~~=========================================================================~~ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q

(Mark One)


{X}		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2001

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

For the transition period from ~~___________~~_________________to ~~to ___________~~_________________

Commission File Number:
000-29515

Net2000 Communications, Inc.
(Exact name of registrant as specified in its charter)

DELAWARE		51-0384995
DELAWARE (State or other jurisdiction of incorporation or organization)		51-0384995 (I.R.S. Employer Identification No.)
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
2180 FOX MILL ROAD HERNDON, VA (Address of principal executive offices)		20171 (Zip Code)
incorporation or organization)
2180 FOX MILL ROAD		20171
HERNDON, VA		(Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code: (800) 825-2000

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.

(1) Yes {X} (2) No { }

The number of shares outstanding of the Registrant’s common stock as of ~~July~~October 31, 2001, was 40,~~304~~335,~~179~~994.

=========================================================================

INDEX
		Page	~~Page~~
PART I - FINANCIAL INFORMATION
PART I — FINANCIAL INFORMATION
ITEM 1. Financial Statements
	Consolidated Balance Sheets at June 30, 2001 (Unaudited) and December 31, 2000			1
	Consolidated Balance Sheets at September 30, 2001 (Unaudited) and December 31, 2000		1
	Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2001 and 2000			2
	Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2001 and 2000		2
	Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000			3
	Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000		3
	Notes to the Unaudited Consolidated Financial Statements		4	4
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			11	11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			25	24
PART II - OTHER INFORMATION
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings			26	25
ITEM 2. Changes in Securities and Use of Proceeds			26	25
ITEM 3. Defaults upon Senior Securities			26	25
ITEM 4. Submission of Matters to a Vote of Security Holders			26	25
ITEM 5. Other Information			27	26
ITEM 6. Exhibits and Reports on Form 8-K			27	26
Signature			31	31

PART I. -— FINANCIAL INFORMATION

NET2000 COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

			June 30,				December 31,
					September 30,				December 31,
			~~2001~~		2001		~~2000~~		2000
			~~(Unaudited)~~	(Unaudited)
ASSETS		~~ASSETS~~
Current assets:
	Cash and cash equivalents		$	~~34,852~~	$	14,905	$	~~49,194~~	$	49,194
	Investments available for sale			~~11,823~~		—		~~15,720~~		15,720
	Restricted cash			~~5,332~~		4,582		~~4,582~~		4,582
	Accounts receivable, net of allowance for doubtful accounts of approximately $9,735 and $4,370 at June 30, 2001 and December 31, 2000, respectively			29,594				19,143
	Accounts receivable, net of allowance for doubtful accounts of approximately $14,668 and $4,370 at September 30, 2001 and December 31, 2000, respectively					33,695				19,143
	Other current assets			~~6,073~~		5,893		~~3,620~~		3,620
Total current assets				~~87,674~~		59,075		~~92,259~~		92,259
Property and equipment, net of accumulated depreciation				~~171,078~~		167,274		~~156,973~~		156,973
Goodwill, net of accumulated amortization				~~20,300~~		19,100		~~16,357~~		16,357
Other noncurrent assets				~~11,771~~		10,567		~~9,793~~		9,793
Unamortized debt discount				~~1,806~~		1,714		~~1,993~~		1,993
Total assets			$	~~292,629~~	$	257,730	$	~~277,375~~	$	277,375
LIABILITIES AND STOCKHOLDERS’ EQUITY		~~LIABILITIES AND STOCKHOLDERS’ EQUITY~~
Current liabilities:
	Accounts payable		$	~~5,793~~	$	11,542	$	~~9,333~~	$	9,333
	Accrued expenses and other current liabilities			~~38,874~~		45,014		~~28,532~~		28,427
	Deferred revenue			1,703				1,349
	Short Term Debt					110,814				105
Total current liabilities				46,370				39,214
	Deferred revenue					1,791				1,349
Related party noncurrent liabilities				2,550				5,504
Total current liabilities						169,161				39,214
Long-term debt				111,599				98,894
Related party noncurrent liabilities						—				5,504
Redeemable convertible Series D preferred stock, $0.01 par value; 65,000 shares authorized and outstanding at June 30, 2001; including accrued preferred dividends				66,140				—
Long-term debt						371				98,894
Stockholders’ equity:
Redeemable convertible Series D preferred stock, $0.01 par value; 65,000 shares authorized and outstanding at September 30, 2001; including accrued preferred dividends						61,807				—
	Common stock, $0.01 par value; 200,000,000 shares authorized, 39,767,008, and 38,447,418 shares issued and outstanding June 30, 2001 and December 31, 2000, respectively			398				384
Stockholders’ equity:
Additional capital				326,527				324,148
	Common stock, $0.01 par value; 200,000,000 shares authorized, 40,313,346, and 38,447,418 shares issued and outstanding September 30, 2001 and December 31, 2000, respectively					403				384
Deferred stock compensation				(5,621	)			(6,843	)
Additional capital						332,922				324,148
Accumulated deficit				(255,334	)			(183,926	)
Deferred stock compensation						(4,552	)			(6,843	)
		Total stockholders’ equity		65,970				133,763
Accumulated deficit						(302,382	)			(183,926	)
		Total liabilities and stockholders’ equity	$	292,629			$	277,375
		Total stockholders’ equity				26,391				133,763
		Total liabilities and stockholders’ equity			$	257,730			$	277,375

See accompanying notes that are an integral part of these condensed consolidated Financial Statements.

NET2000 COMMUNICATIONS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)

		For the Three Months Ending June 30,						For the Six Months Ending June 30,
		For the Three Months						For the Nine Months
		Ending September 30,						Ending September 30,
		2001			2000			2001			2000
Revenues		$	3031,~~315~~537		$	1316,~~176~~628		$	5486,~~824~~361		$	2340,~~789~~416
	Operating costs and expenses:
	Operating costs		1920,~~826~~315			1012,~~222~~412			3757,~~416~~731			1831,~~741~~153
	Selling, general and administrative (exclusive of non-cash compensation expense shown below)		3132,~~672~~347			1823,~~077~~836			6093,~~767~~114			3458,~~324~~160
	Non-cash compensation expense		~~600~~1,068			~~970~~572			12,~~222~~290			12,~~630~~202
	Restructuring charge		38,~~000~~500			—			311,~~000~~500			—
	Depreciation and amortization		810,~~968~~050			35,~~328~~890			1626,~~779~~829			511,~~768~~658
Loss from operations			(3340,~~751~~743	)		(1926,~~421~~082	)		(64105,~~360~~103	)		(3662,~~674~~757	)
Other income (expenses):
	Interest income		~~818~~399			2,~~855~~009			12,~~712~~111			35,~~940~~949
	Interest expense		(4,~~303~~053	)		(1,~~309~~471)	)		(711,~~588~~641	)		(34,~~392~~863	)
	Miscellaneous income		(28	)		(6	)		161			4
	Miscellaneous income (expense)		26			(19	)		187			(14	)
Loss before provision for income taxes			(3744,~~264~~371	)		(1725,~~881~~563	)		(70114,~~075~~446	)		(3661,~~122~~685	)
Provision for income taxes			—			—			—			—
Loss before extraordinary item			(3744,~~264~~371	)		(1725,~~881~~563	)		(70114,~~075~~446	)		(3661,~~122~~685	)
Extraordinary debt extinguishment loss			—			—			—			(4,724	)
Net loss			(3744,~~264~~371	)		(1725,~~881~~563	)		(70114,~~075~~446	)		(4066,~~846~~409	)
Preferred stock accretion			—			—			—			(3,759	)
Preferred stock dividend			(1,~~140~~573	)		—			(12,~~140~~713	)		—
Net loss available to common stockholders		$	(3845,~~404~~944	)	$	(1725,~~881~~563	)	$	(71117,~~215~~159	)	$	(4470,~~605~~168	)
Pro forma net loss available to common stockholders											$	(4066,~~846~~409	)
Basic and diluted loss per shares:
	Available to common stockholders before extraordinary item	$	(1.9716	)	$	(.4767	)	$	(12.8195	)	$	(12.4309	)
	Extraordinary loss		—			—			—			(.1715	)
	Available to common stockholders	$	(1.9716	)	$	(.4767	)	$	(12.8195	)	$	(12.6024	)
Pro forma basic and diluted loss per share:
	Available to common stockholders before extraordinary item										$	(1.0976	)
	Extraordinary loss											(.14	)
	Available to common stockholders										$	(1.2390	)
Shares used in calculation of loss per share:
Basic and diluted			39,~~762~~770,~~303~~018			3738,~~785~~319,~~732~~805			39,~~362~~678,~~428~~842			2731,~~845~~338,~~216~~120
Pro forma basic and diluted												3334,~~166~~885,~~210~~449

See accompanying notes that are an integral part of these condensed consolidated Financial Statements.

NET2000 COMMUNICATIONS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

			For the Six Months Ended
			For the Nine Months Ended
			June 30,
			September 30,
			2001			2000
Operating activities Net loss			$	(70,075	)	$	(40,846	)
Operating activities
Adjustments to reconcile net loss to net cash used in operating activities:
Net loss			$	(114,446	)	$	(66,409	)
	Depreciation and amortization			16,779			5,768
Adjustments to reconcile net loss to net cash used in operating activities:
	Allowance for doubtful accounts			5,365			1,209
	Depreciation and amortization			26,830			11,658
	Deferred stock compensation			1,222			1,630
	Allowance for doubtful accounts			6,993			2,517
	Amortization of debt discount			187			405
	Deferred stock compensation			2,290			2,202
	Amortization of debt discount			279			502
	Extraordinary debt extinguishment loss			—			4,724
	Loss from sale of assets			73			—
	Changes in operating assets and liabilities:
		Accounts receivable		(1319,~~695~~424	)		(510,~~405~~428	)
		Other current assets		(1,~~089~~965	)		(4173	)
		Other noncurrent assets		(~~2,003~~950	)		(45,~~497~~807	)
		Accounts payable		(41,~~179~~570	)		~~5,196~~516
		Accrued expenses and other current liabilities		511,~~900~~541			411,~~495~~289
		Deferred revenue		(~~793~~705	)		—
		Other noncurrent liabilities		—			(~~117~~216	)
Net cash used in operating activities				(6287,~~308~~914	)		(2749,~~442~~279	)
Investing activities Acquisition of property and equipment				(31,394	)		(68,190	)
Investing activities
Purchase of investments available for sale				—			(68,151	)
Acquisition of property and equipment				(37,927	)		(95,871	)
Sale of investments available for sale				3,897			11,066
Acquisition, net of cash				—			(8,292	)
Increase in restricted cash				(750	)		(150	)
Purchase of investments available for sale							(78,723	)
Net cash used in investing activities				(28,247	)		(125,425	)
Sale of investments available for sale				15,720			30,006
Financing activities Proceeds from note payable				14,556			99,427
Increase in restricted cash							(1,065	)
Repayments on note payable				(1,116	)		(90,838	)
Net cash used in investing activities				(22,207	)		(153,945	)
Proceeds from issuance of common stock				—			212,261
Financing activities
Proceeds from exercise of stock options and employee stock purchase plan				530			1,225
Proceeds from note payable				15,690			99,427
Repayments on note payable				(1,128	)		(94,113	)
Proceeds from issuance of common stock				—			212,052
Proceeds from exercise of stock options and employee stock purchase plan				305			2,235
Proceeds from sale of redeemable convertible preferred stock				65,000			—
Repayment of capital leases				(24,~~757~~035	)		(24,~~590~~193	)
Net cash provided by financing activities				7675,~~213~~832			~~219~~215,~~485~~408
Net (decrease) increase in cash				(1434,~~342~~289	)		6612,~~618~~184
Cash at the beginning of period				49,194			5,523
Cash at the end of period			$	3414,~~852~~905		$	7217,~~141~~707

See accompanying notes that are an integral part of these condensed consolidated Financial Statements.

NET2000 COMMUNICATIONS, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Three and ~~six~~nine months ended ~~June~~September 30, 2001 and ~~June~~September 30, 2000 (In thousands, except share and per share amounts)

1. Description of Business and Basis of Presentation

Net2000 Communications, Inc. (the “Company”) is a ~~rapidly-growing,~~ innovative provider of state-of-the-art broadband telecommunications services. As a competitive local exchange carrier (“CLEC”), the Company offers businesses located throughout the mid-Atlantic and northeastern regions of the United States cutting-edge, responsive solutions as an alternative to traditional telephone companies. The Company focuses on high-end customers, primarily large- and medium-sized businesses, and offers an integrated package of high-speed data services, internet services, local and long distance services, and interactive video services, primarily delivered from our own network over a single, high-capacity broadband connection.

The accompanying consolidated financial statements as of ~~June~~September 30, 2001, and for the three and the ~~six~~nine months ended ~~June~~September 30, 2001 and ~~June~~ September 30, 2000, are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the results for the periods presented in accordance with generally accepted accounting principles. Our results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year. These financial ~~statements~~ statements should be read in conjunction with our audited financial statements for the year ended December 31, 2000, included in the Company’s Form 10-K, filed with the Securities and Exchange Commission.

As more fully described in Note 14, on November 16, 2001, the Company agreed to sell substantially all of its telecommunications services assets and filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The consolidated interim financial statements do not include any adjustments to reflect the effects on the recoverability and classification of assets or the amounts or classifications of liabilities that may result from the bankruptcy reorganization.

2. Investments Available for Sale

The Company classifies its investments as available-for-sale. Investments in securities that are classified as available-for-sale and have readily determinable fair values are measured at fair market value on the balance sheets. As of ~~June~~September 30, 2001, all investments were held in conservative investment grades of commercial paper. Any unrealized gains or losses, net of taxes, are reported as a separate component of stockholders’ equity, if deemed material. Realized gains and losses and declines in market value judged to be other than temporary are included in investment income. Interest and dividends are included in interest income. As of ~~June~~September 30, 2001 and December 31, 2000, there are no material unrealized gains or losses on investments.

3. Goodwill and Other Intangible Assets

Goodwill and other intangible assets represent the amortized excess cost of an acquired business over the fair value of the net tangible assets at the date of acquisition. Goodwill and intangible assets are being amortized on the straight-line basis over 5 years. The carrying value of goodwill is evaluated periodically based on fair values or undiscounted operating cash flow whenever significant events or changes occur which might impair recovery of recorded costs. The Company believes that no impairment of goodwill exists at ~~June~~ September 30, 2001. Amortization of goodwill and other intangible assets was ~~approximately~~ approximately $1,~~100~~351 and $23,~~108~~459 for the three and ~~six~~nine months ended ~~June~~ September 30, 2001, respectively, and is included in depreciation and amortization expense.

NET2000 COMMUNICATIONS, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)

4. Accounting for Derivatives Instruments

On April 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 (“SFAS No. 133”), “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS No. 137 and 138, which establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or a liability measured at its fair value. The statement also requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows gains and losses on derivative to offset related results on the hedged item in the income statement, and requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The Company will enter into derivative financial instruments as appropriate to minimize its exposure to interest rates. WeThe doCompany does not utilize derivative financial ~~instruments~~ instruments for currency, trading, or other speculative purposes.

