon the better of certain debt ratings. At
December 31, 1998 and 1997, the weighted average interest rates under the
Company's credit facilities were 6.0% and 6.1%, respectively. The Credit
Facilities are unsecured but include a negative pledge of the assets of the
Company and its subsidiaries (subject to certain exceptions). The Credit
Facilities require compliance with a financial covenant based on the ratio of
total debt to total capitalization, calculated on a consolidated basis. The
Credit Facilities require compliance with certain operating covenants which
limit, among other things, the incurrence of additional indebtedness by the
Company and its subsidiaries, sales of assets and mergers and dissolutions,
which covenants are generally less restrictive than those contained in the Old
Credit Facilities and which do not restrict distributions to shareholders,
provided the Company is not in default under the Credit Facilities. At December
31, 1998, the Company was in compliance with these covenants. The Facility A
Loans and the Facility C Loans are subject to annual commitment fees not to
exceed 0.25% and 0.12%, respectively, of any unborrowed portion of the
facilities.

In 1998, the Company approved the issuance of commercial paper notes in the
aggregate principal amount not to exceed $10.0 billion, which notes have a
maturity not to exceed 364 days from the date of issuance. The Company maintains
unused credit facilities equal to 100% of the commercial paper notes
outstanding. As of December 31, 1998, $2.59 billion was outstanding under the
commercial paper program.

On August 11, 1998, the Company completed a public debt offering of $6.1 billion
principal amount of debt securities. The net proceeds of $6.04 billion were used
to pay down commercial bank debt, finance a portion of the approximately $7
billion payment to BT and for general corporate purposes.

The public debt offering consisted of $1.5 billion principal amount of 6.125%
Notes Due 2001 (the "Notes Due 2001"), which mature August 15, 2001, $600
million principal amount of 6.25% Notes Due 2003 (the "Notes Due 2003"), which
mature on August 15, 2003, $2.25 billion principal amount of 6.40% Notes Due
2005 (the "Notes Due 2005"), which mature August 15, 2005 and $1.75 billion
principal amount of 6.95% Notes Due 2028 (the "Notes Due 2028" and collectively
with the Notes Due 2001, the Notes Due 2003 and the Notes Due 2005, the
"Notes"), which mature August 15, 2028. The Notes bear interest payable
semiannually in arrears on February 15 and August 15 of each year, commencing
February 15, 1999.

The Notes are redeemable, as a whole or in part, at the option of the Company,
at any time or from time to time, at respective redemption prices equal to the
greater of (i) 100% of the principal amount of the Notes to be redeemed or (ii)
the sum of the present values of the Remaining Scheduled Payments (as defined
therein) plus (a) 10 basis points for the Notes Due 2001, (b) 15 basis points
for the Notes Due 2003 and the Notes Due 2005, or (c) 20 basis points for the
Notes Due 2028, plus in the case of each of clause (i) and (ii), accrued
interest to the date of redemption.




                                      F-19
<PAGE>   76

At the time of the MCI Merger, MCI had outstanding $1.44 billion of MCI Senior
Debentures with rates ranging from 7.125% to 8.25% and maturing from January
2023 through June 2027 (the "MCI Senior Debentures"), and $2.65 billion of MCI
Senior Notes with rates ranging from 6.125% to 7.5% and maturing from March 1999
through April 2012 (the "MCI Senior Notes"). Additionally, MCI had outstanding a
note payable in annual local currency installments (US$1.32 billion at December
31, 1998) as a result of MCI's purchase of Embratel on August 4, 1998 and other
debt including, without limitation, capital leases.

As of December 31, 1998, Embratel had $552 million of long-term debt
outstanding, of which approximately $496 million was denominated in U.S. dollars
and $56 million denominated in other currencies including the French Franc,
Deutsche Mark and Japanese Yen. The Embratel debt bears fixed interest rates
ranging from 5.7% to 10.1% and variable interest rates ranging from 0.25% to
3.30% per annum over LIBOR. The LIBOR rate at December 31, 1998 was 5.06%.

Certain of Embratel's credit agreements contain covenants restricting, among
other things, (i) the ability of Telecomunicacacoes Brasileiras S.A., Telebras
("Telebras"), Embratel's former parent, to dispose of all or a substantial part
of its assets or to cease to control a company that was an operating subsidiary
of Telebras and (ii) the ability of the Brazilian Federal Government to dispose
of its controlling interest in Telebras. The breakup of Telebras on May 22, 1998
and the privatization of Embratel constituted an event of default under such
credit agreements. In addition, most of Embratel's other credit agreements
include 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 is in default or accelerated. A substantial
portion of Embratel's outstanding debt is currently in default or expected to be
in default as a result of the privatization. Embratel is currently in
negotiations with the appropriate creditors with respect to this indebtedness.

The consolidated financial statements do not include any adjustments relating to
the recoverability of assets and classification of liabilities that might be
necessary should Embratel be unable to renegotiate its credit agreements. The
Company believes that once the privatization is finalized, Embratel's creditors
will renegotiate the terms of these credit agreements and/or provide appropriate
waivers regarding such defaults.

The Company has designated the remaining $1.32 billion note payable in local
currency installments, resulting from the Embratel investment, as a hedge of its
investment in Embratel. Accordingly, as of December 31, 1998, the Company
recorded the change in value of $25 million, resulting from foreign currency
fluctuations, as a reduction of the note payable with the offset through foreign
currency translation adjustment in shareholders' investment.

The aggregate principal repayments and reductions required in each of the years
ending December 31, 1999 through December 31, 2003 and thereafter for the
Company's long-term debt is as follows (in millions):

<TABLE>
<S>                                                      <C>    
                         1999                            $ 4,756
                         2000                              1,174
                         2001                              1,674
                         2002                                146
                         2003                              2,694
                         Thereafter                       10,395
                                                         -------
                                                         $20,839
                                                         =======
</TABLE>  




                                      F-20
<PAGE>   77


(6)  COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
     TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES OF
     THE COMPANY AND OTHER REDEEMABLE PREFERRED SECURITIES-

In connection with the MCI Merger, the Company acquired $750 million aggregate
principal amount of 8% Cumulative Quarterly Income Preferred Securities, Series
A, representing 30 million shares outstanding ("preferred securities") due June
30, 2026 which were previously issued by MCI Capital I, a wholly owned Delaware
statutory business trust (the "Trust"). The Trust exists for the sole purpose of
issuing the preferred securities and investing the proceeds in the Company's 8%
Junior Subordinated Deferrable Interest Debentures, Series A ("Subordinated Debt
Securities") due June 30, 2026, the only assets of the Trust.

Holders of the preferred securities are entitled to receive preferential
cumulative cash distributions from the Trust on a quarterly basis, provided the
Company has not elected to defer the payment of interest due on the Subordinated
Debt Securities to the Trust. The Company may elect this deferral from time to
time, provided that the period of each such deferral does not exceed five years.
The preferred securities are subject to mandatory redemption, in whole or in
part, upon repayment of the Subordinated Debt Securities at maturity or earlier
in an amount equal to the amount of Subordinated Debt Securities maturing or
being repaid. In addition, in the event the Company terminates the Trust, the
Subordinated Debt Securities will be distributed to the then holders of the
preferred securities of the Trust. The Trust assets had an estimated fair market
value of $804 million at December 31, 1998.

The Company and MCI have executed various guarantee agreements and supplemental
indentures which agreements, when taken together with the issuance of the
Subordinated Debt Securities, constitute a full, irrevocable, and unconditional
guarantee by the Company and MCI of all of the Trust's obligations under the
preferred securities (the "Guarantee"). A Guarantee Agreement and Supplement No.
1 thereto covers payment of the preferred securities' quarterly distributions
and payments on maturity or redemption of the preferred securities, but only in
each case to the extent of funds held by the Trust. If the Company does not make
interest payments on the Subordinated Debt Securities held by the Trust, the
Trust will have insufficient funds to pay such distributions. The obligations of
the Company and MCI under the Guarantee and the Subordinated Debt Securities are
subordinate and junior in right of payment to all senior debt of the Company and
MCI, respectively.

OTHER REDEEMABLE PREFERRED SECURITIES:

On December 28, 1998, MCI WORLDCOM Synergies Management Company, Inc. ("SMC"), a
wholly owned subsidiary of the Company, issued 475 shares of an authorized 500
shares of 6.375% cumulative preferred stock, Class A ("SMC Class A Preferred
Stock") in a private placement. Each share of SMC Class A Preferred Stock has a
par value of $0.01 per share and a liquidation preference of $100,000 per share.
The SMC Class A Preferred Stock is mandatorily redeemable by SMC at the
redemption price of $100,000 per share plus accumulated and unpaid dividends on
January 1, 2019. Dividends on the SMC Class A Preferred Stock are cumulative
from the date of issuance and are payable quarterly commencing April 1, 1999 at
a rate per annum equal to 6.375% of the liquidation preference of $100,000 per
share when, as and if declared by the Board of Directors of SMC.



                                      F-21
<PAGE>   78

(7)      PREFERRED STOCK-

In connection with the MFS Merger, the Company issued 9,499,200 depositary
shares (the "Depositary Shares"), each representing 1/100th interest in a share
of Series A 8% Cumulative Convertible Preferred Stock ("the MCI WorldCom Series
A Preferred Stock") and 12.7 million shares of MCI WorldCom Series B Preferred
Stock.

