SELECTED CONSOLIDATED FINANCIAL DATA

Dollars in thousands, except per share data

The Company's development and acquisition of its networks and services during
the periods reflected below materially affect the comparability of financial
data from one period to another. The following selected consolidated financial
data should be read in conjunction with the Consolidated Financial Statements
and the notes thereto, and Management's Discussion and Analysis of Financial
Condition and Results of Operations.

<TABLE>
<CAPTION>
                                                      1996         1995         1994        1993(1)
                                                   ----------   ----------   ----------   -----------
<S>                                                <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA:

Revenue:                                              $45,574      $14,160       $2,809            $2

Costs and expenses:
     Service costs                                     21,468        7,177        1,557            --
     Selling, general and administrative expenses      38,596       11,405        3,966           206
     Depreciation and amortization                     16,296        4,118          663             3
                                                   ----------   ----------   ----------   -----------
Total                                                  76,360       22,700        6,186           209
                                                   ----------   ----------   ----------   -----------
Loss from operations                                  (30,786)      (8,540)      (3,377)         (207)
Other income (expense), net                           (14,647)      (2,096)        (598)            2
                                                   ----------   ----------   ----------   -----------
Loss before minority interest                         (45,433)     (10,636)      (3,975)         (205)
Minority interest                                       1,590        1,085           78            --
                                                   ----------   ----------   ----------   -----------
Net loss                                             $(43,843)     $(9,551)     $(3,897)        $(205)
                                                   ==========   ==========   ==========   ===========
Loss per share (2)                                     $(1.71)      $(0.49)
                                                   ==========   ==========
Number of shares (2)                               25,627,328   19,523,584
                                                   ==========   ==========

BALANCE SHEET AND OTHER DATA:

EBITDA (3)                                           $(14,490)     $(4,422)     $(2,714)        $(204)
Capital expenditures                                  217,230       27,577        6,693            --
Acquisitions of businesses, net of cash acquired        4,290       13,941       35,669            --
Networks and equipment                                306,455       53,172       21,093            --
Total assets                                          879,581      146,610       71,325         5,000
Long-term obligations, less current maturities        552,810       43,977       29,403            --
Shareholders' equity                                  266,634       93,455       36,699         4,846

---------------
<FN>
(1) For statement of operations data, reflects the period from inception
    (November 10, 1993) to December 31, 1993.

(2) See Note 2 to the Consolidated Financial Statements, which describes the
    calculation of loss per share.

(3) EBITDA consists of earnings (loss) before interest, income taxes,
    depreciation, amortization and minority interests. EBITDA is commonly used
    in the communications industry to analyze companies on the basis of
    operation performance, leverage and liquidity.EBITDA is not intended to
    represent cash flows for the periods. See the Consolidated State of Cash
    Flows.
</TABLE>

                                       4
<PAGE>

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

     The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto included
herewith.

OVERVIEW

     The Company was founded in 1993 and has rapidly become a leading
facilities-based provider of competitive local telecommunications services in
selected markets within the United States. The Company competes with local
exchange carriers by providing high quality, integrated local telecommunications
services over fiber optic digital networks to meet the voice, data and video
transmission needs of its customers. The Company's customers are principally
inter-exchange carriers (IXCs), internet service providers (ISPs), wireless
carriers, telecommunications-intensive business, government and institutional
end users, and residential customers. The Company offers these customers
technologically advanced local telecommunications services as well as superior
customer service, flexible pricing and route diversity.

     The Company's goal is to become the primary full-service provider of
competitive local telecommunications services to its customers in selected
cities by offering superior products with excellent customer service at prices
below those charged by the ILECs. The principal elements of the Company's
strategy include targeting selected U. S. markets with an emphasis on second-
and third-tier markets, aggressively pursuing switched services opportunities,
further building out existing systems, and expanding service offerings. The
Company provides these services in an expanding number of U. S. markets. As of
February 28, 1997, the Company has networks in operation or under construction
which serve a total of 36 U. S. cities. The Company plans to expand its network
operations to have systems in operation or under construction in a total of 40
cities by the end of 1997 and 50 cities by the end of 1998. As of December 31,
1996, the Company has a total of 20 digital telephone switches installed in its
operating networks and plans to leverage its networks and customer relationships
by offering local dial tone, switched access termination and origination
services, centrex and desktop products. As of December 31, 1996, the Company
offers such services and products in substantially all of its operating networks
and expects to offer such services and products in all of its currently
operating networks by the end of the second quarter of 1997. The Company is also
expanding its capabilities to provide flexible enhanced services that complement
its switch-based services. Such enhanced services include, among others, high
speed video conferencing, frame relay and ATM-based packet transport services,
and internet access products. The Company is currently offering such services in
certain markets and expects to offer such services in all of its operating
networks by the end of 1997.

     Through December 31, 1996, the Company's growth, including its capital
expenditure requirements, acquisition financing and working capital, has been
principally funded by two senior discount note offerings during 1996, the
Company's initial public offering in May of 1996, the Company's $50 million
credit facility and two private equity offerings completed prior to 1996.

     In order to capitalize on the competitive dynamics of the changing IXC/ILEC
relationships, the Company has established close business alliances with major
IXCs, including joint ventures and preferred vendor relationships. In accordance
with this strategy, the Company and MCImetro Access Transmission Services, inc.
(MCImetro), a wholly-owned subsidiary of MCI Communications Corporation (MCI),
have entered into agreements which provide that, until September 30, 2001,

                                       5

<PAGE>

the Company will be MCImetro's preferred provider of certain local access
services in a number of the Company's markets and pursuant to which MCImetro has
acquired an investment in 958,720 shares of the Common Stock. Also, in December
1995, the Company concluded a national preferred vendor agreement with AT&T
Communications, Inc. (AT&T Communications), a wholly-owned subsidiary of AT&T
Corp. (AT&T), pursuant to which the Company has become AT&T Communications'
preferred supplier of local access services in most of the Company's markets.
During February 1997, the Company and AT&T announced the expansion of this
relationship to include several of the markets in which the Company is in the
process of acquiring or constructing networks. In addition, the Company's
relationship was further expanded in a new agreement between the Company and
AT&T whereby AT&T will begin utilizing the Company's networks to originate and
terminate the calls of AT&T customers served by the Company's networks. The
Company believes preferred vendor relationships with IXCs provide opportunities
to leverage its partners' sales channels and market support to sell the
Company's products and services and expand the Company's potential revenue base.
In addition, the Company believes that relationships with IXCs facilitate its
entry into new markets by providing access between the IXCs and their customers.

     On January 31, 1996, the Company acquired City Signal, Inc., which included
networks in operation or under construction in four cities in Michigan and Ohio,
including an installed switch in Grand Rapids, Michigan. In addition, effective
January 2, 1996, Brooks Telecommunications Corporation (BTC), a founding
stockholder of the Company and the previous owner of GLA International (GLA),
was merged into the Company. GLA, a wholly-owned subsidiary of the Company,
offers a full range of consulting, management, engineering and information
system solutions for telecommunications companies. GLA's capabilities also serve
as an internal source for the telecommunications infrastructure support needed
to facilitate the Company's network growth and penetration of the competitive
local exchange company (CLEC) business.

     In July 1996, the Company acquired ALD Communications, Inc. (ALD), a
switchless reseller of long distance services and provider of shared tenant
services in the Bay area of San Francisco and, effective in September 1996,
acquired Bittel Telecommunications Corporation (Bittel), a switch-based reseller
of long distance services in Los Angeles and the San Francisco Bay area. By
acquiring ALD and Bittel, the Company not only added businesses that compliment
its own long distance and facilities management resale operations but was also
able to increase its end-user sales force.

     In addition, the Company, during early 1997, formed a joint venture for the
construction of three networks located in Maine and New Hampshire. The Company
has also signed definitive agreements related to the acquisition of networks
located in Utah and Nevada, and certain operating rights in Idaho. This
transaction is subject to regulatory approval.

     The development of the Company's businesses and the construction,
acquisition and expansion of its networks require significant expenditures, a
substantial portion of which is incurred before the realization of revenues.
These expenditures, together with the associated early operating expenses,
result in negative cash flow until an adequate customer base may be established.
However, as this customer base grows, the Company expects incremental revenues
can be added within operating networks with minimal additional expense,
providing significant contributions to cash flow. The Company also incurs
ongoing capital expenditures with respect to both existing and new systems which
are directly related to the installation of new revenue-producing services.

                                       6
<PAGE>

RESULTS OF OPERATIONS

     The following summary provides revenue, income (loss) from operations and
EBITDA(1) of the Company for the periods indicated:

(in thousands)                                 1996          1995         1994
                                               ----          ----         ----

Revenues................................       45,574       14,160        2,809
Income (loss) from operations...........      (30,786)      (8,540)      (3,377)
EBITDA..................................      (14,490)      (4,422)      (2,714)

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

(1) EBITDA consists of net loss before minority interest, interest, income
    taxes, depreciation and amortization. It is a measure commonly used in the
    telecommunications industry and is presented to assist in understanding the
    Company's operating results. However, it is not intended to represent cash
    flow or results of operations in accordance with generally accepted
    accounting principles. See the Company's consolidated financial statements
    and notes thereto appearing elsewhere herein.


YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

     REVENUE

     The Company's revenues increased to $45.6 million for 1996 from $14.2
million during 1995, an increase of $31.4 million or 221%. Total annualized
monthly revenues increased to approximately $73.4 million based on December 1996
revenues from $15.5 million based on December 1995 revenues. The increase in
revenues reflects the impact of the Company's acquisition and development
activities, including an increase in the number of networks in operation to 23
from 11 in 1995, and increased utilization of the Company's network facilities
arising from the sales of additional services to current and new customers.
While access revenues were the most significant contributor to the Company's
revenue growth for 1996, the Company's entry into local switched services, in
Grand Rapids, Michigan during the first quarter of 1996 and in additional
markets during the fourth quarter of 1996, was also a factor. Current annualized
monthly local switched service revenues, based on December 1996 revenues, are
$17.4 million. Local switched service revenues for the year ended December 31,
1996, totaled $7.8 million.

