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 September 30, 1998

                                       OR

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

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


                          Commission File No. 333-53467


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

         Delaware                                        52-1941838
(State or other jurisdiction of                          (I.R.S. Employer
incorporation or organization)                           Identification No.)

     1015 31st Street, N.W.
         Washington, DC                                      20007
(Address of principal executive offices)                   (Zip Code)

                                 (202) 625-7284
              (Registrant's telephone number, including area code)

                                 Not Applicable
(Former name,former address and former fiscal year,if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                 Yes [ ] No [X]

As of November  7, 1998,  there were  2,902,358  shares of the  Issuer's  common
stock, par value $.01 per share, outstanding.

<PAGE>


                                                          
                                  PATHNET, INC.
                          QUARTERLY REPORT ON FORM 10-Q
                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
                                      INDEX
<TABLE>

                                                                                            Page
<S>                                                                                         <C>
Part I.    Financial Information

Item 1.   Unaudited Consolidated Financial Statements

             Consolidated Balance Sheets as of September 30, 1998 (unaudited)
               and December 31, 1997                                                        3

             Unaudited Consolidated Statements of Operations for the three months ended
               September 30, 1998 and 1997, for the nine months ended September 30,
               1998 and 1997 and for the period August 25, 1995 (date of inception) to
               September 30, 1998                                                           4

            Unaudited Consolidated Statements of Comprehensive Loss for the three
               months ended September 30, 1998 and 1997, for the nine months ended
               September 30, 1998 and 1997 and for the period August 25, 1995
               (date of inception) to September 30, 1998                                    5

            Unaudited Consolidated Statements of Cash Flows for the nine months
               ended September 30, 1998 and 1997 and for the period August 25, 1995
               (date of inception) to September 30, 1998                                    6

            Notes to Unaudited Consolidated Financial Statements                            7


Item 2.    Management's Discussion and Analysis of Financial Condition and Results of
            Operations                                                                     12

Item 3.     Quantitative and Qualitative Disclosures About Market Risk                     29


Part II.   Other Information

Item 1.      Legal Proceedings                                                             30

Item 2.      Changes in Securities and Use of Proceeds                                     30

Item 3.      Defaults Upon Senior Securities                                               30

Item 4.      Submission of Matters to a Vote of Security Holders                           30

Item 5.      Other Information                                                             30

Item 6.      Exhibits and Reports on Form 8-K                                              31

Signatures                                                                                 33

Exhibits Index                                                                             34

</TABLE>


                                       2
<PAGE>

Part I.     Financial Information
Item 1.    Financial Statements
                                  PATHNET INC.
                        (A Development Stage Enterprise)
                           CONSOLIDATED BALANCE SHEETS
<TABLE>

                                                                                           September 30,     December 31,
                                                                                                1998             1997
                                                                                           -------------    -------------
                                                                                            (Unaudited)
<S>                                                                                        <C>              <C>  
                                     ASSETS
Cash and cash equivalents                                                                  $  59,558,631    $   7,831,384
Interest receivable                                                                            3,936,127             --
Marketable securities available for sale, at market                                          122,658,304             --
Prepaid expenses and other current assets                                                        168,366           48,571
                                                                                           -------------    -------------
    Total current assets                                                                     186,321,428        7,879,955
Property and equipment, net                                                                   33,135,699        7,207,094
Deferred financing costs, net                                                                 10,792,256          250,428
Restricted cash                                                                               10,647,253          760,211
Marketable securities available for sale, at market                                           69,010,807             --
Pledged marketable securities held to maturity                                                83,224,243             --
                                                                                           -------------    -------------        
      Total assets                                                                         $ 393,131,686    $  16,097,688
                                                                                           =============    =============
               LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
                            AND STOCKHOLDERS' DEFICIT
Accounts payable                                                                           $  14,158,634    $   5,592,918
Accrued interest                                                                              20,484,724             --
Accrued expenses                                                                               1,906,685             --
Deferred revenue                                                                                 251,863          300,000
                                                                                           -------------    -------------
   Total current liabilities                                                                  36,801,906        5,892,918
12 1/4% Senior Notes, net of unamortized bond discount of $3,890,250                         346,109,750             --
                                                                                           -------------    -------------
   Total liabilities                                                                         382,911,656        5,892,918
Series A convertible preferred stock, $0.01 par value, 1,000,000 shares authorized,
  issued and outstanding at September 30, 1998 and December 31, 1997, respectively
  (liquidation preference $1,000,000)                                                          1,000,000        1,000,000
Series B convertible preferred stock, $0.01 par value, 1,651,046 shares authorized,
  issued and outstanding at September 30, 1998 and December 31, 1997, respectively
  (liquidation preference $5,033,367)                                                          5,008,367        5,008,367
Series C convertible preferred stock, $0.01 par value, 2,819,549 shares authorized;
  2,819,549 and 939,850 shares issued and outstanding at September 30, 1998 and
  December 31, 1997, respectively (liquidation preference $30,000,052)                        29,961,272        9,961,274
                                                                                           -------------    -------------
   Total mandatorily redeemable preferred stock                                               35,969,639       15,969,641

Voting common stock, $0.01 par value, 60,000,000 and 7,500,000 shares authorized at
  September 30, 1998 and December 31, 1997, respectively; 2,902,358 and 2,900,000 shares
  issued and outstanding at September 30, 1998 and December 31, 1997, respectively                29,024           29,000
Common stock subscription receivable                                                                --             (9,000)
Deferred compensation                                                                         (1,189,924)            --
Additional paid-in capital                                                                     6,156,406          381,990
Unrealized gain on marketable securities available for sale                                      436,490             --
Deficit accumulated during the development stage                                             (31,181,605)      (6,166,861)
                                                                                           -------------    ------------- 
   Total stockholders' deficit                                                               (25,749,609)      (5,764,871)
                                                                                           -------------    ------------- 
      Total liabilities, mandatorily redeemable preferred stock and stockholders'equity    $ 393,131,686    $  16,097,688
                                                                                           =============    =============
</TABLE>

       The accompanying notes are an integral part of these consolidated
                             financial statements.


                                       3
<PAGE>


                                  PATHNET, INC.
                        (A Development Stage Enterprise)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (unaudited)
<TABLE>
                                                                                                           For the period
                                                                                                          August 25, 1995
                                           For the three months ended      For the nine months ended    (date of inception)
                                                    September 30,                 September 30,           to September 30,
                                          ----------------------------    ----------------------------    ----------------
                                               1998            1997           1998             1997           1998
                                          ------------    ------------    ------------    ------------    ------------
 <S>                                       <C>             <C>             <C>             <C>             <C>   

Revenue                                   $    475,000    $       --      $  1,050,000    $     62,500    $  1,213,500
                                          ------------    ------------    ------------    ------------    ------------

Expenses:
    Cost of revenue                          1,621,211            --         5,385,718            --         5,385,718
    Selling, general and administrative      2,694,505       1,187,833       6,721,862       2,537,112      12,731,344
    Depreciation expense                       203,725          11,423         315,247          26,863         371,265
                                          ------------    ------------    ------------    ------------    ------------
      Total expenses                         4,519,441       1,199,256      12,422,827       2,563,975      18,488,327
                                          ------------    ------------    ------------    ------------    ------------
Net operating loss                          (4,044,441)     (1,199,256)    (11,372,827)     (2,501,475)    (17,274,827)

Interest expense                           (11,151,467)           --       (21,862,169)           --       (22,277,526)
Interest income                              4,728,582          23,626       9,574,286          59,562       9,749,282
Initial public offering costs               (1,354,534)           --        (1,354,534)           --        (1,354,534)
Other income (expense), net                      1,661            --               500            --            (5,000)
                                          ------------    ------------    ------------    ------------    ------------
      Net loss                            $(11,820,199)   $ (1,175,630)   $(25,014,744)   $ (2,441,913)   $(31,162,605)
                                          ============    ============    ============    ============    ============ 
Basic and diluted loss per
    common share                          $      (4.07)   $      (0.41)   $      (8.62)   $      (0.84)   $     (10.74)
                                          ============    ============    ============    ============    ============    
Weighted average number of
    common shares outstanding                2,902,358       2,900,000       2,901,917       2,900,000       2,900,462
                                          ============    ============    ============    ============    ============ 

</TABLE>





        The accompanying notes are an integral part of these consolidated
                             financial statements.




                                       4
<PAGE>

                                  PATHNET, INC.
                        (A Development Stage Enterprise)
                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                                   (unaudited)
                                                                    
 <TABLE>
                                                                                                           For the period
                                                                                                          August 25, 1995
                                           For the three months ended      For the nine months ended    (date of inception)
                                                    September 30,                 September 30,           to September 30,
                                          ----------------------------    ----------------------------    ----------------
                                                 1998           1997              1998          1997           1998
                                                 ----           ----              ----          ----           ----
<S>                                       <C>             <C>             <C>             <C>             <C>   


Net loss                                  $ (11,820,199)  $ (1,175,630)   $ (25,014,744)  $ (2,441,913)   $ (31,162,605)

Other comprehensive income
    Unrealized gain on marketable
    securities available for sale               488,345           --            436,490            --           436,490
                                          -------------   ------------    -------------   ------------    -------------
Comprehensive loss                        $ (11,331,854)  $ (1,175,630)   $ (24,578,254)  $ (2,441,913)   $ (30,726,115)
                                          =============   ============    =============   ============    ============= 

</TABLE>




        The accompanying notes are an integral part of these consolidated
                             financial statements.




                                       5
<PAGE>

                           PATHNET, INC.
                 (A Development Stage Enterprise)
               CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (unaudited)
<TABLE>