In May 1998, the Company exercised its option to redeem all of the outstanding
MCI WorldCom Series A Preferred Stock and related Depositary Shares. Prior to
the redemption date, substantially all of the holders of MCI WorldCom Series A
Preferred Stock elected to convert the preferred stock into MCI WorldCom Common
Stock, resulting in the issuance of approximately 32.7 million shares of MCI
WorldCom Common Stock.

The MCI WorldCom Series B Preferred Stock is convertible into shares of MCI
WorldCom Common Stock at any time at a conversion rate of 0.0973912 shares of
MCI WorldCom Common Stock for each share of MCI WorldCom Series B Preferred
Stock (an effective initial conversion price of $10.268 per share of MCI
WorldCom Common Stock). Dividends on the MCI WorldCom Series B Preferred Stock
accrue at the rate per share of $0.0775 per annum and are payable in cash.
Dividends will be paid only when, as and if declared by the Board of Directors.
The Company has not declared any dividends on the MCI WorldCom Series B
Preferred Stock to date, and anticipates that future dividends will not be
declared but will continue to accrue. Upon conversion, accrued but unpaid
dividends are payable in cash or shares of MCI WorldCom Common Stock at the
Company's election. To date, the Company has elected to pay all accrued
dividends in cash, upon conversion.

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

The MCI WorldCom Series B Preferred Stock is entitled to one vote per share with
respect to all matters. The MCI WorldCom Series B Preferred Stock has a
liquidation preference of $1.00 per share plus all accrued and unpaid dividends
thereon to the date of liquidation. There is no established market for the MCI
WorldCom Series B Preferred Stock.

In 1996, the Company exercised its option to redeem its Series 2 Preferred
Stock. Prior to the redemption date, all of the remaining outstanding Series 2
Preferred Stock was converted into 5,266,160 shares of MCI WorldCom Common
Stock.

(8)      SHAREHOLDER RIGHTS PLAN-

On August 25, 1996, the Board of Directors of MCI WorldCom declared a dividend
of one preferred share purchase right (a "Right") for each outstanding share of
MCI WorldCom Common Stock. Each Right entitles the registered holder to purchase
from the Company one one-thousandth of a share of Series 3 Junior Participating
Preferred Stock, par value $.01 per share (the "Junior Preferred Stock"), of the
Company at an initial price of $160.00 per one one-thousandth of a share of
Junior Preferred Stock (the "Purchase Price"), subject to adjustment.

The Rights generally will be exercisable only after the close of business on the
tenth business day following the date of public announcement or the date on
which the Company first has notice or determines that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, 15% or more of the outstanding shares of voting
stock of the Company without the prior express written consent of the Company,
by a person which, upon consummation, would result in such party's control of
15% or more of the Company's voting stock. The Rights will expire, if not
previously exercised, exchanged or redeemed, on September 6, 2001.



                                      F-22
<PAGE>   79



If any person or group acquires 15% or more of the Company's outstanding voting
stock without prior written consent of the Board of Directors, each Right,
except those held by such persons, would entitle each holder of a Right to
acquire such number of shares of MCI WorldCom's Common Stock as shall equal the
result obtained by multiplying the then current Purchase Price by the number of
one one-thousandths of a share of Junior Preferred Stock for which a Right is
then exercisable and dividing that product by 50% of the then current per-share
market price of MCI WorldCom Common Stock.

If any person or group acquires more than 15% of the outstanding MCI WorldCom
Common Stock without prior written consent of the Board of Directors, each
Right, except those held by such persons, may be exchanged by the Board of
Directors for one share of MCI WorldCom Common Stock.

If the Company were acquired in a merger or other business combination
transaction where the Company is not the surviving corporation or where MCI
WorldCom Common Stock is exchanged or changed for 50% or more of the Company's
assets or earnings power is sold in one or several transactions without the
prior written consent of the Board of Directors, each Right would entitle the
holders thereof (except for the Acquiring Person) to receive such number of
shares of the acquiring company's common stock as shall be equal to the result
obtained by multiplying the then current Purchase Price by the number one one-
thousandths of a share of Junior Preferred Stock for which a Right is then
exercisable and dividing that product by 50% of the then current market price
per share of the common stock of the acquiring company on the date of such
merger or other business combination transaction.

At any time prior to the time an Acquiring Person becomes such, the Board of
Directors of the Company may redeem the Rights in whole, but not in part, at a
price of $.01 per Right (the "Redemption Price"). The redemption of the Rights
may be made effective at such time, on such basis and with such conditions as
the Board of Directors in its sole discretion may establish. Immediately upon
any redemption of the Rights, the right to exercise the Rights will terminate
and the only right of the holders of the Rights will be to receive the
Redemption Price.

The terms of the Rights may be amended by the Board of Directors of the Company
without the consent of the holders of the Rights, including an amendment to
lower certain thresholds described above to not less than the greater of (i) any
percentage greater than the largest percentage of the voting power of all
securities of the Company then known to the Company to be beneficially owned by
any person or group of affiliated or associated persons (other than an excepted
person) and (ii) 10%, except that from and after such time as any person or
group of affiliated or associated persons becomes an Acquiring Person no such
amendment may adversely affect the interests of the holders of the Rights.

(9)      LEASES AND OTHER COMMITMENTS-

The Company leases office facilities and certain equipment under noncancellable
operating leases having initial or remaining terms of more than one year. In
addition, the Company leases a right-of-way from a railroad company under a
fifteen-year lease with three fifteen-year renewal options. The Company is also
obligated under rights-of-way and franchise agreements with various entities for
the use of their rights-of-way for the installation of the Company's
telecommunications systems. Rental expense under these operating leases was $184
million, $140 million, and $60 million in 1998, 1997 and 1996, respectively.





                                      F-23
<PAGE>   80



At December 31, 1998, minimum lease payments under noncancellable operating
leases and commitments and capital leases were as follows (in millions):


<TABLE>
<CAPTION>
                                                 OPERATING AND CAPITAL LEASES
                              -------------------------------------------------------------------

                                                   TELECOMMUNICATIONS
                           OFFICE FACILITIES            FACILITIES                                            CAPITAL
        YEAR                 AND EQUIPMENT          AND RIGHTS OF WAY                  TOTAL                   LEASES
----------------------        ----------              --------------               --------------          --------------

<S>                           <C>                     <C>                          <C>                     <C>           
1999                          $      363              $        1,151               $        1,514          $          169
2000                                 331                       1,040                        1,371                     111
2001                                 277                         831                        1,108                     103
2002                                 221                         631                          852                      65
2003                                 182                         430                          612                      35
Thereafter                           500                         648                        1,148                     420
                              ----------              --------------               --------------          --------------
Total                         $    1,874              $        4,731               $        6,605                     903   
                              ==========              ==============               ==============          
Less: imputed interest                                                                                               (264)   
                                                                                                           --------------
                                                                                                           $          639   
                                                                                                           ==============   
</TABLE>



Certain of the Company's facility leases include renewal options, and most
leases include provisions for rent escalation to reflect increased operating
costs and/or require the Company to pay certain maintenance and utility costs.

MCI WorldCom also has agreements with a company that installs, operates and
maintains certain MCI WorldCom data processing, telecommunications and billing
systems. The agreements expire in 2003 and are renewable on an annual basis
thereafter. The agreements require minimum annual payments of approximately $27
million.

Additionally, MCI WorldCom has an agreement with a company that develops,
constructs and maintains facilities based communications systems. The agreement
expires in 2003 and includes minimum annual commitments of $40 million with a
minimum aggregate commitment during the term of the contract of $325 million.

In 1998, the Company's existing receivables purchase agreement generated
additional proceeds of $83 million, bringing the total amount outstanding to
$500 million. The Company used these proceeds to reduce outstanding debt under
the Company's Credit Facilities. As of December 31, 1998, the purchaser owned an
undivided interest in a $1.25 billion pool of receivables which includes the
$500 million sold.

(10)     CONTINGENCIES -

The Company is involved in legal and regulatory proceedings generally
incidental to its business and has included loss contingencies in other current
liabilities and other liabilities for certain of these matters. In some
instances, rulings by regulatory authorities in some states may result in
increased operating costs to the Company. Except as described herein, and while
the results of these various legal and regulatory matters contain an element of
uncertainty, MCI WorldCom believes that the probable outcome of these matters
should not have a material adverse effect on the Company's consolidated results
of operations or financial position.

GENERAL. MCI WorldCom is subject to varying degrees of federal, state, local and
international regulation. In the United States, the Company's subsidiaries are
most heavily regulated by the states, especially for the provision of local
exchange services. The Company must be certified separately in each state to
offer local 

                                      F-24
<PAGE>   81



exchange and intrastate long distance services. No state, however, subjects MCI
WorldCom to price cap or rate of return regulation, nor is the Company currently
required to obtain FCC authorization for installation or operation of its
network facilities used for domestic services, other than licenses for specific
terrestrial microwave and satellite earth station facilities that utilize radio
frequency spectrum. FCC approval is required, however, for the installation and
operation of its international facilities and services. MCI WorldCom is subject
to varying degrees of regulation in the foreign jurisdictions in which it
conducts business including authorization for the installation and operation of
network facilities. Although the trend in federal, state and international
regulation appears to favor increased competition, no assurance can be given
that changes in current or future regulations adopted by the FCC, state or
foreign regulators or legislative initiatives in the United States or abroad
would not have a material adverse effect on MCI WorldCom.