     Network utilization as reflected in the number of on-net buildings
connected to the Company's networks increased 309% during 1996 to 883 as
compared to 216 at December 1995. The Company's penetration of buildings to
serve additional customers is further augmented by 1,238 off-net buildings
resulting in total buildings served of 2,121 at December 31, 1996. VGEs in
service increased 321% to 516,743 VGEs as of December 31, 1996, as compared with
122,617 VGEs at the end of 1995. As reflected in CLEC lines in service, network
utilization increased to 21,013 lines in service at year-end 1996, as compared
to 3,187 lines in service on January 31, 1996 in the Company's acquired Grand
Rapids operations. Network development as measured by operational networks has
increased to 23 with these networks covering 1,059 route miles at year-end 1996,
an increase of 304% from the 262 route miles in service at December 31, 1995.
Fiber miles also increased to 71,292 from the 17,111 at December 31, 1996, an
increase of 317%. In addition, the Company's aggressive switch deployment plans
have enabled the Company to deploy switches to serve 24 of the Company's markets
by year-end 1996.

                                       7
<PAGE>

     COSTS AND EXPENSES

     Service costs increased to $21.5 million or 47% of telecommunications
services revenue in 1996 from $7.2 million or 51% of telecommunications services
revenue in 1995. The increase was due primarily to the impact of the Company's
acquisition and development activities, including increasing costs associated
with the Company's rapidly growing local exchange services in Grand Rapids and
the Company's expanding long distance resale operations. Total service costs
directly related to providing local exchange services increased $5.1 million in
1996. The increase in total service costs also includes an increase of $6.8
million related to the direct operating costs of the Company's long distance
resale operations. Service costs primarily represent the portion of total
operating expenses paid to third parties for unbundled loop charges and other
local and long distance service costs, including right-of-way fees. Also
included are salaries and benefits associated with the technical operations of
the networks and other network costs.

     The Company's selling, general and administrative expenses (SG&A) for the
year ended December 31, 1996 were $38.6 million, as compared with SG&A expenses
of $11.4 million for the year ended December 31, 1995. The increase was
principally due to the increasing number and continued expansion of the
Company's networks, including added personnel costs and marketing activities
related to the introduction of switched services. There is typically a period of
higher SG&A expense and a lag time in the generation of revenues following the
acquisition and development of the Company's networks. Management expects SG&A
expenses to continue to increase in 1997 as the Company continues to expand its
networks, services and marketing activities.

     Depreciation and amortization expense increased to $16.3 million for the
year ended December 31, 1996, from $4.1 million for the year ended December 31,
1995 as a result of the continued expansion of the Company's networks and the
Company's acquisitions.

     INTEREST INCOME (EXPENSE)

     Interest expense totaling $31.2 million was recorded during the year ended
December 31, 1996, as compared to interest expense of $3.7 million for the year
ended December 31, 1995. The primary contributor to the substantial increase in
interest expense as compared to the prior year is non-cash interest expense
totaling $29.8 million primarily attributable to accretion of the Company's
senior discount notes (see Liquidity and Capital Resources) issued during 1996.
Interest of $2.0 million was capitalized for the year ended December 31, 1996,
related to network construction projects. For the years ended December 31, 1996
and 1995, interest income totaling $16.5 million and $1.6 million, respectively,
was derived from the Company's available cash and cash equivalents and
marketable securities.

     NET LOSS

     For the reasons stated above, the Company's net loss before minority
interest increased to $45.4 million in 1996, from $10.6 million in 1995.
Minority interests in net losses, representing minority investors' interests in
certain of the Company's subsidiaries, totaled $1.6 million and $1.1 million for
the years ended December 31, 1996 and 1995, respectively. As a result, the
Company's net loss for 1996 was $43.8 million as compared to a net loss of $9.6
million for 1995.

     EBITDA

     Earnings before interest, taxes, depreciation, amortization and minority
interest (EBITDA) decreased to ($14.5) million for the year ended December 31,
1996, from ($4.4) million for the year ended December 31, 1995, a decrease of
$10.1 million. The decrease reflects

                                       8
<PAGE>

the increasing service and SG&A expenses noted above resulting from the
acquisition, development and expansion of the Company's networks in order to
pursue the opportunities provided by offering the full array of local exchange
services.

     Since its inception in November 1993, the development of the Company's
business has required substantial capital investments and has resulted in
substantial net losses. The acquisition of networks, procurement of
rights-of-way and start-up costs of new networks will continue to represent a
large portion of the Company's funding requirements during the Company's
continued expansion. The Company expects to have networks operating or under
development in a total of 40 cities by the end of 1997 and in 50 cities by the
end of 1998. The costs related to the acquisition and development of new
systems, along with the varying degrees of maturity of these systems, will
materially affect the comparability of the Company's financial results from one
period to another and any assessment of the Company's operating performance.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

     REVENUE

The Company's revenues increased to $14.2 million for the year ended December
31, 1995 from $2.8 million for the year ended December 31, 1994, an increase of
407%. Annualized monthly revenues increased to approximately $15.5 million based
on the results for the month of December 1995 from $11.9 million based on
December 1994 results. These increases reflect the impact of the Company's
acquisition and development activities as well as increased utilization of the
Company's network facilities arising from the sales of additional services to
current and new customers. Network capacity as reflected in VGEs in service
increased to 122,617 VGEs as of December 31, 1995, as compared to 59,208 VGEs as
of December 31, 1994.

     COSTS AND EXPENSES

     Service costs increased to $7.2 million for the year ended December 31,
1995 from $1.6 million for the year ended December 31, 1994. Service costs as a
percentage of telecommunications services revenues declined to approximately 51%
for the year ended December 31, 1995 as compared to approximately 55% for the
year ended December 31, 1994.

     The Company's SG&A expenses for the year ended December 31, 1995 were $11.4
million, as compared with SG&A expenses of $4.0 million for the year ended
December 31, 1994. The increase was principally due to the increasing number and
continued expansion of the Company's competitive access networks and related
marketing activities.

     Depreciation and amortization expense increased to $4.1 million for the
year ended December 31, 1995, from $663,000 for the year ended December 31,
1994, as a result of the Company's acquisitions and the continued expansion of
the Company's networks.

     INTEREST INCOME (EXPENSE)

     Interest expense totaling $3.7 million was recorded during the year ended
December 31, 1995, as compared to interest expense of $693,000 for the year
ended December 31, 1994, as a result of the incurrence of secured indebtedness
to finance the acquisition and development of certain of the Company's
operations. For the year ended December 31, 1995 and 1994, interest income
totaling $1.6 million and $95,000, respectively, was derived from the Company's
available cash balances.

     NET LOSS

     For the reasons stated above, the Company's net loss before minority
interest increased to $10.6 million for the year

                                       9
<PAGE>

ended December 31, 1995, from $4.0 million for the year ended December 31, 1994.
Minority interests in net losses, representing minority investors' interests in
certain of the Company's subsidiaries, totaled $1.1 million and $78,000 for the
years ended December 31, 1995 and 1994, respectively. As a result, the Company's
net loss for 1995 was $9.6 million as compared to a net loss of $3.9 million for
1994.

     EBITDA

     EBITDA decreased to ($4.4) million for the year ended December 31, 1995,
from ($2.7) million for the year ended December 31, 1994, a decrease of $1.7
million. The decrease reflects the increasing operating and SG&A expenses noted
above resulting from the acquisition, development and expansion of the Company's
networks.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's total assets increased from $5.0 million at December 31, 1993
to $879.6 million at December 31, 1996. This growth has principally been funded
by stock offerings in 1993 and 1995, the Company's IPO during 1996, the two
offerings of Senior Discount Notes during 1996 and a secured credit facility.
The Company's current assets of $470.2 million at December 31, 1996, including
cash and cash equivalents and marketable securities of $444.2 million, exceeded
current liabilities of $34.9 million, providing working capital of $435.3
million as compared to $57.9 million at December 31, 1995. Network and equipment
totaled $306.5 million at December 31, 1996 as compared to $53.2 million at
December 31, 1995.

     The Company's operating activities used net cash of $17.3 million in the
year ended December 31, 1996, and $2.6 million in the year ended December 31,
1995. The increase in cash used by operating activities was primarily due to the
increased loss from operations incurred related to the acquisition, development,
and expansion of the Company's networks which is offset by increased
depreciation and amortization and non-cash interest expense associated with the
Company's debt facilities. The increase in cash used was also due to supporting
increased levels of accounts receivable and other current assets resulting from
an expanding customer base and increased interest receivable on the Company's
investments.

     On February 26, 1996, the Company issued $425.0 million aggregate principal
amount of 10 7/8% Senior Discount Notes due March 1, 2006, and on November 7,
1996, issued $400.0 million aggregate principal amount of 11 7/8% Senior
Discount Notes due November 1, 2006 (the "Senior Discount Notes"). The Company
received gross proceeds of approximately $475 million, and proceeds net of
underwriting fees of approximately $458 million. No cash payments of interest
are required on the senior discount notes until September 1, 2001.

     On May 2, 1996, the Company sold 7,385,331 shares of the Company's common
stock in an initial public offering ("IPO") at a price of $27.00 per share.
Gross proceeds from this offering totaled approximately $199.4 million and
proceeds net of underwriting discounts and advisory fees and expenses totaled
approximately $185.2 million.

     In connection with the City Signal acquisition, the seller has an option to
require the Company to repurchase 2,016,000 shares of the Company's common stock
issued in the City Signal acquisition at a price of $12.50 per share on or
before February 1, 1998.

     In June 1996, the Company and MCImetro entered into an agreement pursuant
to which MCImetro acquired a minority interest in the Company's Sacramento,
California network and made an additional investment in the San Jose joint
venture company. In connection with these agreements, MCImetro made additional
cash investments totaling $8.0 million. On October 10, 1996,

                                       10
<PAGE>

MCImetro exchanged this investment along with its initial investment made in
September 1995 for 958,720 shares of the Company's common stock.

