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

FORM 10-K
(Mark One)

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

For the fiscal year ended December 31, 1997

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

For the transition period from to
---------------- ------------------

Commission file number 0-21602

LCI INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 13-3498232
(State or other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
22102
8180 GREENSBORO DRIVE, SUITE 800 (Zip Code)
McLEAN, VA
(Address of principal executive offices)

Registrant's telephone number, including area code: 1-800-296-0220

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

Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------

Common Stock, $.01 par value New York Stock Exchange, Inc.

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

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

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

The aggregate market value of the voting common equity held by
non-affiliates of LCI International, Inc. was $3,237,110,142 March 2, 1998.

As of March 2, 1998, there were 96,814,799 shares of LCI
International, Inc. Common Stock (par value $.01 per share) outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 1998 Annual Meeting of Shareowners -
Part III
2

LCI INTERNATIONAL, INC.
1997 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I
- ---------------------------------------------------------------------------------------------------------------
ITEM 1. Business 3
ITEM 2. Properties 11
ITEM 3. Legal Proceedings 11
ITEM 4. Submission of Matters to a Vote of Security Holders 11

EXECUTIVE OFFICERS OF THE COMPANY 12

PART II
- ---------------------------------------------------------------------------------------------------------------
ITEM 5. Market for the Company's Common Equity and Related Shareowner Matters 13
ITEM 6. Selected Financial Data 14
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 15
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk 27
ITEM 8. Financial Statements and Supplementary Data 27
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 48

PART III
- ---------------------------------------------------------------------------------------------------------------
ITEM 10. Directors and Executive Officers of the Company 48
ITEM 11. Executive Compensation 48
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 48
ITEM 13. Certain Relationships and Related Transactions 48

PART IV
- ---------------------------------------------------------------------------------------------------------------
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 49

INDEX TO EXHIBITS E-1

SIGNATURES S-1

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PART I

ITEM 1. BUSINESS

LCI International, Inc., together with its subsidiaries (LCI or the
Company), is a facilities-based, telecommunications carrier that provides a
broad range of voice and data telecommunications services in domestic and
international markets: commercial, wholesale, residential/small business and
local. The Company provides service to its customers spanning the U.S. and more
than 230 countries through owned and leased digital fiber-optic facilities (the
Network). LCI's Network includes more than 15 switches strategically located
throughout the U.S., connecting LCI to metropolitan areas that account for 95%
of U.S. call volume.

LCI International, Inc., a Delaware corporation, was incorporated in 1988
and is a holding company. The Company's operations are conducted through LCI's
direct and indirect wholly owned subsidiaries, principally LCI International
Management Services, Inc., LCI International Telecom Corp., and USLD
Communications Corp.

INDUSTRY BACKGROUND

Historically, the Company has operated in the $80 billion long-distance
telecommunications industry. The long-distance industry is highly competitive
and is currently dominated by the three largest interexchange carriers: AT&T
Corporation (AT&T), MCI Communications Corporation (MCI) and Sprint Corporation
(Sprint). In 1997, fewer than 10 other publicly traded interexchange carriers,
including the Company, had annual revenues exceeding $1 billion. The balance of
the long-distance industry comprises several hundred smaller interexchange
carriers. Recent legislative and regulatory activity is designed to foster one
telecommunications industry that encompasses long-distance and local
telecommunications services, as well as data and network services.

The local telecommunications industry is approximately $95 billion and is
dominated by the regional Bell operating companies (RBOCs) and GTE
Communications Corporation (GTE). The RBOCs and GTE have the authority to
provide interLATA (local access transport area) long-distance service outside
their service regions. The Telecommunications Act of 1996 (the Act) established
procedures whereby the RBOCs can apply for authority to provide interLATA
long-distance service inside their respective service regions. Similarly,
certain of the requirements governing GTE's provision of in-region
long-distance service were removed by the legislation. The nature of
competition in this combined industry is expected to change significantly as
legislative, regulatory and judicial activities progress. The Company intends
to provide combined local and long-distance services to compete in what is
expected to be a combined $150 billion market.

The present long-distance telecommunications marketplace was shaped by the
1984 court-ordered divestiture by AT&T of its 22 Bell Operating Companies,
known as "BOCs." As part of the AT&T Divestiture Consent Decree, the United
States was divided into geographic areas known as local access transport areas
(LATAs). The local exchange carriers (LECs), which include the RBOCs and
independent local exchange carriers, provide local telephone service, local
access services and short-haul toll service. Interexchange carriers (IXCs)
including the Company and certain independent local exchange carriers, provide
interLATA long-distance service and long-distance service within LATAs.

The Company's ability to compete and grow is subject to changing industry
conditions. Legislation and the resulting regulatory and judicial action have
had a significant impact on the current industry environment. These changes
will alter the nature and degree of competition in both the local and
long-distance segments of the industry and could directly impact the Company's
future growth opportunities.

INDUSTRY STRUCTURE

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interLATA long-distance services. As RBOCs are allowed into the long-distance
market, the Company expects competition within the industry to increase in both
the long-distance and local markets.

Several of the Company's competitors are larger and have greater financial,
technical and marketing resources. In addition to the largest
telecommunications companies, (AT&T, MCI and Sprint, or the Big Three), the
Company also competes with hundreds of other long-distance carriers, as well as
LECs, in various types of telecommunications services. The Company's principal
pricing strategy is to offer a simple, flat-rate pricing structure with rates
competitive with those of the Big Three. Although LCI is prepared to respond to
competitive offerings from other carriers, the Company continues to believe
that its Simple, Fair and Inexpensivesm marketing and service pricing approach
is competitive in retaining existing customers, as well as in obtaining new
customers. In 1997, the Company introduced Exact Billing(SM), a differentiator
that neither the Big Three nor any other nationwide long-distance carrier
offers, giving LCI a competitive advantage in some markets (see discussion
under Telecommunication Services). The Company believes that the nature of
competition will continue to change with consolidation in the industry. The
Company's ability to compete effectively will depend on maintaining exceptional
customer service and high quality, market-responsive services at prices
generally equal to or below those charged by its major competitors.

Industry Mergers. The telecommunications industry has experienced
significant merger activity in the last year. Of the many mergers that have
occurred or have been announced in the last year, the most significant include:
Bell Atlantic/NYNEX; SBC/Pacific Telesis (PacTel); MCI/WorldCom; SBC/Southern
New England Telephone Company; and, most recently, AT&T/Teleport Communications
Group. To date, only the Bell Atlantic/NYNEX and SBC/PacTel mergers have
received federal and state regulatory approvals. At this time the Company is
unable to predict the impact of these mergers, if any, on the Company or
competition within the industry as a whole.

PROPOSED MERGER

On March 8, 1998, the Company entered into a merger agreement with Qwest
Communications International Inc. (Qwest) and a subsidiary of Qwest pursuant to
which LCI will become a wholly owned subsidiary of Qwest. The all-stock
transaction is valued at approximately $4.4 billion. Under the terms of the
agreement, each of the outstanding shares of the Company's common stock, par
value $.01 per share, will be converted into $42 of Qwest common stock, subject
to certain exceptions. The number of shares of Qwest common stock to be
exchanged for each share of the Company's common stock will be determined by
dividing $42 by a 15-day volume weighted average of trading prices for Qwest
common stock prior to the closing, but will not be less than 1.0625 shares (if
Qwest's average stock price exceeds $39.53) or more than 1.5583 shares (if
Qwest's average stock price is less than $26.95). The Company may terminate the
merger agreement if Qwest's average stock price is less than $26.95, unless
Qwest then agrees to exchange for each share of common stock of the Company the
number of Qwest shares determined by dividing $42 by such average price. The
merger is intended to qualify as a tax-free reorganization and will be
accounted for as a purchase. It is anticipated that the merger will occur by
the end of the third quarter of 1998. The transaction is subject to the
majority vote of the outstanding shares of Qwest and LCI and to other customary
conditions such as receipt of regulatory approvals. The majority shareholder of
Qwest has entered into an agreement to vote in favor of the merger. There can
be no assurances that the conditions to closing of the merger will be met.

ACQUISITIONS

On December 22, 1997, the Company acquired USLD Communications Corp.
(USLD), in a stock-for-stock merger that was accounted for as a pooling of
interests. USLD provided long-distance telecommunications services principally
to business customers in the Southwest, Southeast, Pacific Northwest and
Western regions of the United States. In addition, USLD offered operator
services for the hospitality and payphone industries, as well as local
telephone service in selected markets. The Company exchanged approximately 12
million shares of Common Stock for all of the outstanding shares of USLD common
stock. The Company's Consolidated Financial Statements have been restated to
include the results for USLD, as though the companies had always been a
combined entity.

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In 1996, USLD spun off Billing Information Concept Corp. (Billing) as a
separate public company. The Company's results of operations reflect the
results of Billing as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30 (APB 30). For the comparative periods
presented, the Company's results of operations include the acquisitions of
Teledial America, Inc. (Teledial America) and ATS Network Communications, Inc.
(ATS) from January 1, 1996, and the acquisition of Corporate Telemanagement
Group, Inc. (CTG) from September 1, 1995.

TELECOMMUNICATIONS SERVICES

The Company provides a broad array of long-distance and local
telecommunications services to its customers, which include residential/small
business, medium-sized and large businesses, national accounts, other
interexchange carriers, government agencies and academic institutions. The
Company's switched services include basic long-distance or measured toll
service (MTS), accessible via "l plus" dialing or dialing a five digit access
code (10XXX).

The Company has developed a marketing strategy that focuses on
differentiating LCI through "simple, fair and inexpensive" domestic and
international telecommunications service offerings in all market segments. The
Company provides low, easy to understand rates, that vary primarily based on
the time a call is placed and not by the distance of an interstate call. Since
1991, the Company has offered flat rates to business customers. In 1992, the
Company was the first to bill residential customers in six-second increments,
instead of rounding up to the full minute like every major competitor. In 1997,
LCI was the first to introduce Exact Billing(SM) to both residential and
business customers, billing in single second increments, after an initial one
minute call increment. In addition, the Company offers discounted evening rates
beginning at 6 p.m. and does not require waiting until later hours for
discounts. The Company does not attach complex conditions to the simple, fair
and inexpensive service, such as minimum monthly usage or term requirements, or
requiring customers to sign up other customers to earn full discounts. For
commercial customers, LCI also focuses on offering a full complement of high
quality, competitively priced services to small, medium-sized and large
customers including calling card services, prepaid calling cards, toll-free
services, audioconferencing, frame relay data service, broadcast fax, Internet
access, and specialized high-volume data transmission services. Although the
Company provides long-distance services to a wide range of market segments, the
Company does not seek to compete with every service offered by the Company's
competitors. The Company's strategy for competitive flexibility includes a
balance across all market segments with selective service offerings.

The Company's strategic direction is supported by growth through geographic
expansion of sales presence and Network operating facilities, as well as
expansion in sales channels, targeted service offerings to each market segment,
and selective acquisitions. This approach is dependent on maintaining
efficient, low cost operations in order to preserve pricing flexibility and
operating margins. The Company has historically managed its selling, general
and administrative expenses at a percentage of revenue which is lower than its
three largest competitors.

TARGETED SERVICE OFFERINGS

Residential/small business customers and medium-sized businesses primarily
purchase switched services, while carriers and large commercial customers
typically purchase both switched and dedicated services. Switched services,
charged on a usage-sensitive basis, are telecommunications services provided to
each customer through switching and transmission facilities. Private line
services, a type of dedicated service, are charged on a fixed price basis for
which transmission capacity is reserved for a specific customer's traffic.

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Business Services. In each of 1997, 1996 and 1995, business long-distance
customers, including wholesale customers, accounted for more than 70% of the
Company's annual revenues. The Company has expanded its marketing to include a
full range of large and small businesses throughout the United States. In 1997,
LCI introduced Simply Guaranteed Plus(SM) for general business customers which
offers an all-in-one package with guaranteed domestic rates for business
customers spending between $100 and $10,000 a month. It offers a complete line
of voice and data services with Exact Billing(SM) at rates that are, on
average, 30% lower than those offered by the Big Three. In response to the
fast-growing market of small and home-based businesses, the Company delivered
services specially tailored to the needs of these customers through its product
offering Simply Business(SM). Unlike other plans for businesses, the Company
offers plans that do not require term commitments, contracts, subscription fees
or penalties. These popular commercial services have continued to be successful
and have been extended to the small and medium-sized business customer. The
Company's simple, fair and inexpensive philosophy also extends to pricing for
international calls, with rates varying based on the originating and
terminating countries.

Another important source of revenue for the Company is the sale of
transmission capacity and services to other long-distance wholesalers and to
resellers of long-distance service. Although gross margin on some switched
services sales can be lower than the Company's overall average, the service
expenses associated with this segment are lower, and should result in an
operating margin in line with the Company's overall average.

The Company also offers private line telecommunications services to its
business and wholesale customers, as well as increased offerings to small to
mid-sized companies. Private line services are dedicated exclusively for a
single customer's use and typically connect to three or four customer locations
with dedicated access facilities. The Company has experienced success with its
frame-relay service, FramePlus(SM), and offers strict performance guarantees
and new network management technologies.

Residential Services. Within the past three years, the Company has
implemented marketing and service development efforts intended to expand its
share of the U.S. residential long-distance market. The Company offers
residential customers Exact Billing(SM) after the first minute for all
state-to-state, international outbound, in-state, toll, residential 800 and
calling card calls. Residential/small business revenue grew 30%, 125%, and 170%
in 1997, 1996, and 1995, respectively, and represented approximately 30% of
revenue in 1997 and 1996 and 20% in 1995. The decline in residential/small
business revenue growth in 1997 reflects competitive pricing as well as a
larger base of customers and revenue.

In addition to its internal sales force, the Company uses a combination of
other channels, such as advertising and third-party sales representatives, to
market its services. For certain third-party sales representatives,
compensation is paid through a combination of upfront payments and an ongoing
commission based upon collected long-distance revenue attributable to customers
identified by the representatives. The Company retains responsibility for the
customer relationship, including billing and customer service. American
Communications Network, Inc. (ACN), a nationwide network of third-party sales
representatives, continued to be the largest of the Company's sales
representatives for residential/small business customers. The Company has
diversified and expanded other sales channels and, as a result, channels other
than ACN currently are generating more than 70% of new residential/small
business sales. ACN is authorized to sell certain defined services that
currently exist; new services may or may not be authorized in the future.

The Company has experienced an increase in selling, general and
administrative expenses such as billing, commissions, and bad debt expenses as
a result of the growth in the residential/small business service line.
Although, the residential/small business segment incurs higher proportional
selling, general and administrative costs, it also provides a higher gross
margin than most other segments.

Local Services. The Company is seeking state approval to resell local
services in various states, which would enable the Company to provide combined
local and long-distance services to existing and prospective customers. The
Company is currently reselling local telecommunications service in more than 30
markets.

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The Company has extended its simple, fair and inexpensive marketing
strategy to its local service offerings. Through the Company's Simply
Direct(SM) service offering, LCI's local service customers will receive
simplified rates, direct dialing for local and long distance service, 24-hour
customer service, combined billing for local and long distance service and
six-second incremental billing.

FACILITIES EXPANSION

The Company's Network utilizes transmission equipment consisting of digital
fiber optic transmission circuits to complete long-distance calls. In 1997, the
Company entered into several agreements to extend its owned fiber-optic network
throughout several geographic areas of the United States. The Company purchased
3,100 route miles from Chicago to Los Angeles, via Dallas. The route miles from
Chicago to Dallas were paid for and delivered in the third quarter of 1997 with
the remaining miles from Dallas to Los Angeles expected for delivery in the
first half of 1998. The Company also purchased a position in 729 route miles
from Cleveland to New York and 1,925 route miles between Washington D.C. and
Dallas. Delivery of the route miles is expected in the first half of 1998. In
addition, the Company has entered into an agreement to swap fiber along routes
with excess capacity in exchange for fiber from New York to Baltimore, which
completes a strategic Network fiber ring for the Company. Adding to the
Company's 1,400 route miles within the central Midwest region of the United
States, the Company will have more than 8,500 route miles of owned network
capacity. The Company provides nationwide long-distance telecommunications
services primarily through its entire Network, which includes both owned and
leased digital fiber optic transmission facilities spanning the continental
United States. The Company expects increased costs during the transition to the
new owned facilities during 1998, but expects a lower cost of services after
the transition and as a result of the Network synergies. The Company will
continue to evaluate the best options to expand its network capacity through
leased or owned facilities.

In 1997, the Company opened sales offices in Denver, Boston, Los Angeles,
Tampa, and Fort Lauderdale. The offices added with the acquisition of USLD
expanded our coverage into the Southwest, West, and Pacific Northwest. As of
the end of 1997, the Company has more than 60 direct sales offices.

LEGISLATIVE MATTERS

Telecommunications Act of 1996. In February 1996, the Telecommunications
Act of 1996 (the Act) was enacted to increase competition in the long-distance
and local telecommunications industries. The legislation is intended to open
competition in the local services market and, at the same time, contains
provisions intended to protect consumers and businesses from unfair competition
by incumbent local exchange carriers (LECs), including the RBOCs. The Act
allows RBOCs to provide interLATA long-distance voice and data services to
consumers inside their local service territories only after meeting certain
competitive criteria, including a list of 14 specific "competitive checklist"
requirements for opening the local market to competition.

The Act provides a framework for the Company and other long-distance
carriers to compete with LECs by reselling local telephone service, leasing
unbundled elements of the incumbent LEC networks or building new local service
facilities. The Company has signed local service resale agreements with
Ameritech, BellSouth and Bell Atlantic, an interconnection agreement with
Ameritech and is currently in formal interconnection negotiations with several
other LECs. LCI intends to vigorously compete in the local service market and
is currently providing local service to customers on a bundled resale basis.
The Company is also evaluating providing local service through the
recombination of unbundled network elements; however, a recent court ruling
(see Local Competition Order, below) does not require the LECs to recombine the
various network elements on behalf of local service competitors. The Company
could also decide in the future to build, or otherwise acquire, local service
facilities or use a competitive LEC other than incumbent LECs (such as the
RBOCs or GTE) to provide local service. The Company's decision on the timing
and method of providing local service is dependent on the economic viability
and profitability of its options, the resolution of various operational issues,
and the outcome of several pending regulatory and judicial proceedings.