In implementing the Telecom Act, the FCC established nationwide rules designed
to encourage new entrants to participate in the local services markets through
interconnection with the ILECs, resale of ILECs' retail services and use of
individual and combinations of unbundled network elements. Appeals of the FCC
order adopting those rules were consolidated before the United States Court of
Appeals for the Eighth Circuit (the "Eighth Circuit"). Thereafter, the Eighth
Circuit held that constitutional challenges to various practices implementing
cost provisions of the Telecom Act that were ordered by certain Public Utility
Commissions ("PUCs") were premature; it vacated, however, significant portions
of the FCC's nationwide pricing rules and an FCC rule requiring that unbundled
network elements be provided on a combined basis. The United States Supreme
Court (the "Supreme Court") reviewed the decision of the Eighth Circuit and on
January 25, 1999, reversed the Eighth Circuit in part and reinstated, with one
exception, all of the FCC local competition rules. The Court vacated and
remanded to the FCC for reconsideration the rule determining which unbundled
network elements must be provided by incumbent local exchange carriers to new
entrants. The Eighth Circuit will now consider the ILECs' challenges to the
substance of pricing rules which it previously had found to be premature.

Certain BOCs have also raised constitutional challenges to sections of the
Telecom Act restricting BOC provisioning of long distance services, and their
manufacturing of telecommunications equipment, electronic publishing and alarm
monitoring services. On December 31, 1997, the U.S. District Court for the
Northern District of Texas (the "District Court") ruled that these restrictions
violate the Bill of Attainder Clause of the U.S. Constitution. The decision only
applied to SBC Corporation ("SBC"), US WEST Communications Group ("US WEST") and
Bell Atlantic Corporation ("Bell Atlantic"). At the request of various parties,
on February 11, 1998, the District Court issued a stay of its decision pending
appeal. On September 4, 1998, the U.S. Court of Appeals for the Fifth Circuit
(the "Fifth Circuit") reversed the decision of the District Court and upheld the
constitutionality of the challenged provisions. On October 19, 1998, SBC, US
WEST and Bell Atlantic filed petitions requesting the Supreme Court review the
Fifth Circuit decision. On January 19, 1999, the Supreme Court denied these
petitions for review. BellSouth Corporation ("BellSouth") also raised the Bill
of Attainder issue in its appeal before the United States Court of Appeals for
the D.C. Circuit of the FCC's denial of BellSouth's application to provide
access long distance service in South Carolina. On December 22, 1998, the U.S.
Court of Appeals for the D.C. Circuit, in a 3-0 opinion, denied BellSouth's
constitutional challenges.

The FCC has denied applications filed by Regional Bell Operating Companies
("RBOCs") seeking authority to provide interLATA long distance service. In its
denial of an Ameritech Corporation ("Ameritech") application and a BellSouth
application, the FCC provided detailed guidance to applicants regarding the
obligations of the applicants, the format of future applications, the content of
future applications, and the review standards that it will apply in evaluating
any future applications. The National Association of Regulatory Utility
Commissioners and several state regulatory commissions appealed jurisdictional
aspects of that Ameritech application denial to 






                                      F-25
<PAGE>   82

the Eighth Circuit. On January 22, 1998, the Eighth Circuit granted the various
appeals and held that the FCC does not have jurisdiction to consider pricing
issues when deciding RBOC interLATA long distance applications. On February 22,
1999, the Supreme Court vacated the Eighth Circuit's decision, re-establishing
the jurisdiction of the FCC to use forward-looking pricing methodology when
reviewing RBOC entry into the long distance market.

Access charges, both interstate and intrastate, are a principal component of MCI
WorldCom's telecommunications expense. On the interstate side, the U.S. Court of
Appeals for the D.C. Circuit is presently considering multiple appeals of the
FCC's 1997 changes to the price cap system for regulating interstate access
charges. Several PUCs have initiated proceedings to address reallocation of
implicit subsidies contained in the access rate and retail service rates to
state universal service funds. In addition, the FCC is presently considering
further universal service reforms, access reform, and pricing flexibility for
ILEC access charges. MCI WorldCom cannot predict the outcome of these
proceedings or whether or not the result(s) will have a material adverse impact
upon its consolidated financial position or results of operations.

In August 1998, in response to petitions filed by several ILECs under the guise
of Section 706 of the Telecom Act, the FCC issued its Advanced Services Order.
This order clarifies that the interconnection, unbundling, and resale
requirements of Section 251(c) of the Telecom Act, and the interLATA
restrictions of Section 271 of this Act, apply fully to so-called "advanced
telecommunications services," such as Digital Subscriber Line ("DSL"). In a
companion notice, the FCC sought comment on how to implement Section 706 of the
Telecom Act, which directs the FCC to (1) encourage the deployment of advanced
telecommunications capability to Americans on a reasonable and timely basis, and
(2) complete an inquiry concerning the availability of such services no later
than February 8, 1999. The Commission's rulemaking notice included a proposal
that, if adopted, would allow the ILECs the option of providing advanced
services via a separate subsidiary free from the unbundling and resale
obligations of Section 251(c), as well as other dominant carrier regulatory
requirements.

In early February 1999, the FCC issued its report to Congress, concluding that
the deployment of advanced services is proceeding at a reasonable and timely
pace. The FCC has not yet issued its Section 706 rulemaking order.

On February 26, 1999, the FCC issued a Declaratory Ruling and Notice of Proposed
Rulemaking regarding the regulatory treatment of calls to ISPs. Prior to the
FCC's order, approximately thirty PUCs issued orders unanimously finding that
carriers, including MCI WorldCom, are entitled to collect reciprocal
compensation for completing calls to ISPs under the terms of their
interconnection agreements with ILECs. Many of these PUC decisions have been
appealed by the ILECs and, since the FCC's order, many have filed new cases at
the PUCs or in court. Moreover, MCI WorldCom has appealed the FCC's order to the
Court of Appeals for the D.C. Circuit. MCI WorldCom cannot predict either the
outcome of these appeals and the FCC's rulemaking proceeding or whether or not
the result(s) will have a material adverse impact upon its consolidated
financial position or results of operations.

INTERNATIONAL. In December 1996, the FCC adopted a new policy that makes it
easier for United States international carriers to obtain authority to route
international public switched voice traffic to and from the United States
outside of the traditional settlement rate and proportionate return regimes. In
August 1998, the FCC proposed to modify its rules to make it even easier for
U.S. international carriers to engage in alternative traffic routing. In
February 1997, the United States entered into a World Trade Organization
Agreement (the "WTO Agreement") that is designed to have the effect of
liberalizing the provision of switched voice telephone and other
telecommunications services in scores of foreign countries over the next several
years. The WTO Agreement became effective in February 1998. In light of the
United States commitments to the WTO Agreement, the FCC implemented new rules in
February 1998 that liberalize existing policies regarding (1) the services that
may be 



                                      F-26
<PAGE>   83

provided by foreign affiliated United States international common carriers,
including carriers controlled or more than 25 percent owned by foreign carriers
that have market power in their home markets, and (2) the provision of
alternative traffic routing. The new rules make it much easier for foreign
affiliated carriers to enter the United States market for the provision of
international services.

In August 1997, the FCC adopted mandatory settlement rate benchmarks. These
benchmarks are intended to reduce the rates that United States carriers pay
foreign carriers to terminate traffic in their home countries. The FCC will also
prohibit a United States carrier affiliated with a foreign carrier from
providing facilities-based service to the foreign carrier's home market until
and unless the foreign carrier has implemented a settlement rate at or below the
benchmark. The FCC also adopted new rules that will liberalize the provision of
switched services over private lines to World Trade Organization ("WTO") member
countries. These rules allow such services on routes where 50% or more of United
States billed traffic is being terminated in the foreign country at or below the
applicable settlement rate benchmark or where the foreign country's rules
concerning provision of international switched services over private lines are
deemed equivalent to United States rules. On January 12, 1999, the FCC's
benchmark rules were upheld in their entirety by the U.S. Court of Appeals for
the D.C. Circuit. On March 11, 1999 the D. C. Circuit denied petitions for
rehearing of the case.

Although the FCC's new policies and implementation of the WTO Agreement may
result in lower settlement payments by MCI WorldCom to terminate international
traffic, there is a risk that the payment that MCI WorldCom will receive from
inbound international traffic may decrease to an even greater degree. The
implementation of the WTO Agreement may also make it easier for foreign carriers
with market power in their home markets to offer United States and foreign
customers end-to-end services to the disadvantage of MCI WorldCom. The Company
meanwhile, may continue to face substantial obstacles in obtaining from foreign
governments and foreign carriers the authority and facilities to provide such
end-to-end services.