     As of December 31, 1996, outstanding indebtedness under an AT&T Credit
Facility is $50.0 million. Amounts borrowed bear interest at the 90-day
commercial paper rate plus 4.0% per annum (9.46% at December 31, 1996), payable
quarterly. Terms of the AT&T Credit Facility further provide for interest-only
payments through December 31, 1997, and a six-year principal and interest payout
period thereafter. In addition, the Company has borrowed $100,000 under a $10
million Bank Credit Facility. Terms of the Bank Credit Facility provide for a
wholly-owned subsidiary of the Company to borrow up to $10 million from time to
time prior to June 30, 1997. Additional terms provide for interest-only payments
through August 31, 1997, and a 4.5 year principal and interest payout period
thereafter.

     Subsequent to December 31, 1996, the Company completed a secondary offering
of 6,723,429 shares of common stock at a price of $25.00 per share. All of these
shares were sold by existing shareholders, and the Company did not receive any
proceeds from the sale of these shares. In conjunction with the offering, the
Company granted the underwriters an over-allotment option at $25.00 per share.
This option was fully exercised by the underwriters, and an additional 1,008,514
shares were issued. Gross proceeds to the Company totaled approximately $25.2
million, and proceeds net of underwriting discounts totaled approximately $24.0
million.

     In June 1996, the Company formed a strategic alliance with Verio, Inc.,
formally known as World-Net Access, Inc., and has made a $20 million convertible
preferred stock investment for a 25.5% fully-diluted interest in Verio, and it
is possible that the Company may commit additional funds in furtherance of its
strategic alliance. Verio is a privately-held consolidator of ISPs. The Company
intends for both companies to seek ways to work together and provide
customer-oriented internet and intranet communications solutions.

     The competitive local telecommunications services business is a
capital-intensive business. The Company's operations have required and will
continue to require substantial capital investment for (i) the installation of
electronics for switched services in the Company's operating networks;
(ii) the expansion and improvement of the Company's operating systems, including
the installation of capabilities to provide other enhanced services; (iii) the
design, construction and development of additional networks; and (iv)
acquisitions as an alternative to constructing networks, adding customers or
introducing additional services. For the years ended December 31, 1996 and 1995,
the Company's capital expenditures, primarily for installation of digital
telephone switches, expansion of existing networks, and design, construction and
development of new networks, totaled $217.2 million and $27.6 million,
respectively. Cash used for acquisitions in 1996 and 1995 totaled $4.3 million
and $13.9 million, respectively.

     In response to the demand initially encountered for its services, the
Company will continue its aggressive capital deployment plans for the
development and expansion of its existing networks to allow for an increased
level of demand-driven capital spending to take full advantage of the
opportunities presented by offering a full array of local exchange services. The
Company's network development plans provide for the Company to (i) increase the
geographic reach and robustness of its networks to allow the Company to serve a
significantly higher percentage of its markets by extending its networks to
serve most, if not all, of the ILEC's central offices in its markets, and (ii)
more rapidly deploy switches with full capabilities for local dial tone and
switched access termination

                                       11
<PAGE>

and origination services. The Company estimates that it will spend $400 million
during 1997 to fund these capital needs, and such amounts may be funded from the
Company's existing cash resources.

     The Company's strategic plan calls for having systems in operation or under
development in a total of 50 cities by the end of 1998, which will require
substantial additional capital. The Company expects this expansion into
additional cities to be accomplished by the acquisition of existing networks as
well as the development of new networks. The Company will continue to evaluate
additional revenue opportunities in its existing markets and other strategic
initiatives, and as such opportunities may develop, the Company plans to make
additional capital investments in its networks that may be required to pursue
such opportunities, such as costs required to extend a network or install
additional telecommunications equipment to meet specific customer requirements.
Due to the number and variability of the factors which could affect the amount
of capital that will be required for such purposes, the Company cannot provide a
reasonable estimate of such additional capital needs. For example, the size of a
particular network to be developed or acquired and the types of electronics
installed can impact significantly the amount of capital required. Similarly,
the potential cost of acquiring additional networks is not determinable, and it
is possible that the Company could acquire existing networks using a variety of
financing alternatives. The Company expects to meet such additional capital
needs with the proceeds from existing and future credit facilities and other
borrowings and the proceeds from sales of additional equity securities and joint
ventures. However, there can be no assurance that the Company will be able to
raise or generate sufficient funds to enable it to meet its strategic
objectives. There can be no assurance that actual expenditures will not be
significantly higher or lower.

     The Company intends to preserve financial flexibility in order to react to
the rapidly evolving telecommunications marketplace and new opportunities. The
Company will continue to take advantage of favorable financing arrangements,
including the sale of debt or equity securities in the public or private
markets, to maintain this flexibility.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

     The statements contained in this report which are not historical facts are
forward-looking statements that involve risks and uncertainties. Management
wishes to caution the reader that these forward-looking statements, such as the
Company's plans to have systems in operation or under construction in a total of
50 cities by the end of 1998 and its plans to offer switched and enhanced
services in all of its markets by the end of 1997, are only predictions; actual
events or results may differ materially as a result of risks facing the Company.
Such risks include, but are not limited to, the Company's ability to
successfully market its services to current and new customers, access markets,
identify, finance and complete suitable acquisitions, design fiber optic
backbone routes, install cable and facilities, including switching electronics,
and obtain rights-of-way, building access rights and any required governmental
authorizations, franchises and permits, all in a timely manner, at reasonable
costs and on satisfactory terms and conditions, as well as favorable regulatory,
legislative and judicial developments.

                                       12
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
Brooks Fiber Properties, Inc.:

     We have audited the accompanying consolidated balance sheets of Brooks
Fiber Properties, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.


                                          KPMG Peat Marwick LLP
St. Louis, Missouri
February 12, 1997, except
for Note 14, which is as
of February 25, 1997

                                       13
<PAGE>
                         BROOKS FIBER PROPERTIES, INC.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                DECEMBER 31,    DECEMBER 31,
                                                                    1996            1995
                                                                ------------    ------------
<S>                                                             <C>             <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................    $261,880,000    $ 59,913,000
  Marketable securities, at cost, market value of
     $182,190,000...........................................    182,304,000               --
                                                                ------------    ------------
                                                                444,184,000       59,913,000
  Accounts receivable, net..................................     13,989,000        2,003,000
  Other current assets......................................     11,989,000        1,183,000
                                                                ------------    ------------
     Total current assets...................................    470,162,000       63,099,000
Networks and equipment, at cost.............................    306,455,000       53,172,000
  Less accumulated depreciation and amortization............     16,114,000        3,130,000
                                                                ------------    ------------
  Networks and equipment, net...............................    290,341,000       50,042,000
Investment in minority-owned venture........................     20,000,000               --
Other assets, net...........................................     99,078,000       33,469,000
                                                                ------------    ------------
                                                                $879,581,000    $146,610,000
                                                                ============    ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................    $ 6,511,000     $  4,397,000
  Accrued liabilities.......................................     17,915,000          789,000
  Other current liabilities.................................     10,511,000               --
                                                                ------------    ------------
     Total current liabilities..............................     34,937,000        5,186,000
                                                                ------------    ------------
Long-term debt, net of current portion......................    552,810,000       43,977,000
Minority Interests..........................................             --        3,992,000
Common stock, subject to redemption, $.01 par value,
  2,016,000 and 0 shares issued and outstanding.............     25,200,000               --
Shareholders' equity:
  Preferred stock, 1,040,012 shares authorized:
     Convertible preferred stock, Series A-1, $.01 par
       value;
       0 and 396,000 shares issued and outstanding..........             --       39,600,000
     Convertible preferred stock, Series A-2, $.01 par
       value;
       0 and 419,705 shares issued and outstanding..........             --       65,596,000
     Convertible preferred stock, Series B-1, $.01 par
       value;
       0 and 12,000 shares issued and outstanding...........             --        1,200,000
     Convertible preferred stock, Series B-2, $.01 par
       value;
       0 and 4,545 shares issued and outstanding............             --          711,000
  Common stock, $.01 par value, 50,000,000 shares
     authorized, 29,066,139 and 1,162,800 shares issued and
     outstanding............................................        291,000           12,000
  Additional paid-in capital................................    323,850,000               --
  Accumulated deficit.......................................    (57,507,000)     (13,664,000)
                                                                ------------    ------------
     Total shareholders' equity.............................    266,634,000       93,455,000
                                                                ------------    ------------
                                                                $879,581,000    $146,610,000
                                                                ============    ============
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       14
<PAGE>
                         BROOKS FIBER PROPERTIES, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                 YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994