In July 1997, SBC Communications Inc. (SBC), US West and Bell Atlantic
filed a lawsuit in the United States District Court for the Northern District
of Texas (the District Court) challenging, on constitutional grounds, the
restrictions contained in the Act applicable only to RBOCs. The plaintiffs
sought both a declaratory judgment

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and an injunction against the enforcement of the challenged provisions. On
December 31, 1997, the District Court ruled that the RBOC-specific provisions
of the Act were an unconstitutional bill of attainder, but on February 11,
1998 stayed the effectiveness of its order pending appeal. The Federal
Communications Commission (FCC), AT&T, MCI and Sprint have appealed this ruling
to the United States Court of Appeals for the Fifth Circuit. If the ruling is
ultimately upheld, the RBOCs will likely be able to provide long-distance
services within their local service territories much sooner than expected and
without first undergoing the kind of detailed review by state regulators and
the FCC that is currently required under the Act. If this decision is upheld,
the Company would expect to see a significant increase in competition in
long-distance services which could result in the loss of market share and/or a
decrease in operating margins. The Company is unable to predict the outcome of
the pending appeal.

In addition, Congress is considering several amendments to the Act.
Congress is considering reducing or eliminating the statutory requirements that
RBOCs must meet prior to entering the in-region, interLATA market. In addition,
Congress is considering legislation that would impose increased verification
requirements when a customer switches to a new long-distance carrier and would
increase the penalties for violations of the verification requirements. The
company cannot predict whether these amendments will be passed.

REGULATORY MATTERS

In order to implement the Act, the FCC is required to undertake a variety
of regulatory actions that impact competition in the telecommunications
industry. Many of the actions taken by the FCC to implement the Act -as well as
the Act itself - face court challenges. Certain of these regulatory actions are
described below.

Local Competition Order. In August 1996, the FCC adopted a local
competition order (the Local Competition Order) which established a minimum
national framework related to the manner in which companies wanting to provide
local service could interconnect with the LECs. The Local Competition Order
covered several important interconnection issues, including the purchase of
unbundled local network elements, resale discounts and arbitration procedures
between incumbent LECs and competitive local exchange carriers.

Several states, companies, associations and other entities appealed the
Local Competition Order. On July 18, 1997, the United States Court of Appeals
for the Eighth Circuit (the Eighth Circuit) overturned on jurisdictional
grounds many of the rules established in the Local Competition Order, including
the pricing of interconnection, resale and unbundled network elements. In
addition, the Eighth Circuit overturned the "pick-and-choose" rule, which would
have allowed potential competitors to receive the benefit of the most favorable
provisions contained in a LEC's interconnection agreements with other carriers.
On October 14, 1997, the Eighth Circuit further overturned the FCC's rules
pertaining to the unbundled network elements platform. The Eighth Circuit
concluded that the FCC's rules prohibiting a LEC from separating network
elements that are currently combined in the incumbent LEC's network are
contrary to the Act. The FCC and others filed a petition for a writ of
certiorari asking the United States Supreme Court to accept the case and
consider the merits of various appeals. In addition, several incumbent LECs
filed cross petitions with the Supreme Court requesting review of the Eighth
Circuit's decision to uphold certain of the FCC's rules regarding resale and
unbundled network elements. On January 26, 1998, the Supreme Court announced
that it will hear the appeals from the Eighth Circuit.

The Eighth Circuit's decisions substantially limit the FCC's jurisdiction
and expand the jurisdiction of state regulators to establish and enforce rules
governing the development of local competition. If the Eighth Circuit's
decisions are upheld, it is likely that over time the rules governing local
competition will vary substantially from state to state. If a patchwork of
state regulations were to develop, it could make competitive entry in some
markets difficult and expensive and could increase the costs of regulatory
compliance associated with local entry. If the Supreme Court were to uphold the
Eighth Circuit ruling, it could negatively affect the Company's ability to
offer competitive local service and increase the costs associated with local
service. The Company cannot predict the outcome of the current appeals to the
Supreme Court.

RBOC Applications to Provide In-Region InterLATA Long-Distance. Throughout
1997, various RBOCs applied to the FCC for authority to provide in-region
interLATA service. The FCC denied these in-region

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applications for various reasons, including that the RBOCs have not
demonstrated compliance with the competitive checklist or the other safeguards
of the Act. The FCC's orders have been appealed in a number of proceedings. The
Company is unable to predict when one or more RBOCs may be actively competing
in the long-distance market, but expects that when able to compete, RBOCs will
gain a significant market share. In addition, several RBOCs have recently
requested that the FCC exercise its forbearance authority to permit the RBOCs
to provide in-region, interLATA high-speed data services without first
complying with the competitive checklist or other otherwise applicable
safeguards. These requests are pending.

Access Charge Reform. In May 1997, the FCC issued an order designed to
reform the system of interstate access charge expenses levied by LECs on
long-distance service carriers. In the May order, the FCC decided to rely on a
combination of prescriptive rate reductions and increased competition in
interstate access to bring interstate access charges closer to actual economic
cost. The FCC has stated that it will issue a further order designed to permit
incumbent LECs to lower interstate access charges in response to competition.
The manner in which the FCC implements its approach to lowering access charge
levels will have a material effect on the prices the Company and its
long-distance competitors pay for originating and terminating interstate
traffic. Various parties have filed petitions for reconsideration of the May
order with the FCC. Some parties, including the Company, have appealed the May
order to the Eighth Circuit, which heard oral arguments on January 15, 1998.
The Company cannot predict when the Eighth Circuit will issue a ruling on the
Company's appeal. Although the ultimate outcome of the FCC and resulting court
actions is uncertain, the Company does expect lower access charges in 1998.
This decrease, however, is expected to be offset by increases in customer line
charges and charges for the universal service fund. It is possible that either
federal statutory or regulatory changes will mandate that the increase in
universal service payments made by long-distance carriers are completely offset
by reductions in interstate access charges.

Payphone Compensation. In September 1996, the FCC adopted rules to
implement the Act's requirement to fairly compensate payphone service
providers. This order included a specific fee to be paid to each payphone
service provider by long-distance carriers and intraLATA toll providers
(including LECs) on all "dial-around" calls, including debit card and calling
card calls. In orders released in July and September 1997, the United States
Court of Appeals for the D.C. Circuit (D.C. Circuit) vacated and remanded some
of the FCC rules. On October 9, 1997, the FCC issued an order addressing the
default per-call compensation rate in light of the D.C. Circuit's decision, and
established a default per-call rate of $0.284 for a two-year period. The FCC's
action will increase the Company's costs to carry "dial-around" calls that
originate from payphones. This decision has been appealed by several parties.
The Company intends to charge its customers for the expected cost of these
calls. In light of this appeal and any court action in these proceedings, the
Company is unable to predict the ultimate impact this decision will have on the
Company.

Petition for Expedited Rulemaking. In May 1997, LCI and the Competitive
Telecommunications Association (CompTel) jointly filed a petition for expedited
rulemaking requesting that the FCC establish performance standards for
incumbent LECs to meet the operations support systems (OSS) requirements of the
Act and applicable FCC regulations. The OSS requirements are critical in
ensuring that access to the incumbent LECs' internal systems is provided at a
level of quality consistent with services incumbent LECs provide to themselves.
In its petition, LCI proposed that an industry group consisting of local and
long-distance carriers, trade associations and regulators be given
approximately nine weeks to establish measurement categories, measurement
formulas and default performance intervals for several OSS categories. In June
1997, the FCC issued a public notice requesting comments on LCI's petition.
Numerous parties, including the California Public Service Commission, the
Wisconsin Public Service Commission and the National Association of Regulatory
Utilities Commissioners, have filed comments in support of LCI's petition. This
petition is currently pending.

Universal Service. In May 1997, the FCC released an order establishing a
significantly expanded federal telecommunications subsidy regime. Providers of
interstate telecommunications services, such as the Company, as well as certain
other entities, must pay to subsidize services for schools, libraries and rural
health care providers as well as services for low income consumers and
consumers living in high cost areas. The Company's share of the federal subsidy
will be based on its market share of defined telecommunications services and
certain defined telecommunications end user revenues. The order has resulted in
an increase of the Company's total obligation,

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but the Company anticipates that such increase will be billed to the customer.
Several parties have appealed the May 1997 order, and those appeals have been
transferred and consolidated in the United States Court of Appeals for the
Fifth Circuit.

Detariffing. In October 1996, the FCC issued an order that non-dominant
interexchange carriers will no longer be permitted to file tariffs for
interstate domestic long-distance services. Under the terms of the FCC order,
detariffing would be mandatory after a nine-month transition period.
Interexchange carriers would still be required to retain and make available
information as to the rates and terms of the services they offer. The FCC's
order was appealed by several parties and, in February 1997, the D.C. Circuit
issued a stay preventing the rules from taking effect pending judicial review.
The Company is currently unable to predict what impact the FCC's order will
have on LCI or the telecommunications industry if the mandatory detariffing
rules take effect.

Operator Services. On January 29, 1998, the FCC released an order requiring
operator service providers (OSPs) to put in place a process for customers to
determine the cost of making 0+ calls from payphones and other public phones
prior to making such calls. The new disclosure rules, which are scheduled to
take effect on July 1, 1998, may increase the amount of operator staff time
needed to provide cost information to customers, which consequently may
increase the cost of the Company's OSP activities.

Local Service. The Company is seeking state approval to resell local
services in various states, which would enable the Company to provide combined
local and long-distance services to existing and prospective customers.
Presently, the Company has received approval to resell local service in 38
states and the District of Columbia, and has applications pending to resell
local service in nine other states. The Company is currently reselling local
telecommunications service in more than 30 markets.

To date, the Company's efforts to provide local resale service have not
been profitable. The Company continues to identify and evaluate alternatives to
reselling incumbent LEC service, such as purchasing service from competitive
access providers and investments in local facilities-based providers. On
January 22, 1998, LCI filed a petition with the FCC that identified three
critical barriers to local competition, including the absence of a
nondiscriminatory OSS, no practical and efficient unbundled network elements,
and pricing that discriminates in favor of the RBOCs' own retail operations. To
mitigate discrimination, the petition recommends that the RBOCs be given the
option to separate into wholesale and retail units. The wholesale units would
be required to provide comparable service to new local service providers, such
as the Company, and the RBOCs' retail operations. In return, the RBOC would
benefit from a rebuttable presumption in favor of granting in-region inter-LATA
authority. On January 26, 1998, the FCC issued a public notice seeking comments
on LCI's Petition. In February 1998, the Illinois Commerce Commission initiated
a notice of inquiry into LCI's proposal, and the Oklahoma Corporation
Commission opened a notice of inquiry into the status of local telephone
exchange competition and asked for input on the issue of structural separation.
The petition is currently pending.

Impact of Regulatory Issues. The regulatory actions discussed above could
impact the Company's pricing and cost structure by changing access, per-line
and pay phone charges or other costs, or by generally increasing competition.
The Company is unable to predict what impact these changes will have on its
pricing, revenue growth or gross margin.

EMPLOYEES

At December 31, 1997, the Company had more than 3,900 full-time employees,
none of whom were subject to any collective bargaining agreement.

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ITEM 2. PROPERTIES

Currently, the Company's corporate headquarters are located in McLean,
Virginia, where it leases space for general and administrative functions as
well as a sales office under a lease expiring in March 2004. During 1996, the
Company entered into an operating lease agreement for the rental of a new
corporate headquarter being developed in Arlington, Virginia. This agreement
has a three-year lease term with two options to renew for one year each. The
property is owned by an unrelated entity that is leasing the facility to the
Company. The Company plans to occupy the building in June 1998. In addition,
the Company leases office space in Dublin, Ohio, a suburb of Columbus, for
certain Network operations as well as administrative and marketing offices.
Office space is leased in three buildings: two under capitalized leases
expiring in 2005 and 2012; and an operating lease, which expires in 2001. The
Company leases more than 80 properties for its offices, switching and other
facilities. Properties leased by the Company for general office space are
generally available at fair market rentals in all of the locations in which the
Company operates. The Company's growth and ability to operate have not been
constrained by a lack of suitable office space.

ITEM 3. LEGAL PROCEEDINGS

As of the date of this Form 10-K, LCI is aware of three lawsuits that have
been filed in the Court of Chancery of the State of Delaware relating to the
Merger. The first suit, Shapiro v. [Mc]Connell, was filed on March 9, 1998 and
names LCI, certain of its directors and Qwest as defendants. The second suit,
Isquith v. LCI International, Inc., was filed on March 10, 1998 and names LCI
and certain of its directors as defendants. The third suit, Rehm v. Thompson,
was filed on March 12, 1998 and names LCI, certain of its directors, and Qwest
as defendants. Each suit was brought by a purported stockholder of LCI,
individually and allegedly as a class action on behalf of all stockholders of
LCI. Generally these suits allege breach of fiduciary duty by the Board of
Directors of LCI in connection with the Merger Agreement. They seek preliminary
and permanent injunctive relief prohibiting the consummation of the Merger,
unspecified damages and other relief. LCI believes that these suits are without
merit and intends to defend them vigorously.

The Company has been named as a defendant in various litigation matters
incident to the character of its business. Management intends to vigorously
defend these outstanding claims. The Company believes it has adequate accrued
loss contingencies and that current or threatened litigation matters will not
have a material adverse impact on the Company's results of operations or
financial condition.

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

None.

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EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth the executive officers of LCI as of March 1,
1998:

Name Age Position
- ---- --- --------

H. Brian Thompson 59 Chairman of the Board of Directors and Chief Executive Officer
Joseph A. Lawrence 48 Executive Vice President and Chief Financial Officer
Marshall W. Hanno 52 Senior Vice President - Commercial Segment
Lawrence J. Bouman 51 Senior Vice President - Engineering, Operations and Technology
Roy N. Gamse 52 Senior Vice President - Business Marketing
Anne K. Bingaman 54 Senior Vice President - Local Telecommunications Division
John G. Musci 41 Senior Vice President - Wholesale Segment
John C. Taylor 40 Senior Vice President - Consumer Segment

Mr. Thompson has been Chairman of the Board of Directors and Chief
Executive Officer of LCI and its subsidiaries since July 1991. Mr. Thompson
previously served as Executive Vice President of MCI Communications Corporation
and its affiliates (collectively referred to as "MCI") where he was responsible
for all eight of MCI's operating divisions and held various other senior
executive positions from 1981 to 1991. Mr. Thompson is a director of Bell
Canada International Inc., Microdyne Corporation, Golden Books Family
Entertainment, Inc. and Comcast UK Cable Partners Limited. He is a member of
the Listed Company Advisory Committee to the New York Stock Exchange (NYSE)
Board of Directors.

Mr. Lawrence was named Executive Vice President of LCI in 1997, and has
served as the Company's Chief Financial Officer of LCI since October 1993.
From January 1985 through October 1993, Mr. Lawrence held several executive
positions at MCI, including Senior Vice President-Finance and Vice President
Finance and Administration for the Consumer Division and Vice President Finance
for the Mid-Atlantic Division. Mr. Lawrence is a director of Journal Register
Company.

Mr. Hanno was named to Senior Vice President - Commercial Segment in
January 1997. Since July 1991, Mr. Hanno held the positions of Senior Vice
President - Sales and Vice President of Sales. From 1987 to July 1991, Mr.
Hanno was Vice President of Sales of MCI and prior thereto was Vice President
of Sales and Marketing with Allnet Communications.

Mr. Bouman has been Senior Vice President - Engineering, Operations and
Technology of LCI and its subsidiaries since October 1995. From October 1990
through October 1995, Mr. Bowman held several executive positions at MCI,
including Senior Vice President of Network Operations, Senior Vice President of
Network Engineering and Senior Vice President of Planning and Program
Management.

Mr. Gamse has been Senior Vice President - Business Marketing of LCI since
March 1996. From 1982 to 1993, Mr. Gamse held several positions at MCI,
including Senior Vice President of Marketing for Consumer Markets and Senior
Vice President of Customer Service. In addition, Mr. Gamse was previously a
policy advisor at the U.S. Environmental Protection Agency.

Ms. Bingaman was appointed Senior Vice President - Local Telecommunications
Division in January 1997. From 1993 to 1996, Ms. Bingaman was Assistant
Attorney General of the antitrust division at the U.S. Department of Justice
and Chief of the department's Antitrust Division.

Mr. Musci was named Senior Vice President - Wholesale segment in 1997. From
1985 to 1997, Mr. Musci has held several executive positions at LCI in sales
and marketing. Prior to joining LCI, Mr. Musci held marketing and sales
positions with AT&T Information Systems and Ohio Bell Telephone.

Mr. Taylor was named Senior Vice President - Consumer Segment in 1997,
after serving as Vice President of Corporate Development and Investor Relations
at the Company since 1995. Prior to joining LCI, Mr. Taylor spent 12 years at
MCI in a variety of key positions in financial and strategic planning, business
development, sales channel development and partner marketing.

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PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREOWNER MATTERS

LCI's Common Stock trades on the New York Stock Exchange under the symbol
"LCI". The following table sets forth, on a per share basis, the range of the
high and low closing New York Stock Exchange composite sale price information
of shares of the Common Stock.

Market Price Per Share
1997 1996
------------------------------------------ ----------------------------------------
End of End of
High Low Period High Low Period
--------- ---------- --------- -------- -------- ---------

First Quarter $ 23 $ 16 3/4 $ 16 3/4 $ 26 1/8 $ 21 1/2 $ 24 3/4
Second Quarter 24 1/4 15 7/8 22 32 1/2 23 31 3/8
Third Quarter 26 5/8 19 7/8 26 5/8 36 3/4 27 31 3/4
Fourth Quarter 31 7/16 24 15/16 30 3/4 35 1/8 19 1/8 21 5/8

At March 2, 1998 there were 96,814,799 shares of Common Stock outstanding
held by 2,575 shareowners of record.

LCI has not declared or paid any cash dividends on its Common Stock since
its inception and does not currently anticipate paying any cash dividends on
its Common Stock in the foreseeable future. LCI is a holding company which
conducts substantially all of its operations through its subsidiaries. The
Company is restricted from paying dividends under the terms of certain of its
financing agreements.

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ITEM 6. SELECTED FINANCIAL DATA

The selected financial data presented below are derived from the Consolidated
Financial Statements of the Company. All periods presented have been restated
to reflect LCI International, Inc. and USLD Communications Corp. (USLD) as a
combined entity. In addition, 1993 through 1996 reflect the spin-off of Billing
Information Concept Corp., a former subsidiary of USLD, as discontinued
operations. (See the Notes to Consolidated Financial Statements.) The Company
has never declared cash dividends on its Common Stock, nor does it anticipate
doing so in the foreseeable future.

