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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the Fiscal Year Ended December 31, 1998

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File No.: 333-53841

WAM!NET INC.

(Exact Name of Registrant as specified in its charter)

Minnesota 41-1795247
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)

6100 West 110th Street
Minneapolis, Minnesota 55438
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (612) 886-5100

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

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

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

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

As of March 15, 1999, there were 9,297,427 shares of the Company's Common
Stock outstanding. The aggregate market value of the voting stock of the
company held by non-affiliates is $36,522,096.

Documents Incorporated by Reference--Not applicable.

FORM 10-K

TABLE OF CONTENTS

ITEM PAGE
- - ---- ----

PART I

ITEM 1. BUSINESS........................................................................................ 1

ITEM 2. PROPERTIES...................................................................................... 24

ITEM 3. LEGAL PROCEEDINGS............................................................................... 24

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................. 25

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................... 25

ITEM 6. SELECTED FINANCIAL DATA......................................................................... 26

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 28

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................... 38

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................................... 38

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............ 39

PART II

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................. 40

ITEM 11. EXECUTIVE COMPENSATION.......................................................................... 43

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................. 49

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................. 51

PART III

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K................................ 57

IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS.................................................. 62

SIGNATURES - WAM!NET INC.................................................................................. 63

FINANCIAL STATEMENT SCHEDULES............................................................................. F-1

(i)

PART I

ITEM 1. BUSINESS.

OVERVIEW

The Company provides a managed, high speed, digital data delivery network
service (the "WAM!NET(R) Service"). The WAM!NET Service allows users to
transmit, receive and store large digital data files. The Company has developed
applications for companies in the graphic arts, the printing, publishing,
advertising, pre-press and, corporate communication (collectively, "Graphic
Arts") and entertainment industries, and is evaluating applications of the
WAM!NET Service for the medical imaging industry as well. The Company integrates
industry-specific software applications with commercially available computer and
telephony technologies to provide its customers with rapid, secure and reliable
transportation and storage of digital data. The Company provides customers with
a choice of solutions for their data transportation and workflow needs, ranging
from a turn-key, single source solution for high-volume data requirements to
solutions for subscribers having less intensive data requirements. The Company
focuses its software development, service, sales and marketing efforts on
vertical markets within targeted industries by providing services and products
specifically tailored for an industry sector, "Industry Smart(TM)" applications,
which serve to improve a customer's productivity and output under a simple,
monthly fee and usage pricing plan that requires no up-front capital investment
by the customer. The WAM!NET Service connects customers and trading partners
within an industry, thereby implementing the Company's Industry Smart approach.
The Company's applications combine rapid, secure data transportation services
with industry specific software applications that allow remote users to work
together, eliminate production deadlines imposed by courier schedules, eliminate
delays and copying errors associated with the transportation of physical media
(such as disks or tapes) and permit access to and use of the Company's remote
storage and retrieval services.

The Company has initially capitalized on the growing need to transmit data
in the Graphic Arts industry. The Company believes that the WAM!NET Service is
achieving wide acceptance among leading firms within the Graphic Arts industry.
This acceptance will in turn encourage other industry participants with whom
such firms share digital information (their "workflow community of interest") to
subscribe to the WAM!NET Service.

Since March 1996, when the Company first commercially released and
commenced marketing the WAM!NET Service to the Graphic Arts industry, the
Company has a customer base of more than 1,450 customer locations. In November
1997, the WAM!NET Service received an award from the Graphic Arts Technical
Foundation (an independent trade association) for developing the product or
service that will most likely change the manner in which the Graphic Arts
industry conducts business. WAM!NET customers include Graphics Arts industry
leaders such as Time Inc., RR Donnelley & Sons Company ("RR Donnelley"), Quad
Graphics, The Walt Disney Company ("Disney"), J.C. Penney Company and Fox
Broadcasting Company ("Fox Broadcasting"). The WAM!NET Service was released in
the United Kingdom during the fourth quarter of 1998.

The Company has also developed and released to its Graphic Arts customers
advanced software applications, such as an on-line "Customer Information System"
("CIS") that includes digital job tracking and a billing system, and
WAM!PROOF(R), an application enabling remote proofing. The WAM!PROOF(R) service
was commercially released in the second quarter of 1998. The WAM!BASE(R)
service, a remote data archiving, retrieval and distribution system, was
commercially released to the

printed catalog division of Sears and four of its primary vendors on November 1,
1998, and is expected to be released nationally in the second quarter of, 1999.
The WAM!NET Service was also released in the United Kingdom during the fourth
quarter of 1998.

The Company's diversified product line addresses the requirements of
customers exchanging data with workflow partners, regardless of the volume of
data transmitted or stored. In addition to the Company's current single source,
turn-key solution for data-intensive customers, the Company has developed
software applications which permit access to the WAM!NET Service by customers
with lower data volume requirements. The first such application is a fifth
generation graphical user interface, Transmission Manager, which provides
worldwide access to the Company's redundantly interconnected proprietary
purpose-built network hubs ("Distribution Hubs") via leased high-bandwidth
telephone circuits (the "WAM!NET Network"). The dial-up version of Transmission
Manager utilizes ISDN telephone circuits and was released in March of 1999.

The Company intends to continue its strategy of providing Industry Smart
solutions for vertical markets requiring mass transport and storage of digital
data beyond the Graphics Arts industry. The Company has created two new business
units, WAM!NET Entertainment and WAM!NET Medical, to develop and market Industry
Smart network services and applications for the entertainment and medical
industries. In particular, the Company is developing Industry Smart solutions to
address the video data transportation and storage and related workflow needs of
the entertainment industry and is also considering applications for its WAM!NET
Service for the transportation, storage and retrieval of medical images and data
for use by the medical industry.

RECENT DEVELOPMENTS

. SGI Investment. On March 4, 1999, the Company consummated the "SGI
Investment," a transaction with Silicon Graphics, Inc. ("SGI"), which
provided for an equity investment by SGI of $75.0 million and the
establishment of certain strategic relationships between the Company and SGI,
including a preferred provider relationship pursuant to which the Company
will be able to purchase hardware, software and services from SGI based on
SGI's most favored pricing models. In addition, SGI will also act as sales
agent for the Company's products in the entertainment industry. The Company
believes that the SGI Investment will provide many strategic benefits,
including:

- a networking and storage partnering relationship with an established
industry leader;

- access to a powerful new distribution channel for the WAM!NET Service,
including premier accounts in the entertainment industry; and

- the ability to partner with SGI's professional services group on
large, multi-year, multi-site deals which require customization and
involve complex implementation.

. Global Infrastructure Expansion. Building an international network to provide
trans-Atlantic, trans-Pacific and intra-European connectivity was one of the
Company's primary goals in 1998. At the beginning of 1998, the Company had 16
Distribution Hubs and two network operations centers ("NOCS") in North
America. During 1998, the Company added nine Distribution Hubs in North
America, seven in Europe, and one in Asia (Tokyo). The Company has also added
a third NOC in Brussels, Belgium, to support the Company's European
expansion.

. Network Traffic Growth. As the Company has grown its installed base of
customers to over 1,450, the data traffic traveling over the WAM!NET Network
has increased more than six-fold in 1998 compared to 1997. During October
1998, the Company posted its first month of billable network traffic greater
than two terabytes (1 terabyte = 1 thousand gigabytes = 1 million megabytes),
up from 0.9 terabytes in January, 1998. Traffic for the month ended February
1999 totaled 2.5 terabytes.

. International Market Expansion. On March 13, 1998, the Company acquired 4-
Sight Limited, a private limited company incorporated under the laws of
England and Wales ("4-Sight"), which was subsequently integrated into Wam!Net
Limited, a wholly-owned subsidiary of the Company ("WAM!NET U.K."). With the
acquisition and integration of 4-Sight Limited into WAM!NET U.K., the WAM!NET
Service is being introduced in Europe and Japan. The Company is utilizing
WAM!NET U.K.'s existing distribution infrastructure in these regions to
convert the previous 4-Sight Limited business from selling software and
hardware bundles to selling WAM!NET service contracts. The Company believes
it can convince the more than 30,000 WAM!NET U.K. software users to upgrade
to the WAM!NET Service. In September 1998, the WAM!NET Service was launched
in the U.K., followed by Germany, the nations of the Benelux region and
Scandinavia in October and November 1998. In September 1998, the Company and
Hermstedt AG, the leading manufacturer of ISDN card equipment in Germany,
announced a joint, global marketing and promotion campaign for the WAM!NET
Service and Hermstedt hardware. The Company believes that this will enable it
to address Hermstedt's 50,000 installed customer base and provide an
opportunity to present those customers with the WAM!NET Service.
Additionally, in September 1998, WAM!NET entered into a co-marketing
agreement with Deutsche Telekom AG to provide the WAM!NET Service to Deutsche
Telekom customers in Germany. The combination of these two co-marketing
agreements, with the leading ISDN equipment manufacturer and telephony
services provider, respectively, places the Company in a strong position to
address the German market.

. Greater Network Accessibility. The release of Transmission Manager will
provide a common user interface for both high and low data volume customers
and will enable WAM!NET U.K. customers (more than 30,000 worldwide) to
upgrade to this product and connect to the WAM!NET Network. The Company's
goal is to digitally connect both high and low volume customers through the
WAM!NET Network worldwide beginning in early 1999. Increasing the number of
customers, both large and small, significantly increases the value of the
WAM!NET Network and product offerings. Transmission Manager was released in
March of 1999.

. WAM!BASE. Sears' printed catalog division and four of its primary vendors
became the Company's first commercial WAM!BASE service customers on November
1, 1998, following a six month beta test. During the beta test, the amount of
data being moved over the WAM!NET Network resulting from digital images being
loaded into the WAM!BASE application grew from an average of three gigabytes
per month per customer to over 150 gigabytes in one month for one of the
primary vendors. During 1998, the Company also developed an innovative
distribution channel made up of "Digital Asset Management" ("DAM") firms who
will market the WAM!BASE service to their client base in the Graphic Arts
industry. In the third quarter of 1998, the Company signed-up over 35 DAM
distributors as part of the Company's "MasterMind" channel. The WAM!BASE
service is expected to be released nationally in the second quarter of 1999.

. Entertainment Industry. In February 1999, WAM!NET's entertainment group began
offering its entertainment customers the WAM!NET Service and a compressed
video viewing application. The Company expects its initial focus to be on
selling existing WAM!NET transportation and storage service to the post-
production market connecting post-production facilities with advertising
agencies for the delivery of review quality video during the television
advertisement creation process. Additional segments, including network
clearance for television advertisements, large data file transfer and storage
applications and video on demand are also being targeted. The Company expects
that this opportunity will be further expanded and leveraged by WAM!NET's
relationship with SGI and will target higher bandwidth transport
applications, video storage and distribution and rendering applications.

MARKET OPPORTUNITY

The Company believes that the increasing digitalization of work product and
workflow in data intensive and time sensitive industries is driving the demand
for managed, secure and reliable electronic data transportation and archiving
services. Based on information derived from independent studies, the Company
believes that the Graphic Arts industry will spend approximately $10.0 billion
between 1998 and 2000 on the digitalization of its production and printing
process, ranging from computer publishers investing at the desktop level to
commercial printers investing in computer-to-plate ("CTP") technology, which
facilitates a fully digital work product. Despite this movement toward the
digital transport and storage of data, many companies continue to use overland
or air courier services to deliver magnetic tape or optical disk copies of data
to others who desire access to such data due to the lack of reliable, cost
effective electronic transport mechanisms. This non-digital step results in a
method of transporting data which can both significantly lengthen production
cycle time and lead to possible errors. The same fundamental issues exist in the
movie, television and entertainment industry and in medical imaging. The Company
believes the current potential market for managed digital data transportation
and asset storage services is $4.3 billion and $2.3 billion, respectively, in
the Graphic Arts industry, and $1.8 billion and more than $10.0 billion,
respectively, in the entertainment industry.

The Company believes that existing electronic means for transporting large
digital data files have proven to be ineffective and/or prohibitively expensive
for most companies. Large files may take up to several days to transport using
the Internet or the fastest standard telephone modems (56,000 bps) and may lose
significant quality in transmission. The use of the Internet and standard
telephone modems can also lead to other significant disadvantages, most notably
high telephone usage charges and a lack of security, accountability and
reliability of transmission. Other dedicated technologies, such as point-to-
point telephone lines, offer more speed than the Internet (which is not managed)
or a standard telephone modem, but at a significantly higher cost. Such
technologies may also lead to data degradation and integration obstacles. Large
data files can be transported reliably in minutes over dedicated point to point
telephone lines (such as DS1 and DS3 lines); however, the substantial equipment
necessary at each dedicated connecting point and the sizable costs of leasing a
dedicated point to point telephone line makes this means of transport
uneconomical for most companies transporting large data files.

COMPETITIVE ADVANTAGES

The Company believes it is uniquely positioned to meet the growing need for
a cost-effective and reliable means of electronically transporting, storing and
retrieving digital data based on the following competitive advantages:

. Purpose-Built Network. The WAM!NET Service allows customers to move large
data files via the WAM!NET Network, a global network that integrates the
Company's Industry Smart software applications with a purpose-built network
of Company-owned Distribution Hubs. The Distribution Hubs are interconnected
redundantly with high-bandwidth leased telephone circuits. The Company
currently maintains 33 Distribution Hubs, located in 23 major U.S. and
Canadian cities as well as in London and Manchester, England; Paris, France;
Amsterdam, The Netherlands; Stockholm, Sweden; Frankfurt, Hamburg and Munich,
Germany; Brussels, Belgium; and Tokyo, Japan. The Company operates three
mirrored NOCs in Minneapolis, Las Vegas and Brussels through which it
monitors all data transmission on a 24 hour a day, seven day a week basis.
The Company believes that the WAM!NET Network provides reliable and secure
data transmission with guaranteed delivery and no degradation in quality.

. Diversified Solutions. The Company offers its customers a choice of solutions
based on their particular needs. For example, the Company provides each data
intensive subscriber with all of the hardware, software, transmission
facilities and management services necessary to use the WAM!NET Service.
Installation of the service, which is performed on behalf of the Company by
national service providers, consists of connecting data intensive customers
to the nearest Distribution Hub through a Company-owned network access device
and an appropriate communications link (such as T1, ISDN, frame relay, SMDS,
ADSL or other suitable facility) matched to the customer's transfer speed and
throughput requirements. The WAM!NET Service is designed for ease of use,
with a point and click e-mail type interface and a simple "pay by the
megabyte" pricing model. The WAM!NET Service can also be accessed remotely by
less data-intensive customers, through a dial-up connection to the WAM!NET
Network. The Company's strategy is to offer customers the WAM!NET Service at
rates competitive with overland and air courier services furnished on an
annual or multi-year subscription basis. There is no up-front capital
investment by the customer, who is charged based on a minimum monthly usage
fee and volume of data sent per transaction.

. Industry Smart Applications. The Company collaborates with leading
participants in its target markets and designs software applications
addressing industry-specific workflow requirements. These Industry Smart
applications, combined with the guaranteed delivery of the WAM!NET Service,
allow work partners in separate locations to collaborate digitally in real
time. The WAM!PROOF application allows customers to directly output across
the WAM!NET Network to remote locations, thereby eliminating the need to
deliver physical proofs by overnight courier. The WAM!BASE application allows
users to store and retrieve data, eliminating the need for redundant archives
and shrinking work cycle time by providing more immediate remote access to
desired data files.

. Customer Support and Customer Information System. The Company has implemented
extensive customer service functions, including customer support technicians
who are available 24 hours a day, seven days a week, who are trained
extensively in the Company's service offerings and who understand the
industry-specific workflow of the Company's customers. The CIS allows
customers to view data files, verify account information and check the status
of transactions on-line, as well

as to log help requests. The Company also provides its customers itemized
information regarding the size, cost, and destination of each "shipment" that
may be electronically imported directly into the customer's own accounting
system. This information facilitates capturing of project-specific costs and
billing of services on a job-by-job basis.

. First to Market Advantage. By being the first to market a managed, high-speed
digital data delivery network with Industry Smart applications, the Company
believes it is becoming the industry standard in the Graphic Arts industry
and is positioned to become the industry standard in its other target
industries. The Company has found that industry leaders such as Time, Inc.,
RR Donnelley and World Color, each of which were early WAM!NET Service
customers, actively encourage their workflow partners to subscribe to the
WAM!NET Service to increase workflow efficiencies. Potential entrants into
the managed digital data delivery field would need to deploy a global,
purpose-built network integrated with customized value-added applications,
and simultaneously convert industry leaders and their workflow partners, more
than 1,450 of whom already subscribe to the WAM!NET Service. Current
customers of the WAM!NET Service include 14 of the 20 largest publishers, 12
of the 20 largest printers, 17 of the 20 largest advertising agencies, and 14
of the 20 largest pre-press graphic arts agencies in the U.S., as well as the
corporate marketing communications departments of many U.S. corporations.

. Strategic Relationships with MCI WorldCom and SGI. Both MCI WorldCom, Inc.
("MCI WorldCom") and SGI have made strategic investments and created
alliances with the Company. MCI WorldCom provides telecommunication and other
services to the Company on a non-exclusive basis. The Company anticipates
that its relationship with MCI WorldCom will enable it to access the
worldwide infrastructure, sales and marketing work force, telephony
technologies, high bandwidth carrier service and other services of MCI
WorldCom and its affiliates, including UUNet. In addition, in connection with
SGI Investment, the Company and SGI have entered into a preferred provider
relationship pursuant to which the Company will purchase hardware, software
and services from SGI based on SGI's most favored pricing models, and SGI
will act as sales agent for the Company's products in the entertainment
industry.

BUSINESS STRATEGY

The Company's objective is to become the leading provider of enhanced,
managed digital data delivery and archiving services to industries comprised of
participants requiring high-speed digital access to shared data. WAM!NET's
strategy to achieve this objective and to build a long-term sustainable
competitive advantage is to:

. Increase its Customer Base to Create Critical Mass. The Company's sales and
marketing strategy has been designed to rapidly penetrate its initial target
market, the Graphic Arts industry. Elements of this strategy include: (i)
creating the WAM!NET Service as a turn-key, single source service solution;
(ii) implementing an easy to understand "pay by the megabyte" pricing model,
eliminating the need for any capital investment by customers; (iii) designing
aggressive advertising, trade show attendance, event marketing and direct
selling to drive trials, including introductory product trials for industry
leaders; (iv) building a direct sales force to target leading industry
participants who, in turn, encourage their workflow partners to subscribe to
the WAM!NET Service; and (v) implementing programs in which large receivers
of data (e.g., printers) promote and market the WAM!NET Service, along with
the WAM!NET direct sales force, to customers and workflow partners. As the
Company increases its number of installed customer locations and

as its customers increase the number of workflow partners with whom they
exchange data, the amount of data transmitted through the WAM!NET Service is
expected to increase exponentially.

. Apply Industry Smart Network Model to Other Industries. The Company believes
that the WAM!NET Industry Smart network model can provide the benefits and
advantages it offers the Graphic Arts industry to other industries with
similar data transportation, storage and retrieval requirements. Some of the
Company's entertainment industry prospective customers, such as Fox
Broadcasting and Disney, currently subscribe to the WAM!NET Service for their
Graphic Arts-related needs. Through its relationship with SGI, the Company
will continue to develop Industry Smart applications and sales and marketing
strategies suitable to the entertainment industry. The Company is also
collaborating with industry leaders in the medical imaging industry to
develop and implement Industry Smart applications in connection with
marketing to that industry.

. Maximize WAM!NET Network Accessibility. The Company's product line is
designed to maximize customer access to the WAM!NET Service worldwide,
regardless of the volume of data to be transmitted or stored. While data-
intensive customers may be connected to the WAM!NET Service through a single
source, turn-key solution utilizing a Company-owned network access device and
an appropriate communications link matched to the customer's requirements,
lower data-intensive customers may access the WAM!NET Service remotely
through the currently available dial-up version of Transmission Manager or
through wireless technologies. The Company is presently testing and expects
to provide access to the WAM!NET Service through the Internet during 1999.

. Drive Utilization Through Value-Added Services and Volume Discounts. The
Company believes that Industry Smart applications, such as the Customer
Information System, the WAM!PROOF service, the WAM!BASE service and
compressed video viewing, will provide significant benefits to its customers
and stimulate increased usage of the WAM!NET Service. The Company also offers
volume discounts and a variety of promotional programs for industry leaders
to induce customers to connect with their trading partners and send
increasingly large volumes of data traffic across the WAM!NET Network. The
combination of additional customers and increased utilization of the WAM!NET
Network is expected to lower the Company's average network cost per
subscriber.

. Expand and Enhance Infrastructure and Develop Worldwide Capabilities. The
Company intends to invest in resources and systems to ensure that the
Company's operating infrastructure and support services provide its
subscribers with optimal digital connectivity with guaranteed performance at
competitive rates. Primarily through its acquisition of 4-Sight, the Company
is currently expanding into parts of Europe and Asia for the purpose of
providing its customers with desired international connectivity. The Company
has expanded the WAM!NET Network into seven countries beyond the U.S. and
Canada, with Distribution Hubs in London and Manchester, England; Frankfurt,
Hamburg and Munich, Germany; Paris, France; Amsterdam, the Netherlands;
Stockholm, Sweden; Brussels, Belgium; and Tokyo, Japan. During 1999, the
Company expects to further develop its international service infrastructure
by providing installation and customer support via third parties, expanding
local sales and distribution relationships and establishing additional
Distribution Hubs and regional NOCs in selected countries. The Company
released Transmission Manager(R), the fifth generation software application
developed by the newly integrated Company and WAM!NET U.K. applications and
network engineering departments, on March 1, 1999 which will permit less
volume intensive customers to gain remote access to the WAM!NET Network. The
Company believes that WAM!NET U.K.'s more than 30,000 customers in 42
countries are prime candidates for the Transmission Manager application. The

Company is transitioning WAM!NET U.K.'s existing distribution infrastructure
in Europe and Japan from selling software and hardware bundles to selling
WAM!NET Service contracts. By utilizing WAM!NET U.K.'s infrastructure and
investment, the Company believes it has reduced the time that it would have
taken to enter certain international markets by at least twelve months. The
Company may also establish its international presence through other
acquisitions, joint ventures or other similar business transactions.

. Reduce Costs and Improve Operating Margins. The Company seeks to reduce costs
and improve operating margins by (i) spreading the cost of installing and
operating the WAM!NET Network over a large base of customers; (ii) designing
the network to use more expensive hub equipment in a few national and
regional operational centers and less expensive equipment at each customer
site; (iii) deploying the dial-up version of the Transmission Manager
application ("On Ramps") for less volume intensive customers; (iv) pursuing
programs to reduce the costs of capital equipment, including obtaining mass
purchasing discounts for network infrastructure and customer premises
equipment; (v) utilizing network management tools to optimize existing and
planned network capacity as volume increases and traffic patterns begin to
emerge; (vi) deploying new, lower-cost last mile local loop technologies to
connect customer sites to Distribution Hubs, including wireless technologies
and remote dial-up capabilities; and (vii) deriving other incremental revenue
from value-added services such as the WAM!BASE service, which can be
delivered over the existing WAM!NET Network infrastructure. The Company also
expects its operating margins to improve as a result of anticipated cost
reductions associated with increasing competition in both the local and long
distance markets.

TARGET MARKET OVERVIEW

The WAM!NET Service has been designed to support a community of interest
among interdependent participants in time sensitive and data intensive
industries with highly collaborative workflows. The Company is currently
providing its services to the Graphic Arts industry, and is beginning to market
the WAM!NET Service to other communities of interest with similar data
transportation and archiving needs as those found in the Graphic Arts industry,
including the entertainment and medical imaging industries. The Company intends
to apply its business strategy to these other industries by capitalizing on the
network, operations, service, application engineering and sales/marketing
infrastructure already developed by the Company and by developing and offering
Industry Smart applications that are tailored to the workflow requirements of
those industries.

Graphic Arts. The Graphic Arts industry is comprised of printers, pre-press
production firms, advertising agencies, publishing firms, graphic artists and
list management firms who design, prepare and produce printed materials. Based
on industry information and research performed for the Company, the Company
estimates the total potential size of the managed data delivery service and the
digital asset storage markets for the Graphic Arts industry in the United States
to be $4.3 billion and $2.3 billion, respectively. The Company's estimate of the
number of potential sites in key segments of the Graphic Arts industry is
outlined below, based on information contained in industry research reports.

POTENTIAL SITES BY MARKET SEGMENT AND FIRM SIZE

LARGE MEDIUM SMALL TOTAL
----- ------ ----- -----

Printers(1).................................. 1,088 4,169 64,830 70,087

Pre-Press(1)................................. 108 427 4,584 5,119

Publishers(2)................................ 597 3,031 39,522 43,150

Ad Agencies/Graphic Designers(3)............. 1,615 10,742 68,478 80,835

Corporate Communications(4).................. 2,402 5,405 112,294 120,101

List Management(4)........................... 103 231 649 983
----- ------ ------- -------
Total Sites................................ 5,913 24,005 290,357 320,275
===== ====== ======= =======

_______________
(1) Large, medium and small means having at least 100, at least 25 but less than
100 or less than 25 employees, respectively.
(2) Large, medium and small means having at least 250, at least 50 but less than
250 or less than 50 employees, respectively.
(3) Large, medium and small means (i) advertising agencies having at least 100,
at least 25 but less than 100 or less than 25 employees, respectively; and
(ii) direct mail advertising, commercial photography and graphic art design
firms having at least 25, at least 5 but less than 25 or less than 5
employees, respectively.
(4) Large, medium and small means having at least 25, at least 5 but less than
25 or less than 5 employees, respectively.

The materials created and printed by the Graphic Arts industry include
books, magazines, newspapers, catalogues, circular advertisements, billboard
advertisements, marketing materials, brochures, packaging and multi-media
materials. According to industry data, approximately 50% of content in the
Graphic Arts industry is currently created in a digital format using specialized
software applications such as Adobe PhotoShop(R) and QuarkXpress(R), and by the
year 2000, more than 64% of the Graphic Arts industry is expected to be using
digital page/imaging software. File assembly and printing preparation activities
are also becoming digital with the increasing use of digital scanners and
cameras. Analog images, including photographs, can now be easily scanned and
digitally incorporated into the production process. Additionally, adoption of
CTP technologies by large- and medium-sized printers facilitates a fully digital
workflow throughout the entire creation and printing process.

The digitalization of the printing process has resulted in the need for
both higher bandwidth connectivity to move data intensive printing jobs through
the print production process and for storage solutions which provide asset
management capabilities and collaborative access to the stored digital assets.
Today, the majority of work files are stored on magnetic or optical disks and
transported via local or overnight couriers, such as Federal Express and United
Parcel Service. The Company anticipates that large portions of data will
increasingly be delivered via digital networks, driven primarily by the need to
compress time schedules and reduce production costs. The Company expects that
once market leaders and other influential participants in these industries
become significant users

of managed data delivery services, other industry participants will follow in an
effort to remain competitive.

The Company believes it is well positioned to take advantage of the
following factors, identified by industry research reports, which indicate that
between 1996 and the year 2000: (i) the percentage of print jobs transferred
across networks will quadruple, representing over 40% of all print jobs and two
thirds of print job revenue; (ii) more than 50% of all publishing workflow and
more than 60% of all creative services workflow will be conducted almost
entirely over networks; (iii) businesses with the equivalent of T1 wide area
connectivity will increase 5 times; (iv) manufacturers will integrate CTP
equipment creating a total digital pre-press workflow; (v) high resolution
digital cameras will be affordable for most Graphic Arts users; and (vi) most
medium to large printers and pre-press firms will offer digital content
management services to support re-purposing of digital data into other products.