<TABLE>
<CAPTION>
                                                       1996              1995             1994
                                                       ----              ----             ----
<S>                                                <C>               <C>               <C>
Revenues........................................   $ 45,574,000      $ 14,160,000      $ 2,809,000
Expenses:
  Service costs.................................     21,468,000         7,177,000        1,557,000
  Selling, general and administrative
     expenses...................................     38,596,000        11,405,000        3,966,000
  Depreciation and amortization.................     16,296,000         4,118,000          663,000
                                                   ------------      ------------      -----------
                                                     76,360,000        22,700,000        6,186,000
                                                   ------------      ------------      -----------
  Loss from operations..........................    (30,786,000)       (8,540,000)      (3,377,000)
Other income (expense):
  Interest income...............................     16,539,000         1,608,000           95,000
  Interest expense..............................    (31,186,000)       (3,704,000)        (693,000)
                                                   ------------      ------------      -----------
  Loss before minority interest.................    (45,433,000)      (10,636,000)      (3,975,000)
Minority interests in share of loss.............      1,590,000         1,085,000           78,000
                                                   ------------      ------------      -----------
  Net loss......................................   $(43,843,000)     $ (9,551,000)     $(3,897,000)
                                                   ============      ============      ===========
  Net loss per share............................   $      (1.71)     $      (0.49)
                                                   ============      ============
  Weighted average number of shares
     outstanding................................     25,627,328        19,523,584
                                                   ============      ============
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       15
<PAGE>
                         BROOKS FIBER PROPERTIES, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
                                               CONVERTIBLE PREFERRED STOCK                     CONVERTIBLE PREFERRED STOCK
                                    -------------------------------------------------   ------------------------------------------
                                          SERIES A-1                SERIES A-2               SERIES B-1             SERIES B-2
                                    -----------------------   -----------------------   ---------------------   ------------------
                                     SHARES       AMOUNT       SHARES       AMOUNT      SHARES      AMOUNT      SHARES    AMOUNT
                                     ------       ------       ------       ------      ------      ------      ------    ------
<S>                                 <C>        <C>            <C>        <C>            <C>       <C>           <C>      <C>
Balance, January 1, 1994...........  396,000   $ 39,600,000         --             --    12,000   $ 1,200,000      --           --
Subscriptions receivable, payments
 and reclassifications.............       --             --         --             --        --            --      --           --
Net loss...........................       --             --         --             --        --            --      --           --
                                    --------   ------------   --------   ------------   -------   -----------   ------   ---------
Balance, December 31, 1994.........  396,000     39,600,000         --             --    12,000     1,200,000      --           --
Issuance of Series A-2 preferred
 stock.............................       --             --    419,705   $ 65,596,000        --            --      --           --
Issuance of Series B-2 preferred
 stock.............................       --             --         --             --        --            --   4,545    $ 711,000
Net loss...........................       --             --         --             --        --            --      --           --
                                    --------   ------------   --------   ------------   -------   -----------   ------   ---------
Balance, December 31, 1995.........  396,000     39,600,000    419,705     65,596,000    12,000     1,200,000   4,545      711,000
Merger with BTC:
 -- issuance of common stock.......       --             --         --             --        --            --      --           --
 -- conversion of preferred stock
    to common stock................   (6,350)      (635,000)    (6,061)    (1,000,000)       --            --      --           --
Issuance of Series A-2 preferred
 stock.............................       --             --      6,060        997,000        --            --      --           --
Warrants exercised.................    9,940        109,000         --             --        --            --      --           --
Initial public offering:
 -- issuance of common stock.......       --             --         --             --        --            --      --           --
 -- common stock, subject to
    redemption, exchanged for
    common stock...................       --             --         --             --        --            --      --           --
 -- conversion of preferred stock
    to common stock................ (399,590)   (39,074,000)  (419,704)   (65,593,000)  (12,000)   (1,200,000)  (4,545)   (711,000)
Options exercised..................       --             --         --             --        --            --      --           --
Warrants exercised.................       --             --         --             --        --            --      --           --
Conversion of minority interest in
 Subsidiaries to common stock......       --             --         --             --        --            --      --           --
Net loss...........................       --             --         --             --        --            --      --           --
                                    --------   ------------   --------   ------------   -------   -----------   ------   ---------
Balance, December 31, 1996.........       --   $         --         --   $         --        --   $        --      --    $      --
                                    ========   ============   ========   ============   =======   ===========   ======   =========

<CAPTION>

                                         COMMON STOCK         ADDITIONAL                                       TOTAL
                                     ---------------------     PAID-IN      SUBSCRIPTIONS   ACCUMULATED    SHAREHOLDERS'
                                       SHARES      AMOUNT      CAPITAL       RECEIVABLE       DEFICIT         EQUITY
                                       ------      ------     ----------    -------------   -----------    -------------
<S>                                  <C>          <C>        <C>            <C>             <C>            <C>

Balance, January 1, 1994...........   1,162,800   $ 12,000   $         --   $(35,750,000)   $  (216,000)   $  4,846,000
Subscriptions receivable, payments
 and reclassifications.............          --         --             --     35,750,000             --      35,750,000
Net loss...........................          --         --             --             --     (3,897,000)     (3,897,000)

                                     ----------   --------   ------------   -------------   ------------   ------------
Balance, December 31, 1994.........   1,162,800     12,000             --             --     (4,113,000)     36,699,000
Issuance of Series A-2 preferred
 stock.............................          --         --             --             --             --      65,596,000
Issuance of Series B-2 preferred
 stock.............................          --         --             --             --             --         711,000
Net loss...........................          --         --             --             --     (9,551,000)     (9,551,000)

                                     ----------   --------   ------------   -------------   ------------   ------------
Balance, December 31, 1995.........   1,162,800     12,000             --             --    (13,664,000)     93,455,000
Merger with BTC:
 -- issuance of common stock.......     756,340      8,000      9,447,000             --             --       9,455,000
 -- conversion of preferred stock
    to common stock................     248,220      2,000      1,633,000             --             --              --
Issuance of Series A-2 preferred
 stock.............................          --         --             --             --             --         997,000
Warrants exercised.................          --         --             --             --             --         109,000
Initial public offering:
 -- issuance of common stock.......   7,385,331     74,000    185,149,000             --             --     185,223,000
 -- common stock, subject to
    redemption, exchanged for
    common stock...................     224,000      2,000      2,798,000             --             --       2,800,000
 -- conversion of preferred stock
    to common stock................  16,527,920    165,000    106,413,000             --             --              --
Options exercised..................      70,474      1,000        356,000             --             --         357,000
Warrants exercised.................   1,489,185     15,000      7,681,000             --             --       7,696,000
Conversion of minority interest in
 Subsidiaries to common stock......   1,201,869     12,000     10,373,000             --             --      10,385,000
Net loss...........................          --         --             --             --    (43,843,000)    (43,843,000)

                                     ----------   --------   ------------   -------------   ------------   ------------
Balance, December 31, 1996.........  29,066,139   $291,000   $323,850,000   $         --    $(57,507,000)  $266,634,000
                                     ==========   ========   ============   =============   ============   ============
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       16-17
<PAGE>
                         BROOKS FIBER PROPERTIES, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
                                                      1996             1995            1994
                                                      ----             ----            ----
<S>                                               <C>              <C>             <C>
Cash flows from operating activities:
  Net loss....................................    $ (43,843,000)   $ (9,551,000)   $ (3,897,000)
  Adjustments to reconcile net loss to net
     cash provided by (used in) operating
     activities:
     Depreciation and amortization............       16,296,000       4,118,000         663,000
     Non-cash interest expense................       29,787,000       3,814,000         135,000
     Minority interests.......................       (1,590,000)     (1,085,000)        (78,000)
     Changes in assets and liabilities, net of
       effects from acquisitions:
       Accounts receivable....................       (7,931,000)       (593,000)       (576,000)
       Accounts payable and accrued
          expenses............................         (384,000)        623,000       3,955,000
       Other, net.............................       (9,587,000)        114,000        (133,000)
                                                  -------------    ------------    ------------
            Net cash provided by (used in)
               operating activities...........      (17,252,000)     (2,560,000)         69,000
                                                  -------------    ------------    ------------
Cash flows from investing activities:
  Purchase of networks and equipment..........     (217,230,000)    (27,577,000)     (6,693,000)
  Purchase of marketable securities...........     (358,598,000)             --              --
  Maturity of marketable securities...........      176,294,000              --              --
  Increase in other assets....................      (11,831,000)     (2,026,000)       (769,000)
  Payment for acquisitions, net of cash
     acquired.................................       (4,290,000)    (13,941,000)    (35,669,000)
  Investment in minority-owned venture........      (20,000,000)             --              --
                                                  -------------    ------------    ------------
            Net cash used in investing
               activities.....................     (435,655,000)    (43,544,000)    (43,131,000)
                                                  -------------    ------------    ------------
Cash flows from financing activities:
  Issuances of common stock...................      193,260,000              --              --
  Issuance of preferred stock and
     subscriptions receivable payments, net...        1,106,000      84,107,000      21,781,000
  Proceeds from minority investments..........        7,991,000       4,088,000       1,067,000
  Proceeds from long-term debt................      477,772,000      10,760,000      29,268,000
  Long-term debt issuance cost................      (19,197,000)             --              --
  Repayment of long-term debt and capital
     leases...................................       (5,797,000)             --              --
  Other financing activities..................         (261,000)     (1,733,000)     (1,337,000)
                                                  -------------    ------------    ------------
            Net cash provided by financing
               activities.....................      654,874,000      97,222,000      50,779,000
                                                  -------------    ------------    ------------
Net increase in cash..........................      201,967,000      51,118,000       7,717,000
Cash, beginning of period.....................       59,913,000       8,795,000       1,078,000
                                                  -------------    ------------    ------------
Cash, end of period...........................    $ 261,880,000    $ 59,913,000    $  8,795,000
                                                  =============    ============    ============
Supplemental disclosure of cash flow
  information:
  Cash paid during the year for interest......    $   1,399,000    $    132,000    $    408,000
                                                  =============    ============    ============
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       18
<PAGE>
                             SUPPLEMENTAL SCHEDULE
                             OF NON-CASH FINANCING
                            AND INVESTING ACTIVITIES

     Significant non-cash investing and financing activities are as follows:

<TABLE>
<CAPTION>
                                                            1996           1995          1994
                                                            ----           ----          ----
<S>                                                     <C>             <C>           <C>
Cash paid for acquisitions:
  Fair value of tangible assets acquired, net of
     cash acquired..................................    $ 41,614,000     5,958,000    15,037,000
  Fair value of intangible assets acquired..........      36,159,000     8,323,000    20,757,000
  Liabilities assumed...............................     (36,028,000)     (340,000)     (125,000)
  Common stock issued...............................     (37,455,000)           --            --
                                                        ------------    ----------    ----------
     Cash paid for acquisitions, net of cash
       acquired.....................................    $  4,290,000    13,941,000    35,669,000
                                                        ============    ==========    ==========
Capitalized non-cash interest on network
  construction projects.............................    $  1,994,000            --            --
                                                        ============    ==========    ==========
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       19
<PAGE>
                         BROOKS FIBER PROPERTIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1996 AND 1995

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

     The consolidated financial statements include the accounts of Brooks Fiber
Properties, Inc. (BFP) and its wholly-owned subsidiaries (the Company). The
Company, through its subsidiaries, is a leading provider of competitive local
telecommunications services in selected cities within the United States. The
Company competes with local exchange carriers by providing high quality,
integrated local telecommunications services over fiber optic digital networks
to meet the voice, data and video transmission needs of its customers. The
Company's customers are principally inter-exchange carriers (IXCs), internet
service providers (ISPs), wireless carriers, telecommunications-intensive
business, government and institutional end users, and residential customers. The
Company offers these customers technologically advanced local telecommunications
services as well as superior customer service, flexible pricing and route
diversity.