                                                                                                                  For the period
                                                                                                                  August 25, 1995
                                                                                  For the nine months ended     (date of inception)
                                                                                          September 30,             September 30,
                                                                               ------------------------------    ----------------
                                                                                      1998            1997             1998
                                                                               -------------    -------------    -------------
<S>                                                                            <C>              <C>              <C>    
Cash flows from operating activities:
   Net loss                                                                    $ (25,014,744)   $  (2,441,913)   $ (31,162,605)
   Adjustment to reconcile net loss to net cash used in operating activities
     Depreciation                                                                    315,247           26,863          371,265
     Amortization of deferred financing costs                                        558,785             --            558,785
     Loss on disposal of asset                                                          --               --              5,500
     Write-off of deferred financing costs                                           613,910             --            613,910
     Interest expense resulting from amortization of discount on the
       bonds payable                                                                 204,750             --            204,750
     Stock based compensation                                                        489,435             --            489,435
     Interest expense for beneficial conversion feature of bridge loan                  --               --            381,990
     Accrued interest satisfied by conversion of bridge loan to
       Series B preferred stock                                                         --               --             33,367
   Changes in assets and liabilities:
     Prepaid expenses and other current assets                                      (119,796)         (39,987)        (168,366)
     Interest receivable                                                          (3,936,127)            --         (3,936,127)
     Accrued interest                                                             20,484,724             --         20,484,724
     Deferred revenue                                                                (48,137)            --            251,863
     Accounts payable                                                                 53,711          (57,608)         554,616
     Accrued expenses                                                              1,856,685            1,483        1,856,684
                                                                               -------------    -------------    -------------
       Net cash used in operating activities                                      (4,541,557)      (2,511,162)      (9,460,209)
                                                                               -------------    -------------    -------------
Cash flows from investing activities:
   Expenditures for property and equipment                                        (8,548,737)        (148,601)      (8,985,554)
   Purchase of marketable securities available for sale                         (191,232,621)            --       (191,232,621)
   Purchase of marketable securities - pledged as collateral                     (83,224,243)            --        (83,224,243)
   Restricted cash                                                                (9,887,042)        (750,000)     (10,647,253)
   Repayment of notes receivable                                                       9,000             --              9,000
   Expenditures for network work in progress                                      (9,183,109)            --        (10,922,891)
                                                                               -------------    -------------    -------------
       Net cash used in investing activities                                    (302,066,752)        (898,601)    (305,003,562)
                                                                               -------------    -------------    -------------
Cash flows from financing activities:
   Issuance of voting and non-voting common stock                                       --               --              1,000
   Proceeds from sale of preferred stock                                          19,999,998        2,000,000       35,000,052
   Proceeds from sale of Series B preferred stock representing the
     conversion of committed but undrawn portion of bridge loan
     to Series B preferred stock                                                        --               --            300,000
   Proceeds from bond offering                                                   350,000,000             --        350,000,000
   Proceeds from bridge loan                                                            --               --            700,000
   Exercise of employee common stock options                                              81             --                 81
   Payment of issuance costs                                                            --               --            (63,780)
   Payment of deferred financing costs                                           (11,664,523)            --        (11,914,951)
                                                                               -------------    -------------    -------------
       Net cash provided by financing activities                                 358,335,556        2,000,000      374,022,402
                                                                               -------------    -------------    -------------
Net increase (decrease) in cash and cash equivalents                              51,727,247       (1,409,763)      59,558,631
Cash and cash equivalents at the beginning of period                               7,831,384        2,318,037             --
                                                                               -------------    -------------    -------------
Cash and cash equivalents at the end of period                                 $  59,558,631    $     908,274    $  59,558,631
                                                                               =============    =============    =============
</TABLE>

       The accompanying notes are an integral part of these consolidated
                             financial statements.

                                       6
<PAGE>

                                                  
                                  PATHNET, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.       THE COMPANY

                  Pathnet,  Inc.  (Company)  is a  wholesale  provider  of  high
         quality, low cost, long haul telecommunications  capacity to second and
         third  tier  U.S.   markets.   The  Company  is  building  its  digital
         telecommunications  network by upgrading,  integrating  and  leveraging
         existing  telecommunications assets, sites and rights of way, including
         those utilized by railroads, utilities, state and local governments and
         pipelines  (Incumbents).  In return for providing equipment,  designing
         systems  and  managing  construction  of the  Incumbent  networks,  the
         Company has received and expects to receive the  exclusive  contractual
         right  to  market  excess   telecommunications   capacity  created  and
         aggregated on Incumbent networks.  In addition to deploying its network
         by forming  long-term  relationships  with Incumbents,  the Company may
         enter into  alternative  markets  or  acquire  or deploy  complementary
         telecommunications assets or technologies.

                  The Company  currently  has 1,200  route miles of  operational
         network on which  telecommunication  capacity is available for sale and
         an  additional  5,500  route  miles  of  network  under   construction.
         Additionally,   the  Company   recently  began   providing   commercial
         telecommunications  service to two  customers  with several  additional
         customers awaiting installation.

                  The  Company's  business  has been  funded  primarily  through
         equity  investments  by  the  Company's   stockholders  and  a  private
         placement  in April  1998 of  units  consisting  of  senior  notes  and
         warrants to purchase  common  stock (Debt  Offering).  On  September 2,
         1998, the Company  commenced an offer to exchange  (Exchange Offer) all
         outstanding  Restricted  Notes  for  up  to  $350.0  million  aggregate
         principal  amount of 12 1/4% Senior Notes due 2008  (Registered  Notes)
         which  have  been  registered  under  the  Securities  Act of 1933,  as
         amended.  The  terms  of the  Registered  Notes  are  identical  in all
         material respects to the terms of the Restricted Notes, except that the
         Registered  Notes have been registered under the Securities Act and are
         generally freely transferable by holders thereof and are issued without
         any  covenant  upon  the  Company  regarding   registration  under  the
         Securities  Act. The Exchange  Offer expired on October 2, 1998 and all
         outstanding  Restricted Notes were exchanged for Registered Notes. (The
         Restricted Notes and the Registered Notes are collectively  referred to
         herein as the "Senior Notes".)

                  A substantial portion of the Company's  activities to date has
         involved   developing   strategic    relationships   with   Incumbents.
         Accordingly,  its  revenues to date  reflect  only  certain  consulting
         services in connection with the design, development and construction of
         digital microwave infrastructure.  The Company has also been engaged in
         constructing  network,  developing  operating  systems,  constructing a
         network  operations  center,  raising capital and hiring management and
         other key personnel.  The Company has experienced significant operating
         and net losses and negative  operating cash flow to date and expects to
         continue to experience  operating and net losses and negative operating
         cash flow until such time as it is able to generate revenue  sufficient
         to cover its operating expenses.

                                        7
<PAGE>


2.       BASIS OF ACCOUNTING

                  While the  Company  recently  commenced  providing  commercial
         service  to  customers,  its  principal  activities  to date  have been
         securing   contractual   alliances  with   Incumbents,   designing  and
         constructing  network  segments,  obtaining  capital and  planning  its
         proposed service.  Accordingly,  the Company's  consolidated  financial
         statements  are  presented  as  a  development  stage  enterprise,   as
         prescribed  by  Statement  of  Financial  Accounting  Standards  No. 7,
         "Accounting  and  Reporting by  Development  Stage  Enterprises."  As a
         development  stage  enterprise,  the  Company  has been  relying on the
         issuance of equity and debt securities, rather than recurring revenues,
         for its primary sources of cash since inception.

                  In the  opinion  of  management,  the  accompanying  unaudited
         consolidated  financial statements of the Company. and its subsidiaries
         contain all adjustments  (consisting only of normal recurring accruals)
         necessary  to  present  fairly  the  Company's  consolidated  financial
         position as of September 30, 1998,  and the results of  operations  and
         cash flows for the periods indicated.  Certain information and footnote
         disclosures  normally  included  in  financial  statements  prepared in
         accordance  with generally  accepted  accounting  principles  have been
         condensed or omitted. It is suggested that these consolidated financial
         statements be read in  conjunction  with the financial  statements  and
         notes thereto included in the Company's  Registration Statement on Form
         S-4  (Registration  No.  333-53467).  The results of operations for the
         three and nine months  ended  September  30,  1998 are not  necessarily
         indicative of the operating results to be expected for the full year.

3        LOSS PER SHARE

                  The  Company   adopted   Statement  of  Financial   Accounting
         Standards No. 128, "Earnings Per Share" (SFAS 128),  effective December
         31, 1997.  Basic earnings  (loss) per share is computed by dividing net
         income (loss) by the weighted  average number of shares of common stock
         outstanding during the applicable  period.  Diluted earnings (loss) per
         share is computed by dividing net income (loss) by the weighted average
         common and potentially  dilutive common equivalent  shares  outstanding
         during the applicable period. For each of the periods presented,  basic
         and diluted loss per share are the same.  The  exercising  of 2,541,387
         employee  common  stock  options,  the exercise of warrants to purchase
         1,116,500  shares of common  stock,  and the  conversion  of  5,470,595
         shares of Series A, B and C convertible preferred stock into 15,864,716
         shares  of  common  stock  as  of  September  30,  1998,   which  could
         potentially  dilute  basic  earnings  per share in the future  were not
         included in the  computation  of diluted loss per share for the periods
         presented because to do so would have been antidilutive in each case.

4.       MARKETABLE SECURITIES

                  The Company's marketable  securities are considered "available
         for sale," and, as such, are stated at market value. The net unrealized
         gains and losses on marketable  securities  are reported as a component
         of stockholders'  equity  (deficit).  Realized gains or losses from the
         sale of marketable securities are based on the specific  identification
         method.

                                       8
<PAGE>



                 The  following is a summary of the  investments  in  marketable
securities at September 30, 1998:
<TABLE>
                                                                             Gross Unrealized 
                                                                             ---------------- 
                                                            Cost            Gains      Losses      Market Value
                                                            ----            -----      ------      ------------
<S>                                                     <C>              <C>         <C>         <C> 
Available for sale securities:
  U.S. Treasury securities and debt securities
      of U.S. Government agencies                       $    32,331,103  $   79,755  $   7,525   $    32,403,333
  Certificates of deposit and money market
      funds                                                  11,591,492      31,475         --        11,622,967
  Corporate debt securities                                 145,557,458     334,928      2,856       145,889,530
  Debt securities issued by foreign
     governments                                              1,752,568         713         --         1,753,281
                                                        ---------------  ----------  ---------   ---------------
                                                        $   191,232,621  $  446,871  $  10,381   $   191,669,111
                                                        ===============  ==========  =========   ===============
</TABLE>

         Proceeds  from the sales of  available  for sale  securities  and gross
realized  gains  and  gross  realized  losses  on  sales of  available  for sale
securities were immaterial during the nine months ended September 30, 1998.

         The  amortized  cost and  estimated  fair value of  available  for sale
securities by contractual maturity at September 30, 1998 is as follows:
<TABLE>

                                              Cost              Market Value
<S>                                      <C>                 <C>    
Due in one year or less                  $  122,512,247      $  122,658,304
Due after one year through two years.        68,720,374          69,010,807
                                        ---------------      --------------
                                         $  191,232,621      $  191,669,111
                                        ===============      ===============
</TABLE>

         Expected maturities may differ from contractual  maturities because the
issuers  of the  securities  may have the  right to prepay  obligations  without
prepayment penalties.

         In addition to marketable  securities,  the Company has  investments in
pledged  marketable  securities  that are pledged as collateral for repayment of
interest on the  Company's  Senior Notes through April 2000 (see note 8) and are
classified  as  non-current  assets on the  consolidated  balance  sheet.  As of
September  30, 1998 pledged  marketable  securities  consisted of U.S.  Treasury
securities   classified  as  held  to  maturity   with  an  amortized   cost  of
approximately $61.0 million and cash and cash equivalents of approximately $22.2
million.  Approximately  $40.3 million of the investments  contractually  mature
prior to September 30, 1999 and approximately $20.7 million contractually mature
after September 30, 1999 and prior to April 30, 2000.

                                       9
<PAGE>


5.       PROPERTY AND EQUIPMENT

         Property and  equipment,  stated at cost, is comprised of the following
at September 30, 1998 and December 31, 1997:
<TABLE>
                                            September 30,         December 31,
                                                1998                  1997    
                                            ------------          ------------
                                            (unaudited)
         <S>                             <C>                    <C>  
         Network work in progress        $  24,526,910          $  6,831,795
         Communications network              6,274,445                  --
         Office and computer equipment       1,820,335               248,880
         Furniture and fixtures                740,431               120,093
         Leasehold improvements                144,843                62,344
                                         -------------          ------------
                                            33,506,964             7,263,112
         Less: accumulated depreciation       (371,265)              (56,018)
                                         -------------          ------------
         Property and equipment, net     $  33,135,699          $  7,207,094
                                         =============          ============
</TABLE>

         As of September  30, 1998 and December 31, 1997,  the Company  incurred
non-cash capital  expenditure of  approximately  $13.6 million and $5.1 million,
respectively.