(In millions, except revenue per MOU and
earnings per common share) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------

STATEMENT OF OPERATIONS DATA
Revenues $ 1,642 $ 1,304 $ 824 $ 590 $ 431
Operating expenses 1,544 1,174 743 540 412
Operating income 98 130 81 50 19
Income (loss) from continuing operations 31 63 49 5 (4)
Net income (loss) 31 74 64 16 (8)
Income (loss) on common stock $ 31 $ 71 $ 58 $ 10 $ (10)

OPERATING DATA
Minutes of use (MOUs) 12,903 9,567 5,675 3,907 2,589
Revenue per MOU $ 0.119 $ 0.127 $ 0.132 $ 0.135 $ 0.148
EBITDA(A) $ 194 $ 205 $ 135 $ 95 $ 58

BALANCE SHEET DATA
Total assets $ 1,354 $ 1,053 $ 897 $ 574 $ 443
Long-term debt and capital lease obligations $ 413 $ 252 $ 291 $ 163 $ 103
Shareowners' equity $ 552 $ 490 $ 416 $ 254 $ 234

EARNINGS PER COMMON SHARE(B)
Income (loss) per share from
continuing operations $ 0.32 $ 0.64 $ 0.53 $ (0.01) $ (0.27)
Income (loss) per share $ 0.32 $ 0.75 $ 0.69 $ 0.13 $ (0.16)

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES(B) 99 99 92 76 55

(A) EBITDA represents earnings before interest, income taxes, depreciation
and amortization.

(B) Earnings per common share and weighted average number of common shares
are presented on a diluted basis.

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

INTRODUCTION

LCI International, Inc., together with its subsidiaries (LCI or the Company),
is a facilities-based, telecommunications carrier that provides a broad range
of voice and data telecommunications services in domestic and international
markets: commercial, wholesale, residential/small business and local. The
Company provides service to its customers through owned and leased digital
fiber-optic facilities. Collectively, these facilities constitute the Company's
network (the Network).

The local telecommunications industry is approximately $95 billion and is
dominated by the regional Bell operating companies (RBOCs) and GTE
Communications Corporation (GTE). Previously, the RBOCs and GTE had the
authority to provide interLATA (local access transport area) long-distance
service outside their service regions. In February 1996, legislation
established procedures whereby the RBOCs can apply for authority to provide
interLATA long-distance service inside their respective service regions.
Similarly, the certain requirements governing GTE's provision of in-region
long-distance service were removed by the legislation. The nature of
competition in this combined industry is expected to change significantly as
legislative, regulatory and judicial activities progress. The Company intends
to provide combined local and long-distance services to compete in what is
expected to be a combined $150 billion market.

On December 22, 1997, the Company acquired USLD Communications Corp. (USLD), in
a stock-for-stock transaction that was accounted for as a pooling of interests.
USLD provided long-distance telecommunications services principally to business
customers in the Southwest, Southeast, Pacific Northwest and Western regions of
the United States. In addition, USLD offered operator services for the
hospitality and payphone industries, as well as local telephone service in
selected markets. The Company exchanged approximately 12 million shares of
Common Stock for all of the outstanding shares of USLD common stock. The
Company's Consolidated Financial Statements have been restated to include the
results for USLD, as though the companies had always been a combined entity.

While the revenue of long-distance telecommunications industry providers has
grown between 5% and 8% annually in recent years, the Company has experienced
26%, 58% and 40% growth in revenues in 1997, 1996 and 1995, respectively, as
well as 35%, 69% and 45% growth in the volume of switched minutes of use (MOUs)
during the same periods. The Company's residential/small business revenues grew
approximately 30%, 125% and 170% in 1997, 1996 and 1995, respectively, while
revenues from the Company's business segment exhibited growth rates of
approximately 25%, 42% and 26% in each of the same periods. The Company intends
to continue expanding its service lines and its sales, marketing and
promotional efforts across all market segments.

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INDUSTRY ENVIRONMENT

LEGISLATIVE MATTERS
Telecommunications Act of 1996. In February 1996, the Telecommunications Act of
1996 (the Act) was enacted to increase competition in the long-distance and
local telecommunications industries. The legislation is intended to open
competition in the local services market and, at the same time, contains
provisions intended to protect consumers and businesses from unfair competition
by incumbent local exchange carriers (LECs), including the RBOCs. The Act
allows RBOCs to provide interLATA long-distance service to consumers inside
their local service territories only after meeting certain competitive
criteria, including a list of 14 specific "competitive checklist" requirements
for opening the local market to competition.

The Act provides a framework for the Company and other long-distance carriers
to compete with LECs by reselling local telephone service, leasing unbundled
elements of the incumbent LEC networks or building new local service
facilities. The Company has signed local service resale agreements with
Ameritech, BellSouth and Bell Atlantic, and is currently in formal
interconnection negotiations with several other LECs. LCI intends to vigorously
compete in the local service market and is currently providing local service to
customers on a bundled resale basis. The Company is also evaluating providing
local service through the recombination of unbundled network elements; however,
a recent court ruling (see Local Competition Order, below) does not require the
LECs to recombine the various network elements on behalf of local service
competitors. The Company could also decide in the future to build, or otherwise
acquire, local service facilities or use a competitive LEC other than incumbent
LECs (such as the RBOCs or GTE) to provide local service. The Company's
decision on the timing and method of providing local service is dependent on
the economic viability and profitability of its options, the resolution of
various operational issues and the outcome of several pending regulatory and
judicial proceedings.

In July 1997, SBC Communications Inc. (SBC) and an RBOC local exchange carrier
subsidiary filed a lawsuit in the United States District Court for the Northern
District of Texas (the District Court) challenging, on constitutional grounds,
the restrictions contained in the Act applicable only to RBOCs. The plaintiffs
sought both a declaratory judgment and an injunction against the enforcement of
the challenged provisions. On December 31, 1997, the District Court ruled that
the RBOC-specific provisions of the Act were an unconstitutional bill of
attainder. The Federal Communications Commission (FCC), AT&T, MCI and Sprint
have appealed this ruling to the United States Court of Appeals for the Fifth
Circuit and requested a stay of this ruling pending the appeal. If the ruling
is ultimately upheld, the RBOCs may be able to provide long-distance services
within their local service territories much sooner than expected and without
first undergoing the kind of detailed review by state regulators and the FCC
that is currently required under the Act. If this decision is upheld, the
Company would expect to see a significant increase in competition in
long-distance services which could result in the loss of market share and/or a
decrease in operating margins. The Company is unable to predict the outcome of
the pending appeal.

REGULATORY MATTERS
In order to implement the Act, the FCC is required to undertake a variety of
regulatory actions that impact competition in the telecommunications industry.
Many of the actions taken by the FCC to implement the Act -as well as the Act
itself - face court challenges. Certain of these regulatory actions are
described below.

Local Competition Order. In August 1996, the FCC adopted a local competition
order (the Local Competition Order) which established a minimum national
framework related to the manner in which companies wanting to provide local
service could interconnect with the LECs. The Local Competition Order covered
several important interconnection issues including the purchase of unbundled
local network elements, resale discounts and arbitration procedures between
LECs and interexchange carriers.

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17
overturned the FCC's rules pertaining to the unbundled network elements
platform. The Eighth Circuit concluded that the FCC's rules prohibiting a LEC
from separating network elements that are currently combined in the incumbent
LEC's network are contrary to the Act. The FCC and others filed a writ of
certiorari asking the United States Supreme Court to accept the case and
consider the merits of various appeals. On January 26, 1998, the Supreme Court
announced that it will hear the appeal from the Eighth Circuit.

The Eighth Circuit's decisions substantially limit the FCC's jurisdiction and
expand the jurisdiction of state regulators to establish and enforce rules
governing the development of local competition. If the Eighth Circuit's
decisions are upheld, it is likely that over time the rules governing local
competition will vary substantially from state to state. If a patchwork of
state regulations were to develop, it could make competitive entry in some
markets difficult and expensive and could increase the costs of regulatory
compliance associated with local entry. If the Supreme Court were to uphold the
Eighth Circuit ruling, it could negatively impact the Company's ability to
offer competitive local service and increase the costs associated with local
service. The Company cannot predict the outcome of the current appeal to the
Supreme Court.

RBOC Applications to Provide In-Region InterLATA Long-Distance. Throughout
1997, various RBOCs applied to the FCC for authority to provide in-region
interLATA service. The FCC has yet to approve any in-region application for
various reasons, including that the RBOCs had not demonstrated compliance with
the competitive checklist or the other safeguards of the Act. Several appeals
by RBOCs and one in-region application to the FCC are still pending. The
Company is unable to predict when one or more RBOCs may be actively competing
in the long-distance market, but expects that when able to compete, RBOCs will
gain a significant market share of the industry.

Access Charge Reform. In May 1997, the FCC issued an order designed to reform
the system of interstate access charge expenses levied by LECs on long-distance
service carriers. In the May order, the FCC decided to rely on a combination of
prescriptive rate reductions and increased competition in interstate access to
bring interstate access charges closer to actual economic cost. The FCC has
stated that it will issue a further order designed to permit incumbent LECs to
lower interstate access charges in response to competition. The manner in which
the FCC implements its approach to lowering access charge levels will have a
material effect on the prices the Company and its long-distance competitors pay
for originating and terminating interstate traffic. Various parties have filed
petitions for reconsideration of the May order with the FCC. Some parties,
including the Company, have appealed the May order to the Eighth Circuit, which
heard oral arguments on January 15, 1998. The Company cannot predict when the
Eighth Circuit will issue a ruling on the Company's appeal. Although the
ultimate outcome of the FCC and resulting court actions are uncertain, the
Company does expect lower access charges in 1998. This decrease, however, is
expected to be offset by increases in customer line charges and charges for the
universal service fund.

Payphone Compensation. In September 1996, the FCC adopted rules to implement
the Act's requirement to fairly compensate payphone service providers. This
order included a specific fee to be paid to each payphone service provider by
long-distance carriers and intraLATA toll providers (including LECs) on all
"dial-around" calls, including debit card and calling card calls. In orders
released in July and September 1997, the United States Court of Appeals for the
D.C. Circuit (the D.C. Circuit) vacated and remanded some of the FCC rules. On
October 9, 1997, the FCC issued an order addressing the default per-call
compensation rate in light of the D.C. Circuit's decision, and established a
default per-call rate of $0.284 for a two-year period. The FCC's action will
increase the Company's costs to carry "dial-around" calls that originate from
payphones. This decision has been appealed by several parties. As of the fourth
quarter of 1997, the Company intends to charge its customers for the expected
cost of these calls. In light of this appeal and any court action in these
proceedings, the Company is unable to predict the ultimate impact this decision
will have on the Company.

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In its petition, LCI proposed that an industry group consisting of local and
long-distance carriers, trade associations and regulators be given
approximately nine weeks to establish measurement categories, measurement
formulas and default performance intervals for several OSS categories. In June
1997, the FCC issued a public notice requesting comments on LCI's petition.
Numerous parties, including the California Public Service Commission, the
Wisconsin Public Service Commission and the National Association of Regulatory
Utilities Commissioners, have filed comments in support of LCI's petition. This
petition is currently pending.

Local Service. The Company is seeking state approval to resell local services
in various states, which would enable the Company to provide combined local and
long-distance services to existing and prospective customers. As of December
31, 1997, the Company has received approval to resell local service in 37
states and the District of Columbia, and has applications pending to resell
local service in another nine states. The Company is currently reselling local
telecommunications service in more than 30 markets.

To date, the Company's efforts to provide local resale service have not been
profitable. The Company continues to identify and evaluate alternatives to
reselling incumbent LEC service, such as purchasing service from competitive
access providers and investments in local facilities-based providers. On
January 22, 1998, LCI filed a petition with the FCC that identified three
critical barriers to local competition, including the absence of a
nondiscriminatory OSS, no practical and efficient unbundled network elements,
and pricing that discriminates in favor of the RBOCs' own retail operations. To
mitigate discrimination, the petition recommends that the RBOCs be given the
option to separate into wholesale and retail units. The wholesale units would
be required to provide comparable service to new local service providers, such
as the Company, and the RBOCs' retail operations. In return, the RBOC would
benefit from a rebuttable presumption in favor of granting in-region interLATA
authority.

Impact of Regulatory Issues. The regulatory actions discussed above could
impact the Company's pricing and cost structure by changing access, per-line
and pay phone charges, or by generally increasing competition. The Company is
unable to predict what impact these changes will have on its pricing, revenue
growth or gross margin.

INDUSTRY STRUCTURE

The long-distance telecommunications market is highly competitive. The
principal competitive factors affecting the Company's market share are pricing,
regulatory and judicial developments (as described above), customer service and
diversity of services and features. The Act is expected to change the nature of
the industry by allowing carriers other than incumbent LECs to provide local
service, while permitting RBOCs to provide interLATA long-distance services. As
RBOCs are allowed into the long-distance market, the Company expects
competition within the industry to increase in both the long-distance and local
markets.

Several of the Company's competitors are larger and have greater financial,
technical and marketing resources. In addition to the largest
telecommunications companies, (AT&T, MCI and Sprint, or the Big Three), the
Company also competes with hundreds of other long-distance carriers, as well as
LECs, in various types of telecommunications services. The Company's principal
pricing strategy is to offer a simple, flat-rate pricing structure with rates
competitive with those of the Big Three. Although LCI is prepared to respond to
competitive offerings from other carriers, the Company continues to believe
that its Simple, Fair and Inexpensivesm marketing and service pricing approach
is competitive in retaining existing customers, as well as in obtaining new
customers. In 1997, the Company introduced Exact Billingsm, a differentiator
that neither the Big Three nor any other nationwide long-distance carrier
offers, giving LCI a competitive advantage in some markets. The Company
believes that the nature of competition will continue to change with
consolidation in the industry. The Company's ability to compete effectively
will depend on maintaining exceptional customer service and high quality,
market-responsive services at prices generally equal to or below those charged
by its major competitors.

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and SBC/PacTel mergers have received federal and state regulatory approvals. At
this time the Company is unable to predict the impact of these mergers, if any,
on the Company or competition within the industry as a whole.

REVIEW OF OPERATIONS

LCI's revenues primarily consist of long-distance switched, data and private
line revenues, local service revenues and operator service revenues. The
Company's switched revenues are a function of switched MOUs and rates charged
per MOU, which in turn are based upon the Company's customer and service mix.
Private line revenues are a function of fixed rates that do not vary with
usage. Operator service revenues are based on a percentage of call revenues
for operator assistance and/or alternative billing option calls. The Company's
cost of services consists primarily of expenses incurred for origination and
termination of calls through LECs and for transmission over the Company's
Network or other long-distance carriers' networks. The cost of operator
services also includes compensation to payphone owners and the cost of
operators and direct support systems.

LCI's Consolidated Financial Statements have been restated to include the
results of operations for USLD as though the companies had always been a
combined entity. In 1996, USLD spun off Billing Information Concept Corp.
(Billing) as a separate public company. The Company's results of operations
have been restated to reflect the results of Billing as discontinued operations
in accordance with Accounting Principles Board Opinion No. 30 (APB 30). For the
comparative periods presented, the Company's results of operations include the
acquisitions of Teledial America, Inc. (Teledial America) and ATS Network
Communications, Inc. (ATS) from January 1, 1996, and the acquisition of
Corporate Telemanagement Group, Inc. (CTG) from September 1, 1995.

REVENUES
In 1997, total revenues increased 26% to $1.6 billion, compared to $1.3 billion
in 1996. Total revenues in 1996 increased 58% from $824 million in 1995.
Revenues for all periods presented are reduced by estimated allowances for
credits and uncollectible accounts (sales allowance).

Revenues from business customers increased approximately 25% during 1997, as
compared to approximately 42% and 26% during 1996 and 1995, respectively.
Business revenues represented in excess of 70% of the Company's total revenues
in 1997. The decline in business revenue growth rates are the result of current
competitive pricing and acquisition revenue in 1996 and 1995. Residential/small
business revenues increased approximately 30% in 1997, compared to
approximately 125% in 1996 and 170% in 1995, and represented nearly 30% of
total revenues for 1997. Growth in international service revenues across all
revenue service lines was more than 80% in 1997, compared to more than 100% in
both 1996 and 1995. The decline in residential/small business and international
revenue growth rates reflect both competitive pricing and the Company's larger
base of customers and revenue. The Company's growth rates remain substantially
higher than the general industry growth rates.

The Company experienced a 6% decrease year-over-year in revenue per MOU for
1997, compared to a 4% and 2% decrease in 1996 and 1995, respectively. Revenue
per MOU is affected by several factors, including competitive pricing and the
mix of services, market segments and regions. The growth in business and
international service volumes, as measured in MOUs, exceeded the growth in
revenue due to competitive pricing pressures, changes in the mix of services
and changes in the mix of international country traffic. The Company's growth
in various segments, which have different rate structures and generate
different gross margins, has changed its revenue mix and consequently impacted
average revenue per MOU.

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channels and, as a result, channels other than ACN currently are generating
more than 70% of new residential/small business sales.

GROSS MARGIN
The Company's gross margin increased 25% to $656 million in 1997 from $526
million in 1996. Gross margin in 1996 increased 60% from $328 million in 1995.
The following table provides information regarding gross margin:

(In millions) 1997 1996 1995
-----------------------------------------------------------------

Revenues $ 1,642 $ 1,304 $ 824
Cost of services 986 778 496
-----------------------------------------------------------------
Gross margin $ 656 $ 526 $ 328
-----------------------------------------------------------------
Gross margin % 40.0% 40.3% 39.8%
-----------------------------------------------------------------

Gross margin as a percentage of revenue remained relatively flat in 1997,
reflecting several market conditions. The Company experienced a shift in the
revenue mix to higher volume customers with a lower gross margin per MOU, and
continued competitive pricing pressures existed in all market segments. The
domestic market has seen a significant rate decline due to forward pricing, or
pricing reductions that anticipated access charge reductions. Access charge
reform lowered access charges on January 1, 1998; however, this is expected to
be offset by higher customer line charges and increased costs for universal
service funding. The Company expects that the impact of access reform will not
significantly impact the cost of providing service.