     The Company was founded on November 10, 1993, by Brooks Telecommunications
Corporation (BTC) and a group of venture capital investors who, along with BTC
and management of the Company, provided initial equity capital of $40.8 million.
As the Company's founding shareholder, BTC received 1,162,800 founder's shares
of the Company's common stock and founder's warrants to purchase an additional
81,600 shares of the Company's preferred stock (convertible into 1,632,000
shares of common stock).

     Pursuant to an Agreement and Plan of Merger between BTC and the Company,
BTC was merged into the Company on January 2, 1996, and the securities of the
Company held by BTC were canceled. Following the merger, the former holders of
BTC's common stock, preferred stock, convertible notes, and options and warrants
received shares of the Company's common stock, options and warrants.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     PRINCIPLES OF CONSOLIDATION:

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

     CASH AND CASH EQUIVALENTS:

     The Company considers cash equivalents as all highly liquid securities
purchased with a maturity of three months or less.

     MARKETABLE SECURITIES:

     Marketable securities consist of treasury bills and notes, commercial
paper, and repurchase agreements with maturities beyond three months but less
than twelve months.

     FINANCIAL INSTRUMENTS:

     Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of marketable securities and
accounts receivable. Concentrations of credit risk of marketable securities are
limited as the Company invests in short-term, investment grade securities.

     CONCENTRATION OF CREDIT RISK:

     For purposes of segment reporting, management believes the Company operates
in the telecommunications industry. Concentrations of credit risk with respect
to accounts receivable are limited due to the dispersion of the Company's
customer base among different industries and geographic areas and remedies
provided by terms of contracts and statutes. One long distance carrier customer
accounted for 13% and 24% of total revenues for the years ended December 31,
1996 and 1995, respectively.

                                       20
<PAGE>
                         BROOKS FIBER PROPERTIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     NETWORKS AND EQUIPMENT:

     Networks and equipment are stated at cost. Costs of construction are
capitalized, including interest costs related to the installation and expansion
of the Company's networks. Leasehold improvements are amortized using the
straight-line method over their useful life or lease term, whichever is shorter.
Generally, provisions for depreciation are provided using the straight-line
method over the estimated useful lives beginning in the year an asset is put
into service as follows:

<TABLE>
<CAPTION>
                                                                YEARS
                                                                -----
<S>                                                             <C>
Telecommunications networks.................................    8-25
Electronics and related equipment...........................     8
Office equipment and furniture..............................    5-7
Leasehold improvements and other equipment..................    5-10
Buildings...................................................     40
</TABLE>


     OTHER ASSETS:

     Goodwill is being amortized using the straight-line method over 25 years
from the dates of acquisition. The Company reviews the carrying amount of
goodwill periodically to determine whether any impairment has occurred in the
value of such assets. The Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, on January 1,
1996. This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of SFAS No. 121 did not have a material impact on the Company's
financial position, results of operations or liquidity.

     Direct incremental costs incurred in the organization and development of
new networks, including the costs associated with negotiating rights-of-way,
obtaining legal/regulatory authorizations, and developing network design, are
deferred and amortized over five years. Pre-operating costs representing
substantially all direct incremental non-development costs incurred during the
pre-operating phase of a newly constructed network are amortized over five-year
periods commencing with the start of operations.

     Costs of the Company's interest rate cap arrangements purchased under the
terms of debt facilities are deferred and amortized over the contractual period
of the underlying interest rate cap arrangements.

     Costs incurred in connection with securing the Company's debt facilities,
including commitment, legal and other such costs, are deferred and amortized
over the term of the financing.

     REVENUE RECOGNITION:

     The Company recognizes revenue on local telecommunications services in the
month such services are provided. Revenues and associated costs of facilities
management services are recognized as services are provided.

     INCOME TAXES:

     The Company accounts for income taxes in accordance with the
asset/liability method. Deferred taxes are determined based on the estimated
future tax effects of differences between the financial statement and tax bases
of assets and liabilities given the provisions of the enacted tax laws.

     STOCK OPTION PLAN:

     On January 1, 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation, which permits

                                       21
<PAGE>
                         BROOKS FIBER PROPERTIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and later years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.

     LOSS PER SHARE:

     Loss per share has been computed using the number of shares of common stock
and common stock equivalents outstanding. The weighted average number of shares
used in computing loss per share was 25,627,328 and 19,523,584 for the years
ended December 31, 1996 and 1995, respectively. Pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83, shares issued and stock
options and warrants granted at prices below the initial public offering price
of the Company's common stock on May 2, 1996, of $27.00 per share during the
twelve-month period preceding the date of the Company's initial filing of the
Registration Statement for such offering have been included in the calculation
of common stock equivalent shares using the treasury stock method as if they
were outstanding for all of 1995 and for the entire six-month period ended June
30, 1996. Subsequent to this period, the weighted average number of shares was
based on common stock outstanding and does not include common stock equivalents
as their inclusion would be anti-dilutive.

     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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

3. FINANCIAL INSTRUMENTS

     CASH AND CASH EQUIVALENTS:

     Cash and cash equivalents consist of cash on hand and all highly liquid
securities with insignificant interest rate risk and original maturities of
three months or less at the date of acquisition. Accordingly, the carrying value
is a reasonable estimate of fair value.

     MARKETABLE SECURITIES:

     Marketable securities, as defined in Note 2, are stated at cost, adjusted
for discount accretion and premium amortization. The securities in the Company's
portfolio are classified as held to maturity as management has the intent and
ability to hold those securities to maturity. The carrying value and fair value
of marketable securities at December 31, 1996, are as follows:

<TABLE>
<CAPTION>
                                                CARRYING VALUE    FAIR VALUE
                                                --------------    ----------
<S>                                             <C>              <C>
U. S. Treasury securities.....................   $ 56,737,000    $ 56,703,000
Corporate debt securities.....................    125,567,000     125,487,000
                                                 ------------    ------------
Total marketable securities...................   $182,304,000    $182,190,000
                                                 ============    ============
</TABLE>

                                       22
<PAGE>
                          BROOKS FIBER PROPERTIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The Company had unrealized gains of $4,000 and unrealized losses of
$118,000 related to the above marketable securities held at December 31, 1996.

     ACCOUNTS RECEIVABLE:

     Accounts receivable are reflected net of an allowance for doubtful accounts
of $740,000 and $76,000 at December 31, 1996 and 1995, respectively. The net
carrying value of accounts receivable approximates fair value due to the terms
of the underlying receivables.

     INVESTMENT IN MINORITY-OWNED VENTURE:

     The investment in minority-owned venture represents an investment in
convertible preferred stock of Verio, Inc., formerly known as World-Net Access,
Inc. (Verio). Verio is a development stage company, and the underlying
securities are not readily marketable. The investment is carried at cost, and
management believes there is no impairment of the underlying value of the
securities.

     LONG-TERM DEBT:

     As of December 31, 1996, the fair value of long-term debt approximated
carrying value.

     In conjunction with certain of the long-term debt agreements, the Company
purchased interest rate cap arrangements under which, if the 90-day commercial
paper rate rises above 7.5%, the Company will receive payments to offset the
higher interest rates on long-term debt. These payments, if any, will be
recorded as reductions of interest expense. As of December 31, 1996, the Company
had notional amounts of interest rate caps totaling $4,752,000 and $30,551,000
related to contract periods from October 1996 through October 2001, and January
1997 through January 2002, respectively. Notional amounts decrease during the
contract period. As of December 31, 1996, the carrying value, net of
amortization, and fair value of the interest rate cap arrangements approximated
$1,498,000 and $469,000, respectively.

4. NETWORKS AND EQUIPMENT

     Networks and equipment consist of the following:

<TABLE>
<CAPTION>
                                                       1996          1995
                                                       ----          ----
<S>                                                <C>            <C>
Telecommunications networks......................  $170,687,000   $30,158,000
Electronics and related equipment................    85,050,000    20,174,000
Office equipment and furniture...................    22,625,000     2,435,000
Leasehold improvements and other equipment.......    14,456,000       405,000
Land and buildings...............................    13,637,000            --
                                                   ------------   -----------
                                                    306,455,000    53,172,000
Less accumulated depreciation....................    16,114,000     3,130,000
                                                   ------------   -----------
                                                   $290,341,000   $50,042,000
                                                   ============   ===========
</TABLE>

     As of December 31, 1996 and 1995, networks and equipment include
$21,875,000 and $4,469,000, respectively, of networks in progress that were not
in service and, accordingly, have not been depreciated.

                                       23
<PAGE>
                         BROOKS FIBER PROPERTIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. OTHER ASSETS, NET

     Other assets consist of the following:

<TABLE>
<CAPTION>
                                                         1996           1995
                                                         ----           ----
<S>                                                  <C>             <C>
Goodwill.........................................    $ 65,648,000    $29,129,000
Debt issuance costs..............................      20,437,000      1,559,000
Organization, development and pre-operating
  costs..........................................      13,756,000      2,341,000
Interest rate cap arrangements...................       1,511,000      1,511,000
Rights-of-way and other..........................       3,604,000        581,000
                                                     ------------    -----------
                                                      104,956,000     35,121,000
Less accumulated amortization....................       5,878,000      1,652,000
                                                     ------------    -----------
                                                     $ 99,078,000    $33,469,000
                                                     ============    ===========
</TABLE>

     Amortization charged to expense for the years ended December 31, 1996 and
1995 was $4,226,000 and $1,356,000, respectively.