On April 3, 2001, the Company entered into an interest rate swap agreement that effectively converted $31,000 of the Senior Security Credit Facility with TD Securities (USA), Inc., to a fixed-rate basis for the next three years, thus reducing the impact of interest-rate changes on future interest expense. The swap was accounted for as an effective cash flow hedge. As of ~~June~~September 30, 2001, the change in fair value was recorded as a liability on the balance sheet, with the corresponding effect recorded to accumulated other comprehensive income amounting to $~~193~~1,297.

5. Property and Equipment

Property and equipment, including leasehold improvements, are recorded at cost. Depreciation is calculated using the straight-line method over the estimated useful life ranging between three and eight years. Leasehold improvements are amortized over the lesser of the related lease term or the useful life. Interest capitalized and included in the cost of switch equipment was $255 and $1,964 for the ~~six~~nine months ended ~~June~~September 30, 2001 and the year ~~ended~~ ended December 31, 2000, respectively.

Construction in process includes software and switch equipment for projects not complete as of the balance sheet dates. When the project is complete, the balance of the assets are transferred to software and switch equipment and depreciated in accordance with the Company’s policy.

Property and equipment consist of the following:

	June 30,			December 31,
	September 30,			December 31,
	2001			2000
	(Unaudited)
Software	$	2425,~~720~~599		$	18,889
Computer equipment		1517,~~957~~026			13,731
Office furniture and equipment		10,~~518~~700			9,691
Leasehold improvements		27,~~209~~698			26,255
Vehicles		675			609
Switch equipment		~~102~~100,~~346~~600			78,202
Construction in process		2428,~~882~~898			30,202
		206,307			177,579
		211,196			177,579
Less accumulated depreciation and amortization		(3543,~~229~~922	)		(20,606	)
	$	~~171~~167,~~078~~274		$	156,973

NET2000 COMMUNICATIONS, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)

6. Net Loss per Common Share

Basic and diluted net loss per common share is calculated by dividing the net loss by the weighted average number of common shares outstanding. Pro forma net loss per share is computed using the weighted average number of shares used for basic and diluted per share amounts and the weighted average redeemable convertible preferred stock outstanding as if such shares were converted to common stock at the time of issuance.

		For the Three Months Ending June 30,						For the Six Months Ending June30,
		For the Three Months						For the Nine Months
		Ending September 30,						Ending September 30,
		2001			2000			2001			2000
Loss before extraordinary item		$	(3744,~~264~~371	)	$	(1725,~~881~~563	)	$	(70114,~~075~~446	)	$	(3661,~~122~~685	)
Preferred stock accretion			—			—			—			(3,759	)
Preferred stock dividend			(1,~~140~~573	)		—			(12,~~140~~713	)		—
Loss available to common stockholders before extraordinary item			(3845,~~404~~944	)		(1725,~~881~~563	)		(71117,~~215~~159	)		(3965,~~881~~444	)
Extraordinary item			—			—			—			(4,724	)
Net loss available to common stockholders		$	(3845,~~404~~944	)	$	(1725,~~881~~563	)	$	(71117,~~215~~159	)	$	(4470,~~605~~168	)
Weighted average of common shares, denominator for basic loss per share			39,~~762~~770,~~303~~018			3738,~~785~~319,~~732~~805			39,~~362~~678,~~428~~842			2731,~~845~~338,~~216~~120
Effect of dilutive securities:
	Stock options		—			—			—			—
	Warrants		—			—			—			—
	Convertible stock		—			—			—			—
Denominator for diluted loss per share			39,~~762~~770,~~303~~018			3738,~~785~~319,~~732~~805			39,~~362~~678,~~428~~842			2731,~~845~~338,~~216~~120
Pro forma adjustment for redeemable preferred stock												53,~~320~~547,~~994~~329
Pro forma denominator for basic and diluted loss per share												3334,~~166~~885,~~210~~449
Loss per share
Loss per share Basic and diluted before extraordinary item		$	(1.16	)	$	(.67	)	$	(2.95	)	$	(2.09	)
	Basic and diluted before extraordinary item	$	(.97	)	$	(.47	)	$	(1.81	)	$	(1.43	)
	Extraordinary loss		—			—			—			(.15	)
	Extraordinary loss		—			—			—			(.17	)
	Basic and diluted	$	(1.16	)	$	(.67	)	$	(2.95	)	$	(2.24	)
	Basic and diluted	$	(.97	)	$	(.47	)	$	(1.81	)	$	(1.60	)
	Pro forma basic and diluted before extraordinary item										$	(1.76	)
	Pro forma basic and diluted before extraordinary item										$	(1.09	)
	Extraordinary loss											(.14	)
	Pro forma basic and diluted										$	(1.2390	)

Due to their anti-dilutive effects, outstanding shares of preferred stock, stock options and warrants to purchase shares of common stock were excluded from the computation of diluted earnings per share for all periods presented.

NET2000 COMMUNICATIONS, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)

7. Debt

Long Term Debt

Long-term debt consists of the following:

		June 30,			December 31,
		September 30,			December 31,
		2001			2000
		(Unaudited)
Delayed draw term loan facility, face amount $225,000, due December 30, 2007, effective interest rate of approximately 12.75%		$	109,556		$	95,000
Delayed draw term loan facility, face amount $325,000, dueDecember 30, 2007, effective interest rate of approximately 12.75%		$	110,688		$	95,000
Notes payable to bank			~~147~~126			140
Capital lease obligations			65,~~448~~172			8,769
	Total		~~116~~115,~~151~~986			103,909
Less current maturities			(4115,~~552~~615	)		(5,015	)
Total long-term debt		$	~~111,599~~371		$	98,894

Included in accrued expenses and other current liabilities at ~~June~~ September 30, 2001 and December 31, 2000 is $4,~~552~~801 and $5,015, respectively, which are currently payable under capital lease obligations. ~~and~~Current ~~notes~~maturities ~~payable~~include all amounts outstanding under the Secured Credit Facilities due to ~~bank~~the covenant violation at September 30, 2001, see discussion below.

Secured Credit Facilities

On April 12, 2001, the Company amended its $200,000 Senior Secured Credit Facility with TD Securities (USA), Inc., to include an additional $125,000 senior secured delay draw term loan (the “Incremental Facility”). The Incremental Facility may be used solely to purchase goods and services from Nortel Networks Inc. (“Nortel”) so long as Nortel is a lender under the Incremental Facility. The entire $325,000 Facility is secured by a first priority perfected security interest in all existing and future assets and all equity interests of the Company. Interest on the revolving credit facility, the delayed draw term loan facility, and the Incremental Facility will accrue at ranges (Prime plus 2% to 3.25% for Prime Rate loans or Eurodollar rate plus 3% to 4.25% for Eurodollar loans) depending on certain debt to annualized EBITDA ratios as defined in the terms of the Facility agreement. Repayment of accrued interest on a Prime Rate loan is on each quarterly due date. Repayment on accrued interest on a Eurodollar loan is on the last day of the interest period and, in the case of interest period greater than three months, at three month intervals after the first day of such interest period. The Facility also requires a ~~fees~~fee ofranging from .75% to 1.5% on the unused principal balance payable quarterly. The Incremental Facility will be available on a delayed draw basis until March 31, 2004 (Incremental Facility Commitment Termination date), on which all unused portions of the Incremental Facility commitment will expire. Repayment of Incremental Facility loans outstanding begins December 31, 2003 in quarterly installments over the remaining four-year term as defined. The amended Facility’s financial and operating performance covenants were also revised. The company was not in compliance with all such ~~restrictive~~certain covenants as of ~~June~~ September 30, 2001. As a result all amounts under the facility have been reclassed to current liabilities and the Company can no longer draw under the facility. Refer to Note 14.

Upon closing of the Facility, underwriter and agency fees of $2,910 were paid. In addition, $141,~~556~~133 was drawn on the Facility during the three months ended ~~June~~September 30, 2001.

The Company paid interest related to all outstanding debt of $4,~~303~~053 and $1,~~309~~471 for the three months ended ~~June~~September 30, 2001 and 2000, respectively and $711,~~588~~641 and $34,~~392~~863 for the ~~six~~nine months ended ~~June~~September 30, 2001 and 2000, respectively.

On November 9, 2001, the Company completed an amendment and consent to the amended Facility which provided for the disposition of its Video Teleconferencing Division (refer to Note 14) and requested that the Company not request any borrowing or advance under the Credit Agreement on or prior to November 19, 2001.

NET2000 COMMUNICATIONS, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)

8. Related Party Non-Current Liabilities

At ~~June~~September 30, 2001 and December 31, 2000, the Company had outstanding purchases totaling $~~2,550~~0 and $5,504, respectively, of goods and services which have been classified as a non-current liability as these purchases are subsequently financed under the Senior Secured Credit Facility.

9. Equity

Equity Transactions

On April 12, 2001, the Company sold 65,000 shares of Convertible Pay In Kind Series D Preferred Stock (“Series D Preferred Stock” or “Series D Preferred Share”) for $1,000.00 per share (Liquidation Preference). The Series D Preferred Stock matures 10 years from the closing date and the proceeds are to be used for general corporate purposes. The Series D Preferred Stock accretes an 8% per annum in kind dividend payable quarterly. Each Series D Preferred Share is convertible into shares of Common Stock at a price of $2.955, with no ~~re-sets~~resets. Voting rights of the Series D Preferred Shares are on an as converted basis. The Company has the right to redeem the Series D Preferred Shares after 5 years from the closing date, upon at least 30 days prior notice, and at a 5% premium to the accreted Liquidation Preference. Upon maturity or in the event of a change of control, each holder of the Series D Preferred Stock has the option to redeem the Series D Preferred Stock or to convert to shares of common stock. The Company can require the conversion of the Series D Preferred Stock into common stock provided that the closing bid price for the Company’s common stock has been no less than three times the conversion price for a consecutive six month period. Such mandatory conversion cannot occur prior to twenty-four months from the closing date. ~~In connection~~ ~~with the Series D Preferred Stock issuance, the Company issued to the holders~~ ~~detachable warrants to acquire 1,755,267 shares of common stock at $10.00 per share.~~

~~During~~ In ~~the~~connection ~~three~~with ~~and~~the ~~six~~Series D ~~months~~Preferred ~~ended~~Stock ~~June 30~~issuance, ~~2001,~~ the Company’s ~~employees~~issued ~~exercised~~to ~~options~~the toholders ~~purchase~~detachable ~~31,833~~warrants ~~and~~to ~~111~~acquire 1,~~781~~755,267 shares of common stock ~~under~~at ~~its~~$10.00 ~~1997~~per share. The Company allocated the proceeds from the offering to the Series D Preferred Stock and ~~1999~~the ~~stock~~warrants ~~option~~on ~~plans~~a relative fair value basis. The difference ($1,688,074) ~~for~~between ~~aggregate~~the proceeds allocated to the Series D Preferred Stock and the value of common stock into which preferred stock is convertible has been recorded as a beneficial conversion feature discount. This amount, together with the allocated fair value of the warrants ($124,217,685), is the total discount on the preferred stock. This discount is being accreted over the period to the redemption ~~and~~date as a deemed dividend. Dividend accretion amounted to $80263 for the nine months ended September 30, ~~respectively~~2001.

During the three ~~months~~ and ~~six~~nine months ended ~~June~~September 30, 2001, ~~amortization~~the Company’s ~~expense~~employees ~~for~~exercised ~~stock~~options ~~based~~to ~~compensation~~purchase of9,469 ~~$600~~ and $1121,~~222,~~250 ~~respectively,~~shares ~~relates~~of common tostock ~~employees~~under ~~whose~~its ~~salaries~~1997 ~~are~~and ~~included~~1999 instock ~~selling~~option plans, ~~general~~for ~~and~~aggregate ~~administrative~~proceeds of $1 ~~expense~~and $81, respectively.

During the three months and nine months ended September 30, 2001, amortization expense for stock based compensation of $1,068 and $2,291 respectively, relates to employees whose salaries are included in selling, general and administrative expense.

Acquisition

On March 16, 2001, the Company acquired Vision I.T. Corporation (“Vision I.T.”), a California-based provider of integrated video, data and network services, in exchange for 1,000,000 shares of the Company’s common stock and the assumption of $1,067 of Vision I.T. debt, for total consideration of approximately $6,100. As part of the acquisition, the Company guaranteed the value of the shares issued to equal $5,000 as measured one year from the acquisition date as defined in the agreement with any additional consideration being paid out in either cash or stock. The Company has recorded a liability amounting to $3,138 related to the additional consideration, which is included in the accrued expenses and other current liabilities. The agreement also provides for an earnout of up to $20,000, payable as either cash or stock, ~~upon~~ upon attainment of certain financial milestones. The transaction was accounted for using the purchase method of accounting and, accordingly, the net assets and results of operations of the acquired company have been included in ~~the~~ the Company’s consolidated financial statements since the acquisition date, ~~with~~ with the majority of the purchase price being allocated to acquired intangibles. The Company has made a tentative allocation of the purchase price in the related goodwill and other intangibles and is amortizing them using the straight-line method over a period of five years. Subsequent to September 30, 2001, the Company sold the Vision I.T. operations. Refer to Note 14.

NET2000 COMMUNICATIONS, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)

Accretion to Redemption Value of Series A, Series B and Series C Preferred Stock

The Company has accreted its preferred stock to its redemption value based on the fair market value of the Company using the effective interest method. The Company recorded accretion totaling $0 and $3,759 for the three and six months ended June 30, 2000, respectively. On March 10, 2000, all then outstanding shares of preferred stock were converted into common stock at the closing of the Company’s initial public offering.

10. Restructuring

On May 1, 2001, the Company implemented a plan to close the Atlanta sales office and switch facilities. The plan resulted in: (i) the termination of approximately 20 employees (consistent with the plan) primarily from the sales and switch technician areas; (ii) the removal and relocation of the voice and data switch and disconnection of all network circuits; and (iii) the sub-leasing of the current facility. As a result, the Company recorded a restructuring charge of $3,000. The restructuring charge included accruals of approximately $130 for employee relocation and termination costs, approximately $520 for the removal and relocation of the voice and data switch and disconnecting the network circuits, and approximately $2,350 for expenses related to facility sub-leasing and the write-down of assets no longer in use. During the ~~second~~third quarter, the Company paid $~~235~~403 against costs included in the restructuring accrual. The Company expects to have the majority of the costs settled by the end of 2001.

On September 28, 2001, the Company implemented a plan to further reduce its employee base and close the Philadelphia sales office and switch facilities. The plan resulted in: (i) the termination of approximately 300 employees (consistent with the plan) primarily from the sales and switch technician areas; (ii) the removal and relocation of the voice and data switch and disconnection of all network circuits in Philadelphia; and (iii) the sub-leasing of the current facility in Philadelphia. As a result, the Company recorded a restructuring charge of $8,500. The restructuring charge included accruals of approximately $2,487 for employee relocation and termination costs, approximately $1,288 for the removal and relocation of the voice and data switch and disconnecting the network circuits, and approximately $4,725 for expenses related to facility sub-leasing and the write-down of assets no longer in use. During the third quarter, the Company paid $0 against costs included in the restructuring accrual. The Company expects to have the majority of the costs settled by the end of 2001.