6.       DEFERRED FINANCING COSTS

         During the second quarter of 1998, the Company incurred direct issuance
costs of  approximately  $10.5  million in  connection  with the Debt  Offering.
During the three and nine months ended  September 30, 1998,  amortization of the
costs of  approximately  $280,000  and  $559,000,  respectively,  was charged to
interest expense.

         As of December 31, 1997, debt financing  costs comprised  approximately
$250,000  related to costs incurred in obtaining  debt  financing  arrangements.
During the period,  these costs,  together with  additional debt financing costs
incurred during the period of approximately  $364,000,  were charged to interest
expense.

7.       RESTRICTED CASH

         Restricted cash comprises  amounts held in escrow to collateralize  the
Company's  obligations  under  certain of its Fixed Point  Microwave  Facilities
Services   Agreements.   During  the  third  quarter,   the  Company   deposited
approximately $10.3 million in escrow.

8.       LONG-TERM DEBT.

         On April 8, 1998,  the Company  completed  the Debt  Offering for total
gross  proceeds of $350.0 million less direct  issuance  costs of  approximately
$10.5  million.  Approximately  $345.9  million  of the gross  proceeds  were on
issuance  allocated to the Restricted Notes and approximately  $4.1 million were
on issuance  allocated to the Warrants  based upon  estimated  fair values.  The
Warrants  expire  on April 15,  2008.  The  estimated  value  attributed  to the
Warrants  has been  recorded as a discount on the face value of the Senior Notes

                                       10

<PAGE>

and as  additional  paid-in  capital.  This  discount  will be  amortized  as an
increase to interest expense and the carrying value of the debt over the related
term using the interest method. The Company has recorded  approximately $205,000
of  expense  for the nine  months  ended  September  30,  1998,  related  to the
amortization of this discount. Interest on the Senior Notes accrues at an annual
rate of 12 1/4 %, payable semiannually,  in arrears, beginning October 15, 1998,
with principal due in full on April 15, 2008. Interest expense, exclusive of the
amortization  of the discount,  for the nine months ended September 30, 1998 was
$20.7 million.  The Company used approximately  $81.1 million of the proceeds to
purchase U.S.  Government debt  securities,  which are restricted and pledged as
collateral  for  repayment of all interest due on the Senior Notes through April
15, 2000. The Company made its first  interest  payment of  approximately  $22.3
million on October 15, 1998. The Senior Notes are redeemable,  in whole or part,
at any time on or after  April 15,  2003 at the  option of the  Company,  at the
following  redemption  prices plus  accrued and unpaid  interest (i) on or after
April 15, 2003; 106% of the principal  amount,  (ii) on or after April 15, 2004;
104% of the  principal  amount,  (iii) on or after April 15,  2005;  102% of the
principal  amount and (iv) on or after  April 15,  2006;  100% of the  principal
amount. In addition, at any time prior to April 15, 2001, the Company may redeem
within  sixty days,  with the net cash  proceeds  of one or more  public  equity
offerings,  up to 35% of the aggregate principal amount of the Senior Notes at a
redemption  price  equal to 112.25% of the  principal  amount  plus  accrued and
unpaid interest  provided that at least 65% of the original  principal amount of
the Senior Notes remain outstanding.  Upon a change in control, as defined, each
holder of the  Senior  Notes may  require  the  Company to  repurchase  all or a
portion of such holder's  Senior Notes at a purchase price of cash equal to 101%
of the principal amount plus accrued and unpaid interest and liquidated  damages
if any.

         The  Senior  Notes  contain   certain   covenants  which  restrict  the
activities of the Company  including  limitations  of  indebtedness,  restricted
payments,  issuances and sales of capital stock, affiliate transactions,  liens,
guarantees, sale of assets and dividends.

9.       PREFERRED STOCK

         On April 8, 1998, the Company completed the sale of 1,879,699 shares of
Series  C  convertible  preferred  stock  for an  aggregate  purchase  price  of
approximately  $20.0 million.  There were no issuance costs  associated with the
sale.

10.      COMMON STOCK

         On May 8, 1998,  the Company filed a  Registration  Statement  with the
Securities  and Exchange  Commission  for an initial  public  offering of common
stock  (Initial  Public  Offering).  See "Item 2.  Management's  Discussion  and
Analysis of Financial  Condition  and Results of  Operations  --  Liquidity  and
Capital  Resources"  for a discussion of the Company's  decision to postpone the
Offering.  In relation to the postponement of the Initial Public  Offering,  the
Company wrote off approximately $1.4 million in expenses,  consisting  primarily
of legal and accounting  fees,  printing costs,  and SEC and Nasdaq Stock Market
fees. On July 24, 1998, the Company's  stockholders  approved a 2.9-for-1  stock
split  which  was  effected  on August  3,  1998,  the  record  date.  All share
information has been adjusted for this stock split for all periods presented.


                                       11

<PAGE>

Item 2.    Management's Discussion and Analysis of Financial Condition and 
            Results of Operations

         Certain  statements  contained in this item constitute  forward-looking
statements.   See  Part  II.  Other  Information,   Item  5(a)  "Forward-Looking
Statements."

Results of Operations

Overview

         The Company is a wholesale  provider of high  quality,  low cost,  long
haul  telecommunications  capacity  to second and third tier U.S.  markets.  The
Company  is  building  its  digital  telecommunications  network  by  upgrading,
integrating and leveraging existing  telecommunications assets, sites and rights
of way,  including  those  utilized  by  railroads,  utilities,  state and local
governments and pipelines (the "Incumbents").

         The Company's business commenced on August 25, 1995 and has been funded
primarily through equity investments by the Company's stockholders and a private
placement  (the "Debt  Offering") in April 1998 of 350,000 units (the  "Units"),
consisting  of 12 1/4% Senior Notes (the  "Restricted  Notes") and warrants (the
"Warrants")  to purchase  shares of common stock,  par value $.01 per share (the
"Common  Stock").  On October 2, 1998,  the Company  completed an exchange  (the
"Exchange Offer") of all outstanding Restricted Notes for $350,000,000 aggregate
principal  amount of 12 1/4%  Senior  Notes due 2008 which have been  registered
under the  Securities  Act of 1933,  as amended (the  "Registered  Notes").  The
Restricted Notes and the Registered Notes are collectively referred to herein as
the "Senior Notes."

         The Company  currently has 1,200 route miles of operational  network on
which  telecommunication  capacity is available for sale and an additional 5,500
route miles of network under  construction.  Additionally,  the Company recently
began  providing  commercial  telecommunications  service to two customers  with
several additional customers awaiting installation.

           Due to Pathnet's  focus on developing  strategic  relationships  with
Incumbents,  its  revenues  to  date  reflect  certain  consulting  services  in
connection with the design,  development and  construction of digital  microwave
infrastructure.  The  Company  has  also  been  engaged  in the  acquisition  of
equipment,  the development of operating systems, the design and construction of
a Network  Operations  Center  (the  "NOC"),  capital  raising and the hiring of
management  and other key  personnel.  The Company has  experienced  significant
operating and net losses and negative operating cash flow to date and expects to
continue to experience operating and net losses and negative operating cash flow
until  such  time as it is able to  generate  revenue  sufficient  to cover  its
operating  expenses.  In addition to deploying its network by forming  long-term
relationships with Incumbents, the Company may enter into alternative markets or
acquire or deploy complementary telecommunications assets or technologies.

Three and Nine Months Ended  September 30, 1998 Compared with the Three and Nine
Months Ended September 30, 1997

         During the three and nine months ended  September 30, 1998, the Company
continued to develop  relationships  with  Incumbents,  buildout its network and
develop its infrastructure including the hiring of key management personnel.


                                       12
<PAGE>


         Revenue

         Substantially  all of the  Company's  revenues  for the  three and nine
month  periods ended  September 30, 1998 and 1997  consisted of fees received in
connection with services provided to Incumbents,  including analysis of existing
facilities and system performance,  advisory services relating to PCS relocation
matters,  and turnkey  network  construction  management  services.  The Company
expects  substantially  all  future  revenue  to be  generated  from the sale of
telecommunications  services.  For the three months ended September 30, 1998 and
1997,  the  Company  generated  revenues  of  approximately  $  475,000  and $0,
respectively.  The increase is  attributable to fees received in connection with
the continued performance of construction management.  For the nine months ended
September 30, 1998 and 1997 the Company generated revenues of approximately $1.1
million  and  $62,500,  respectively.  This  increase  is  attributable  to fees
received in connection  with continued  performance of  construction  management
services.

         Operating Expenses

         For the three months  ended  September  30, 1998 and 1997,  the Company
incurred  operating  expenses of  approximately  $4.5 million and $1.2  million,
respectively.  For the nine months ended September 30, 1998 and 1997 the Company
incurred  operating  expenses of  approximately  $12.4 million and $2.6 million,
respectively.  In each  case,  the  increase  is  primarily  as a result  of the
increased activity in the buildout of the Company's network and additional staff
costs  incurred as part the  development  of the Company's  infrastructure.  The
Company  expects  selling,  general and  administrative  expenses to continue to
increase in the remainder of 1998 as additional staff is added in all functional
areas,  particularly  in sales and marketing.  Cost of revenue  reflects  direct
costs associated with performance of construction, management services and costs
incurred in connection with the provision of telecommunications services.

         Interest Expense

         Interest expense for the three months ended September 30, 1998 and 1997
was approximately  $11.2 million and $0,  respectively,  and for the nine months
ended  September  30,  1998 and 1997 was  approximately  $21.9  million  and $0,
respectively. Interest expense primarily represents interest on the Senior Notes
issued in April 1998 together with  financing  costs  associated  with obtaining
debt  financing  arrangements  and  the  amortization  expense  related  to bond
issuance costs in respect of the Senior Notes.

         Interest Income

         Interest  income for the three months ended September 30, 1998 and 1997
was  approximately  $4.7  million and  $23,600,  respectively,  and for the nine
months  ended  September  30, 1998 and 1997 was  approximately  $9.6 million and
$59,600, respectively. This increase primarily represents interest earned on the
proceeds of the Senior Notes issued in April 1998.

         Initial Public Offering Costs

         During the three and nine months ended  September 30, 1998, the Company
recorded a one-time  write off of costs  associated  with the postponed  initial
public offering of the Company's  Common Stock (the "Initial Public  Offering").
These costs consisted  primarily of legal and accounting  fees,  printing costs,
and SEC and Nasdaq Stock Market fees.

                                       13

<PAGE>

Liquidity and Capital Resources

         The  Company  expects to  continue  to  generate  cash  primarily  from
external financing and, as its network matures, from operating  activities.  The
Company's  primary  uses of cash will be to fund capital  expenditures,  working
capital and operating  losses.  Deployment of the Company's  digital network and
expansion of the  Company's  operations  and services  will require  significant
capital expenditures.  Capital expenditures will be used primarily for continued
development and  construction of its network,  implementing  the Company's sales
and marketing strategy and constructing and improving the Company's NOC.