EMBRATEL. The 1996 General Telecommunications Law (the "General Law") provides a
framework for telecommunications regulation for Embratel. Article 8 of the
General Law created Agencia Nacional de Telecomunicacoes ("Anatel") to implement
the General Law through development of regulations and to enforce such
regulations. According to the General Law, companies wishing to offer
telecommunications services to consumers are required to apply to Anatel for a
concession or an authorization. Concessions are granted for the provision of
services under the public regime (the "Public Regime") and authorizations are
granted for the provision of services under the private regime (the "Private
Regime"). The Public Regime is differentiated from the Private Regime primarily
by the obligations imposed on the companies rather than the type of services
offered by those companies. Service providers subject to the Public Regime
(concessionaires) are subject to obligations concerning network expansion and
continuity of service provision and are subject to rate regulation. These
obligations and the tariff conditions are provided in the General Law and in
each company's concession contract. The network expansion obligations (called
universal service obligations) are also provided in the Plano Geral de
Universalizacao ("General Plan on Universal Service"). 

The only services provided under the Public Regime are the switched fixed
telephone services (local and national and international long distance) provided
by Embratel and the three regional Telebras holding companies. All other
telecommunications companies, including other companies providing switched fixed
telephone services ("SFTS"), operate in the Private Regime and, although they
are not subject to the Public Regime, individual authorizations may contain
certain specific expansion and continuity obligations.

Therefore, when providing SFTS, Embratel and the three Telebras holding
companies ("Teles") established with the privatization, are subject to the
Public Regime obligations provided in the General Law, in their concession
contracts and in the General Plan on Universal Service, among other regulations.




                                      F-27
<PAGE>   84

The main restriction imposed on these companies by the General Grant Plan, is
that, until December 31, 2003, the three Teles are prohibited from offering
inter-regional and international long distance service, while Embratel is
prohibited from offering local services. These companies can start providing the
mentioned services two years sooner if they meet their network expansion
obligations by December 31, 2001.

Embratel and the three Teles were granted their concessions at no fee, until
2005. After 2005, the concessions may be renewed for a period of 20 years, upon
the payment, every two years, of a fee equal to 2% of annual net revenues
calculated based on the provision of SFTS in the prior year, excluding taxes and
social contributions, during the 20-year renewal period.

Embratel also offers a number of ancillary telecommunications services pursuant
to authorizations granted in the Private Regime. The principal such services are
the provision of dedicated analog and digital lines, packet switched network
services, circuit switched network services, mobile marine telecommunications,
telex and telegraph, radio signal satellite retransmission and television signal
satellite retransmission. Some of these services are subject to some specific
continuity obligations and rate conditions, provided in the respective
authorization.

All providers of telecommunications services are subject to quality and
modernization obligations provided in the Plan Geral de Qualidade ("General Plan
on Quality").

LITIGATION. On November 4, 1996, and thereafter, and on August 25, 1997, and
thereafter, MCI and all of its directors were named as defendants in a total of
15 complaints filed in the Court of Chancery in the State of Delaware. BT was
named as a defendant in 13 of the complaints. The complaints were brought by
alleged stockholders of MCI, individually and purportedly as class actions on
behalf of all other stockholders of MCI. In general, the complaints allege that
MCI's directors breached their fiduciary duty in connection with the MCI BT
Merger Agreement, dated November 3, 1996 (the "MCI BT Merger Agreement"), that
BT aided and abetted those breaches of duty, that BT owes fiduciary duties to
the other stockholders of MCI and that BT breached those duties in connection
with the MCI BT Merger Agreement. The complaints seek damages and injunctive and
other relief.

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

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

Three complaints were filed in the U.S. District Court for the District of
Columbia, as class actions on behalf of purchasers of MCI shares. The three
cases were consolidated on April 1, 1998. On or about May 8, 1998, the
plaintiffs in all three cases filed a consolidated amended complaint alleging,
on behalf of purchasers of MCI's shares between July 11, 1997 and August 21,
1997, inclusive, that MCI and certain of its officers and directors 





                                      F-28
<PAGE>   85

failed to disclose material information about MCI, including that MCI was
renegotiating the terms of the MCI BT Merger Agreement. The consolidated amended
complaint seeks damages and other relief. The Company and the other defendants
have moved to dismiss the consolidated amended complaint.

On May 7, 1998, GTE Corporation and three of its subsidiaries filed suit in the
U.S. District Court for the District of Columbia against MCI and WorldCom. The
complaint alleges that the MCI Merger would have the effect of substantially
lessening competition or tending to create a monopoly, and thereby violate
section 7 of the Clayton Act, with respect to the markets for Internet backbone
services, facilities to extend the reach of the Internet backbone, wholesale and
retail long distance services and international calling services. The complaint
requested declaratory and injunctive relief. On or about October 14, 1998, GTE
filed an amended complaint seeking declaratory and injunctive relief and
damages; MCI and WorldCom moved to dismiss the amended complaint in its
entirety. On February 22, 1999, the parties filed a joint stipulation of
dismissal with prejudice.

At least nine class action complaints have been filed that arise out of the
FCC's decision in Halprin, Temple, Goodman and Sugrue v. MCI Telecommunications
Corp., and allege that MCI WorldCom has improperly charged "Pre-Subscribed"
customers "Non-Subscriber" or so-called "casual" rates for certain direct-dialed
calls. Plaintiffs assert that this conduct violates the Communications Act and
various state laws; they seek rebates to all affected customers and (in some
cases) punitive damages. MCI WorldCom has filed a motion with the Judicial Panel
on Multi-District Litigation to consolidate these matters in the U.S. District
Court for the District of Columbia. The Company intends to move to dismiss the
cases or, in the alternative, to stay them, pending the FCC's resolution of MCI
WorldCom's outstanding motion for reconsideration and any subsequent appeals of
the FCC decision.

The Company believes that all of the complaints are without merit, and based on
information currently available, MCI WorldCom presently does not expect that the
above actions will have a material adverse effect on the Company's consolidated
results of operations or financial position.

(11)    EMPLOYEE BENEFIT PLANS-

STOCK OPTION PLANS:

The Company has several stock option plans under which options to acquire up to
317 million shares may be granted to directors, officers and certain employees
of the Company including the stock option plans acquired through various
acquisitions. The Company accounts for these plans under APB Opinion No. 25,
under which no compensation cost is recognized. Terms and conditions of the
Company's options, including exercise price and the period in which options are
exercisable, generally are at the discretion of the Compensation and Stock
Option Committee of the Board of Directors; however, no options are exercisable
for more than 10 years after date of grant. As of December 31, 1998, 245 million
options had been granted under these plans.

Prior to the MCI Merger, certain executives of MCI were granted incentive stock
units ("ISUs") that vested over a three-year period and entitled the holder to
receive shares of common stock. At December 31, 1998, there were approximately
2.1 million ISUs outstanding.

Additionally, there are outstanding warrants to acquire shares of MCI WorldCom
Common Stock at $6.25 per share which were granted by MFS prior to the MFS
Merger.

Additional information regarding options and warrants granted and outstanding is
summarized below (in millions, except per share data):


                                      F-29
<PAGE>   86

<TABLE>
<CAPTION>
                                                                                                         WEIGHTED-
                                                                                 NUMBER                  AVERAGE
                                                                               OF OPTIONS             EXERCISE PRICE
                                                                               ----------            ---------------
<S>                                                                                 <C>                  <C>        
Balance, December 31, 1995                                                          30                   $      8.52
Granted to employees/directors                                                      10                         15.65
Assumed in connection with acquisition                                              55                          8.74
Exercised                                                                          (11)                         6.62
Expired or canceled                                                                 (1)                        10.43
                                                                                   ---                   -----------
Balance, December 31, 1996                                                          83                         10.05
Granted to employees/directors                                                      32                         25.14
Exercised                                                                          (24)                         5.72
Expired or canceled                                                                 (6)                        14.68
                                                                                   ---                   -----------
Balance, December 31, 1997                                                          85                         16.54
Granted to employees/directors                                                      32                         30.51
Assumed in connection with acquisitions                                             84                         28.02
Exercised                                                                          (32)                        14.75
Expired or canceled                                                                 (6)                        24.65
                                                                                   ---                   -----------
Balance, December 31, 1998                                                         163                   $     25.25
                                                                                   ===                   ===========
</TABLE>







                                      F-30
<PAGE>   87



The following table summarizes information about the shares outstanding at
December 31, 1998:


<TABLE>
<CAPTION>
                                               OPTIONS OUTSTANDING                                  OPTIONS EXERCISABLE
                            --------------------------------------------------------       -----------------------------------

                                NUMBER              REMAINING            WEIGHTED-              NUMBER             WEIGHTED-
  RANGE OF EXERCISE          OUTSTANDING           CONTRACTUAL            AVERAGE            OUTSTANDING            AVERAGE
        PRICES              (IN MILLIONS)         LIFE (YEARS)        EXERCISE PRICE        (IN MILLIONS)       EXERCISE PRICE
----------------------      -------------         ------------        --------------        -------------       --------------   

<S>                                    <C>                <C>            <C>                         <C>          <C>       
$         0.01 -  9.95                 14                 4.5            $     6.28                  12           $     6.33
          9.96 - 19.90                 33                 5.8                 14.66                  24                14.40
         19.91 - 29.85                 54                 7.2                 25.47                  36                25.23
         29.86 - 39.80                 47                 8.6                 33.04                   1                36.12
         39.81 - 48.75                 15                 9.3                 40.39                   -                41.52
                         ----------------                                                   -----------           
                                      163                                                            73
                         ================                                                   ===========           
</TABLE>