6. LONG-TERM DEBT

     Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                     ---------------------------
                                                         1996           1995
                                                         ----           ----
<S>                                                  <C>             <C>
10 7/8% Senior discount notes, due March 1,
  2006...........................................    $273,379,000    $        --
11 7/8% Senior discount notes, due November 1,
  2006...........................................     229,109,000             --
Credit Facility at a variable rate (approximately
  9.46% at December 31, 1996)....................      50,000,000     43,877,000
Other long-term debt.............................         756,000        100,000
                                                     ------------    -----------
                                                      553,244,000     43,977,000
Less: Current portion............................         434,000             --
                                                     ------------    -----------
                                                     $552,810,000    $43,977,000
                                                     ============    ===========
</TABLE>

     THE SENIOR DISCOUNT NOTES:

     On February 26, 1996, the Company issued $425 million aggregate principal
amount of 10 7/8% Senior Discount Notes due March 1, 2006 (the 10 7/8% Senior
Discount Notes), and on November 7, 1996, issued $400 million aggregate
principal amount of 11 7/8% Senior Discount Notes due November 1, 2006 (the
11 7/8% Senior Discount Notes), from which the Company received gross proceeds
of $250 million and $225 million, respectively. The 10 7/8% Senior Discount
Notes and 11 7/8% Senior Discount Notes (the Senior Discount Notes) will not
require the payment of interest until March 1, 2001, and November 1, 2001,
respectively; however, the Company may elect to commence the payment of interest
at any time prior to that date. Thereafter, interest will be payable
semi-annually until maturity.

     On or after March 1, 2001, and November 1, 2001, the Senior Discount Notes
will be redeemable at the option of the Company, in whole or in part from time
to time, at the following prices (expressed in percentages of the principal
amount

                                       24

<PAGE>
                         BROOKS FIBER PROPERTIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

at the stated maturity), if redeemed during the 12 months beginning March
1 and November 1, respectively, of the years indicated below, in each case
together with interest accrued to the redemption date.

<TABLE>
<CAPTION>
                                               10 7/8% SENIOR    11 7/8% SENIOR
                                               DISCOUNT NOTES    DISCOUNT NOTES
                                               --------------    --------------
<S>                                            <C>               <C>
2001.......................................       104.50%           105.94%
2002.......................................       103.00%           103.96%
2003.......................................       101.50%           101.98%
2004 and thereafter........................       100.00%           100.00%
</TABLE>


     In addition, under certain conditions related to a change in control of the
Company, the Company may be required to repurchase all or any part of the Senior
Discount Notes as stipulated in the note agreements. The Senior Discount Notes
are senior unsecured obligations of the Company and are subordinated to all
current and future indebtedness of the Company's subsidiaries, including trade
accounts payable.

     CREDIT FACILITY:

     The Company's Amended and Restated Loan and Security Agreement dated as of
October 1, 1996 (Credit Facility) with AT&T Credit Corporation (AT&T Credit)
provides financing for the acquisition and construction of telecommunications
networks, the purchase of equipment related to the construction and operation of
the networks, and working capital. As of December 31, 1996, outstanding
indebtedness under the Credit Facility is $50.0 million. Amounts borrowed bear
interest at the 90-day commercial paper rate plus 4.0% per annum, payable
quarterly. Terms of the Credit Facility further provide for interest-only
payments through December 31, 1997, and a six-year principal and interest payout
period thereafter. Borrowings are secured by the assets and stock of certain of
the Company's subsidiaries.

     OTHER:

     Other long-term debt includes $100,000 related to a $10 million credit
facility with a commercial bank (Bank Credit Facility) and $656,000 related to
certain capitalized leases. Terms of the Bank Credit Facility provide for a
wholly-owned subsidiary of the Company to borrow amounts up to $10 million from
time to time prior to June 30, 1997. Terms of the Bank Credit Facility further
provide for interest-only payments through August 31, 1997, a 4.5 year principal
and interest payout and final maturity of all loans no later than June 30, 2002.

     The aforementioned credit agreements contain certain restrictive and
financial covenants, including limitations on the ability of the Company and its
subsidiaries to declare and pay dividends, incur additional indebtedness,
dispose of assets, issue additional capital stock, make loans and advances, and
the maintenance of certain financial ratios and minimum annualized operating
cash flow. At December 31, 1996, the Company was in compliance with the terms of
these covenants.

     Maturities of long-term debt at December 31, 1996, are as follows:

<TABLE>
<S>                                                             <C>
1998........................................................    $  2,680,000
1999........................................................       5,072,000
2000........................................................       7,528,000
2001........................................................      10,028,000
Thereafter..................................................     527,502,000
                                                                ------------
                                                                $552,810,000
                                                                ============
</TABLE>

                                       25

<PAGE>
                         BROOKS FIBER PROPERTIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. ACQUISITIONS AND JOINT VENTURES

     Pursuant to an Agreement and Plan of Merger between BTC and the Company,
BTC was merged into the Company on January 2, 1996, and the securities of the
Company held by BTC were canceled. Following the merger, the former holders of
BTC's common stock, preferred stock, convertible notes, options and warrants
received shares of the Company's common stock, options and warrants. After the
consideration of the shares of the Company held by BTC at the time of
acquisition, the Company issued 756,340 shares of common stock valued at $12.50
per share and certain options and warrants. Intangible assets of approximately
$6.4 million were recorded as a result of this acquisition.

     On January 31, 1996, the Company acquired City Signal, Inc., a provider of
competitive access and local exchange services in Michigan and Ohio, and certain
related assets. In connection with the acquisition, the Company issued
approximately 2.2 million shares of common stock and assumed certain specified
liabilities. Intangible assets of approximately $13.1 million were recorded as a
result of this acquisition. In addition, the Company granted the seller the
option to require the Company to repurchase any or all of such shares at a price
of $12.50 per share on or before February 1, 1998. In conjunction with the
Company's initial public offering, the holder of such shares sold 10% of such
shares. Accordingly, approximately 2.0 million shares remain subject to
redemption.

     On March 15, 1995, the Company acquired 100% of the assets of PSC of
Oklahoma (PSO), a 105-mile competitive access network in Tulsa, Oklahoma.

     Effective July 1, 1996, the Company acquired 100% of the stock of ALD
Communications, Inc. (ALD), a switchless reseller of long distance services, and
Tenant Network Services, Inc. (TNS), a wholly-owned subsidiary of ALD which acts
as a shared tenant service provider of telecommunications services, both of
which provide their services primarily to customers in the San Francisco,
California area. Also, effective September 1, 1996, the Company acquired 100% of
the stock of Bittel Telecommunications Corporation (Bittel), a switch-based
reseller of long distance services primarily to customers in the San Francisco
and Los Angeles, California areas. In connection with the aforementioned
acquisitions, the Company has an obligation totaling $10 million due during
January, 1997, which is included in other current liabilities at December 31,
1996.

     The above acquisitions were accounted for using the purchase method of
accounting and, accordingly, the results of operations of the acquired companies
have been included in the Company's consolidated financial statements since the
effective dates of acquisition. The following unaudited condensed pro forma
information presents the results of operations of the Company for the years
ended December 31, 1996 and 1995 as if the above transactions had occurred on
January 1, 1995:

<TABLE>
<CAPTION>
                                                      1996           1995
                                                      ----           ----
<S>                                               <C>            <C>
Revenue.........................................  $ 54,515,000   $ 34,844,000
Loss before minority interest...................  $(46,410,000)  $(20,125,000)
</TABLE>

     The unaudited pro forma information is provided for informational purposes
only and is not necessarily indicative of the results of operations that would
have occurred had the purchases been made on January 1, 1995, or of the future
anticipated results of operations of the combined companies.

     In June 1996, the Company formed a strategic alliance with Verio, Inc.,
formerly known as World-Net Access, Inc. (Verio), and to date has made a $20
million convertible preferred stock investment for a 25.5% fully-diluted
interest in Verio. The investment in Verio is classified as Investment in
Minority-Owned Venture on the Company's consolidated balance sheet. Verio is a
privately-held consolidator of ISPs.

     On October 24, 1996, the Company and MaineCom Services, Inc. (MaineCom), a
subsidiary of Central Maine Power Company, entered into a letter of intent to
form a joint venture company, to be owned 60% by the Company and 40% by
MaineCom, for the purposes of constructing, owning, operating and developing
networks initially in Portland, Maine and Nashua and Manchester, New Hampshire
and other markets in Maine and New Hampshire as may be agreed upon by the
Company and MaineCom in the future.

                                       26
<PAGE>
                         BROOKS FIBER PROPERTIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. STOCKHOLDERS' EQUITY

     COMMON STOCK:

     Effective January 2, 1996, the Company's Board of Directors authorized a
20-for-1 split for each share of common stock and adjusted all outstanding
common stock options and warrants accordingly. All share data presented within
the consolidated financial statements have been revised to reflect the 20-for-1
stock split.

     On May 2, 1996, the Company completed its initial public offering of
7,385,331 shares of common stock at a price of $27.00 per share. Gross proceeds
from this offering totaled approximately $199.4 million, and proceeds net of
underwriting discounts, advisory fees and expenses totaled approximately $185.2
million.

     The Company's authorized common stock consists of 50,000,000 shares, of
which 49,669,100 shares are designated as voting common stock and 330,900 shares
are designated as non-voting stock. No shares of non-voting common stock are
outstanding. A total of 14,358,155 authorized shares of common stock, which have
not been reserved for issuance upon exercise of warrants and options and under
employee stock plans are available for issuance from time to time and under such
circumstances as may be determined by the Board of Directors.

     In connection with the Agreement and Plan of Merger between the Company and
BTC on January 2, 1996, the Company issued options and warrants to certain of
the shareholders and employees of BTC for the purchase of 1,134,840 shares of
the Company's common stock at prices of $11.35 to $31.04 per share.