         On April 8, 1998, the Company completed the Debt Offering  resulting in
net proceeds to the Company of approximately $339.5 million, after reduction for
offering costs of approximately  $10.5 million.  The Company used  approximately
$81.1  million of the net proceeds of the Debt  Offering to purchase  securities
(the  "Pledged  Securities")  in an amount  sufficient to provide for payment in
full of the interest due on the Senior  Notes  through  April 15, 2000 and which
have been pledged as security for  repayment  of the Senior  Notes.  The Company
made its first interest  payment of  approximately  $22.3 million on October 15,
1998.  The  indenture  relating to the Senior Notes (the  "Indenture")  contains
provisions  restricting,  among  other  things,  the  incurrence  of  additional
indebtedness,  the payment of dividends and the making of  restricted  payments,
the sale of assets and the creation of liens.

         On  September 2, 1998,  the Company  commenced  the  Exchange  Offer to
exchange all outstanding Restricted Notes for Registered Notes. The terms of the
Registered  Notes are  identical  in all  material  respects to the terms of the
Restricted  Notes,  except that the Registered  Notes have been registered under
the Securities Act and are generally freely  transferable by holders thereof and
are issued without any covenant upon the Company  regarding  registration  under
the  Securities  Act.  The  Exchange  Offer  expired  on October 2, 1998 and all
outstanding Restricted Notes were exchanged for Registered Notes.

         Concurrently with the Debt Offering, the Company completed the issuance
and sale of  1,879,699  shares of  Series C  Convertible  Preferred  Stock at an
aggregate  price  of $20.0  million  (the  "1998  Private  Equity  Investment"),
bringing the total investment by the Company's private equity investors to $36.0
million.

         The net proceeds from the issuance of the Units (after  purchasing  the
Pledged  Securities)  and the 1998 Private Equity  Investment are being used for
capital expenditures,  working capital and general corporate purposes, including
the funding of operating losses.

         On May 8, 1998,  the Company filed a registration  statement  under the
Securities Act of 1933, as amended, with the Securities and Exchange Commission,
relating to the Initial Public Offering.  On August 5, 1998, pursuant to section
12(g) of the  Securities  and Exchange Act of 1934,  the Company  registered its
Common Stock under the  Securities and Exchange Act of 1934. On August 13, 1998,
the Company  announced that it would postpone the Initial Public Offering due to
general  weakness  in the  capital  markets.  The timing and size of the Initial
Public Offering are dependent on market conditions and there can be no assurance
that the Initial Public Offering will be completed.

                                       14

<PAGE>

         As at  September  30,  1998,  the Company had  capital  commitments  of
approximately  $22.0 million  relating to  telecommunications  and  transmission
equipment.  It is anticipated  that these will be met with current  resources of
the Company.

         The Company believes that the modular design of its network will enable
the  Company to rely on  traditional  sources of  financing.  In  addition,  the
Company expects to rely on other sources,  including public and private debt and
equity financing and operating cash flow to fund future growth. In addition, the
Company is currently  exploring several equipment  financing and other financing
alternatives.  The  Company has not  finalized  commitments  for any  additional
financing and there can be no assurance  that the Company will be able to secure
financing  from these  sources on terms that are  favorable to the  Company.  In
addition,  the  Company  may  require  additional  capital in the future to fund
operating deficits and net losses and for potential strategic  alliances,  joint
ventures and  acquisitions.  Although there can be no assurance,  if the network
roll-out were delayed from the schedule currently  anticipated by the Company or
if demand for the  Company's  services  were lower than  expected,  the  Company
expects  that it  would  be able to  defer or  reduce  portions  of its  capital
expenditures.

         Because the Company's cost of rolling out its network and operating its
business,  as  well  as its  revenues,  will  depend  on a  variety  of  factors
(including,  among other things, the ability of the Company to meet its roll-out
schedules,  its ability to negotiate  favorable  prices for purchases of network
equipment,  the number of customers and the services they  purchase,  regulatory
changes and changes in  technology),  actual costs and  revenues  will vary from
expected amounts,  possibly to a material degree, and such variations are likely
to affect the Company's future capital requirements.  Accordingly,  there can be
no assurance that the Company's actual capital  requirements will not exceed the
anticipated amounts described above.  Further, the exact amount of the Company's
future capital requirements will depend upon many factors, including the cost of
the  development  of its  network,  the  extent of  competition  and  pricing of
telecommunication  services in its  markets,  the  acceptance  of the  Company's
services and the development of new products.

Year 2000

         The Year 2000 issue exists  because many computer  systems and software
applications  use two digits  rather than four digits to designate an applicable
year. As a result,  the systems and applications may not properly  recognize the
year 2000,  or process data that includes  that date,  potentially  causing data
miscalculations or inaccuracies or operational malfunctions or failures.

         The Company has begun a  corporate-wide  program to ready its  computer
systems and software  applications for the year 2000. The Company's objective is
to target year 2000  compliance  for all of its systems,  including  network and
customer interfacing  systems,  before December 31, 1999. Due to the development
stage status of the Company, few legacy systems or applications exist,  however,
the Company is  identifying  all systems  and  applications  that may need to be
modified or reprogrammed in order to achieve year 2000 compliance.

         As part of its year 2000 plan, the Company is seeking confirmation from
major  communications  equipment  vendors (the "Primary  Vendors"),  Incumbents,
suppliers,  financial  institutions  and  others  that they are  developing  and
implementing  plans to become year 2000  compliant  by  December  31,  1999.  In
addition,  the Company is developing a contingency  plan to deal with  potential
year 2000 related  business  interruptions  that may occur on January 1, 2000 or
thereafter. These plans are expected to assess


                                       15

<PAGE>

the potential for business  disruption in various scenarios,  and to provide for
key operational back-up, recovery and restoration alternatives.

         To achieve its year 2000 compliance plan, the Company is utilizing both
internal and external resources to identify,  correct or reprogram, and test its
systems for year 2000 compliance. The Company expects to incur internal labor as
well as consulting and other expenses related to  infrastructure  and facilities
enhancements  necessary  to prepare its  systems for the year 2000.  The Company
currently  expects  expenses in the last quarter of 1998 and 1999 to support its
compliance  and  contingency  initiatives  will not be  material.  Although  the
Company intends to develop and, if necessary,  implement appropriate contingency
plans to mitigate,  to the extent possible,  the effects of any significant Year
2000  noncompliance,  such plans may not be  adequate  and the cost of Year 2000
compliance may be higher than expected.  Further, the Company cannot predict the
outcome  or the  success of its year 2000  program  or the year 2000  compliance
programs of the Primary Vendors, Incumbents,  suppliers,  financial institutions
and other third parties nor can it predict the impact on its financial condition
or results of operations,  if any, in the event that such compliance objectives,
or year 2000 compliance programs of its Primary Vendors, Incumbents,  suppliers,
financial institutions and other third parties, are not successful.

Risk Factors

         Limited History of Operations; Operating Losses and Negative Cash Flow

         The  Company  was  formed in August  1995 to begin  development  of its
digital  network.  The Company has  completed  1,200 route miles of its network,
which are commercially available, and an additional 5,500 route miles of network
are under  construction.  In  addition,  the  Company  is  providing  commercial
telecommunications  service  to  only  two  customers  with  several  additional
customers awaiting installation. There can be no assurance that the Company will
enter into any additional  contracts with  Incumbents  for the  construction  of
additional   network  or  with   customers   for  the   purchase   and  sale  of
telecommunications  capacity.  Based on its experience,  Pathnet expects that it
may take between six and 18 months from the initial contact with an Incumbent to
complete  a  long-term   contract  and  12  months   thereafter  to  complete  a
commercially  available  system.  As  a  result  of  development  and  operating
expenses, the Company has incurred significant operating and net losses to date.
The Company's operations have resulted in cumulative net losses of $31.2 million
and  cumulative  net losses  before  interest  income  (expense)  and income tax
benefit of $18.6 million from inception in 1995 through September 30, 1998.

         The Company expects to incur significant  operating losses, to generate
negative cash flows from operating activities and to invest substantial funds to
construct its digital  network  during the next several  years.  There can be no
assurance  that the Company  will achieve or sustain  profitability  or generate
sufficient  positive  cash flow to meet its debt  service  obligations,  capital
expenditure requirements or working capital requirements.

         Substantial Leverage; Ability to Service Debt; Restrictive Covenants

         The Company is highly leveraged.  As of September 30, 1998, the Company
had  $346.1  million of  indebtedness  outstanding  (approximately  97% of total
invested  capital).   The  Company  will  likely  incur  substantial  additional
indebtedness (including secured indebtedness) for the 


                                       16
<PAGE>

development  of its network and other  capital and operating  requirements.  The
level of the  Company's  indebtedness  could  adversely  affect the Company in a
number of ways. For example,  (i) the ability of the Company to obtain necessary
financing in the future for working capital, capital expenditures,  debt service
requirements  or other  purposes  may be limited;  (ii) the  Company's  level of
indebtedness  could  limit its  flexibility  in planning  for,  or reacting  to,
changes in its business;  (iii) the Company will be more highly  leveraged  than
some of its competitors, which may place it at a competitive disadvantage;  (iv)
the Company's  degree of indebtedness  may make it more vulnerable to a downturn
in its  business or the economy  generally;  (v) the terms of the  existing  and
future indebtedness  restrict, or may restrict,  the payment of dividends by the
Company;  and  (vi) a  substantial  portion  of the  Company's  cash  flow  from
operations  must be dedicated  to the payment of  principal  and interest on its
indebtedness and will not be available for other purposes.

         The  Indenture  relating  to the  Senior  Notes (the  "Indenture")  and
certain of the  Company's  agreements  with  Incumbents  (the "FPM  Agreements")
contain, or will contain,  restrictions on the Company and its subsidiaries that
will affect, and in certain cases significantly  limit or prohibit,  among other
things,  the ability of the Company and its  subsidiaries to create liens,  make
investments,  pay dividends and make certain other  restricted  payments,  issue
stock of  subsidiaries,  consolidate,  merge,  sell assets and incur  additional
indebtedness.  There can be no assurance  that such  covenants and  restrictions
will not adversely affect the Company's ability to finance its future operations
or capital needs or to engage in other  business  activities  that may be in the
interest of the Company.

         In  addition,  any future  indebtedness  incurred by the Company or its
subsidiaries is likely to impose similar restrictions. Failure by the Company or
its subsidiaries to comply with these restrictions could lead to a default under
the  terms  of  the   Senior   Notes  or  the   Company's   other   indebtedness
notwithstanding the ability of the Company to meet its debt service obligations.
In the event of such a default,  the holders of such indebtedness could elect to
declare all such indebtedness due and payable,  together with accrued and unpaid
interest. In such event, a significant portion of the Company's indebtedness may
become  immediately  due and  payable,  and there can be no  assurance  that the
Company  would be able to make such  payments  or borrow  sufficient  funds from
alternative  sources to make any such  payments.  Even if  additional  financing
could be  obtained,  there can be no  assurance  that it would be on terms  that
would be acceptable to the Company.