Entertainment Industry. The entertainment industry, which in terms of data
transport needs is similar to the Graphic Arts industry, provides another
potential community of interest for the expansion of the WAM!NET Service. This
industry consists of many subsectors, including television and radio
advertising, feature films, broadcast, cable and satellite video, high-
definition television, home video, video games and video applications on the
Internet. An adjunct market to the entertainment industry is the distance
learning market, which includes corporate (training, marketing and
communications) and educational distance learning. Each of these subsectors is
moving away from traditional analog media, such as film, photographs and other
physical media expression, and toward digital media. Digital tools previously
available only to large media customers (such as television networks and major
film studios) are now widely available to the entire industry. The Company
believes the WAM!NET Service will be attractively priced for a wide spectrum of
customers, including the independent contractor/artist, small to large
production and post-production studios and global media conglomerates.

In contrast to the Graphic Arts industry, however, which involves the
creation of static or still imagery, the entertainment industry principally
produces motion imagery coupled with digital audio. As a comparison, the range
of data transmission requirements varies to a much greater extent. While some
applications involve the transport of compressed video many involve the
transport of uncompressed video and HDTV. For comparison, an uncompressed 30-
second television advertisement is comprised of approximately 40 times the
amount of digital data found in a typical full page magazine advertisement. The
Company believes the WAM!NET Network is capable of accommodating the high-speed
data transfer rates necessary to transport motion imaging in the entertainment
industry.

The Company's initial entry into the entertainment industry is focused on
connecting post production facilities with advertising agencies to transfer
compressed television advertisements for review purposes during the
advertisement production cycle. Review quality work is typically transported via
couriers and disk. The Company believes that by using the WAM!NET Service,
companies will be able to reduce their advertisement production cycles by
several days. In addition, network clearance applications are also being
pursued. The network clearance process involves sending compressed version of
completed advertisements to the various network clearance groups for their
approval to air advertisements. Additionally, the large data transport and video
storage and retrieval represents a dynamic opportunity for the WAM!BASE service
and compressed video viewing and is expected to drive the rapid growth of this
business unit. Both of these opportunities will be pursued jointly with SGI.

Medical Imaging. The emergence of digital imaging in the medical industry
has created another community of interest with potentially promising
applications for the WAM!NET Service. The increasing availability of advanced
computer technology combined with continued pressures to contain health care
costs is resulting in significant portions of the medical imaging workflow being
completely digitalized, including output from medical scanning equipment such as
Computed Tomography ("CT") and Magnetic Resonance Imaging ("MRI") devices. These
devices capture and display patient data in digital formats, generating data
files often in excess of 35 megabytes per file.

The Company has identified multiple steps in the medical imaging workflow
process which may effectively be addressed by the WAM!NET Service. For example,
radiologists and other healthcare professionals who examine the output generated
by CT and MRI devices are often located in facilities separate from the
facilities where the digital images are created. Furthermore, the increasing
prominence of health maintenance organizations and other provider alliances,
where member patients can go to any facility within the provider's network, may
require an increased ability to retrieve and transport medical data between
physically separate facilities. Currently, most files are either printed to film
or copied to optical disks and then physically transported via courier services
between facilities. In cases where digital images are printed to film,
healthcare professionals lose the ability to do real time reads of the images.
Current methods of storing medical images also present file transportation and
storage problems. Analog files need to be manually located, copied and couriered
to the healthcare professional for examination. It is estimated that 10%-25% of
images stored in a non-digital film format are not readily accessible when
needed and often lost entirely. Digital file storage is emerging as an option,
but optical disks still need to be located, copied and then transported to
remote sites.

As a result, hospitals are beginning to explore real-time remote imaging
and archiving creating efficiencies by, for example, allowing radiologists to
collaborate more effectively. As documented in the January 1998 Journal of
Diagnostic Imaging, Hammersmith Hospital in London, England, found that the
change from hardcopy to digital archiving reduced staffing requirements by eight
positions, saved an estimated $0.7 million per year, and increased workload by
4,500 exams per year without adding additional radiologists. The Company
believes the industry will need to eliminate multiple archives to adopt full
digital implementation and provide affordable long-term on-line storage.

The Company believes that medical service providers, particularly those of
substantial size or that span a number of separate facilities, have significant
medical imaging requirements. The Company is presently conducting a pilot
project of the WAM!NET Service with two medical facilities that are transporting
and retrieving medical images through the WAM!NET Network. The WAM!NET Service
has been configured to comply with Digital Imaging and Communications in
Medicine ("DICOM") industry standards for compatibility with medical imaging
equipment which are the industry accepted standards utilized by major medical
imaging equipment manufacturers in the domestic healthcare industry. If and when
WAM!NET Service is offered for treatment or diagnostic purposes, it would be
subject to regulation by the Food and Drug Administration.

WAM!NET U.K. BUSINESS

On March 13, 1998, the Company acquired 4-Sight, which was subsequently
integrated into WAM!NET U.K. (the "4-Sight Acquisition"). WAM!NET U.K. is a
provider of data transmission software and related products and applications
targeted to the Graphic Arts industry, primarily utilizing ISDN lines, with
particular emphasis on European, Asian and North American markets and is engaged
primarily in software development and distribution on a global basis through
resellers. As a result of the Company's acquisition of WAM!NET U.K. and the
companies' shared resources and facilities,

WAM!NET U.K. is currently able to provide certain managed network services
related to delivering files. This is accomplished by modifying its software
applications to allow access to the WAM!NET Network. The software user is
generally responsible for all software and hardware installation, procuring an
ISDN telephony connection and verifying the integrity of their files being sent
over a public network infrastructure. By exploiting the synergies in coupling 4-
Sight's data transportation software with the Company's managed, network
infrastructure the Company has been able to achieve broader market coverage in
the Graphic Arts industry by combining WAM!NET U.K.'s international presence and
penetration of the lower volume user market with the Company's domestic presence
and penetration of the higher volume user market. At December 31, 1998, WAM!NET
U.K. had a customer base of more than 30,000 customer locations, including 3,000
sites in the United States, prior to its acquisition by the Company.

WAM!NET U.K.'s products have been designed to work with public ISDN
telephony infrastructures used widely in Europe and Japan and to a lesser extent
in the United States. WAM!NET U.K. has formal sales agreements with resellers
who distribute WAM!NET U.K.'s products in 19 countries. WAM!NET U.K.'s software
products are installed at over 12,000 sites in the United Kingdom, where the
Company estimates it has a 90% market share in the Graphic Arts market segment.
Key users of WAM!NET U.K. software in the United States include Xerox
Corporation ("Xerox"), Ogilvy & Mather Worldwide, Inc., McCann-Erickson and the
National Geographic Society.

Key Benefits from the 4-Sight. Acquisition. The Company has realized
multiple benefits from the 4-Sight Acquisition including:

. Providing Additional Network Access. WAM!NET U.K.'s software applications
have been modified to allow access to the WAM!NET Network. New versions of
WAM!NET U.K. software can be introduced which are WAM!NET Service
compatible and can be used to send to and receive data from other WAM!NET
locations. The Company believes this will significantly improve its ability
to attract and retain customers at the lower end of the market segment
where ISDN lines are most common. The Company has achieved broader market
coverage in the Graphic Arts market by combining WAM!NET U.K.'s
international presence and penetration of the lower volume user market with
the Company's domestic presence and penetration of the higher volume user
market. In addition, many of the Company's current customers have workflow
partners who use WAM!NET U.K. software. Modifying WAM!NET U.K. technology
has allowed WAM!NET U.K. customers to transmit data to WAM!NET Service
customers with whom they require periodic data exchange and thereby
increase traffic over the WAM!NET Network.

. Facilitating WAM!NET U.K. Customer Upgrades. WAM!NET U.K. software upgrades
that are WAM!NET Service compatible are marketed to existing WAM!NET U.K.
customers and bundled with WAM!NET Service contracts. In addition, the
Company could potentially re-provision local loop ISDN lines for the
current WAM!NET U.K. customer base or upgrade higher traffic sites to
network access devices.

. Accelerating International Expansion. WAM!NET U.K. has already invested in
developing distribution channels in the United Kingdom, Germany, the
nations of the Benelux region, Scandinavia and Japan, and has plans to
expand distribution capabilities in France and other Asian markets. The
Company has greatly benefited from the formal working relationships WAM!NET
U.K. has developed with dealers, by the people it employs to manage dealer

relationships in these international markets and by the working knowledge
WAM!NET U.K. employees have developed regarding unique business practices
in these international markets. The Company believes that it can utilize
WAM!NET U.K.'s existing distribution infrastructure and investment to
bundle the WAM!NET Services with new versions of WAM!NET U.K.'s
transmission software, such as Transmission Manager. By utilizing WAM!NET
U.K.'s infrastructure and investment, the Company has reduced the time that
it would have taken it to enter certain international markets by nine to
twelve months.

. Accelerate Development Activities. WAM!NET U.K. has invested significant
resources to build software development competencies in data transmission
user applications. In addition, WAM!NET U.K. has developed capabilities to
localize its software applications for use in specific international
markets including the French, German, Benelux and Japanese markets. These
capabilities may augment the Company's development staff and help increase
application development staffing expertise.

PRODUCTS AND SERVICES

The WAM!NET Service. To send or receive a data file over the WAM!NET
Network, a customer uses a proprietary software program designed and furnished
by the Company. High volume customers use proprietary software-driven network
access devices to access the WAM!NET Network, while lower volume customers use
Transmission Manager. Whether the customer accesses the network remotely or by
using a network access device, the WAM!NET Service appears as an icon on the
customer's desktop, like a multi-layered e-mail or fax application. Clients can
use the application to manage an address book of WAM!NET users with whom they
both send and receive packages of files and to set application default
parameters. To send a package, the user "highlights" and "drags" a file to the
appropriate address which appears across the top of the user interface. Once a
file is dropped onto an address tile, a packing slip is automatically opened and
the user is prompted to fill out basic packing slip information. Additional
files can be added to the package to be included in the transmission. Similarly,
additional sites can be identified for simultaneous package delivery. The user
then selects the send button and the package is automatically delivered to the
user's network access device for processing, coding and routing. Once a package
has been delivered to a network access device, the package will be transported
regardless of whether the sending or receiving computer is operating. If the
destination computer is unavailable, the package will be held for delivery until
the destination computer becomes available to receive the file. Unlike a dial-up
network, where both computers need to be on and available at either end or there
will be a busy signal, the WAM!NET Service store and forward function holds the
file in transit until the file can be delivered. To receive a package, customers
are prompted on screen to view packages that have been received by their network
access device. Files can be transferred from the network access device to the
client's local area network ("LAN") either by dragging and dropping files from
the network access device icon to the local network or by using a file retrieval
menu.

The WAM!NET Network can also be accessed remotely by Transmission Manager.
This software allows current users who upgrade to the new software as well as
new subscribers to utilize WAM!NET's range of services without the use of
customer premise equipment.

Each transaction over the WAM!NET Service is tracked and accounted for as
an individual "shipment" of data. On a monthly basis, the Company furnishes its
customers with an invoice summarizing the customer's WAM!NET Service use and
charges. If requested by a customer, the Company will also deliver to such
customer an electronic data file over the WAM!NET Service that

contains itemized information regarding the size, cost and destination of each
shipment as well as information regarding other services used by the customer.
This data file may be imported directly into the customer's own accounting
system, providing what the Company believes to be a valuable service for
customers who need to capture costs and bill for services on a job-by-job basis.

Customer Care and the Customer Information System. The Company has
implemented extensive customer support functions, including customer support
technicians available 24 hours a day, seven days a week. These technicians are
trained to understand the Company's product and service offerings, and the
industry specific workflow of the Company's customers. Customer support
technicians routinely answer customer questions concerning product functions,
update address books, handle upgrade requests, and resolve product use issues.
In addition, customer calls are logged into call management software for
tracking and analysis purposes.

The Company's CIS application allows customers to verify account
information and check the status of their transactions on-line. The CIS appears
as an icon on the customer's computer desk-top. When activated, the CIS accesses
a menu which provides the customer with several options, including viewing
packages, viewing account information or logging a help request. The "view
packages" option allows customers to view sent and received package activity for
user definable time periods between one hour and 90 days. This option also
provides key transmission statistics for each package sent or received including
date, time, size, content and file type. The account information option allows
customers to view relevant account information, including billing information,
site contact names and phone numbers and also enables customers to update
account information on-line. The "help" option allows customers to log a help
request by e-mailing questions or requests directly to the Company's customer
support group.

WAM!PROOF. The Company has developed an application, the WAM!PROOF
application, which allows customers to directly output across the WAM!NET
Network to proofing devices located at remote locations. The WAM!PROOF service
was released in the second quarter of 1998. Proofs, which are physical
representations of printed output, are created throughout the production process
at major check points. Because workflow participants are often located in
geographically diverse locations, proofs have historically been printed and
delivered by overnight couriers to remote participants. WAM!PROOF application
enables customers to print proofs in geographically diverse locations as if they
were printing to a workflow participant on their LAN, thereby reducing
turnaround times and creating workflow efficiencies. The Company has
collaborated with leading manufacturers of printing/proofing devices to ensure
compatibility with the WAM!PROOF application. "WAM!PROOF Ready"
printing/proofing devices include devices made by Canon, Inc., Hewlett Packard
Company ("HP"), Ambition Corp., Eastman Kodak Company, Tektronix, Inc. and
Xerox. Heavy users of the WAM!PROOF service often generate 100% more traffic per
month than before their use of the application.

WAM!BASE. The Company has also developed a wide area data repository
service, the WAM!BASE service, which provides WAM!NET Service users access to a
remote data archive and allows them to store, retrieve and manage data on a per-
megabyte cost basis. The first customer to use the WAM!BASE service, Sears,
completed beta testing and began commercial usage of the WAM!BASE service on
November 1, 1998, and the WAM!BASE service is expected to be released nationally
in the second quarter of 1999. The ability to manage and access digital assets
is becoming significantly more challenging due to increasing digitalization in
the Company's target industries. The implementation of a workable and cost-
effective data management solution requires the integration of hardware,
software and networking to make data accessible to multiple workflow partners
and to

eliminate redundant processes and storage facilities. The implementation of such
a system requires substantial investments in capital equipment, systems
integration and archive management and often takes months to complete. Typical
problems that can occur include inadequate scalability, high operations costs
and lack of high-speed and secure network infrastructure needed to share large
digital data files, all of which are eliminated through the use of the WAM!BASE
service.

The Company believes that the WAM!BASE service provides a collaborative
digital asset management service that addresses significant data management and
storage issues for its customers, and can potentially eliminate the need for
investment in capital and archive management. Given the speed at which
technology changes and the need to ensure reliable access to stored images, many
participants are unwilling to make these investments. Because it has been
designed to be scaleable to the needs of entire industries, the WAM!BASE service
can spread infrastructure and operating costs across numerous users. The
WAM!BASE service is designed to offer a turn-key archiving system that is cost
competitive in relation to an individual customer's investment in a local,
stand-alone archiving system. Customers send their data files over the WAM!NET
Service to the WAM!BASE repository where files are stored in customer
configurable libraries. Customers are charged a monthly per megabyte fee for
storage. Since customers are using the WAM!NET Service to retrieve data from the
WAM!BASE repository, they can obtain quick and secure access to their data.

The WAM!BASE service provides collaborative access to stored data files.
With existing systems, industry participants working on the same job often store
multiple copies of the same data files because they do not have a collaborative
means of sharing file access. Participants who use the WAM!BASE service and
store files in their private library space, can control security access to each
individual file in their library, and can change security access privileges at
any time. This eliminates the need to store redundant copies of files at
multiple participant sites, can shrink cycle time by providing more immediate
access to important data files, and supports the job driven workflow by enabling
customers to control security access to images on a job-by-job basis.

The WAM!BASE service uses two mirrored storage facilities linked by high
bandwidth data connections. The initial WAM!BASE storage centers are located in
Minneapolis and Las Vegas within the NOCs already located in each city. Each
storage facility is connected to the WAM!NET Network through redundant links and
customer data files are stored in both locations. Customers may use proprietary
software provided by the Company to upload data to the storage facilities and to
browse, retrieve and forward files stored in the repository. Customers are able
to restrict access to individual files, groupings of files or complete libraries
of files, manage the distribution of files, and are also able to catalogue,
identify and search for stored files using assigned attributes.

SERVICE CONTRACTS

The Company believes that the WAM!NET Service is achieving wide acceptance
among leading participants in the Graphic Arts industry, which in turn
encourages those with whom information is shared to subscribe to the WAM!NET
Service. As of December 31, 1998, more than 1,450 network access device
customer locations were connected to the WAM!NET Network. As of December 31,
1998, the Company's mix of service contracts was as follows:

SERVICE LEVEL (IN MEGABYTES PER HOUR) # OF CONTRACTS % OF CONTRACTS
------------------------------------- -------------- --------------

40 MPH Service............................. 94 7 %

120 MPH Service............................ 724 49

200 MPH Service*........................... 75 5

400 MPH Service............................ 459 31

1,000 MPH Service.......................... 19 1

Other...................................... 106 7
----- ---
Total...................................... 1,477 100%
===== ===

___________________
*Released in January 1998.

The Company's standard WAM!NET Service contract is structured to assess
charges based on the minimum throughput capability (i.e., the minimum number of
megabytes per hour of the customer's data that the Company is obligated to
transfer via the WAM!NET Network), the monthly minimum volume and any usage in
excess of such monthly minimum volume. The pricing structure varies depending on
the monthly minimum fee and on volume, with higher minimum fees and higher
volumes generally resulting in lower per megabyte charges. During most of 1998,
the pricing structure required each WAM!NET customer to sign a service contract
for a fixed term of one to three years, at a specified location with minimum
monthly fees ranging from $250 to $2,500 per month up to the specified volume.
The standard service contract is automatically renewable for additional one year
periods at the Company's then prevailing pricing structure, unless the customer
gives notice of termination at least 60 days prior to any automatic renewal
date. During the fourth quarter of 1998, the Company implemented a new three
zone pricing model in the U.S. and Canada. The new pricing model maintains much
of the original model's simplicity but charges higher monthly minimums outside
major metropolitan areas where local loop telecommunication charges are more
expensive.

Each service contract also grants the customer a limited, non-transferable
license to use the Company's proprietary software and certain other intellectual
property solely in connection with the customer's use of the WAM!NET Service.
Under each service contract, a customer generally agrees to pay all taxes and
fees imposed by governmental authorities, to be responsible for all loss or
damage to the network access device, to maintain certain insurance coverage for
the network access device, to preserve the Company's ownership of the licensed
intellectual property, to keep the network access device at the leased location,
to return the network access device and all licensed intellectual property at
the termination of the service contract, and to pay all of the Company's costs
of enforcement in the event the customer breaches the service contract.

In addition to the standard service contract, the Company also negotiates
custom service contracts with large users of the Company's services. These
custom service contracts generally address specific customer workflow
requirements or multi-site installations and typically contain scheduled

rebates and discounts based upon the number of third party trading partners who
become connected to the WAM!NET Network and upon the volume of data received
from those third parties. These custom service contracts also typically contain
negotiated provisions relating to issues of non-infringement, indemnification
and damages for breach.

The Company has begun to offer the WAM!BASE and the WAM!PROOF service as
add-on features to the WAM!NET Service. Subscribers for the WAM!BASE and
WAM!PROOF service sign an addendum to their WAM!NET service contract that
separately licenses the software necessary to utilize the WAM!BASE or WAM!PROOF
service, as the case may be, and contains other appropriate terms. The Company
furnishes the WAM!BASE software without charge to customers who agree to minimum
monthly WAM!BASE storage fees. WAM!PROOF customers are charged for usage on a
per megabyte basis like any other transmission over the WAM!NET Network. The
Company requires a nominal one-time license fee covering the costs incurred by
the Company to furnish the WAM!PROOF software. Additional WAM!BASE fees are
charged to the customer for library set up and administration which is often
done through an authorized third party. Additionally, the Company is evaluating
digital storage of large (terabyte and petabyte-sized) entertainment industry
files currently being stored on tape.

SALES AND MARKETING

Over the course of the year ended December 31, 1998, the Company has spent
significant time and resources developing and building international marketing
and sales expertise. The Company's sales force has been expanded from 15 U.S.
based sales people to over 150 sales and marketing people worldwide, located in
major markets such as New York, Chicago, Los Angeles, Boston, Washington D.C.,
Minneapolis, San Francisco, Dallas, Atlanta, Denver, Seattle, Toronto, Montreal,
London, Amsterdam, Hamburg, and Oslo. Originally focused on just the Graphic
Arts market, the sales division also covers the entertainment industry. In
addition, the Company has grown its marketing effort, which now has
responsibility for the definition, commercialization, promotion, pricing and
ongoing management of the Company's products and services. The marketing
division is divided into three functional groups, based on customer needs and
demands, including a product marketing group, a segment marketing group and
communications group. The product marketing group is concerned with definition,
development and integration of service products across all vertical market
segments. The segment marketing group is responsible for planning, launching and
coordinating ongoing marketing activities (promotions, pricing, etc.) within
specific vertical market segments, including the Graphic Arts industry, the
medical industry and the entertainment industry. The communications group is
responsible for working with segment groups to design and create marketing
materials and integrated marketing programs including direct mail promotions,
brochures, advertisements, web-based marketing materials and public relations.
The sales organization is also divided into specific groups, including a new
sales group, an account management group, a national accounts group, an
entertainment group and WAM!BASE group.

Primary marketing and sales strategies focus on making inroads with major
participants in the Company's target industries. In the Graphic Arts industry,
the Company's initial sales focus was on signing large commercial printers, the
final data destination in the digital workflow. Once several printers subscribed
to the WAM!NET Service, the Company's sales organization sought to connect the
printer's customers (pre-press firms, advertising agencies and publishers) to
the WAM!NET Network using a combination of sales and marketing strategies. Such
strategies include implementing promotional programs in which printers promoted
and marketed the WAM!NET Service to their

customers and workflow partners along with the Company's direct sales force.
Similar strategies are being applied by the Company to its entertainment and
medical imagery initiatives.

In connection with the SGI Investment, the Company and SGI have entered
into a strategic relationship where, among other things, SGI will act as sales
agent for the Company's products in the entertainment industry.

As more customers subscribe to the WAM!NET Service, the Company expects the
rate of growth and strategic focus of its sales force to balance new site
acquisition and increasing utilization from its existing customers. As a
result, the sales organization may employ additional digital consultants to work
with customers to help them better utilize WAM!NET services, increase their
acceptance of Industry Smart applications such as the WAM!BASE and WAM!PROOF
applications, and expand the circle of WAM!NET users with whom they send and
receive data.

The Company's product marketing will focus on commercializing new features
and new products that are also intended to help increase the utilization of the
WAM!NET Network. This will include full scale commercialization of Industry
Smart applications such as the WAM!PROOF and WAM!BASE applications and the
addition of new Industry Smart features into existing products, including
directory services with white and yellow pages functionality, and directed
billing capabilities which will enable customers to reverse bill or bill third
parties for data transportation services.

The Company has network access devices in 44 states, Canada and the United
Kingdom. No single state or province accounted for more than 10% of the
Company's revenues for 1998 on a consolidated basis. For the year ended December
31, 1998, the Company derived approximately 46.8% of its revenues from sales in
the United States, 42.2% from the United Kingdom, 8.9% from the rest of Europe,
and 2.1% from the rest of the world.

INSTALLATION SERVICES

The Company believes its ability to deliver consistently high quality
installation services will materially affect its ability to attract and retain
customers. The Company, therefore, has expended considerable resources to build
an installation function which coordinates and performs all aspects of service
installation for the customer. When a new contract is signed, an installation
project manager is assigned to manage the installation. Site surveys are
completed to capture and confirm key customer information including network
access device placement, appropriate service level, account information and
network connectivity requirements. The project manager coordinates installation
of the network access device with on-site third-party installers and the
Company's circuit engineers, who test and certify connectivity and throughput
between the customer's site and the Distribution Hub.

Installation of the WAM!NET Service consists of installing a simple,
graphical user interface ("GUI") on the customer's computer or LAN, connecting
the customer's computer or network to a network access device, and connecting
the network access device through telephone service to the nearest Distribution
Hub. The Company has entered into arrangements with third-party field
maintenance providers, to offer installation, maintenance and repair services on
customer sites.

NETWORK ARCHITECTURE

The WAM!NET Network is comprised of international, domestic, regional and
local Distribution Hubs that are owned by the Company and interconnected
redundantly with high-

bandwidth leased telephone circuits. The Company currently maintains 33
Distribution Hubs, located in 23 major U.S. and Canadian cities, nine cities in
Europe and one in Asia. The Company also operates three mirrored NOCs located in
Minneapolis, Las Vegas and Brussels through which it manages and operates all
data transport. The Company has also contracted with an independent third-party
for the provision of satellite transmission services for added redundancy with
respect to services provided to Time. The Company is currently negotiating to
employ satellite services to add redundancy and last mile local loop
capabilities to the WAM!NET Network.

The WAM!NET Service uses technology similar to the Internet, such as ISDN,
DS1 lines, DS3 lines, frame relay and ATM. Because the WAM!NET Service provides
managed data package traffic, the available bandwidth of the WAM!NET Network is
not cluttered with large amount of random data traffic that typically exists on
a public network such as the Internet. The Company has sized aggregation points
throughout the WAM!NET Network to ensure that no backbone connection (a
connection between Distribution Hubs) is smaller than any "last mile" connection
(i.e., from a customer site to a Distribution Hub).

The hub infrastructure consists of large Cisco Systems, Inc. ("Cisco")
routers which are co-located with MCI WorldCom or other facility management
providers points of presence and which primarily route data traffic across the
Company's network of Distribution Hubs. The 33 Distribution Hubs are
interconnected with a meshed DS3 asynchronous transfer mode (a communications
protocol that divides digital data into small packets of fixed length to
facilitate high speed switching ("ATM")) backbone provided by MCI WorldCom.
Additional network diversity is provided by a layer of private lines leased from
Sprint Corporation ("Sprint") which primarily serve as network back-up. Local
loop connections between Distribution Hubs and network access devices at
customer sites are provided almost exclusively by MCI WorldCom and regional Bell
operating companies. The Company's policy is to procure local loop lines from
the lowest-cost, highest-quality provider. Network traffic patterns are
continuously monitored. Operating agreements with MCI WorldCom enable the
Company to increase backbone bandwidth to accommodate planned growth on an as-
needed basis.

The WAM!NET Network incorporates multiple firewalls, constant monitoring
and other security features to prevent unauthorized access or tampering with
either the Company's or the customers' data systems. For security purposes, the
WAM!NET Network is designed to prevent customers from gaining unauthorized
access to the WAM!NET Network through a network access device, from logging onto
any other device attached to the WAM!NET Network and from exploring the WAM!NET
Service or activating or controlling any of its other functions. The Company's
software installed on the user's computer only delivers files to or from
authorized network access devices.

NETWORK MANAGEMENT

The Company provides customers toll-free access to its technical services
support team 24 hours a day, seven days a week. The Company believes that
because its customers are in time sensitive, data intensive industries, they
rely on the WAM!NET Service to provide guaranteed delivery and throughput. The
Company has sought to build reliability into its network by interconnecting all
Distribution Hubs and NOCs with at least two redundant paths so that in the
event of network line failures data can still be transmitted. In addition,
automated network monitoring software from Hewlett Packard has been installed
and configured to provide continuous monitoring capabilities, including an alarm
system that automatically alerts network engineers of problems. Key aspects of
the WAM!NET Network are continuously monitored, including NOC equipment,
Distribution Hub equipment,

backbone lines, local customer connections and the network access devices. The
network management team is trained to proactively work with telephony and on-
site service providers using specially developed processes to identify and
resolve network issues quickly and efficiently.