In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 requires disclosure of the compensation cost for
stock-based incentives granted after January 1, 1995 based on the fair value at
grant date for awards. Applying SFAS No. 123 would result in pro forma net
income (loss) and earnings (loss) per share ("EPS") amounts as follows (in
millions, except share data):


<TABLE>
<CAPTION>
                                                                                  1998           1997          1996
                                                                                  ----           ----          ----

<S>                                                           <C>             <C>            <C>          <C>           
Net income (loss) before extraordinary items                  As reported     $     (2,571)  $        221 $      (2,234)
                                                               Pro forma            (2,681)           166        (2,251)
Basic EPS                                                     As reported            (2.02)          0.23         (5.02)
                                                               Pro forma             (2.10)          0.17         (5.06)
Diluted EPS                                                   As reported            (2.02)          0.22         (5.02)
                                                               Pro forma             (2.10)          0.17         (5.06)
</TABLE>

The fair value of each option or restricted stock grant is estimated on the date
of grant using an option-pricing model with the following weighted-average
assumptions used for grant:


<TABLE>
<CAPTION>
                                                                                       WEIGHTED-
                                               EXPECTED             RISK-FREE       AVERAGE GRANT-
                         DATE GRANTED         VOLATILITY          INTEREST RATE     DATE FAIR VALUE
                         ------------         ----------          -------------     ---------------

<S>                              <C>               <C>                     <C>         <C>         
                                 1996              21.6%                   5.4%        $       5.62
                                 1997              22.8%                   6.4%        $       7.99
                                 1998              23.7%                   5.6%        $      10.07
</TABLE>
                                                                      
Additionally, for all options, a 15% forfeiture rate was assumed with an
expected life of 5 years and no dividend yield.

Because the SFAS No. 123 method of accounting has been applied only to grants
after December 31, 1994, the resulting pro forma compensation cost may not be
representative of that to be expected in future periods.



                                      F-31
<PAGE>   88



401(K) PLANS:

The Company and its subsidiaries offer its qualified employees the opportunity
to participate in one of its defined contribution retirement plans qualifying
under the provisions of Section 401(k) of the Internal Revenue Code. Each
employee may contribute on a tax deferred basis a portion of annual earnings not
to exceed $10,000. The Company matches individual employee contributions in
certain plans, up to a maximum level which in no case exceeds 6% of the
employee's compensation. Expenses recorded by the Company relating to its 401(k)
plans were $26 million, $7 million, and $6 million for the years ended December
31, 1998, 1997 and 1996, respectively.

(12)    PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS-

As a result of the MCI Merger, MCI WorldCom has a noncontributory defined
benefit pension plan (the "MCI Plan") and a supplemental pension plan (the
"Supplemental Plan") and Western Union International, Inc. ("WUI"), a subsidiary
of MCI, has a defined benefit pension plan (the "WUI Plan"). Collectively, these
plans cover substantially all MCI employees who became MCI WorldCom employees as
a result of the MCI Merger and who work 1,000 hours or more in a year. Effective
January 1, 1999, no future compensation credits will be earned by participants
of the MCI Plan.

Annual service cost is determined using the Projected Unit Credit actuarial
method, and prior service cost is amortized on a straight-line basis over the
average remaining service period of employees. The MCI Plan accumulated benefit
obligation exceeds the fair value of assets by $27 million. There is no
additional minimum pension liability required to be recognized.

Additionally, Embratel sponsors a contributory defined benefit pension plan and
a post-retirement benefit plan. Approximately 97% of Embratel's employees are
covered by these plans. The defined benefit pension plan has an accumulated
benefit obligation in excess of fair value of assets of $340 million at December
31, 1998. There is no additional minimum pension liability to be recognized.

Embratel health care cost trend rates of increase were projected at annual rates
excluding inflation ranging from 6.48% in 1998 to 2.00% in 2047. The effect of a
one percentage point increase in the assumed health care cost trend rates would
increase the Embratel accumulated post-retirement benefit obligation at December
31, 1998 by $63 million and the aggregate service and interest cost components
by $7 million on an annual basis. The effect of a one percentage point decrease
in the assumed health care cost trend rate would reduce the accumulated
post-retirement benefit obligation by $51 million and reduce the total service
and interest cost component by $6 million.

The following table sets forth information for the MCI pension plans and
Embratel defined benefit pension and post-retirement plans' assets and
obligations (in millions):



                                      F-32
<PAGE>   89




<TABLE>
<CAPTION>
                                                                             EMBRATEL PLANS
                                                                      -----------------------------

                                                       MCI
                                                     PENSION           PENSION             OTHER
                                                      PLANS            BENEFITS           BENEFITS
                                                   ----------         ----------         ----------

<S>                                                <C>                <C>                <C>       
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at January 1, 1998              $      563         $    1,231         $      265
Service cost                                               54                 47                 10
Interest cost                                              39                 67                 16
Actuarial (gain) loss                                      39                (80)                11
Benefits paid                                             (39)               (39)                (3)
Foreign currency exchange                                  --                (24)                (5)
Assumption change                                         (74)              (178)                --
Curtailment/settlement                                     --               (567)              (162)
                                                   ----------         ----------         ----------
Benefit obligation at December 31, 1998            $      582         $      457         $      132
                                                   ==========         ==========         ==========

CHANGE IN PLAN ASSETS
Fair value at January 1, 1998                      $      494         $      550         $       29
Actual return on plan assets                               63                (14)                 7
Employer contributions                                     63                 40                 71
Employee contributions                                     --                 30                 --
Foreign currency exchange                                  --                (12)                --
Benefits paid                                             (39)               (39)                (3)
Effect of settlement                                       --               (403)               (65)
                                                   ----------         ----------         ----------
Fair value of assets at December 31, 1998          $      581         $      152         $       39
                                                   ==========         ==========         ==========


Funded status                                      $       (1)        $     (305)        $      (93)
Unrecognized net actuarial gain                           (83)              (123)                44
Unrecognized prior service cost                             1                 --                 --
Unrecognized transition liability                          --                  5                 --
                                                   ----------         ----------         ----------
Accrued benefit cost                               $      (83)        $     (423)        $      (49)
                                                   ==========         ==========         ==========

WEIGHTED AVERAGE ACTUARIAL ASSUMPTIONS:
Discount rate                                            6.50%              6.00%              6.00%
Expected return on plan assets                           9.00%              9.00%              9.00%
Rate of compensation increase                            5.75%              3.25%               N/A
</TABLE>

The components of the Embratel net post-retirement benefit and pension costs for
the year ended December 31, 1998 (in millions):



                                      F-33
<PAGE>   90




<TABLE>
<CAPTION>
                                                                       PENSION           OTHER
                                                                       BENEFITS        BENEFITS
                                                                     -----------      ----------

<S>                                                                  <C>              <C>     
Service cost                                                         $       4        $      2
Interest cost on accumulated postretirement  benefit                                 
    obligation                                                              17               4
Expected return on plan assets                                             (13)             (1)
Amortization of transition obligation                                        7              --
Amortization of net loss (gain)                                             (1)               1
                                                                     ---------        --------
Net periodic post-retirement benefit cost                            $      14        $      6
                                                                     =========        ========
</TABLE>

Embratel has created a new defined contribution plan (the "New Plan") which has
been approved by the Brazilian government. Effective November 19, 1998, all
newly hired employees of Embratel automatically enter the New Plan and entry
into the existing Embratel pension and post-retirement plans has been frozen.
Current Embratel employees were given the option to migrate from the existing
defined benefit pension and post-retirement benefit plans to the New Plan. The
option expired on December 31, 1998 and is effective on January 1, 1999. The New
Plan will provide an employer match on employee contributions based on certain
limits, transfer of the defined benefit account balance, employee directed
investment, and a lump sum payment from the post-retirement plan, which can be
used to assist with medical coverage in the future. Any employees not electing
to migrate to the New Plan will remain in the existing plans and will not have a
future opportunity to move to the New Plan.

(13)     INCOME TAXES -

The provision for income taxes is composed of the following (in millions):


<TABLE>
<CAPTION>
                                                                         1998            1997             1996
                                                                       ---------       --------         -------

<S>                                                                    <C>             <C>              <C>    
Current                                                                $      89       $     48         $    71
Deferred                                                                     787            368              59
                                                                       ---------       --------         -------
Total provision for income taxes                                       $     876       $    416         $   130
                                                                       =========       ========         =======
</TABLE>


The following is a reconciliation of the provision for income taxes to the
expected amounts using the statutory rate:



                                      F-34
<PAGE>   91




<TABLE>
<CAPTION>
                                                                 1998            1997           1996
                                                               -------         -------        -------

<S>                                                              <C>              <C>           <C>    
Expected statutory amount                                        (35.0)%          35.0%         (35.0)%
Nondeductible amortization of excess of cost over net
tangible assets acquired                                          11.3            14.8            1.0
State income taxes                                                (2.6)            2.4            0.4
Charge for in-process research and development                    84.5              --           35.6
Write-down of assets                                                --              --            4.1
Valuation allowance                                                 --             7.1           (1.0)
Other                                                             (2.4)            3.4            1.1
                                                               -------         -------        -------
Actual tax provision                                              55.8%         62.7 %            6.2%
                                                               =======         =======        =======
</TABLE>


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
net operating loss carryforwards.