11. Commitments

Operating Leases

The Company currently leases office space and equipment under non-cancelable operating leases, with expirations through 2015. Rent expense for the three months ended ~~June~~September 30, 2001 and 2000, was $2,~~530~~626 and $2,~~063,~~354 respectively, and for the ~~six~~nine months ended ~~June~~September 30, 2001 and 2000, was $57,~~009~~ 590 and $36,~~674,~~028 respectively.

The future minimum lease payments under non-cancelable operating leases, including leases for which termination costs have been accrued as part of our restructuring plans, at ~~June~~September 30, 2001 are as follows:


Fiscal Year

2001		$	5,009
2002			9,649
2003			9,319
2004			8,854
2005			8,951


Thereafter			38,205

	Total	$	79,987

Master Purchase and License Agreement

On March 27, 2001, the Company entered into a Master Purchase and License Agreement with Nortel. Terms of the agreement include a $165 million commitment over a three year period to purchase goods and services from Nortel.

NET2000 COMMUNICATIONS, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)

12. Related Party Transactions

On May 8, 2001, a promissory note made December 5, 2000 and amended as of February 1, 2001, in the amount of $1,500 between Net2000 Communications Group, Inc. and Clayton A. Thomas, Jr., was modified. The new terms require any portion outstanding plus all accrued interest to be paid back by May 31, 2002~~, with monthly interest accrued at the Applicable Federal Rate~~. In addition, the Company waived the repayment of the first $100 of outstanding balance. As of ~~June~~September 30, 2001, $899 is outstanding on the note and is included in other current assets.

On June 4, 2001, a promissory note in the amount of $100 was executed between Net2000 Communications Group, Inc. and Mark Mendes, the Company’s Chief Technology Officer. The terms of the loan require repayment of any portion outstanding to be paid back by November 30, 2002. Interest accrues at an annual rate of 5% or the Applicable Federal Rate, whichever is greater. Repayment of accrued interest occurs monthly. As of ~~June~~September 30, 2001, $100 is is outstanding on the note and is included in other noncurrent assets.

13. Litigation

On September 27, 2001, the former owners (Plantiffs) of FreBon International Corporation (FreBon) filed a lawsuit against certain wholly-owned subsidiaries of the Company (Defendants) alleging that the Defendants breached its representations and warranties made to the Plaintiffs in connection with the FreBon Stock Purchase Agreement. The amount of relief sought is believed to exceed $15 million. The Company believes that the Plaintiffs claims are without merit and intends to contest the case vigorously. It is management's position that an assessment of the probability of the outcome of this matter cannot be made. Accordingly, no provision for this matter has been made in the interim financial statement. On August 28, 2001, the Company filed a complaint seeking unspecified damages against the Plaintiffs alleging breach of various representations and warranties made in connection with the FreBon Stock Purchase Agreement.

14. Subsequent Events

Restructuring

On October 22, 2001, the Company implemented a plan to further reduce its employee base and close the New York, Boston and Providence, RI sales offices. The plan resulted in the termination of approximately 400 employees across all areas. The Company expects to incur employee termination costs and expenses related to facility sub-leasing and asset write downs. The Company is currently in the process of estimating those costs.

Sale of Video Teleconferencing Division

On November 9, 2001, the Company sold its video teleconferencing division assets to Visual Systems Group, Inc. (VSGi) for $3,500 in cash. The Company recorded a loss on the sale of approximately $2,100. The video teleconferencing division was formed through the acquisitions of Vision I.T. and FreBon International Corporation.

Sale of Core Business and Bankruptcy Filing

On November 16, 2001, the Company agreed to sell substantially all its telecommunications services assets, including its customer base, to Cavalier East (Cavalier), an affiliate of Richmond, Virginia-based Cavalier Telephone. In addition, the Company filed a voluntary petition with the U.S. Bankruptcy Court in Delaware for reorganization under Chapter 11 of the U.S. Bankruptcy Code to effect the sale to Cavalier. The Company has secured debtor-in-possession (DIP) financing with TD Securities and other banks to finance operations during the reorganization. The sale of the assets to Cavalier or another asset purchaser who might outbid Cavalier is expected to close in late December, 2001 or sometime in January, 2002.

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

Overview

WeRecent ~~are a rapidly growing, innovative provider of state-of-the-art~~Events ~~broadband telecommunications services. As a competitive telecommunications~~ ~~services provider, we offer businesses located throughout the mid-Atlantic and~~ northeastern regions of the United States cutting-edge, responsive solutions as an alternative to the traditional telephone companies. We focus on high-end customers, primarily large- and medium-sized businesses, typically businesses with 50 or more business access lines and spending at least $50,000 annually for telecommunications services. Today, we offer an integrated package of high-speed data services, video services, Internet services, local telephone services and long distance services, primarily delivered from our own network over a single broadband connection and conveniently billed on a single invoice.

As of September 30, 2001, we were not in compliance with certain covenants under our facility with TD Securities. Although we have not received notice of default, we have been informed that we can no longer draw funds under this facility. We have attempted to obtain other sources of capital, but have not been successful and are no longer able to fund our operations. As a result, we agreed to sell substantially all of our telecommunications services assets, including our customer base, to Cavalier East (Cavalier), an affiliate of Richmond, Virginia-based Cavalier Telephone. In addition, we filed a voluntary petition with the U.S. Bankruptcy Court in Delaware for reorganization under Chapter 11 of the U.S. Bankruptcy Code to effect the sale to Cavalier. We have secured debtor-in-possession (DIP) financing with TD Securities and other banks to finance operations during the reorganization.

We are an innovative provider of state-of-the-art broadband telecommunications services. As a competitive telecommunications services provider, we offer businesses located throughout the mid-Atlantic and northeastern regions of the United States cutting-edge, responsive solutions as an alternative to the traditional telephone companies. We focus on high-end customers, primarily large- and medium-sized businesses, typically businesses with 50 or more business access lines and spending at least $50,000 annually for telecommunications services. Today, we offer an integrated package of high-speed data services, video services, Internet services, local telephone services and long distance services, primarily delivered from our own network over a single broadband connection and conveniently billed on a single invoice.

We began operations in 1993 as a sales agent selling Verizon Communication, Inc. (“Verizon”) (formerly known as Bell Atlantic Corporation) local telephone services to businesses. Under this program, we received a one-time commission for selling complex and high-capacity data telecommunications services. From 1994 through 1997, we were the largest producing Verizon sales agent based on annual sales revenue.

We initially used the resale of telecommunications services as a market entry strategy while we began the build-out of our network. In January 1998, we began offering long distance and non-local data services on a resale basis. In June 1998, we left the Verizon sales agent program and began offering Net2000-branded local telecommunications services on a resale basis directly to large- and medium-sized businesses. We subsequently ceased acquiring new resale customers in markets where we deployed our own network. In March 1999, we deployed our first switch and began offering facilities-based telecommunications services. We no longer use local resale as a primary customer acquisition strategy, do not intend to do so in the future and plan to migrate as many of our existing resale customers as possible to our network. In limited circumstances, we use resale to satisfy customer needs for data and long distance services outside our network area or to initiate service to new customers until we migrate them onto our own network.

General – Results of Operations

We have been successful in selling services to business customers, with approximately ~~188~~214,~~100~~000 lines installed since beginning our Net2000-branded sales efforts in June 1998. The table below provides additional selected key operational data:

As of

June 30,

March 31,

June 30,

September 30,

June 30,

September 30,

2001

~~2000~~2001

~~2001~~2000

On-Net Markets Served

119

2111

1518

Number of Switches

1817

2818

Total Lines Installed

~~188~~214,~~100~~000

~~152~~188,~~200~~100

85100,~~700~~900

Total Lines in Service

~~165~~181,~~300~~700

~~140~~165,~~800~~300

8097,~~500~~900

Sales Force Employees

~~368~~196

~~380~~368

~~225~~255

Total Employees

~~918~~672

~~884~~918

~~613~~736

Average Access Line Count Per Customer

7067

We have built our network by initially deploying lower-cost data switches and leasing fiber optic lines from other carriers. As we experience increases in customer traffic in a given market, we will consider deploying voice switches and owning a portion of the fiber optic lines. By deploying this “smart-build” network strategy, we believe it offers a number of competitive advantages over the traditional build-out strategy by enabling us to:

	•		reduce network capital requirements;

	•		improve speed to market and mitigate the risk associated with investing capital in long term assets, thereby preserving capital for other uses such as sales and marketing;

	•		improve operating margins;

	•		broaden service offerings and enhance customer control by providing more efficient service;

	•		and reduce operating expenses.

~~Although~~ This ~~we believe our smart-build~~ strategy ~~will improve our results of operations over the long-term, this strategy~~ is expected to have a negative effect on our financial condition and results of operations over the short-term. We expect significant losses and negative cash flow for at least the next several years, which we expect will be primarily attributable to the deployment of our network and expected expansion of our operations.

Revenue

We generate most of our revenue from the sale of local, long distance, Internet access, interactive video products and other data services to large and medium-sized businesses. We are currently offering our full suite of services on our network in markets where we have deployed our voice and data network. In markets where we have not deployed either a data or voice switch, we offer data and long distance services on a resale basis to meet the needs of our customers.

Our revenue consists of monthly recurring charges, usage charges, video equipment and maintenance charges, and initial, non-recurring charges. Monthly recurring charges include the fees paid by our customers for lines in service, additional features on those lines, and collocation space. Usage charges consist of fees paid for each call made generally measured by the minute but also measured by the call. Video equipment revenue usually consists of one-time equipment sales. Non-recurring revenue is typically derived from fees charged to install new customer lines.

In addition to revenue generated from end-user and carrier customers, we also generate revenue from access fees charged to long distance companies for the local origination and termination of long distance calls from or to our customers. If an imbalance occurs based on inbound versus outbound local calls, we may also be owed reciprocal compensation charges from the incumbent local exchange carrier (“ILEC”). We bill the access and reciprocal compensation charges to the long distance companies and local telephone companies on a monthly basis. Reciprocal compensation and access charges represented approximately 17% of the Company’s revenues for the ~~six~~nine months ended ~~June~~September 30, 2001. ~~Although~~We ~~we expect revenue from reciprocal compensation and access charges to increase as more customers come onto our network, we~~ anticipate deriving the majority of our revenue from the sale of our data, local, long distance, and Internet access services and video products to large- and medium-sized businesses.

Operating Costs and Expenses

We expect that our primary operating costs and expenses will consist of the cost of providing our services and selling, general and administrative expenses.

Operating costs. Our most significant expense is the cost of leasing certain elements of the full “bundle” of traditional telecommunications services for sale to our local service customers, the cost of leasing part of the data network being used by our data customers and the cost of leasing parts of the long distance network being used by our long distance service customers.

We purchase local telephone service for our customers on a “wholesale” basis pursuant to interconnection agreements with ILECs and other telephone companies in our targeted markets. Typically, these agreements establish the terms and conditions of the interconnection arrangements along with the cost per minute to be charged by each party for the calls that travel between each carrier’s network. We also purchase local telephone service for our customers on a “retail” basis from ILECs in situations where interconnection arrangements are not in place due to network or regulatory considerations.

We provide data services to our customers over our own switches in 109 markets and leased fiber optic lines, and in other areas by leasing part of the data network requirements from various telecommunications companies. During the ~~second~~nine ~~quarter~~months ended September 30, 2001, we decommissioned eleven of our data switches across the U.S. to minimize expenses related to leased fiber lines.

We have entered into agreements with long distance providers in order to originate or terminate long distance traffic in areas where we cannot do so over our own network. These agreements provide for the origination or termination of long distance services on a per-minute basis and contain minimum usage volume commitments. If we fail to meet minimum volume commitments, we may be obligated to pay underutilization charges. To date, we have met our usage volume commitments and have not incurred any underutilization charges.

To minimize our costs, we lease fiber optic lines between cities on a fixed cost basis pursuant to written agreements with the providers of fiber optic lines. These fiber optic lines interconnect our switches, enabling us to cost-effectively provide much of the data and long distance network capacity to our customers. During the second quarter of 2001, we terminated an agreement with our nationwide fiber optic network provider that provided approximately 7,300 miles of broadband backbone fiber optic facilities.

If we underestimate our need for fiber optic capacity, we may be required to obtain capacity through more expensive means. These costs are usage sensitive and will increase as our customers’ long distance calling volume increases. As traffic on specific routes increases, we may lease flat-rated long distance trunk capacity to reduce our variable costs and improve our gross margins.

In construction of a switch for a new market, we capitalize as a component of property and equipment only the non-recurring charges associated with our initial network facilities and monthly recurring costs of those network facilities until the switch begins to carry revenue-producing traffic. Once we have deployed a switch in a particular market, maintenance expense will be a significant part of our ongoing cost of services.

Our primary expense associated with providing Internet access to our customers is the cost of interconnecting our network with a national Internet service provider. Currently, we provide our customers direct connectivity to the Internet through a national Internet access provider.

Selling, general and administrative expenses. Our selling, general and administrative expenses include our infrastructure costs, including selling and marketing costs, customer care, billing, corporate administration, personnel and network maintenance expenses. The nature of these costs have been generally consistent throughout our history; however, these costs have increased to support our growth as a telecommunications services provider. Our selling, general and administrative expenses exclude non-cash compensation expense, which is classified on our income statement as non-cash compensation expense.

We employ a direct sales force in each market where we deploy local voice capability. To attract and retain a highly qualified sales force, we offer our sales personnel a compensation package that emphasizes commissions. We expect to incur additional selling and marketing costs as we continue to hire additional personnel and expand our sales operations.

In addition to our direct sales force, we utilize sales agents who sell our services and typically focus on specific niche markets or industries, augmenting our direct sales initiatives. Customers acquired through agents are serviced by our customer care representatives, are invoiced by us, and have the same post-sale direct relationship with us as any of our other customers.

We have successfully achieved “electronic bonding” of T-1 circuits between our operating support systems and Verizon. As a result, we may achieve the following results:

• reduce errors and inefficiencies associated with manually processing orders; • significantly reduce the installation interval from order to billing;

• reduce customer turnover; and • reduce operational expenses.

We have deployed a state-of-the-art billing system that provides consolidated billing on a single invoice for all services we provide to our customers. Using this system, we began issuing consolidated invoices (invoices which combine local, Internet access, long distance and other data services) in the third quarter of 1998.

We have developed tailored systems and procedures for operational support and other back office systems that are required to provision and track a customer order from point of sale to the installation and testing of service. These systems are operational on a stand-alone basis today and will interface automatically with trouble management, inventory, billing, collection and customer care systems.

In addition to the significant development and implementation cost of our back office systems, we expect to incur expenses to maintain and enhance such systems and capabilities. Such enhancements will be necessary to ensure our systems remain current, effective, and meet the changing demands of the marketplace. We will also incur ongoing expenses for customer care and billing. As our strategy stresses the importance of personalized customer care, we expect that the expenses related to our customer care department will remain a significant part of our ongoing administrative expenses.

We incur other costs and expenses, including the costs associated with the maintenance of our network, administrative overhead, office leases and bad debt. We expect that these costs will grow as we expand our operations and that administrative overhead will be a large portion of these expenses during the business expansion. However, we expect these expenses to become smaller as a percentage of our revenue as we build our customer base and increase revenues.

Results of Operations

Three Months Ended ~~June~~September 30, 2001 compared to the Three Months Ended ~~June~~ September 30, 2000.

