FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

(mark one)
   [X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

         For the quarterly period ended June 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. 333-52247

                                  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 August 5, 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 QUARTER ENDED JUNE 30, 1998
                                      INDEX
<TABLE>
<CAPTION>
                                                                                           Page
                                                                                           ----
<S>                                                                                        <C>
Part I.    Financial Information

Item 1.    Consolidated Financial Statements

           Consolidated Balance Sheets as of June 30, 1998 (unaudited)
           and December 31, 1997                                                              1

           Consolidated Statements of Operations for the three months ended June
           30, 1998 (unaudited) and 1997 (unaudited), for the six months ended
           June 30, 1998 (unaudited) and 1997 (unaudited) and for the
           period August 25, 1995 (date of inception) to June 30, 1998 (unaudited)            2

           Consolidated Statements of Comprehensive Loss for the three months
           ended June 30, 1998 (unaudited) and 1997 (unaudited), for the six
           months ended June 30, 1998 (unaudited) and 1997 (unaudited) and for
           the period August 25, 1995 (date of inception) to June 30, 1998 (unaudited)        3

           Consolidated Statements of Cash Flows for the six months ended June
           30, 1998 (unaudited) and 1997 (unaudited) and for the period
           August 25, 1995 (date of inception) to June 30, 1998 (unaudited)                   4

           Notes to Consolidated Financial Statements (unaudited)                             5

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of
           Operations                                                                         9

Item 3.    Quantitative and Qualitative Disclosures About Market Risk                        13

Part II.   Other Information

Item 1.    Legal Proceedings                                                                 13

Item 2.    Changes in Securities and Use of Proceeds                                         13

Item 3.    Defaults Upon Senior Securities                                                   13

Item 4.    Submission of Matters to a Vote of Security Holders                               13

Item 5.    Other Information                                                                 14

Item 6.    Exhibits and Reports on Form 8-K                                                  15

           Signatures                                                                        16
</TABLE>
<PAGE>

PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

                                  PATHNET, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                    JUNE 30, 1998           DECEMBER 31,
                                                                                     (UNAUDITED)                1997
                                                                                ---------------------   ---------------------
<S>                                                                             <C>                     <C>                  
                                    ASSETS
Cash and cash equivalents                                                       $         115,821,396   $           7,831,384
Interest receivable                                                                         3,078,144                      __
Marketable securities available for sale, at market                                        95,691,600                      __
Prepaid expenses and other current assets                                                     351,455                  48,571
                                                                                ---------------------   ---------------------
Total current assets                                                                      214,942,595               7,879,955

Property and equipment, net                                                                14,921,717               7,207,094
Deferred financing costs                                                                   10,935,933                 250,428
Restricted cash                                                                               292,280                 760,211
Investments in marketable securities available for sale, at market                         62,703,480                      __
Pledged securities                                                                         80,829,045                      __
                                                                                ---------------------   ---------------------
Total assets                                                                    $         384,625,050   $          16,097,688
                                                                                =====================   =====================

             LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
                      AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable                                                                $           5,733,395 $             5,592,918
Deferred revenue                                                                              725,000                 300,000
Accrued interest                                                                            9,765,973                      __
Accrued expenses                                                                            1,310,073                      __
                                                                                ---------------------   ---------------------
Total current liabilities                                                                  17,534,441               5,892,918

Bonds payable, net of unamortized bond discount of $3,992,625                             346,007,375                      __
                                                                                ---------------------   ---------------------
Total liabilities                                                                         363,541,816               5,892,918
                                                                                ---------------------   ---------------------

Series A convertible preferred stock, $0.01 par value, 1,000,000 shares
authorized, issued and outstanding at June 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 June 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 June 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, 10,200,000 and 7,500,000 shares authorized
at June 30, 1998 and December 31, 1997, respectively; 2,902,358 and 2,900,000
shares issued and outstanding at June 30, 1998 and December 31, 1997, respectively             29,024                  29,000
Common stock subscription receivable                                                               __                 (9,000)

Deferred compensation                                                                     (1,402,324)                      __

Additional paid in capital                                                                  5,900,156                 381,990

Unrealized gain (loss) in investments                                                        (51,855)                      __

Deficit accumulated during the development stage                                         (19,361,406)             (6,166,861)
                                                                                ---------------------   ---------------------
Total stockholders' equity (deficit)                                                     (14,886,405)             (5,764,871)
                                                                                ---------------------   ---------------------
Total liabilities, mandatorily redeemable preferred stock
and stockholders' equity (deficit)                                              $         384,625,050   $          16,097,688
                                                                                =====================   =====================

</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL 
STATEMENTS.