     In June 1996, the Company and MCImetro Access Transmission Services, Inc.
(MCImetro) entered into an agreement pursuant to which MCImetro acquired a 15%
interest in the Company's Sacramento, California network for $4.5 million, and
invested an additional $3.5 million in the Company's majority-owned San Jose,
California joint venture company, formed in September 1995 between the Company
and MCImetro to operate and expand the Company's existing networks in San Jose
and its environs. In accordance with the provisions of the agreements between
the Company and MCImetro, on October 10, 1996, MCImetro exchanged the agreed
value of these investments and its September 1995 investment in the San Jose
joint venture company for 958,720 shares of the Company's common stock.

     On November 12, 1996, AT&T Credit exchanged the agreed value of its
minority investments in certain subsidiaries of the Company made in connection
with borrowings under the Credit Facility for an aggregate of 234,260 shares of
the Company's common stock.

     Stock warrant activity for the years ended December 31, 1996 and 1995 is as
follows:

<TABLE>
<CAPTION>
                                                    NUMBER     PRICE PER SHARE
                                                    ------     ---------------
<S>                                               <C>          <C>
Balance, January 1, 1995........................   1,632,000           $11.00
  Granted.......................................     192,340            $8.25
                                                  ----------
Balance, December 31, 1995......................   1,824,340     $8.25-$11.00
  Issued........................................     814,520    $11.35-$31.04
  Exercised.....................................  (2,228,940)    $8.25-$22.17
  Canceled......................................         (60)           $8.25
                                                  ----------
Balance, December 31, 1996......................     409,860    $11.35-$31.04
                                                  ==========    =============
</TABLE>

     PREFERRED STOCK:

     The Company's authorized preferred stock consists of 1,040,012 shares, of
which 50,000 shares are designated Series C Junior Participating Preferred Stock
and reserved for issuance in connection with the Rights described below. The
remainder of the preferred stock has the status of authorized and unissued
shares of preferred stock subject to issuance from time to time as a new series
of preferred stock created by resolution of the Board of Directors. At December
31, 1996, there was no preferred stock outstanding.

                                       27
<PAGE>
                         BROOKS FIBER PROPERTIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     STOCKHOLDER RIGHTS PLAN:

     In February 1996, the Company adopted a Shareholders Protection Rights Plan
(Rights Plan) and distributed a dividend of one Preferred Stock Purchase Right
(Right) (collectively the Rights). The Rights expire on February 28, 2006. The
Rights generally will be exercisable and transferable apart from the common
stock only after the tenth day following public disclosure that a person or
group has acquired beneficial ownership of 20% or more of the voting power of
the Company's stock or the tenth business day after the date on which a person
commences a tender or exchange offer upon consummation of which such person or
group would beneficially own 20% or more of the voting power of the Company's
stock of the Company. Thereafter, each holder of a Right will be entitled to
purchase shares of common stock of the Company having a value equal to twice the
Right's exercise price.

     In addition, if, after any person or group has become a 20%-or-more
stockholder, the Company is involved in a merger or other business combination
transaction with another person or group in which its common stock is changed or
converted, or sells 50% or more of its assets or earning power to another person
or group, each Right will entitle its holder to purchase shares of common stock
of such other person or group having a value of twice the Right's exercise
price.

     At any time prior to the time the Rights become exercisable, the Company is
generally entitled to redeem the Rights at $.001 per Right.

9. EMPLOYEE BENEFIT PLANS

     STOCK OPTION PLAN:

     The Company's 1993 Stock Option Plan (the Plan) authorizes the granting of
options and stock appreciation rights covering up to 3,400,000 shares of common
stock. Stock options are granted with an exercise price equal to the stock's
fair market value at the date of grant and generally vest over a period of three
years from the date of grant.

     Stock option activity for the Plan for the years ended December 31, 1996,
and 1995 is as follows:

<TABLE>
<CAPTION>
                                                                     PRICE PER
                                                       NUMBER          SHARE
                                                       ------        ---------
<S>                                                   <C>          <C>
Balance, January 1, 1994..........................      580,000           $ 4.00
  Granted.........................................      460,000           $ 4.00
  Canceled........................................     (120,000)          $ 4.00
                                                      ---------
Balance, January 1, 1995..........................      920,000           $ 4.00
  Granted.........................................      875,000    $ 4.00-$ 6.60
  Canceled........................................     (143,340)   $ 4.00-$ 6.60
                                                      ---------
Balance, December 31, 1995........................    1,651,660    $ 4.00-$ 6.60
  Granted.........................................    1,313,000    $12.50-$33.75
  Exercised.......................................      (70,474)   $ 4.00-$ 6.60
  Canceled........................................     (144,000)   $ 6.00-$12.50
                                                      ---------
Balance, December 31, 1996........................    2,750,186    $ 4.00-$33.75
                                                      =========
</TABLE>
                                       28
<PAGE>
                         BROOKS FIBER PROPERTIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the grant
date for awards in 1996 and 1995 consistent with the provisions of SFAS No. 123,
the Company's net loss and net loss per share would have been the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
                                                         1996           1995
                                                         ----           ----
<S>                                                  <C>             <C>
Net loss -- as reported..........................    $(43,843,000)   $(9,551,000)
Net loss -- pro forma............................     (46,825,000)    (9,847,000)
Net loss per share -- as reported................           (1.71)         (0.49)
Net loss per share -- pro forma..................           (1.83)         (0.50)
</TABLE>


     Pro forma net loss reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of three years and compensation cost for options granted prior to January
1, 1995 is not considered.

     The fair value of each options grant for both 1996 and 1995 is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants: expected volatility of
37.2%, risk-free interest rate of 6.1%, expected life of 5 years; and an
expected dividend yield of 0.0%.

     The pro forma information is provided for informational purposes only and
is not necessarily indicative of the results of operations that would have
occurred or of the future anticipated results of operations of the Company.

     EMPLOYEE STOCK PURCHASE PLAN:

     In February 1996, the Company established an Employee Stock Purchase Plan
(the ESPP) to provide employees of the Company with an opportunity to purchase
common stock through payroll deductions. Under the ESPP, up to 500,000 shares of
common stock have been reserved for issuance, subject to certain antidilution
adjustments. The ESPP became effective at the time of the Company's initial
public offering of common stock in May 1996. The first offering period under the
ESPP is from May 1996 through April 30, 1997. The Board of Directors will have
authority to authorize up to four annual offering periods thereafter. The ESPP
terminates on April 30, 2001. Initially, the amount of authorized payroll
deductions will be not less than 1% nor more than 10% of an employee's cash
compensation during an offering period, but not more than $25,000 per year.

     401(K) PLAN:

     The Company has a 401(k) Plan which covers substantially all employees of
the Company. Employees of the Company who are 21 years of age or older are
eligible to participate in the 401(k) Plan upon completion of twelve months of
service, at which time they may voluntarily contribute a percentage of
compensation. Participants are eligible to receive Company matching
contributions each year in an amount up to 50% of the participant's contribution
up to a maximum of 4% of such participant's annual compensation. The Company's
matching contributions for 1996 and 1995 were $181,000 and $69,000,
respectively.

10. RELATED PARTY TRANSACTIONS

     During November 1993, the Company entered into a management agreement with
BTC pursuant to which BTC agreed to provide certain services to the Company. The
management agreement commenced upon the Company's first acquisition (January 31,
1994). The management agreement provided for payment by the Company to BTC of a
fee equal to $250,000 per year adjusted annually beginning in 1996 and
subsequent years for inflation, plus the Company's proportionate share of rent
and support services. Furthermore, BTC charged BFP for consulting services and
certain expenses incurred, plus the Company's proportionate share of rent and
support services. Aggregate expenses related to services provided by BTC during

                                       29
<PAGE>
                         BROOKS FIBER PROPERTIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1995 totaled $1,478,000. Concurrent with the Agreement and Plan of Merger
between BTC and the Company on January 2, 1996, the management agreement was
canceled.

11. INCOME TAXES

     The Company files its income tax return on a consolidated basis. No
provision for income taxes was recorded for 1996, 1995, or for any prior
periods. A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. The Company has
established a valuation allowance for the entire portion of the net deferred
income tax asset. The valuation allowance increased by $20.6 million and $4.4
million for 1996 and 1995, respectively.

     The actual income tax expense for the years ended December 31, 1996, 1995
and 1994 differs from the "expected" income tax expense, computed by applying
the U. S. Federal corporate tax rate of 35% to income before income taxes as
follows:

<TABLE>
<CAPTION>
                                         1996          1995          1994
                                         ----          ----          ----
<S>                                  <C>            <C>           <C>
Computed "expected" income tax
  expense..........................  $(15,345,000)  $(3,343,000)  $(1,364,000)
Non-utilization of net operating
  loss.............................    14,150,000     2,691,000     1,272,000
Amortization of goodwill...........       579,000       258,000        60,000
Minority interest..................       557,000       380,000        27,000
Other, net.........................        59,000        14,000         5,000
                                     ------------   -----------   -----------
                                     $         --   $        --   $        --
                                     ============   ===========   ===========
</TABLE>


    As of December 31, 1996 and 1995, temporary differences and carryforwards
that give rise to deferred income tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
                                                       1996          1995
                                                       ----          ----
<S>                                                <C>            <C>
Deferred income tax assets:
  Tax loss carryforwards.........................  $ 35,040,000   $ 6,358,000
  Other..........................................       611,000        52,000
                                                   ------------   -----------
  Gross deferred income tax assets...............    35,651,000     6,410,000
  Less valuation allowance.......................   (26,573,000)   (6,011,000)
                                                   ------------   -----------
  Net deferred income tax asset..................     9,078,000       399,000
Deferred income tax liabilities:
  Tangible and intangible assets.................    (9,078,000)     (399,000)
  Net deferred income tax liabilities............    (9,078,000)     (399,000)
                                                   ------------   -----------
  Net deferred income taxes......................  $         --   $        --
</TABLE>


     As of December 31, 1996, net operating loss carryforwards totaling $87.6
million expire in years 2008-2012 if not utilized in future income tax returns.