Total Revenue. Total revenue increased ~~130~~90% to $3031.35 million for the three months ended ~~June~~September 30, 2001, from $1316.26 million for the three months ended ~~June~~ September 30, 2000. The increase resulted primarily from increased volume of ~~providing~~ providing telecommunications services to large and medium-sized businesses and one-time video equipment sales. Revenue from resale telecommunication ~~activities~~ activities increased 107% to $98.07 million for the three months ended ~~June~~ September 30, 2001, from $8.21 million for the three months ended ~~June~~September 30, 2000. Revenue from direct provision of telecommunications services increased ~~230~~136% to $1617.56 million for the three months ended ~~June~~September 30, 2001, from $57.05 million for the three months ended ~~June~~September 30, 2000. Revenue from one-time video equipment sales ~~were~~increased 420% to $45.8 2 million for the three months ended ~~June~~ September 30, 2001, ~~and~~from ~~zero~~$1.0 million ~~for~~ the three months ended ~~June~~September 30, 2000.

Operating Costs. Operating costs increased 9464% to $1920.83 million for the three months ended ~~June~~September 30, 2001, from $1012.24 million for the three months ~~ended~~ ~~June~~ended September 30, 2000. This increase was attributable to the cost of providing the telecommunications services underlying the increased revenue from telecommunications services and purchases of video equipment. Operating costs for resale activities decreased 95% to $6.64 million for the three months ended ~~June~~September 30, 2001, from $76.27 million for the three months ended ~~June~~September 30, 2000. Operating costs for direct provision of telecommunications services ~~increased~~ ~~227~~increased 102% to $910.81 million for the three months ended ~~June~~September 30, 2001, from $35.0 million for the three months ended ~~June~~September 30, 2000. Operating costs for one-time video equipment sales increased 448% to $3.8 million for the three months ended ~~June~~September 30, 2001, ~~were~~from $30.47 million for the three months ended September 30, 2000.

Selling, General and Administrative. Selling, general and administrative expenses increased 7536% to $3132.73 million for the three months ended ~~June~~ September 30, 2001, from $1823.18 million for the three months ended ~~June~~September 30, 2000. ~~This~~ This increase was primarily attributable to the increase in sales, service delivery, and support associated with the increase in revenue discussed above, the launch of ~~our telecommunications services, the acquisitions~~ of ~~Frebon International~~our ~~Corporation (“Frebon”) and Vision I.T., and the hiring of~~

telecommunications services, the acquisitions of Frebon International Corporation (“Frebon”) and Vision I.T., and the hiring of key senior management and other personnel to develop and implement certain infrastructure initiatives to support our new markets.

Depreciation and Amortization. Depreciation and amortization expense increased ~~173~~69% to $910.0 million for the three months ended ~~June~~September 30, 2001, ~~from~~ from $35.39 million for the three months ended ~~June~~September 30, 2000. This increase ~~was~~ was primarily due to depreciation of network elements and the back office ~~systems~~ systems and software and the amortization of goodwill related to our acquisitions.

Restructuring Charge. On May 1, 2001, the Company implemented a plan to close the Atlanta sales office and switch facilities. The plan resulted in: (i) ~~the~~ the termination of approximately 20 employees (consistent with the plan) ~~primarily~~ primarily from the sales and switch technician areas; (ii) the removal and relocation of the voice and data switch and disconnection of all network circuits; and (iii) the sub-leasing of the current facility. As a result, the Company recorded a restructuring charge of $3,000. The restructuring charge included accruals of approximately $130 for employee relocation and termination costs, approximately $520 for the removal and relocation of the voice and data switch and disconnecting the network circuits, and approximately $2,350 for ~~expenses~~ expenses related to facility sub-leasing and the write-down of assets no longer in use. During the ~~second~~third quarter, the Company paid $~~235~~403 against costs included in the restructuring accrual. The Company expects to have the majority of the costs settled by the end of 2001.

~~Other~~ On ~~Income (expenses).~~September ~~Interest~~28, ~~income~~2001, ~~decreased~~the ~~263%~~Company implemented a plan to further $0reduce its employee have and close the Philadelphia sales office and switch facilities.8 The plan resulted in: (i) ~~million~~the ~~for~~termination ~~the~~of ~~three~~approximately ~~months~~300 ~~ended~~employees ~~June 30,~~(consistent ~~2001,~~with the plan) primarily from ~~$2.9~~the sales and switch technician areas; (ii) ~~million~~the ~~for~~removal and relocation of the ~~three~~voice and data switch and disconnection of all network circuits in ~~months~~Philadelphia ~~ended~~and ~~June 30,~~(iii) the ~~2000.~~sub-leasing ~~This~~of ~~decrease~~the ~~was~~current facility in Philadelphia. As a result, ofthe aCompany ~~decrease~~recorded ina ~~investments~~restructuring ~~available~~charge ~~for~~of ~~sale~~$8,500. ~~Interest~~The ~~expense~~restructuring ~~increased~~charge ~~231%~~included toaccruals of approximately $~~4.3~~2,487 for employee relocation and termination costs, ~~million~~approximately $1,288 for the ~~three~~removal ~~months~~and ~~ended~~relocation ~~June 30,~~of ~~2001~~the voice and data switch and disconnecting the network circuits, ~~from~~and approximately $~~1.3 million~~4,725 for expenses related to facility sub-leasing and the write-down of assets no longer ~~three~~in ~~months~~use. ~~ended~~During ~~June 30~~the third quarter, ~~2000~~the Company paid $0 against costs included in the restructuring accrual. The ~~increase~~Company ~~was~~expects ~~due~~ to ~~increased~~have ~~levels~~the majority of the ~~debt~~costs settled by the end of 2001.

~~Preferred~~ Other ~~stock~~Income ~~dividends~~(expenses). Interest income decreased 80% to $0.4 ~~The~~million for ~~April~~the three months ended September 1230, 2001, ~~issuance~~from of$2.0 million for the ~~Series D~~three ~~preferred~~months ~~stock~~ended ~~resulted~~September 30, in2000. anThis ~~accrued~~decrease ~~preferred~~was ~~stock~~a ~~dividend~~result of a decrease in investments available for sale. Interest expense increased 173% to $14.1 ~~million~~ ~~during~~million for the three months ended ~~June~~September 30, 2001, from $1.5 million for the three months ended September 30, 2000. The increase was due to increased levels of debt.

~~Net~~ Preferred ~~Loss~~stock ~~available to common stockholders~~dividends. The ~~net loss available to common stockholders increased 115% to $38.4~~April ~~million for the three months ended June 30~~12, 2001, ~~from~~issuance ~~$17.9 million~~of ~~for~~ the ~~three months ended June~~Series ~~30, 2000.~~D ~~The~~preferred ~~increase~~stock resulted ~~primarily~~in ~~from~~an ~~the~~accrued ~~expansion~~preferred ofstock ~~our~~dividend ~~network, the growth~~ of ~~our sales force~~ $1.3 million and ~~support~~deemed ~~employees,~~dividends ~~development~~ of ~~our~~$263 ~~back~~associated ~~office support~~with ~~systems,~~the ~~acquisitions~~preferred ofstock ~~two~~discount ~~video~~during ~~conferencing~~the ~~companies,~~three ~~and~~months ~~the preferred~~ended ~~stock~~September 30, ~~dividend~~2001.

~~Six~~ Net ~~Months~~Loss ~~Ended~~available ~~June~~to common stockholders. The net loss available to common stockholders increased 79% to $45.9 million for the three months ended September 30, 2001, ~~compared~~from to$25.6 million for the ~~Six~~three ~~Months~~months ~~Ended~~ended ~~June~~September 30, 2000. The increase resulted primarily from the expansion of our network, the growth of our sales force and support employees, development of our back office support systems, acquisitions of two video conferencing companies, the preferred stock dividend and restructuring costs as discussed above.

~~Total~~Nine ~~Revenue. Total~~Months ~~revenue~~Ended ~~increased 130% to $54.8~~September ~~million for the six months ended June~~ 30, 2001, ~~from~~compared ~~$23.8 million for the six months ended June 30, 2000. The increase resulted primarily from increased volume of providing telecommunications services~~ to ~~large and medium-sized businesses and one-time video equipment sales. Revenue from resale telecommunication activities increased 11% to $18.2 million for~~ the ~~six~~Nine ~~months~~Months ~~ended June 30, 2001, from~~Ended ~~$16.4~~September ~~million for the six months ended June~~ 30, 2000. ~~Revenue from direct~~ ~~provision of telecommunications services increased 288% to $28.7 million for~~ the six months ended June 30, 2001, from $7.4 million for the six months ended June 30, 2000. Revenue from one-time video equipment sales were $7.9 million for the six months ended June 30, 2001 and zero for the six months ended June 30, 2000.

~~Operating~~ Total ~~Costs~~Revenue. ~~Operating~~ ~~costs~~Total revenue increased ~~100~~114% to $3786.4 million for the ~~six~~ nine months ended ~~June~~September 30, 2001, from $1840.74 million for the ~~six~~nine months ended ~~June~~September 30, 2000. ~~This~~The increase ~~was~~resulted ~~attributable~~primarily tofrom ~~the~~increased ~~cost~~volume of providing ~~the~~ telecommunications services ~~underlying~~to ~~the~~large ~~increased~~and ~~revenue~~medium-sized ~~from telecommunications~~businesses ~~services~~ and one-time ~~purchases of~~ video equipment sales. ~~Operating~~Revenue ~~costs for~~from resale telecommunication activities ~~decreased~~increased 39% to $1326.69 million for the ~~six~~nine months ended September ~~June~~ 30, 2001, from $1424.06 million for the ~~six~~nine months ended ~~June~~September 30, 2000. ~~Operating~~Revenue ~~costs~~from ~~for~~ direct provision of telecommunications services increased ~~291~~ 213% to $1846.4 million for the ~~six~~nine months ended ~~June~~September 30, 2001, from $414.~~7 for the six months ended June~~8 ~~30, 2000. Operating costs for one-time video equipment~~million ~~sales~~ for the ~~six months ended June 30, 2001 were $5.4 million.~~

~~Selling,~~nine ~~General~~months ~~and~~ended ~~Administrative.~~September ~~Selling~~30, ~~general~~2000. ~~and~~Revenue ~~administrative~~from one-time video ~~expenses~~equipment sales increased 771208% to $6013.71 million for the ~~six~~nine months ended ~~June~~ September 30, 2001, from $341.30 million for the ~~six~~nine months ended ~~June~~September 30, 2000. ~~This increase was~~ ~~primarily attributable to the increase in sales, service delivery, and support~~ associated with the increase in revenue discussed above, the launch of our telecommunications services, the acquisitions of Frebon and Vision I.T., and the hiring of key senior management and other personnel to develop and implement certain infrastructure initiatives to support our new markets.

~~Depreciation~~ Operating ~~and Amortization~~Costs. ~~Depreciation~~ ~~and~~Operating ~~amortization~~costs ~~expense~~ increased ~~190~~85% to $1657.87 million for the nine ~~six~~ months ended ~~June~~September 30, 2001, from $531.82 million for the ~~six~~nine months ended ~~June~~September 30, 2000. This increase was ~~primarily~~ ~~due~~attributable to ~~depreciation~~the cost of providing ~~network~~the ~~elements~~telecommunications ~~and~~services underlying the ~~back~~increased ~~office~~revenue ~~systems~~from ~~and~~telecommunications ~~software~~services and purchases of video equipment. Operating costs for resale activities decreased 4% to $20.0 million for the ~~amortization~~nine months ended September 30, 2001, from $20.8 million for the nine months ended September 30, 2000. Operating costs for direct provision of ~~goodwill~~telecommunications ~~related~~services increased 194% to $28.5 million for the ~~Company’s~~nine months ended September 30, 2001, ~~acquisitions~~from $9.7 for the nine months ended September 30, 2000. Operating costs for one-time video equipment sales increased 1215% to $9.2 million for the nine months ended September 30, 2001, from $0.7 million for the nine months ended September 30, 2000.

~~Restructuring. On May 1~~ Selling, ~~2001,~~General ~~the~~and ~~Company~~Administrative. ~~implemented~~Selling, ageneral ~~plan~~and ~~to close the~~administrative ~~Atlanta~~expenses ~~sales~~increased ~~office~~60% ~~and~~to ~~switch facilities~~$93.1 million ~~The~~for ~~plan~~the ~~resulted~~nine ~~in:~~months ~~(i)~~ended September ~~the~~30, ~~termination~~2001, offrom ~~approximately~~$58.2 million 20for ~~employees (consistent with~~ the ~~plan)~~nine ~~primarily from~~months ~~the~~ended ~~sales and switch technician areas; (ii)~~September ~~the~~30, ~~removal~~2000. ~~and relocation of~~This ~~the~~increase ~~voice~~was ~~and~~primarily ~~data~~attributable ~~switch~~to ~~and~~the ~~disconnection~~increase ofin ~~all~~sales, ~~network~~service ~~circuits;~~ delivery, and ~~(iii) the~~support ~~sub-leasing~~associated ofwith the ~~current~~increase ~~facility.~~in Asrevenue adiscussed ~~result~~above, the ~~Company recorded a~~launch ~~restructuring~~of ~~charge~~our oftelecommunications $3services,~~000.~~ ~~The~~the ~~restructuring~~acquisitions ~~charge included accruals~~ of ~~approximately~~ ~~$130~~Frebon ~~for employee relocation~~ and ~~termination~~Vision ~~costs~~I.T., ~~approximately~~ ~~$520~~and ~~for~~ the ~~removal~~hiring ~~and relocation~~ of ~~the~~key ~~voice~~senior ~~and~~management ~~data switch~~ and ~~disconnecting~~ ~~the~~other ~~network~~personnel ~~circuits, and approximately $2,350 for expenses related~~ to ~~facility~~develop ~~sub-leasing~~ and ~~the write-down of assets no longer in use.~~ ~~During~~implement ~~the~~certain ~~second~~infrastructure ~~quarter,~~initiatives ~~the Company paid $235 against costs included in the restructuring accrual. The Company expects~~ to ~~have~~support ~~the~~our ~~majority~~new ~~of the costs settled by the end of 2001~~markets.

~~Other~~ Depreciation ~~Income~~and ~~(expenses)~~Amortization. ~~Interest~~ ~~income~~Depreciation ~~decreased~~and 56amortization expense increased 130% to $126.78 million for the ~~six~~nine months ended ~~June~~September 30, 2001, from $311.97 million for the ~~six~~nine months ended ~~June~~September 30, 2000. This ~~decrease~~ increase was aprimarily ~~result~~due ofto adepreciation ~~decrease~~of innetwork ~~investments available~~elements ~~for~~and ~~sale.~~the ~~Interest~~back ~~expense~~office systems ~~increased~~and ~~124%~~software toand ~~$7.6 million for~~ the ~~six~~ ~~months~~amortization ~~ended~~of ~~June 30,~~goodwill ~~2001,~~related ~~from~~to ~~$3.4 million for~~ the ~~six months ended June~~Company’s ~~30, 2000~~acquisitions. ~~The increase was due to increased levels of debt.~~

~~Extraordinary Loss~~ Restructuring. On May 1, 2001, the Company implemented a plan to close the Atlanta sales office and switch facilities. The ~~early~~plan ~~extinguishment~~resulted in: (i) the termination of approximately 20 employees (consistent with the ~~Senior~~plan) ~~Discount~~primarily from ~~note~~the sales and switch technician areas; (ii) the removal and relocation of ~~resulted~~the invoice and data switch and disconnection of all network circuits; and (iii) the ~~Company~~sub-leasing ~~incurring~~of anthe ~~extraordinary~~current ~~loss~~facility. As a result, the Company recorded a restructuring charge of $43,000.~~7 million~~ ~~during~~The restructuring charge included accruals of approximately $130 for employee relocation and termination costs, approximately $520 for the ~~six~~removal ~~months~~and ~~ended~~relocation ~~June 30~~of the voice and data switch and disconnecting the network circuits, ~~2000~~and approximately $2,350 for expenses related to facility sub-leasing and the write-down of assets no longer in use. During the third quarter, the Company paid $403 against costs included in the restructuring accrual. The Company expects to have the majority of the costs settled by the end of 2001.