At December 31, 1998, the Company had unused net operating loss ("NOL")
carryforwards for federal income tax purposes of approximately $3.5 billion
which expire in various amounts during the years 2002 through 2012. These NOL
carryforwards together with state and other NOL carryforwards result in a
deferred tax asset of approximately $1.32 billion at December 31, 1998. A
valuation allowance of $109 million has been established related to deferred tax
assets due to the uncertainty of realizing the full benefit of the NOL
carryforwards. In evaluating the amount of valuation allowance needed, the
Company considers the acquired companies' prior operating results and future
plans and expectations. The utilization period of the NOL carryforwards and the
turnaround period of other temporary differences are also considered.

Approximately $544 million of the Company's deferred tax assets are related to
preacquisition NOL carryforwards attributable to entities acquired in
transactions accounted for as purchases. Accordingly, any future reductions in
the valuation allowance related to such deferred tax assets will result in a
corresponding reduction in goodwill. If, however, subsequent events or
conditions dictate an increase in the valuation allowance attributable to such
deferred tax assets, income tax expense for the period of the increase will be
increased accordingly.

The following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of December 31, 1998 and 1997 (in
millions):



                                      F-35
<PAGE>   92




<TABLE>
<CAPTION>
                                                      1998                                 1997
                                          ----------------------------        ----------------------------      

                                            ASSETS         LIABILITIES          ASSETS         LIABILITIES
                                            ------         -----------          ------         -----------
                                                                                                            
<S>                                       <C>               <C>               <C>               <C>       
Allowance for bad debts                   $       89        $       --        $       12        $       --
Fixed assets                                      --            (2,448)               --              (143)
Goodwill and other intangibles                    --               (92)               --              (278)
Software                                          --              (116)               --               (64)
Investments                                       91                --                --               (23)
Line installation costs                           --              (277)               --               (40)
Accrued liabilities                              921                --               267                --
NOL carryforwards                              1,321                --               689                --
Minimum tax credits                              102                --                --                --
Research and development credits                  40                --                --                --
Stock options                                     --                --               146                --
Other                                             68               (27)               11               (36)
                                          ----------        ----------        ----------        ----------
                                               2,632            (2,960)            1,125              (584)
Valuation allowance                             (109)               --              (195)               --
                                          ----------        ----------        ----------        ----------
                                          $    2,523        $   (2,960)       $      930        $     (584)
                                          ==========        ==========        ==========        ==========
</TABLE>


(14) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -

Interest paid by the Company during the years ended December 31, 1998, 1997 and
1996 amounted to $496 million, $265 million and $236 million, respectively.
Income taxes paid, net of refunds, during the years ended December 31, 1998,
1997 and 1996 were $38 million, $14 million and $6 million, respectively.

In conjunction with business combinations during the years ended December 31,
1998, 1997 and 1996, assets acquired, liabilities assumed and common stock
issued were as follows (in millions):

<TABLE>
<CAPTION>
                                                  1998               1997               1996
                                              ------------       ------------       ------------

<S>                                           <C>                <C>                <C>         
Fair value of assets acquired                 $     21,913       $        309       $      3,284
Goodwill and other intangible assets                37,104                998              9,207
Liabilities assumed                                (22,476)                (4)            (2,011)
Common stock issued                                (33,141)              (159)           (10,592)
                                              ------------       ------------       ------------
Net cash paid                                 $      3,400       $      1,144       $       (112)
                                              ============       ============       ============
</TABLE>


(15)              SEGMENT AND GEOGRAPHIC INFORMATION-

The Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information," as of December 31, 1998. SFAS No. 131 establishes
annual and interim reporting standards for an enterprise's operating segment and
related disclosures about is products, services, geographic areas and major
customers.

Based on its organizational structure, the Company operates in five reportable
segments: MCI WorldCom Communications, MCI WorldCom International Operations,
Embratel, Operations and technology and Other. The Company's reportable segments
represent business units that primarily offer similar products and services;
however, the business units are managed separately due to the geographic
dispersion of their operations. MCI WorldCom Communications provides voice, data
and other types of domestic communications services including 




                                      F-36
<PAGE>   93

Internet services. MCI WorldCom International Operations provides voice, data,
Internet and other similar types of communications services to customers
primarily in Europe. Embratel provides communications services in Brazil.
Operations and technology includes network operations, information services,
engineering and technology, and customer service. Other includes primarily the
operations of SHL and other non-communications services.

The Company's chief operating decision maker utilizes revenue information in
assessing performance and making overall operating decisions and resource
allocations. Communications services are generally provided utilizing the
Company's fiber optic networks, which do not make a distinction between the
types of services. As a result, the Company does not allocate line costs or
assets by segment. Profit and loss information is reported only on a
consolidated basis to the chief operating decision maker and the Company's board
of directors.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Information about the Company's
segments is as follows:


<TABLE>
<CAPTION>
                                 REVENUES FROM EXTERNAL CUSTOMERS          CAPITAL EXPENDITURES
                                ----------------------------------  ----------------------------------
                                   1998        1997        1996        1998        1997        1996
                                ----------  ----------  ----------  ----------  ----------  ----------

<S>                             <C>         <C>         <C>         <C>         <C>         <C>       
MCI WorldCom Communications     $   14,792  $    6,246  $    4,023  $       --  $       --  $       --
MCI WorldCom International
   Operations                        1,130         726         225          --          --          --
Operations and technology               --          --          --       4,740       2,995         827
Other                                  574         412         201          28          34          20
Corporate                               --          --          --         316          37          28
                                ----------  ----------  ----------  ----------  ----------  ----------
   Total before Embratel            16,496       7,384       4,449       5,084       3,066         875
Embratel                             1,182          --          --         334          --          --
                                ----------  ----------  ----------  ----------  ----------  ----------
   Total                        $   17,678  $    7,384  $    4,449  $    5,418  $    3,066  $      875
                                ==========  ==========  ==========  ==========  ==========  ==========
</TABLE>


The following is a reconciliation of the segment information to income (loss)
before income taxes, minority interests and extraordinary items:

<TABLE>
<CAPTION>
                                                                      1998                 1997               1996
                                                                -----------------      -------------      ------------   

<S>                                                             <C>                    <C>                <C>         
Revenues                                                        $          17,678      $       7,384      $      4,449
Operating expenses                                                         18,653              6,366             6,324
                                                                -----------------      -------------      ------------   
Operating income (loss)                                                      (975)             1,018            (1,875)
Other income (expense):                                                                                     
   Interest expense                                                          (637)              (395)             (253)
   Miscellaneous                                                               41                 40                25
                                                                -----------------      -------------      ------------   
Income (loss) before income taxes,                                                                          
   minority interests and extraordinary items                   $          (1,571)     $         663      $     (2,103)
                                                                =================      =============      ============   
</TABLE>



Information about the Company's operations by geographic areas are as follows
(in millions):



                                      F-37
<PAGE>   94




<TABLE>
<CAPTION>
                                           1998                             1997                               1996
                             ------------------------------     ----------------------------      -------------------------------
                                                LONG-LIVED                      LONG-LIVED                          LONG-LIVED
                               REVENUES           ASSETS         REVENUES         ASSETS          REVENUES             ASSETS
                             -------------     ------------     -----------     ------------      ----------      ---------------

<S>                          <C>               <C>              <C>             <C>               <C>             <C>            
United States                $      14,766     $     17,747     $     6,534     $      6,030      $    4,166      $         3,893
Brazil                               1,182            5,049              --               --              --                   --
All other international              1,730            1,511             850              684             283                  294
                             -------------     ------------     -----------     ------------      ----------      ---------------
Total                        $      17,678     $     24,307     $     7,384     $      6,714      $    4,449      $         4,187
                             =============     ============     ===========     ============      ==========      ===============
</TABLE>


(16)    UNAUDITED QUARTERLY FINANCIAL DATA -


<TABLE>
<CAPTION>
                                                                      QUARTER ENDED
                               -----------------------------------------------------------------------------------------
                                   MARCH 31,                JUNE 30,              SEPTEMBER 30,           DECEMBER 31,
                                   ---------                --------              -------------           ------------
                               1998         1997       1998         1997       1998         1997        1998        1997
                               ----         ----       ----         ----       ----         ----        ----        ----
                                                            (in millions, except per share data)

<S>                         <C>          <C>         <C>         <C>         <C>          <C>         <C>         <C>    
Revenues                    $ 2,322      $ 1,678     $ 2,581     $ 1,776     $ 3,758      $ 1,911     $ 9,017     $ 2,019
Operating income (loss)         (71)         156         495         219      (2,632)         288       1,233         355
Net income (loss) before
   extraordinary items         (281)          25         228          44      (2,944)          76         457         102
Net income (loss)              (410)          25         228          41      (2,944)          76         457         102
Preferred dividend
   requirement                    7            7           7           7           3            7          15           7
Earnings (loss) per
common  share before
extraordinary items:
  Basic                     $ (0.28)     $  0.02     $  0.21     $  0.04     $ (2.44)     $  0.07     $  0.24     $  0.10
  Diluted                     (0.28)        0.02        0.21        0.04       (2.44)        0.07        0.23        0.10
</TABLE>

In the first quarter of 1998, the Company recorded a pre-tax charge of $38
million for employee severance, alignment charges, loss contingencies and direct
merger costs associated with the BFP Merger and $31 million for write-down of a
permanently impaired asset. Additionally, in the third quarter of 1998, the
Company recorded a pre-tax charge of $127 million primarily in connection with
the MCI Merger. The third quarter charge included severance costs associated
with the termination of certain employees which was completed in the first
quarter of 1999. Also included are other exit activities which include exit
costs under long-term commitments and certain asset write-downs. In connection
with recent business combinations, the Company made allocations of the purchase
price to acquired in-process research and development totaling $429 million in
the first quarter of 1998 related to the CompuServe Merger and AOL Transaction
and $3.1 billion in the third quarter of 1998 related to the MCI Merger. See
Note 3.