The Company continues to evaluate strategies for reducing its cost of services.
These strategies include using its owned fiber-optic capacity and gaining
access to fiber-optic and broadband capacity through contract negotiations or
other arrangements with carriers. The Company's substantial fiber expansion
will continue into early 1998 and will temporarily result in redundant
facilities and increased costs while traffic is migrated from current leased
facilities to the new owned facilities. In addition, while awaiting delivery of
the fiber in 1998, the Company is continuing the current Network expansion on a
temporary leased basis. The increased cost of these leased facilities has
pressured gross margin; however, after delivery of the fiber, these temporary
leased facilities will no longer be needed in the Network. The transition from
the current and incremental leased facilities to the Company's owned facilities
will occur throughout 1998.

Expansion of the fiber capacity will require only minimal incremental costs. As
a result, as the Company's volume grows, costs per MOU are expected to decline.
In addition, the Network expansion allows the Company to begin to compete more
aggressively and to accelerate the growth of data and private line services.
The costs associated with the growth of these services are primarily embedded
in the fixed cost of the owned Network and should allow the Company to improve
overall gross margins. The historical results as restated do not reflect
synergies the Company expects to realize from the transition of USLD traffic to
LCI's owned Network or the significant cost reductions from the fiber
expansion. The expected owned Network synergies will occur primarily in the
second half of 1998 and should lower cost of services.

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OPERATING EXPENSES AND OPERATING INCOME

(In millions) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------

Gross margin $ 656 $ 526 $ 328
Selling, general and administrative expenses 408 305 193
Merger charges 45 -- --
Restructuring charges 9 16 --
Depreciation and amortization 96 75 54
- ---------------------------------------------------------------------------------------------------------
Operating income $ 98 $ 130 $ 81
- ---------------------------------------------------------------------------------------------------------

As a percent of revenue:
Gross margin 40.0% 40.3% 39.8%
Selling, general and administrative expenses 24.8% 23.4% 23.4%
Merger charges 2.7% -- --
Restructuring charges 0.6% 1.2% --
Depreciation and amortization 5.8% 5.8% 6.6%
- ---------------------------------------------------------------------------------------------------------
Operating income 6.0% 10.0% 9.8%
- ---------------------------------------------------------------------------------------------------------

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (SG&A) expenses increased 34% to $408 million in 1997, and
increased 58% to $305 million in 1996 from $193 million in 1995. As a
percentage of revenues, SG&A expenses were 24.8% in 1997 and 23.4% for both
1996 and 1995. SG&A expenses increased in 1997 due to several one-time charges,
which are discussed below.

The Company's SG&A expenses are affected primarily by payroll and commissions.
Payroll expenses increased 28%, 46% and 34% in 1997, 1996 and 1995,
respectively. Payroll expenses represented approximately 7% of revenue in each
of the years 1997, 1996 and 1995. In 1996 and 1995, the Company experienced
increases in the number of employees from the Company's acquisitions and the
expansion of the sales and customer support infrastructure. For each of the
years 1997, 1996 and 1995, commission expenses represented approximately 6% of
revenue and grew in proportion to revenue growth for the same periods.
Residential/small business revenue related to third-party sales agents was the
primary driver of the dollar increase in commission expense. The costs incurred
for third-party commissions primarily replace other variable marketing and
selling expenses for this revenue segment.

Included in SG&A for 1997 was $35 million of costs that the Company does not
expect to continue. This primarily included strengthening the allowance for
doubtful accounts for the combined customer base of LCI and USLD through a $21
million charge. This charge was required as a result of several large customers
that either filed bankruptcy or were identified at risk for collection during
the fourth quarter of 1997; reserve strengthening for RBOC uncollectible rates;
and increased credits associated with the Company's conversion to its in-house
billing system for residential/small business customers. The one-time charges
also included approximately $6 million of costs for the write-off of assets
associated with the $300 million investment in the Network as the Company moves
from a primarily leased to a primarily owned network. The remaining charges
were for the write-off of certain assets, and one-time charges related to
salary and commissions expenses and other miscellaneous items.

The Company anticipates an incremental increase in SG&A expenses with the
continued expansion of its geographic sales presence, and expansion in the data
and local services markets. The Company's efforts to resell services in the
local services market have not been profitable due to pricing discrimination
and other difficulties with the LECs, as well as the uncertain regulatory and
judicial proceedings governing the provision of local service. The Company
expects continued increases in SG&A expenses to correspond with growth in the
residential/small business segment, which incurs higher proportional costs, but
also provides a higher gross margin than other segments. The Company continues
to expand its growth geographically, in market segments and services, and
actively manages the Company's investment in and expected profitability of this
growth. SG&A

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expenses should be positively impacted by efficiencies resulting from the
integration of USLD's operations, which should be realized in the second half
of 1998.

MERGER CHARGE. During 1997, the Company recorded a charge of $45 million in
connection with the merger of USLD. The merger charge included $7 million for
direct transaction costs, including fees for investment bank and other
professional fees, $31 million for the elimination of redundant facilities and
the write-off of assets, and $7 million for employee severance and termination
costs.

RESTRUCTURING CHARGE. Restructuring costs of $9 million were recorded in 1997,
which included $8 million for the move to a new corporate headquarters and for
employee severance costs, and $1 million for the resignation of USLD's former
chairman of the board of directors.

During 1996, USLD recorded a $13 million charge for the spin-off of Billing and
$3 million for restructuring costs associated with the consolidation of support
functions and the write-off of certain assets.

DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense
(D&A) for 1997, 1996 and 1995 increased 28%, 39% and 20% year-over-year,
respectively. The increase reflects the investments made in infrastructure for
sales, customer service and other service delivery systems in support of the
Company's growth in revenues and MOUs, as well as additional amortization
expenses from acquisitions. D&A as a percentage of revenues was consistent at
5.8% in both 1997 and 1996, which decreased from 6.6% in 1995. The Company's
revenue growth has exceeded the growth in the cost of additional Network and
other capital assets, due to LCI's ability to take advantage of improved
technology with higher capacity at lower costs. An increase in D&A for the
additional Network facilities is expected beginning in the first quarter of
1998 as the Company moves from a primarily leased network to a primarily owned
network. The increase will be offset by lower cost of services paid to
third-party providers for leased facilities.

OPERATING INCOME. Operating income decreased 25% to $98 million in 1997 and
increased 60% to $130 million in 1996 from $81 million in 1995. As a percentage
of revenues, operating income decreased to 6.0% for the year ended December 31,
1997, from approximately 10% for each of the years ended December 31, 1996 and
1995. The merger costs, restructuring costs and the one-time items in SG&A had
an adverse effect on operating income as a percentage of revenue. In addition,
the decline in operating income as a percentage of revenue reflects the
competitive pressure on gross margin, the higher leased facilities costs for
USLD off-Network traffic and the increase in SG&A.

INTEREST AND OTHER EXPENSE, NET
Interest and other expense, net of capitalized interest, increased to $36
million in 1997 from $29 million in 1996 and $16 million in 1995. The $350
million senior debt securities (the Notes) issued in June 1997, which carry a
higher interest rate than previously outstanding short-term debt, resulted in
increased interest expense for more than half of the year. Interest expense is
expected to increase due to the higher fixed rate of interest on the Notes
compared to LCI's floating short-term rates. However, the issuance provides
interest rate stability and provides additional availability under the
Company's other credit facilities. Interest and other expense in 1997 includes
a $5 million write-off of deferred financing fees associated with prior credit
facilities and $5 million and $2 million in 1997 and 1996, respectively, for
the costs of the accounts receivable securitization program (Securitization
Program).

The increases in interest and other expense, net in 1996 and 1995 were the
result of higher debt levels to fund the Company's acquisitions and capital
expenditures. Interest and other expense, net in 1996 included a gain of
approximately $2 million on the sale of a wholly owned subsidiary, which
provided service to non-strategic geographic locations, and in 1995 included a
gain of approximately $2 million related to the resolution of an investment in
STN Incorporated (STN).

INCOME TAXES
Income tax expense was $31 million, $38 million and $16 million in 1997, 1996
and 1995, respectively. In 1997, the effective tax rate increased to 50% as a
result of non-deductible costs incurred in connection with the merger

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of USLD. However, the Company believes that its recurring effective tax rate is
between 39% and 40%. Increased income tax expense resulted from an increase in
the effective tax rate and the increase in income before income taxes for 1996
as compared to 1995. The effective income tax rate was lower than the statutory
rate in 1996 and 1995, primarily due to the Company's expected use of available
net operating losses (NOLs). Previously generated NOLs for financial reporting
purposes were fully realized as of December 31, 1996.

DISCONTINUED OPERATIONS
In August 1996, USLD completed the spin-off of Billing, its billing
clearinghouse and information management services business. The spin-off was
accounted for as discontinued operations and, accordingly, $11 million and $15
million were recorded, net of income taxes of $7 million and $9 million, in
1996 and 1995, respectively.

PREFERRED DIVIDENDS
Preferred dividends were $3 million and $6 million for 1996 and 1995,
respectively, as a result of the dividend requirements on the Company's
previously outstanding 5% Cumulative Convertible Exchangeable Preferred Stock
(Convertible Preferred Stock). During 1996, nearly all of the 4.6 million
shares of Convertible Preferred Stock outstanding were converted into shares of
the Company's Common Stock, par value $.01 per share (Common Stock).

NET INCOME AND EARNINGS PER COMMON SHARE
Net income decreased to $31 million from $74 million in 1996 and $64 million in
1995. Income on common stock was $31 million, $71 million and $58 million for
1997, 1996 and 1995, respectively.

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share," for the fiscal year ending December 31, 1997, and
accordingly, all periods have been restated to calculate basic and diluted
earnings per share. Basic earnings per share were calculated as income
available to common shareowners divided by the weighted average number of
common shares outstanding. For the years ended December 31, 1996 and 1995, the
diluted weighted average number of common shares included the assumed
conversion of any Convertible Preferred Stock then outstanding at any time
during the period into 12 million shares of Common Stock. For all years
presented, Common Stock equivalents were reflected in the diluted weighted
average number of common shares using the treasury stock method.

LIQUIDITY AND CAPITAL RESOURCES

LCI International, Inc. is a holding company and conducts its operations
through its direct and indirect wholly owned subsidiaries. LCI SPC I, Inc.
(SPC) is a wholly owned subsidiary of LCI and facilitates the Securitization
Program. Except in limited circumstances, SPC is subject to certain contractual
prohibitions concerning the payment of dividends and the making of loans and
advances to LCI. There are, however, no restrictions on the movement of cash
within the remainder of the consolidated group. Therefore, the Company's
discussion of its liquidity is based on the consolidated group.

CASH FLOWS - OPERATING ACTIVITIES
The Company provided $187 million of cash from operations, which includes the
use of $53 million for net securitization activity for the year ended December
31, 1997. Cash provided from operations in 1997, excluding the proceeds from
the Securitization Program, was $240 million, compared to $196 million and $54
million for 1996 and 1995, respectively. The increases in 1997 and 1996 were
due primarily to improved management of working capital and stronger cash
collections.

CASH FLOWS - DISCONTINUED OPERATIONS
In connection with USLD's spin-off of Billing, $15 million and $8 million for
the years ended December 31, 1996 and 1995, respectively, were provided by
discontinued operations and, accordingly, were separated from other cash flow
activities.

23
24
CASH FLOWS - INVESTING ACTIVITIES
The Company has supported its growth strategy with both capital additions and
acquisitions. In 1997, 1996 and 1995, the Company paid $321 million, $156
million and $106 million, respectively, for capital expenditures to acquire
additional switching, transmission and distribution capacity, as well as to
develop information systems support. This includes approximately $68 million
for the Company's expansion of its fiber-optic Network made during 1997. The
Company's acquisitions resulted in the use of $124 million in cash in 1996.

CASH FLOWS - FINANCING ACTIVITIES
In 1997, financing activities provided a net $139 million, primarily from the
proceeds from the issuance of the $350 million Notes, offset by debt repayments
and proceeds from stock issuances. During 1996, the Company used a net $31
million, which included net payments of $42 million under its debt agreements,
to fund its acquisitions and capital expenditures as discussed in Investing
Activities, above. In 1995, financing activities provided a net $123 million,
primarily from bank borrowings.

CAPITAL RESOURCES
The Company has numerous sources for capital, including credit facilities, debt
securities, the Securitization Program and operations. The Company believes
these sources provide adequate capital to fund operations.

The Company has two revolving credit facilities, aggregating $750 million
(Credit Facility) with a syndicate of banks that allow the Company to borrow
funds on a floating-rate basis. The Credit Facility has provisions to be
increased to $1 billion after certain requirements are met. As a result, the
Company uses its available cash to reduce the balance of its borrowings and
usually maintains no cash on hand. As of December 31, 1997, there was no
outstanding balance on the Credit Facility and the Company was in compliance
with all financial and negative covenants of the facility.

The Company has three separate discretionary line of credit agreements (Lines
of Credit) with commercial banks, for a total of $75 million. The Lines of
Credit provide flexible short-term borrowing at competitive rates dependent
upon a market indicator. As of December 31, 1997, there was $25 million
outstanding under the Lines of Credit.

The Company maintains a Securitization Program to sell a percentage ownership
interest in a defined pool of the Company's trade accounts receivable. The
Company can transfer an undivided interest in a designated pool of accounts
receivable on an ongoing basis to maintain the participation interest up to
$150 million. As of December 31, 1997, the pool of trade accounts receivable
that was available for sale was approximately $130 million and the amount of
receivables sold was approximately $59 million.

CAPITAL REQUIREMENTS
During 1998, the Company expects that its non-binding commitment for capital
expenditures (excluding acquisitions) will increase from 1997 levels and is
dependent on the Company's geographic and revenue growth. These capital
requirements are primarily for switching and transmission facilities,
technology platforms and information systems applications.

In addition to its other ongoing capital requirements, the Company has entered
into several agreements to extend its owned fiber-optic network throughout
several geographic areas of the United States. The Company has binding
commitments of approximately $250 million to purchase fiber-optic capacity and
related equipment. The timing of remaining payments will depend on the delivery
and acceptance of facilities, which is expected to occur in the first half of
1998. The Company believes it has adequate cash flow and borrowing capacity to
fund these planned capital expenditures.

During 1996, the Company executed lease agreements for a new corporate
headquarters to be occupied in mid-1998. The agreement is a three-year
operating lease with two one-year renewal periods, and has a maximum residual
guarantee payment at the end of the lease term. (See Note 8 to the Consolidated
Financial Statements.)

24
25
The Company has relied upon strategic acquisitions as one means of expanding
its Network, sales and service presence across the country. The Company
evaluates each potential acquisition to determine its strategic fit with the
Company's growth, operating margin and income objectives. The Company expects
to continue to actively explore potential acquisitions and may enter into
discussions from time to time with potential acquisition candidates. But there
can be no assurance that the Company will be able to enter into or complete
acquisition agreements on acceptable terms.

COMMITMENTS AND CONTINGENCIES
The Company has agreements with certain interexchange carriers, LECs and
third-party vendors to lease facilities for originating, terminating and
transport services. The third-party carriers include AT&T, MCI, Sprint,
WorldCom Network Services, Inc., d/b/a WilTel, and Frontier Corporation. In
addition, the Company uses services provided by each RBOC, GTE and other
smaller LECs. Some agreements require the Company to maintain minimum monthly
and/or annual billings based on usage. The Company has met and expects to
continue to meet such minimum usage requirements.

In October 1997, the Company amended a significant contract with a third-party
carrier. Under the original contract, the Company had an obligation to use that
carrier for a significant percentage (over 70%) of domestic and international
services that the Company provided through its leased facilities. Under the
terms of the amended contract, the Company is no longer obligated to use that
carrier for its leased facilities and the minimum usage commitments were
significantly reduced. In addition, the rates for domestic leased facilities
used in the Company's Network did not increase and are protected from changes
for a five-year period. As an integral part of the amended agreement, the
Company also entered into a new agreement under which the Company will swap
excess fiber along routes with excess capacity in exchange for fiber along
beneficial routes to the Company, allowing for the completion of strategic
Network fiber rings. The reduced requirements of the amended contract enable
the Company to utilize competitive alternatives, such as joint ventures or
investments in foreign facilities providers. These competitive alternatives
were not available to the Company under the terms of the original contract and
are more significant in light of the recent World Trade Organization (WTO)
deregulation. In addition, the Company expects that the WTO deregulation may
decrease international termination costs. The WTO deregulation is expected to
open countries to competition, allowing partnerships with and investments in
foreign companies, and the Company anticipates taking advantage of these
strategic opportunities.

Under the amended contract, the Company received a usage credit in exchange for
agreeing to increases in certain international and domestic switched services
rates. The Company expects to mitigate the impact of increased rates on
switched services by applying the credit against future use of services during
the two-year agreement period. In addition, the Company intends to migrate
traffic to other lower priced vendors and its owned facilities to offset the
rate changes. The Company anticipates the credit will be substantially
exhausted by the end of 1998, and intends to use alternative arrangements to
reroute traffic over a reasonable time period to minimize the effect of the
rate changes. The Company expects that it will be able to implement alternative
strategies and reduce its reliance on this third-party carrier such that it
does not anticipate that the amended contract will have a material adverse
impact on the future results of operations. However, if other alternatives are
not available or accomplished before the usage credit is exhausted, the Company
would expect its cost of services to increase.

The Company has engineered its Network to minimize the impact on its customers
of a service failure by any third-party carrier and has established contingency
plans to reroute traffic as quickly as possible if a service failure by a
third-party carrier should occur. Although most service failures the Company
has experienced have been corrected in a relatively short time period, a
catastrophic service failure could interrupt the provision of service by both
the Company and its competitors for a lengthy time period. The restoration
period for a catastrophic service failure cannot be reasonably determined;
however, the Company has not experienced a catastrophic service failure in its
history.

The Company has an agreement with ACN, a third-party sales representative,
through April 2011. The agreement contains a provision whereby ACN will receive
a payment if there is a change in the control of the Company. In consideration
for this change in control payment, the acquiring company would receive a 31%
reduction in the ongoing commission rates paid to ACN. The change in control
payment is calculated based on a multiple of three

25
26
times the average monthly collected revenue generated by customers identified
by ACN to use the Company's long-distance services. The monthly collected
revenue average is calculated over a 24-month performance period subsequent to
the change in control. The amount of this payment, if any, is therefore
dependent upon ACN's level of performance during the entire performance period,
and cannot be reasonably estimated at this time.