~~Preferred~~ On ~~stock~~September 28, ~~accretion~~2001, the Company implemented a plan to further reduce its employee base and close the Philadelphia sales office and switch facilities. The plan resulted in: (i) the termination of approximately 300 employees (consistent with the plan) primarily from the sales and switch technician areas; (ii) the removal and relocation of the voice and data switch and disconnection of all network circuits in Philadelphia; and (iii) the sub-leasing of the current facility in Philadelphia. As a result, the Company recorded ~~accretion~~a restructuring ~~totaling~~charge of $38,~~759~~500. The restructuring charge included accruals of approximately $2,487 for ~~the~~employee ~~six~~relocation ~~months~~and ~~ended~~termination ~~June 30~~costs, approximately ~~2000~~$1,288 for the removal and ~~zero~~relocation of the voice and data switch and disconnecting the network circuits, and approximately $4,725 for expenses related to facility sub-leasing and the ~~six~~write-down ~~months~~of ~~ended~~assets ~~June~~no longer ~~30,~~in ~~2001~~use. ~~The~~During ~~accretion~~the ofthird quarter, the Company’s ~~preferred~~paid ~~stock~~$0 toagainst ~~its~~costs ~~redemption~~included ~~value~~in ~~was~~the ~~based~~restructuring onaccrual. ~~the~~The ~~fair~~Company ~~market~~expects ~~value~~to have the majority of the costs ~~Company~~settled ~~using~~by the ~~effective interest~~end ~~method~~of 2001.

~~Preferred~~ Other ~~stock~~Income ~~dividends~~(expenses). Interest income decreased 64% to $2.1 ~~The~~million for ~~April~~the nine months ended September 1230, 2001, ~~issuance~~from of$5.9 million for the ~~Series D~~nine ~~preferred~~months ~~stock~~ended ~~resulted~~September 30, in2000. anThis ~~accrued~~decrease ~~preferred~~was ~~stock~~a ~~dividend~~result of a decrease in investments available for sale. Interest expense increased 137% to $111.~~1 million~~6 ~~during~~million for the ~~six~~nine months ended ~~June~~September 30, 2001, from $4.9 million for the nine months ended September 30, 2000. The increase was due to increased levels of debt.

Net Loss available to common stockholders. The net loss available to common stockholders increased 60% to $71.2 million for the six months ended June 30, 2001, from $44.6 million for the six months ended June 30, 2000. The increase resulted primarily from the expansion of our network, the growth of our sales force and support employees, development of our back office support systems, acquisitions of two video conferencing companies, and the preferred stock dividend.

Liquidity and Capital Resources

The development of our business, the deployment of switching facilities in our targeted markets and the establishment of reliable operations support systems will require significant capital to fund the following:

• capital expenditures, • working capital needs, • debt service, and • the cash flow deficits generated by operating losses.

~~Our~~ Extraordinary ~~principal~~Loss. ~~capital~~The ~~expenditure~~early ~~requirements~~extinguishment ~~include:~~of • the ~~purchase~~Senior ~~and~~Discount ~~installation~~note resulted ofin ~~digital~~the ~~switches,~~Company •incurring ~~the~~an ~~purchase~~extraordinary ~~and~~loss ~~installation~~ of ~~fiber-optic~~$4.7 million ~~network fiber rings and optronics, •~~ during the ~~development~~nine ~~and~~months ~~licensing~~ended ~~of operations support systems and other automated back office systems~~September 30, ~~• in certain cases, leasing excess fiber optic capacity where projected traffic volume growth makes it economically attractive to do so, and • the consummation of potential strategic acquisitions~~2000.

To Preferred ~~date~~stock accretion. The Company recorded accretion totaling $3,759 for wethe ~~have~~nine ~~funded~~months ~~our~~ended ~~expenditures~~September 30, ~~through~~2000 ~~our~~and ~~initial~~zero ~~public offering~~for ~~which~~the ~~raised~~nine ~~approximately~~months ~~$212.0~~ended September ~~million~~30, ~~the~~2000. ~~private~~The ~~sale~~accretion of ~~equity~~the Company’s preferred stock to its ~~securities~~redemption ofvalue ~~$115.5 million,~~was ~~and~~based ~~access~~on tothe afair ~~$325 million~~market ~~Senior~~value ~~Secured~~of the Company using the ~~Credit~~effective ~~Facility~~interest method.

Preferred stock dividends. The April 12, 2001 issuance of the Series D preferred stock resulted in an accrued preferred stock dividend of $2.5 million and deemed dividend of $263 associated with the preferred stock discount during the nine months ended September 30, 2001.

Net Loss available to common stockholders. The net loss available to common stockholders increased 67% to $117.1 million for the nine months ended September 30, 2001, from $70.2 million for the nine months ended September 30, 2000. The increase resulted primarily from the expansion of our network, the growth of our sales force and support employees, development of our back office support systems, acquisitions of two video conferencing companies, the preferred stock dividend and restructuring costs as discussed above.

Liquidity and Capital Resources

Recent Developments

As of September 30, 2001, we were not in compliance with certain covenants under our credit facility with TD Securities. Although we have not received a notice of default, we have been informed that we can no longer draw funds under this facility. We have attempted to obtain other sources of capital, but have not been successful and are no longer able to fund operations. As a result, we agreed to sell substantially all of our telecommunications services assets, including our customer base, to Cavalier East (Cavalier), an affiliate of Richmond, Virginia-based Cavalier Telephone. In addition, on November 16, 2001 we filed a voluntary petition with the U.S. Bankruptcy Court in Delaware for reorganization under Chapter 11 of the U.S. Bankruptcy Code to effect the sale to Cavalier. We have secured debtor-in-possession (DIP) financing with TD Securities and other banks to finance operations during the reorganization.

To date, we have funded our expenditures through our initial public offering which raised approximately $212.0 million, the private sale of equity securities of $115.5 million, and the drawdown of approximately $111 million against our Senior Secured Credit Facility.

On March 7, 2000, we completed our initial public offering and raised $212.0 million after underwriters’ discounts and related expenses.

On June 28, 2000, we completed a $200 million Senior Secured Credit Facility transaction with TD Securities (USA), Inc., lead arranger and syndicate manager for the Company. This Facility consists of a $100 million revolving credit facility and a $100 million delayed term loan facility. Upon closing of the transaction, $50.0 million of the new term loan facility was drawn and $49.6 million of principal, accrued interest and commitment fees outstanding on then existing $75 million Senior Term Loan Facility was repaid and extinguished. As of December 31, 2000, $95.0 million was outstanding under the Senior Secured Credit Facility.

On April 12, 2001, we amended our $200 million Facility with TD Securities (USA), Inc., to now total $325 million through the addition of $125 million senior secured delay draw term loan (the “Incremental Facility”). The Incremental Facility may be used solely to purchase goods and services from Nortel so long as Nortel is a lender under the Incremental Facility.

On April 12, 2001, we sold 65,000 shares of Convertible Pay In Kind Series D Preferred Stock for $1,000.00 per share, for a total cash consideration of $65 million. In addition, we issued warrants for 1,755,267 shares of our Common Stock exercisable at a price of $10.00 per share.

Net cash used in operating activities was $62.3 million for the six months ended June 30, 2001 and $27.4 million for the six months ended June 30, 2000. The increase of $34.9 million is primarily due to an increase in operating losses and accounts receivables offset by increases in non-cash reconciling items for allowance for doubtful accounts, depreciation and amortization expense, accrued expenses and deferred revenue and decreases in other noncurrent assets. Net cash used in investing activities was $28.2 million for the six months ended June 30, 2001 and $125.4 million for the six months ended June 30, 2000. The decrease of $97.2 million is due to reduced capital expenditures within existing markets and the decrease in investments available for sale to fund operating losses for the six month ended June 30, 2000. Net cash provided by financing activities was $76.2 million for the six months ended June 30, 2001 and $219.5 million for the six months ended June 30, 2000. The decrease of $143.3 million is primarily the result of net proceeds received from the Company’s initial public offering during the first quarter of 2000 offset by the proceeds received from the Series D Preferred Stock issuance during the second quarter of 2001.

Many investment analysts use the measure of earnings before deducting interest, taxes, depreciation and amortization, also commonly referred to as “EBITDA,” as a way of evaluating a company. EBITDA losses excluding the restructuring charge and non-cash compensation expense increased 40% to $21.2 million for the three months ended June 30, 2001, from $15.1 million for the three months ended June 30, 2001. We expect to experience additional operating losses and negative EBITDA as a result of our development and current market expansion activities.

We have delayed our Phase III westward market expansion of our voice and data switches for at least two years to allow us to preserve cash and intensify our efforts in further penetration of our existing sales markets.

We On expect to make additional capital outlays for the foreseeable future to continue the development activities contemplated in our current business plan and to fund expected operating losses. Until such time as we begin to generate positive cash flow from operationsJune 28, ~~these capital expenditures will be financed with cash on hand~~2000, ~~additional debt and equity capital. We believe that our current resources will be sufficient to satisfy our liquidity needs; however,~~ we ~~cannot~~completed ~~make~~a ~~any~~$200 million assurances to that effect. If our plans or assumptions change, if our assumptions prove to be inaccurate, if we experience unexpected costs or competitive pressures, or if we are non-compliant with any of our Senior Secured ~~Credits~~ Credit Facility ~~covenants~~transaction ~~resulting~~with inTD ~~limiting~~Securities ~~our~~(USA), ~~access to funds we will be required to seek additional capital~~Inc. ~~In particular~~, iflead ~~we elect~~arranger ~~to pursue significant additional acquisition opportunities or accelerate~~and ~~our~~syndicate ~~network~~manager ~~expansion,~~for ~~our~~the ~~cash needs may be increased substantially~~Company. ~~We cannot~~This ~~assure~~Facility ~~you~~consists ~~that our current projection~~ of ~~cash~~a ~~flow and losses from~~$100 million ~~operations,~~revolving ~~which~~credit ~~will~~facility ~~depend~~and ~~upon~~a ~~numerous~~$100 million ~~future~~delayed ~~factors~~term ~~and~~loan ~~conditions~~facility. ~~and~~Upon ~~many~~closing of ~~which~~the ~~are outside of our control and/or unpredictable~~transaction, ~~will be accurate~~$50.0 million ~~Actual~~of ~~results~~the ~~will~~new ~~almost~~term ~~certainly~~loan ~~vary~~facility ~~materially from our~~was ~~current~~drawn ~~projections~~and $49.6 million Itof isprincipal, ~~likely~~accrued ~~that~~interest ~~actual costs~~ and ~~revenues~~commitment ~~will vary~~fees ~~from~~outstanding ~~expected~~on ~~amounts~~then ~~which~~existing ~~will~~$75 million ~~likely~~Senior ~~affect~~Term ~~our~~Loan ~~future~~Facility ~~capital~~was ~~requirements.~~repaid ~~Our~~and ~~cost~~extinguished. As of ~~expanding~~September ~~our network services and sales efforts~~30, ~~funding other strategic initiatives~~2001, ~~and~~$95.0 million ~~operating~~was ~~our~~outstanding ~~business will depend on a variety of~~under ~~factors,~~the ~~including,~~Senior ~~among~~Secured ~~other~~Credit ~~things:~~Facility.

• On April 12, 2001, we amended our $200 million Facility with TD Securities (USA), Inc., to increase the ~~number~~total to $325 million through the addition of ~~customers~~$125 million senior ~~and~~secured delay draw term loan (the “Incremental Facility”). The Incremental Facility may be used solely to purchase goods and services ~~for~~from Nortel ~~which~~so ~~they~~long ~~subscribe~~as Nortel is a lender under the Incremental Facility. As of September 30, 2001, $15.8 million was outstanding under the Incremental Facility.

• On ~~the~~April 12, ~~nature~~2001, ~~and~~we ~~penetration~~sold 65,000 shares of ~~services~~Convertible ~~that~~Pay ~~may~~In beKind ~~offered~~Series D byPreferred usStock for $1,000.00 per share, for a total cash consideration of $65 million. In addition, we issued warrants for 1,755,267 shares of our Common Stock exercisable at a price of $10.00 per share.

• Net ~~regulatory~~cash used in operating activities was $87.9 million for the nine months ended September 30, ~~judicial~~2001 and $49.3 million for the nine months ended September 30, 2000. The increase of $38.6 million is primarily due to an increase in operating losses and ~~legislative~~accounts ~~developments~~receivables offset by increases in non-cash reconciling items for allowance for doubtful accounts and depreciation and amortization expense. Net cash used in investing activities was $22.2 million for the nine months ended September 30, 2001 and $153.9 million for the nine months ended September 30, 2000. The decrease of $131.7 million is due to reduced capital expenditures within existing markets and the decrease in investments available for sale to fund operating losses for the nine months ended September 30, 2000. Net cash provided by financing activities was $75.8 million for the nine months ended September 30, 2001 and $215.4 million for the nine months ended September 30, 2000. The decrease of $139.6 million is primarily the result of net proceeds received from the Company’s initial public offering during the first quarter of 2000 offset by the proceeds received from the Series D Preferred Stock issuance during the second quarter of 2001.

• Many ~~response~~investment analysts use the measure of ~~our~~earnings ~~competitors~~before deducting interest, taxes, depreciation and amortization, also commonly referred to as “EBITDA,” as a ~~loss~~way of ~~customers~~evaluating toa uscompany. EBITDA losses excluding the restructuring charge and ~~changes~~non-cash incompensation ~~technology~~expense increased 51% to $21.1 million for the three months ended September 30, ~~and~~2001, from $19.6 million for the three months ended September 30, 2000.

~~• the availability of network capacity from ILECs and other carriers.~~18

Regulatory

The following summary of regulatory and legislative developments describes significant current and proposed federal, state, and local regulation and legislation related to the telecommunications and Internet service industries that could have a material effect on our business. Existing federal and state regulations currently are subject to judicial proceedings, legislative hearings and administrative proposals that could change, in varying degrees, the manner in which these industries operate. In addition, legislative proposals have been announced or adopted which could adversely impact our business. We cannot predict the outcome of these proceedings or legislative initiatives, or their impact upon the telecommunications and Internet service industries or upon us.