In connection with certain debt refinancings, the Company recognized in the
first quarter of 1998 and the second quarter of 1997, extraordinary items of
approximately $129 million and $3 million, respectively, net of taxes,
consisting of unamortized debt discount, unamortized issuance cost and
prepayment fees.




                                      F-38
<PAGE>   95



(17)    SUBSEQUENT EVENTS -

In February 1999, the Company and EDS announced the signing of a definitive
agreement to sell MCI Systemhouse Corp. and SHL Systemhouse Co., wholly-owned
subsidiaries of the Company, to EDS for approximately $1.65 billion in cash. In
addition, both companies agreed to significant outsourcing contracts which will
capitalize on the individual strengths of each company. The definitive
agreements for the outsourcing contracts will most likely be finalized in the
second quarter of 1999. Both transactions are subject to customary closing
conditions and regulatory approvals.




                                      F-39
<PAGE>   96


                               MCI WORLDCOM, INC.
                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                                BALANCE AT   CHARGED TO      FROM        DEDUCTIONS
                               BEGINNING OF  COSTS AND     PURCHASE     AND ACCOUNTS   BALANCE AT
       DESCRIPTIONS              PERIOD       EXPENSES   TRANSACTIONS   WRITTEN OFF   END OF PERIOD
       ------------              ------       --------   ------------   -----------   -------------

<S>                                <C>           <C>           <C>           <C>           <C>     
Allowance for doubtful accounts (in millions):
Accounts Receivable
1998                               $203          $374          $581          $261          $897    
1997                                136           111            16            60           203    
1996                                 59            58            64            45           136    
</TABLE>


                                      F-40
<PAGE>   97
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit No.                        Description
-----------                        -----------

<S>      <C>          
2.1      Agreement and Plan of Merger dated as of November 9, 1997 among
         WorldCom, TC Investments Corp. and MCI Communications Corporation
         (incorporated by reference to Exhibit 2.1 to the Company's Current
         Report on Form 8-K dated November 9, 1997 (filed November 12, 1997)
         (File No. 0-11258))*

2.2      Agreement dated as of November 9, 1997 among British Telecommunications
         plc, WorldCom and MCI Communications Corporation (incorporated by
         reference to Exhibit 99.1 to the Company's Current Report on Form 8-K
         dated November 9, 1997 (filed November 12, 1997) (File No. 0-11258))*

2.3      Agreement and Plan of Merger, dated as of September 7, 1997, by and
         among H&R Block, Inc., H&R Block Group, Inc., CompuServe Corporation,
         WorldCom, and Walnut Acquisition Company, L.L.C. (incorporated herein
         by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K
         dated September 7, 1997 (File No. 0-11258))*

2.4      Purchase and Sale Agreement by and among American Online, Inc., ANS
         Communications, Inc. and WorldCom, dated as of September 7, 1997
         (incorporated herein by reference to Exhibit 2.4 to the Company's
         Current Report on Form 8-K dated September 7, 1997 (File No. 0-11258))*

2.5      Amended and Restated Agreement and Plan of Merger dated as of October
         1, 1997 by and among WorldCom, BV Acquisition, Inc. and Brooks Fiber
         Properties, Inc. (incorporated by reference to Exhibit 2.1 to
         WorldCom's Registration Statement on Form S-4 (File No. 333-43253))*

4.1      Second Amended and Restated Articles of Incorporation of MCI WORLDCOM,
         Inc. (including preferred stock designations), as amended as of
         September 15, 1998 (incorporated herein by reference to Exhibit 4.1 of
         MCI WorldCom's Post-Effective Amendment No. 1 on Form S-8 to
         Registration Statement on Form S-4, No. 333-36901 (filed September 14,
         1998))

4.2      Restated Bylaws of MCI WORLDCOM, Inc. (incorporated by reference to
         Exhibit 3.2 to the Company's Current Report on Form 8-K dated September
         14, 1998) (filed September 29, 1998)) (File No. 0-11258)

4.3      Form of 6.125% Notes Due 2001 (incorporated herein by reference to
         Exhibit 4.1 to the Company's Current Report on Form 8-K dated August 6,
         1998 (filed August 7, 1998) (File No. 0-11258))

4.4      Form of 6.250% Notes Due 2003 (incorporated herein by reference to
         Exhibit 4.2 to the Company's Current Report on Form 8-K dated August 6,
         1998 (filed August 7, 1998) (File No. 0-11258))

4.5      Form of 6.400% Notes Due 2005 (incorporated herein by reference to
         Exhibit 4.3 to the Company's Current Report on Form 8-K dated August 6,
         1998 (filed August 7, 1998) (File No. 0-11258))
</TABLE>


                                      E-1
<PAGE>   98

<TABLE>
<S>      <C>          
4.6      Form of 6.950% Notes Due 2028 (incorporated herein by reference to
         Exhibit 4.4 to the Company's Current Report on Form 8-K dated August 6,
         1998 (filed August 7, 1998) (File No. 0-11258))

4.7      Senior Indenture dated March 1, 1997 by and between WorldCom and The
         Chase Manhattan Bank, as successor trustee to Mellon Bank N.A.
         (incorporated herein by reference to Exhibit 4.6 to the Company's
         Quarterly Report on Form 10-Q for the period ended March 31, 1997 (File
         No. 0-11258))

4.8      Supplemental Indenture No. 3 to the Junior Subordinated Indenture dated
         as of November 12, 1998, among MCI WORLDCOM, Inc., MCI Communications
         Corporation and Wilmington Trust Company (incorporated herein by
         reference to Exhibit 4.8 to the Company's Quarterly Report on Form 10-Q
         for the period ended September 30, 1998 (File No. 0-11258))

4.9      Supplement No. 1 to the Guarantee Agreement dated as of November 12,
         1998 among MCI WORLDCOM, Inc., MCI Communications Corporation and
         Wilmington Trust Company(incorporated herein by reference to Exhibit
         4.9 to the Company's Quarterly Report on Form 10-Q for the period ended
         September 30, 1998 (File No. 0-11258))

4.10     Trust Agreement Guarantee dated as of November 12, 1998, among
         Wilmington Trust Company, the administrative trustee thereto, MCI
         Communications Corporation and MCI WORLDCOM, Inc. (incorporated herein
         by reference to Exhibit 4.10 to the Company's Quarterly Report on Form
         10-Q for the period ended September 30, 1998 (File No. 0- 11258))

4.11     Expense Agreement Guarantee dated as of November 12, 1998, between MCI
         WORLDCOM, Inc. and MCI Capital I, a Delaware business trust
         (incorporated herein by reference to Exhibit 4.11 to the Company's
         Quarterly Report on Form 10-Q for the period ended September 30, 1998
         (File No. 0-11258))

4.12     Junior Subordinated Indenture between MCI Communications Corporation
         and Wilmington Trust Company, as Debenture Trustee, (incorporated by
         reference to Exhibit 4.01 of MCI's Registration Statement on Form S-3,
         Registration No. 333-02693)

4.13     Form of Amended and Restated Trust Agreement among MCI Communications
         Corporation, Wilmington Trust Company and the Administrative Trustees
         named therein (incorporated by reference to Exhibit 4.10 of MCI's
         Registration Statement on Form S-3, Registration No. 333-02593)

4.14     Form of Guarantee Agreement between MCI Communications Corporation and
         Wilmington Trust Company, (incorporated by reference to Exhibit 4.12 of
         MCI's Registration Statement on Form S-3, Registration No. 333-02593)

4.15     Form of Supplemental Indenture between MCI Communications Corporation
         and Wilmington Trust Company, (incorporated by reference to Exhibit
         4.13 of MCI's Registration Statement on Form S-3, Registration No.
         333-02593)
</TABLE>

                                       E-2

<PAGE>   99




**

<TABLE>
<S>      <C>          
10.1     Amended and Restated Facility A Revolving Credit Agreement among
         WorldCom, NationsBank, N.A., NationsBanc Montgomery Securities LLC,
         Bank of America NT & SA, Barclays Bank PLC, The Chase Manhattan Bank,
         Citibank, N.A., Morgan Guaranty Trust Company of New York, and Royal
         Bank of Canada and the lenders named therein dated as of August 6, 1998
         (incorporated herein by reference to Exhibit 10.1 to the Company's
         Current Report on Form 8-K dated August 6, 1998 (filed August 7, 1998)
         (File No. 0-011258))