         The  successful  implementation  of the Company's  strategy,  including
expanding its digital network and obtaining and retaining a sufficient number of
customers,  and significant and sustained growth in the Company's cash flow will
be necessary for the Company to meet its debt service requirements.  The Company
does not currently,  and there can be no assurance that the Company will be able
to, generate sufficient cash flows to meet its debt service obligations.  If the
Company is unable to generate  sufficient  cash flows or otherwise  obtain funds
necessary to make required payments, or if the Company otherwise fails to comply
with  the  various   covenants  under  the  terms  of  its  existing  or  future
indebtedness,  it could trigger a default under the terms  thereof,  which would
permit the  holders of such  indebtedness  to  accelerate  the  maturity of such
indebtedness  and could cause defaults under other  indebtedness of the Company.
The ability of the Company to meet its  obligations  will be dependent  upon the
future performance of the Company,  which will be subject to prevailing economic
conditions and to financial, business, regulatory and other factors.

                                       17
<PAGE>

         Significant Capital Requirements; Uncertainty of Additional Financing

         Deployment  of the  Company's  network and  expansion of the  Company's
operations and services will require significant capital expenditures, primarily
for continued  development and construction of its network and implementation of
the Company's sales and marketing  strategy.  The Company intends to use capital
raised to date to meet projected capital  requirements through the first quarter
of 2000.  The Company  will need to seek  additional  financing  to fund capital
expenditures  and working  capital to expand its network further to its eventual
target of  approximately  100,000 route miles.  The Company  estimates that this
will require  substantial  additional  external  financing  but presently has no
negotiated  commitments for any such additional financing.  The Company may also
require additional capital for activities complementary to its currently planned
businesses,  or in the event it decides to pursue  network  development  through
acquisitions, joint ventures or strategic alliances.

         The actual amount of the Company's  future  capital  requirements  will
depend upon many factors,  including the costs of network  deployment in each of
its markets,  the speed of the development of the Company's network,  the extent
of competition and pricing of telecommunications  services in its markets, other
strategic  opportunities  pursued  by the  Company  and  the  acceptance  of the
Company's  services.  Accordingly,  there can be no  assurance  that the  actual
amount of the Company's financing needs will not exceed,  perhaps significantly,
the current estimates.

         There  can be no  assurance  that the  Company  will be  successful  in
raising additional capital on terms that it will consider  acceptable,  that the
terms of such  indebtedness  or other  capital  will not  impair  the  Company's
ability to develop its business or that all available capital will be sufficient
to service its indebtedness. Sources of additional capital may include equipment
financing facilities and public and private equity and debt financings.  Failure
to raise  sufficient  funds may require the Company to modify,  delay or abandon
some of its  planned  future  expansion  or  expenditures,  which  could  have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

         Risks of Completing the Company's Network; Market Acceptance

         The Company's  ability to achieve its strategic  objectives will depend
in large part upon the successful,  timely and cost effective  completion of its
network,  as well as on  selling  a  substantial  amount  of its  capacity.  The
successful  completion of the Company's  network may be affected by a variety of
factors, uncertainties and contingencies, many of which are beyond the Company's
control.  Although the Company  believes  that its cost  estimates and build-out
schedules  are  reasonable,  only 1,200  route miles  under  contract  have been
completed as of September 30, 1998. There can be no assurance that the Company's
network  will be  completed  as  planned  at the cost and  within the time frame
currently estimated, if at all. In addition, although the Company recently began
providing  commercial  telecommunications  service to two customers with several
additional customers awaiting installation,  there can be no assurances that the
Company will attract additional purchasers of capacity.

         The successful and timely  construction  of the Company's  network will
depend upon, among other things, the Company's ability to (i) obtain substantial
amounts  of  additional   capital  and  financing  

                                       18

<PAGE>

at  reasonable  cost and on  satisfactory  terms  and  conditions,  (ii)  manage
effectively and efficiently  the  construction of its network,  (iii) enter into
agreements  with Incumbents and other owners of  telecommunications  assets that
will enable the Company to leverage the assets of Incumbents and of other owners
of  telecommunications  assets,  (iv)  access  markets  and enter into  customer
contracts  to sell  capacity on its network,  (v)  integrate  successfully  such
networks and associated  rights  acquired in connection  with the development of
the Company's network including cost effective  interconnections and (vi) obtain
necessary  FCC  licenses and other  approvals.  Successful  construction  of the
Company's  network also will depend upon the timely  performance  by third party
contractors  of their  obligations.  There can be no assurance  that the Company
will  achieve  any or all of these  objectives.  Any  failure by the  Company to
accomplish  these objectives may have a material adverse affect on the Company's
business, financial condition and results of operations.

         The  development  of the  Company's  network and the  expansion  of the
Company's  business  may  involve   acquisitions  of  other   telecommunications
businesses and assets and  implementation of other  technologies  (such as fiber
optic cable) either in lieu of or as a supplement to the excess capacity created
by  upgrading  Incumbents'  networks.  In  addition,  the Company may enter into
relationships  with  telecom  service  providers  or other  entities  to  manage
existing  assets  or  to  deploy  alternative  telecommunications  technologies.
Furthermore, the Company may seek to serve markets which are not second or third
tier and which may present  differing  market risks (including as to pricing and
competition).   If  pursued,   these   opportunities  could  require  additional
financing,  impose additional risks (such as increased or different competition,
additional  regulatory  burdens  and  network  economics  different  from  those
described  elsewhere  herein) and could divert the resources and management time
of the Company. There can be no assurance that any such opportunity, if pursued,
could be successfully  integrated into the Company's operations or that any such
opportunity  would perform as expected.  Furthermore,  as the Company builds out
its  network,  there  can be no  assurance  that the  Company  will  enter  into
agreements   with  the  best  suited   Incumbents   or  such  other   owners  of
telecommunications assets, as the case may be, or that the Company will continue
to pursue its core strategy of leveraging the assets of Incumbents as opposed to
other telecommunications assets,  technologies or other markets. Moreover, there
can be no assurance  that the  resulting  network will match or be responsive to
the demand for telecommunications capacity or will maximize the possible revenue
to be earned by the Company.  There can be no assurance the Company will be able
to develop and expand its business  and enter new markets as currently  planned.
Failure  of  the  Company  to  implement  its  expansion  and  growth   strategy
successfully  could have a material  adverse  effect on the Company's  business,
financial condition and results of operations.

         Dependence on  Relationship  with  Incumbents;  Rights of Incumbents to
         Certain Assets

         There can be no assurance that existing  long-term  relationships  with
the  Company's  Incumbents  will  be  maintained  or that  additional  long-term
relationships will result on terms acceptable to the Company,  or at all. If the
Company is not successful in negotiating such agreements,  its ability to deploy
its network would be adversely affected.

         The Company does not typically  expect to own the underlying  sites and
facilities upon which its network is deployed.  Instead,  the Company expects to
enter into long-term  relationships  with Incumbents whereby each such Incumbent
agrees to grant to the Company a leasehold interest in or 

                                       19

<PAGE>

a similar right to use such  Incumbent's  facilities  and  infrastructure  as is
required for the Company to deploy its network. In some cases, system assets may
be held by  subsidiaries  in which both the  Company  and the  Incumbent  own an
interest.   As  a  result,  the  Company  will  depend  on  the  facilities  and
infrastructure  of its Incumbents  for the operation of its business.  Long-term
relationships  with  Incumbents  may expire or terminate if the Company does not
satisfy certain  performance targets with respect to sales of excess capacity or
fails to  commission an initial  communications  system  within  specified  time
periods. In such cases, certain equipment relating to the initial communications
system  will  be  transferred  to  the  Incumbent.  Any  such  expiration  of  a
relationship  with  an  Incumbent,   and  the  resulting  loss  of  use  of  the
corresponding  system and  opportunity  to utilize  such segment of its network,
could  result in the  Company  not  being  able to recoup  its  initial  capital
expenditure  with  respect to such  segment  and could  have a material  adverse
effect on the business and financial condition of the Company. In addition, such
a loss under certain circumstances could result in an event of default under the
Company's  debt  financings.  There can be no  assurance  that the Company  will
continue  to have  access to such  Incumbent's  sites and  facilities  after the
expiration  of such  agreements  or in the  event  that an  Incumbent  elects to
terminate its agreement with the Company.  If such an agreement were  terminated
or  expires  and the  Company  were  forced to remove or  abandon a  significant
portion of its network,  such  termination  or  expiration,  as the case may be,
could have a material  adverse effect on the business,  financial  condition and
results of operations of the Company.

         The Company  expects to rely  significantly  on its  Incumbents for the
maintenance and provisioning of circuits on its network. The Company has entered
into  maintenance  agreements  with three  Incumbents  and expects to enter into
agreements with additional Incumbents pursuant to which, among other things, the
Company  will pay the  Incumbent a monthly  maintenance  fee and a  provisioning
services  fee  in  exchange  for  such  Incumbent   providing   maintenance  and
provisioning  services for that portion of the Company's  network that primarily
resides  along  such  Incumbent's  system.  Failure  by  the  Company  to  enter
successfully  into similar  agreements with other Incumbents or the cancellation
or non-renewal of any of such existing  agreements could have a material adverse
effect  on the  Company's  business.  To the  extent  the  Company  is unable to
establish  similar  arrangements  in new markets with  additional  Incumbents or
establish replacement arrangements on systems where a maintenance agreement with
a particular  Incumbent is canceled or not renewed,  the Company may be required
to  maintain  its  network  and  provision   circuits  on  its  network  through
establishment  of  its  own  maintenance  and   provisioning   workforce  or  by
outsourcing  maintenance  and  provisioning  to a  third  party.  The  Company's
operating costs under these conditions may increase.

Management of Growth

         The Company's business plan may, if successfully implemented, result in
rapid expansion of its operations.  Rapid expansion of the Company's  operations
may place a significant strain on the Company's management,  financial and other
resources.  The Company's ability to manage future growth, should it occur, will
depend  upon  its  ability  to  monitor  operations,   control  costs,  maintain
regulatory   compliance,   maintain   effective   quality  controls  and  expand
significantly  the Company's  internal  management,  technical,  information and
accounting  systems and to attract and retain  additional  qualified  personnel.
Furthermore,  as the Company's  business develops and expands,  the Company will
need additional facilities for its growing workforce.  There can be no assurance
that the Company will  successfully  implement and maintain such operational and
financial  systems or successfully  obtain,  integrate and utilize the employees
and  management,  operational  and  financial  resources  necessary  to manage a
developing and expanding  business in an evolving and  increasingly  competitive
industry  which is subject to  regulatory  change.  Any failure to expand  these
areas and to implement and improve such systems,  procedures  and controls in an
efficient manner at a pace consistent with the growth of the Company's  business
could have a material  adverse effect on the business,  financial  condition and
results of operations of the Company.

         The expansion and development of the Company's business will depend on,
among other things,  the Company's  ability to implement  successfully its sales
and marketing  strategy,  evaluate markets,  design network path routes,  secure
financing,  install facilities,  obtain any required government  authorizations,
implement   interconnection  to,  and  co-location  with,  facilities  owned  by
Incumbents,  purchasers  of  capacity  and other  owners  of  telecommunications
assets. The Company's ability to implement its growth strategy successfully will
require  the  Company to enhance  its  operational,  management,  financial  and
information  systems  and  controls  and to hire  and  retain  qualified  sales,
marketing,  administrative,  operating and technical personnel.  There can be no
assurance  that 

                                       20
<PAGE>

the  Company  will  be  able  to do so,  and any  failure  to  accomplish  these
objectives could result in lower than expected levels of customer service, which
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of operations.