Government Regulation

Our telecommunications services are subject to regulation by federal, state and local government agencies. Generally, Internet, video conferencing, and certain data services are not directly regulated, although the underlying telecommunications services may be regulated in certain instances. We hold various federal, state and local regulatory authorizations for our regulated service offerings. The FCC has jurisdiction over our facilities and services to the extent those facilities are used in the provision of interstate or international telecommunications services. Additionally, state regulatory commissions have jurisdiction over our facilities and services to the extent they are used in intrastate telecommunications services. Our network also may be subject to certain local regulations such as licensing, building codes and generally applicable public safety and welfare requirements. Many of the regulations issued by these regulatory bodies may change and are the subject of various judicial proceedings, legislative hearings and administrative proposals. We cannot predict what impact, if any, these proceedings or changes will have on our business or results of operations.

Federal Regulation

The FCC regulates us as a non-dominant common carrier. Non-dominant carriers are subject to less regulation than dominant carriers but remain subject to the general requirements that they offer just and

1819

reasonable rates and terms of service and do not unreasonably discriminate in the provision of services. We have obtained authority from the FCC to provide domestic, interstate long distance services and international services between the United States and foreign countries and have filed the required tariffs. While we believe that we are in compliance with applicable laws and regulations, it cannot be assured that the FCC or third parties will not raise issues with regard to our compliance.

The Telecommunications Act of 1996

The Telecommunications Act was designed to increase competition in the long distance and local telecommunications industries. The Telecommunications Act imposes a variety of duties on ILECs to facilitate the development of competition in the provision of local telecommunications and access services. Like all local telecommunications carriers, where we provide local telephone services, we are required to provide network interconnection, reciprocal compensation, resale, number portability, and access to rights-of-way. ILECs, including the Regional Bell Operating Companies (“RBOCs”), are subject to requirements in addition to these, including the duty to: undertake additional obligations applicable to the interconnection of their networks; permit collocation of competitors’ equipment at their central offices; provide unbundled access to individual network elements, including network facilities, features and capabilities, on non-discriminatory and cost-based terms; and offer their retail services for resale at wholesale rates.

The Telecommunications Act also eliminates certain pre-existing prohibitions on the provision of long distance services by the RBOCs on a phased-in basis. RBOCs currently are permitted to provide long distance service outside those states in which they provide local telecommunications service. RBOCs will be permitted to provide long distance service within the regions in which they also provide local telecommunications service upon demonstrating to the FCC that they have complied with a statutory checklist of requirements intended to open local telephone markets to competition. To date, only Verizon and SBC Communications, Inc. (“SBC”) have been granted approval to to provide long distance services in their local telephone service regions and that is restricted to long distance calls originating in Connecticut, Massachusetts, ~~and~~ New York, and Pennsylvania for Verizon and Kansas, Oklahoma and Texas for SBC. Verizon, SBC, BellSouth Corporation (“BellSouth”) and other RBOCs have initiated similar proceedings to obtain in region long distance service authority in other states, including ~~Pennsylvania.~~Arkansas, Missouri, Georgia, and Louisiana. Additional entry by Verizon, SBC, BellSouth, and other RBOCs into the long distance services market in various states is expected in the near future and could further increase competition in the market for our services. Increased competition from the RBOCs may have a material adverse effect on our business, as they will be able to offer integrated local and long distance services and may enjoy significant competitive advantages.

Legislation is currently pending before the United States Congress that would give RBOCs the authority to transmit data traffic over LATA boundaries prior to complying with the statutory checklist of requirements intended to open their local telephone markets to competition. The legislation would also exempt the RBOCs from providing advanced data services to competitive carriers through unbundled network elements or wholesale discounts. If approved, this legislation could further increase competition by the RBOCs in the market for our services and have a negative impact on our business. We are unable to predict the outcome of such legislation.

In addition to overseeing the entry of the RBOCs into the long distance market, the FCC is charged with establishing national rules implementing the local competition provisions of the Telecommunications Act. In August 1996, the FCC released an order adopting an extensive set of regulations governing network interconnection, network element unbundling and resale of ILEC services, under the Telecommunications Act. In July 1997, the United States Court of Appeals for the Eighth Circuit (“Eighth Circuit”) issued a decision vacating substantial portions of these rules, principally on the ground that the FCC had improperly intruded into matters reserved for state jurisdiction.

In January 1999, the United States Supreme Court reversed many aspects of the Eighth Circuit’s decision, concluding that the FCC has jurisdiction to implement the local competition provisions of the Telecommunications Act. In so doing, the Supreme Court found that the FCC has authority to establish ~~pricing guidelines applicable to interconnection, the provision of unbundled network elements, and the~~

1920

pricing guidelines applicable to interconnection, the provision of unbundled network elements, and the resale of ILEC services. The Supreme Court, however, did not evaluate the specific pricing methodology adopted by the FCC and remanded the case to the Eighth Circuit for further consideration.

On remand, the Eighth Circuit generally upheld the FCC’s forward-looking cost methodology as a permissible basis for establishing pricing for interconnection and unbundled network elements, but overturned the specific aspect of the FCC’s pricing standard that was based on the use of the most efficient technology available in the industry and, instead, determined that prices should be based on actual costs incurred using equipment currently deployed. The Supreme Court has agreed to review the Eighth Circuit’s pricing decision, which has been stayed pending the outcome of the Supreme Court’s review. We cannot predict what impact the Eight Circuit’s decision or the upcoming Supreme Court decision will have on our business. Similarly, we cannot predict the outcome of any subsequent proceeding on remand by either the Eighth Circuit or the FCC, or the effect that any such subsequent proceedings could have on our business.

Although most of the FCC’s interconnection rules were upheld by the Supreme Court in its January 1999 decision, the Court found that the FCC had not adequately considered certain statutory criteria for requiring ILECs to make unbundled network elements available to CLECs. On remand, the FCC then conducted new proceedings to reexamine which unbundled network elements ILECs must provide. On November 5, 1999, the FCC released an order in which it required that ILECs make available all but one of the network elements specified in its initial order. The FCC also clarified and enhanced the scope of its initial unbundling requirements by expanding the definitions of those network elements which it requires the ILECs to offer on an unbundled basis. In that same order, however, the FCC declined to require ILECs to provide CLECs with unbundled access to data switching services, except in limited circumstances. On April 5, 2001, several RBOCs filed a petition with the FCC seeking the elimination of the dedicated transport and high capacity loop unbundling requirements. We are unable to predict how or when the FCC will respond to the RBOCs’ petition.

The FCC also clarified the obligation of ILECs to provide certain combinations of network elements. Specifically, the FCC determined that ILECs may not separate network elements that an ILEC currently combines. As a result, subject to certain restrictions, some special access circuits can now be converted to combinations of unbundled loop and transport elements, also known as enhanced extended links or EELs. We expect to benefit economically from EELs, because, unlike special access, EELs are subject to cost-based pricing under the FCC’s forward looking incremental cost pricing standard. Various parties have sought reconsideration and appeal of the FCC’s order. We are unable to predict the outcome of such reconsideration and appellate proceedings.

In March 1999, the FCC adopted new rules strengthening the rights of CLECs to obtain physical collocation for purposes of interconnecting with ILEC networks and gaining access to unbundled network elements. The order also requires ILECs to permit CLECs to collocate equipment used for interconnection and/or access to unbundled network elements even if such equipment includes certain switching or enhanced services functions. Additionally, the FCC adopted rules designed to limit ILECs’ ability to deny CLECs the ability to deploy transmission hardware in collocation space by purporting that the equipment will cause electrical interference with other wires, and it proposed rules making these requirements more specific. On March 17, 2000, the United States Court of Appeals for the District of Columbia Circuit reversed significant portions of the FCC’s collocation order and rules, and remanded the issue to the FCC for further proceedings. Among other things, the appeals court decision overturns the FCC’s regulations that require ILECs to permit competitors to collocate certain equipment that has enhanced services functionality and allow collocating carriers to construct cross-connect facilities between their own collocated equipment and that of another CLEC. On July 12, 2001, the FCC adopted new rules in response to the appeal court’s ruling that, among other things, allow CLECs to collocate multifunctional equipment and require ILECs to provision cross-connects between collocating carriers, eliminating its previous decision allowing collocating carriers to provision their own cross-connects between collocation arrangements. Various parties may seek reconsideration and/or appeal of the FCC’s order. We are unable to predict the outcome of such reconsideration or appellate proceedings or likely effect such outcome could have on our business.

2021

In October 2000, the FCC adopted rules to enhance the ability of CLECs to provide services in commercial buildings or other multiple tenant environments. Among other things, the FCC prohibited telecommunications carriers from entering into exclusive contracts with commercial building owners and also required ILECs to open up their equipment and wiring in multiple tenant buildings to use by CLECs. Reconsideration of the FCC’s order has been sought. In addition, the FCC has issued a further notice of proposed rulemaking. We cannot predict the outcome or likely effect of either of these proceedings.

Access Regulation

The FCC regulates the interstate access rates charged by ILECs and CLECs to long distance carriers for the local origination and termination of interstate long distance traffic. Those access rates make up a significant portion of the cost of providing long distance traffic. Over the past few years, the FCC has implemented several changes in its interstate access rules that have resulted in the restructuring of the access charge system and significant downward changes in access charge rate levels.

In addition, on May 31, 2000, the FCC adopted a proposal submitted by a coalition of long distance companies and RBOCs referred to as “CALLS”. Pursuant to this plan, ILEC access rates must be decreased in stages over five years. ~~The~~On ~~FCC’s~~September 10, ~~latest~~2001, ~~rules~~the ~~governing~~United ~~ILECs~~States ~~subject~~Court toof ~~“price-cap”~~Appeals for the Fifth ~~regulation~~Circuit (~~generally,~~“Fifth Circuit”) upheld most of the ~~largest~~FCC’s ~~ILECs~~CALLS order, ~~including~~but remanded for further consideration portions of the ~~RBOCs)~~order ~~have~~that ~~been~~created a new universal ~~appealed~~service fund and ~~are~~that ~~the~~set ~~subject~~a offactor ~~petitions~~applied ~~for~~annually ~~reconsideration~~to ~~before~~reduce access rates at a certain pace. We cannot predict the ~~FCC~~outcome or likely effect of such a reconsideration proceeding.

Over the past few years, the FCC has granted ILECs significant flexibility in pricing their interstate special and switched access services. We anticipate that this pricing flexibility will result in ILECs lowering their prices in high traffic density areas, where we currently compete. We also anticipate that the FCC will grant ILECs greater pricing flexibility as the number of actual and potential competitors increases in each of these markets. In August 1999, the FCC released an order that granted substantial additional pricing flexibility to ILECs for certain interstate services. Among other things, the FCC granted immediate pricing flexibility to many ILECs and also established a framework for granting greater flexibility in the pricing of all interstate access services once an ILEC market satisfies certain prescribed competitive criteria. ~~The FCC also invited public comment on proposals for additional ILEC pricing flexibility.~~ In ~~December 2000~~February ~~and January~~ 2001, the ~~FCC~~ ~~issued~~United ~~its~~States ~~first~~Court ~~grants~~ of ~~additional~~Appeals ~~pricing flexibility to BellSouth Corporation (“BellSouth”). Petitions~~ for ~~reconsideration have been filed with~~ ~~respect~~the toDistrict atof ~~least~~Columbia ~~two~~upheld of the FCC’s ~~orders~~prescribed ~~regarding~~competitive ~~ILEC~~criteria. ~~special and switched~~To ~~access~~date, ~~pricing flexibility. We are unable to predict~~ the ~~outcome~~FCC ofhas ~~any related~~granted ~~subsequent~~additional ~~proceedings~~pricing orflexibility ~~whether~~in ~~the~~specific ~~decisions~~markets ~~that may be reached~~to ~~could~~Verizon, ~~have~~BellSouth, aand ~~materially adverse impact on our business~~SBC.

The FCC recently issued two orders dealing with CLEC access charge levels. First, in April 2001, the FCC issued its ruling regarding the interstate access charges levied by CLECs on long distance carriers. The FCC decided that, effective June 20, 2001, CLEC access charges should be reduced over a three-year period to the level charged by ILECs in the competing area. Prior to this order, CLECs were free to charge access rates at any level they deem appropriate, subject to overarching statutory requirements that such rates must be just, reasonable and non-discriminatory. The FCC-ordered reduction in CLEC access charge rates will result in a substantial reduction in the rate per minute we charge for interstate access services and, depending on the volume of our access traffic, could result in a decrease in the amount of access charge revenue we will collect during 2001 and in subsequent years. Second, in May 2001, the FCC issued another order concluding that a particular CLEC’s past access rates were excessive and applied new reduced access rates retroactively. This order may prompt long distance carriers to seek retroactive refunds of rates paid in excess of those prescribed in the FCC’s order. Various parties have sought reconsideration and appeal of the FCC’s orders. We are unable to predict the outcome of such reconsideration and appellate proceedings or whether this could result in the Company being required to refund certain access charge payments.

On April 19, 2001, the FCC adopted a notice of proposed rulemaking seeking to unify its rules regarding inter-carrier compensation. The FCC seeks to address disparities in rates for access charges and reciprocal compensation – the rates which carriers pay each other for completing calls exchanged between them. The FCC’s proposal seeks comments on a transition to a “bill and keep” system where carriers

2122

would not exchange cash compensation, but would provide call completion services free of charge. Further adoption by the FCC of a unified inter-carrier compensation regime that adopts a bill and keep regime or otherwise reduces the rates that we (and other carriers) may charge for access charges and/or reciprocal compensation could significantly reduce our inter-carrier compensation revenues. We are unable to predict the outcome of this proceeding or whether the decision that may be reached could have a materially adverse impact on our business.

In addition, in various contexts, certain ILECs have asked the FCC to rule that certain packet-based transmission services, such as calls made over the Internet, are subject to regulation as telecommunications services including the assessment of interstate switched access charges and universal service fund assessments. Although the FCC has suggested that Internet-based telephone-to-telephone calls may be considered telecommunications services, it has not reached a final decision on that issue. The FCC recently initiated an inquiry on issues surrounding high-speed Internet access over cable modems, including the appropriate regulatory classification of such services. We are unable to predict the outcome of any of these proceedings or the impact they could have on our business.

Reciprocal Compensation

The Telecommunications Act requires both CLECs and ILECs to establish reciprocal compensation arrangements for the transport and termination of local telecommunications traffic. When two different carriers collaborate to complete a local call, these reciprocal compensation arrangements ensure compensation both for the originating carrier, which receives payment from the customer, and for the terminating carrier, which gets paid by the originating carrier.

In late 1998 and 1999, the FCC determined that both dedicated access and dial-up calls from a customer to an Internet service provider are primarily interstate in nature and, therefore, subject to the FCC’s jurisdiction. The FCC then initiated a proceeding to determine what effect this regulatory classification will have on the obligation of a service provider to pay reciprocal compensation for dial-up calls to Internet service providers. On March 24, 2000, the United States Court of Appeals for the District of Columbia Circuit vacated the FCC’s determination that dial-up calls to Internet service providers are not “local” calls for purposes of reciprocal compensation, and remanded the matter to the FCC for further consideration.