MANUFACTURING

The Company currently conducts limited equipment assembly functions. The
Company presently installs proprietary software and assembles standard computer,
router and power management equipment components into steel housings for use as
network access devices, Distribution Hubs and equipment in the NOCs. The
equipment housing is manufactured by a third party to the Company's
specifications. The Company currently contracts with third parties for
installation of network access devices at customer sites. The Company installs
Distribution Hubs and equipment in the NOCs. The Company intends to outsource
the assembly of network access devices.

SUPPLIER RELATIONSHIPS

Equipment. In connection with the SGI Investment, the Company and SGI
entered into a preferred provider agreement with SGI dated March 4, 1999 (the
"Preferred Provider Agreement") pursuant to which the Company will be able to
purchase hardware, software and services from SGI based on SGI's most favored
pricing models. The Company also has procurement arrangements with Cisco and
Osicom Technologies, Inc. for certain computer equipment, routers and computer
interface cards used in the WAM!NET Network. These arrangements qualify the
Company for discounts off participant list pricing for such equipment. The
Company is presently negotiating more formal supply arrangements with Cisco. The
Company also purchases certain high volume data storage equipment from HP and
Hitachi Data Systems Corporation under supply agreements.

Installation and Field Maintenance. The Company has an agreement with
third-party field maintenance providers to offer installation, maintenance and
repair services on customer sites.

Telephone Carriage and Infrastructure Support. The Company currently
leases local loop and long distance telephone services in the United States from
MCI WorldCom. In addition, the Company has procurement agreements with Sprint,
Deutsche Telecom, Inc., Madge Network Ltd. and Tanet Ltd.

The supplier agreements described or contemplated above contain commitments
on behalf of the suppliers from one to three years.

COMPETITION

Despite what the Company believes to be meaningful product differentiation,
the Company faces competition in the provision of digital data transportation
and archiving services, including from companies that have substantially greater
financial, technological, marketing, and research and development resources than
it and which have an established presence in markets that the Company serves.
The Company's competitors (or potential competitors, including MCI WorldCom)
include major long-distance companies, regional Bell operating companies,
Internet service providers, systems integrators, such as Digital Art Exchange,
and other smaller companies which manage routers as part of more comprehensive
public, private and virtual private wide area network service offerings. Some
companies have begun to offer data communications networks which use standard
communication technology in conjunction with emerging frame-relay and ATM
technology. The architecture of these

networks is similar to that of the WAM!NET Service. These competitors, including
the Sprint DRUMS network, MCI SMDS telecommunications service and a joint
venture arrangement between AT&T Corp. and Xerox, offer some of the services the
Company offers or plans to offer in the future. Additionally, a new competitive
service called the Graphic Arts Digital Network by VIO which directly targets
the WAM!NET Service was announced in Spring 1997, and was released in October of
1998. This service is provided by a joint venture between British
Telecommunications and Scitex. Pricing is similar to WAM!NET's with a monthly
service fee and per megabyte pricing for transport. In addition, while the
Internet is not currently an effective competitor to the WAM!NET Service,
efforts are under way, through a consortium of research universities, the
Federal Government's Very-High-Performance Backbone Network Service and several
major corporations, to create "Internet2." Press stories on Internet2 suggest
that it will include commercial channels through which large amounts of data can
be moved securely between researchers or companies. The commercial availability
of Internet2 is not expected before 2003.

In addition, the Company faces competition from overland and air courier
services, who transport magnetic tape or optical disk copies of digital data to
their desired locations.

The Company believes the major competitive factors in the digital data
delivery industry are price, reliability and capacity. The Company's
technologically higher-end competitors that offer high bandwidth dedicated lines
have the capability of reliably providing high capacity transmission, but with
the comparatively higher user costs involved in leasing dedicated point to point
lines, dedicated equipment costs and attendant information management fees.
Lower-end competitors, such as standard telephone modems or the Internet, can
compete with the Company on a cost basis, but do not provide the managed
reliability or capacity of the WAM!NET System. The Company believes that it is
the only provider of a turn-key, managed digital data delivery service with a
purpose-built network tailored to target industries' needs which addresses the
price, reliability and capacity requirements of data intensive industries.

GOVERNMENT REGULATION, STANDARDS

North America. The Company purchases telephone equipment, routers and
relays that are used in the WAM!NET Network from telecommunications equipment
manufacturers and combines that equipment with Company-provided software and
telephone circuits provided by common carriers regulated by the Federal
Communications Commission (the "FCC"), the Canadian Radio-Television and
Telecommunications Commission (the "CRTC") and various state regulatory
agencies. The Company believes that under the FCC's interpretation of the
Communications Act of 1934, as amended, the services which it offers to its
customers are interstate information (enhanced) services. Consequently, it is
not required to obtain licenses or other approvals from the FCC or state
regulatory agencies to offer such services. If the Company's services were
deemed to be intrastate services, certain state regulatory agencies might seek
to assert jurisdiction over the Company's offerings. If that were to occur, the
Company could be required to expend substantial time and money to acquire the
appropriate licenses and to comply with state regulations. The Company also
believes that, under the CRTC's interpretation of Canadian law, the services
that the Company offers do not require it to obtain telecommunications permits
or approvals in Canada.

Worldwide. The Company believes that European Union directives require
that member states permit the provision of the Company's services on a
competitive basis. Bilateral agreements exist between the United States and
Japan and the United States and Hong Kong which encourage cross-border provision
of enhanced services like those offered by the Company. Pursuant to commitments
in

the World Trade Organization ("WTO") General Agreement on Trade and Services,
over fifty governments have agreed to permit provision of enhanced services
(i.e., value-added) by nationals of WTO member countries. Nevertheless, certain
other countries in Europe, Asia and elsewhere in the world might seek to license
and regulate the Company's services. Any such license or regulation may limit,
delay or increase the costs of operations as associated with the international
locations to which the Company may desire to expand.

Medical Imaging. The Company intends to offer its WAM!NET Service and
WAM!BASE service as medical imaging applications for transmitting, storing and
retrieving medical data for primary diagnostic purposes. The Company is
currently participating in a test of the medical image transmission application
of the WAM!NET Service between a hospital and a remotely located clinic. Any
medical imaging applications offered for primary diagnostic purposes are
required to comply with the Food and Drug Act, and regulations promulgated
thereunder by the FDA. Under recently adopted FDA regulations, both the WAM!NET
Service's data transmission application and the WAM!BASE data storage and
retrieval application are classified as Class I devices that do not perform
"irreversible data compression." Prior to adoption of those regulations, both
the transmission and storage functions were classified as Class II devices, and
the Company had received marketing clearance from the FDA for data transmission
pursuant to a 510(k) Premarket Notification filing. The Company's medical image
transmission, storage and retrieval applications conform to the DICOM standards.
The Company works with medical imaging equipment manufacturers to ensure
compatibility of the WAM!NET and WAM!BASE applications with their medical
imaging equipment. The manufacture of network access devices for medical imaging
applications and their provision as part of the Company's services are subject
to regulation by numerous governmental authorities, principally the FDA and
corresponding foreign agencies, including regulations concerning compliance with
Quality Systems Regulation ("QSR"), or good manufacturing practices, and
labeling. The Company is also required to register with the FDA as a medical
device manufacturer. As such, the Company's facilities are subject to inspection
by the FDA for compliance with QSR. These regulations require that the Company
manufacture its products and maintain its documents in a prescribed manner. As a
medical device manufacturer, the Company is further required to comply with FDA
requirements regarding the reporting of adverse events and malfunctions that
would likely cause or contribute to death or serious injury. FDA regulations
also govern product labeling and can prohibit a manufacturer from marketing an
approved device for unapproved applications. If the FDA believes that a
manufacturer is not in compliance with the law, it can institute enforcement
proceedings to detain or seize products, issue a recall, enjoin future
violations and assess criminal and civil penalties against the manufacturer, its
officers and employees.

PRODUCT DEVELOPMENT

Certain of the Company's employees have significant experience in the
development, design, engineering, implementation and management of complex
software and networking systems. The Company's current development activities
are focused on completing development of additional functions, including the
next generation of network and transportation management software and protocols
necessary to provide applications such as broadcast transmissions, queue
management, directed billing, directory services and job ticketing, including
integrating such features into the shipping and customer information management
facilities. The Company utilizes its technical capabilities to monitor and
evaluate developments in computer hardware and software and in relay and
telephony equipment and, to the extent possible, to incorporate appropriate
advancements or enhancements into the WAM!NET Service in a timely fashion.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

It is the Company's policy to protect its intellectual property, to seek
patent protection for those aspects of its technology that the Company believes
may be patentable and to preserve any copyrights or trade secrets (to the extent
not disclosed in any patent) that may be applicable to the WAM!NET Service, the
WAM!PROOF and WAM!BASE services and their related software.

The Company is designing or has designed most of the proprietary software
necessary for the management of the WAM!NET Service, including network access
device operations and the GUI, CIS, WAM!PROOF and WAM!BASE applications. The
Company believes that its proprietary software and trade secrets applicable to
the operation of the WAM!NET Service and the WAM!BASE data archiving system may
be of equal or greater importance to the Company than patent or copyright
protection. The Company is not aware of any claims of infringement of patents or
other intellectual property belonging to others. However, the Company has
conducted only a limited inquiry regarding the possibility of other
infringement. Given the recent acquisition of WAM!NET U.K., with its substantial
international presence, the Company will increasingly offer its products and
services in foreign countries. However, some of these countries may lack
intellectual property protection that is comparable to that afforded by the
intellectual property laws of the United States.

The Company has entered into confidentiality agreements with certain of its
employees, consultants and others to protect the Company's proprietary
information and trade secrets.

LIABILITY AND INSURANCE

The WAM!NET Service uses an assemblage of telecommunications equipment,
software, operating protocols and proprietary applications for high speed
transmission of large quantities of data among multiple locations. In such
operations, it is possible that data files may be lost, altered or distorted.
Moreover, the Company's targeted industries' businesses are extremely time
sensitive, and delays in delivering data may cause a significant loss to a
customer using the network for managed data delivery service. The WAM!NET
Service, and future enhancements or adaptations, may contain undetected design
faults and software "bugs" that, despite testing by the Company, are discovered
only after the system has been installed and used by customers. Such faults or
errors could cause delays or require design modifications that could adversely
affect the Company's competitive position and results of operations. The Company
obtains contractual agreements from its customers limiting the Company's
liability for damages resulting from errors in the transportation of data to a
maximum of $100 per transmission. Nevertheless, the Company may still be subject
to significant claims for data losses in the transportation of data over the
WAM!NET Service. In addition to general business liability insurance coverage,
the Company presently maintains errors and omissions insurance coverage issued
by Chubb Custom Insurance Company in the amount of $2.0 million per occurrence
and $5.0 million for all occurrences relating to the transportation of data over
the WAM!NET Service. The Company also presently maintains $2.0 million of
business interruption insurance coverage against losses from floods, earthquakes
and other natural disasters.

EMPLOYEES

Including its officers, as of March 15, 1999, the Company employed 631
persons. The Company's executive and technical personnel have significant
experience in the design, programming, implementation, marketing, sales and
support of complex data networks and software programs. The

Company considers its employee relations to be good. None of the Company's
current employees are subject to a collective bargaining agreement.

ITEM 2. PROPERTIES.

The Company occupies approximately 45,000 square feet of office space
located in a modern facility in an industrial park complex in Bloomington,
Minnesota, a suburb of Minneapolis. The building is occupied under a 99 month
lease which expires in November 2005. To meet its future space requirements, the
Company acquired a facility in Eagan, a suburb of Minneapolis. The Company will
initially occupy 160,000 square feet in this facility and will lease the
remainder of the space to SGI pursuant to a short-term lease. The Company
expects that all Minnesota headquartered employees will be relocated to this
facility during the summer of 1999. The Company will also be relocating its
Minneapolis NOC in this facility. The Company has also acquired, through the
acquisition of 4-Sight, a 9,000 square foot office space in Bournemouth, Dorset,
England.

SGI leases certain of the space in the Eagan, Minnesota office facility
from the Company. The term of the lease with SGI shall commence on March 4, 1999
and end on May 31, 2004. Effective as of June 1, 2001 and on each June 1
thereafter until June 1, 2003, SGI shall have the option to terminate the lease
by delivering to the Company at least six (6) months' prior written notice of
termination (which notice shall be delivered not sooner than June 1, 2001,
providing a termination date of not sooner than six (6) months thereafter). From
June 1, 1999 through May 31, 2001, SGI will occupy 326,000 square feet (67.8% of
the square footage of the interior common area) and will pay a base rent in the
amount of $12.00 per square foot of rentable area per year. With respect to the
portion of the premises which SGI continues to occupy under the lease from and
after June 1, 2001, the base rent shall be in the amount of $12.60 per square
foot of rentable area per year. SGI shall pay as additional rent its
proportionate share of all taxes and operating expenses. The proportionate share
will be determined by dividing the then existing SGI rentable area of the
premises by the total rentable area.

The Company's leased properties also include: (i) an approximately 18,000
square foot manufacturing and warehousing facility located in Minneapolis, (ii)
an approximately 1,540 square foot office facility located in Minneapolis, where
one of the Company's NOCs is located, (iii) an approximately 7,970 square foot
facility located in Las Vegas, Nevada where the Company's other NOC is located
and which serves as a backup customer service center, (iv) the Company occupies
20,000 square feet of office space in Brussels, Belgium; this facility contains
the Company's European NOC and customer service operations, (v) an approximately
1,500 square foot office facility located in Missoula, Montana where the
headquarters of FreeMail, Inc., a wholly-owned subsidiary of the Company, is
located, (vi) small offices in Toronto, New York, Chicago, and Washington, D.C.
for use by the Company's business development managers and account executives
stationed in those cities, (vii) an approximately 18,800 square foot office
facility located in Minneapolis, which previously served as the Company's
headquarters and which the Company intends to sub-lease, (viii) a 16,000 square
foot office space located in Bournemouth, Dorset, England under a 100 month
lease which expires in September of 2006, and (ix) small offices in Hamburg,
Germany, Woburn, Massachusetts, West Des Moines, Iowa, Hague, Holland,
Gothenburg, Sweden, Copenhagen, Denmark and Paris, France for WAM!NET U.K.'s
sales and marketing personnel stationed in those cities.

ITEM 3. LEGAL PROCEEDINGS.

The Company is aware that certain holders of warrants issued in connection
with bridge loans in 1995 and 1996 have commenced litigation seeking a reduction
in the exercise price of these warrants and seeking attorney's fees. Although
the warrants provide for downward adjustments under certain circumstances, the
Company believes no adjustment is required. Should the warrant holders initiate
litigation and should that litigation be successful, the gross proceeds
receivable by the Company from exercise of those warrants would be reduced from
approximately $8.4 million to $4.9 million. The Company will vigorously defend
such litigation.

The Company is engaged in certain legal proceedings and claims arising in
the ordinary course of its business. The ultimate liabilities, if any, which may
result from these or other pending or threatened legal actions against the
Company cannot be determined at this time. However, it is the opinion of
management that facts known at the present time do not indicate that there is a
probability that such litigation will have a material effect on the financial
position of the Company.

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

None.

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

(a) There is no established public trading market for the Company's
outstanding common stock.

(b) As of March 15, 1999, there were 74 holders of record of the
outstanding common stock of the Company.

(d) Not applicable.

(e) RECENT SALES OF UNREGISTERED SECURITIES:

On March 5, 1998, the Company consummated an offering (the "1998
Offering"), pursuant to which the Company sold 208,530 units (the "1998 Units")
consisting of $208,530,000 aggregate principal amount at maturity of the 1998
Notes and 625,590 warrants (the "1998 Warrants") to purchase an aggregate of
1,257,436 shares of Common Stock. Each 1998 Unit consists of $1,000 principal
amount at maturity of the 1998 Notes and three 1998 Warrants, each 1998 Warrant
entitling the holder thereof to purchase 2.01 shares of Common Stock. The 1998
Units were initially sold to the lead underwriters; Merrill Lynch & Co., Credit
Suisse First Boston and First Chicago Capital Markets, Inc., under an exemption
from registration requirements of Section 5 of the Securities Act of 1933, as
amended (the "Securities Act") pursuant to the provisions of Section 4(2) of the
Securities Act. Subsequently, 208,030 of the 1998 Units were sold pursuant to
Rule 144A under the Securities Act, and 500 Units were sold pursuant to
Regulation S under the Securities Act.

On January 13, 1999, the Company issued the 13.25% Subordinated Unsecured
Convertible Note due August 28, 2005 (the "1999 MCI WorldCom Convertible Note")
pursuant to the Subordinated Unsecured Convertible Note and Warrant Purchase
Agreement by and between MCI

WorldCom and the Company (the "1999 MCI WorldCom Convertible Note Purchase
Agreement") and on January 13 and March 4, 1999, respectively, the Company
borrowed $10.0 million and $15.0 million thereunder. The 1999 MCI WorldCom
Convertible Note automatically converted into 2,196,317 shares of the Company's
Class D Convertible Preferred Stock, par value $.01 per share (the "Class D
Preferred Stock"), immediately prior to the closing of the SGI Investment. The
Class D Preferred Stock is immediately convertible in the aggregate into
approximately 2.9% of the Common Stock (calculated on a fully diluted basis). In
connection with the issuance of the 1999 MCI WorldCom Convertible Note, the
Company also (i) issued warrants to purchase 150,000 shares of Common Stock at
an exercise price of $.01 per share after April 30, 1999 and until April 30,
2004 and (ii) expects to issue warrants to purchase 200,000 shares of Common
Stock at an exercise price of $.01 per share from April 30, 1999 until April 30,
2004, (together the "1999 MCI WorldCom Warrants"). The Class D Preferred Stock
and the 1999 MCI WorldCom Warrants are subject to certain registration rights.

On March 4, 1999, the Company consummated the SGI Investment pursuant to
which SGI purchased 5,710,425 shares of the Company's Class B Convertible
Preferred Stock, par value $.01 per share (the "Class B Preferred Stock"), and
878,527 shares of the Company's Class C Convertible Preferred Stock, par value
$.01 per share (the "Class C Preferred Stock" and together with the Class B
Preferred Stock, the "SGI Preferred Stock"). The SGI Preferred Stock is subject
to certain registration rights. The holders of the Class B Preferred Stock,
voting separately as a class, have the right to designate one member of the
Company's Board of Directors. The SGI Preferred Stock is convertible in the
aggregate into approximately 8.7% of the Common Stock (calculated on a fully
diluted basis); provided that the Class C Preferred Stock may not be converted
until the earlier of September 4, 2000 or a public offering of the Common Stock
at a minimum specified price. The aggregate consideration received by the
Company in the SGI Investment was $75.0 million, of which $35.0 million was paid
in cash and $40.0 million was paid by transfer to the Company of a corporate
campus office facility located in Eagan, Minnesota.

The sale and purchase of the 1999 MCI WorldCom Note and the conversion
thereof into the Class D Preferred Stock and the sale and purchase of the Class
B Preferred Stock, the Class C Preferred Stock and the 1999 MCI WorldCom
Warrants were exempt from the registration requirements of Section 5 of the
Securities Act pursuant to the provisions of Section 4(2) of the Securities Act.

ITEM 6. SELECTED FINANCIAL DATA.

The following table sets forth selected historical consolidated financial
data for the Company and its subsidiaries for each of the years in the four year
period ended December 31, 1998. The 4-Sight Acquisition occurred on March 13,
1998 and the operating results of WAM!NET U.K. are included in the Company's
operating results from that date through December 31, 1998. The Company's
development and expansion activities during the periods presented below
significantly affect the period-to-period comparability of the historical data
presented for the Company. The financial data should be read in conjunction with
the financial statements and related notes thereto of the Company included
elsewhere in this Annual Report on Form 10-K.

WAM!NET INC.
---------------------------------------------
Year Ended December 31, (1)
---------------------------------------------
1995 1996 1997 1998
--------- --------- ---------- ---------

(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues................................. $ 180 $ 279 $ 1,555 $ 17,629
Operating expenses....................... 1,437 7,036 31,037 119,981
Operating income (loss).................. (1,257) (6,757) (29,482) (102,352)
Interest income (expense), net........... (20) (839) (4,154) (20,878)
Income (loss) before income taxes........ (1,277) (7,596) (33,636) (123,230)
Net income (loss)........................ (1,277) (7,596) (33,636) (121,878)

OTHER DATA:
EBITDA(2)................................ $(1,226) $(6,310) $(26,814) $ (84,684)
Depreciation and amortization............ 31 447 2,668 17,668
Capital expenditures..................... 657 4,244 16,599 54,584
Net cash used in operating activities.... (747) (6,218) (23,917) (57,892)
Net cash used in investing activities.... (657) (5,244) (15,599) (71,304)
Net cash provided by financing
activities............................. (2,372) 24,578 25,346 135,194
Ratio of earnings to fixed charges(3).... -- -- -- --

BALANCE SHEET DATA (END OF PERIOD):
Cash and cash equivalents................ $(1,328) $15,444 $ 274 $ 6,272
Total assets............................. 2,075 20,070 29,134 125,459
Total debt(4)............................ 1,900 20,473 54,826 210,238
Shareholders' deficit(5)................. (371) (2,683) (30,671) (109,854)

(1) The Company was organized in September 1994 and commenced operations in
March 1995.

(2) EBITDA represents earnings (loss) from operations before taking into
consideration net interest expense, income tax expense, depreciation
expense and amortization expense. The Company has included information
concerning EBITDA as it is used by certain investors as a measure of a
company's ability to service its debt. EBITDA should not be considered as
an alternative to net income or any other measure of performance or
liquidity as determined in accordance with generally accepted accounting
principles or as an indicator of the Company's overall financial
performance. In addition, the measure of EBITDA presented herein by the
Company may not be comparable to other similarly titled measures of other
companies.

(3) The ratio of earnings to fixed charges is calculated by dividing (i) net
income (loss) before taxes plus fixed charges by (ii) fixed charges. Fixed
charges consist of interest incurred and the portion of rent expense which
is deemed representative of interest. Earnings were insufficient to cover
fixed charges by $1,242, $6,653, $29,180 and $99,027 for the Company for
the years ended December 31, 1995, 1996, 1997 and 1998.

(4) Total debt includes long-term debt, redeemable preferred stock, current
portion of long-term debt and obligations under capitalized leases.

(5) The estimated value of warrants issued to debtholders and of options
issued to consultants is reflected as both an asset and an element
of paid in capital.

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

Revenue. The Company's revenue is derived primarily from WAM!NET Service
contracts which usually are annual, automatically renewable service contracts
with a minimum monthly fee and additional charges for usage exceeding the
monthly minimum. The Company offers the WAM!NET Service at scaled minimum usage
fees, ranging from $250 per month to $3,000 per month. The Company begins to
earn gross revenue following installation of service at a customer's premises;
however, the Company incurs cost of service rebates which offset such gross
revenue. Furthermore, free trial periods under the Company's various promotional
programs have ranged from 60 days to six months and have been extended to 60% of
the Company's customer base. As a result, the Company's generation of net
revenue from any customer may lag contract signing by a period of three to nine
months, a practice that is not customary in the digital data delivery industry
but is a key component in the Company's market penetration strategy. The
Company's experience with promotional programs has been favorable to date, with
approximately 93% of customers continuing to subscribe to the WAM!NET Service
following expiration of the promotional period extended to them. The Company
expects the use of promotional programs in the Graphic Arts sector of the media
industry to decline with increasing penetration of the market, but the Company
will likely use similar promotional programs to introduce the WAM!NET Service to
the entertainment and medical imaging industries. The Company also plans to
continue to develop new Industry Smart applications to increase the volume of
files transferred over the WAM!NET Network.

In connection with the SGI Investment, SGI and the Company entered into the
Preferred Provider Agreement pursuant to which both parties have developed a
list of existing SGI customers in the entertainment industry which the Company
believes represents a significant sales revenue opportunity for it over the next
three years. The Company and SGI have agreed to jointly develop a marketing,
sales and implementation plan to address these accounts, including field
resource commitments, compensation to SGI for field activities and professional
services, and such other matters applicable to the sale of the WAM!NET Service
to such potential customers. In addition, SGI and the Company intend to explore
a broader strategic relationship that is intended to enable the Company to
obtain the benefit of SGI's presence in the entertainment industry, other
selected commercial accounts and the U.S. federal government sector.

Revenue is primarily driven by the number of installed customer locations
(network access device's), the length of time a customer has been using the
service, the number of work flow (trading) partners with whom a customer
exchanges data and the size of the files exchanged.

Network Communications Fees. Network communications fees include both the
costs of the high bandwidth carrier services interconnecting the Company's
national infrastructure of NOCs and Distribution Hubs and the costs of local
telephone circuits connecting network access devices to the nearest Distribution
Hub. Local telephone circuit connections account for approximately 80% of these
charges, with significant differences between urban and rural connection costs.
National carrier service, provided primarily by MCI WorldCom, accounts for most
of the balance of these charges. Network communication fees are generally a
fixed monthly cost per circuit. The excess of these fees over revenue represents
excess capacity costs which the Company expects will decline with the increasing
utilization of the WAM!NET Network. The Company actively seeks to obtain and
deploy technologies that will reduce the costs of local telephone circuit
connections, such as wireless technologies and remote dial-up capabilities. The
Company also intends to use its network management tools to optimize the use of
existing and planned network capacity as volume increases and traffic

patterns begin to emerge. The Company has implemented new pricing strategies for
its services which take into account the significant cost differential between
urban and rural local telephone circuit connections. The Company also believes
that growing competition among telephony and communications providers may reduce
the cost of local telephone circuit connections.

Network Operations Expense. Network operations expense represents costs
directly associated with developing, maintaining, managing and servicing the
global WAM!NET Network. Such costs include direct labor, vendor service fees,
point-of-presence charges and research and development charges, which are often
incurred in advance of receiving revenue. The Company's currently installed
NOCs, which account for the substantial majority of direct labor and network
operating costs, are capable of providing for and managing the Company's current
and planned North American, European and Asian operations. Costs associated with
the development of the WAM!BASE, WAM!PROOF and other network applications
related to medical media transport and storage are also contained in network
operations expense and are incurred in advance of revenue receipt. The Company
expects that network operations costs will increase as the WAM!NET Network
expands; however, the cost of network operations as a percentage of revenue is
expected to decline.

Pursuant to the Preferred Provider Agreement, the Company has agreed to
purchase hardware, software and services from SGI over a four year period with a
firm commitment to purchase $35 million during the period commencing December 1,
1998 and ending December 31, 2000. The Company has the ability to purchase such
products at prices based on SGI's most favored pricing models. The Company
believes that the discounted prices, reduced commissions and lower servicing
fees for such products will result in lower network operations expenses in the
future.

Sales and Marketing Expense. The Company's sales and marketing efforts are
intended to create global awareness of the WAM!NET Service, communicate its
potential for work flow enhancement, demonstrate its reliability and establish
strong brand recognition. As a result, the Company aggressively markets the
WAM!NET Service through a combination of trade journal advertising, trade show
attendance, promotional programs, direct field sales, tele-sales, cooperative
sales presentations and active participation in industry-sponsored seminars and
publications. The Company expects to continue to incur significant sales and
marketing expenses to obtain increased penetration of the global media industry,
to generate increased traffic among its existing customers and to market the
WAM!NET media transport service to other targeted industries.

General and Administrative Expense. The Company's general and
administrative expense includes administrative salaries, related overhead and
professional service fees. These costs reflect expenditures related to the rapid
growth and expansion of the Company's administrative infrastructure necessary to
manage its expanding operations, and professional service fees for financing
activities, contract negotiations and acquisitions. The Company expects to
continue to incur substantial general and administrative expense as the Company
deploys the WAM!NET Service internationally; however, the cost of general and
administrative expense as a percentage of revenue is expected to decline.