10.2     364-Day Revolving Credit and Term Loan Agreement among WorldCom,
         NationsBank, N.A., NationsBank Montgomery Securities LLC, Bank of
         America NT & SA, Barclays Bank PLC, The Chase Manhattan Bank, Citibank,
         N.A., Morgan Guaranty Trust Company of New York, and Royal Bank of
         Canada and the lenders named therein dated as of August 6, 1998
         (incorporated herein by reference to Exhibit 10.3 to the Company's
         Current Report on Form 8-K dated August 6, 1998 (filed August 7, 1998)
         (File No. 0-11258))

10.3     WorldCom, Inc. Third Amended and Restated 1990 Stock Option Plan
         (incorporated herein by reference to Exhibit A to the Company's Proxy
         Statement dated April 22, 1996 (File No. 0-11258)) (compensatory plan)

10.4     LDDS Communications, Inc. 1988 Nonqualified Stock Option Plan
         (incorporated herein by reference to the exhibits to LDDS-TN's
         Registration Statement on Form S-4 (File No. 33-29051) (compensatory
         plan)

10.5     LDDS Annual Performance Bonus Plan (incorporated by reference to the
         Company's Proxy Statement used in connection with the Company's 1994
         Annual Meeting of Shareholders (File No. 1-10415)) (compensatory plan)

10.6     WorldCom, Inc. Special Performance Bonus Plan (incorporated herein by
         reference to Exhibit B to the Company's Proxy Statement dated April 22,
         1996 used in connection with the Company's 1996 Annual Meeting of the
         Shareholders (File No. 0-11258)) (compensatory plan)

10.7     WorldCom, Inc. Performance Bonus Plan (incorporated herein by reference
         to Exhibit A to the Company's Proxy Statement dated April 21, 1997
         (File No. 0-11258)) (compensatory plan)

10.8     WorldCom/MFS/UUNET 1995 Performance Option Plan (incorporated herein by
         reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K
         for the period ended December 31, 1996 (File No. 0-11258))
         (compensatory plan)
</TABLE>



                                       E-3

<PAGE>   100



<TABLE>
<S>      <C>          
10.9     WorldCom/MFS/UUNET Equity Incentive Plan (incorporated herein by
         reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K
         for the period ended December 31, 1996 (File No. 0-11258))
         (compensatory plan)

10.10    WorldCom/MFS/UUNET Incentive Stock Plan (incorporated herein by
         reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K
         for the period ended December 31, 1996 (File No. 0-11258))
         (compensatory plan)

10.11    MCI 1979 Stock Option Plan as amended and restated (incorporated by
         reference to Exhibit 10(a) to MCI's Annual Report on Form 10-K for the
         fiscal year ended December 31, 1988 (File No. 0-6457)) (compensatory
         plan)***

10.12    Supplemental Retirement Plan for Employees of MCI Communications
         Corporation and Subsidiaries, as amended (incorporated by reference to
         Exhibit 10(b) to MCI's Annual Report on Form 10-K for the fiscal year
         ended December 31, 1993 (File No. 0-6457)) (compensatory plan) ***

10.13    Description of Executive Life Insurance Plan for MCI Communications
         Corporation and Subsidiaries (incorporated by reference to
         "Renumeration of Officers" in MCI's Proxy Statement for its 1992 Annual
         Meeting of Stockholders (File No. 0-6457)) (compensatory plan)***

10.14    MCI Communications Corporation Executive Incentive Compensation Plan
         (incorporated by reference to Exhibit 10(e) to MCI's Annual Report on
         Form 10-K for the fiscal year ended December 31, 1995 (File No.
         0-6457)) (compensatory plan)***

10.15    Amendment No. 1 to MCI Communications Corporation Executive Incentive
         Compensation Plan (incorporated by reference to Exhibit 10(e) to MCI's
         Annual Report on Form 10-K for the fiscal year ended December 31, 1996
         (File No. 0-6457)) (compensatory plan)***

10.16    1988 Directors' Stock Option Plan of MCI (incorporated by reference to
         Exhibit D to MCI's Proxy Statement for its 1989 Annual Meeting of
         Stockholders (File No. 0-6457)) (compensatory plan)***

10.17    Amendment No. 1 to the 1988 Directors' Stock Option Plan of MCI
         (incorporated by reference to Appendix D to MCI's Proxy Statement for
         its 1996 Annual Meeting of Stockholders (File No. 0-6457))
         (compensatory plan)***

10.18    Amendment No. 2 to 1988 Directors' Stock Option Plan of MCI
         (incorporated by reference to Exhibit 10(i) to MCI's Annual Report on
         Form 10-K for the fiscal year ended December 31, 1996) (File No.
         0-6457)) (compensatory plan)***

10.19    Amendment No. 3 to 1988 Directors' Stock Option Plan of MCI
         (incorporated by reference to Exhibit 10(j) to MCI's Annual Report on
         Form 10-K for the fiscal year ended December 31, 1996 (File No.
         0-6457)) (compensatory plan)***
</TABLE>



                                       E-4

<PAGE>   101



<TABLE>
<S>      <C>          
10.20    Stock Option Plan of MCI (incorporated by reference to Exhibit C to
         MCI's Proxy Statement for its 1989 Annual Meeting of Stockholders (File
         No. 0-6457)) (compensatory plan)***

10.21    Amendment No. 1 to the Stock Option Plan of MCI (incorporated by
         reference to Exhibit 10(l) to MCI's Annual Report on Form 10-K for the
         fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory
         plan)***

10.22    Amendment No. 2 to the Stock Option Plan of MCI (incorporated by
         reference to Appendix B to MCI"s Proxy Statement for its 1996 Annual
         Meeting of Stockholders (File No. 0- 6457)) (compensatory plan)***

10.23    Amendment No. 3 to the Stock Option Plan of MCI (incorporated by
         reference to Exhibit 10(n) to MCI's Annual Report on Form 10-K for the
         fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory
         plan)***

10.24    Amendment No. 4 to the Stock Option Plan of MCI (incorporated by
         reference to Exhibit 10(o) to MCI's Annual Report on Form 10-K for the
         fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory
         plan)***

10.25    Amendment No. 5 to the Stock Option Plan of MCI (incorporated by
         reference to Exhibit 10(p) to MCI's Annual Report on Form 10-K for the
         fiscal year ended December 31, 1996 (File No. 0-6457)) (compensatory
         plan)***

10.26    Board of Directors Deferred Compensation Plan of MCI (incorporated by
         reference to Exhibit 10(i) to MCI's Annual Report on Form 10-K for the
         fiscal year ended December 31, 1994 (File No. 0-6457)) (compensatory
         plan)

10.27    The Senior Executive Incentive Compensation Plan of MCI (incorporated
         by reference to Appendix A to MCI's Proxy Statement for its 1996 Annual
         Meeting of Stockholders (File No. 0-6457)) (compensatory plan)

10.28    Amendment No. 1 to the Senior Executive Incentive Compensation Plan of
         MCI (incorporated by reference to Exhibit 10(s) to MCI's Annual Report
         on Form 10-K for the fiscal year ended December 31, 1996 (File No.
         0-6457)) (compensatory plan)

10.29    Executive Severance Policy (incorporated by reference to Exhibit 10(a)
         to MCI's Quarterly Report on Form 10-Q for the quarter ended September
         30, 1996 (File No. 0-6457) (compensatory plan)

10.30    Form of employment agreement, effective as of November 2, 1996, between
         MCI and Messrs. Bert C. Roberts, Timothy F. Price and Gerald H. Taylor
         (incorporated by reference to Exhibit 10(u) to MCI' s Annual Report on
         Form 10-K for the fiscal year ended December 31, 1996 (File No.
         0-6457)) (compensatory plan)
</TABLE>



                                       E-5

<PAGE>   102


<TABLE>
<S>      <C>          
10.31    Employment Agreement between UUNET and John W. Sidgmore dated May 13,
         1994 (incorporated herein by reference to UUNET's Registration on Form
         S-1 (Registration No. 33-91028)) (compensatory plan)

10.32    Amendment to employment agreement dated September 16, 1998 between MCI
         WorldCom and Gerald H. Taylor.

10.33    Change of Control Severance Agreement effective April 8, 1997 between
         Brooks Fiber Properties, Inc. ("BFP") and James C. Allen (incorporated
         herein by reference from Exhibit 10.1 to BFP's Quarterly Report on Form
         10-Q for the quarterly period ended June 30, 1997 (File No. 0-28036))
         (compensatory plan)

21.1     Subsidiaries of the Company

23.1     Consent of Arthur Andersen LLP

23.2     Consent of KPMG LLP

27.1     Financial Data Schedule
</TABLE>

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

*    The registrant hereby agrees to furnish supplementally a copy of any
     omitted schedules to this Agreement to the Securities and Exchange
     Commission upon request.

**   No other long-term debt instruments are filed since the total amount of
     securities authorized under any such instrument does not exceed ten percent
     of the total assets of the Company and its subsidiaries on a consolidated
     basis. The Company agrees to furnish a copy of such instruments to the
     Securities and Exchange Commission upon request.

***  Pursuant to this plan, the common stock of the Company was substituted for
     common stock of MCI.











                                       E-6