         Dependence on Key Personnel; Need for Additional Personnel

         The success of the Company will depend to a significant extent upon the
abilities and continued efforts of its senior management,  particularly  members
of its senior management team, including David Schaeffer,  Chairman,  Richard A.
Jalkut,  President and Chief Executive Officer, Kevin J. Bennis,  Executive Vice
President serving as President of the Company's Communications Services Division
and Michael L. Brooks,  Vice  President of Network  Development.  Other than its
Employment  Agreement  with  Richard A.  Jalkut,  the Company  does not have any
employment  agreements  with, nor does the Company  maintain "key man" insurance
on, these employees. The loss of the services of any such individuals could have
a material  adverse effect on the Company's  business,  financial  condition and
results of  operations.  The success of the Company will also  depend,  in part,
upon  the  Company's  ability  to  identify,  hire  and  retain  additional  key
management personnel, including the senior management, who are also being sought
by   other   businesses.    Competition   for   qualified   personnel   in   the
telecommunications  industry is intense.  The  inability to  identify,  hire and
retain such  personnel  could have a material  adverse  effect on the  Company's
results of operations.

         Competition; Pricing Pressures

         The telecommunications  industry is highly competitive.  In particular,
price  competition in the `carrier's  carrier' market has generally been intense
and is expected to  increase.  The Company  competes and expects to compete with
numerous  competitors  who have  substantially  greater  financial and technical
resources,  long-standing  relationships  with their  customers and potential to
subsidize  competitive  services from less competitive service revenues and from
federal  universal  service  subsidies.  Such  competitors  may be  operators of
existing or newly deployed wireline or wireless telecommunications networks. The
Company  will  also  face  intense  competition  due to an  increased  



                                       21
<PAGE>

supply of  telecommunications  capacity,  the  effects of  deregulation  and the
development of new technologies,  including  technologies that will increase the
capacity of existing networks.

         The  Company  anticipates  that  prices  for  its  `carrier's  carrier'
services  will continue to decline over the next several  years.  The Company is
aware that  certain long  distance  carriers are  expanding  their  capacity and
believes that other long distance carriers, as well as potential new entrants to
the  industry,  are  constructing  new  microwave,  fiber  optic and other  long
distance  transmission  networks  in the United  States.  If  industry  capacity
expansion  results in capacity that exceeds  overall  demand along the Company's
routes,  severe additional pricing pressure could develop. As a result, within a
few years,  the Company could face dramatic and  substantial  price  reductions.
Such pricing  pressure  could have a material  adverse  effect on the  business,
financial condition and results of operations of the Company.

         While the Company  generally  will not  compete  with  telecom  service
providers for end-user customers, the Company may compete, on certain routes, as
a `carrier's carrier' with long-distance carriers such as AT&T Corporation,  MCI
WorldCom Inc., Sprint Corporation and operators of fiber optic systems,  such as
IXC  Communications,  Inc., The Williams Companies,  Inc., QWest  Communications
International Inc. and Level 3 Communications,  Inc., who would otherwise be the
Company's customers in second and third tier markets. The Company will also face
competition  increasingly in the long haul market from local exchange  carriers,
regional network providers,  resellers and satellite carriers and may eventually
compete with public utilities and cable companies. In particular,  certain ILECs
and  competitive  local  exchange  carriers  ("CLECs")  are  allowed  to provide
inter-LATA  long  distance  services.   Furthermore,   Regional  Bell  Operating
Companies ("RBOCs") will be allowed to provide inter-LATA long distance services
within their regions after meeting certain regulatory  requirements  intended to
foster  opportunities  for  local  telephone  competition.  Certain  RBOCs  have
requested  regulatory  approval to provide inter-LATA data services within their
regions.  The RBOCs already have  extensive  fiber optic cable,  switching,  and
other network  facilities in their respective regions that can be used for their
long  distance  services  after  a  waiting  period.  In  addition,   other  new
competitors may build  additional  fiber capacity in the geographic areas served
and to be served by the Company.

         The  Company  may also  face  competitors  seeking  to deploy a digital
wireless  network in the same manner as the Company by leveraging  the assets of
Incumbents  or other  owners of  telecommunications  assets  or from  Incumbents
leveraging  their own assets.  Although the Company  believes its strategy  will
provide it with a cost advantage,  there can be no assurance that  technological
developments  will  not  result  in  competitors  achieving  even  greater  cost
efficiency and therefore a competitive advantage.

         A continuing trend toward business combinations and strategic alliances
in the  telecommunications  industry  may  create  stronger  competitors  to the
Company,  as the resulting  firms and  alliances are likely to have  significant
technological, marketing and financing resources greater than those available to
the Company.


                                       22
<PAGE>

         Reliance on Equipment Suppliers

         The  Company  currently   purchases  most  of  its   telecommunications
equipment  pursuant to an agreement  with NEC America,  Inc. and its  affiliates
("NEC")  from whom the Company has agreed to purchase  $200 million of equipment
by March 31, 2003 and has entered  into an  equipment  purchase  agreement  with
Andrew  Equipment  Corporation.  Any  reduction or  interruption  in supply from
either  supplier  or any  increase  in prices  for such  equipment  could have a
disruptive  effect on the Company.  Currently NEC and Northern  Telecom Ltd. are
the only  manufacturers  of SONET radios that are compatible  with the Company's
proposed system design and reliability  standards,  although Harris  Corporation
and Alcatel Alsthom  Compagnie  Generale  d'Electricite SA are in the process of
developing and testing  similar and compatible  products.  Further,  the Company
does not manufacture, nor does it have the capability to manufacture, any of the
telecommunications  equipment used on its network.  As a result,  the failure of
the Company to procure sufficient equipment at reasonable prices and in a timely
manner could adversely affect the Company's successful deployment of its network
and results of operations.

         Technical Limitations of the Network

         The Company will not be able to offer route  diversity  until such time
as it has completed a substantial  portion of its mature  network.  In addition,
the Company's network requires a direct line of sight between two antennae (each
such  interval  comprising a "path")  which is subject to distance  limitations,
freespace fade,  multipath fade and rain attenuation.  In order to meet industry
standards for reliability,  the maximum length of a single path similar to those
being designed by the Company is generally limited to 40 miles and, as a result,
intermediate  sites in the  form of  back-to-back  terminals  or  repeaters  are
required to permit digital wireless  transmission beyond this limit based on the
climate and topographic conditions of each path. In the absence of a direct line
of sight, additional sites may be required to circumvent obstacles, such as tall
buildings in urban areas or mountains in rural areas.  Topographic conditions of
a path and climate can cause  reflections  of signals  from the ground which can
affect the transmission  quality of digital wireless services.  In addition,  in
areas of heavy rainfall, the intensity of rainfall and the size of the raindrops
can affect the transmission quality of digital wireless services. Paths in these
areas are engineered for shorter distances to maintain  transmission quality and
use space  diversity,  frequency  diversity,  adaptive power control and forward
error correction to minimize  transmission  errors.  The use of additional sites
and shorter paths to overcome  obstructions,  multipath fade or rain attenuation
will increase the Company's  capital costs.  While these increased costs may not
be significant in all cases,  such costs may render  digital  wireless  services
uneconomical in certain circumstances.

         Due to line of sight  limitations,  the Company currently  installs its
antennae on towers, the rooftops of buildings or other tall structures.  Line of
sight  and  distance  limitations  generally  do not  present  problems  because
Incumbents  have  already  selected,   developed  and  constructed  unobstructed
transmission sites. In certain instances,  however,  the additional  frequencies
required  for the excess  capacity  to be  installed  by the  Company may not be
available from  Incumbents'  existing  sites.  In these  instances,  the Company
generally  expects to use other  developed sites already owned or leased by such
Incumbent. In some instances,  however, the Company has encountered,  and may in
the future encounter, line of sight, frequency blockage and distance limitations
that cannot be solved


                                       23
<PAGE>

economically.  While the  effect  on the  financial  condition  and  results  of
operations  of the Company  resulting  from such cases has been minimal to date,
there can be no assurance that such  limitations  will not be  encountered  more
frequently  as the Company  expands its  network.  Such  limitations  may have a
material adverse effect on the Company's future development costs and results of
operations.  In  addition,  the current  lack of  compression  applications  for
wireless  technology  limits the Company's  ability to increase capacity without
significant capital expenditures for additional equipment.

         In order to obtain the necessary access to install its radios, antennae
and other  equipment  required for  interconnection  to the PSTN or to points of
presence ("POP") of the Company's capacity purchasers,  the Company must acquire
the necessary  rights and enter into the arrangements to deploy and operate such
interconnection  equipment.  There can be no  assurance  that the  Company  will
succeed  in  obtaining  the  rights  necessary  to  deploy  its  interconnection
equipment in its market areas on acceptable  terms, if at all, or that delays in
obtaining  such rights will not have a material  adverse effect on the Company's
development or results of operations.

         Dependence on Information and Processing Systems

         Sophisticated  information  and  processing  systems  are  vital to the
Company's  growth  and its  ability to monitor  network  performance,  provision
customer  orders for  telecommunications  capacity,  bill customers  accurately,
provide high-quality customer service and achieve operating efficiencies. As the
Company  grows,  any  inability  to operate  its  billing  and  information  and
processing  systems, or to upgrade internal systems and procedures as necessary,
could  have a  material  adverse  impact on the  Company's  ability to reach its
objectives, or on its business, financial condition and results of operations.

         Risk of Rapid Technological Changes

         The  telecommunications  industry  is subject to rapid and  significant
changes in technology.  Although the Company  believes that, for the foreseeable
future,  these changes will neither  materially  affect the continued use of its
network  equipment,  nor  materially  hinder its  ability  to acquire  necessary
technologies,  the  effect  of  technological  changes  on the  business  of the
Company,  such as changes relating to emerging wireline  (including fiber optic)
and  wireless  (including  broadband)  transmission   technologies,   cannot  be
predicted.  There can be no assurance that (i) the Company's network will not be
economically  or technically  outmoded by technology or services now existing or
developed and  implemented in the future,  (ii) the Company will have sufficient
resources to develop or acquire new  technologies  or to introduce  new services
capable of competing with future  technologies or service offerings or (iii) the
cost of the  equipment  used on its network  will  decline as rapidly as that of
competitive alternatives. The occurrence of any of the foregoing events may have
a material adverse effect on the operations of the Company.

         Regulation

         The  Company's   arrangements  with  Incumbents  contemplate  that  the
Company's   digital   network  will  provide   largely   "common  carrier  fixed
point-to-point  microwave"  telecommunications  services  under  Part 101 of the
FCC's Rules ("Part 101"),  which  services are subject to regulation by


                                       24

<PAGE>

federal,  state and local  governmental  agencies.  Changes in existing federal,
state or local laws and  regulations,  including those relating to the provision
of Part 101  telecommunications  services,  any failure or significant  delay in
obtaining  necessary  licenses,  permits or  renewals,  or any  expansion of the
Company's   business  that   subjects  the  Company  to  additional   regulatory
requirements  could have a material  adverse  effect on the Company's  business,
financial condition, and results of operations.