Depreciation and Amortization. To facilitate entry into its target markets,
the Company furnishes its global customers with all the hardware and software
necessary for them to use the WAM!NET Service on a turn-key, pay-by-use basis.
As a result, the Company retains ownership of the network access devices it
furnishes to customers for their use of the WAM!NET Service. Depreciation and
amortization expense includes depreciation of network access devices,
Distribution Hubs and equipment located in the NOCs. The Company's network
infrastructure is generally organized to use the most expensive equipment in the
NOCs, less expensive equipment for Distribution

Hubs and the least expensive equipment in the network access devices. The
Company anticipates substantial capital investments for additional North
American and international Distribution Hubs, WAM!BASE storage facilities to be
located in the existing NOCs and network access devices to be located at
customer premises. As a result, the Company anticipates that depreciation and
amortization expense will continue to increase in future periods as the Company
continues to purchase equipment.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
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Revenue. Revenue for the year ended December 31, 1998 was $8,776,512
compared to $1,627,590 for the year ended December 31, 1997, an increase of
$7,148,922, or 439.2%. This increase in revenue was primarily due to increased
market penetration of the North American graphic-arts segment by the Company's
high end media transport service. Installed network access device media
transport services increased from 474 sites for the year ended December 31, 1997
to 1,477 sites for the year ended December 31,1998; an increase of 1,003 sites
or 212%. For the years ending December 31, 1997 and December 31, 1998, average
monthly gross of the Company's media transport revenue per customer increased
from $526 to $761, respectively, an increase of $235 or %44.6. Service rebates
for the years ended December 31, 1997 and December 31, 1998 were $150,400, 9.2%
of gross revenue, and $1,976,904, 22.5% of gross revenue, respectively; an
increase of $1,826,504 or 1,214%. Service rebates are primarily the result of
marketing programs that allow customers who sign up for the Company's high end
media transport services to participate in a trial period that under certain
circumstances can rebate the associated monthly minimum charges for a period of
two to six months. During 1998, approximately 60% of newly installed customers
participated in a trial period and approximately 93% of those customers have
remained on the network after the lapse of their initial trial period. Revenue
for software and hardware sales for the year ended December 31, 1997 was $0,
compared to $10,829,671 for the year ended December 31, 1998. Software and
hardware sales revenue for the year ended December 31, 1998 were primarily
derived from continuing media-transport software sales of WAM!NET U.K. following
its integration with 4-sight on March 13, 1998.

Operating Expenses. Network communications fees for the year ended December
31, 1998 were $18,259,389, compared to $7,363,667 for the year ended December
31, 1997, an increase of $10,895,722, or 148.0%. This increase was due primarily
to an increase of 201% in customers purchasing the Company's media transport
services. Network communications fees represent the largest direct cost
associated with providing the Company's media transport service to customers.
Although network communications fees increased 148% from the year ending
December 31, 1997 to the year ending December 31, 1998, the average monthly
communications fees incurred by the Company to provide media transport services
to a single customer declined from $2,421 for the period ending December 31,
1997 to $1,336 for the period ending December 31, 1998; a decline of $1,085 or
44.8%.

Network operations expense for the year ended December 31, 1998 was
$29,704,742, compared to $7,477,753 for the year ended December 31, 1997, an
increase of $22,226,989, or 297.2%. This increase was due to several significant
factors relating to the design and implementation of the Company's global media
transport infrastructure and the shift from a primary North American operational
focus to a global operational focus. The Company expects to incur significant
expenses from global network operations; however, as a percentage of global
revenue these expenses are expected to decline in future periods.

Sales and marketing expense for the year ended December 31, 1998 was
$21,997,438, compared to $9,207,486 for the year ended December 31, 1997, an
increase of $12,789,952, or 138.9%. This increase is primarily due (i) to the
expansion of the North American sales and marketing force and the creation of a
European sales and marketing force to increase market penetration, (ii)
enhancing product recognition within the existing North American market and
(iii) implementing global sales and marketing strategies throughout Europe and
Asia. The Company expects to incur significant expenses from its global sales
and marketing efforts; however, as a percentage of global revenue these expenses
are expected to decline in future periods.

General and administrative expense for the year ended December 31, 1998 was
$28,815,594, compared to $4,320,128 for the year ended December 31, 1997, an
increase of $24,495,466, or 567.0%. The increase in general and administrative
expenses during 1998 was primarily the result of large non-cash compensation
expenses relating to the vesting of certain option and warrant contracts held by
various officers of the Company which totaled $12,528,726. The balance of the
increase in general and administrative expenses was due to the increased global
support requirements of the Company's expanding operations. The Company expects
to continue to incur significant general and administrative expenses; however,
as a percentage of global revenue these expenses are expected to decline in
future periods.

Depreciation and amortization for the year ended December 31, 1998 was
$17,667,765, compared to $2,668,177 for the year ended December 31, 1997, an
increase of $14,999,588, or 562.2%. This increase is primarily due to the
purchasing of network equipment and other support equipment in the amount of
$54,584,000 and the increase of $32,557,000 in goodwill that resulted from the
acquisition of WAM!NET U.K.

Interest expense for the year ended December 31, 1998 was $22,626,008,
compared to $4,355,676 for the year ended December 31, 1997, an increase of
$18,270,332, or 419.5%. The increase was primarily due to the increase in long-
term unsecured debt the Company incurred during 1998 to fund its operations and
acquisition, consisting primarily of the Company's 13.25% Senior Discounted
Notes due 2005 (the "1998 Notes") in the amount of $138,975,000 and the
equipment financing increase of $7,102,000.

Interest income for the year ended December 31, 1998 was $1,748,340,
compared to $202,035 for the year ended December 31, 1997, an increase of
$1,546,305, or 765.4%. The increase in interest income was primarily due to the
increase in the Company's average monthly balance of cash and cash equivalents,
which was $34,815,203 for the year ended December 31, 1998 over the average
monthly balance of $3,105,890 for the year ended December 31, 1997. During 1998
the Company invested a large portion of the cash proceeds from its offering of
the 1998 Notes into highly liquid investments with staggered maturities ranging
from 30 to 180 days, corresponding with the Company's operational cash
requirements. These investments consisted of high-grade (A1/P1) rated commercial
paper, certificates of deposits and securities backed by the United States
government.

The cost of hardware and software sales for the year ended December 31,
1998 was $3,537,413, compared to $0 for the year ended December 31, 1997. These
costs are directly related to the software and hardware sales revenue associated
with the acquisition of 4-sight and its subsequent integration into WAM!NET U.K.

Income Taxes. For the year ended December 31, 1998, the Company experienced
net losses of $121,878,317 and paid no income taxes. These losses are available
to offset future taxable income

through the year 2013 and are subject to the limitations of Section 382 of the
Internal Revenue Code of 1986, as amended (the "Code"). These limitations may
result in expiration of net operating loss carry-forwards before they can be
utilized. An income tax benefit of $1,352,000 related to U.K. income tax and
V.A.T. benefits was realized by the Company in the year ended December 31, 1998.

YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
- - -----------------------------------------------------------------------

Revenue. Revenue for the year ended December 31, 1997 was $1,627,590
compared to $110,424 for the year ended December 31, 1996, an increase of
$1,517,166, or 1,373.9%. This was primarily due to a 1,375.8% increase in the
number of subscribers to the WAM!NET Service from approximately 33 installed
customer sites on December 31, 1996 to approximately 487 installed customer
sites on December 31, 1997. At December 31, 1997, the Company had contracts to
install network access devices at 578 customer sites awaiting installation of
telephone service. Service rebates for the year ended December 31, 1997 were
$150,400, or 9.2% of revenue. Service rebates for the year ended December 31,
1996 were $0.

Other service fees revenue for the year ended December 31, 1997 was
$77,748, compared to $168,290 for the year ended December 31, 1996, a decrease
of $90,542, or 53.8%. Other service fees revenue is primarily derived from minor
transactions with currently existing WAM!NET Service customers which includes
consulting services and hardware sales. The decrease was primarily due to the
expiration of a contractual consulting relationship that the Company had in
place with a customer during 1996.

OPERATING EXPENSES

Network communications fees for the year ended December 31, 1997 were
$7,363,667, compared to $816,403 for the year ended December 31, 1996, an
increase of $6,547,264, or 802.0%. Network operations expense for the year ended
December 31, 1997 was $7,477,753, compared to $1,108,807 for the year ended
December 31, 1996, an increase of $6,368,946, or 574.4%. These increases were
primarily due to the 1,375.8% increase in customers that subscribed to the
WAM!NET Service during 1997.

Sales and marketing expense for the year ended December 31, 1997 was
$9,207,486, compared to $2,052,860 for the year ended December 31, 1996, an
increase of $7,154,626, or 348.5%. This increase was primarily due to costs
associated with building the Company's direct sales force and marketing
department as well as higher outside advertising agency and trade show
expenditures.

General and administrative expense for the year ended December 31, 1997 was
$4,320,128, compared to $2,609,879 for the year ended December 31, 1996, an
increase of $1,710,249, or 65.5%. General and administrative expense increased
during 1997 as operational support requirements intensified due to the rapid
expansion of the Company's services and corporate facilities.

Depreciation and amortization for the year ended December 31, 1997 was
$2,668,177, compared to $447,233 for the year ended December 31, 1996, an
increase of $2,220,944, or 496.6%. As a percentage of total revenue,
depreciation and amortization was 171.6% in 1997 compared to 160.5% in 1996.
This increase is primarily due to an increase in the installed communications
backbone equipment and equipment installed on customers' premises as a result of
the increase in the number of customers.

Interest expense for the year ended December 31, 1997 was $4,355,676,
compared to $903,443 for the year ended December 31, 1996, an increase of
$3,452,233, or 382.1%. The increase was primarily due to the Company's financing
of its 1997 operations through the issuance of various debt instruments,
including $24 million of long term subordinated notes to MCI WorldCom and $18.8
million in borrowings from the Company's revolving credit facility (the
"Revolving Credit Facility") and $9.6 million of equipment financing.

Income Taxes. For the year ended December 31, 1997, the Company
experienced net losses of $33,636,000 and paid no income taxes. These losses are
available to offset future taxable income through the year 2012 and are subject
to the limitations of Section 382 of the Code. These limitations may result in
expiration of net operating loss carryforwards before they can be utilized.

LIQUIDITY AND CAPITAL RESOURCES

The Company continues to incur substantial operating losses as a direct
result of its continuing efforts to expand its media network throughout North
America, Europe and Asia. Net losses since the Company's inception have
resulted in an accumulated deficit balance of approximately $164.4 million.
Though these losses are not unexpected, the Company's ability to continue to
fund these operating losses and its ability to continue to purchase and install
the required WAM!NET Network hardware to provide the WAM!NET Service to its
increasing global customer base depends on its ability to obtain additional
sources of funds for working capital during 1999. Sources of such funds which
the Company will continue to seek include but are not limited to long- and
short-term secured equipment financing from vendors, financial institutions and
banks, long-term unsecured senior debt, long-term property mortgages on its
existing facilities and the issuance of the Company's equity securities. Though
the Company believes it can secure additional funding by one or more of the
above sources, there can be no assurances that such funding can be obtained.
From inception through December 31, 1998, the Company has derived substantially
all of its operating capital from the issuance of short- and long-term debt and
equity instruments. At December 31, 1998, the Company had a total of
approximately $209.2 million in long-term debt, of which approximately $5.3
million becomes payable during 1999.

The Company's available operating capital as of March 10, 1999, as
evidenced by cash, cash equivalent investments and commitments from financial
institutions for additional equipment financing, totaled approximately $50
million. If additional sources of funding cannot be obtained during the course
of the Company's fiscal year ending December 31, 1999, due to a constraint of
available operating capital, the Company will be required to significantly slow
its global market penetration, network growth and product development. In
addition, should the Company be unable to generate cash to fund its operations
and network growth during 1999, management expects that it would implement plans
to reduce cash expenditures. The reduction of cash expenditures would have a
material adverse effect on the Company's global revenue and network expansion
plans. The Company believes that the most evident and clearly measurable impact
resulting from these reductions would be a significant decrease of installed
network customers for the year ending December 31, 1999. A material reduction
in the base of installed customers would slow the growth of the Company's
recurring revenue stream, which is dependent upon customer utilization of the
Company's excess network capacity. Reductions in network utilization would
directly impact the Company's network revenue and could ultimately defer overall
profitability of the Company's service and products. Another possible impact of
the above outlined expenditure reductions, would be potentially material delays
in software product development, the impact of which could further erode
customer retention and network utilization.

The Company's source of liquidity since inception has primarily come from
the issuance of debt and equity instruments and from credit facilities and other
borrowings. The Company has received approximately $171.7 million net cash
proceeds from the issuance of long- and short-term debt and collateralized
equipment financing. An additional $61.9 million of net cash proceeds has been
received from the sale of equity securities. The Company has utilized these
proceeds by investing $71.9 million into its globally expanding WAM!NET Network
and investing $20.3 million to acquire WAM!NET U.K.. Since inception, the
Company has also expended $112.8 million to fund its globally expanding
operating activities. To date, the Company has not generated cash from
operating activities and remains dependent upon its ability to generate
operating capital for its global expansion from credit facilities or other
borrowings, or the issuance of additional short- and long-term debt and equity
instruments.

During September of 1997, the Company established the Revolving Credit
Facility, the proceeds of which were used by the Company to fund its operations
and purchase WAM!NET Network equipment. The maximum amount that can be borrowed
under the Revolving Credit Facility is $25.0 million. The Revolving Credit
Facility was established under an agreement with The First National Bank of
Chicago. In addition, MCI WorldCom guaranteed the Company's obligations under
the Revolving Credit Facility. At December 31, 1998, the Company had $24.0
million borrowed under the Revolving Credit Facility. Interest and principal on
the Revolving Credit Facility become payable in September 1999. Borrowings by
the Company under the Revolving Credit Facility require the prior consent of MCI
WorldCom. The Company expects to repay all amounts outstanding under the
Revolving Credit Facility prior to September 1999.

In December 1997, the Company acquired the outstanding common stock of
FreeMail, Inc. ("FreeMail"). In connection with the acquisition, the Company
issued to FreeMail 125,000 shares of Common Stock, with a fair value of
approximately $488,000, as consideration. The Company is also obligated to pay
the former shareholders of FreeMail as additional contingent consideration, on a
quarterly basis, amounts equal to five percent of the gross collected revenue
derived by the Company from certain identified FreeMail products; however, the
total amounts of the quarterly payments shall not exceed $3,012,500. As of
December 31, 1998, the Company did not record a liability relating to the
FreeMail revenue because no revenue had been collected.

On March 5, 1998, the Company consummated the offering of the 1998 Units,
each consisting of $1,000 principal amount of 1998 Notes and three 1998 Warrants
resulting in net proceeds to the Company of approximately $120.6 million. Cash
interest does not accrue nor is payable on the 1998 Notes prior to March 1,
2002. Thereafter, cash interest on the 1998 Notes will accrue at a rate of
13.25% per annum (calculated on a semi-annual bond equivalent basis) and will be
payable semi-annually in arrears on March 1 and September 1 of each year,
commencing September 1, 2002. The Company used the proceeds of the 1998
Offering as follows: (i) $20.0 million to pay the cash portion of the 4-Sight
Acquisition, (ii) approximately $25.0 million to repay borrowings under the
Revolving Credit Facility and (iii) the balance to further the Company's
business development and expansion strategy, to enhance the WAM!NET Service
infrastructure and develop additional value-added features and services, to
optimize marketing, sales and customer support and service capabilities and for
working capital and other general corporate purposes.

Class D Preferred Stock immediately prior to the closing of the SGI Investment.
The Class D Preferred Stock is immediately convertible in the aggregate into
approximately 2.9% of the Common Stock (calculated on a fully diluted basis). In
connection with the issuance of the 1999 MCI WorldCom Convertible Note, the
Company also issued the 1999 MCI WorldCom Warrants to MCI WorldCom. The Class D
Preferred Stock and the 1999 MCI WorldCom Warrants are subject to certain
registration rights.

On March 4, 1999, the Company consummated the SGI Investment pursuant to
which SGI purchased (a) 5,710,425 shares of the Class B Preferred Stock and (b)
878,527 shares of the Class C Preferred Stock, which Class B Preferred Stock and
Class C Preferred Stock are convertible in the aggregate into approximately 8.7%
of the Common Stock (calculated on a fully diluted basis); provided that the
Class C Preferred Stock may not be converted until the earlier of September 4,
2000 or a public offering of the Common Stock at a minimum specified price. The
Class B Preferred Stock and the Class C Preferred Stock are subject to certain
registration rights.

In consideration for the SGI Preferred Stock, the Company has received
$75.0 million, of which $35.0 million was paid in cash and $40.0 million was
paid by way of transfer to the Company of SGI's corporate campus office facility
located in Eagan, Minnesota. See "Properties."

In connection with the SGI Investment, SGI and the Company entered into the
Preferred Provider Agreement pursuant to which both parties have developed a
list of existing SGI customers in the entertainment industry which the Company
believes represents a significant sales revenue opportunity for it over the next
three years. The Company and SGI have agreed to jointly develop a marketing,
sales and implementation plan to address these accounts, including field
resource commitments, compensation to SGI for field activities and professional
services, and such other matters applicable to the sale of the WAM!NET Service
to such potential customers. In addition, SGI and the Company intend to explore
a broader strategic relationship that the Company believes will enable it to
obtain the benefit of SGI's presence in the entertainment industry and other
selected commercial accounts.

Pursuant to the Preferred Provider Agreement, the Company has agreed to
purchase hardware, software and services from SGI over a four year period with a
firm commitment to purchase $35 million during the period commencing January 1,
1999 and ending December 31, 2000. The Company has the ability to purchase such
products at prices based on SGI's most favored pricing models. The Company
believes that the discounted prices, reduced commissions and lower servicing
fees for such products will result in lower network operations expenses in the
future.

Pursuant to an agreement with MCI WorldCom, if the Company is not publicly
held by 2001, under certain circumstances and subject to certain conditions, the
Company may be required to buy and MCI WorldCom may be required to sell, the
1996 MCI WorldCom Securities (as defined herein) pursuant to a tender offer and
pricing methodology described herein under "Certain Relationships and Related
Transactions." If the Company fails to timely pay the purchase price for the
1996 MCI WorldCom Securities, MCI WorldCom will be relieved of all obligations
to sell such securities to the Company, the Company will have no right to cause
MCI WorldCom to sell such securities and the Company will not be obligated to
pay the purchase price for such securities. See "Certain Relationships and
Related Transactions."

During the year ended December 31, 1998, the Company received less than 5%
of its total revenue from sales and operations in Asian countries. As a result,
the Company had limited exposure

to the particular risks attendant to doing business in Asia and did not
experience any material adverse effects from the Asian economic crisis; however,
the Company presently intends to expand its operations in that region. The
Company is currently unable to determine the effect, if any, that recent
economic downturns in Asia, particularly Japan, will have on the Company's
future business, operating results or liquidity, although the Company intends to
exercise prudence and sound business judgment prior to making any future
investments in Asia.

During the year ended December 31, 1998, the Company's revenue originating
outside the U.S. was 53% of total revenues. Currently, the Company does not
employ currency hedging strategies to reduce the risks associated with the
fluctuation of foreign currency exchange rates. Currently, all of the Company's
contracts are denominated in U.S. dollars except for those contracts entered
into by WAM!NET U.K. which denominates all of its contracts in pounds sterling
other than its German sales contracts which are denominated in Euro, the single
European currency. The Company is unable to determine what effect, if any, the
adoption and use of the Euro will have in the future on the Company's business,
operating results, liquidity and financial condition. See "Quantitative and
Qualitative Disclosures About Market Risk."

YEAR 2000 COMPLIANCE

Many computer systems and applications experience problems handling dates
beyond the year 1999 and will need to be modified before the year 2000 in order
to remain functional. As for many other companies, the year 2000 computer issue
poses a potential risk for the Company as a user of information systems in the
operation of its business, as a provider of managed, high speed, digital data
delivery network service and the related computer technology and software to
customers, and as a customer of other organizations whose operations may be
affected by year 2000 compliance issues.

The Company has completed an assessment of its core business information
systems, many of which are provided by outside suppliers, for year 2000
readiness and is extending that review to include a wide variety of other
information systems and related business processes used in its operations. The
Company plans to have changes to critical systems implemented by the third
quarter of 1999 to allow time for testing. Most of the Company's mission-
critical applications are believed to be year 2000 compliant. Although its
assessment is ongoing, the Company currently believes that resolving these
matters will not have a material adverse effect on its financial condition or
results of operations.

The Company is also assessing the possible effect on its operations of the
year 2000 readiness of critical suppliers of products and services. These
include not just suppliers of components but also the Company's outsourcing
partners in manufacturing as well as suppliers of basic utilities. The
Company's reliance on its key suppliers, and therefore on the proper functioning
of their information systems and software, is increasing, and there can be no
assurance that another company's failure to address year 2000 issues could not
have a material adverse effect on the Company.

Telecommunication and data traffic between customers who are connected to
the WAM!NET Network are routed over high-bandwidth leased telephone circuits.
In addition, most customers are connected to the WAM!NET Network through
facilities of the incumbent local telephone company. Consequently, customers
may not be able to complete telephone calls or data transmissions if the
computer, telecommunications or other systems of the service provider over which
the call or transmission is routed is not year 2000 compliant. To the extent
that any disruption caused by the

failure of a service provider to make its systems year 2000 compliant is
substantial, it could have a material adverse effect on the Company's results of
operations.

The Company has not incurred material historical costs for year 2000
awareness, inventory assessment, analysis, conversion, testing or contingency
planning. Certain of the costs associated with the Company's internal Year 2000
compliance effort (exclusive of any potential costs related to any customer or
other claim) cannot effectively be isolated from other operating expenses,
because investing in new systems is both an ordinary cost of doing business and
a means to year 2000 compliance. The Company's current estimates indicate the
total costs to insure year 2000 compliance will not be material. The Company
believes that it is unlikely to experience a material adverse impact on its
financial condition or results of operations due to year 2000 compliance issues.
However, since the assessment process is ongoing, year 2000 complications are
not fully known, and potential liability issues are not clear, the full
potential impact of the year 2000 on the Company is not known at this time.

The information regarding year 2000 issues provided in this Form 10-K is
based on the Company's current assessment of ongoing activities and is subject
to change as the Company continuously monitors these activities. The Company is
currently evaluating the need for contingency plans associated with potential
year 2000 problems. The Year 2000 disclosure set forth above is a "year 2000
statement" as defined in the Year 2000 Information and Readiness Disclosure Act
of 1998 (the "Year 2000 Act") and, to the extent the disclosure related to year
2000 processing of the Company or to products or services offered by the
Company, is also a "year 2000 readiness disclosure" as defined in the Year 2000
Act.

In a recent Securities and Exchange Commission release regarding Year 2000
disclosure, the Securities and Exchange Commission stated that public companies
must disclose the most reasonably likely worst case Year 2000 scenario.
Although it is not possible to assess the likelihood of any of the following
events, each must be included in a consideration of worst case scenarios:
widespread failure of electrical, gas, and similar supplies serving the Company;
widespread disruption of the services provided by common communications
carriers; similar disruption to the means and modes of transportation for the
Company and its employees, contractors, suppliers, and customers; significant
disruption to the Company's ability to gain access to, and remain working in,
office buildings and other facilities; the failure of substantial numbers of the
Company's critical computer hardware and software systems, including both
internal business systems and systems controlling operational facilities such as
electrical generation, transmission, and distribution systems; and the failure
of outside entities' systems, including systems related to banking and finance.
Among other things, the Company could face substantial claims by customers or
loss of revenue due to service interruptions, inability to fulfill contractual
obligations or to bill customers accurately and on a timely basis, and increased
expenses associated with litigation, stabilization of operations following
critical system failures and the execution of contingency plans. The Company
could also experience an inability by customers and others to pay, on a timely
basis or at all, obligations owed to the Company. Under these circumstances, the
adverse effects on the Company would be material, although not quantifiable at
this time. Further, the cumulative effect of these failures could have a
substantial adverse effect on the economy, domestically and internationally.
The adverse effect on the Company from a domestic or global recession or
depression also could be material, although not quantifiable at this time.

The Company will continue to monitor business conditions to assess and
quantify material adverse effects, if any, that may result from the Year 2000
problem.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Foreign Currency Exchange Rates. The Company's revenue originating
outside the U.S. for the year ending December 31, 1998 was 53% of total
revenues. As the Company expands its operations into countries outside of the
U.S., its results of operations and the value of its assets will be affected by
the currency exchange rates between the U.S. dollar and the functional currency
of countries in which the Company has assets. The Company may also sell
products and services in certain countries in the local functional currency or
in a currency other than the U.S. dollar. In addition, the Company may acquire
interests in companies that operate in countries where the removal or conversion
of currency is restricted. The Company cannot be certain that countries that do
not have such restrictions regarding removal or conversion of currency at the
time it establishes operations in those countries will not subsequently impose
them, especially in situations where there is a deterioration in a country's
balance of payments or where the local currency is being heavily converted into
other currencies. The Company does not currently hedge against such
fluctuations. Gains and losses from such fluctuations have not been material to
the Company's consolidated results of operations. A 10% shift in such local
currencies against the U.S. dollar as of December 31, 1998 would not have had a
material effect on the Company's pretax earnings over the next fiscal year
ending December 1, 1999. Currently, all of the Company's contracts are
denominated in U.S. dollars except for those contracts entered into by WAM!NET
U.K. which denominates all of its contracts in pounds sterling other than its
German sales contracts which are denominated in Euro, the single European
currency.

The Company's international business is subject to risks typical of an
international business, including, but not limited to: differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility.
Accordingly, the Company's future results could be materially and adversely
impacted by changes in these or other factors.

Interest Rates. The Company invests its cash in a variety of financial
instruments, including bank time deposits and fixed rate obligations of
governmental entities and agencies. These investments are denominated in U.S.
dollars. Cash balances in foreign currencies overseas are operating balances
and are invested in short-term time deposits of the local operating bank.

Investments in fixed rate interest earning instruments carry a degree of
interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates. Due in part to these
factors, the future investment income of the Company may fall short of
expectations due to changes in interest rates, or the Company may suffer losses
in principal if forced to sell securities which have seen a decline in market
value due to changes in interest rates. The Company's investment securities are
held for purposes other than trading.

The Company is exposed to market risk from changes in the interest rates on
certain of its outstanding debt. The outstanding loan balance under the
Revolving Credit Facility bears interest at a variable rate based on prevailing
short-term interest rates in the U.S. and Europe. Based on the average
outstanding bank debt for the year ended December 31, 1998, a 100 basis point
change in interest rates would not change interest expense by a material amount.
For fixed rate debt such as the Company's 1998 Notes, interest rate changes
effect the fair market value thereof, but do not impact earnings or cash flows.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

An index to the financial statements and the required financial statement
schedules is set forth in Item 14.

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

None.

PART II

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The Company's executive officers and directors are:

NAME Age Position with the Company
- - ------------------------------ --- ------------------------------------------------------------------------

Edward J. Driscoll III........ 38 Chairman of the Board, Chief Executive Officer, President and Treasurer
Allen L. Witters.............. 40 Chief Technology Officer
Bradley E. Sparks............. 52 Executive Vice President and Chief Financial Officer
James R. Clancy............... 37 Senior Vice President of Corporate Development
David T. Ottinger............. 50 Senior Vice President of Operations and Engineering
John R. Kauffman.............. 41 Vice President of Global Marketing
David A. Townend.............. 40 Managing Director, WAM!NET U.K.
Raymond E. Kang............... 39 Vice President of Product Marketing and Development
Gary C. Jader................. 47 Vice President and General Manager of Medical Services
Carrie J. Maurer.............. 32 Vice President, Global Operations
Mark Marlow................... 34 Director of Finance
Curtis G. Gray................ 50 Director
K. William Grothe, Jr......... 43 Director
Robert L. Hoffman............. 70 Director
Susan Mayer................... 49 Director

The Board of Directors of the Company consists of five directors, two of
whom (currently Messrs. Driscoll, Hoffman are elected by the holders of the
Common Stock, three of whom (currently Ms. Mayer and Messrs. Grothe and Gray)
are elected by the holders of the Company's Class A Preferred Stock.