In anticipation of the year 2000 (Year 2000), management has developed a plan
to review software that was internally developed and/or externally purchased or
licensed for compliance with Year 2000 processing requirements. Management
believes that Year 2000 compliance will not have a material adverse effect on
operations and anticipates these costs to be between $5 million and $10
million, which will be expensed as incurred during the conversion period.

The Company has been named as a defendant in various litigation matters.
Management intends to vigorously defend these outstanding claims. The Company
believes it has adequate accrued loss contingencies and that current pending or
threatened litigation matters will not have a material adverse impact on the
Company's results of operations or financial condition.

FEDERAL INCOME TAXES
The Company generated significant NOLs in prior years that are available to
reduce current cash requirements for income taxes. See Note 13 to the
Consolidated Financial Statements for a discussion of the availability and
utilization of the NOLs.

IMPACT OF INFLATION AND SEASONALITY
The Company does not believe that the relatively moderate levels of inflation
that have been experienced in the United States in recent years have had a
significant effect on its revenues or earnings. The Company's revenue is
subject to seasonal variations in each business segment. The number of business
days and holidays in a period can affect quarterly results, but seasonal
variations have little impact on annual revenue results.

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 -- SAFE HARBOR CAUTIONARY
STATEMENT
This report contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995 (the Reform Act). These
forward-looking statements express the beliefs and expectations of management
regarding LCI's future results and performance and include, without limitation,
the following: statements concerning the Company's future outlook; the
Company's plans to enter the local service market; the effect of FCC and
judicial rulings pertaining to the Act, local service competition and the
ultimate timing of RBOC entry into the long-distance market; the impact of
marketplace competition on pricing strategies and rates; expected revenue
growth; the cost reduction strategies and opportunities to expand the Network
which may allow for increased gross margin; expected future interest rates;
funding of capital expenditures and operations; the Company's beliefs regarding
a catastrophic service failure; implementation of a facilities-based
international strategy; and other similar expressions concerning matters that
are not historical facts.

Such statements are based on current expectations and involve a number of known
and unknown risks and uncertainties that could cause the actual results,
performance and/or achievements of the Company to differ materially from any
future results, performance or achievements, expressed or implied by the
forward-looking statements. Readers are cautioned not to place undue reliance
on these forward-looking statements and any such statement is qualified by
reference to the following cautionary statements. In connection with the safe
harbor provisions of the Reform Act, the Company's management is hereby
identifying important factors that could cause actual results to differ
materially from management's expectations including, without limitation, the
following: increased levels of competition in the telecommunications industry
(including the competitive factors described in Industry Environment),
including RBOC entry into the interLATA long-distance industry and the
corresponding impact on pricing; the adoption and application of rules and
regulations related to the implementation of the Act, including the decisions
of federal and state regulatory agencies and courts interpreting and applying
the Act; the impact of access charge reform; the ability to negotiate
appropriate local service agreements with LECs; the timely delivery of planned
Network expansions; the Company's ability to identify lower priced vendors for
certain services; and other risks described from time to time in the Company's
periodic filings with the Securities and

26
27
Exchange Commission. The Company is not required to publicly release any
changes to these forward-looking statements for events occurring after the date
hereof, or to reflect other unanticipated events.

OTHER MATTERS

ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE
Two new accounting pronouncements, on comprehensive income and segment
information, were issued in 1997 and are effective for fiscal years beginning
after December 15, 1997. As explained in Note 2 to the Consolidated Financial
Statements, the Company does not expect any significant impact from the
adoption of these pronouncements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In 1997, the Company issued $350 million of 7.25% Senior Notes (Notes),
which mature on June 15, 2007 and pay interest semi-annually on June 15 and
December 15 of each year, beginning December 15, 1997. The effective interest
rate is 7.58%. As of December 31, 1997, the fair market value of the Notes was
approximately $361 million. As a result of issuing fixed interest rate
securities, the Company is less sensitive to market rate fluctuations.

The Company has three discretionary line of credit agreements (Lines of
Credit) with commercial banks for a total of $75 million. As of December 31,
1997 and 1996, the outstanding balances under the Lines of Credit was $25
million and $8 million, respectively, with an interest rate of 6.26% and 5.93%.
The Lines of Credit provide flexible short-term borrowing at competitive rates
dependent upon a market indicator. The carrying value of the Lines of Credit
approximates its fair market value. The Lines of Credit exposure to market rate
fluctuations are limited since each borrowing is repriced based on current
market conditions.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company and the related report
of the Company's independent public accountants thereon are included in this
report at the page indicated.

Pages
-----

Report of Independent Public Accountants 28
Consolidated Statements of Operations 29
Consolidated Balance Sheets 30-31
Consolidated Statements of Shareowners' Equity 32
Consolidated Statements of Cash Flows 33
Notes to Consolidated Financial Statements 34-47

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND SHAREOWNERS OF LCI INTERNATIONAL, INC.:
We have audited the accompanying consolidated balance sheets of LCI
International, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of operations,
shareowners' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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 financial position of LCI International,
Inc. and subsidiaries, as of December 31, 1997 and 1996, and the results of
their operations and cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.

Arthur Andersen LLP
Washington, D.C.
February 16, 1998 (except with respect to the matter
Discussed in Note 15, as to which
the date is March 16, 1998)

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29
LCI International, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except earnings per common share)

For the Year Ended December 31,
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------

REVENUES $ 1,642 $ 1,304 $ 824

Cost of services 986 778 496
- --------------------------------------------------------------------------------------------------------------
GROSS MARGIN 656 526 328

Selling, general and administrative expenses 408 305 193
Merger charges 45 -- --
Restructuring charges 9 16 --
Depreciation and amortization 96 75 54
- --------------------------------------------------------------------------------------------------------------
OPERATING INCOME 98 130 81

Interest and other expense, net 36 29 16
- --------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 62 101 65

Income tax expense 31 38 16
- --------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 31 63 49

Discontinued operations:
Income from discontinued operations, net of income
taxes of $7 and $9 for 1996 and 1995, respectively -- 11 15
- --------------------------------------------------------------------------------------------------------------
Net income 31 74 64
- --------------------------------------------------------------------------------------------------------------
Preferred dividends -- 3 6
- --------------------------------------------------------------------------------------------------------------
INCOME ON COMMON STOCK $ 31 $ 71 $ 58
- --------------------------------------------------------------------------------------------------------------

EARNINGS PER COMMON SHARE

CONTINUING OPERATIONS:
Basic $ 0.34 $ 0.73 $ 0.60
- --------------------------------------------------------------------------------------------------------------
Diluted $ 0.32 $ 0.64 $ 0.53
- --------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE:
Basic $ 0.34 $ 0.86 $ 0.81
- --------------------------------------------------------------------------------------------------------------
Diluted $ 0.32 $ 0.75 $ 0.69
- --------------------------------------------------------------------------------------------------------------

WEIGHTED AVERAGE NUMBER OF COMMON SHARES:

Basic 91 83 71
Diluted 99 99 92

The accompanying notes are an integral part of these statements.

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30
LCI International, Inc.
CONSOLIDATED BALANCE SHEETS
(In millions)

December 31,
- ------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------
ASSETS

CURRENT ASSETS
Cash and cash equivalents $ -- $ 12
Trade accounts receivable, less allowance for doubtful accounts
of $52 and $30 for 1997 and 1996, respectively 190 121
Current deferred tax assets, net 59 51
Prepaids and other 22 22
- ------------------------------------------------------------------------------------------------------------
Total current assets 271 206
- ------------------------------------------------------------------------------------------------------------

PROPERTY AND EQUIPMENT
Fiber-optic network 558 450
Technology platforms, equipment and building lease 231 125
Less - accumulated depreciation and amortization (206) (204)
- ------------------------------------------------------------------------------------------------------------
583 371
Property under construction 88 61
- ------------------------------------------------------------------------------------------------------------
Total property and equipment, net 671 432
- ------------------------------------------------------------------------------------------------------------

OTHER ASSETS
Excess of cost over net assets acquired, net of
accumulated amortization of $38 and $28
for 1997 and 1996, respectively 359 364
Other, net 53 51
- ------------------------------------------------------------------------------------------------------------
Total other assets 412 415
- ------------------------------------------------------------------------------------------------------------
Total assets $ 1,354 $ 1,053
- ------------------------------------------------------------------------------------------------------------

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31

December 31,
- --------------------------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------------

LIABILITIES AND SHAREOWNERS' EQUITY

CURRENT LIABILITIES
Accounts payable $ 43 $ 40
Facility costs accrued and payable 154 135
Accrued expenses and other 91 63
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 288 238
- --------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 413 252
- --------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES AND DEFERRED CREDITS 101 73
- --------------------------------------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES

SHAREOWNERS' EQUITY
Preferred Stock - authorized 15 million shares, no shares
issued and outstanding in 1997 and 1996 -- --
Common Stock - authorized 300 million shares, issued and
outstanding 96 million shares in 1997 and 89 million shares in 1996 1 1
Paid-in capital 511 480
Retained earnings 40 9
- --------------------------------------------------------------------------------------------------------------
Total shareowners' equity 552 490
- --------------------------------------------------------------------------------------------------------------
Total liabilities and shareowners' equity $ 1,354 $ 1,053
- --------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these statements.

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LCI International, Inc.
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY

(In millions)

Preferred Common
Stock Stock
--------- ----------------------
Retained Total
$.01 Par Issued and $.01 Par Paid-in Earnings Shareowners'
Value Outstanding Value Capital (Deficit) Equity
- -------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 1994 $115 69 $ 1 $242 $(104) $254
- -------------------------------------------------------------------------------------------------------------
Acquisition of CTG -- 5 -- 93 -- 93
Employee stock purchases and
exercises of options/warrants,
including related tax benefits -- 1 -- 10 -- 10
Conversion/redemption of
Convertible Preferred Stock (1) -- -- 1 -- --
Other transactions -- -- 1 -- 1
Net income -- -- -- -- 64 64
Preferred dividends -- -- -- -- (6) (6)
- -------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 1995 $114 75 $ 1 $347 $ (46) $416
- -------------------------------------------------------------------------------------------------------------
Employee stock purchases and
exercises of options/warrants,
including related tax benefits -- 2 -- 19 -- 19
Conversion/redemption of
Convertible Preferred Stock (114) 12 -- 114 -- --
Spin-off of Billing (16) (16)
Net income -- -- -- -- 74 74
Preferred dividends -- -- -- -- (3) (3)
- -------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 1996 $ -- 89 $ 1 $480 $ 9 $490
- -------------------------------------------------------------------------------------------------------------
Employee stock purchases and
exercises of options/warrants,
including related tax benefits -- 7 -- 31 -- 31
Net income -- -- -- -- 31 31
- -------------------------------------------------------------------------------------------------------------

BALANCE AT DECEMBER 31, 1997 $ -- 96 $ 1 $511 $ 40 $552
- -------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these statements.

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33
LCI International, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

For the Year Ended December 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------

OPERATING ACTIVITIES
Income from continuing operations $ 31 $ 63 $ 49
Adjustments to income from continuing operations:
Depreciation and amortization 96 75 54
Change in deferred taxes 20 36 (1)
Merger and restructuring charges 43 - --
Change in assets/liabilities:
Trade accounts receivable (16) (52) (67)
Net securitization activity (53) 112 --
Accounts payable and facility costs accrued and payable 34 53 21
Other assets/liabilities 32 21 (2)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 187 308 54
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations -- 15 8
- -----------------------------------------------------------------------------------------------------------------

INVESTING ACTIVITIES
Capital expenditures - property and equipment (321) (156) (106)
Payment for acquisitions and other (17) (124) (79)
- -----------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (338) (280) (185)
- -----------------------------------------------------------------------------------------------------------------

FINANCING ACTIVITIES
Proceeds from issuance of debt 350 6 5
Net debt (payments) borrowings (228) (48) 115
Preferred dividend payments -- (3) (6)
Proceeds from employee stock plans and warrants 17 14 9
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 139 (31) 123
- -----------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents (12) 12 --
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the beginning of the year 12 -- --
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the year $ -- $ 12 $ --
- -----------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these statements.

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34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS ORGANIZATION AND PURPOSE

The financial statements presented herein include the Consolidated Balance
Sheets of LCI International, Inc., a Delaware corporation, and its wholly owned
subsidiaries (LCI or the Company) as of December 31, 1997 and 1996, and the
related Consolidated Statements of Operations, Shareowners' Equity and Cash
Flows for the three years ended December 31, 1997.

LCI is a facilities-based telecommunications carrier that provides a broad
range of domestic and international voice and data services to the commercial,
wholesale, residential/small business and local market segments, and operator
assisted services. The Company serves its customers primarily through owned and
leased digital fiber-optic facilities.

On December 22, 1997, the Company acquired USLD Communications Corp. (USLD) in
a stock-for-stock transaction that has been accounted for as a pooling of
interests. The Company exchanged approximately 12 million shares of its common
stock, par value $.01 per share (Common Stock) for all of the outstanding
shares of USLD common stock. The Company's Consolidated Financial Statements
have been restated to include the results for USLD, as though the companies had
always been a combined entity.

2. ACCOUNTING POLICIES

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

PRINCIPLES OF CONSOLIDATION
The accompanying Consolidated Financial Statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated. Certain reclassifications have
been made to the Consolidated Financial Statements for 1996 and 1995 to conform
with the 1997 presentation. In August 1996, USLD completed the spin-off of its
billing clearinghouse and information management services business, Billing
Information Concepts Corp. (Billing). The spin-off has been accounted for as
discontinued operations and, accordingly, the Company restated its Consolidated
Financial Statements for all periods presented prior to that date in accordance
with Accounting Principles Board Opinion (APB) No. 30. Financial disclosures
for all periods presented reflect that restatement.

CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The Company uses its
available cash to reduce the balance of its revolving credit facility (Credit
Facility) and generally maintains no cash on hand.

TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable represent amounts due from customers for
telecommunications services, less an allowance for uncollectible accounts.
Revenues and, therefore, trade accounts receivable, include amounts recognized
for services provided but not yet billed.

ACCOUNTS RECEIVABLE SECURITIZATION PROGRAM
In accordance with Statement of Financial Accounting Standards (SFAS) No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," the transfers of receivable balances meet the criteria to be
classified as a sale for accounting purposes. As such, amounts sold under the
accounts receivable

34
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securitization program (Securitization Program) are not included in the
accompanying Consolidated Financial Statements. The costs of the Securitization
Program are included in interest and other expense, net in the accompanying
Consolidated Statements of Operations. The cash proceeds are included in
operating activities in the accompanying Consolidated Statements of Cash Flows.

PREPAIDS AND OTHER
Prepaids and other assets include deferred customer promotion costs and
customer acquisition costs that are amortized over the estimated life of the
related contract term, and various other accounts and notes receivable expected
to be received within the next year.

PROPERTY AND EQUIPMENT
These assets are stated at cost or at fair market value if obtained as part of
an acquisition. Construction costs include material, labor, interest and
overhead costs. Property and equipment as of December 31, 1997 and 1996
includes the net book value of $25 million and $9 million for a capitalized
building lease for the Company's operating subsidiaries' headquarters. Routine
repairs and maintenance of property and replacements of minor items are charged
to expense as incurred. Depreciation of buildings and equipment is provided
using the composite method over the estimated useful lives of these assets. The
cost of equipment retired in the ordinary course of business, less proceeds, is
charged to accumulated depreciation. The capitalized building lease is
amortized on a straight-line basis over the term of the lease.

The estimated depreciation and amortization periods by asset type:

----------------------------------------------------------------
Asset Category Years
----------------------------------------------------------------

Fiber-optic network:
Fiber-optic cable and buildings 30
Transmission, distribution and switching equipment 10 - 15
Installation costs 3
Technology platforms 5
Equipment:
Information systems - hardware and software 3 - 5
General office equipment 5 - 10
Capitalized building lease 15

EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired (goodwill) consists of the excess of
the cost to acquire an entity over the estimated fair market value of the net
assets acquired. Goodwill is amortized on a straight-line basis over 40 years.
The Company continually evaluates whether events and circumstances have
occurred which indicate that the remaining estimated useful life of goodwill
may warrant revision or that the remaining balance of goodwill may not be
recoverable. If such an event has occurred, the Company estimates the sum of
the expected future cash flows, undiscounted and without interest charges,
derived from such goodwill over its remaining life. The Company believes that
no such impairment existed at December 31, 1997. Amortization of goodwill was
$10 million, $10 million and $5 million for the years ended December 31, 1997,
1996 and 1995, respectively.

OTHER ASSETS
Other assets consist of debt issuance costs, rights-of-way, customer lists,
non-compete agreements and other deferred costs, which are amortized over the
estimated life or contract term of the agreement.

OTHER LIABILITIES AND DEFERRED CREDITS
Other liabilities and deferred credits primarily include long-term deferred
income taxes and other long-term liabilities. As of December 31, 1997 and 1996,
net long-term deferred tax liabilities of $84 million and $56 million,
respectively, were included in other liabilities and deferred credits.

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36
REVENUE RECOGNITION
Telecommunications revenues are recognized when services are provided and are
net of estimated credits and uncollectible amounts.

ADVERTISING COST
In accordance with Statement of Position 93-7, "Reporting on Advertising
Costs," costs for advertising are expensed as incurred within the fiscal year.
If it is determined that the advertising costs will provide a future economic
benefit, the costs are capitalized and amortized over the period of benefit,
not to exceed one year.

INCOME TAXES
The Company follows SFAS No. 109, "Accounting for Income Taxes" (see Note 13).

FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of current assets and liabilities approximate their fair
market value. The fair market value of long-term debt is discussed further in
Note 7.

CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts receivable. The risk is
limited due to the number of market segments, the large number of entities
comprising the Company's customer base and the dispersion of those entities
across many different industries and geographic regions. As of December 31,
1997, the Company had no significant concentrations of credit risk.

STATEMENTS OF CASH FLOWS
Cash payments and significant non-cash activity:

For the years ended December 31,
(In millions) 1997 1996 1995
- -----------------------------------------------------------------------------------------------

Cash payments for interest $ 30 $ 27 $ 17
Cash payments for income taxes $ 4 $ 2 $ 3

Non-cash investing and financing activities:
Tax benefit recognized in connection
with stock option exercises $ 12 $ 6 $ 1
Capital lease obligations incurred $ 17 $ 1 $ --
Dividend pursuant to spin-off of Billing $ -- $ 34 $ --

During 1997, the Company exchanged approximately 12 million shares of Common
Stock for all of the outstanding common stock of USLD to affect the business
combination, and 5 million shares of Common Stock were issued in connection
with the non-cash exercise of warrants. During 1996, shareowners converted
approximately 5 million shares of Convertible Preferred Stock into
approximately 12 million shares of Common Stock. During 1995, the Company
issued 5 million shares of Common Stock with a market value of approximately
$93 million, as partial consideration in a purchase acquisition.

ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." Both are required for financial
statements in fiscal years beginning after December 15, 1997.

SFAS No. 130 requires comprehensive income to be reported in a financial
statement that is displayed with the same prominence as other financial
statements. As the Company does not currently have any components of
comprehensive income, it is not expected that this statement will affect the
Consolidated Financial Statements.

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37
SFAS No. 131 requires entities to disclose financial and detailed information
about its operating segments in a manner consistent with internal segment
reporting used by the Company to allocate resources and assess financial
performance. The Company has not completed the analyses required to determine
the additional disclosures requirements, if any, for the adoption of SFAS No.
131.

In anticipation of the year 2000 (Year 2000), management has developed a plan
to review software that was internally developed and/or externally purchased or
licensed for compliance with Year 2000 processing requirements. In accordance
with Emerging Issues Task Force Opinion No. 96-14, "Accounting for the Costs
Associated with Modifying Computer Software for the Year 2000," the Company
will expense all costs as incurred.

3. MERGER & RESTRUCTURING

MERGER
On December 22, 1997, the Company acquired USLD in a stock-for-stock
transaction that resulted in USLD becoming a wholly owned subsidiary of LCI.
Under the terms of the agreement, USLD shareholders received .7576 of a share
of Common Stock of the Company for each USLD share. Accordingly, the Company
issued approximately 12 million shares of Common Stock for all outstanding
shares of USLD common stock. Additionally, outstanding options and warrants to
acquire USLD common stock were converted to options and warrants to purchase
approximately 2 million shares of Common Stock of the Company.

The merger qualified as a tax-free reorganization and was accounted for as a
pooling of interests. Accordingly, the Company's financial statements have been
restated to include the accounts and operations of USLD for all periods
presented as though the two companies had always been a combined entity.

Combined and separate results of LCI and USLD during the periods preceding the
merger:

(In millions) LCI USLD COMBINED
-------------------------------------------------------------------------------------------

NINE MONTHS ENDED SEPTEMBER 30, 1997
Revenues $ 1,018 $ 178 $ 1,196
Net income $ 65 $ 4 $ 69
-------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Revenues $ 1,103 $ 201 $ 1,304
Net income $ 75 $ (1) $ 74
-------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995
Revenues $ 673 $ 151 $ 824
Net income $ 51 $ 13 $ 64
-------------------------------------------------------------------------------------------

No adjustments were necessary to the combined financial results presented above
to conform the accounting policies of the two companies, other than
reclassifications of certain revenue and expense reporting to conform financial
statement presentation. There were no material intercompany transactions
between the two companies for the periods presented.

In connection with the merger, the Company recorded a $45 million one-time
merger charge during 1997. The charge included $7 million of transaction costs
for investment bank and other professional fees, $31 million for the
elimination of duplicate facilities and the write-off of assets, and $7 million
for employee severance and termination costs.

RESTRUCTURING
In the fourth quarter of 1997, the Company recorded restructuring charges of $8
million for the costs associated with relocation to the new headquarters
building and for employee severance and termination costs. In addition,

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38
during the second quarter of 1997, there was a $1 million one-time charge by
USLD for the resignation of its former chairman of the board of directors.

In 1996, USLD charged $13 million for the direct spin-off costs related to
Billing. In addition, $3 million of restructuring charges were recorded for the
costs associated with consolidating support functions and the write-off of
assets.

4. ACQUISITIONS

The Company has supplemented growth from its base business with several
strategic acquisitions. Each acquisition during 1996 and 1995 was accounted for
as a purchase.

In January 1996, the Company purchased the long-distance business assets of
Teledial America, Inc. (Teledial America), which did business as U.S. Signal
Corporation, and an affiliated company, ATS Network Communications, Inc. (ATS).
The Company acquired both companies for approximately $99 million in cash, and
the amount of goodwill recorded in the purchase transactions was $100 million.
The results of operations for Teledial America and ATS were included in the
Consolidated Statement of Operations from January 1, 1996.

In September 1995, the Company acquired Corporate Telemanagement Group, Inc.
(CTG), for approximately $140 million in cash and Common Stock, and assumed
approximately $24 million in debt. The amount of goodwill recorded in the
purchase transaction was $157 million. The Consolidated Statements of
Operations include the results of CTG from September 1, 1995. The combination
of the operations of the Company and CTG provided pro forma net revenues of
$815 million, pro forma net income of $54 million and pro forma earnings per
common share of $0.63. The pro forma information is provided as if the
acquisition had occurred at the beginning of the 1995 fiscal year and is for
informational purposes only.

USLD had insignificant business combinations in 1997 and 1995 that were not
material for financial statement purposes.

5. DISCONTINUED OPERATIONS

In August 1996, USLD completed the spin-off of Billing. The spin-off has been
accounted for as discontinued operations and, accordingly, the Company restated
its Consolidated Financial Statements for all periods presented prior to that
date. The spin-off was a tax-free distribution of 100% of the common stock of
Billing to USLD's shareowners. Revenue of the discontinued operations of
Billing was $86 million and $81 million for the years ended December 31, 1996
and 1995, respectively. Basic and diluted earnings per share for discontinued
operations for the year ended December 31, 1996 were $0.13 and $0.11,
respectively, and for the year ended December 31, 1995 were $0.21 and $0.16.

In connection with the spin-off, USLD distributed, for financial statement
purposes, a dividend of $16 million to record the net effect of forgiven
intercompany payable/receivable balances, the reimbursement by Billing of
direct spin-off costs, and the transfer of a working capital balance of $22
million to USLD. Direct spin-off costs of $13 million were included in
restructuring charges in the Consolidated Statements of Operations for the year
ended December 31, 1996. These costs included professional fees, tax payments
triggered by the spin-off, payments under employment agreements and costs
associated with accelerated stock grants.

6. ACCOUNTS RECEIVABLE SECURITIZATION

In August 1996, the Company entered into an agreement to sell a percentage
ownership interest in a defined pool of its trade accounts receivable
(Securitization Program). Under the Company's Securitization Program, LCI SPC
I, Inc. (SPC), a wholly owned, bankruptcy-remote subsidiary of the Company,
sells accounts receivable. Under this Securitization Program, the Company can
transfer an undivided interest in a designated pool of its accounts

38
39
receivable on an ongoing basis to maintain the participation interest up to a
maximum of $150 million. The accounts receivable balances sold, but not yet
collected, of approximately $59 million and $112 million at December 31, 1997
and 1996, respectively, are not included in the accompanying Consolidated
Balance Sheets. SPC had approximately $130 million and $120 million of accounts
receivable available for sale as of December 31, 1997 and 1996. The cost of the
Securitization Program is based on a discount rate equal to the short-term
commercial paper rate plus certain fees and expenses. The Company retains
substantially all the same risk of credit loss as if the receivables had not
been sold, and has established reserves for such estimated credit losses.

Under the Securitization Program agreement, the Company acts as agent for the
purchaser of the receivables by performing recordkeeping and collection
functions on the interest sold and receives a fee providing adequate
compensation for such services. The agreement also contains certain covenants
regarding the quality of the accounts receivable portfolio, as well as
financial covenants that are substantially identical to those contained in the
Company's Credit Facility (see Note 7). Except in limited circumstances, SPC is
subject to certain contractual prohibitions concerning the payment of dividends
and the making of loans and advances to LCI.

7. DEBT

In June 1997, the Company issued $350 million of 7.25% Senior Notes (Notes),
which mature June 15, 2007. The net proceeds from the issuance of the Notes
were used to repay outstanding indebtedness and for working capital and general
corporate purposes. As of December 31, 1997, the fair market value of the Notes
was approximately $361 million.

The Company had approximately $10 million in various fixed-rate notes as of
December 31, 1997. These notes are expected to be repaid during early 1998.

CREDIT FACILITY
The Company has an aggregate $750 million revolving credit (Credit Facility)
from a syndicate of banks. The Credit Facility is comprised of two separate
facilities of $500 million and $250 million. The first facility has a term of
five years, while the second facility has a one-year term. Each facility may be
extended for a limited number of periods. Both facilities bear interest at a
rate consisting of two components: The base rate component is dependent upon a
market indicator; the second component varies from 0.30% to 0.75% based on the
more favorable of the relationship of borrowing levels to operating cash flow
(leverage ratio) or the Company's senior unsecured debt rating.

The Credit Facility contains various financial covenants, the most restrictive
being the leverage ratio requirement. As of December 31, 1997 and 1996, the
Company was in compliance with all Credit Facility covenants. The company had
no outstanding balance under the Credit Facility as of December 31, 1997,
compared to $215 million outstanding as of December 31, 1996. The weighted
average interest rate on the outstanding borrowings under the Credit Facility
as of December 31, 1996 was 6.09%. The carrying amount of the Credit Facility
approximates its fair value, as the underlying instruments are variable rate
notes that reprice frequently.

The Company also has an interest rate cap agreement with certain banks to
manage interest rate risk on the Credit Facility. The agreement is for a
two-year period ending February 1998 and limits the base interest rate exposure
to 7.5% on $130 million notional principal balance of the Credit Facility. In
the event of non-performance by the banks, the Company would be obligated to
make the contractual payments under the Credit Facility, and would have
exposure to the extent of any increase in the base rate component above 7.5%.
The Company believes the probability of such an event is remote.

LINES OF CREDIT
The Company has three separate discretionary line of credit agreements (Lines
of Credit) with commercial banks for a total of $75 million. The Lines of
Credit provide flexible short-term borrowing at competitive rates dependent
upon a market indicator. As of December 31, 1997 and 1996, the outstanding
balances under the Lines of Credit were $25 million and $8 million,
respectively, with interest rates of 6.26% and 5.93%, respectively.

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40
The outstanding balance in the accompanying Consolidated Balance Sheets is
reflected in long-term debt, due to the borrowing availability under the Credit
Facility to repay such balances. The carrying value of the Lines of Credit
approximates its fair market value.

8. LEASES

The Company's capital leases primarily include two building leases, which
expire at various times through 2012. The noncurrent portions of all capital
lease obligations were $28 million and $13 million as of December 31, 1997 and
1996, respectively. The Company has operating leases for other office space and
equipment with lease terms from three to ten years with options for renewals.

During 1996, the Company entered into an operating lease agreement for the
rental of a new corporate headquarters being developed in Arlington, Virginia.
This agreement has a three-year base term with two options to renew for one
year each. The agreement includes a maximum residual guarantee of $62 million
at the end of the base term, which is included in the minimum lease payments,
below. However, the Company expects to exercise the renewal options, which
will extend the lease term and defer the residual guarantee payment. The
property is owned by an unrelated entity that is leasing the facility to the
Company. The Company plans to occupy the building in June 1998.

Total expenses for operating leases for the years ended December 31, 1997, 1996
and 1995 were $15 million, $12 million and $9 million, respectively. The
Company is required, at a minimum, to make the following payments on capital
and operating leases:

(In millions) Capital Operating
-------------------------------------------------------------------------------

1998 $ 5 $ 19
1999 5 80
2000 5 14
2001 5 11
2002 5 10
Thereafter 28 49
-------------------------------------------------------------------------------
Total minimum lease payments 53 $183
Less - amounts representing interest 23 ----------
---------------------------------------------------------------
Capital lease obligations 30
Less - amounts due within one year 2
---------------------------------------------------------------
Noncurrent portion of capital lease obligations $ 28
---------------------------------------------------------------

9. COMMITMENTS AND CONTINGENCIES

CAPITAL REQUIREMENTS
During 1998, the Company expects that its nonbinding commitment for capital
expenditures (excluding acquisitions) will increase from the levels expended in
1997 and is dependent on the Company's geographic and revenue growth. The
Company's capital requirements are primarily for switching and transmission
facilities and technology platforms arising from the Company's strategic
expansion plans. In addition to its ongoing capital requirements, the Company
has entered into several agreements to extend its fiber-optic network. These
commitments will extend the Network throughout several geographic areas of the
United States, and are expected to require incremental capital expenditures of
approximately $250 million for fiber-optic capacity and related equipment. The
timing of payments will depend on the delivery and acceptance of facilities,
which are expected to be completed in the first half of 1998.

VENDOR AGREEMENTS
The Company has agreements with certain interexchange carriers, LECs and
third-party vendors to lease facilities for originating, terminating and
transport services. Some agreements require the Company to maintain minimum

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41
monthly and/or annual billings based on usage. The Company has met and expects
to continue to meet these minimum usage requirements.

During 1997, the Company amended an agreement with its largest provider of
leased and international services. Under the terms of the amended contract, the
Company is no longer obligated to use that carrier for its leased facilities
and the minimum usage commitments were significantly reduced. In addition, the
Company received a usage credit in exchange for agreeing to increases in
certain domestic and international switch services. The Company expects to
mitigate the impact of increased rates by applying the credit against future
use of services during the two-year agreement period, as well as using
alternative arrangements and strategic investments to reduce the reliance on
this third-party carrier.

LEGAL MATTERS
The Company has been named as a defendant in various litigation matters.
Management intends to vigorously defend these outstanding claims. The Company
believes it has adequate accrued loss contingencies. Although the ultimate
outcome of these claims cannot be ascertained at this time, in management's
opinion, current pending or threatened litigation matters will not have a
material adverse impact on the Company's results of operations or financial
condition.

10. SHAREOWNERS' EQUITY

PREFERRED STOCK
In January 1997, the Board of Directors adopted a shareholder rights agreement
(Rights Agreement) designed to ensure that shareowners receive fair and equal
treatment in the event of a proposed takeover of the Company. One preferred
share purchase right (Right) has been attached to each share of the Company's
Common Stock to shareowners of record on January 22, 1997 (and all subsequently
issued shares) and, until distributed, may be transferred only with the Common
Stock. Each Right, when exercisable, represents the right to purchase one
one-thousandth of a share of a newly issued series of preferred stock of the
Company, designated as Junior Participating Preferred Stock, par value $.01 per
share or, in certain circumstances, to purchase shares of Common Stock at less
than the prevailing market price. The exercise price is $100 per Right, the
redemption price is $.01 per Right, and the Right expires on January 22, 2007.
The Rights will be distributed and become exercisable only in the event that
any person or entity, together with its affiliates or associates, acquires more
than a certain specified percentage of Common Stock of the Company.

On September 3, 1996, the remaining outstanding shares of the Company's
previously outstanding 5% Cumulative Convertible Exchangeable Preferred Stock
(Convertible Preferred Stock) were redeemed by the Company. Preferred
dividends, cumulative from the date of issuance, were paid quarterly at an
annual rate of $1.25 per share on the outstanding shares until redemption.
Prior to redemption, shareowners converted 4.6 million shares of Convertible
Preferred Stock into 12.1 million shares of Common Stock.

COMMON STOCK
In December 1997, the Company issued 12.4 million shares of Common Stock in
connection with the merger of USLD with LCI Acquisition Corp., a wholly owned
subsidiary of the Company. In September 1995, the Company issued 4.6 million
shares of Common Stock to purchase CTG.

COMMON STOCK WARRANTS
In 1993, the Company issued warrants for 5.4 million shares of Common Stock, at
$2.83 per share. During 1997 and 1996, respectively, warrant holders exercised
5.2 million and 0.2 million warrants for an aggregate amount of 4.6 million and
0.2 million shares of Common Stock. As of December 31, 1997, all Common Stock
warrants had been exercised. USLD had granted warrants to purchase shares of
Common Stock pursuant to telecommunications service agreements in 1992, 1995
and 1997. Pursuant to the merger agreement, each outstanding warrant was
converted into a warrant to purchase Common Stock of LCI based on the
conversion ratio stated in the terms of the merger agreement. As of December
31, 1997, approximately 0.2 million of these warrants were outstanding.

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EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution retirement plan for its employees.
Under this plan, eligible employees may contribute a percentage of their base
salary, subject to certain limitations. Beginning in 1994, the Company elected
to match a portion of the employees' contributions. The expense of the
Company's matching contribution was approximately $1 million for each year
ending December 31, 1997, 1996 and 1995.

11. INCENTIVE STOCK PLANS

STOCK OPTIONS
The Company has stock option plans under which options to purchase shares of
Common Stock may be granted to directors and key employees. Under the plans,
the Company may grant incentive stock options (ISOs), as defined by the
Internal Revenue Code, or non-qualified options (NQOs). Stock options generally
have a five-year vesting period. In the event of a change in control of the
Company, all options outstanding would become 100% exercisable. Under the
plans, options expire up to 10 years after the date of the grant and shares of
Common Stock underlying surrendered options may be re-granted by the Board of
Directors. Options that had been issued pursuant to USLD option plans were
converted to options to purchase Common Stock of LCI based on the conversion
ratio stated in the terms of the merger agreement. Upon the effective date of
the merger, all USLD options became fully vested and exercisable, but otherwise
have the same terms and conditions in effect prior to the merger.

The option price under all plans is fixed at the discretion of the compensation
committee of the Board of Directors at the time of grant. During 1997, 1996 and
1995, the option prices for all options granted were the fair market value of
the shares on the date of grant. As of December 31, 1997, there were 18 million
options authorized under the Company's stock option plans.