         Licensing by the Company and Incumbents. Many Incumbents whose existing
systems operate in the 2 GHz band of the frequency  spectrum will be required to
relocate  their  systems  and  operations  to the 6 GHz band or other  alternate
spectrum. In most instances the Company will enter into a strategic relationship
with an Incumbent and, as part of the upgrade of such  Incumbent's  system,  the
Company will license the upgraded  network in the 6 GHz band,  which will depend
on its  obtaining  newly  issued  Part  101  licenses  for the  use of  existing
facilities and infrastructure of such relocated Incumbents.

         The Company  intends to establish any such  arrangement so as to ensure
that  there  is no de  facto  transfer  of  control  of a FCC  license  from  an
Incumbent,  which has obtained  authorization from the FCC to operate a Part 101
telecommunications  system at the newly  occupied 6 GHz  location  (a  "Licensed
Incumbent"),  to the Company,  because such a transfer without FCC consent would
violate the FCC's  rules.  Because any review by the FCC of such an  arrangement
would be fact  specific and would involve the review of conduct that has not yet
occurred,  there can be no assurance  that, if such an  arrangement  between the
Company and a Licensed Incumbent were challenged, the FCC would not deem such an
arrangement to constitute an  unauthorized  transfer of control.  Such a finding
could result in a restructuring of the arrangement with a Licensed  Incumbent or
the loss of the FCC license.

         Mutual Exclusivity.  Pursuant to its arrangements with Incumbents,  the
Company  will,  in most  cases,  apply to the FCC for new Part 101  licenses  to
operate in the 6 GHz band.  As each such Part 101  license is granted by the FCC
with  respect to the  frequencies  to be used  between  two  specific  points as
designated  by specific  latitude and longitude  coordinates,  and as Incumbents
already own the  infrastructure and sites that comprise each such licensed point
along the network,  the Company expects to be the first and only entity to apply
for these licenses at or near the specific  locations and in the  frequencies to
be designated by the Company,  and hence to have  licensing  priority  under the
FCC's procedures.  There can be no assurance,  however, that other entities will
not seek  licenses to operate in the same portion of the  frequency  spectrum as
the  Company  in  locations  geographically  close  to those  designated  by the
Company.

         In the event that a mutually exclusive situation were to arise, the FCC
may hold a  comparative  hearing to decide which  applicant  will be awarded the
relevant  licenses,  in which case there can be no  assurance  that the  Company
would be able to obtain the desired license. In the event that numerous mutually
exclusive  applications  were to be filed, the FCC may decide to impose a filing
freeze with  respect to  additional  applications,  and would,  in the  interim,
decide  on  the  most  appropriate   manner  in  which  to  resolve  the  mutual
exclusivity.  In this vein,  the FCC may decide to seek from  Congress  enabling
legislation  that would  permit the FCC to hold an auction in order to determine
which of the competing  applicants  would obtain the sought-after  licenses,  in
which case the Company could be required to pay potentially  large sums in order
to obtain  the  necessary  license,  and there  would be no  assurance  that the
Company  would be able to obtain  any  auctioned  licenses.  The FCC might  also


                                       25
<PAGE>

decide to impose  fees on the use of the  desired  spectrum,  in which  case the
Company would be required to pay  potentially  large sums in order to obtain and
use its FCC licenses.

         Frequency Coordination.  Prior to applying to the FCC for authorization
to use portions of the 6 GHz band,  the Company must  coordinate  its use of the
frequency with any existing  licensees,  permittees,  and applicants in the same
area  whose  facilities  could be  subject  to  interference  as a result of the
Company's  proposed  use of the  spectrum.  There  can  be no  assurance  in any
particular  case that the Company will not encounter other entities and proposed
uses of the desired  spectrum that would  interfere  with the Company's  planned
use, and that the Company  will be able to  coordinate  successfully  such usage
with such entities.  If the Company were unable to coordinate  effectively  with
other  users of or  applicants  for the  spectrum  at a  substantial  number  of
proposed  sites,  there can be no  assurance  that the Company  would be able to
obtain and retain the licenses  necessary  for the  successful  operation of the
Company's network.

         FCC License  Requirements.  As part of the  requirements of obtaining a
Part 101 license,  the FCC requires the Company to demonstrate  the site owner's
compliance with the reporting,  notification  and technical  requirements of the
Federal  Aviation  Administration  ("FAA")  with  respect  to the  construction,
installation,   location,  lighting  and  painting  of  transmitter  towers  and
antennae,  such as  those  to be used by the  Company  in the  operation  of its
network.  Specifically,  the FCC requires compliance with the FAA's notification
requirement,   and  where  such   notification   is  required,   a  "no  hazard"
determination  from  the  FAA  before  granting  a  license  with  respect  to a
particular  facility.  Any  failure  by the  Company  to  comply  with the FAA's
notification  procedures,  any finding of a hazard by the FAA with  respect to a
proposed new or substantially modified facility, or any delay on the part of the
FAA in making  such a  finding,  may have an  adverse  effect  on the  Company's
ability to obtain in a timely  manner all  necessary  FCC licenses in accordance
with its business plan.

         In  addition  to FAA  requirements,  in  order to  obtain  the Part 101
licenses  necessary for the operation of its network,  the Company,  and in some
cases Licensed Incumbents, must file applications with the FCC for such licenses
and demonstrate  compliance with routine technical and legal qualification to be
an  FCC  licensee.  The  Company  must  also  obtain  FCC  authorization  before
transferring control of any of its licenses or making certain modifications to a
licensed  facility.  Such  requirements for obtaining such Part 101 licenses and
for transferring  such licenses include items such as certifying to the FCC that
frequency   coordination  has  been  completed,   disclosing  the  identity  and
relationship  of all entities  directly or indirectly  owning or controlling the
applicant,   and  demonstrating  the  applicant's  legal,  technical  and  other
qualifications  to be an FCC licensee.  Nevertheless,  there can be no assurance
that the Company or any  Licensed  Incumbent  will obtain all of the licenses or
approvals necessary for the operation of the Company's business, the transfer of
any  license,  or the  modification  of any  facility,  or that the FCC will not
impose burdensome conditions or limitations on any such license or approval.

         Construction of Facilities and Channel Loading Requirements.  Under the
FCC's  rules,  the Company is required to have each  licensed  Part 101 facility
constructed  and "in operation"  (i.e.,  capable of providing  service),  and to
complete each authorized modification to an existing facility,  within 18 months
of the grant of the  necessary  license or  approval.  Failure to meet the FCC's
timetable  for  construction  or  operation  or to obtain an  extension  of said
timetable will automatically  

                                       26

<PAGE>

cancel the  underlying  license or approval,  to the  detriment of the Company's
ability to execute its business plan. A license or authorization will also lapse
if,  after  construction  and  operation,  the facility is removed or altered to
render it non-operational for a period of 30 days or more. Similarly,  the FCC's
rules  provide  that,  in the absence of the Company  obtaining a waiver of such
rule, any authorized Part 101 station that fails to transmit operational traffic
during any 12 consecutive  months after  construction  is complete is considered
permanently  discontinued  under the FCC's rules, and its underlying  license is
forfeited. In addition, the FCC requires that a certain portion of the available
channels on Part 101 digital  systems be loaded with traffic within 30 months of
licensing.  There can be no assurance  that the Company's Part 101 licenses will
not lapse because of failure to meet the FCC's  construction  or channel loading
benchmarks  or to obtain an  extension  of such  deadlines,  or  because  of the
Company's  failure  to  comply  with the  FCC's  requirements  with  respect  to
operational traffic.

         FCC License Renewal. The Part 101 licenses obtained by the Company or a
Licensed  Incumbent  have been and will be issued for a term of 10 years,  after
which such licenses will have to be renewed by the filing of  applications  with
the FCC. Although such renewals are typically granted routinely, there can be no
assurance that necessary license renewals will be granted by the FCC.

         Provision of Common and Private  Carrier  Services.  The  Company's and
Licensed Incumbents' Part 101 licenses allow the Company to sell excess capacity
on its network to the  customers  targeted  under the Company's  business  plan.
Although the Part 101 licenses that the Company and Licensed Incumbents hold are
designated for "common carriers," under the FCC's rules, a Part 101 licensee may
provide both common carriage and private carriage over Part 101 facilities.  The
Company is currently offering,  and expects to offer in the future, its services
on  a  private  carrier  basis.  The  Company's  private  carrier  services  are
essentially unregulated,  while any common carrier offerings would be subject to
additional   regulations  and  reporting   requirements   including  payment  of
additional fees and compliance with additional  rules and regulations  including
that  any  such  services  must  be  offered   pursuant  to  filed  tariffs  and
non-discriminatory  terms,  rates and practices.  There can be no assurance that
the FCC will not find that some or all of the private carrier  services  offered
by the Company are in fact common  carrier  services,  and thus  subject to such
additional    regulations    and    reporting    requirements    including   the
non-discrimination and tariff filing requirements imposed on common carriers, in
which case the Company may be required to pay additional fees or adjust,  modify
or cease  provision  of certain of its services in order to comply with any such
regulations,  including  offering such services on the same terms and conditions
to all of those  seeking  such  services,  and  pursuant to rates made public in
tariff filings at the FCC.

         Foreign Ownership.  As the licensee of facilities designated for common
carriage,  the Company is subject to Section 310(b)(4) of the Communications Act
of 1934, as amended (the "Communications Act"), which by its terms restricts the
holding company of an FCC common carrier licensee (the Company is such a holding
company,  because  it  expects  to hold  all FCC  licenses  indirectly,  through
subsidiaries) to a maximum of 25% foreign  ownership and/or voting control.  The
FCC has  determined  that it will allow a higher level (up to 100%) on a blanket
basis  with  respect  to all  common  carrier  licensees,  but only for  foreign
ownership by citizens of, or companies  organized under the laws of, World Trade
Organization  ("WTO")  member  countries.  The FCC  continues  to


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<PAGE>

apply  the  25%  foreign  ownership  limitation  with  respect  to  citizens  or
corporations of non-WTO nations.

         Although  the Company is  presently  within the 25%  foreign  ownership
limitation,  there can be no assurance  that, as a result of future  financings,
the Company  will not exceed this  limitation,  in which case the Company  would
have to analyze  its  foreign  ownership  with  respect to the WTO status of the
nations with which the Company's foreign owners are associated.  In addition, if
any Incumbent elects to be a Licensed  Incumbent on the portion of the Company's
network relating to its system, such Licensed Incumbent would also be subject to
such foreign ownership restrictions. If such analysis showed that the Company or
any Licensed  Incumbent had more than 25% foreign  ownership from non-WTO member
nations, the Company or such Licensed Incumbent,  as the case may be, would have
to seek a  further  ruling  from  the FCC  and/or  reduce  its  non-WTO  foreign
ownership.  In the event  that a Licensed  Incumbent  were to choose to hold the
relevant  Part 101  license  itself,  and not  through a holding  company,  that
Licensed  Incumbent would be subject to Section 310(b)(3) of the  Communications
Act, which limits direct foreign  ownership of FCC licenses to 20%. The FCC does
not have discretion to waive this limitation, and there can be no assurance than
such a Licensed Incumbent would not exceed the 20% limitation, in which case the
Licensed Incumbent would be required to reduce its foreign ownership in order to
obtain or retain its Part 101 license.