Edward J. Driscoll III is a founder and principal shareholder of the
Company and has served as its Chairman of the Board, Chief Executive Officer,
President and Treasurer since inception. Previously, Mr. Driscoll was the
principal shareholder, Chief Executive Officer, and a director of Cybernet
Systems, Inc. ("Cybernet"). Mr. Driscoll founded Cybernet in 1991 to provide
network integration services to the pre-press industry. Prior to founding
Cybernet, he held various marketing and management positions, most recently as
general manager of Roland Marketing, Inc., a regional wholesale produce
marketing and packaging company. He holds a Bachelor of Arts degree in economics
from St. John's University, Minnesota and a Master of Business Administration
degree from the University of St. Thomas.

Allen L. Witters is a founder and principal shareholder of the Company and
has served as its Chief Technology Officer since inception. He is principally
responsible for designing and implementing the WAM!NET Service architecture. Mr.
Witters has been engaged in technical consulting to the computer industry since
1975, including serving as a technical consultant from 1992 to 1996 for
Cybernet, and has broad experience in the invention, design, engineering and
implementation of software, networks, and network management systems. From 1987
to 1992, Mr. Witters was the Chief Executive Officer and a principal shareholder
of Datamap, Inc., a company that was engaged in the development and sale of GIS
(geographic information systems) software. In 1994, Mr. Witters filed a petition
for bankruptcy under Chapter 7 of the United States Bankruptcy Code.

Bradley E. Sparks joined the Company in September 1998 and currently serves
as Executive Vice President and Chief Financial Officer. Mr. Sparks has more
than 20 years of experience in corporate planning, management and finance. For
the past three and a half years, Mr. Sparks served as Chief Financial Officer
for the wireless telecommunications firm, Omnipoint Corporation, and was
instrumental in its 1996 initial public offering. At Omnipoint, Mr. Sparks
focused on arranging more than $3 billion of financing with a variety of
financial instruments including public equity, high yield debt, private
placements and bank financing. Prior to that time, Mr. Sparks was employed by
MCI Communications Corporation (now MCI WorldCom), where, from 1993 to 1995 he
held the position of Vice President and Controller and was responsible for
internal controls and, from 1988 to 1993, he served as Vice President and
Treasurer, responsible for the company's financing and capital structure. Prior
to that, Mr. Sparks served twelve years in corporate planning and finance for
Ryder System, Inc.

James R. Clancy joined the Company in April 1996 first serving as Chief
Marketing and Sales Officer until February 1999 and currently serves as Senior
Vice President of Corporate Development. From 1994 to 1996, Mr. Clancy was
employed by the Ceridian Corporation as Director of Marketing and Strategic
Planning. From 1988 to 1994, Mr. Clancy was employed by General Mills, Inc., in
various marketing and marketing management capacities. Prior to General Mills,
Mr. Clancy was a founder/President and General Manager of two Macintosh supply
manufacturing companies, respectively. Mr. Clancy holds a Bachelor of Arts
degree in economics from Moorhead State University and a Master of Business
Administration degree from the Wharton School of Business.

David T. Ottinger joined the Company in November 1997 as Senior Vice
President of Operations and Engineering. From April 1997 to November 1997, he
served as President and Chief Executive Officer of NetAccess, Inc., a network
security company. From April 1996 to April 1997, he served as Vice President,
Professional Services of Parallel Technologies, Inc. From October 1993 to April
1996, he served as Vice President, Network Services of COMDISCO Network
Services.

John R. Kauffman joined the Company in January 1998 first serving as Vice
President of Strategic Marketing and Communications until February 1999 and
currently serves as Vice President of Global Marketing. From 1991 to December
1997, Mr. Kauffman was President of Kauffman Marketing Group, Inc., where from
November 1995 to November 1997, he provided strategic positioning and outside
marketing services to the Company. Prior to 1991, Mr. Kauffman was President of
Kauffman Stewart Advertising.

David A. Townend joined the Company in March 1998 upon the consummation of
the 4-Sight Acquisition, and currently serves as Managing Director of WAM!NET
U.K. Mr. Townend founded 4-Sight and has been its Managing Director for more
than the past five years.

Raymond E. Kang joined the Company in March 1998 and currently serves as
Vice President of Product Marketing and Development. Prior to joining the
Company, Mr. Kang was employed by MCI Telecommunications for fourteen years in
various management and sales positions, most recently as Director of Broadband
and Multimedia Marketing.

Carrie J. Maurer joined the Company in November 1996 as the Director,
Installation & Customer Service and is currently the Vice President, Global
Operations. Prior to joining the Company, Ms. Maurer was employed from 1994 to
1996 by COMDISCO Network Services as the Director of Implementation Services.
From 1984 to 1994, she was employed in various customer service management
positions with Minnesota Mutual.

Gary C. Jader joined the Company in February 1998 and currently serves as
Vice President and General Manager of Medical Services. Prior to joining the
Company, Mr. Jader was employed from 1996 to February 1998 by NeuroMotion Inc.,
a medical device company, as Vice President, Marketing and Sales. From 1991 to
1996, Mr. Jader was employed by 3M Corporation as Marketing Supervisor.

Mark Marlow joined the Company in May 1995 and currently serves as its
Director of Finance. From 1994 until May 1995, he was employed as an accounting
senior by the public accounting firm of Brunberg, Thorsen and Associates,
Minneapolis, Minnesota. From 1991 to 1994, he was employed as an assistant
controller at Miller, Johnson and Kuehn, Incorporated, a licensed securities
brokerage firm. Mr. Marlow is a certified public accountant, holds a Bachelor of
Science degree in accounting from the University of Minnesota and also holds a
general securities license.

Curtis G. Gray has served as a Director of the Company since 1996 and since
November 1991 has served as MCI WorldCom's Vice President of Enhanced Data
Networks. Mr. Gray has more than 20 years of experience in the data
communication arena, including through his own consulting firm and engineering
and management positions with GTE Laboratories and Blue Cross and Blue Shield
Association. Mr. Gray received his Masters and Bachelors degrees in Engineering
from the University of Wisconsin.

K. William Grothe, Jr. has served as a Director of the Company since 1996
and has served as Vice President of Corporate Development of MCI WorldCom since
January 1996. From July 1990 to January 1996, Mr. Grothe was Senior Vice
President and Chief Financial Officer of MobileCom, a national paging company
headquartered in Jackson Mississippi. Mr. Grothe is a Certified Public
Accountant and received a Bachelor of Science degree in Accounting from the
University of Illinois.

Robert L. Hoffman has served as a Director of the Company since October
1995. Mr. Hoffman is a founder and shareholder of the law firm of Larkin,
Hoffman, Daly & Lindgren, Ltd, where he has practiced for more than the past
five years, and has served as its Chairman of the Board and President. He has
been extensively involved in land use and development for the past 35 years as
both an attorney and in various elective and appointive offices, including 14
years as a member of the Bloomington City Council, seven years as a member of
the Metropolitan Council, a land use law instructor at Hamline University School
of Law, a member of the Urban Land Institute Development Policies and
Regulations Council and a member of the Land Use Advisory Group for the Public
Technologies Institute of Washington, D.C.

Susan Mayer has served as a Director of the Company since October 1998 and
currently serves as an MCI WorldCom Senior Vice President. Ms. Mayer is also
President, MCI WorldCom Fund, a

venture fund created to invest in technologies, products and services that
complement MCI WorldCom's strategic direction. Previously, she was Senior Vice
President, ventures and alliances of MCI Communications Corporation, responsible
for strategy development, and mergers and acquisitions, and President and Chief
Operating Officer of SkyMCI, an MCI company that marketed a full range of data,
information and training services. Ms. Mayer joined MCI WorldCom in July 1993.
Previously, Ms. Mayer was with NHP, Inc., where she was responsible for the
development and implementation of acquisition and financing strategies. She also
previously served as general manager of COMSAT Video Enterprises, and vice
president of corporate development for COMSAT Corp., and was manager of strategy
consulting for The Boston Consulting Group.

ITEM 11. EXECUTIVE COMPENSATION.

The following table summarizes all compensation paid to the Company's Chief
Executive Officer and to each of the Company's executive officers other than the
Chief Executive Officer (collectively, the "Named Executive Officers") whose
salaries and bonus exceed $100,000 for services rendered in all capacities to
the Company for each of the years ended December 31, 1997 and 1998.

SUMMARY COMPENSATION TABLE

LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------ -----------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS RESTRICTED SECURITIES ALL OTHER
--------------------------- ---- ------ ----- ---------- ---------- ---------
STOCK UNDERLYING COMPEN-
----- ---------- -------
AWARD(S) OPTIONS (#) SATION
-------- ----------- ------

Edward J. Driscoll III.......................... 1998 $ 195,000 $ -- (1) $-- 750,000 --
Chairman of the Board, Chief Executive 1997 150,000 75,000 -- -- --
Officer, President and Treasurer
1996 101,250 67,500 -- 2,000,000 --

Allen L. Witters................................ 1998 195,000 -- (1) -- 750,000 --
Chief Technology Officer 1997 150,000 75,000 -- -- --
1996 101,250 67,500 -- 2,000,000 --

James R. Clancy................................. 1998 170,000 -- (1) -- -- --
Senior Vice President of Corporate 1997 135,000 67,500 -- 500,000 --
Development
1996 55,580 40,000 -- 375,000 --

David T. Ottinger............................... 1998 120,000 10,000 (1) -- -- --

1997 16,000 (2) 5,000

Senior Vice President of Operations and 1997 -- -- -- 150,000 --
Engineering

1996 -- -- -- -- --

John R. Kauffman................................. 1998 150,000 100,000 (1) -- 350,000 --
Vice President of Global Marketing 1997 -- -- -- 225,000 --
1996 -- -- -- -- --

_____________________
(1) The total bonuses for the year ended December 31, 1998 for Messrs.
Driscoll, Witters, Clancy, Ottinger and Kauffman have yet to be determined
by the Board of Directors.
(2) David T. Ottinger's employment with the Company began in November of 1997.

The following table sets forth certain information for the fiscal year
ended December 31, 1998 with respect to stock options granted to the Named
Executive Officers. For the fiscal year ended December 31, 1998, no stock
appreciation rights were granted to the Named Executive Officers and no stock
options were granted to the Named Executive Officers at an option price below
market value on the date of the grant, as determined by the Board of Directors
of the Company. The potential realized dollar value of an option grant is the
product of (a) the difference between (1) the product of the per-share market
price at the time of the grant (which the Company determined was $3.90 on
January 1, 1998 and $8.00 on July 1, 1998, which was the price per share
attributable to the Company's common stock in the immediately preceding arm's
length transaction with an independent third party) and the sum of 1 plus the
adjusted stock price appreciation rate and (2) the per-share exercise price of
the option, and (b) the number of securities underlying the grant at fiscal
year-end.

STOCK OPTION GRANTS IN 1998

POTENTIAL REALIZED VALUE AT
ASSUMED ANNUAL RATES OF
STOCK APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
--------------------------------------------------- -----------
% OF TOTAL
----------
NUMBER OF OPTIONS EXERCISE
--------- ------- --------
SECURITIES GRANTED TO OR BASE
---------- ---------- -------
NAME UNDERLYING OPTIONS EMPLOYEES PRICE EXPIRATION
- - ----- ------------------ --------- ----- ----------
GRANTED (#) IN FISCAL YEAR ($/SH) DATE 5% 10%
----------- -------------- ------ ---- ---------- ----------

Edward J. Driscoll III....... 750,000 16% $8.00 7/01/08 $1,657,689 $3,663,060
Allen L. Witters............. 750,000 16% 8.00 7/01/08 1,657,689 3,663,060
James R. Clancy.............. -- -- -- -- -- --
David T. Ottinger............ -- -- -- -- -- --
John R. Kauffman............. 350,000 8% 3.90 1/01/06 377,124 833,346

The following table sets forth certain information with respect to the value
of unexercised stock options held by the Named Executive Officers as of December
31, 1998.

FISCAL YEAR-END OPTION VALUES

NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT FY-END (#) OPTIONS AT FY-END
--------------------------------- ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ----------------------------- ----------- ------------- ----------- -------------

Edward J. Driscoll III....... 2,750,000 -- $14,080,000 $ --
Allen L. Witters............. 2,750,000 -- 14,080,000 --
James R. Clancy.............. 583,333 291,667 4,106,664 2,053,336
David T. Ottinger............ 50,000 100,000 205,000 410,000
John R. Kauffman............. 410,000 165,000 2,342,500 676,500

DIRECTORS' COMPENSATION

The Company does not grant compensation to its directors other than as set
forth below. Each director is reimbursed for reasonable out-of-pocket expenses
incurred in connection with attendance at meetings of the Board of Directors.
In January 1996 Mr. Robert L. Hoffman was granted 75,000 stock options at an
exercise price of $0.96 per share, which options expire November 30, 2005, all
of which were vested and exercisable of December 31, 1998. Other than Mr.
Hoffman, no director received compensation in any form for services rendered as
a director from the Company during fiscal year 1998.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of the Company's Compensation Committee is or has been an officer
or employee of the Company or any of its subsidiaries. During 1998, no executive
officer of the Company served on the Compensation Committee or as a director of
another entity in which any such entity's executive officers served on the
Company's Compensation Committee or Board of Directors. K. William Grothe, Jr.
a member of the Compensation Committee, is an officer of MCI WorldCom, a
significant shareholder of the Company. See "Certain Relationships and Related
Transactions."

EMPLOYMENT AGREEMENTS

Effective October 1, 1996, the Company entered into an employment agreement
with Edward J. Driscoll III which provides for: (i) an initial term of 27 months
and subsequent one-year renewals, (ii) an initial annual salary of $150,000,
subject to periodic review and adjustment, (iii) an additional bonus or other
compensation as may be established from time to time by the Board of Directors
based upon achievement of performance goals derived from the Company's annual
business plan, which sets forth revenue and profit measures of the Company, (iv)
use of a company automobile, (v) non-competition by Mr. Driscoll with the
business of the Company during the term of the agreement and for a period of two
years after its termination of employment and non-solicitation of the employees
or customers of the Company during such period, (vi) confidentiality with
respect to all information and trade secrets of the Company during the term of
employment and for a period of two years after the termination of employment and
(vii) automatic assignment to the Company of all ideas, inventions, discoveries
and improvements of Mr. Driscoll relating to the business of the Company. In the
event that the agreement is terminated by the Company without cause, Mr.
Driscoll is entitled to receive

severance, payable in cash, in an amount equal to the sum of (a) the greater of
(x) his then base salary for two years or (y) the amounts reasonably estimated
to be due under the agreement for the two year period following termination and
(b) one half of the bonus to which he would have been entitled to in the year of
termination. In connection with this employment agreement, the Company and Mr.
Driscoll also entered into a stock option agreement which provides for the grant
of an option, expiring December 31, 2007, to purchase up to 2,000,000 shares of
Common Stock at a price of $0.96 per share. These options vested on January 2,
1998.

Effective October 1, 1996, the Company entered into an employment agreement
and a stock option agreement with Allen L. Witters on terms substantially the
same as those of the employment agreements with Mr. Driscoll. The stock options
issued to Mr. Witters also vested on January 2, 1998.

Effective April 16, 1996, the Company entered into an employment agreement
with James R. Clancy which provides for: (i) an annual salary of $85,000, (ii) a
bonus of up to $40,000, conditioned on achievement of certain operational
objectives, such operational objectives to include (a) the proposal of a written
plan and timeline for the development and implementation of a comprehensive
marketing plan for the Company's products during 1996 and 1997 and (b) such
other additional objectives that Mr. Clancy was to determine and achieve during
the first twelve month period following the effective date of his employment
agreement, (iii) confidentiality with respect to all information and trade
secrets of the Company during the term of employment and for a period of one
year after the termination of employment and (iv) non-competition by Mr. Clancy
with the business of the Company for a period of 18 months after the termination
of employment, and non-solicitation of the customers of the Company during such
period. The employment agreement is for an unspecified term on an "at will"
basis. In connection with this employment agreement, the Company and Mr. Clancy
have entered into incentive stock option agreements with respect to the grant of
options to purchase 875,000 shares of Common Stock at a purchase price of $0.96
per share. 750,000 options vest in annual increments ending May 1, 2000 and the
remaining 125,000 vested on January 2, 1998.

Effective September 8, 1998, the Company entered into an employment
agreement with Bradley E. Sparks which provides for (i) an initial monthly base
salary of $16,667; (ii) an annual bonus of up to 30% of his base salary
conditioned upon achievement of specific performance objectives; (iii) an
automobile allowance; (iv) non-competition with the Company during the term of
the agreement and for a period of one year after his termination of employment
and non-solicitation of Company employees during such period; (vi)
confidentiality with respect to all Company confidential information and trade
secrets of the Company during the terms of his employment and for a period of
one year after the termination of employment; and (vii) automatic assignment to
the Company of all ideas, inventions, discoveries and improvements of Mr. Sparks
relating to the business of the Company. In the event that the agreement is
terminated by the Company without cause, Mr. Sparks is entitled to receive as
severance pay an amount equal to six months of his base pay as of the date of
his termination, less customary payroll deductions, to be paid in monthly
installments. In connection with the agreement, the Company and Mr. Sparks also
entered into stock option agreements which provides for the grant of options to
purchase 400,000 shares of Common Stock at a price of $8.00 per share and
200,000 shares of Common Stock at a price of $12.00 per share.

Effective January 1, 1998, the Company entered into an employment agreement
with John R. Kauffman which provides for (i) an initial monthly base salary of
$12,500; (ii) non-competition with the Company during the term of the agreement
and for a period of one year after his termination of employment and non-
solicitation of Company employees during such period; (iii) confidentiality with
respect to all Company confidential information and trade secrets of the Company
during the terms of his employment and for a period of one year after the
termination of employment; and (iv) automatic assignment to the company

of all ideas, inventions, discoveries and improvements of Mr. Kauffman relating
to the business of the Company. In connection with the agreement, the Company
and Mr. Kauffman also entered into a stock option agreement which provided for
the grant of options to purchase 350,000 shares of Common Stock at a price of
$3.90 per share. Mr. Kauffman's employment agreement was subsequently amended to
provide Mr. Kauffman with quarterly bonuses of $25,000 per calendar quarter.
Prior to joining the Company as an employee, Mr. Kauffman served the Company as
a consultant and in connection therewith was granted options to purchase 225,000
shares of Common Stock at a purchase price of $.96 per share.

Effective November 3, 1997, the Company entered into an employment
agreement with David T. Ottinger which provides for (i) an initial monthly base
salary of $8,333; (ii) a initial bonus of up to $20,000 based upon achievement
of specific operational objectives; (iii) non-competition with the Company
during the term of the agreement and for a period of one year after his
termination of employment and non-solicitation of Company employees during such
period; (iii) confidentiality with respect to all Company confidential
information and trade secrets of the Company during the terms of his employment
and for a period of one year after the termination of employment; and (iv)
automatic assignment to the company of all ideas, inventions, discoveries and
improvements of Mr. Ottinger relating to the business of the Company. In
connection with the agreement, the Company and Mr. Ottinger also entered into a
stock option agreement which provided him with options to purchase 150,000
shares of Common Stock at a price of $3.90 per share.

The Company has implemented a quarterly bonus compensation program pursuant
to which directors and key managers can receive up to 30%, and other employees
up to 20%, of their annual salary in cash bonuses based upon individual
achievement and the achievement of corporate goals and objectives.

The Company's other officers and significant technical employees are
employed pursuant to annually renewing employment agreements which continue
until terminated by either the Company or the employee. Each such agreement
contains confidentiality and assignment of invention provisions in favor of the
Company. The Company currently has no retirement, pension, or insurance plans
for its officers. The Company may in the future adopt such plans and may also
adopt a compensation plan substantially increasing officers' salaries and other
compensation based upon the performance of the Company.

STOCK OPTION PLANS

The Company's Stock Option Plan (the "1994 Plan") was adopted in September
1994 by the Company's Board of Directors and was approved by the shareholders of
the Company in October 1994. The 1994 Plan has been subsequently amended, most
recently on April 24, 1998 (as so amended and restated, the "Amended 1994 Plan")
in conjunction with the adoption of the Company's 1998 Combined Stock Option
Plan (the "1998 Plan" and, collectively, the "Plans"), to reflect the Company's
name change to WAM!NET Inc., to incorporate prior amendments to the 1994 Plan,
to provide that no new options be granted under the Amended 1994 Plan and to
limit the number of shares of Common Stock available for issuance under the
Amended 1994 Plan to 7,000,000. Each Plan is currently administered by the
Company's Board of Directors. The 1998 Plan and the amendments to the 1994 Plan
adopted by the Board of Directors on April 24, 1998 received shareholder
approval on May 30, 1998.

The Amended 1994 Plan and the 1998 Plan provide for the granting of Common
Stock options which qualify as "incentive stock options" under Section 422 of
the Code, as well as the granting of

"nonqualified options." Under each Plan, the Board or, if the Board appoints
one, a "Stock Option Committee" has complete discretion to select the optionees
and to establish the terms and conditions of each option, subject in all cases
to the applicable provisions of the Plan and the Code. Options granted under a
Plan are not transferable and are subject to various other conditions and
restrictions. Participation in the Amended 1994 Plan is limited to officers and
regular full-time executive, administrative, professional, production and
technical employees of the Company or a subsidiary of the Company, who are
salaried employees of the Company or such subsidiary, and consultants or the
Company or a subsidiary. Non-employee directors of the Company may be granted
nonqualified options. Participation in the 1998 Plan is limited to employees of
the Company or a subsidiary of the Company and to non-employee directors and
non-employee consultants. The 1998 Plan provides that without amending the 1998
Plan, the Stock Option Committee may grant options to eligible employees who are
foreign nationals on such terms and conditions different from those specified in
the 1998 Plan as may in the judgment of the committee be necessary or desirable
to foster and promote achievement of the purposes of the 1998 Plan, and, in
furtherance of such purposes, the Committee may make such addenda,
modifications, amendments, procedures and subplans as may be necessary or
advisable to comply with provisions of laws in other countries in which the
Company operates or has employees. An addendum to the 1998 Plan extends the
benefits of stock options granted under the 1998 Plan to employees of the
Company and its subsidiaries who are residents of the United Kingdom.

A total of 7,000,000 shares of Common Stock have been reserved for issuance
under the Amended 1994 Plan and a total of 25,000,000 shares of Common Stock
have been reserved for issuance under the 1998 Plan, subject to adjustment for
stock splits or recapitalizations. Shares subject to canceled, unexercised,
lapsed or terminated options are available for subsequently granted options
under a Plan. The exercise price of all incentive stock options granted under a
Plan must be at least equal to the fair market value of the shares on the date
of grant, and the maximum term of each option is ten years. Under the terms of
each Plan, the aggregate fair market value of the Common Stock (determined at
the date of the option grant) for which any employee may first exercise
incentive stock options in any calendar year may not exceed $100,000. Upon
exercise of an option, payment of the exercise price in cash is required, or, at
the discretion of the Company, by the delivery of Common Stock of the Company
already owned by the optionee or a promissory note for all or a portion of the
exercise price of the shares so purchased or a combination of the foregoing.
There is no express limitation on the duration of a Plan; provided, however,
that incentive stock options may not be granted after the date that is ten years
from the date of shareholder approval of a Plan. The Board may terminate either
Plan and, subject to certain limitations, may amend either Plan at any time. As
of the date hereof, there were 6,913,251 options issued and outstanding under
the Amended 1994 Plan, consisting of incentive stock options to employees to
purchase a total of 5,847,417 shares of Common Stock at exercise prices ranging
from $0.45 to $8.00 per share, and non-qualified stock options to purchase a
total of 1,065,834 shares of Common Stock at exercise prices ranging from $0.96
to 12.00 per share. As of the date hereof, there were 2,191,250 options issued
and outstanding under the 1998 Plan, consisting of incentive options to
employees and consultants to purchase a total of 552,000 shares of Common Stock
at an exercise price of $8.00 per share and non-qualified options to purchase a
total of 1,639,250 shares of Common Stock at exercise prices ranging from $8.00
to $12.00 per share.

In addition to options granted under the Plans, the Company has also
granted certain officers and consultants options to purchase a total of
5,125,000 shares of Common Stock at exercise prices ranging from $0.45 to $3.90
per share.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth the beneficial ownership of the Company's
Common Stock as of March 15, 1999 for (i) each of the Company's executive
officers and directors, (ii) all executive officers and directors as a group and
(iii) each person known by the Company to own beneficially 5% or more of the
Company's outstanding shares of Common Stock. All persons indicated have sole
voting and dispositive power over such shares unless otherwise indicated. Except
as indicated below, none of the persons in the table have beneficial ownership
in any class of equity securities of any parent or subsidiary of the Company.

NAME OF BENEFICIAL OWNER Number of Shares Percentage of Total
------------------------
Beneficially Owned (1) SHARES OUTSTANDING (1)
---------------------- ----------------------

Edward J. Driscoll III/(2)/......................................... 4,750,000 (3) 39.4%
Allen L. Witters/(2)/............................................... 4,750,000 (3) 39.4
James R. Clancy/(2)/................................................ 645,833 (4) 6.5
Mark Marlow/(2)/.................................................... 81,666 (5) 0.9
John R. Kauffman/(2)/............................................... 485,000 (6) 5.0
David T. Ottinger/(2)/.............................................. 50,000 (7) 0.5
Gary C. Jader/(2)/.................................................. 50,000 (7) 0.5
Raymond E. Kang/(2)/................................................ 83,333 (8) 0.9
Carrie J. Maurer/(2)/............................................... 65,000 (9) 0.7
Bradley E. Sparks/(2)/.............................................. -- --
David A. Townend/(10)/.............................................. 1,317,300 14.2
Robert L. Hoffman................................................... 75,000 (11) 0.8
K. William Grothe, Jr./(12)/........................................ -- (13) --
Susan Mayer/(12)/................................................... -- (14) --
Curtis G. Gray/(12)/................................................ -- (15) --
MCI WorldCom, Inc./(12)/............................................ 36,794,680 (16) 79.8
Silicon Graphics, Inc............................................... 5,710,425 (17) 38.0
George L. Frisch.................................................... 625,000 (18) 6.5
James L. Ecker...................................................... 922,520 (19) 9.0
All executive officers and directors as a group (15 persons)........ 12.403,132 (3)(4)(5)(6)((7) 75.7
(8)(9)(10)(11)

________________________

(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission, and includes general voting power
and/or investment power with respect to securities. Shares of Common Stock
subject to options or warrants currently exercisable or exercisable within
60 days are deemed outstanding for purposes of computing the beneficial
ownership percentage of the person holding such options but are not deemed
outstanding for purposes of computing the percentage of any other person.

(2) Address: 6100 W. 110th Street, Minneapolis, Minnesota 55438.

(3) Includes 2,750,000 shares issuable upon exercise of stock options currently
exercisable.

(4) Includes 583,333 shares issuable upon exercise of stock options currently
exercisable and 62,500 shares issuable upon exercise of stock options
exercisable within 60 days.

(5) Includes 81,666 shares issuable upon exercise of stock options currently
exercisable.

(6) Includes 455,000 shares issuable upon exercise of stock options currently
exercisable and 30,000 shares issuable upon exercise of stock options
exercisable within 60 days.