Number Exercisable Weighted
of Options Average
(In millions) Shares Exercise Price
-------------------------------------------------------------------------------------------

OUTSTANDING AS OF DECEMBER 31, 1994 7 3 $ 5.28
-------------------------------------------------------------------------------------------
Options granted 4 12.49
Options exercised (1) 6.52
Options surrendered (1) 14.09
-------------------------------------------------------------------------------------------
OUTSTANDING AS OF DECEMBER 31, 1995 9 4 7.37
-------------------------------------------------------------------------------------------
Options granted 3 18.92
Options exercised (1) 7.17
Options surrendered -- 16.66
-------------------------------------------------------------------------------------------
OUTSTANDING AS OF DECEMBER 31, 1996 11 5 10.27
-------------------------------------------------------------------------------------------
Options granted 4 19.76
Options exercised (2) 5.18
Options surrendered (1) 19.67
-------------------------------------------------------------------------------------------
OUTSTANDING AS OF DECEMBER 31, 1997 12 7 $ 13.44
-------------------------------------------------------------------------------------------
Options available for grant as of
December 31, 1997 4
-------------------------------------------------------------------------------------------

42
43
The following table presents information for the 12 million options outstanding
as of December 31, 1997:

(In millions) Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number of Exercise Contractual Number of Exercise
Price Options Price Life (Years) Options Price
-----------------------------------------------------------------------------------------------

$ 0.17 - $ 2.83 1 $ 2.00 4 1 $ 2.00
$ 4.56 - $ 8.91 3 $ 6.93 5 2 $ 6.88
$ 9.75 - $11.21 2 $ 11.05 7 2 $ 10.94
$11.25 - $19.31 3 $ 18.68 8 1 $ 15.55
$19.35 - $35.13 3 $ 22.62 8 1 $ 22.65
-----------------------------------------------------------------------------------------------

EMPLOYEE STOCK PURCHASE PLAN
The Company has an employee stock purchase plan (ESPP) that enables
substantially all employees to purchase shares of Common Stock on monthly
offering dates at a purchase price equal to the lesser of 85% of the fair
market value of the Common Stock on the date of its purchase or 85% of the fair
market value of the Common Stock, as established at intervals from time to
time. In August 1997, the Company amended the ESPP to extend the offering
period through February 2000 or until shares authorized under the ESPP are
exhausted. A maximum of 1.8 million shares of Common Stock were authorized for
purchase under the ESPP. During 1997, 1996 and 1995, respectively, 0.4 million,
0.3 million and 0.2 million shares were issued under the ESPP at average prices
of $19.02, $24.64 and $11.59. As of December 31, 1997, the amount of Common
Stock available for issuance under the ESPP was 0.7 million shares.

STOCK-BASED COMPENSATION PLANS
The Company follows the requirements of APB No. 25 to account for its stock
option plans and ESPP and, accordingly, no compensation cost is recognized in
the Consolidated Statements of Operations for these plans. In 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which requires
certain disclosures about stock-based employee compensation arrangements. SFAS
No. 123 requires pro forma disclosure of the impact on net income and earnings
per share if the fair value method defined in SFAS No. 123 had been used.

The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model, with the following weighted average
assumptions used for grants in 1997, 1996 and 1995, respectively: risk-free
interest rates of 6.2%, 5.7% and 6.7% for the stock option plans and 5.6%, 5.5%
and 5.6% for the ESPP; no expected dividend yields; expected lives of 5.2
years, 3.9 years and 4.0 years for the stock option plans and 0.7 years, 1.5
years and 2.2 years for the ESPP; and expected volatility of 46.7%, 39.6% and
48.3% for the stock option plans and 44.1%, 45.3% and 47.5% for the ESPP. The
weighted compiled average fair values of options granted during 1997, 1996 and
1995 for the stock option plans were $8.48, $6.69 and $4.53, respectively, and
for the employee stock purchase plan were $6.02, $9.48 and $7.17, respectively.

Pro forma net income, as if the fair value method had been applied, was $15
million, $66 million and $60 million for the years ended December 31, 1997,
1996 and 1995, respectively. The pro forma earnings per share on a diluted
basis for the same periods were $0.16, $0.66 and $0.65.

In accordance with SFAS No. 123, the fair value method was not applied to
options granted prior to January 1, 1995. The resulting pro forma impact may
not be representative of results to be expected in future periods and is not
reflective of actual stock performance.

43
44
12. EARNINGS PER SHARE

In February 1997, SFAS No. 128, "Earnings per Share," was issued, which
required the Company to change the method used to calculate earnings per share.
Basic earnings per share were calculated as income available to common
shareowners divided by the weighted average number of common shares
outstanding. Diluted earnings per share were calculated as net income divided
by the diluted weighted average number of common shares. Diluted weighted
average number of common shares was calculated using the treasury stock method
for Common Stock equivalents, which included Common Stock issuable pursuant to
stock options, Common Stock warrants and Convertible Preferred Stock. The
following is provided to reconcile the earnings per share calculations:

For the Year Ended December 31,
------------------------------------------------
(In millions, except per share amounts) 1997 1996 1995
------------ ------------ ------------

INCOME:
Net income $ 31 $ 74 $ 64
Less - preferred dividends -- (3) (6)
------------ ------------ ------------
Income available to common shareowners $ 31 $ 71 $ 58
============ ============ ============
Shares:
Weighted average shares (Basic) 91 83 71
============ ============ ============
Effect of dilutive securities:
Stock options 4 6 5
Warrants 4 5 4
Convertible Preferred Stock -- 5 12
------------ ------------ ------------
Diluted weighted average shares 99 99 92
============ ============ ============
PER SHARE AMOUNTS:
Basic earnings per share $ 0.34 $ 0.86 $ 0.81
============ ============ ============
Diluted earnings per share $ 0.32 $ 0.75 $ 0.69
============ ============ ============

13. INCOME TAXES

Income tax expenses for the years ended December 31, 1997, 1996 and 1995,
consisted of:

(In millions) 1997 1996 1995
-----------------------------------------------------------------------------------

Current tax expense (benefit):
Federal $ 1 $ 3 $ (4)
State 3 1 --
Deferred tax expense:
Increase in deferred tax liability 22 4 5
Decrease in deferred tax asset 5 38 27
Decrease in valuation allowance -- (8) (12)
-----------------------------------------------------------------------------------
Income tax expense $ 31 $ 38 $ 16
-----------------------------------------------------------------------------------

The decrease in the valuation allowance in 1996 and 1995 resulted from the
Company's realization of its net operating loss (NOL) carryforwards based on
the Company's growth in recurring operating income.

The Company pays state income taxes on the greater of a net worth basis or an
income basis in a majority of the states in which it operates. The Company
records state deferred tax assets and liabilities, net of its federal benefit,
at an average blended rate of 4%.

44
45
The effective income tax rate varies from the federal statutory rate for the
years ended December 31, 1997, 1996 and 1995, as follows:

(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------

Expected tax expense at
federal statutory income tax rate $ 22 35% $ 35 35% $23 35%
Effect of:
State income tax expense 2 3 5 5 2 3
Merger-related expenses 5 9 -- -- -- --
Non-deductible expenses 2 3 4 4 1 2
Change in valuation allowance - - (8) (8) (12) (18)
Other, net - - 2 2 2 3
- --------------------------------------------------------------------------------------------------------
Income tax expense $ 31 50% $ 38 38% $16 25%
- --------------------------------------------------------------------------------------------------------

The significant items giving rise to the deferred tax (assets) and liabilities
as of December 31, 1997 and 1996, were:

(In millions) 1997 1996
-----------------------------------------------------------------------

Deferred tax liabilities:
Property and equipment $ 65 $ 42
Acquisition related 26 24
Deferred expenses 4 3
-----------------------------------------------------------------------
Total deferred tax liabilities 95 69
-----------------------------------------------------------------------
Deferred tax (assets):
Other loss contingencies (2) (6)
Property and other taxes (8) (4)
Accrued expenses (9) (5)
Acquired assets (5) (5)
NOLs and tax credit carryforwards (46) (44)
-----------------------------------------------------------------------
Total deferred tax (assets) (70) (64)
-----------------------------------------------------------------------
Net deferred tax liability $ 25 $ 5
-----------------------------------------------------------------------

The Company's 1997 deferred income tax balances were included in current
deferred tax assets, net of $59 million, and in other liabilities and other
deferred credits of $84 million. The 1996 deferred income tax balances were
included in current deferred tax assets, net of $51 million, and in other
liabilities and other deferred credits of $56 million.

The Company has generated significant NOLs that may be used to offset future
taxable income. Each year's NOL has a maximum 15-year carryforward period. The
Company's ability to fully use its NOL carryforwards is dependent on future
taxable income. As of December 31, 1997, the Company has NOL carryforwards of
$104 million for income tax return purposes subject to various expiration dates
beginning in 1998 and ending in 2010. The future tax benefit of these NOL
carryforwards of $43 million and $41 million in 1997 and 1996, respectively,
has been recorded as a deferred tax asset.

45
46

14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a tabulation of the unaudited quarterly results of operations
for the two years ended December 31:

(In millions, except earnings per common share) 1997
- ------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------------------------------------------------

Revenues $ 368 $ 399 $ 430 $ 446
Cost of services 219 240 256 271
- ------------------------------------------------------------------------------------------------------------
Gross margin 149 159 174 175
Selling, general and administrative expenses 84 90 98 136
Merger charges -- -- 1 44
Restructuring charges -- 1 -- 8
Depreciation and amortization 21 23 26 25
- ------------------------------------------------------------------------------------------------------------
Operating income (loss) 44 45 49 (38)
Interest and other expense, net 7 7 9 13
- ------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 37 38 40 (51)
Income tax expense (benefit) 15 15 16 (14)
- ------------------------------------------------------------------------------------------------------------
Net income (loss) 22 23 24 (37)
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
Earnings per share - basic $ 0.25 $ 0.25 $ 0.27 $ (0.39)
- ------------------------------------------------------------------------------------------------------------
Earnings per common share - diluted $ 0.22 $ 0.23 $ 0.24 $ (0.39)
- ------------------------------------------------------------------------------------------------------------
Basic weighted average shares 89 90 91 95
- ------------------------------------------------------------------------------------------------------------
Diluted weighted average shares 99 98 99 95(A)
- ------------------------------------------------------------------------------------------------------------

(In millions, except earnings per common share) 1996
- ------------------------------------------------------------------------------------------------------------
First Second Third Fourth
- ------------------------------------------------------------------------------------------------------------

Revenues $ 297 $ 321 $ 341 $ 344
Cost of services 180 193 201 203
- ------------------------------------------------------------------------------------------------------------
Gross margin 117 128 140 141
Selling, general and administrative expenses 70 75 81 80
Restructuring charges -- 7 9 --
Depreciation and amortization 17 18 20 20
- ------------------------------------------------------------------------------------------------------------
Operating income 30 28 30 41
Interest and other expense, net 8 7 8 6
- ------------------------------------------------------------------------------------------------------------
Income before income taxes 22 21 22 35
Income tax expense 8 7 10 12
- ------------------------------------------------------------------------------------------------------------
Income from continuing operations 14 14 12 23
Discontinued operations 5 4 2 --
- ------------------------------------------------------------------------------------------------------------
Net income 19 18 14 23
Income on common stock $ 18 $ 17 $ 14 $ 23
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
- ------------------------------------------------------------------------------------------------------------
Earnings per common share - basic $ 0.23 $ 0.21 $ 0.16 $ 0.26
- ------------------------------------------------------------------------------------------------------------
Earnings per common share - diluted $ 0.20 $ 0.18 $ 0.14 $ 0.23
- ------------------------------------------------------------------------------------------------------------
Basic weighted average shares 77 81 86 89
- ------------------------------------------------------------------------------------------------------------
Diluted weighted average shares 98 99 99 100
- ------------------------------------------------------------------------------------------------------------

(A) Common Stock equivalents were antidilutive and therefore excluded from
weighted average shares.

46
47

15. SUBSEQUENT EVENT

47
48

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

None.

PART III

ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY

Information with respect to executive officers of the Company is set forth
in Part I of this Annual Report on Form 10-K.

Information with respect to directors of the Company is incorporated by
reference from the information under the caption "Information As to Nominees
For Election As Directors" and "Information As to Directors Continuing In
Office" in LCI's Proxy Statement for its 1998 Annual Meeting of Shareowners
(the "1998 Proxy Statement"). Information with respect to compliance with
Section16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to the information under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance in the 1998 Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

Incorporated by reference from the captions "Board of Directors' Meetings,
Committees and Fees" and "Executive Compensation and Related Information"
including "Summary Compensation Table," "Option Grants in 1997," "Aggregated
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values,"
"Employment Contracts, Termination of Employment and Change-In-Control
Arrangements," and "Compensation Committee Interlocks and Insider
Participation" but not including "Compensation Committee Report on Executive
Compensation" and "Performance Graph" in the 1998 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by reference from "Security Ownership of Management and
Others" in the 1998 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

48
49

PART IV

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

(a) Documents filed as part of this report:

(1) Financial Statements

The consolidated financial statements of the Company and the related report
of the Company's independent public accountants have been filed under Item
8 on page 27 hereof.

(2) Financial Statement Schedules

All supporting schedules other than those listed below have been omitted
because they are not required or the information to be set forth therein is
included in the financial statements or in the notes thereto. The
following additional financial data should be read in conjunction with the
financial statements incorporated by reference herein.

Report of Independent Public Accountants on Financial Statement Schedule

Schedule II - Valuation and Qualifying Accounts

(3) Exhibits.

The exhibits filed or incorporated by reference as part of this report are
set forth in the Index of Exhibits on page E-1 of this Annual Report.

(b) Reports on Form 8-K: The Company did not file any reports on Form 8-K
during the three months ended December 31, 1997.

(d) See Item 14(a)(2) above.

49
50

INDEX TO EXHIBITS

EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------

2(a) - Agreement of purchase of sale of assets dated December 17,
1995 by and between LCI International Telecom Corp. and
Teledial America, Inc. (d/b/a U.S. Signal Corporation).(16)

2(b) - Agreement and Plan of Merger, dated as of September 17, 1997,
by and among LCI International, Inc., LCI Acquisition Corp.
and USLD Communications Corp.(27)

3(i)(a) - Amended and Restated Certificate of Incorporation. (19)

3(i)(b) - Certificate of Designation of 5% Cumulative Convertible
Exchangeable Preferred Stock.(2)

3(i)(c) - Certification of Designations, Preferences and Rights of
Junior Participating Preferred Stock. (24)

3(ii) - Amended and Restated By-laws. (22)

4(a)(i) - Specimen Preferred Stock Certificate. (2)

4(a)(ii) - Specimen Common Stock Certificate. (1)

4(b) - Registration Rights Agreement, effective as of November 15,
1988, among LCI Communications Holdings Co., LCI
Communications, Inc., Warburg, Pincus Capital Company, L.P.,
Primus Capital Fund and Primus Capital Fund II, L.P.(1)

4(c) - Credit Agreement, dated as of December 30, 1993, by and among
LCI International, Inc., First Union National Bank of North
Carolina and Nationsbank of Texas, N.A.(5)

4(c)(i) - First Amendment and Confirmation, dated as of March 3, 1994,
by and among LCI International, Inc., LCI International
Management Services, Inc., LCI International of New Hampshire,
Inc., 1056974 Ontario Inc., First Union National Bank of North
Carolina and NationsBank of Texas, N.A.(5)

4(c)(ii) - Unconditional Guaranty Agreement, dated as of January 19,
1994, by and between LCI International Management Services,
Inc. and First Union National Bank of North Carolina. (5)

4(c)(iii) - Unconditional Guaranty Agreement, dated as of January 19,
1994, by and between LCI International of New Hampshire, Inc.
and First Union National Bank of North Carolina.(5)

4(c)(iv) - Unconditional Guaranty Agreement, dated as of January 19,
1994, by and between 1056974 Ontario Inc. and First Union
National Bank of North Carolina.(5)

4(c)(v) - Pledge Agreement, dated as of December 30, 1993, by and
between LCI International, Inc. and First Union National Bank
of North Carolina.(5)

4(c)(vi) - Pledge Agreement, dated as of January 19, 1994, by and between
LCI International Management Services, Inc. and First Union
National Bank of North Carolina.(5)

4(c)(vii) - Pledge Agreement, dated as of January 19, 1994, by and between
LCI International, Inc. and First Union National Bank of North
Carolina.(5)

4(c)(viii) - Second Amendment, dated April 7, 1994, to the Credit
Agreement, dated December 30, 1993 by and among LCI
International, Inc., First Union National Bank of North
Carolina and Nationsbank of Texas, N.A.(6)

4(c)(ix) - Third Amendment, dated September 28, 1994, to the Credit
Agreement, dated December 30, 1993 by and among LCI
International, Inc., First Union Bank of North Carolina and
Nationsbank of Texas, N.A.(8)

4(c)(x) - Unconditional Guaranty Agreement, dated as of September 1,
1994, by and between LCI Telecom South, Inc. and First Union
National Bank of North Carolina.(8)

4(c)(xi) - Unconditional Guaranty Agreement, dated as of September 1,
1994, by and between LCI International Telecom Corp., and
First Union National Bank of North Carolina.(8)

4(c)(xii) - Fourth Amendment, dated October 21, 1994, to the Credit
Agreement, dated December 30, 1993 by and among LCI
International, Inc., First Union Bank of North Carolina and
Nationsbank of Texas, N.A.(11)

E - 1
51

4(c)(xiii) - Amended and Restated Credit Agreement, dated as of June 6,
1995, by and among LCI International, Inc., First Union
National Bank of North Carolina, and Nationsbank of Texas,
N.A.(13)

4(c)(xiv) - Second Amended and Restated Credit Agreement, dated as of
February 14, 1996, by and among LCI International, Inc., First
Union National Bank of North Carolina, and Nationsbank of
Texas, N.A. (18)

4(c)(xv) - Third Amended and Restated Credit Agreement, dated as of
September 5, 1997, by and among LCI International Inc., First
Union National Bank, Nationsbank of Texas, N.A., and the Bank
of New York. (28)

4(c)(xvi) - 364 Day Credit Agreement, dated as of September 5, 1997, by
and among LCI International, Inc., First Union National Bank,
Nationsbank of Texas, N.A., and the Bank of New York. (28)

4(c)(xvii) - Indenture, dated as of June 23, 1997 between LCI
International, Inc., and First Trust National Association, as
trustee, Providing for the Issuance of Senior Debt Securities,
including Resolutions of the Pricing Committee of the Board
of Directors establishing the terms of the 7.25% Senior Notes
due June 15, 2007. (25)

4(d) - Registration Rights Agreement, dated as of November 15, 1988,
by and among LCI Communications Holdings Co., Warburg, Pincus
Capital Company, L.P., APT Holdings Corporation and
Creditanstalt-Bankverein.(1)

4(e) - Registration Rights Agreement, dated as of December 30, 1988,
by and among LCI Communications Holdings Co., Warburg, Pincus
Capital Company, L.P., PNC Venture Corp. and PNC Venture Group
I, L.P.(1)

4(f) - Registration Rights Agreement, dated as of January 16, 1989,
by and among LCI Communications Holdings Co., Warburg, Pincus
Capital Company, L.P., and Trustees of General Electric
Pension Trust.(1)

4(g) - $64,262,707 Subordinated Term Note, dated June 17, 1993,
issued by LiTel Communications, Inc.(2)

