Robert J. Merlo - Page 2

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          Inc. (Exodus) he acquired during 2000 as a result of exercising             
          an incentive stock option (ISO) were subject to a substantial               
          risk of forfeiture; and (2) whether petitioner is entitled to an            
          alternative tax net operating loss (ATNOL) deduction under                  
          section 56(d).                                                              
                                     Background                                       
               At the time he filed his petition, petitioner resided in               
          Dallas, Texas.                                                              
               On July 2, 1999, petitioner commenced work for Service                 
          Metrics, Inc. (SMI), as Vice President of Marketing.  On July 14,           
          1999, SMI granted petitioner a stock option to purchase 275,000             
          shares of SMI common stock.                                                 
               On November 19, 1999, petitioner entered into an employment            
          agreement with Exodus.  On November 23, 1999, Exodus acquired               
          SMI.  Pursuant to the reorganization agreement, petitioner’s SMI            
          stock option was assumed by Exodus and was converted into an                
          option to purchase shares of Exodus common stock.                           
               According to the Exodus prospectus entitled “Stock Options             
          Granted Under the Service Metrics, Inc. 1998 Stock Option Plan              
          Assumed by Exodus Communications, Inc.”:                                    
                    The Service Metrics Plan generally does not impose                
               any restrictions on the resale of shares of Common                     
               Stock purchased under the Service Metrics Plan. * * *                  
                    In accordance with federal law and Exodus’ policy                 
               prohibiting insider trading, you [petitioner] are                      
               always prohibited from trading in Exodus securities                    
               when you [petitioner] have inside information.                         





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