(7) Includes 50,000 shares issuable upon exercise of stock options currently
exercisable.

(8) Includes 83,333 shares issuable upon exercise of stock options currently
exercisable.

(9) Includes 65,000 shares issuable upon exercise of stock options currently
exercisable.

(10) Address: 2 Poole Road, Bournemouth, Dorset, BH25QY England.

(11) Issuable upon exercise of stock options currently exercisable. Address:
Larkin, Hoffman, Daly & Lindgren, Ltd., 1500 Northwest Financial Center,
7900 Xerxes Avenue South, Bloomington, MN 55431.

(12) Address: 515 East Amite, Suite 400, Jackson, MS 39201.

(13) Mr. Grothe is the beneficial owner of 53,333 shares of Common Stock of MCI
WorldCom, representing fewer than 1% of the total shares outstanding, which
total includes 43,833 shares issuable upon exercise of stock options
exercisable within 60 days.

(14) Ms. Mayer is the beneficial owner of 25,122 shares of Common Stock of MCI
WorldCom, representing fewer than 1% of the total shares outstanding, which
total includes 4,970 shares issuable upon exercise of stock options
exercisable within 60 days.

(15) Mr. Gray is the beneficial owner of 98,000 shares of Common Stock of MCI
WorldCom, representing fewer than 1% of the total shares outstanding, which
total includes 58,000 shares issuable upon exercise of stock options
exercisable within 60 days.

(16) Includes 29,333,670 shares issuable upon exercise of warrants currently
exercisable and 200,000 shares issuable upon the exercise of warrants
exercisable within 60 days, 5,064,868 shares issuable upon conversion of a
convertible subordinated note in the principal amount of $5 million and
2,196,317 shares of Class D Convertible Preferred Stock. MCI WorldCom also
owns 115,206 shares of Class A Preferred Stock.

(17) Includes 5,710,425 shares of Class B Convertible Preferred Stock which are
immediately convertible. Silicon Graphics, Inc. also owns 878,527 shares
of Class C Convertible Preferred Stock. Address: 2011 N. Shoreline Blvd.,
Mountain View, CA 94043-1389.

(18) Includes 150,000 shares issuable upon exercise of warrants currently
exercisable, 200,000 shares issuable upon exercise of stock options
currently exercisable and 25,000 shares issuable upon exercise of stock
options exercisable within 60 days. Address: 5030 Woodlawn Blvd.,
Minneapolis, MN 55417.

(19) Includes 131,580 shares issuable upon exercise of a convertible
subordinated debenture, 416,665 shares issuable upon exercise of currently
exercisable warrants and 50,000 shares owned by the Ecker Family Limited
Partnership, of which he is a partner. Address: 5061 Interlachen Bluff,
Edina, MN 55436.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

MCI WorldCom is a principal shareholder of the Company. As a result of the
consummation of the SGI Investment, MCI WorldCom will have the right to elect
the largest whole number that is less than the majority of all of the members of
the Board of Directors of the Company. In September 1996, the Company issued to
MCI WorldCom the 1996 MCI WorldCom Convertible Note. Interest on the 1996 MCI
WorldCom Convertible Note accrues at an annual rate of 10%, payable semi-
annually, commencing with the first payment on March 30, 1997. At any time prior
to September 30, 1999, MCI WorldCom may convert the principal amount of the 1996
MCI WorldCom Convertible Note into shares of Common Stock at a conversion price
of $1.00 per share, subject to adjustment in the event of stock splits,
reorganizations or recapitalizations. Payment of principal and interest on the
1996 MCI WorldCom Convertible Note is subordinated to existing and future
obligations of the Company for money borrowed from bank, trust, insurance or
other financial institutions. The shares of Common Stock underlying the 1996 MCI
WorldCom Convertible Note are subject to certain registration rights.

In November 1996, the Company and MCI WorldCom entered into a Preferred
Stock, Subordinated Note and Warrant Purchase Agreement (the "1996 MCI WorldCom
Agreement"). Pursuant to the 1996 MCI WorldCom Agreement, the Company issued
100,000 shares of its Class A Preferred Stock, par value $10.00 per share, to
MCI WorldCom for an aggregate purchase price of $1.0 million. In connection
with the SGI Investment, MCI WorldCom exchanged its shares of Class A Preferred
Stock for 115,206 shares of a new Series of Class A Preferred Stock, par value
$10.00 per share (the "Class A Preferred Stock") with terms substantially the
same as the original Class A Preferred Stock except with respect to matters
related to the Tender Valuation (as discussed below) and the right to elect
directors. Except for voting with respect to the election of directors, holders
of shares of Class A Preferred Stock are entitled to one vote for each share
held of record, voting together with the holders of Common Stock as a single
class, on all matters submitted to a vote of shareholders. Following the SGI
Investment, holders of Class A Preferred Stock, voting separately as a class,
will be entitled to elect one member less than a majority of all directors.

Pursuant to the 1996 MCI WorldCom Agreement, the Company also issued to MCI
WorldCom a $28.5 million Subordinated Note due December 31, 2003 (the "1996 MCI
WorldCom Subordinated Note"), of which $20.4 million aggregate principal amount
was outstanding as of December 31, 1998. The MCI WorldCom Subordinated Note
accrues interest at an annual rate of 7%, payable semi-annually, commencing
March 31, 1997. Payment of principal and interest on the 1996 MCI WorldCom
Subordinated Note is subordinated to existing and future obligations of the
Company for money borrowed from bank, trust, insurance or other financial
institutions.

In February 1998 MCI WorldCom agreed to defer all cash payments of
principal (or premium on) or interest on, or dividend, distribution, redemption
or other payment in respect of the 1996 MCI WorldCom Convertible Note, the Class
A Preferred Stock owned by MCI WorldCom and the 1996 MCI WorldCom Subordinated
Note until a date that is 180 days following the Stated Maturity of the 1998
Notes (the "Deferral Date"). The agreement also provides that the payment of the
principal of and interest on the 1996 MCI WorldCom Convertible Note and the 1996
MCI WorldCom Subordinated Note may be accelerated only in the event of the
acceleration of the payment of the principal amount of the 1998 Notes following
an Event of Default with respect to the 1998 Notes. The agreement grants MCI
WorldCom an option to convert (a) interest otherwise due on the 1996 MCI
WorldCom Convertible Note and deferred pursuant to MCI WorldCom's agreement, and
(b) the interest accrued on the outstanding principal amount of the 1996 MCI
WorldCom Subordinated Note

from December 31, 2003 through the date such amount is paid pursuant to MCI
WorldCom's agreement into shares of Common Stock at the per share price on the
date of such conversion.

Pursuant to the 1996 MCI WorldCom Agreement, the Company also issued to MCI
WorldCom warrants to purchase, on or before December 31, 2000, up to 20,787,500
shares of the Company's Common Stock at an initial exercise price of $0.96 per
share, subject to adjustment in the event of stock splits, reorganizations or
recapitalizations (the "1996 MCI WorldCom Warrants"). The exercise price
increased to $0.98 per share on March 31, 1997, and thereafter will
automatically increase by the amount of $0.02 per share on the last day of each
calendar quarter, subject to certain abatement provisions. The exercise price is
currently $1.09 per share. The 1996 MCI WorldCom Warrants are subject to certain
registration rights.

The 1996 MCI WorldCom Agreement (as amended) provides that if the Company
is not publicly held by the year 2001 its managers and Board of Directors will
obtain an independent valuation by a nationally recognized investment bank of
the fair market value per share of the Company's Common Stock, without any
premium allocated for any controlling interest (the "Tender Valuation"). Upon
receipt of the Tender Valuation, MCI WorldCom may, but is not required to,
tender (the "First Tender") to purchase all outstanding shares of Common Stock
and all outstanding options, warrants, convertible securities and other rights
to purchase shares of Common Stock (collectively, "Company Common Securities")
for at least the per share amount of the Tender Valuation. If the owners of a
majority of the then outstanding shares of the Company's Common Stock (excluding
shares held by MCI WorldCom or its affiliates) reject the First Tender, MCI
WorldCom will have 60 days following such rejection to again tender (the "Second
Tender") to purchase the same securities. During such 60-day period, the
Company will use its good faith efforts to determine what offer price would be
acceptable to the owners of such shares and will communicate such information to
MCI WorldCom. Subject to certain conditions, MCI WorldCom will sell and the
Company will purchase the 1996 MCI WorldCom Warrants, any shares acquired upon
exercise of the 1996 MCI WorldCom Warrants and any shares acquired upon the
conversion of the 1996 MCI WorldCom Convertible Note (collectively, the "1996
MCI WorldCom Securities") if (i) MCI WorldCom fails to make the First Tender
within 90 days after receipt of the Tender Valuation; (ii) owners of a majority
of the then outstanding shares of Common Stock (excluding shares held by MCI
WorldCom or its affiliates) reject the First Tender and 1996 MCI WorldCom makes
no Second Tender; or (iii) owners of a majority of the then outstanding shares
of Common Stock (excluding shares held by MCI WorldCom or its affiliates) reject
the Second Tender. The Company's purchase price for the 1996 MCI WorldCom
Securities will be as follows:

(a) If MCI WorldCom fails to make the First Tender, an amount equal to the
Tender Valuation (or the spread between the Tender Valuation and the
exercise price in the case of warrants).

(b) If the First Tender is rejected by the Company's shareholders and MCI
WorldCom does not make the Second Tender, an amount equal to the
purchase price offered by MCI WorldCom in the First Tender (or the
spread between the offer price and the exercise price in the case of
warrants).

(c) If the Second Tender is rejected by the Company's shareholders, an
amount equal to the purchase price offered by MCI WorldCom in the
Second Tender (or the spread between the offer price and the exercise
price in the case of warrants).

The Company will have nine months in which to pay the purchase price for
the 1996 MCI WorldCom Securities. From the time the obligation of the Company to
purchase the 1996 MCI WorldCom Securities arises until the expiration of such
nine-month period, Edward J. Driscoll III and Allen L. Witters will jointly hold
a limited proxy with regard to all of the 1996 MCI WorldCom Securities. If the
Company fails to timely pay the purchase price for the 1996 MCI WorldCom
Securities, MCI WorldCom will be relieved of all obligations to sell such
securities to the Company, the Company will have no right to cause MCI WorldCom
to sell such securities and the Company will not be obligated to pay the
purchase price for such securities. The parties have agreed to waive their
respective obligations thereunder if the Company determines to become, and
thereafter becomes, a publicly-held company.

In December 1996, MCI WorldCom, Edward J. Driscoll III and Allen L. Witters
executed a Right of Refusal Agreement which provides: (i) for a restriction on
transfer by Mr. Driscoll and Mr. Witters of the shares of Common Stock of the
Company held by them as of the date thereof (the "Subject Shares") and (ii) that
in the event Mr. Driscoll or Mr. Witters desires to sell his Subject Shares,
then he shall offer to the other a right of first refusal and, in the event the
other does not elect to purchase such Subject Shares, he shall offer to MCI
WorldCom a right of second refusal.

In September 1997, the Company entered into the Revolving Credit Facility.
The maximum amount that can be borrowed under the Revolving Credit Facility is
$25.0 million. MCI WorldCom has guaranteed the payment of all amounts owed under
the Revolving Credit Facility, and, accordingly, the Company must obtain MCI
WorldCom's consent prior to obtaining any advances under the Revolving Credit
Facility. At December 31, 1998, the amount outstanding under the Revolving
Credit Agreement was $24,000,000. In consideration of MCI WorldCom's guaranty,
the Company granted to MCI WorldCom 8,396,170 Class A warrants and 14,204,835
Class B warrants to purchase shares of Common Stock at an initial exercise price
of $3.90 per share, subject to adjustment in the event of stock splits,
reorganizations or recapitalizations. The Class A warrants may be exercised at
any time on or before December 31, 2000. The Class B warrants begin to vest
after September 1999 depending upon the outstanding balance under the Revolving
Credit Facility at certain times and whether certain qualified repayments are
made thereunder. If the Company repays all obligations under the Revolving
Credit Facility prior to September 1999 with certain qualified repayments, no
Class B warrants will vest. The Company intends to repay all obligations
thereunder prior to the September 1999 vesting date of the Class B warrants.
The Class A warrants and Class B warrants are subject to certain registration
rights.

MCI WorldCom has also guaranteed the performance of the Company's
obligations under a Service Provision Agreement, dated July 18, 1997, between
the Company and Time.

The Company has entered into service arrangements with MCI WorldCom,
including an Application for Data Services pursuant to which MCI WorldCom
provides the Company with interexchange telecommunications service, frame relay
service and ATM service, and co-location agreements pursuant to which the
Company leases space for its Distribution Hubs. The Company believes that these
arrangements are on terms that are similar to those that could be obtained from
an independent third party on an arm's-length basis. Pursuant to the Company's
agreements with MCI WorldCom, the Company has guaranteed monthly usage levels of
data communications with MCI WorldCom totaling in aggregate approximately $4.1
million, $2.8 million and $1.1

million for the years ended December 31, 1999, 2000 and 2001, respectively. In
the event these agreements are terminated prior to their expiration date, the
Company will be liable to MCI WorldCom for termination contingencies totaling in
aggregate approximately $4.4 million, $2.6 million and $1.1 million for the
years ended December 31, 1998, 1999 and 2000, respectively. The Company's data
communications expense under telecommunication contracts with MCI WorldCom was
approximately $342,573, $5.5 million and $11.8 million for the years ended
December 31, 1996, 1997 and 1998, respectively. In addition, in connection with
the issuance of the 1999 MCI WorldCom Convertible Note, the Company has agreed
to make available to MCI WorldCom certain technology developed by the Company to
be integrated with MCI WorldCom's infrastructure and product/service suites on
terms mutually acceptable to each of the Company and MCI WorldCom, provided that
such technology is provided on such terms and conditions that are at least as
favorable, when viewed in their entirety, as the Company provides (or may in the
future have provided) to any other person or entity not affiliated with MCI
WorldCom.

On January 13, 1999, the Company issued the 1999 MCI WorldCom Convertible
Note to MCI WorldCom in a principal amount up to $25.0 million due August 28,
1999. On January 13 and March 4, 1999, respectively, the Company borrowed $10.0
million and $15.0 million thereunder. The 1999 MCI WorldCom Convertible Note
automatically converted into 2,196,317 shares of the Company's Class D Preferred
Stock immediately prior to the closing of the SGI Investment. The Class D
Preferred Stock is immediately convertible in the aggregate into approximately
2.9% of the Common Stock (calculated on a fully diluted basis). In connection
with the issuance of the 1999 MCI WorldCom Convertible Note, the Company also
issued the 1999 MCI WorldCom Warrants to MCI WorldCom. The Class D Preferred
Stock and the 1999 MCI WorldCom Warrants are subject to certain registration
rights.

SGI, as the holder of Class B Preferred Stock has the exclusive right,
voting separately as a class, to elect one member to the Company's Board of
Directors.

In connection with the SGI Investment, SGI and the Company entered into the
Preferred Provider Agreement, pursuant to which the Company has developed a list
of existing SGI customers in the entertainment industry which the Company
believes represents a significant sales revenue opportunity for it over the next
three years. The Company and SGI have agreed to jointly develop a marketing,
sales and implementation plan to address these accounts, including field
resource commitments, compensation to SGI for field activities and professional
services, and such other matters applicable to the sale of the WAM!NET Service
to such potential customers. In addition, SGI and the Company intend to explore
a broader strategic relationship that the Company believes will enable it to
obtain the benefit of SGI's presence in the entertainment industry and other
selected commercial accounts.

Immediately prior to the issuance of the SGI Preferred Stock, MCI WorldCom
(a) converted the 1999 MCI WorldCom Convertible Note into 2,196,317 shares of
Class D Preferred Stock which are immediately convertible into approximately
2.9% of the Common Stock calculated on a fully diluted basis, and (b) exchanged
100,000 shares (100%) of the Company's Class A Preferred Stock, par value $10.00
per share (which had entitled MCI WorldCom to elect a majority of the members of
the Company's Board of Directors), into 115,206 shares (100%) of 1999 Class A
Preferred Stock, par value $10.00 per share (the "1999 Class A Preferred Stock")
(which now entitles MCI WorldCom to elect the largest whole number that is less
than a majority of all of the members of the Company's Board of Directors).

Concurrently with the closing of the SGI Investment, SGI, MCI WorldCom and
the Company entered into a Stockholder's Agreement, dated as of March 4, 1999
(the "1999 Stockholders Agreement") pursuant to which SGI and MCI WorldCom have
each agreed to provide the other party with certain tag-along rights with
respect to the transfer of any shares of the SGI Stock or the Class D Preferred
Stock. In addition, the parties agreed that the terms of future material
agreements between the Company and MCI WorldCom must be approved by a majority
of the disinterested directors of the Company.

Edward J. Driscoll, Jr., purchased 250,000 shares of Common Stock at the
Company's inception in 1994. As consideration for such shares, Mr. Driscoll paid
the Company $500 and agreed to provide certain consulting services to the
Company. In January 1998, Mr. Driscoll was granted an option to purchase up to
200,000 shares of the Company's Common Stock at a price of $3.90 per share as
partial consideration for his agreement to provide certain services to the
Company. Mr. Driscoll is a shareholder of Larkin, Hoffmann, Daly & Lindgren,
Ltd., which provides certain legal services to the Company. Mr. Driscoll is the
father of Edward J. Driscoll III, the Company's Chairman of the Board, President
and Chief Executive Officer.

George H. Frisch, who provides certain legal services to the Company,
purchased 250,000 shares of Common Stock at the Company's inception in 1994. As
consideration for such shares, Mr. Frisch paid the Company $500 and agreed to
provide certain legal services to the Company. In November 1995, Mr. Frisch was
granted warrants to purchase an additional 150,000 shares of the Company's
Common Stock at the price of $0.60 per share as partial consideration for his
agreement to provide additional legal services to the Company. In addition, Mr.
Frisch was granted, in July 1997, an option to purchase up to 100,000 shares of
the Company's Common Stock at a price of $0.96 per share and Mr. Frisch was
granted, in January 1998, an option to purchase up to 200,000 shares of the
Company's Common Stock at a price of $3.90 per share, in each case as partial
consideration for his agreement to provide additional legal services to the
Company.

The Company's marketing services were performed by Kauffman Marketing
Group, Inc. from November 1995 to December 1997. The former President of
Kauffman Marketing Group, Inc., John Kauffman, joined the Company as Vice
President of Strategic Marketing and Communications in December 1997. During the
years ended December 31, 1995, 1996 and 1997, the Company incurred

marketing expenses of approximately $0.0, $0.3 million and $1.6 million,
respectively, to such firm for marketing services. In addition, Mr. Kauffman was
granted, in July 1997, an option to purchase up to 225,000 shares of Common
Stock at a price of $0.96 per share and Mr. Kauffman was granted, in January
1998, an option to purchase up to 350,000 shares of Common Stock at a price of
$3.90 per share.

In consideration for David Townend's sale of 31,680,000 ordinary shares of
4-Sight Limited to the Company and its subsidiaries in connection with the 4-
Sight Acquisition, Mr. Townend received $7,991,094 and 1,317,300 shares of
Common Stock. In addition, Mr. Townend is entitled to receive 48.95% of the
750,000 shares of Common Stock which comprises the deferred consideration for
the purchase of 4-Sight Limited, which shares are conditioned upon the
achievement of certain revenue goals by the Company following the 4-Sight
Acquisition.

PART III

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

(a) Financial Statements. See index immediately following signature page.

(b) Reports on Form 8-K

No Current Reports on Form 8-K were filed during the quarter
ended December 31, 1998.

2.1 (1) Agreement for the Sale and Purchase of the entire issued share
capital of WAM!NET U.K. Limited dated February 11, 1998, among the
Company, WAM!NET (UK) Limited and the Selling Shareholders listed
therein.

2.2 (1) Agreement and Plan of Reorganization dated December 17, 1997 by and
among NetCo Communications Corporation, NetCo Acquiring Corporation,
FreeMail, Inc. and the shareholders listed therein.

3.1 (1) Amended and Restated Articles of Incorporation of the Company.

3.2 (1) By-Laws of the Company.

4.1 (1) Indenture dated as of March 5, 1998, between the Company, as Issuer,
and First Trust National Association, as Trustee.

4.2a (1) Certificate for the Rule 144A Original Notes ($200,000,000).

4.2b (1) Certificate for the Rule 144A Original Notes ($8,030,000).

4.3 (1) Certificate for the Regulation S Original Notes.

4.4 (1) Certificate for the Rule 144A Warrants.

4.5 (1) Certificate for the Regulation S Warrants.

4.6a (1) Rule 144A Unit Certificate. (200,000 Units)

4.6b (1) Rule 144A Unit Certificate. (8,030 Units)

4.7 (1) Certificate for the Regulation S Units.

4.8 (1) Form of Certificate for the Exchange Notes (incorporated herein by
reference and included in Exhibit 4.1 to the Company's Registration
Statement on Form S-4 filed with Securities and Exchange Commission
on May 28, 1998).

4.9 (1) Common Stock Certificate.

4.10 (1) Registration Rights Agreement, dated March 5, 1998, among the Company
and Merrill Lynch Pierce, Fenner & Smith Incorporated, Credit Suisse
First Boston Corporation and First Chicago Capital Markets, Inc.

4.11 (1) Common Stock Registration Rights Agreement, dated as of March 5,
1998, among the Company, WorldCom Inc., Merrill Lynch, Pierce, Fenner
& Smith Incorporated, Credit Suisse First Boston Corporation and
First Chicago Capital Markets, Inc.

4.12 (1) Warrant Agreement, dated as of March 5, 1998, by and between the
Company and First Trust National Association, as Warrant Agent, to
purchase common stock of the Company.

4.13 Certificate Representing 100,000 Shares of Class A Preferred Stock of
the Company issued to WorldCom Inc. on December 16, 1996
(Incorporated herein by reference to exhibit 10.5 of the Company's
Registration Statement on Form S-4 (File No. 333-53841) filed with
the Securities and Exchange Commission on May 28, 1998).

4.14 Warrants to purchase 4,157,500 Shares of Common Stock of the Company
exercisable on or before December 31, 2000, issued to WorldCom Inc.
on December 16, 1996 (Incorporated herein by reference to exhibit
10.6 of the Company's Registration Statement on Form S-4 (File No.
333-53841) filed with the Securities and Exchange Commission on May
28, 1998).

4.15 Certificate for 13.25% Subordinated Unsecured Convertible Note due
August 28, 2005 ($25,000,000 Note) issued to MCI WorldCom, Inc. on
January 13, 1999.

4.16 Certificate for 1,679,234 Class A Warrants and 2,840,967 Class B
Warrants to purchase Common Stock of the Company, issued to WorldCom
Inc. on September 26, 1997 (Incorporated herein by reference to
exhibit 10.9 of the Company's Registration Statement on Form S-4
(File No. 333-53841) filed with the Securities and Exchange
Commission on May 28, 1998).

4.17 Subordinate Unsecured Convertible Note and Warrant Purchase Agreement
between the Company and MCI WorldCom, Inc. dated January 13, 1999.

4.18 Preferred Stock Purchase Agreement by and between the Company and
Silicon Graphics, Inc. dated as of March 3, 1999.

4.19 Certificate for 150,000 Warrants to purchase shares of Common Stock
for the purchase price of $.01 per share dated January 13, 1999.

4.20 Certificate of Designation of Rights and Preferences of Class A
Preferred Stock of the Company filed with the Secretary of State of
the State of Minnesota on March 4, 1999, as corrected and filed with
the Secretary of State of this State of Minnesota on March 5, 1999.

4.21 Certificate of Designation of Rights and Preferences of Class B
Convertible Preferred Stock of the Company filed with the Secretary
of State of the State of Minnesota on March 4, 1999.

4.22 Certificate of Designation of Rights and Preferences of Class C
Convertible Preferred Stock of the Company filed with the Secretary
of State of the State of Minnesota on March 4, 1999.

4.23 Certificate of Designation of Rights and Preferences of Class D
Convertible Preferred Stock of the Company filed with the Secretary
of State of the State of Minnesota on March 4, 1999.

4.24 Certificate representing 115,206 shares of Class A Preferred Stock of
the Company issued to MCI WorldCom. Inc. on March 4, 1999.

4.25 Certificate representing 5,710,425 shares of Class B Convertible
Preferred Stock of the Company issued to Silicon Graphics, Inc. on
March 4, 1999.

4.26 Certificate representing 878,527 shares of Class C Convertible
Preferred Stock of the Company issued to Silicon Graphics, Inc. on
March 4, 1999.

4.27 Certificate representing 2,196,317 shares of Class D Convertible
Preferred Stock of the Company issued to MCI WorldCom. Inc. on March
4, 1999.

4.28 Stockholders Agreement by and among the Company, Silicon Graphics,
Inc. and MCI WorldCom, Inc. dated as of March 4, 1999.

4.29 Class A Preferred Stock Exchange Agreement by and between the Company
and MCI WorldCom, Inc. dated as of March 4, 1999.

4.30 Class D Preferred Stock Conversion Agreement by and between the
Company and MCI WorldCom, Inc. dated as of March 4, 1999.

10.1 (1) Credit Agreement among the Company, the Lending Institutions party
thereto, as Lenders, The First National Bank of Chicago, as Agent,
dated as of September 26, 1997.

10.2 (1) Ten Percent Convertible Note Purchase Agreement between the Company
and WorldCom Inc. dated September 12, 1996 ($5,000,000 Note).

10.3 (1) Preferred Stock, Subordinated Note and Warrant Purchase Agreement
between the Company and WorldCom Inc. dated November 14, 1996.

10.4 (1) $28,500,000 Seven Percent Subordinated Note due December 31, 2003,
payable to WorldCom Inc.

10.5 Intentionally omitted.

10.6 Intentionally omitted.

10.7 (1) Right of Refusal Agreement Among WorldCom Inc., Edward Driscoll III
and Alan L. Witters dated December 16, 1996.

10.8 (1) Guaranty Agreement dated September 26, 1997, by and between the
Company and WorldCom Inc.

10.9 Intentionally omitted.

10.10 (1) Sublease dated September 24, 1997 between the Company and 1250895
Ontario Limited, relating to the property located at 6100 110th
Street West, Bloomington, Minnesota.

10.11 (1) Service Provision Agreement dated as of July 18, 1997, by and between
the Company and Time Inc.

10.12 (1) Standby Agreement dated as of July 19, 1997 by and between WorldCom
Inc. and Time Inc.

10.13 (1) Employment Agreement dated as of November 14, 1996, by and between
the Company and Edward J. Driscoll III.

10.14 (1) Employment Agreement dated as of November 14, 1996, by and between
the Company and Allen Witters.

10.15 (1) Employment Agreement dated as of April 16, 1996, by and between the
Company and James R. Clancy.

10.16 (1) Employment Agreement dated as of May 10, 1995, as amended, by and
between the Company and Mark Marlow.

10.17 (1) Agreement dated February 11, 1998 between the Company and WorldCom,
Inc. modifying certain terms of the (i) 10% Convertible Subordinated
Note, due September 30, 1999, (ii) 7% Subordinated Note, due December
31, 2003, and (iii) 100,000 shares of Series A Preferred Stock, all
of which are held by MCI

WorldCom, Inc. (incorporated herein by reference to exhibit No. 4.17
to the Company's Registration Statement on Form S-4 (File No. 333-
53841) filed with the Securities and Exchange Commission on May 28,
1998)

10.18 (1) 1994 Stock Option Plan

10.19 (1) Amended and Restated 1994 Stock Option Plan

10.20 (1) 1998 Combined Stock Option Plan.

10.21 (1) Agreement dated June 5, 1997 between the Company and WorldCom, Inc.
regarding data services provided by WorldCom, Inc. to the Company.