         State and Local  Regulation.  Although  the Company  expects to provide
most of its  services  on an  interstate  basis,  in those  instances  where the
Company provides service on an intrastate  basis, the Company may be required to
obtain a certification  to operate from state utility  commissions in certain of
the states where such intrastate  services are provided,  and may be required to
file tariffs covering such intrastate services. In addition,  the Company may be
required to obtain  authorizations  from or notify  such states with  respect to
certain transfers or issuances of capital stock of the Company. The Company does
not expect any such state or local requirements to be burdensome; however, there
can be no assurance that the Company will obtain all of the necessary  state and
local  approvals  and consents or that the failure to obtain such  approvals and
consents  will not have a material  adverse  affect on the  Company's  business,
financial  condition  and results of  operations.  In addition,  there can be no
assurance that Incumbents will be able to obtain all necessary authorizations or
permits from state or local authorities, or that state or local authorities will
not impose burdensome taxes,  requirements or conditions on the Incumbent or the
Company.

         Radio Frequency Emission Concerns

         The use of wireless  equipment  may pose health  risks to humans due to
radio frequency ("RF")  emissions from the radios and antennae.  Any allegations
of  health  risks,  if  proven,  could  result in  liability  on the part of the
Company.  The FCC recently adopted new guidelines and methods for evaluating the
environmental effects of RF emissions from FCC regulated transmitters, including
wireless antennae which are more stringent than those previously in effect.  The
FCC also incorporated into its rules provisions of the  Communications Act which
preempt  state or local  government  regulation of wireless  service  facilities
based on environmental  effects,  to the extent such facilities  comply with the
FCC's rules  concerning  such RF emissions.  The Company cannot predict  whether
more  stringent laws or  regulations  will be enacted in the future.  Compliance
with more  stringent  laws or  regulations  regarding RF emissions  could in the
future require material  expenditures by the


                                       28
<PAGE>

Company which could have a material  adverse  effect on the Company's  business,
financial condition and results of operations.

Investment Company Act Considerations

         The Company has  substantial  cash,  cash  equivalents  and  short-term
investments.  The Company has invested and intends to invest the proceeds of its
financing  activities  so as to  preserve  capital  by  investing  primarily  in
short-term instruments consistent with prudent cash management and not primarily
for the  purpose of  achieving  investment  returns.  Investment  in  securities
primarily  for the purpose of achieving  investment  returns could result in the
Company being treated as an "investment  company"  under the Investment  Company
Act of 1940 (the "1940 Act").  The 1940 Act requires  the  registration  of, and
imposes various substantive  restrictions on, investment  companies that are, or
hold themselves out as being, engaged primarily,  or propose to engage primarily
in, the business of investing,  reinvesting  or trading in  securities,  or that
fail certain  statistical  tests regarding the composition of assets and sources
of income and are not  primarily  engaged in  businesses  other than  investing,
reinvesting, owning, holding or trading securities.

         The Company  believes that it is primarily  engaged in a business other
than  investing,   reinvesting,  owning,  holding  or  trading  securities  and,
therefore,  is not an investment  company within the meaning of the 1940 Act. If
the Company were  required to register as an  investment  company under the 1940
Act, it would  become  subject to  substantial  regulation  with  respect to its
capital structure, management, operations,  transactions with affiliated persons
(as defined in the 1940 Act) and other matters. Application of the provisions of
the  1940  Act to the  Company  would  have a  material  adverse  effect  on the
Company's business, financial condition and results of operations.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

                Not Applicable.






                                       29
<PAGE>


Part II.          Other Information

Item 1.    Legal Proceedings

                   None

Item 2.    Changes in Securities and Use of Proceeds

         On April 8,  1998,  the  Company  completed  the  issuance  and sale of
1,879,699  shares of Series C  Preferred  Stock at an  aggregate  price of $20.0
million.  As of September 30, 1998,  the Company had used these proceeds for the
purchase of property and equipment, and to fund general corporate purposes.

Item 3.    Defaults Upon Senior Securities

                   None

Item 4.    Submission of Matters to a Vote of Security Holders

         On July 13, 1998 the Company solicited written consents from holders of
its Common Stock,  Series A Convertible  Preferred  Stock,  Series B Convertible
Preferred  Stock and Series C  Convertible  Preferred  Stock to (i)  approve the
proposed  initial  public  offering of up to 5,390,625  shares of the  Company's
Common Stock (the "Initial Public  Offering"),  (ii) approval of the appointment
of certain  investment  banking  firms to act as the  managers  on behalf of the
underwriters in connection with the Initial Public  Offering,  (iii) approval of
certain amendments to the Company's Certificate of Incorporation,  (iv) approval
of certain amendments to the Company's Amended and Restated Bylaws, (v) approval
of certain Board  actions,  including,  but not limited to, a 2.9-for-one  stock
split  with  respect  to all  issued  and  outstanding  shares of  Common  Stock
outstanding as of August 3, 1998,  (vi)  consenting to the  implementation  of a
401K Plan,  (vii)  approval of an  agreement  between the Company and  Bellcore,
(vii) approval of the  contribution of certain of the Company's  wireless assets
to wholly  owned  subsidiaries  of the Company,  (viii)  approval of certain new
hires by the Company,  (ix)  ratification  of certain stock option grants by the
Company,  (x)  ratification  of the Fixed  Point  Microwave  Services  Agreement
between the Company and KN Telecommunications,  Inc., (xi) approval of the Lease
between the Company and Richardson Investment  Associates,  Ltd., (xii) approval
of the  Amendment  to the Lease  between the Company  and  Independence  Company
Offices,  (xiii)  approval of the Amendment to the Lease between the Company and
6715   Kenilworth   Avenue  General   Partnership  and  (xiv)  approval  of  the
expenditures  and agreements  required for the Dallas Office Fit Out.  Effective
July 24, 1998, the Company received  written  consents  approving such proposals
from holders  representing and aggregate of 2,902,358 shares of Common Stock and
an aggregate of 5,470,595 shares of Series A Convertible Preferred Stock, Series
B Convertible Preferred Stock and Series C Convertible Preferred Stock.

Item 5.    Other Information

         (a)      Forward-Looking Statements

                  Certain  statements in this Report,  in future  filings by the
         Company with the Securities and Exchange  Commission,  in the Company's
         press releases and in oral  statements  made by or

                                       30
<PAGE>

         with the  approval of an  authorized  executive  officer of the Company
         constitute forward-looking  statements,  including statements which can
         be  identified  by  the  use of  forward-looking  terminology  such  as
         "believes," "anticipates," "expects," "may," "will," or "should" or the
         negative of such terminology or other variations on such terminology or
         comparable  terminology,  or by discussions of strategies  that involve
         risks and  uncertainties.  All  statements  other  than  statements  of
         historical facts in this Report,  including,  without limitation,  such
         statements under the caption  "Management's  Discussion and Analysis of
         Financial  Condition and Results of Operations,"  regarding the Company
         or any of the  transactions  described  in this  Report or the  timing,
         financing,   strategies   and   effects   of  such   transaction,   are
         forward-looking  statements.  Although  the Company  believes  that the
         expectations   reflected  in  such   forward-looking   statements   are
         reasonable,  it can give no assurance that such expectations will prove
         to have been correct. Important factors that could cause actual results
         to differ materially from  expectations  include,  without  limitation,
         those described in conjunction with the  forward-looking  statements in
         this  Report,  as well as, the  amount of capital  needed to deploy the
         Company's network;  the Company's  substantial leverage and its need to
         service its  indebtedness;  the  restrictions  imposed by the Company's
         current and possible future financing arrangements;  the ability of the
         Company to successfully manage the cost effective and timely completion
         of its network and its ability to attract and retain  customers for its
         services;   the   ability  of  the   Company  to  retain  and   attract
         relationships  with  the  incumbent  owners  of the  telecommunications
         assets  with  which  the  Company  expects  to build its  network;  the
         Company's  ability  to retain  and  attract  key  management  and other
         personnel  as  well  as the  Company's  ability  to  manage  the  rapid
         expansion of its  business and  operations;  the  Company's  ability to
         compete in the highly competitive  telecommunications industry in terms
         of price, service, reliability and technology; the Company's dependence
         on the  reliability  of its  network  equipment,  its  reliance  on key
         suppliers of network  equipment and the risk that its  technology  will
         become obsolete or otherwise not economically  viable and the Company's
         ability  to  conduct  its  business  in a  regulated  environment.  See
         "Management's  Discussion  and  Analysis  of  Financial  Condition  and
         Results of Operations - Risk  Factors".  The Company does not intend to
         update these forward-looking statements.

Item 6.    Exhibits and Reports on Form 8-K

         (a)      Exhibits

                  Exhibit Index

         (b)      Reports on Form 8-K

                  On  August 5,  1998,  the  Company  filed a report on Form 8-K
         comprising items 5 and 7. The Report, dated August 3, 1998, gave notice
         of the  adjustment of the exercise  rate of the  Company's  warrants on
         account  of a  2.9-for-1  stock  split of the  Company's  Common  Stock
         

                                       31
<PAGE>
          effected  by a stock  dividend  paid to  stockholders  of record as of
          August 3, 1998.  The Report  also gave  notice  that the  Company  had
          decided not to include any  Registrable  Securities  under the Warrant
          Registration Rights Agreement in the Initial Public Offering.



                  On September 18, 1998,  the Company filed a report on Form 8-K
         comprising  items  5 and 7.  The  Report,  dated  September  17,  1998,
         provided details of a press release issued by the Company in respect of
         a contract secured by the Company.



                                       32
<PAGE>



                                   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.

                                                               PATHNET, INC.,
                                                          a Delaware corporation
                                                                (Registrant)



Date:    November 11, 1998           By:   /S/ RICHARD A.  JALKUT         
                                           --------------------------
                                           Richard A. Jalkut
                                           President and Chief Executive Officer



Date:    November 11, 1998           By:   /S/ WILLIAM R. SMEDBERG, V   
                                           -------------------------------
                                           William R. Smedberg, V
                                           Vice President, Finance
                                            (Principal Accounting &
                                              Financial Officer)





                                       33
<PAGE>


                                                       

EXHIBIT INDEX

Pursuant to Item 601 of Regulation S-K

  Exhibit No.     Description of Exhibit


  10.1            Amendment No. 1 to Fixed Point  Microwave  Services  Agreement
                  dated September 17, 1997, between PathNet, Inc. and KN Energy,
                  Inc. *

  10.2            Amendment  to License  Agreement  dated  July 23,  1998 by and
                  between Pathnet, Inc. and American Tower Corporation.

  27.1            Financial  Data  Schedule for the nine months ended  September
                  30, 1998.

  99.1            Press  release   dated   November  4,  1998   announcing  the
                  appointment of Bob Ferry as Chief  Information  Officer of the
                  Company.

  99.2            Press   release  dated   November  10, 1998   announcing   the
                  Company's results for the third quarter of 1998.

  * - Portions  of this  document  have been  omitted  pursuant to a request for
confidential treatment.



                                       34