4(h) - Rights Agreement, dated as of January 22, 1997 between LCI
International Inc. and Fifth Third Bank, as Rights Agent. (23)

10(a)(i) - License Agreement, dated November 19, 1984, between the Ohio
Turnpike Commission and Litel Telecommunications
Corporation.(1)

10(a)(ii) - Right-of-Way Agreement, dated October 31, 1984, among Grand
Trunk Western Railroad Company and Litel Telecommunications
Corporation.(1)

10(a)(iii) - Right-of-Way Agreement, dated May 14, 1985, between Indiana
Department of Highways Toll Road Division and Litel
Telecommunications Corporation.(1)

10(b) - Lease Agreement, dated September 27, 1984, by and between
Terminal Management Inc. and LiTel, Inc.(1)

10(c) - Indenture of Lease and License Agreement, dated November 1985,
by and between Drytraub of Illinois, Inc., Drytraub Office
Management, Inc. and Litel Telecommunications Corporation, as
amended.(1)

10(d) - Lease Agreement, dated March 3, 1989, by and between The
Equitable Life Assurance Society (successor in interest to 180
East Broad Partnership) and Litel Telecommunications
Corporation, as amended.(1)

10(e) - Lease Agreement, dated August 14, 1989, by and between Duke
Associates No. 70 Limited Partnership and LCI International
Management Services, Inc., as amended.(1)

10(f) - Agreement Regarding Additional Space, dated August 14, 1989,
among Duke Associates No. 70 Limited Partnership and LCI
International Management Services, Inc., as amended.(1)

10(g) - Lease Agreement, dated as of October 11, 1993, by and between
Eighty-One Eighty Greensboro Associates Limited Partnership
and LCI International, Inc.(4)

10(g)(i) - Lease, dated May 19, 1986, by and between 13th and L
Associates and Long-Distance Services of Washington, Inc.(2)

E - 2
52

10(g)(ii) - Amendment No. 1 to Lease, dated December 20, 1988, by and
between 13th and L Associates and Long Distance Service of
Washington, Inc.(4)

10(g)(iii) - Second Amendment to Retail Lease, dated June 6, 1991, by and
between 13th and L Associates and Long Distance Service of
Washington, Inc.(4)

10(h) - Master License and Services Agreement, dated as of March 1,
1993, among LiTel Communications, Inc. and the Subsidiaries
named in Schedule I thereto.(1)

10(h)(i) - First Amendment to Master License and Services Agreement,
dated as of April 29, 1993, among LiTel Communications, Inc.,
Litel Telecommunications Corporation, Afford-A-Call Corp. and
LDS Telecommunications Corp. f/k/a New Cable Inc.(1)

10(h)(ii) - Management Services Agreement dated as of April 1, 1993,
between LCI International, Inc. and LiTel Communications,
Inc.(1)

10(i) - Agreement for Purchase of Assets between LiTel Communications,
Inc. and Long Distance Service of Washington, Inc. and
Richard J. Rice, dated February 1, 1993.(1)

10(j)(i) - Interim Loan Agreement, dated as of October 15, 1993, between
LCI International, Inc. and STN Incorporated.(3)

10(j)(ii) - Secured Demand Note, dated as of October 15, 1993, between LCI
International, Inc. and STN Incorporated.(3)

10(j)(iii) - Note Pledge Agreement, dated as of October 15, 1993, between
LCI International, Inc. and STN Incorporated.(3)

10(j)(iv) - Debenture Purchase Agreement, dated as of October 15, 1993,
between LCI International, Inc. and STN Incorporated.(3)

10(j)(viii) - TransPrairie Option Agreement, dated as of October 15, 1993,
by and among LCI International, Inc., TransPrairie Energy
Management Partnership and certain persons named on the
signature pages thereof.(3)

10(j)(ix) - Services Agreement and License, dated as of October 26, 1993,
between LCI International Management Services, Inc. and STN
Incorporated.(3)

10(j)(x) - Traffic Exchange Agreement, dated as of October 26, 1993,
between LCI International Telecom Corp. and STN
Incorporated.(3)

10(j)(xii) - Promissary note dated April 29, 1994 between LCI International
Telecom Corp. and STN Incorporated.(6)

10(j)(xiii) - Promissary Note dated May 12, 1994 between LCI International
Telecom Corp. and STN Incorporated.(6)

10(j)(xiv) - Debenture Purchase Agreement Amendment, dated as of June 1,
1994, between LCI International, Inc., and STN
Incorporated.(7)

10(j)(xv) - Loan Agreement, dated June 1, 1994, between STN Incorporated
and LCI International, Inc.(7)

10(j)(xix) - Form of Share Option Agreement, dated May 31, 1994, between
LCI International, Inc. and Robey Company Limited, Vanier
Company Limited and Yarker Company Limited.(7)

10(j)(xx) - Debenture Purchase Agreement Second Amendment, dated July 7,
1994, between LCI International, Inc. and STN Incorporated.(7)

10(j)(xxi) - Debenture Purchase Agreement Third Amendment, dated July 22,
1994, between LCI International, Inc. and STN Incorporated.(7)

10(j)(xxii) - Loan Agreement Amendment, dated July 7, 1994, between LCI
International, Inc. and STN Incorporated.(7)

10(j)(xxiii) - Loan Agreement Second Amendment, dated July 22, 1994,
between LCI International, Inc. and STN Incorporated.(7)

10(j)(xxvi) - Promissory Note dated June 30, 1994 between LCI International,
Inc. and STN Incorporated.(7)

10(j)(xxvii) - Agreement of Purchase and Sale of Assets dated as of March 31,
1994 by and among LCI International Management Services, Inc.,
T.M. Sepulveda, Inc. and Gene Elmore.(10)

E - 3
53

10(j)(xxviii)- Agreement of Purchase and Sale of Assets dated as of March 31,
1994 by and among LCI International Management Services, Inc.,
Premium Access, Inc. and Gene Elmore.(10)

10(j)(xxvix) - Amendment No. 1 dated July 11, 1994 to Agreement of Purchase
and Sale of Assets of Glendale Gene, Inc. (formerly known as
T.M. Sepulveda, Inc.).(10)

10(j)(xxx) - Amendment No. 1 dated July 11, 1994 to Agreement of Purchase
and Sale of Assets of Glendale Access International, Inc.
(formerly known as Premium Access, Inc.).(10)

10(j)(xxxi) - Assignment of T.M. Sepulveda, Inc. Agreement of Purchase and
Sale of Assets from LCI International Management Services,
Inc. to LCI International Telecom Corp. dated April 4,
1994.(10)

10(j)(xxxii) - Assignment of Premium Access, Inc. Agreement of Purchase and
Sale of Assets from LCI International Management Services,
Inc. to LCI International Telecom Corp. dated April 4,
1994.(10)

10(j)(xxxiii)- Promissory Note of STN Incorporated, dated as of December 21,
1994, for Cnd. $6,951,500.(11)

10(j)(xxxiv) - General Security Agreement, dated as of December 21, 1994,
between STN Incorporated and LCI International, Inc. relating
to the Promissory Note.(11)

10(j)(xxxv) - Form of Acknowledgment and Promise to Pay, by STN
Incorporated, to be dated as of December 21, 1994, evidencing
amount owed to LCI International Management Services, Inc. for
certain services rendered prior to October 1, 1994.(11)

10(j)(xxxvi) - Form of General Security Agreement, dated as of December 21,
1994, relating to Acknowledgment and Promise to Pay.(11)

10(j)(xxxvii) - Indemnification Agreement, dated as of January 6, 1995,
between STN Incorporated and LCI International, Inc.(11)

10(j)(xxxviii) General Security Agreement, dated as of January 6, 1995
between STN Incorporated and LCI International, Inc., relating
to the Indemnification Agreement.(11)

10(j)(xxxix) - Agreement and Plan Of Merger dated July 10, 1995 among LCI
International Inc., LCI Telemanagement Corp., Corporate
Telemanagement Group, Inc. and the Warrant Holders listed on
the signature pages thereto.(15)

10(k)(i) - Letter Agreement, dated February 9, 1993, between H. Brian
Thompson and Warburg, Pincus Capital Company, L.P.(1)*

10(k)(ii) - Letter Agreement, dated February 9, 1993, between Thomas J.
Wynne and Warburg, Pincus Capital Company, L.P.(1)*

10(k)(iii) - Letter Agreement, dated February 9, 1993, between Marshall W.
Hanno and Warburg, Pincus Capital Company, L.P.(1)*

10(l)(v) - Employment Agreement, dated as of October 18, 1993, between
LCI International Management Services, Inc. and Joseph A.
Lawrence.(11)*

10(l)(vi) - Form of LCI International, Inc. 1994 Executive Perquisite
Program.(5)*

10(l)(vii) - LCI International, Inc. 1992 Stock Option Plan.(1)*

10(l)(viii) - LiTel Communications, Inc. 1993 Stock Option Plan.(1)*

10(l)(ix) - LCI International, Inc. 1994/1995 Stock Option Plan.(5)*

10(l)(x) - LiTel Communications, Inc. Stock Purchase Plan.(1)*

10(l)(xi) - LCI International, Inc. and Subsidiaries Nonqualified Stock
Option Plan for Directors.(2)*

10(l)(xii) - LCI International, Inc. 1995/1996 Stock Option.(9)*

10(l)(xiii) - LCI International, Inc. Amended and Restated Employee Stock
Purchase Plan.(9)*

10(l)(xiv) - Employment Agreement, dated as of March 20, 1994, between LCI
International, Inc. and H. Brian Thompson.(11)*

10(l)(xv) - Employment Agreement, dated as of March 20, 1994, between LCI
International, Inc. and Thomas J. Wynne.(11)*

10(l)(xvi) - Form of Employment Agreement, dated as of March 20, 1994,
between LCI International, Inc. and Marshall W. Hanno.(11)*

E - 4
54

10(l)(xvii) - LCI International Management Services, Inc. Supplemental
Executive Retirement Plan.(12)*

10(l)(xviii) - Employment Agreement, dated as of October 1, 1995
between LCI International Management Services, Inc.,
and Larry Bouman.(18)*

10(l)(xix) - Employment Agreement, dated as of September 18, 1995 between
LCI Telemanagement Corp. and Charles S. Houser.(18)*

10(l)(xx) - Employment Agreement, dated as of March 19, 1996 between LCI
Management Services, Inc. and Roy Gamse.(19)*

10(l)(xxi) - 1997/1998 LCI International, Inc. Stock Option Plan. (22)*

10(l)(xxii) - LCI International, Inc. and Subsidiaries Executive Incentive
Compensation Plan. (22)*

10(l)(xxiii) - Employment Agreement, dated January 23, 1997, between
LCI Management Services, Inc, and Anne K. Bingaman.(26)

10(l)(xxiv) - Agreement and Release of All Claims

10(m) - Lease Agreement dated as of July 1, 1994 by and between LCI
International Management Services, Inc. and Bank Building
Limited Partnership.(6)

10(n) - Lease Agreement dated April 14, 1994 by and between LCI
International Management Services, Inc. and RFG Co., LTD.(6)

10(o) - Fourth Amendment to Lease and Consent to Assignment dated as of
June 28, 1994 by and between LCI International Telecom Corp.
and One Wilshire Arcade Imperial, LTD.(8)

10(p) - Network Services Agreement dated December 22, 1994 between MCI
Telecommunications Corporation and LCI International Telecom
Corp.(11,29)

10(q)(i) - Contractor Agreement dated January 18, 1993 by and between LCI
International Telecom Corp. and American Communications
Network, Inc. (14,29)

10(q)(ii) - Addendum to Contractor Agreement by and between American
Communications Network, Inc. and LCI International Telecom
Corp. dated January 18, 1993.(14)

10(q)(iii) - Amendment No.1 to Contractor Agreement by and between LCI
International Telecom Corp. and American Communications
Network, Inc. dated _______, 1994.(14,29)

10(q)(iiii) - Contractor Agreement dated May 1, 1996 between LCI
International Telecom Corp. and American Communications
Network, Inc. (21, 29)

10(r)(i) - Transfer and Administrative Agreement among Enterprise Funding
Corporation, LCI SPC I, Inc., LCI International Telecom Corp.,
NationsBank, N.A. and certain other parties thereto, dated
August 29, 1996. (20)

10(r)(ii) - Receivables Purchase Agreement dated August 29, 1996, among
LCI International Telecom Corp. and LCI SPC I, Inc. (20)

10(r)(iii) - Subordinated Intercompany Revolving Note, date August 29,
1996, issued to LCI International Telecom Corp. by LCI SPC I,
Inc. (20)

10(r)(iv) - Support Agreement, dated August 29, 1996, by LCI
International, Inc. in favor of LCI SPC I, Inc. (28)

10(s)(i) - Participation Agreement dated as of November 1996 among LCI
International, Inc., as the Construction Agent and as the
Lessee, First Security Bank, National Association, as the
Owner Trustee under the Stuart Park Trust, the various banks
and lending institutions which are parties thereto from time
to time as the Holders, the various banks and lending
institutions which are parties thereto from time to time as
the Lenders and NationsBank of Texas, N.A., as the Agent for
the Lenders. (22)

10(s)(ii) - Unconditional Guaranty Agreement dated as of November 15, 1996
made by LCI International, Inc., as Guarantor in favor of
NationsBank of Texas, N.A., as Agent for the ratable benefit
of the Tranche A Lenders. (22)

10(s)(iii) - Agency Agreement between LCI International, Inc., as the
Construction Agent and First Security Bank, National
Association, as the Owner Trustee under the Stuart Park Trust
as the Lessor dated as of November 15, 1996. (22)

E - 5
55

10(s)(iv) - Deed of Lease Agreement dated as of November 15, 1996 between
First Security Bank, National Association as the Owner Trustee
under the Stuart Park Trust, as Lessor and LCI International,
Inc. as Lessee. (22)

21 - Subsidiaries of LCI International, Inc.

23 - Consent of Arthur Andersen LLP

27 - Financial Data Schedule

(1) Incorporated by reference to the Company's Registration Statement No.
33-60558.

(2) Incorporated by reference to the Company's Registration Statement No.
33-67368.

(3) Incorporated by reference to the Company's Form 8-K dated October 17,
1993.

(4) Incorporated by reference to the Company's Registration Statement No.
33-71500.

(5) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1993.

(6) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1994.

(7) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994.

(8) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994.

(9) Incorporated by reference to the Company's Proxy Statement for the
1995 Annual Meeting of Shareowners.

(10) Incorporated by reference to the Company's Form 8-K dated July 11,
1994.

(11) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994.

(12) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1995.

(13) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1995.

(14) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995.

(15) Incorporated by reference to the Company's Form 8-K dated July 10,
1995.

(16) Incorporated by reference to the Company's Form 8-K dated December 17,
1995.

(17) Incorporated by reference to the Company's Registration Statement No.
33-96186.

(18) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.

(19) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996.

(20) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996.

(21) Incorporated by reference to the Company's Quarterly Report on Form
10-Q/A for the quarter ended June 30, 1996.

(22) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.

(23) Incorporated by reference form the Company's Current Report on Form
8-K, dated January 22, 1997.

(24) Incorporated by reference from the Company's Quarterly Report on Form
10-Q/A for the quarterly period ended March 31, 1997.

(25) Incorporated by reference from the Company's Current Report on Form
8-K dated June 23, 1997.

E - 6
56

(26) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997.

(27) Incorporated by reference form the Company's Current Report on Form
8-K, dated September 17, 1997.

(28) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1997.

(29) Confidential treatment has been requested for portions of this
exhibit.

* Indicates a management contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c) of Form
10-K.

E - 7
57

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

LCI International, Inc.

By: /s/ H. BRIAN THOMPSON
---------------------------
H. Brian Thompson
Chairman of the Board and
Chief Executive Officer
Date: March 12, 1998

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

Name Title
---- -----

/s/ H. BRIAN THOMPSON Chairman of the Board, Chief March 12, 1998
- ------------------------------------------- Executive Officer and Director
H. BRIAN THOMPSON (principal executive officer)

/s/ JOSEPH A. LAWRENCE Executive Vice President - March 13, 1998
- ------------------------------------------- and Chief Financial Officer
JOSEPH A. LAWRENCE (principal financial and
accounting officer)

/s/ RICHARD E. CAVANAGH Director March 13, 1998
- -------------------------------------------
RICHARD E. CAVANAGH

/s/ WILLIAM F. CONNELL Director March 16, 1998
- -------------------------------------------
WILLIAM F. CONNELL

/s/ JULIUS W. ERVING, II Director March 13, 1998
- -------------------------------------------
JULIUS W. ERVING, II

/s/ DOUGLAS M. KARP Director March 13, 1998
- -------------------------------------------
DOUGLAS M. KARP

/s/ GEORGE M. PERRIN Director March 16, 1998
- -------------------------------------------
GEORGE M. PERRIN

/s/ JOHN L. VOGELSTEIN Director March 16, 1998
- -------------------------------------------
JOHN L. VOGELSTEIN

S-1
58

Report of Independent Public Accountants

To the Board of Directors and Shareowners of LCI International, Inc.:

We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in LCI International, Inc.'s annual
report to shareowners incorporated by reference in this Form 10-K, and have
issued our report thereon dated February 16, 1998. Our audits were made for the
purpose of forming an opinion on those statements taken as a whole. The
schedule listed in the index is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Washington, D.C.
February 16, 1998

II-1
59
Schedule II

LCI INTERNATIONAL, INC.

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)

- ---------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ---------------------------------------------------------------------------------------------------------------------------------
Additions
---------------------------------
(1) (2)
Balance at Charged to Charged to Deductions - Balance at
Description Beginning of Costs and Other Accounts Describe End of
Period Expenses - Describe (b) Period
(a)
- ---------------------------------------------------------------------------------------------------------------------------------

Reflected as reductions to the
related assets:

Allowance for doubtful accounts
(deductions from trade
accounts receivable)

Year ended December 31, 1995 7,496 15,178 37,235 (48,294) 11,615
Year ended December 31, 1996 11,615 24,208 67,380 (72,805) 30,398
Year ended December 31, 1997 30,398 50,955 94,390 (123,742) 52,001

(a) Represents reduction of revenue for accrued credits, which is consistent
with industry practice.

(b) Represents amounts written off as uncollectible, credits issued and
collection fees, net of recoveries of amounts previously written off and
balances recorded from acquisitions.

II-1