10.22 Intentionally omitted

10.23 Sale and Purchase Agreement by and between Silicon Graphics, Inc., on
behalf of itself and its wholly-owned subsidiary, Cray Research,
L.L.C., and the Company dated as of March 4, 1999.

10.24 Lease by and between the Company and Silicon Graphics, Inc. on behalf
of itself and its wholly-owned subsidiary, Cray Research, L.L.C.,
with respect to the Company's corporate campus facility located in
Eagan, Minnesota dated as of March 4, 1999.

10.25 Employment Agreement dated January 1, 1998 by and between John R.
Kauffman and the Company.

10.26 Employment Agreement dated November 3, 1997 by and between David T.
Ottinger and the Company.

10.27 Employment Agreement dated September 8, 1998 by and between the
Bradley E. Sparks and the Company.

12.1 Statement re: Computation of Ratios.

21.1 List of Subsidiaries of the Company.

23.1 Consent of Ernst & Young LLP

27.1 Financial Data Schedule.

________________

(1) Incorporated herein by reference to the Company's Registration Statement on
Form S-4 (File No. 333-53841), filed with the SEC on May 28, 1998.

IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Form 10-K and those that
may be made in the future by or on behalf of the Company, the Company notes that
there are various factors that could cause actual results to differ materially
from those set forth in any such forward-looking statements. The forward-
looking statements contained in this Form 10-K were prepared by management and
are qualified by, and subject to, significant business, economic, competitive,
regulatory and other uncertainties and contingencies, all of which are difficult
or impossible to predict and many of which are beyond the control of the
Company. Factors which could cause or contribute to such differences include,
but are not limited to: (1) the ability of the Company to consummate
acquisitions, integrate such acquisitions into existing operations, manage
expansion, achieve operating efficiencies and control costs in its operations;
(2) the Company's success in retaining key employees, including its Chief
Executive Officer and Chief Financial Officer and the senior management teams of
its primary operating units; (3) pressures from competitors with greater
resources than those of the Company, as well as competitive pressures arising
from changes in technology and customer requirements; (4) the availability of
raw intellectual property information from alternative sources for little or no
cost; (5) disruptions to operations resulting from Year 2000 issues that might
originate with third parties; and (6) the concentration of ownership among the
certain stockholders such as MCI WorldCom and SGI who have the ability to
control the Company, including the election of directors and the direction of
the affairs and operations of the business. Accordingly, there can be no
assurance that the forward-looking statements contained in this Form 10-K will
be realized or that actual results will not be significantly higher or lower.
The statements have not been audited by, examined by, compiled by or subjected
to agreed-upon procedures by independent accountants, and no third-party has
independently verified or reviewed such statements. Readers of this Form 10-K
should consider these facts in evaluating the information contained herein. In
addition, the business and operations of the Company are subject to substantial
risks which increase the uncertainty inherent in the forward-looking statements
contained in this Form 10-K. The inclusion of the forward-looking statements
contained in this Form 10-K should not be regarded as a representation by the
Company or any other person that the forward-looking statements contained in
this Form 10-K will be achieved. In light of the foregoing, readers of this
Form 10-K are cautioned not to place undue reliance on the forward-looking
statements contained herein. These risks and others that are detailed in this
Form 10-K and other documents that the Company files from time to time with the
Securities and Exchange Commission, including quarterly reports on Form 10-Q and
any current reports on Form 8-K must be considered by any investor or potential
investor in the Company.

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the 31st day of March, 1998.

WAM!NET INC.

By: /s/ Bradley E. Sparks
___________________________
Name: Bradley E. Sparks
Title: Executive Vice President and Chief
Financial Officer

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

Signature Title Date

/s/ Edward J. Driscoll III Chairman of the Board, March 31, 1999
_________________________________ Chief Executive Officer,
Edward J. Driscoll III President and Treasurer

/s/ Robert L. Hoffman Director March 31, 1999
_________________________________
Robert L. Hoffman

/s/ Curtis G. Gray Director March 31, 1999
_________________________________
Curtis G. Gray

/s/ K. William Grothe, Jr. Director March 31, 1999
_________________________________
K. William Grothe, Jr.

/s/ Susan Mayer Director March 31, 1999
_________________________________
Susan Mayer

WAM!NET INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Auditors........................................... F-1

Consolidated Financial Statements

Consolidated Balance Sheets.............................................. F-2
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Shareholders' Deficit......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-8

F-1

Report of Independent Auditors

Board of Directors
WAM!NET Inc.

We have audited the accompanying consolidated balance sheets of WAM!NET Inc. as
of December 31, 1997 and 1998, and the related consolidated statements of
operations, shareholders' deficit and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We 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 consolidated financial position of WAM!NET
Inc. at December 31, 1997 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
March 19, 1999

F-1

WAM!NET Inc.

Consolidated Balance Sheets

(Dollars in thousands, except share data)

DECEMBER 31
1997 1998
--------------------------------

ASSETS
Current assets:
Cash and cash equivalents $ 274 $ 6,272
Accounts receivable, net of allowance of $40 and $430,
respectively 459 3,466
Inventory - 1,534
Prepaid expenses and other current assets 554 3,187
-------------------------------
Total current assets 1,287 14,459

Property and equipment:
Network equipment 15,618 51,512
Other support equipment 5,242 18,046
Furniture and fixtures 1,078 2,802
Leasehold improvements 259 6,506
-------------------------------
22,197 78,866
Accumulated depreciation 2,877 16,399
-------------------------------
19,320 62,467
Goodwill, net of accumulated amortization of $6 and
$5,308, respectively 479 27,734
Deferred financing charges, net of accumulated
amortization of $1,624 and $5,959, respectively 8,048 20,183
Other assets - 616
--------------------------------
Total assets $29,134 $125,459
================================

F-2

DECEMBER 31
1997 1998
-----------------------------------

LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 2,460 $ 17,098
Accrued salaries and wages 360 4,801
Accrued expenses 2,159 3,176
Current portion of equipment financing and obligations
under capitalized leases 3,129 5,324
-----------------------------------
Total current liabilities 8,108 30,399

Long-term debt:
13.25% Senior Discounted Notes - 138,975
Line of credit 18,800 24,000
Equipment financing 6,434 13,536
Subordinated notes payable 25,463 27,403

Redeemable Preferred Stock, Class A, $10.00 par value:
Authorized, issued and outstanding shares - 100,000 1,000 1,000

SHAREHOLDERS' DEFICIT
Undesignated shares, $.01 par value - 49,500,000
Common Stock, $.01 par value:
Authorized shares - 450,000,000
Issued and outstanding shares - 6,699,740 and 9,288,194
at December 31, 1997 and 1998 67 93
Additional paid-in capital 11,771 54,302
Accumulated deficit (42,509) (164,387)
Other accumulated comprehensive income - 138
-----------------------------------
Total shareholders' deficit (30,671) (109,854)
-----------------------------------
Total liabilities and shareholders' deficit $ 29,134 $ 125,459
===================================

See accompanying notes.

F-3

WAM!NET Inc.

Consolidated Statements of Operations

(Dollars in thousands, except share and per share data)

YEAR ENDED DECEMBER 31
1996 1997 1998
-----------------------------------------------------

Revenues:
WAM!NET revenues $ 110 $ 1,628 $ 8,776
Less rebates - (150) (1,977)
-----------------------------------------------------
Net WAM!NET user fees 110 1,478 6,799
Software and hardware sales - - 10,830
Other services fees 169 77 -
-----------------------------------------------------
Total revenues 279 1,555 17,629

Operating expenses:
Network communication fees 816 7,364 18,259
Cost of software and hardware - - 3,537
Network operations 1,109 7,478 29,705
Sales and marketing 2,054 9,207 21,996
General and administrative 2,610 4,320 28,816
Depreciation and amortization 447 2,668 17,668
-----------------------------------------------------
7,036 31,037 119,981
-----------------------------------------------------
Loss from operations (6,757) (29,482) (102,352)

Other income (expense):
Interest income 64 202 1,748
Interest (expense) (903) (4,356) (22,626)
-----------------------------------------------------
Net loss before income tax benefit (7,596) (33,636) (123,230)
Income tax benefit - - 1,352
-----------------------------------------------------
Net loss (7,596) (33,636) (121,878)
Less preferred dividends - (70) (70)
-----------------------------------------------------
Net loss applicable to common stock $ (7,596) $ (33,706) $ (121,948)
=====================================================

Net loss applicable per common share -
basic and diluted $(1.18) $(5.19) $(13.87)
=====================================================

Weighted average number of common shares
outstanding 6,445,785 6,496,345 8,793,961
=====================================================

See accompanying notes.

F-4

WAM!NET Inc.

Consolidated Statements of Shareholders' Deficit

(In thousands)

ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
------------------
DESCRIPTION ISSUED AMOUNT CAPITAL DEFICIT
- - -------------------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1995 6,415 $64 $ 863 $ (1,277)
Payments received on stock subscriptions - - - -
Value of warrants issued in connection
with bridge financing in July - - 121 -
Value of warrants issued in connection with
subordinated notes in March, June and December - 5,040
Value of warrants issued for services rendered - - 15 -
Value of warrants issued in connection with equipment lease - - 14 -
Issuance of Common Stock upon debt conversion in July,
conversion price of $1.90 per share 65 1 24 -
Payments received on sale of stock warrants - - 48 -
Net loss - - - (7,596)
----------------------------------------------
Balance at December 31, 1996 6,480 65 6,125 (8,873)
Accumulated and unpaid dividends in connection with Preferred Stock - - (70) -
Amortization of stock options - - 426 -
Value of warrants issued in connection with line of credit in September - - 4,766 -
Issuance of Common Stock upon merger with FreeMail 125 1 487 -
Issuance of Common Stock upon debt conversion in December,
conversion price of $1.90 per share 65 1 24 -
Exercise of stock options 30 - 13 -
Net loss - - - (33,636)
------------------------------------------------
Balance at December 31, 1997 6,700 67 11,771 (42,509)
Accumulated and unpaid dividends in connection with Preferred Stock - - (70) -
Amortization of stock options - - 12,538 -
Value of warrants issued in connection with Senior Discounted Notes - - 10,047 -
Issuance of Common Stock upon merger with 4-Sight 2,500 25 19,975 -
Issuance of Common Stock upon debt conversion in December 65 1 24 -
Exercise of stock options 23 - 17 -
Comprehensive loss:
Net loss - - - (121,878)
Foreign currency translation adjustment - - - -

Total comprehensive loss ----------------------------------------------
Balance at December 31, 1998 9,288 $93 $54,302 $(164,387)
==============================================

ACCUMULATED
COMMON OTHER
STOCK COMPREHENSIVE
DESCRIPTION SUBSCRIPTION INCOME TOTAL
- - ----------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1995 $(20) $ - $ (370)
Payments received on stock subscriptions 20 - 20
Value of warrants issued in connection
with bridge financing in July - - 121
Value of warrants issued in connection with
subordinated notes in March, June and December - - 5,040
Value of warrants issued for services rendered - - 15
Value of warrants issued in connection with equipment lease - - 14
Issuance of Common Stock upon debt conversion in July,
conversion price of $1.90 per share - - 25
Payments received on sale of stock warrants - - 48
Net loss - - (7,596)
-----------------------------------------
Balance at December 31, 1996 - - (2,683)
Accumulated and unpaid dividends in connection with Preferred Stock - - (70)
Amortization of stock options - - 426
Value of warrants issued in connection with line of credit in September - - 4,766
Issuance of Common Stock upon merger with FreeMail - - 488
Issuance of Common Stock upon debt conversion in December,
conversion price of $1.90 per share - - 25
Exercise of stock options - - 13
Net loss - - (33,636)
------------------------------------------
Balance at December 31, 1997 - - (30,671)
Accumulated and unpaid dividends in connection with Preferred Stock - - (70)
Amortization of stock options - - 12,538
Value of warrants issued in connection with Senior Discounted Notes - - 10,047
Issuance of Common Stock upon merger with 4-Sight - - 20,000
Issuance of Common Stock upon debt conversion in December - - 25
Exercise of stock options - - 17
Comprehensive loss:
Net loss - - (121,878)
Foreign currency translation adjustment - 138 138
---------
Total comprehensive loss 121,740
-----------------------------------------
Balance at December 31, 1998 - $138 $(109,854)
=========================================

See accompanying notes.

F-5

WAM!NET Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands)

YEAR ENDED DECEMBER 31
1996 1997 1998
----------------------------------------

OPERATING ACTIVITIES
Net loss $(7,596) $(33,636) $(121,878)
Adjustments to reconcile net loss to net cash used in operating
activities:
Noncash interest expense, including related warrant values 306 1,624 18,295
Value of stock options issued to employees and consultants 15 426 12,522
Depreciation and amortization 447 2,668 17,814
Loss on disposal of property and equipment - 797 69
Changes in operating assets and liabilities:
Accounts receivable (14) (386) 647
Inventory (467)
Prepaid expenses and other assets (111) (415) (7,957)
Accounts payable 338 1,832 14,795
Accrued expenses 397 3,173 10,282
----------------------------------------
Net cash used in operating activities (6,218) (23,917) (55,878)

INVESTING ACTIVITIES
Purchases of property and equipment (4,244) (16,599) (54,584)
Patent expenditures - - (370)
Purchase of investments (1,000) - -
Purchase of 4-Sight (net of cash acquired) (16,350)
Proceeds from sale of investments - 1,000 -
----------------------------------------
Net cash used in investing activities (5,244) (15,599) (71,304)

FINANCING ACTIVITIES
Proceeds from sale of common stock 20 - -
Proceeds from sale of common stock warrants 48 - -
Proceeds from sale of preferred stock 1,000 - -
Proceeds from subordinated notes payable 24,000 - -
Payment of subordinated notes payable (250) - -
Proceeds from exercise of stock options - - 15
Proceeds from 13.25% Senior Discounted Notes - - 120,626
Proceeds from line of credit - 18,800 29,203
Payment on line of credit - - (24,003)
Proceeds from bridge financing 4,100 10,000 -
Payments on bridge financing (4,525) (11,075) -
Proceeds from equipment financing 245 8,158 14,348
Payments on equipment financing (60) (537) (4,995)
Capitalized financing costs - - (2,377)
----------------------------------------
Net cash provided by financing activities 24,578 25,346 132,817
Effect of foreign currencies on cash - - 363
----------------------------------------
Increase (decrease) in cash and cash equivalents 13,116 (14,170) 5,998
Cash and cash equivalents at beginning of year 1,328 14,444 274
----------------------------------------
Cash and cash equivalents at end of year $14,444 $ 274 $ 6,272
========================================

See accompanying notes.

F-6

WAM!NET Inc.

Consolidated Statements of Cash Flows (continued)

(Dollars in thousands)

YEAR ENDED DECEMBER 31
1996 1997 1998
----------------------------------------

SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Value of interest cost assigned to warrants $5,176 $4,766 $10,047
Equipment financed through equipment financing - 1,764 -
Conversion of accrued interest to subordinated debt - 1,363 1,965
Issuance of common stock relating to acquisition - 488 20,000
Cashless exercise of stock options - 13 -
Conversion of convertible subordinated debenture for
common stock 25 25 25
Equipment financed through capital leases 239 - -

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest 358 1,208 2,276

See accompanying notes.

F-7

WAM!NET Inc.

Notes to Consolidated Financial Statements

December 31, 1998

1. SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

WAM!NET Inc. (the "Company") provides a managed, high speed digital data
delivery network service that integrates the Company's industry-specific work
flow applications with high speed storage and telephony technologies. The
Company offers digital data delivery service designed to provide its subscribers
with the rapid, secure, accurate and reliable transportation and management of
information.

CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries from their respective dates of acquisition:
FreeMail, Inc., NetCo Communications of Canada, Inc. and WAM!NET U.K. Limited
(formerly 4-Sight Limited). All intercompany transactions have been eliminated.

REVENUE RECOGNITION

The Company records revenue from its digital data delivery network services on a
monthly basis based upon service contracts signed with customers. The service
contracts call for monthly usage amounts by the customer. The Company records
the minimum monthly billing amount as revenue on a monthly basis over the life
of the service contract. If a customer's usage exceeds the maximum usage
specified in the service contract, the Company will record additional revenue in
the month that the overage occurs. The Company does not receive initial up-front
amounts or pre-payments from customers. The Company also incurs service rebates
that offset the gross revenue generated by the Company. Revenue from hardware
and software sales is recognized upon delivery of the hardware and software.
Upon delivery of the hardware and software, the Company has no remaining
obligations to the customer. Other service fees are recognized as revenue in the
period the service is provided to the customer.

F-8

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents. Investments
classified as cash equivalents consist of high grade commercial paper (A1/P1),
certificates of deposit and United States Treasury Bills. Cash equivalents are
considered available for sale and are stated at cost which approximates fair
market value.

INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out) or market.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful life of three to seven years.

GOODWILL

The excess of the cost over the fair value of the net assets acquired is
amortized on a straight-line basis over a period of three to five years. The
Company periodically reviews the recoverability of goodwill based on estimated
future cash flows from the related operations.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. The amount of impairment loss recorded will be measured as the
amount by which the carrying value of the assets exceeds the fair value of the
assets.

F-9

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INCOME TAXES

Income taxes are accounted for under the liability method. Deferred income taxes
are provided for temporary differences between the financial reporting and tax
bases of assets and liabilities.

PRODUCT DEVELOPMENT

Costs associated with the development of new products and services are charged
to operations in the year incurred. These costs for 1996, 1997 and 1998 were
$1,109,000, $3,364,000 and $13,447,000, respectively.

FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS

The Company translates the assets and liabilities of its foreign subsidiaries
stated in local functional currencies to U.S. dollars at the rates of exchange
in effect at the end of the period. Revenues and expenses are translated using
rates of exchange in effect during the period. The cumulative effect of foreign
currency translations is the only component of other comprehensive income.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to credit risk
consist primarily of accounts receivable. The Company grants credit to customers
in the ordinary course of business. No single customer or region represents a
significant concentration of credit risk.

STOCK SPLIT

In February 1998, the Board of Directors declared a five-for-one Common Stock
split effected in the form of a stock dividend. All references to number of
shares, options and warrants and conversion price and exercise price per share
have been adjusted to reflect this stock split on a retroactive basis.

F-10

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NET LOSS PER COMMON SHARE

Under Statement No. 128, Earnings per Share (Statement 128), basic earnings per
share is based on the weighted average shares of common stock outstanding during
the period. Diluted earnings per share includes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share as presented is
the same as basic earnings per share as the effect of outstanding options,
warrants and convertible securities is antidilutive.

RECLASSIFICATION

Certain prior year amounts have been reclassified to conform with the current
year presentation.

2. CASH REQUIREMENTS

The Company continues to incur substantial operating losses as a direct result
of its continuing efforts to expand its WAM!NET media network throughout North
America, Europe and Asia. Net losses since the Company's inception have resulted
in an accumulated deficit balance of $164.4 million. Though these losses are not
unexpected, the Company's ability to continue to fund these operating losses and
its ability to continue to purchase and install the required WAM!NET network
hardware to provide WAM!NET services to its increasing global customer base
depends on its ability to obtain additional sources of funds for working capital
during 1999. Sources of such funds include but are not limited to long- and
short-term secured equipment financing from vendors financial institutions and
banks, long-term unsecured senior debt, long-term property mortgages on its
existing facilities and the issuance of the Company's equity securities. Though
the Company is optimistic regarding its ability to secure additional funding by
one or more of the above sources, there can be no assurances that such funding
can be obtained. From inception through December 31, 1998, the Company has
derived substantially all of its operating capital from the issuance of short-
and long-term debt and equity instruments. At December 31, 1998, the Company had
approximately $204.9 million in long-term debt, of which approximately $5.3
million becomes payable during 1999.

F-11

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

2. CASH REQUIREMENTS (CONTINUED)

The Company's available operating capital as of March 10, 1999 as evidenced by
cash, cash equivalent investments and commitments from financial institutions
for additional equipment financing totaled approximately $50 million dollars. If
additional sources of funding cannot be obtained, the Company would be required
to significantly slow its global market penetration, network growth and product
development due to a constraint of available operating capital. If the Company
encounters a constraint in the availability of operating capital to fund its
operations and network growth during 1999, management would implement plans to
reduce cash expenditures. Management believes such reductions would leave the
Company with adequate cash to continue operations through the end of 1999. The
reduction of cash expenditures would have a material adverse effect on the
Company's global revenue and network expansion plans. The most evident and
clearly measurable impact resulting from these reductions is a significant
decrease of installed network customers for the year ending December 31,1999.
Material reductions to the base of installed customers slow the growth of the
Company's recurring revenue stream, which is dependent upon customer utilization
of the Company's excess network capacity. Reductions in network utilization
directly impact network revenue and may ultimately defer attainment of overall
profitability from the Company's WAM!NET transport products. Another definable
impact of the above outlined expenditure reductions, would be material delays in
software product development, the impact of which may further erode customer
retention and network utilization.

F-12

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

3. LONG-TERM DEBT

EQUIPMENT FINANCING NOTES PAYABLE

Equipment financing notes payable consist of the following:

DECEMBER 31
1997 1998
----------------------------------

FINOVA Technology Finance; installment note; monthly payments of
$43,000 and an additional final installment of $242,000 including
interest imputed at 13.44%; secured by equipment; due April 2001 $1,518,000 $1,152,000

FINOVA Technology Finance; installment note; monthly payments of
$91,000 and an additional final installment of $509,000 including
interest imputed at 13.35%; secured by equipment; due May 2001 3,248,000 2,486,000

FINOVA Technology Finance; installment note; monthly payments of
$120,000 and an additional final installment of $627,000 including
interest imputed at 11.75%; secured by equipment; due October 2002 - 4,675,000

Transamerica Business Credit; installment note; monthly payments of
$46,000 and an additional final installment of $207,000 including
interest imputed at 13.53%; secured by equipment; due May 2001 1,606,000 1,250,000

Transamerica Business Credit; installment note; monthly payments of
$42,000 and an additional final installment of $187,000 including
interest imputed at 13.43%; secured by equipment; due May 2001 1,457,000 1,133,000

Transamerica Business Credit; installment note; monthly payments of
$41,000 and an additional final installment of $184,000 including
interest imputed at 13.11%; secured by equipment; due May 2001 - 1,138,000

Transamerica Business Credit; installment note; monthly payments of
$11,000 and an additional final installment of $48,000 including
interest imputed at 12.88%; secured by equipment; due July 2001 - 302,000

Transamerica Business Credit; installment note; monthly payments of
$75,000 and an additional final installment of $352,000 including
interest imputed at 11.66%; secured by equipment; due October 2001 - 2,348,000

Transamerica Business Credit; installment note; monthly payments of
$40,000 and an additional final installment of $187,000 including
interest imputed at 11.66%; secured by equipment; due October 2001 - 1,245,000

F-13

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

3. LONG-TERM DEBT (CONTINUED)

DECEMBER 31
1997 1998
-----------------------------------

Transamerica Business Credit; installment note; monthly payments of
$19,000 and an additional final installment of $88,000 including
interest imputed at 11.65%; secured by equipment; due December 2001
$ - $ 609,000

Leasetec Corporation; installment note; monthly payments of $47,000
including interest imputed at 13.50%; unsecured; due December 1998 521,000 -

Leasetec Corporation; installment note; monthly payments of $83,000
including interest imputed at 13.50%; unsecured; due April 1999 1,123,000 243,000

Icon Funding Corp.; installment note; monthly payments of $39,000
including interest imputed at 12.57%; secured by equipment; due July
2002 - 1,319,000

Icon Funding Corp.; installment note; monthly payments of $28,000
including interest imputed at 12.57%; secured by equipment; due July
2002 - 960,000
-----------------------------------
9,473,000 18,860,000
Less current portion 3,039,000 5,324,000
-----------------------------------
$6,434,000 $13,536,000
===================================

Maturities of equipment notes payable as of December 31, 1998 are as follows:

1999 $ 5,324,000
2000 5,759,000
2001 5,896,000
2002 1,881,000
$18,860,000
=================

F-14

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

3. LONG-TERM DEBT (CONTINUED)

SENIOR DISCOUNT NOTES

On March 5, 1998, the Company sold 208,530 Units consisting of $1,000 principal
amount at maturity 13 1/4% Senior Discount Notes due 2005 ("Notes") and three
warrants. The aggregate principal amount of the Notes payable at maturity is
$208.6 million. The sale of the Units resulted in net proceeds to the Company of
$120.6 million. Cash interest does not accrue nor is it payable on the Notes
prior to March 1, 2002. Thereafter, cash interest on the Notes will accrue on
the Notes at a rate of 13 1/4% per annum (calculated on a semiannual bond
equivalent basis) and will be payable semiannually in arrears on March 1 and
September 1 of each year, commencing September 1, 2002.

In connection with the Notes, the Company issued 625,590 warrants to purchase a
total of 1,257,436 shares of Common Stock. Each warrant entitles the holder to
purchase 2.01 shares of Common Stock at an exercise price of $.01 per share. The
warrants were deemed to have a value of $10 million, which is being amortized as
interest expense over the life of the Notes.

LINE OF CREDIT AGREEMENT

In September 1997, the Company entered into a three year $25 million line of
credit agreement with a bank. The line of credit is guaranteed by MCI WorldCom
and the Company must obtain MCI WorldCom's consent prior to each borrowing under
the line. At December 31, 1998, the amount outstanding on the line of credit was
$24 million. The line of credit has both Eurodollar and Floating Rate advances.
The Eurodollar and Floating Rate accrue interest at 55 basis points above LIBOR
(5.12% at December 31, 1998) and prime (8.5% at December 31, 1998),
respectively. Interest on the LIBOR borrowings is payable upon maturity and on
the prime borrowings is payable quarterly.

F-15

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

3. LONG-TERM DEBT (CONTINUED)

In connection with MCI WorldCom's guarantee of the line of credit agreement, the
Company issued Class A warrants to purchase 8,396,170 common shares and Class B
Warrants to purchase 14,204,835 common shares at an initial exercise price of
$3.90 per share. The Class A warrants were immediately exercisable and expire on
December 31, 2000. The Class A warrants were deemed to have a value of $4.77
million which is being amortized as interest expense over the life of the
agreement. Amortization of the warrants for the year ended December 31, 1998 was
$1,589,000. The Class B warrants are exercisable based on a calculation that
factors the outstanding balance and repayments made on the line of credit during
the final 12 months of the agreement. The Class B warrants expire on December
31, 2000. It is management's intention to fully repay the credit facility before
the final 12 months of the agreement by the end of the second quarter 1999. The
Class B warrants were deemed to have no value based on management's intentions
and the unpredictability of the factors used to calculate the number of warrants
exercisable.

4. BRIDGE FINANCING

On December 29, 1995, the Company entered into a bridge financing agreement
(Bridge Loan) which provided funding up to $1.6 million. The Bridge Loan accrued
interest at 10% per annum and was payable on the earlier of December 31, 1996 or
the date of closing of a qualifying preferred stock financing. In connection
with the financing, the Company granted warrants to purchase 1,600,000 shares of
common stock at $1.00 per share. The warrants were deemed to have a value of
$109,000 which was recorded as interest expense over the life of the Bridge
Loan. Additionally, the Company granted the placement agent warrants to purchase
160,000 shares of common stock at $1.00 per share exercisable over five years.

F-16

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

4. BRIDGE FINANCING (CONTINUED)

On March 19, 1996, the Company issued a total of $1.0 million of subordinated
notes. The subordinated notes accrued interest at 10% per annum and were payable
on the earlier of December 31, 1996 or the date of closing of a qualifying
financing transaction. In connection with the issuance of the notes, the Company
granted warrants to purchase 1,000,000 shares of Common Stock at $1.50 per
share. The warrants were deemed to have a value of $57,000 which was recorded as
interest expense over the life of the subordinated notes. Additionally, the
Company granted the placement agent warrants to purchase 100,000 shares of
Common Stock at $1.50 per share.