On April 18, 2001, the FCC adopted an order setting forth a new compensation mechanism for Internet-bound traffic. The ruling treats Internet-bound traffic as a special form of interstate traffic, specifically information access and, therefore, not subject to reciprocal compensation. Rather, effective June 14, 2001, Internet-bound traffic will be subject to an interim compensation mechanism with rates generally lower than the reciprocal compensation rates incorporated into our interconnection agreements with various ILECs. This decision could result in a reduction of revenue we receive from reciprocal compensation payments for traffic terminated over our network to Internet service providers, other customers that generate large amounts of inbound calling, and to our other local service customers. Various parties have sought reconsideration and appeal of the FCC’s order. We are unable to predict the outcome of such reconsideration and/or appellate proceedings.

Universal Service

In 1997, the FCC established a significantly expanded universal service regime to subsidize the cost of telecommunications services to high-cost areas, and to low-income customers and qualifying schools, libraries and rural health care providers. Providers of telecommunications services, like us, as well as certain other entities, must pay for these programs. Our share of the payments into these subsidy funds will be based on our share of certain defined telecommunications end user revenues. Various states are also in the process of implementing their own universal service programs. We currently are unable to quantify the amount of subsidy payments we will be required to make in the future or the effect that these required payments will have on our financial condition. Moreover, the FCC’s universal service rules remain subject to change, which could increase our costs and, thereby, could have a materially adverse effect on our financial position.

2223

Detariffing of Interstate and International Services

In November 1996, the FCC issued an order that required non-dominant, long distance carriers, like us, to cease filing tariffs for domestic, long distance services. Tariffing is a traditional requirement of telephone companies whereby such companies publicly submit at state and federal regulatory agencies all terms, conditions, pricing, and available services governing the sale of all regulated services to the public. In March 1999, the FCC adopted further rules that, while still maintaining mandatory detariffing, required long distance carriers to make specific public disclosures on Internet websites of their rates, terms and conditions for domestic interstate services. In April 2000, the U.S. Court of Appeals for the District of Columbia Circuit affirmed the FCC’s mandatory detariffing order in its entirety, which had been stayed by the appeals court pending its decision. Consequently, the FCC implemented a transition period to allow carriers to withdraw federal tariffs and move to contractual relationships with their customers. All carriers, including Net2000, are required to complete the process of detariffing interstate domestic commercial services by January 31, 2001 and must detariff consumer services by July 31, 2001. In March 2001, the FCC imposed similar detariffing requirements with respect to international services provided by non-dominant carries such as Net2000. The detariffing of international services must be completed by January 27, 2002. Long distance carriers will be required to comply with the new public information requirements imposed by the FCC in lieu of tariff filings. In the absence of tariffs, non-dominant, interstate and international services providers will no longer be able to rely on the filing of tariffs with the FCC as a means of providing notice to customers of prices, terms and conditions under which they offer their domestic, interstate and international services, and will have to rely more heavily on individually negotiated agreements with end users.

State Regulation

The Telecommunications Act preempts state and local statutes and regulations that prohibit the provision of competitive telecommunications services. As a result, we are free to provide the full range of local, long distance and data services in all states in which we currently operate, and in any states into which we may wish to expand. While this action greatly increases our potential for growth, it also increases the amount of competition to which we may be subject.

Because we provide intrastate common carrier services, we are subject to various state laws and regulations. Most state public utility and public service commissions require some form of certification or registration before commencing service. We are authorized to provide intrastate long distance services in every state except Alaska ~~and are in the process of obtaining intrastate long distance authority in that state~~. We have authority to provide competitive local telecommunications services in California, Connecticut, Delaware, the District of Columbia, Florida, Georgia, Illinois, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Texas, Virginia and West Virginia. ~~We have also~~ ~~applied to obtain authority to provide competitive local telecommunications~~ ~~services in Maine.~~

In most states, we also are required to file tariffs or price lists setting forth the terms, conditions and prices for services that are classified as intrastate. We are required to update or amend these tariffs when we adjust our rates or add new products and are subject to various reporting and record-keeping requirements in these states. Many states also require prior approval for transfers of control of certified providers, corporate reorganizations, acquisitions of telecommunications operations, assignment of carrier assets, carrier stock offerings and undertaking of significant debt obligations. States generally retain the right to sanction a service provider or to revoke certification if a service provider violates applicable laws or regulations. While we believe that we are in compliance with applicable laws and regulations, it cannot be assured that state public service commissions or third parties will not raise issues with regard to our compliance.

Local Interconnection

The Telecommunications Act imposes a duty upon all ILECs to negotiate in good faith with potential competitive telecommunications providers to provide interconnection to their networks, exchange local traffic, make unbundled network elements available and permit resale of most local telephone services. If ~~negotiations do not succeed, we have a right to seek arbitration with the~~ state regulatory authority of any unresolved issues. Arbitration decisions involving interconnection arrangements in several states have been challenged and appealed to federal courts. We have entered into interconnection agreements with Verizon in Delaware, the District of Columbia, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, Virginia and West Virginia, with BellSouth in Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, and Tennessee, with SBC/Ameritech in Illinois, and with SBC/Southwestern Bell in Texas. We have begun to negotiate similar agreements in the other states where we are authorized to provide competitive local telecommunications services. At this time, we are not a party to any interconnection agreement arbitration proceeding. However, other interconnection arbitration agreement proceedings before various state public service commissions may result in decisions that could have an adverse impact on our business.

negotiations do not succeed, we have a right to seek arbitration with the state regulatory authority of any unresolved issues. Arbitration decisions involving interconnection arrangements in several states have been challenged and appealed to federal courts. We have entered into interconnection agreements with Verizon in Delaware, the District of Columbia, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, Virginia and West Virginia, with BellSouth in Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, and Tennessee, with SBC/Ameritech in Illinois, and with SBC/Southwestern Bell in Texas. At this time, we are not a party to any interconnection agreement arbitration proceeding. However, other interconnection arbitration agreement proceedings before various state public service commissions may result in decisions that could have an adverse impact on our business.

Forward-Looking Statements and Risk Factors

Certain statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and we intend that such forward-looking statements be subject to the safe harbors created thereby. The words “believes,” “expects,” “estimate,” “anticipates,” “will be,” “should” and similar words or expressions identify forward-looking statements made by us or on our behalf. These forward-looking statements are subject to many uncertainties and factors that may cause our actual results to be materially different from any future results expressed or implied by such forward-looking statements. We do not undertake any obligation to update or revise any forward-looking statements made by us or on our behalf, whether as a result of new information, future events or otherwise. Refer to the Company’s annual report on Form 10-K, filed with the Securities and Exchange Commission for details on risk factors.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

We do not have operations subject to risks of foreign currency fluctuations. Our exposure to financial market risk relates primarily to our investment portfolio and outstanding debt. We typically do not attempt to reduce or eliminate our market exposure on our investment securities because a substantial majority of our investments are in fixed-rate, short-term securities. Our earnings are affected by changes in interest rates as our long term debt has variable interest rates based on either the Prime Rate or LIBOR. We have entered into an interest rate swap agreement that effectively protects $31,000 of our outstanding debt from market fluctuations. If interest rates for our long term debt (excluding the interest rate swap agreement) for the three months ended June 30, 2001 average 10% more than they did as of December 31, 2000, our interest expense would increase, and loss before taxes would increase by approximately $1.9 million for the three months ended June 30, 2001. These amounts are determined by considering the impact of the hypothetical interest rates on our borrowing cost and outstanding debt balances. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our financial structure.

2425

PART II. – OTHER INFORMATION

Item 1. Legal Proceedings

On and after June 11, 2001 and as of the date this filing, the Company is aware that six putative shareholder class action lawsuits were filed against the Company, certain of its current and former officers and directors, and several investment banks that were the underwriters of the Company’s initial public offering. The lawsuits were filed in the United States District Court for the Southern District of New York. Three of the lawsuits purport to be class actions filed on behalf of purchasers of the stock of the Company during the period March 6 or 7, 2000 through December 6, 2000, and three of the lawsuits allege as the class period March 6, 2000 through June 6, 2001. Plaintiffs allege that the underwriter defendants agreed to allocate stock in the Company’s initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. Plaintiffs allege that the Prospectus for the Company’s initial public offering was false and misleading in violation of the securities laws because it did not disclose these arrangements. The Company and its current and former officers and directors vigorously deny all allegations of wrongdoing against them and intend to vigorously defend the actions. The Company expects that the lawsuits will be consolidated and that plaintiffs will file a consolidated complaint. The Company intends to file a motion to dismiss that complaint, and is not required to respond before that complaint is filed. The Company believes that more than one hundred other companies have been named in nearly identical lawsuits that have been filed by some of the same law firms.

~~From~~ On ~~time~~August 28, to2001, ~~time~~the Company filed a complaint in the Circuit Court for Fairfax County, weVirginia ~~are~~against Bonnie L. Horner and Fred J. Mueller, the owners of all the outstanding stock of FreBon International Corporation (“FreBon”), a ~~party~~Virginia corporation (the “Defendants”), seeking unspecified damages to ~~routine~~be ~~litigation~~determined ~~and~~at ~~regulatory~~trial. The Company alleges that the Defendants are ~~proceedings~~in ~~before~~breach of various ~~state~~representations ~~commissions~~and warranties made in connection with the Stock Purchase Agreement dated June 28, 2000 by and among Net2000 Communications Group, Inc. (“Net2000 Communications Group”) and the ~~FCC~~Defendants, whereby inNet2000 Communications Group purchased all the ~~ordinary~~Defendants’ ~~course~~stock of FreBon. On November 7, 2001, the case was removed to the United Stated District Court for the Eastern District of ~~business~~Virginia, Alexandria Division.

~~Item~~ On 2September 27, 2001, Fred Muller and Bonnie Horner filed a lawsuit against Net2000 Communications Operations, Inc. ~~Changes~~and Net2000 Communications Group, Inc. (the “Defendants”) in ~~Securities~~the United States District Court for the Eastern District of Virginia, Alexandria Division. In its complaint, the Plaintiffs allege that the Defendants breached certain representations and warranties ~~Use~~made to the Plaintiffs in connection with the Stock Purchase Agreement dated June 28, 2000. The amount of ~~Proceeds~~relief sought is believed to exceed $15,000,000.

~~Report~~ From oftime ~~Offering~~to oftime, ~~Securities~~we are a party to routine litigation and ~~Use~~regulatory proceedings ofbefore ~~Proceeds~~various ~~Therefrom~~state commissions and the FCC in the ordinary course of business.

~~On March~~Item ~~16, 2001, the Company acquired Vision I~~2.T. ~~Corporation,~~Changes ~~a California-based provider of integrated video, data and network services,~~ in ~~exchange~~ ~~for~~Securities ~~1,000,000 shares of the Company’s common stock~~ and ~~the~~Use ~~assumption~~ of ~~$1,067 of Vision I.T. debt, for total consideration of approximately~~Proceeds ~~$6,100. These shares were issued pursuant to the exemption from registration~~ ~~under section 4 (2) of the Securities Act.~~

OnReport ~~April 12, 2001, we sold 65,000 shares~~ of ~~Convertible~~Offering ~~Pay In Kind Series D Preferred Stock for $1,000.00 per share, for a total cash consideration~~ of ~~$65 million.~~ ~~The~~Securities ~~preferred~~and ~~shares~~Use ~~will be convertible initially into approximately 22 million shares~~ of ~~common~~Proceeds ~~stock, based upon a per share~~Therefrom ~~conversion price of $2.955. In addition, we issued warrants for 1,755,267~~ ~~shares of our Common Stock exercisable at a price of $10.00 per share. These securities were issued pursuant to the exemption from registration under section 4 (2) of the Securities Act.~~

~~Item 3. Defaults Upon Senior Securities~~ None

~~None~~Item 3. Defaults Upon Senior Securities

~~Item 4. Submission of Matters to a Vote of Security Holders~~ None

~~(a) ompany~~Item 4. ~~held~~Submission ~~its~~of ~~annual~~Matters ~~meeting~~to ofa ~~Stockholders~~Vote onof ~~May 24,~~Security ~~2001~~Holders ~~(the “Annual Meeting”).~~

~~(b) n/a~~ None

~~(c) The following matters were voted upon at the Annual Meeting:~~26

25Item 5. Other Information

~~(i)~~ Not To elect two directors to serve until the 2004 annual meeting of stockholders, and until their successors are elected and duly qualified, with 90% of the shares of Common Stock present and voting at the meeting voting for Messrs. Bolland and Albro as follows:applicable

Nominee	For		Against or Withheld
Anthony J. Bolland		35,237,415		353,910
Duane Albro		35,237,415		353,910

Item 6. Exhibits and Reports on Form 8-K

(ii) To amend and restate our 1999 Stock Incentive Plan to reserve an additional 4,000,000 shares were approved by 70% of the shares of Common Stock present and voting at the meeting. (Votes for: 24,954,225; votes against or withheld: 3,470,610; abstain: 21,674). (iii) To approve the issuance of shares of our common stock upon the conversion of Series D Pay-in-Kind Preferred Stock and the exercise of related warrants by a holder, which upon such conversion and exercise would hold more than 19.99% of our outstanding common stock was approved by 79% of the shares of Common Stock present and voting at the meeting. (Votes for: 27,977,949; votes against or withheld: 337,114; abstain: 131,446). (iv) The appointment of Ernst & Young, LLP as our independent auditors for the year ending December 31, 2001 was ratified by 99% of the shares of Common Stock present and voting at the meeting. (Votes for: 35,520,905; votes against or withheld: 54,378; broker non-votes: 16,042).Exhibits

Item 5. Other Information


Exhibit No.		Description

3.1.2*		Amended and Restated Certificate of Incorporation of Net2000
3.1.4*		Amended and Restated Bylaws of Net2000
4.1****		Form of Certificate of Designation of Series D Convertible Pay In Kind Preferred Stock
4.2****		Form of Warrant
10.1*		Second Amended and Restated Investor Rights Agreement dated November 4, 1998, by and among Net2000 and certain stockholders named therein
10.2*		Employment Agreement dated July 31, 1998, by and between Net2000 and Clayton A. Thomas, Jr.
10.3*		Employment Agreement dated July 31, 1998, by and between Net2000 and Mark A. Mendes
10.4*		Employment Agreement dated July 31, 1998, by and between Net2000 and Donald E. Clarke
10.5***		Stock Pledge agreement between Clayton A. Thomas Jr. and Net2000 Communications Group, Inc. (Replace prior 10.5 exhibit filed with the S-1)
10.5.1***		First Amendment to the Stock Pledge agreement between Clayton A. Thomas Jr. and Net2000 Communications Group, Inc.
10.6***		Loan terms between Clayton A. Thomas Jr. and Net2000 Communications Group, Inc. (Replace prior 10.6 exhibit filed with the S-1)
10.6.1***		Promissory note between Clayton A. Thomas Jr. and Net2000 Communications Group, Inc.
10.6.2*****		First amendment to the Loan Agreement and Promissory Note by and between Clayton A. Thomas, Jr. and Net2000 Communications Group, Inc.
10.6.3!		Second amendment to the Loan Agreement and Promissory Note by and between Clayton A. Thomas, Jr. and Net2000 Communications Group, Inc.
10.7		Omitted
10.8*		1997 Equity Incentive Plan
10.8.1**		Amended and Restated 1997 Equity Incentive Plan
10.9*		1999 Stock Incentive Plan

~~Not applicable~~27

Item 6. Exhibits and Reports on Form 8-K


10.9.1!		Amended and Restated 1999 Stock Incentive Plan (incorporated by reference to the Corporation’s Proxy Statement on Form DEF-14A (File No. 000-29515)
10.10*		1999 Employee Stock Purchase Plan
10.11*		Incentive Stock Option Agreement dated October 27, 1997, by and between Net2000 and Mark A. Mendes
10.11.1*		Preferred Stock Incentive Stock Option Agreement dated October 27, 1997, by and between Net2000 and Mark A. Mendes
10.11.2*		Amendment No. 1 to Preferred Stock Incentive Stock Option Agreement dated April 1, 1998 (related to Exhibit 10.11.1)
10.11.3*		Incentive Stock Option Agreement dated May 19, 1998, by and between Net2000 and Mark A. Mendes
10.12*		Incentive Stock Option Agreement dated December 15, 1997 by and between Net2000 and Donald E. Clarke
10.12.1*		Incentive Stock Option Agreement dated May 19, 1998 by and between Net2000 and Donald E. Clarke
10.12.2*		Incentive Stock Option Agreement dated November 10, 1999, by and between Net2000 and Donald E. Clarke
10.13*		Stock Option Agreement dated November 15, 1999, by and between Net2000 and Clyde Heintzelman
10.14*		Amended and Restated Credit Agreement dated July 30, 1999, by and among Net2000 Communications Group, Inc., Nortel Networks, Inc. and certain lenders named therein
10.15*		Form of Amended and Restated Guaranty Agreement dated July 30, 1999, signed by each of our subsidiaries and Nortel Networks, Inc.
10.16*		Form of Amended and Restated Pledge and Security Agreement dated July 30, 1999, signed by each of our subsidiaries and Nortel Networks, Inc.
10.17*		Note Purchase Agreement dated July 30, 1999, by and between Net2000 and Nortel Networks, Inc.
10.18*		Warrant Agreement dated July 30, 1999, by and between Net2000 and Nortel Networks, Inc.
10.19*		Form of Warrant Certificate dated July 30, 1999, by and between Net2000 and Nortel Networks, Inc.
10.20*		Senior Discount Notes Due 2009 issued by Net2000 on July 30, 1999 to the holder identified therein
10.21*		Exchange and Registration Rights Agreement dated July 30, 1999 by and between Net2000 and Nortel Networks, Inc.