                                       30
<PAGE>

12. COMMITMENTS AND CONTINGENCIES

     The Company leases office space and other equipment at various locations
under operating leases. Rent expense totaled $3,150,000 and $688,000 for 1996
and 1995, respectively. Future minimum rental payments under non-cancelable
operating leases at December 31, 1996, were as follows:

<TABLE>
<S>                                                           <C>
1997........................................................  $ 4,328,000
1998........................................................    3,602,000
1999........................................................    3,252,000
2000........................................................    2,637,000
2001........................................................    2,343,000
Thereafter..................................................    9,508,000
                                                              -----------
Total minimum lease payments................................  $25,670,000
</TABLE>

     On September 22, 1995, GST Tucson Lightwave, Inc. (Lightwave) was permitted
to intervene in litigation originally filed by Brooks Fiber Communications of
Tucson, Inc., a wholly-owned subsidiary of the Company (BFC Tucson). On October
2, 1995, Lightwave filed a counterclaim against BFC Tucson, the Company and
Tucson Electric Power Company (TEP) charging BFC Tucson, the Company and TEP
with violations of antitrust laws, all of which alleged violations stem from an
agreement between BFC Tucson and TEP that allowed BFC Tucson exclusive rights,
for one year, to utilize certain of TEP's rights of way. The original causes of
action have been settled; however, the counterclaim by Lightwave is currently
still pending. The counterclaim seeks treble damages, attorneys' fees, costs
(all in an unspecified amount) and such other relief as the court deems proper.
The Company believes the claims are without merit and intends to defend
vigorously against this action. The Company believes that resolution of the
matter will not have a material adverse effect on the consolidated financial
condition or results of operations of the Company.

13. QUARTERLY SUMMARY OF OPERATIONS (UNAUDITED)

     The following table presents unaudited quarterly operating results for 1995
and 1996. The Company believes that all necessary adjustments have been included
in the amounts stated below to present fairly the quarterly results when read in
conjunction with the Consolidated Financial Statements and notes thereto.
Results of operations for any particular quarter are not necessarily indicative
of results of operations for a full year or predictive of future periods.

<TABLE>
<CAPTION>
                                     1995                                  1996
                       ---------------------------------   ------------------------------------
                        1ST      2ND      3RD      4TH      1ST       2ND       3RD       4TH
                        ---      ---      ---      ---      ---       ---       ---       ---
                                                     ($ IN 000S)
<S>                    <C>      <C>      <C>      <C>      <C>      <C>       <C>       <C>
Revenue..............   3,023    3,489    3,797    3,851    6,795     8,409    12,943    17,427
Loss from
  operations.........  (1,644)  (1,805)  (2,181)  (2,910)  (5,121)   (7,074)   (7,605)  (10,986)
Other expense, net...    (712)    (825)    (396)    (163)  (2,043)   (3,296)   (2,837)   (6,471)
                       ------   ------   ------   ------   ------   -------   -------   -------
Loss before minority
  interest...........  (2,356)  (2,630)  (2,577)  (3,073)  (7,164)  (10,370)  (10,442)  (17,457)
Minority interest....     142      176      271      496      523       615       451        --
                       ------   ------   ------   ------   ------   -------   -------   -------
Net loss.............  (2,214)  (2,454)  (2,306)  (2,577)  (6,641)   (9,755)   (9,991)  (17,457)
                       ======   ======   ======   ======   ======   =======   =======   =======
Loss per share
  applicable to
  common
  shareholders.......    (.11)    (.13)    (.12)    (.13)    (.35)     (.40)     (.35)     (.58)
                       ======   ======   ======   ======   ======   =======   =======   =======
EBITDA(1)............    (899)    (797)  (1,061)  (1,665)  (2,693)   (3,908)   (3,340)   (4,549)
                       ======   ======   ======   ======   ======   =======   =======   =======
</TABLE>
---------------

(1) EBITDA consists of earnings (loss) before interest, income taxes,
    depreciation, amortization and minority interests. EBITDA is commonly used
    in the communications industry to analyze companies on the basis of
    operating performance, leverage and liquidity. EBITDA is not intended to
    represent cash flows for the periods. See Consolidated Statement of Cash
    Flows.

                                       31

<PAGE>
                         BROOKS FIBER PROPERTIES, INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. SUBSEQUENT EVENTS

     On February 4, 1997, the Company completed a secondary offering of
6,723,429 shares of common stock at a price of $25.00 per share. All of the
6,723,429 shares offered were sold by existing shareholders of the Company, and
the Company did not receive any proceeds from the sale of these shares. In
conjunction with the offering, the underwriters were granted an over-allotment
option by the Company to purchase additional shares at $25.00 per share. This
option was fully exercised by the underwriters, and an additional 1,008,514
shares were issued by the Company. Gross proceeds to the Company from this
offering totaled approximately $25.2 million, and proceeds net of underwriting
discounts totaled approximately $24.0 million.

     On February 7, 1997, the Company signed definitive agreements to acquire
100% of the stock of certain companies related to Phoenix Fiberlink, Inc.
(Phoenix), a provider of competitive access and internet services in Utah and
Nevada. The definitive agreements provide for the purchase price to be paid
through the issuance by the Company of an aggregate of 600,000 shares of common
stock valued at current market value and cash. The transaction is subject to
regulatory approvals.

     On February 25, 1997, the Company and MaineCom Services, Inc. (MaineCom), a
subsidiary of Central Maine Power Company, formed a joint venture company, owned
60% by the Company and 40% by MaineCom, for the purposes of constructing,
owning, operating and developing networks initially in Portland, Maine, and
Nashua and Manchester, New Hampshire, and other markets in Maine and New
Hampshire as may be agreed upon by the Company and MaineCom in the future.

                                       32
<PAGE>

[COLUMN ONE]

OFFICERS AND DIRECTORS

ROBERT A. BROOKS (1)
Chairman

JAMES C. ALLEN (1,4)
Vice Chairman & Chief Executive Officer

D. CRAIG YOUNG (4)
President, Chief Operating Officer
and Director

JOHN C. SHAPLEIGH
Executive Vice President, Regulatory and
Corporate Development

DAVID L. SOLOMON
Executive Vice President & Chief
Financial Officer

JOHN K. BROOKS
Senior Vice President and President --
JB Telecom, Inc.

GREGORY J. CHRISTOFFEL
Senior Vice President & General Counsel

MARILOU CRUM
Senior Vice President, Marketing
and Carrier Sales

JIM A. MOFFIT
Senior Vice President and Managing
Director -- GLA International

MARK W. SENDA
Senior Vice President, Operations

WAYMON R. TIPTON
Senior Vice President, Corporate
Communications and Strategic Development

GERARD J. HOWE
Vice President, Finance, and Senior Vice
President & Chief Financial Officer -- JB
Telecom, Inc.

ROBERT F. BENBOW (3)
Director; Vice President, Burr, Egan,
Deleage & Co.; investment management

WILLIAM J. BRESNAN (1,3,5)
Director; President, Bresnan Communications,
Inc.; cable systems and telephony services

JONATHAN M. NELSON (1,2,4,5)
Director; Co-Chairman, Providence Ventures,
Inc. and Managing Director, Narragansett
Capital, Inc.; investment management

G. JACKSON TANKERSLEY, JR. (1,2,4,5)
Director; President and Chief Executive
Officer; Centennial Holdings, Inc.;
investment management

RONALD H. VANDER POL (3)
Director; telecommunications entrepreneur

CAROL deB. WHITAKER (2,4)
Director; Chairman, Whitko & Company;
investment banking and management consulting

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

(1) Member of Executive Committee (2) Member of Compensation Committee
(3) Member of Audit Committee (4) Member of Finance Committee (5) Member of
Board Governance Committee
<PAGE>

[COLUMN TWO]

CORPORATE INFORMATION

FORM 10-K/INVESTOR CONTACT

A copy of the Company's Annual Report on Form 10-K for 1996 (without exhibits)
is available from the Company at no charge. Requests for the Annual Report on
Form 10-K and other investor contacts should be directed to David L. Solomon,
Chief Financial Officer, at the Company's corporate office.

ANNUAL SHAREHOLDERS' MEETING

The annual meeting of shareholders will be held on Tuesday, April 29, 1997, at
10:00 a.m. CST at The St. Louis Club, 7701 Forsyth Boulevard, St. Louis,
Missouri.

COMMON STOCK AND DIVIDEND INFORMATION

Brooks Fiber Properties, Inc. completed its initial public offering of common
stock on May 3, 1996. The Company's common stock trades on the Nasdaq Stock
Market under the symbol BFPT. As of March 19, 1997, Brooks Fiber Properties,
Inc. had approximately 4100 holders of the common stock. Of that total, 279 were
shareholders of record. No dividends have been paid on the common stock.

The following table sets forth the high and low sales price information as
reported by Nasdaq:

                                                                  Stock Price *
                                                                  --------------
1996                                                               High    Low
--------------------------------------------------------------------------------
First quarter                                                        N/A     N/A
Second quarter                                                    $35.50  $28.25
Third quarter                                                     $34.00  $27.50
Fourth quarter                                                    $33.75  $25.50

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

* No public market for the stock prior to May 3, 1996.


CORPORATE OFFICE

BROOKS FIBER PROPERTIES, INC.
425 WOODS MILL ROAD SOUTH, SUITE 300
TOWN & COUNTRY, MISSOURI 63017
(314) 878-1616


REGISTRAR AND TRANSFER AGENT

BOATMEN'S TRUST COMPANY
POST OFFICE BOX 14768
ST. LOUIS, MSISOURI 63178


INDEPENDENT ACCOUNTANTS

KPMG PEAT MARWICK LLP
ST. LOUIS, MISSOURI

                                                                [CORPORATE LOGO]