On June 24, 1996, the Company issued $3.0 million of subordinated notes. The
subordinated notes accrued interest at 10% per annum and were payable on the
earlier of December 31, 1996 or the date of closing of a qualifying financing
transaction. In connection with the subordinated notes, the Company sold for a
price of $.01 each Common Stock warrants to purchase 600,000 shares of Common
Stock at $1.50 per share. The warrants to purchase 3,000,000 shares of Common
Stock were deemed to have a value of $120,000 which was recorded as interest
expense over the life of the subordinated notes. Additionally, the Company
granted the placement agent warrants to purchase 300,000 shares of Common Stock
at $1.50 per share.

On June 30, 1997, the Company entered into a promissory note agreement with
WorldCom which provided funding up to $10 million. The Company was advanced $10
million on the promissory note. The promissory note accrued interest at 12% per
annum and was paid in full as of December 31, 1997.

The valuation of the Common Stock in each transaction was negotiated between the
parties at arm's-length.

5. SUBORDINATED NOTES PAYABLE

In March through May of 1995, the Company issued a total of $250,000 of
convertible subordinated notes which are due December 31, 1999. Interest on the
notes accrues at an annual rate of 8%, payable semi-annually. The Company may
redeem the notes at any time commencing January 1, 1997, upon notice to the
holders at 110% of the face amount of the notes plus interest. The holder has
the right to convert the unpaid principal amount of the notes into shares of
Common Stock at a conversion price of $.38 per share.

F-17

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

5. SUBORDINATED NOTES PAYABLE

On May 24, 1995, $100,000 of the notes were converted into 263,160 shares of
Common Stock at the conversion price of $.38 per share. On July 3, 1996, $25,000
of the notes were converted into 65,790 shares of Common Stock at the conversion
price of $.38 per share. On December 31, 1997, $25,000 of the notes were
converted into 65,790 shares of Common Stock at the conversion price of $.38 per
share. On February 28, 1998, 25,000 of the notes were converted into 65,790
shares of Common Stock at the conversion price of $.38 per share.

In September 1996, the Company issued to MCI WorldCom a $5.0 million convertible
subordinated note due 2005. Interest on the note accrues at an annual rate of
10%. The Company may redeem the note at any time commencing January 1, 1998,
upon notice to the holder, at the outstanding principal amount of the note plus
interest. The holder has the right to convert the principal amount of the note
into shares of Common Stock at a conversion price of $1.00 per share. During
1998, $635,000 of accrued interest was converted into additional subordinated
notes.

In November 1996, the Company entered into a Redeemable Preferred Stock,
Subordinated Note and Common Stock Warrant Purchase Agreement ("Investment
Agreement") with MCI WorldCom. Pursuant to the agreement, the Company sold
100,000 shares of Class A Preferred Stock, $10.00 par value. The preferred
shares are required to be redeemed in 2005 at a price of $10.00 per share plus
an amount equal to all accumulated and unpaid dividends. Dividends are payable
at the rate of 7% ($.175 per quarter per share) and shall start to cumulate on
January 1, 1997, whether or not earned. Cumulated dividends on the preferred
stock were $140,000 at December 31, 1998. The Class A Preferred Shares also
carry voting rights equal to common shares and possess special voting rights
that entitle the holder to elect a majority of the Directors.

Under the Subordinated Note Agreement, the Company has available an aggregate
amount of $28.5 million. The Company has the option to issue additional notes
not more frequently than once each quarter, commencing with the calendar quarter
ending March 31, 1997. The note accrues interest at 7% per annum due 2005.
During 1998, $1,333,000 of accrued interest was converted into additional
subordinated notes. The amount outstanding on the subordinated note agreement
was $20.4 million and $21.7 million at December 31, 1997 and December 31, 1998,
respectively.

F-18

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

5. SUBORDINATED NOTES PAYABLE (CONTINUED)

In connection with the Investment Agreement, the Company sold, for a price of
$0.01 each, Common Stock Warrants entitling MCI WorldCom to purchase 20,787,500
shares of common stock at an initial exercise price of $.96 share. The warrants
were immediately exercisable and expire on December 31, 2000. The warrants were
deemed to have a value of $4.9 million which will be amortized as interest
expense over the life of the warrant agreement. Amortization of the warrants for
the years ended December 31, 1997 and 1998 was $1.2 million and $2.5 million,
respectively. The initial exercise price of $.96 per share increased to $.98 per
share on March 31, 1997, and shall thereafter increase by an amount of $0.16 per
share on the last day of each calendar quarter during the term of the warrant,
commencing with the calendar quarter ending June 30, 1997. The exercise price
was $1.09 per share on December 31, 1998.

On February 11, 1998, the Company and MCI WorldCom agreed to modify the 10%
Convertible Subordinated Note, due September 30, 1999, the 7% Subordinated Note,
due December 31, 2003 and the 100,000 shares of Series A Preferred Stock. All
principal and interest payment obligations of the Company in respect of the
above securities shall be subordinate to the prior payment in full of the Notes.
MCI WorldCom shall have the option to convert (a) the interest due on the 10%
Subordinated Note and (b) the interest accrued on the outstanding principal
amount of the 7% Subordinated Note from December 31, 2003 through the date such
amount is paid into shares of common stock, par value $.01, of the Company, at
the price per share then existing on the date of such conversion.

The carrying amounts of the Company's debt instruments in the balance sheets at
December 31, 1997 and 1998 approximate fair value.

F-19

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

6. COMMITMENTS AND CONTINGENCIES

The Company enters into various term contracts with suppliers of
telecommunications services for the purpose of receiving discounts off the
standard service offerings. Some of these contracts will result in termination
liabilities if the contract is terminated prior to the expiration date of the
contract. The termination liabilities are generally based upon the minimum
monthly dollar amount committed to the vendor multiplied by a termination
liability percentage, multiplied by the number of months remaining in the
contract. Total data communications expense under telecommunication contracts
was $816,000, $7,364,000 and $16,535,000 for the years ended December 31, 1996,
1997 and 1998, respectively. The Company's data communications expense under
telecommunication contracts with MCI WorldCom was $342,573, $5,538,000 and
$11,840,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
Guaranteed monthly usage levels of data communications with certain of the
Company's telecommunication vendors and MCI WorldCom at December 31, 1998
aggregate to the following annual amounts:

GUARANTEED GUARANTEED
USAGE USAGE
(ALL VENDORS) (WORLDCOM)
-----------------------------------

1999 $ 8,074,000 $4,140,000
2000 6,490,000 2,784,000
2001 3,039,000 1,140,000
2002 1,354,000 -
2003 665,000 -
-----------------------------------
$19,622,000 $8,064,000
===================================

F-20

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

6. COMMITMENTS AND CONTINGENCIES (CONTINUED)

The termination contingency of data communications with certain of the Company's
telecommunication vendors and MCI WorldCom at December 31, 1998 aggregates to
the following annual amounts:

TERMINATION TERMINATION
CONTINGENCY CONTINGENCY
(ALL VENDORS) (WORLDCOM)
-----------------------------------

December 31:
1998 $ 9,805,000 $4,351,000
1999 5,822,000 2,633,000
2000 2,303,000 1,140,000
2001 509,000 -
2002 531,000 -
-----------------------------------
$18,970,000 $8,124,000
===================================

The Company also has operating leases for its office space. Operating expenses
including maintenance, utilities, real estate taxes and insurance are paid by
the Company. Total rent expense under operating leases was $208,000, $592,000
and $2,189,000 for the years ended December 31, 1996, 1997 and 1998,
respectively. Future minimum lease obligations in excess of one year as of
December 31, 1997 are as follows:

1999 $ 2,666,000
2000 2,373,000
2001 2,221,000
2002 2,185,000
2003 2,038,000
Thereafter 4,888,000
-----------
$16,371,000
===========

F-21

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

6. COMMITMENTS AND CONTINGENCIES (CONTINUED)

During 1996, the Company entered into a sale-leaseback agreement for equipment.
The total lease obligation is $239,000 which is to be paid over a 30 month
period. In connection with this lease financing, the leasing company was granted
warrants to purchase 45,000 shares of Common Stock at $1.50 per share. The
warrants were deemed to have a value of $14,000 which will be recorded as
interest expense over the life of the agreement. The Company determined the fair
value of the warrants by considering the difference in interest charged on the
lease with and without the warrants in place. The minimum future obligation on
the capital lease is $0. The balance is paid in full.

7. INCOME TAXES

At December 31, 1998, the Company had net operating loss carryforwards of
approximately $134 million. These carryforwards are available to offset future
taxable income through 2013 and are subject to the limitations of Internal
Revenue Code Section 382 resulting from changes in ownership.

The effective tax rate differs from the statutory rate primarily as a result of
the following:

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

Tax at statutory rate 34.0% 34.0% 34.0%
State income taxes 6.0 6.0 6.0
Foreign tax benefit - - (1.1)
Impact of net operating loss carryforward (40.0) (40.0) (40.0)
-----------------------------------------
- % - % (1.1)%
=========================================

F-22

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

7. INCOME TAXES (CONTINUED)

Income tax benefit consists of:

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

Current:
Federal $ - $ - $ -
State - - -
Foreign - - (1,352,000)

Deferred:
Federal - - -
State - - -
Foreign - - -
-----------------------------------------
$ - $ - $(1,352,000)
=========================================

Components of deferred tax assets are as follows:

DECEMBER 31
1997 1998
-----------------------------------------

Deferred assets:
Net operating loss $ 15,691,000 $ 50,905,000
Warrant amortization 619,000 2,020,000
Stock option amortization 127,000 4,892,000
Other 84,000 199,000
-----------------------------------------
16,521,000 58,016,000

Deferred liability:
Depreciation and amortization (562,000) (1,602,000)
-----------------------------------------
Net deferred income tax assets 15,959,000 56,414,000
Valuation allowance (15,959,000) (56,414,000)
-----------------------------------------
Net deferred income taxes $ - $ -
=========================================

F-23

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

8. CAPITAL STOCK

In February 1998, the Company amended the Articles of Incorporation to increase
its authorized capital from 20,000,000 shares to 100,000,000 shares, 90,000,000
of which are classified as common shares, 100,000 of which are Class A preferred
shares and 9,900,000 of which are undesignated shares.

In May 1998, the Company amended the Articles of Incorporation to increase its
authorized capital from 100,000,000 shares to 500,000,000 shares, 450,000,000 of
which are classified as common shares, 500,000 of which are Class A preferred
shares and 49,500,000 of which are undesignated shares.

9. STOCK OPTIONS AND WARRANTS

In September 1994, the Company adopted an Incentive Stock Option Plan (1994
Stock Option Plan) that includes incentive stock options to be granted to
certain eligible employees and non-employee directors of the Company. In
September 1998, the Company adopted a new incentive stock option plan. The 1998
Combined Stock Option Plan (the "Plan") includes incentive stock options to be
granted to certain eligible employees (including foreign nationals) and non-
employee consultants of the Company and any subsidiary corporation of the
Company. The Company has authorized the grant of options for up to 25,000,000
shares of the Company's Common Stock. The Company also amended the 1994 Stock
Option Plan. The number of shares reserved for option grants was reduced from
22,071,400 to 7,000,000, including those for which options have previously been
granted. The Company has authorized the grant of options to management personnel
for up to 5,125,000 shares of the Company's Common Stock outside the plan. A
majority of the options granted have ten year terms and vest and become fully
exercisable at the end of three years of continued employment.

In November 1996, the Chief Executive Officer and Chief Technology Officer were
each granted options to purchase 2,000,000 shares of Common Stock at an exercise
price of $.96. These options vested in incremental amounts based on the number
of installed customer sites and remain exercisable until December 31, 2007. In
1998, the Board of Directors agreed to amend the stock option agreements whereas
the shares became fully vested. The amendment constituted a repricing and,
accordingly, the Company recorded $11,405,000 as compensation expense in January
1998.

F-24

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

9. STOCK OPTIONS AND WARRANTS (CONTINUED)

During 1997, the Company granted non-plan options to various consultants to
purchase 347,500 shares of the Company's Common Stock at an exercise price of
$.96 per share. The options were deemed to have a value of $92,000 which was
recognized as compensation expense.

During 1998, the Company granted options to purchase a total of 400,000 shares
at an exercise price of $3.90 per share to two consultants. The options were
deemed to have a value of $431,000, which was recognized as legal expense.

Option activity is summarized as follows:

WEIGHTED
SHARES AVERAGE
AVAILABLE EXERCISE
FOR GRANT OPTIONS OUTSTANDING PRICE
--------------------------------
UNDER PLAN PLAN NON-PLAN PER SHARE
----------------------------------------------------------------------

Establishment of 1994 stock Option Plan 500,000 - - $ -
Additional shares reserved for issuance 2,500,000 - - -
Granted (532,500) 532,500 377,500 .45
---------------------------------------------------
Balance at December 31, 1995 2,467,500 532,500 377,500 .45
Additional shares reserved for issuance 4,071,400 - -
Granted (2,992,800) 2,992,800 4,000,000 1.09
Canceled 1,646,400 (1,646,400) - 1.48
---------------------------------------------------
Balance at December 31, 1996 5,192,500 1,878,900 4,377,500 .90
Additional shares reserved for issuance 15,000,000 - -
Granted (3,131,250) 3,131,250 347,500 1.38
Canceled 257,750 (257,750) - .86
Exercised - (30,000) - .45
---------------------------------------------------
Balance at December 31, 1997 17,319,000 4,722,400 4,725,000 1.09
Additional shares reserved for issuance 9,928,600
Granted (4,601,000) 4,601,000 400,000 7.31
Canceled 196,235 (196,235) - 4.60
Exercised - (22,664) - .77
---------------------------------------------------
Balance at December 31, 1998 22,842,835 9,104,501 5,125,000 $2.23
===================================================

F-25

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

9. STOCK OPTIONS AND WARRANTS (CONTINUED)

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

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- - -------------------------------------------------------------------------------------------------------------------

$ .45 721,500 3.8 years $ .45 711,500 $ .45
.96 8,377,251 6.4 years .96 8,443,201 .96
3.90 1,246,750 6.7 years 3.90 460,831 3.90
8.00 3,684,000 9.4 years 8.00 1,503,000 8.00
12.00 200,000 9.7 years 12.00 - -
-------------- -------------
$ .45 - $12.00 14,229,501 7.1 years $ 3.17 9,118,532 $2.23

The Company has shares exercisable within the plans of 1,167,795 and 4,213,532
at December 31, 1997 and 1998, respectively, at a weighted average exercise
price of $.81 and $3.61 per share, respectively. The Company also has shares
exercisable outside the plan of 914,000 and 4,905,000 at December 31, 1997 and
1998, respectively, at a weighted average exercise price of $.76 and $1.04 per
share, respectively. The fair value of options granted within the plan in 1996,
1997 and 1998 was $.27, $.34 and $.90 per share, respectively. The fair value of
options granted outside the plan in 1996, 1997 and 1998 was $.27, $.27 and $.25
per share.

The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation (Statement 123), requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.

F-26

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

9. STOCK OPTIONS AND WARRANTS (CONTINUED)

Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a minimum value
option pricing model with the following weighted-average assumptions for 1996,
1997 and 1998: risk-free interest rate of 6.5%; 6.5% and 4.78%, respectively;
dividend yield of 0%; and a weighted-average expected life of the option of five
years.

The minimum value option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:

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

Net loss as reported $(7,596,000) $(33,636,000) $(121,878,000)
Pro forma net loss (7,763,000) (34,168,000) (127,272,000)

Net loss per common share as reported $ (1.18) $ (5.18) $ (13.87)
Pro forma net loss per common share (1.20) (5.26) (14.47)

During the initial phase-in period, the effects of applying Statement 123 for
recognizing compensation cost may not be representative of the effects on
reported net loss or income for future years because the options in the
Incentive Stock Option Plans vest over several years and additional awards will
be made in the future.

During 1995, the Company granted a consultant warrants to purchase 150,000
shares of common stock at an exercise price of $.60 per share for services
provided. The warrants were immediately exercisable and expire November 17,
2002. The warrants were valued at $15,000 and were charged to expense. The
Company determined the fair value of the warrants by considering the difference
in fees charged by the consultant with and without the warrants in place.

F-27

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

9. STOCK OPTIONS AND WARRANTS (CONTINUED)

The following is a table of the warrants to purchase shares of the Company's
Common Stock:

WARRANTS EXERCISE PRICE EXPIRATION
OUTSTANDING EXERCISABLE PER SHARE DATE
----------------------------------------------------------------
Balance at December 31, 1994
Granted:

Note payable 416,665 416,665 $ .60 2000
Consulting Service 150,000 150,000 .60 2002
Bridge Loan #1 1,760,000 1,760,000 1.00 2000
----------------------------------------------------
Balance at December 31, 1995 2,326,665 2,326,665 .60 - 1.00
Granted:
Bridge Loan #2 1,100,000 1,100,000 1.50 2003
Bridge Loan #3 3,300,000 3,300,000 1.50 2003
Lease financing 45,000 45,000 1.50 2003
7% subordinated notes 20,787,500 20,787,500 1.50 2000
----------------------------------------------------
Balance at December 31, 1996 27,559,165 27,559,165 .60 - 1.50
Granted:
Line of credit 22,601,005 8,396,170 3.90 2000
----------------------------------------------------
Balance at December 31, 1997 50,160,170 35,955,335 $.60 - $3.90
Granted:
13 1/4% Senior Discount Note 1,257,436 1,257,436 .01 2005
----------------------------------------------------
Balance at December 31, 1998 51,417,606 37,212,771 $.01 - $3.90
====================================================

10. EMPLOYMENT AGREEMENTS

In November 1996, the Company entered into Employment Agreements with its
President and Chief Executive Officer and its Chief Technology Officer. The
agreements provide for an annual base salary and a bonus and other compensation
as may be established from time to time by the Board of Directors. As part of
the agreements, the employees were each granted options to purchase 2,000,000
shares of Common Stock at an exercise price of $.96. The agreements contain
provisions providing for the maintenance of confidentiality of proprietary
information of the Company and a two-year non-competition clause in the event of
termination of employment. The agreements may be terminated by either party for
any reason at any time. If, however, the employees are terminated by the Company
without cause, the Company must pay salary to the employees equal to the
employees' then base salary for two years.

F-28

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

11. SAVINGS AND RETIREMENT PLAN

The Company has a savings and retirement plan covering all eligible employees.
The plan was adopted pursuant to 401(k) of the Internal Revenue Code.
Contributions to the plan are discretionary for the employees. The Company does
not make contributions to the plan.

12. ACQUISITIONS

In December 1997, the Company acquired the outstanding common stock of FreeMail,
Inc. (FreeMail). The results of operations of the acquired business are included
in the accompanying financial statements since the date of acquisition.

The Company issued 125,000 shares of Common Stock, with a fair value of
$488,000, as consideration in connection with the acquisition. The Company will
pay a quarterly payment to the former shareholders of FreeMail as additional
contingent consideration equal to 5% of the gross collected revenue derived by
the Company from certain identified FreeMail products. The total amounts of the
quarterly payments shall not exceed $3.0 million. As of December 31, 1998, the
Company did not record a liability relating to the FreeMail revenue since no
revenue from FreeMail products was collected. The acquisition was accounted for
as a purchase. The inclusion of the FreeMail operating results for periods prior
to the date of acquisition would not have materially affected results of
operations.

On March 13, 1998, the Company purchased all of the outstanding capital stock of
4-Sight Limited, a private limited company organized under the laws of the
United Kingdom ("4-Sight"), for $20 million in cash plus related acquisition
expenses of $500,000 and 2,500,000 shares of the Company's Common Stock valued
at $20.0 million. In addition, the former shareholders of 4-Sight will be
entitled to receive up to an additional 750,000 shares of the Company's Common
Stock in the event certain sales objectives are met over the next three years.
Specifically, 4-Sight's former shareholders shall be entitled to receive an
additional 625,000 shares of Common Stock if the cumulative Non-U.S./Canada
Revenues (defined below) for the period from March 13, 1998 to March 13, 2000
equal or exceed $50.0 million; and they shall be entitled to receive a further
125,000 shares of Common Stock if the cumulative Non-U.S./Canada Revenues during
the same three year period equal or exceed $70.0 million.

F-29

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

12. ACQUISITIONS (CONTINUED)

For the purpose of the foregoing, "Non-U.S./Canada Revenues" shall mean the
revenues attributable to customer sites located outside the United States and
Canada and receivable by the Company or any of its subsidiaries. The shares to
be issued as contingent consideration will result in the Company recording
additional goodwill, which will be amortized over its estimated useful life.

The acquisition was accounted for under the purchase method of accounting and,
accordingly, the operating results of 4-Sight have been included in the
consolidated operating results since the date of acquisition.

On acquisition, approximately $32.1 million of goodwill was recorded, which is
being amortized on a straight-line basis over five years. The following table
shows the pro forma consolidated results of operations as if 4-Sight had been
acquired as of the beginning of the periods presented:

YEAR ENDED DECEMBER 31
1997 1998
-------------------------------------
(Unaudited)

Revenues $ 20,833,000 $ 21,109,000
Net loss (37,942,000) (121,922,000)

Net loss per share $ (4.22) $ (13.87)

The pro forma results are not necessarily indicative of what actually would have
occurred if the acquisition had been in effect for the entire periods presented.
in addition, they are not intended to be a projection of future results and do
not reflect any synergies that might be achieved from combined operations.

13. RELATED PARTY TRANSACTIONS

On September 1, 1998, the Company entered into a $305,000 Secured Recourse
Promissory Note and Pledge Agreement (the "Note") with its Chief Technology
Officer (the "Maker"). The Note accrues interest at 7% per annum and is due on
December 15, 1999. As security for the repayment of the principal of and
interest on this Note, the Maker grants to the Company, 60,000 shares of the
Company's common stock, par value $.01 per share.

F-30

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

13. RELATED PARTY TRANSACTIONS (CONTINUED)

The Company's corporate counsel owns 250,000 shares, and has been granted
warrants and options to purchase 450,000 shares of Company Common Stock. During
the years ended December 31, 1996, 1997 and 1998, the Company incurred legal
fees and expenses of approximately $102,000, $128,000 and $152,000,
respectively, to such counsel for services rendered in connection with
litigation and for general legal services.

The Company's corporate counsel is Larkin, Hoffman, Daly & Lingren, Ltd. One of
the partners of this firm is the father of the Company's President and Chief
Executive Officer and owns 250,000 shares of Common Stock of the Company and has
been granted an option to purchase 200,000 shares of the Company's Common Stock.
Additionally, Mr. Hoffman, a partner of this firm, is a director of the Company
and has been granted an option to purchase 75,000 shares of the Company's Common
Stock. During the years ended December 31, 1996, 1997 and 1998, the Company
incurred legal fees and expenses of approximately $75,000, $157,000 and
$1,111,000, respectively, to such counsel for services rendered in connection
with litigation and for general legal services.

The Company's marketing services were performed by Kauffman Marketing Group,
Inc. from November 1995 to December 1997. The former President of Kauffman
Marketing Group, Inc. joined the Company as the Vice President of Strategic
Marketing & Communications in December 1997. During the years ended December 31,
1996, 1997 and 1998, the Company incurred marketing expenses of approximately
$318,000, $1.6 million and $0, respectively, to such firm for strategic
positioning and outside marketing services.

Management believes the fees paid for all the above services rendered to the
Company were on terms at least as favorable to the Company as could have been
obtained from an unrelated party.

14. MAJOR CUSTOMERS

In 1997 three customers accounted for 24%, in aggregate, of net sales. In 1998,
no single customer accounted for more than 10% of net sales.

F-31

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

15. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION

The Company, operating in a single industry segment, provides a managed, high
speed digital data delivery network service. Information regarding operations in
different geographic areas is as follows:

YEARS ENDED DECEMBER
--------------------------------------------------------------
1996 1997 1998
--------------------------------------------------------------
Net sales to unaffiliated customers:

United States $ 279,000 $ 1,555,000 $ 8,255,000
Europe - - 9,005,000
Rest of World - - 369,000
--------------------------------------------------------------
Total net sales $ 279,000 $ 1,555,000 $ 17,629,000
==============================================================

Operating (loss) income:
United States $(7,596,000) $(33,636,000) $(113,272,000)
Europe - - (8,606,000)
Rest of World - - -
--------------------------------------------------------------
Net loss $(7,596,000) (33,636,000) $(121,878,000)
==============================================================

Identifiable assets:
United States $20,070,000 $ 21,086,000 $ 89,698,000
Europe - - 18,358,000
Rest of World - - -
--------------------------------------------------------------
Total assets $20,070,000 $ 21,086,000 $ 108,056,000
==============================================================

"United States" includes United States and Canada. "Rest of World" includes
principally Japan and the Asia-Pacific region. Net revenue from sales to
unaffiliated customers is based on the location of the customer. Operating
income and identifiable assets are classified based on the location of the
Company's facilities.

F-32

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

16. CONTINGENCY

The Company is aware that certain holders of warrants issued in connection with
the bridge loans in 1995 and 1996 believe that the exercise price of those
warrants should be adjusted downward. Although the warrants provide for downward
adjustments under certain circumstances, the Company believes no adjustment is
required. Should the warrant holders initiate litigation and should that
litigation be successful, the gross proceeds receivable by the Company from
exercise of those warrants would be reduced from approximately $8.4 million to
$4.9 million. The Company would vigorously defend any such litigation if
initiated in the future.

The Company is engaged in certain legal proceedings and claims arising in the
ordinary course of its business. The ultimate liabilities, if any, which may
result from these or other pending or threatened legal actions against the
Company cannot be determined at this time. However, it is the opinion of
management that facts known at the present time do not indicate that there is a
probability that such litigation will have a material effect on the financial
position of the Company.

17. SUBSEQUENT EVENTS

In January 1999, the Company issued the 1999 MCI WorldCom Convertible Note and
in January 1999 and March 1999, the Company borrowed $10.0 million and $15.0
million, respectively, thereunder. The 1999 MCI WorldCom Convertible Note was
converted into 2,196,317 shares of the Company's Class D Convertible Preferred
Stock, par value $.01 per share (the "Class D Preferred Stock"), immediately
prior to the closing of the Silicon Graphics, Inc. Investment ("SGI
Investment"). In connection with the MCI WorldCom Convertible Note, the Company
issued warrants to purchase a total of 350,000 shares of Common Stock. The
warrants have an exercise price of $.01 and are exercisable from April 30, 1999
until April 30, 2004.

F-33

WAM!NET Inc.

Notes to Consolidated Financial Statements (continued)

17. SUBSEQUENT EVENTS (CONTINUED)

In March 1999, the Company entered into the SGI Investment, providing for the
purchase by SGI of 5,710,425 shares of the Company's Class B Preferred Stock and
878,527 shares of the Company's Class C Preferred Stock. The holders of a
majority of the Class B Preferred Stock will have the right to designate one
member of the Company's Board of Directors. The aggregate consideration received
by the Company for the Class B Preferred Stock and the Class C Preferred Stock
was $75 million, of which $35 million was paid in cash and $40 million was paid
by transfer to the Company of a campus facility. The Class B Preferred Stock and
the Class C Preferred Stock will be convertible on a one-to one basis into
Common Stock and will have the right to vote such percentage with the Common
Stock as a single class. The Class B Preferred Stock and Class C Preferred Stock
are convertible immediately following the issuance date and 18 months following
the issuance date, respectively. The shares of Common Stock into which the Class
B Preferred Stock and the Class C Preferred Stock are subject to certain
registration rights.

F-34

EXHIBIT INDEX

Item No. Description
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