~~Exhibits~~28

Exhibit No.		Description
10.22*		Lease dated December 24, 1998, by and between Net2000 Communications Real Estate, Inc. and Wellsford/Whitehall Holdings, L.L.C.
3.1.2*		Amended and Restated Certificate of Incorporation of Net2000
10.23*		Lease dated February 19, 1999, by and between Net2000 Communications Real Estate, Inc. and Murdock Atrium Limited Partnership
3.1.4*		Amended and Restated Bylaws of Net2000
10.24*		Sublease Agreement dated June 21, 1999, by and between Net2000 Communications Real Estate, Inc. and Virginia Electric and Power Company
4.1****		Form of Certificate of Designation of Series D Convertible Pay In Kind Preferred Stock
10.25*		Office Lease dated May 26, 1999, by and between Net2000 Communications Real Estate, Inc. and KDC-Dulles Tech, LLC
4.2****		Form of Warrant
10.26!		Employment Agreement dated June, 2001, by and between Net2000 Communications, Inc. and Duane Albro (Replace prior 10.26 exhibit filed with the S-1)
10.1*		Second Amended and Restated Investor Rights Agreement dated November 4, 1998, by and among Net2000 and certain stockholders named therein
10.27!		Consulting Agreement dated June 1, 2001, by and between Net2000 Communications, Inc. and Clyde Heintzelman (Replace prior 10.27 exhibit filed with the S-1)
10.2*		Employment Agreement dated July 31, 1998, by and between Net2000 and Clayton A. Thomas, Jr.
10.28**		Lease dated October 31, 1999, by and between Net2000 Communications Real Estate, Inc, and Hudson Telecom Center, LLC
10.3*		Employment Agreement dated July 31, 1998, by and between Net2000 and Mark A. Mendes
10.29**		Lease dated December 6, 1999, by and between Net2000 Communications Real Estate, Inc, and Hood Business Park, LLC
10.4*		Employment Agreement dated July 31, 1998, by and between Net2000 and Donald E. Clarke
10.30**		Lease dated December 15, 1999, by and between Net2000 Communications Real Estate, Inc, and Callowhill Management, Inc.
10.5***		Stock Pledge agreement between Clayton A. Thomas Jr. and Net2000 Communications Group, Inc. (Replace prior 10.5 exhibit filed with the S-1)
10.31**		Lease dated April 11, 2000, by and between Net2000 Communications Real Estate, Inc, and Permiter Center Investors, LLC
10.32		Omitted
10.33**		Second Amended and Restated Credit Agreement dated June 28, 2000, by and among Net2000 Communications Group, Inc., Toronto Dominion (Texas), Inc., and certain lenders named therein
10.34***		Lease dated October 11, 2000 by and between Net2000 Communications Real Estate, Inc and Charles E Smith Real Estate Services, LP
10.35***		Employment Agreement dated July 26, 2000, by and between Net2000 Communication, Inc. and Carl Pavolic
10.36***		Employment Agreement dated February 16, 2001, by and between Net2000 Communication, Inc. and James Garrettson
10.37		Omitted
10.38****		Securities Purchase Agreement dated as of March 27, 2001 by and among Net2000 Communications, Inc. and the investors listed on the Schedule of Buyers attached thereto.
10.38.1****		Amendment No. 1 to the Securities Purchase Agreement dated March 27, dated as of April 2, 2001.

2629

10.5.1***		First Amendment to the Stock Pledge agreement between Clayton A. Thomas Jr. and Net2000 Communications Group, Inc.
10.39****		Registration Rights Agreement, dated as of April 12, 2001, by and among Net2000 Communications, Inc. and the Stockholders (as defined therein)
10.6***		Loan terms between Clayton A. Thomas Jr. and Net2000 Communications Group, Inc. (Replace prior 10.6 exhibit filed with the S-1)
10.40****		Shelf Registration Rights Agreement dated as of April 12, 2001, by and among Net2000 Communications, Inc. and the Stockholders (as defined therein)
10.6.1***		Promissory note between Clayton A. Thomas Jr. and Net2000 Communications Group, Inc.
10.41****		Third Amended and Restated Credit Agreement dated as of April 12, 2001, by and among Net2000 Communications Group, Inc., as Borrower, Toronto Dominion (Texas), Inc., as Administrative Agent, and the Lenders named therein.
10.6.2*****		First amendment to the Loan Agreement and Promissory Note by and between Clayton A. Thomas, Jr. and Net2000 Communications Group, Inc.
10.41.1		First Amendment and Consent to the Third Amended and Restated Credit Agreement.
10.6.3		Second amendment to the Loan Agreement and Promissory Note by and between Clayton A. Thomas, Jr. and Net2000 Communications Group, Inc.
10.42+****		Purchase and License Agreement dated as of March 27, 2001 by and among Net2000 Communications Capital Equipment, Inc. and Nortel Networks Inc.
10.7		Omitted
10.43!		Loan terms between Mark Mendes and Net2000 Communications Group, Inc.
10.8*		1997 Equity Incentive Plan
10.44!		Promissory note between Mark Mendes and Net2000 Communications Group, Inc.
10.8.1**		Amended and Restated 1997 Equity Incentive Plan
10.9*		1999 Stock Incentive Plan
10.9.1		Amended and Restated 1999 Stock Incentive Plan (incorporated by reference to the Corporation’s Proxy Statement on Form DEF-14A (File No. 000-29515)
10.10*		1999 Employee Stock Purchase Plan
10.11*		Incentive Stock Option Agreement dated October 27, 1997, by and between Net2000 and Mark A. Mendes
10.11.1*		Preferred Stock Incentive Stock Option Agreement dated October 27, 1997, by and between Net2000 and Mark A. Mendes
10.11.2*		Amendment No. 1 to Preferred Stock Incentive Stock Option Agreement dated April 1, 1998 (related to Exhibit 10.11.1)
10.11.3*		Incentive Stock Option Agreement dated May 19, 1998, by and between Net2000 and Mark A. Mendes
10.12*		Incentive Stock Option Agreement dated December 15, 1997 by and between Net2000 and Donald E. Clarke
10.12.1*		Incentive Stock Option Agreement dated May 19, 1998 by and between Net2000 and Donald E. Clarke
10.12.2*		Incentive Stock Option Agreement dated November 10, 1999, by and between Net2000 and Donald E. Clarke
10.13*		Stock Option Agreement dated November 15, 1999, by and between Net2000 and Clyde Heintzelman
10.14*		Amended and Restated Credit Agreement dated July 30, 1999, by and among Net2000 Communications Group, Inc., Nortel Networks, Inc. and certain lenders named therein


*		Incorporated herein by reference to the Company’s Registration Statement on Form S-1, No. 333-31987
**		Incorporated by reference to the Company’s quarterly report on Form 10-Q, filed with the SEC as of August 14, 2000
***		Incorporated by reference to the Company’s annual report on Form 10-K, filed with the SEC as of April 13, 2001
****		Incorporated herein by reference to the Company’s on Form 8-K, filed with the SEC as of April 16, 2001
*****		Incorporated by reference to the Company’s quarterly report on Form 10-Q, filed with the SEC as of May 11, 2001
!		Incorporated by reference to the Company’s quarterly report on Form 10-Q, filed with the SEC as of August 7, 2001

10.15*		Form of Amended and Restated Guaranty Agreement dated July 30, 1999, signed by each of our subsidiaries and Nortel Networks, Inc.
10.16*		Form of Amended and Restated Pledge and Security Agreement dated July 30, 1999, signed by each of our subsidiaries and Nortel Networks, Inc.
10.17*		Note Purchase Agreement dated July 30, 1999, by and between Net2000 and Nortel Networks, Inc.
10.18*		Warrant Agreement dated July 30, 1999, by and between Net2000 and Nortel Networks, Inc.
10.19*		Form of Warrant Certificate dated July 30, 1999, by and between Net2000 and Nortel Networks, Inc.
10.20*		Senior Discount Notes Due 2009 issued by Net2000 on July 30, 1999 to the holder identified therein
10.21*		Exchange and Registration Rights Agreement dated July 30, 1999 by and between Net2000 and Nortel Networks, Inc.
10.22*		Lease dated December 24, 1998, by and between Net2000 Communications Real Estate, Inc. and Wellsford/Whitehall Holdings, L.L.C.
10.23*		Lease dated February 19, 1999, by and between Net2000 Communications Real Estate, Inc. and Murdock Atrium Limited Partnership
10.24*		Sublease Agreement dated June 21, 1999, by and between Net2000 Communications Real Estate, Inc. and Virginia Electric and Power Company
10.25*		Office Lease dated May 26, 1999, by and between Net2000 Communications Real Estate, Inc. and KDC-Dulles Tech, LLC
10.26		Employment Agreement dated June, 2001, by and between Net2000 Communications, Inc. and Duane Albro (Replace prior 10.26 exhibit filed with the S-1)
10.27		Consulting Agreement dated June 1, 2001, by and between Net2000 Communications, Inc. and Clyde Heintzelman (Replace prior 10.27 exhibit filed with the S-1)
10.28**		Lease dated October 31, 1999, by and between Net2000 Communications Real Estate, Inc, and Hudson Telecom Center, LLC
10.29**		Lease dated December 6, 1999, by and between Net2000 Communications Real Estate, Inc, and Hood Business Park, LLC
10.30**		Lease dated December 15, 1999, by and between Net2000 Communications Real Estate, Inc, and Callowhill Management, Inc.
10.31**		Lease dated April 11, 2000, by and between Net2000 Communications Real Estate, Inc, and Permiter Center Investors, LLC
10.32		Omitted

+ Portions of these Exhibits were omitted and have been filed separately with the Secretary of the Commission pursuant to the Company’s Application requesting Confidential Treatment under Rule 406 of the Securities and Exchange Act of 1933.

28Reports on Form 8-K

10.33**		Second Amended and Restated Credit Agreement dated June 28, 2000, by and among Net2000 Communications Group, Inc., Toronto Dominion (Texas), Inc., and certain lenders named therein
10.34***		Lease dated October 11, 2000 by and between Net2000 Communications Real Estate, Inc and Charles E Smith Real Estate Services, LP
10.35***		Employment Agreement dated July 26, 2000, by and between Net2000 Communication, Inc. and Carl Pavolic
10.36***		Employment Agreement dated February 16, 2001, by and between Net2000 Communication, Inc. and James Garrettson
10.37		Omitted
10.38****		Securities Purchase Agreement dated as of March 27, 2001 by and among Net2000 Communications, Inc. and the investors listed on the Schedule of Buyers attached thereto.
10.38.1****		Amendment No. 1 to the Securities Purchase Agreement dated March 27, dated as of April 2, 2001.
10.39****		Registration Rights Agreement, dated as of April 12, 2001, by and among Net2000 Communications, Inc. and the Stockholders (as defined therein).
10.40****		Shelf Registration Rights Agreement dated as of April 12, 2001, by and among Net2000 Communications, Inc. and the Stockholders (as defined therein).
10.41****		Third Amended and Restated Credit Agreement dated as of April 12, 2001, by and among Net2000 Communications Group, Inc., as Borrower, Toronto Dominion (Texas), Inc., as Administrative Agent, and the Lenders named therein.
10.42+****		Purchase and License Agreement dated as of March 27, 2001 by and among Net2000 Communications Capital Equipment, Inc. and Nortel Networks Inc.
10.43		Loan terms between Mark Mendes and Net2000 Communications Group, Inc.
10.44		Promissory note between Mark Mendes and Net2000 Communications Group, Inc.

None

*		Incorporated herein by reference to the Company’s Registration Statement on Form S-1, No. 333-31987
**		Incorporated by reference to the Company’s quarterly report on Form 10-Q, filed with the SEC as of August 14, 2000
***		Incorporated by reference to the Company’s annual report on Form 10-K, filed with the SEC as of April 13, 2001
****		Incorporated herein by reference to the Company’s on Form 8-K, filed with the SEC as of April 16, 2001
*****		Incorporated by reference to the Company’s quarterly report on Form 10-Q, filed with the SEC as of May 11, 2001
+		Portions of these Exhibits were omitted and have been filed separately with the Secretary of the Commission pursuant to the Company’s Application requesting Confidential Treatment under Rule 406 of the Securities and Exchange Act of 1933.

29SIGNATURES

~~Reports~~ Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on ~~Form 8-K~~its behalf by the undersigned thereunto duly authorized.

OnDate: ~~April 16~~November 19, 2001, ~~the~~By: ~~Registrant~~/s/ ~~filed~~Donald asE. anClarke ~~Item 5~~Donald ~~event,~~E. ~~for~~Clarke ~~the Preferred~~Chief ~~Stock~~Financial ~~Series D financing~~Officer, ~~the~~Executive ~~Third~~Vice ~~Amended~~President and ~~Restated Credit Agreement with Toronto Dominion (Texas), Inc., and the Purchase and License Agreement with Nortel Networks, Inc.~~ Treasurer

3031

SIGNATURES

Pursuant to the requirements 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.

Date: August 7, 2001 By: /s/ Donald E. Clarke Donald E. Clarke Chief Financial Officer, Executive Vice President and Treasurer

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