                                        1
<PAGE>

                                  PATHNET, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                                                             
                                                                                                                 FOR THE PERIOD
                                     FOR THE THREE MONTHS ENDED               FOR THE SIX MONTHS ENDED           AUGUST 25, 1995
                                              JUNE 30,                                JUNE 30,                 (DATE OF INCEPTION)
                                -------------------------------------    ----------------------------------        TO JUNE 30,
                                       1998               1997                1998               1997                  1998
                                    (UNAUDITED)        (UNAUDITED)         (UNAUDITED)        (UNAUDITED)           (UNAUDITED)
                                -------------------------------------    ----------------------------------    ------------------- 
<S>                             <C>                 <C>                  <C>               <C>                 <C>                
Revenue                         $          475,000  $         52,500     $        575,000  $         62,500    $           738,500
                                ------------------  -----------------    ----------------  ----------------    ------------------- 
Expenses:
   Cost of revenue                       3,019,928                --            3,764,507                --              3,764,507
   General and administrative            2,251,718           655,658            3,577,830         1,142,288              8,319,720
   Research and development                     --                --                   --                --                245,059
   Legal and consulting                    332,882           151,107              561,049           222,431              1,639,600
                                ------------------  -----------------    ----------------  ----------------    ------------------- 
         Total expenses                  5,604,528           806,765            7,903,386         1,364,719             13,968,886
                                ------------------  -----------------    ----------------  ----------------    ------------------- 
Net operating loss                     (5,129,528)         (754,265)          (7,328,386)       (1,302,219)           (13,230,386)
Interest expense                       (9,868,348)                --          (9,868,348)                --           (10,283,705)
Interest and other income, net           4,488,172            18,829            4,002,189            35,936              4,171,685
                                ------------------  -----------------    ----------------  ----------------    ------------------- 
         Net loss               $     (10,509,704)  $      (735,436)     $   (13,194,545)  $    (1,266,283)    $      (19,342,406)
                                ==================  =================    ================  ================    ===================
         Basic and diluted loss
         per common share       $           (3.62)  $         (0.25)     $         (4.55)  $         (0.44)    $            (6.67)
                                ==================  =================    ================  ================    ===================
         Weighted average
         number of common
         shares outstanding              2,902,358         2,900,000            2,901,693         2,900,000              2,900,295
                                ==================  =================    ================  ================    ===================
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

                                        2
<PAGE>

                                  PATHNET, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

<TABLE>
<CAPTION>
                                                                                                                  FOR THE PERIOD
                                     FOR THE THREE MONTHS ENDED               FOR THE SIX MONTHS ENDED           AUGUST 25, 1995
                                              JUNE 30,                                JUNE 30,                 (DATE OF INCEPTION)
                                -------------------------------------    ----------------------------------        TO JUNE 30,
                                       1998               1997                1998               1997                  1998
                                    (UNAUDITED)        (UNAUDITED)         (UNAUDITED)        (UNAUDITED)           (UNAUDITED)
                                ------------------  -----------------    ----------------  ----------------    ------------------- 
<S>                             <C>                 <C>                  <C>               <C>                 <C>                
Net loss                        $     (10,509,704)  $      (735,436)     $   (13,194,545)  $    (1,266,283)    $      (19,342,406)

Other comprehensive income:
   Unrealized gain (loss) on
    marketable securities                 (51,855)                --             (51,855)                --               (51,855)
                                ------------------  -----------------    ----------------  ----------------    ------------------- 
Comprehensive loss              $     (10,561,559)  $      (735,436)     $   (13,246,400)  $    (1,266,283)    $      (19,394,261)
                                ==================  =================    ================  ================    ===================
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

                                        3
<PAGE>

                                  PATHNET, INC.
                        (A DEVELOPMENT STAGE ENTERPRISE)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                                                    FOR THE PERIOD
                                                                                                                      AUGUST 25,
                                                                                   FOR THE SIX       FOR THE SIX     1995 (DATE OF
                                                                                   MONTHS ENDED     MONTHS ENDED     INCEPTION) TO
                                                                                  JUNE 30, 1998     JUNE 30, 1997    JUNE 30, 1998
                                                                                   (UNAUDITED)       (UNAUDITED)      (UNAUDITED)
                                                                                 ----------------  ---------------  ---------------
<S>                                                                              <C>               <C>              <C>            
Cash flows from operating activities:
      Net loss                                                                   $   (13,194,545)  $   (1,266,283)  $  (19,342,406)
      Adjustments to reconcile the loss to cash provided by operating activities:
        Depreciation                                                                      111,522           15,440          167,540
        Amortization of deferred financing costs                                          278,444               --          278,444
        Loss on disposal of asset                                                              --               --            5,500
        Write-off of deferred financing costs                                             337,910               --          337,910
        Interest expense resulting from amortization of the discount on the bonds 
        payable                                                                           102,375               --          102,375
        Compensation expense related to issuance of employee common stock options         277,035               --          277,035
        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                                       (302,884)          (9,867)        (351,455)
        Interest receivable                                                           (4,371,634)               --      (4,371,634)
        Accrued interest                                                                9,765,973               --        9,765,973
        Deferred revenue                                                                  425,000               --          725,000
        Accounts payable                                                                  140,477         (62,463)          641,382
        Accrued expenses                                                                1,310,073          (1,522)        1,310,073
                                                                                 ----------------  ---------------  ---------------
Net cash used in operating activities                                                 (5,120,254)      (1,324,695)     (10,038,906)
                                                                                 ----------------  ---------------  ---------------
Cash flows from investing activities:
        Expenditures for property and equipment                                       (1,265,533)         (98,833)      (1,702,350)
        Purchases of marketable securities                                          (157,153,445)               --    (157,153,445)
        Purchase of marketable securities - pledged as collateral                    (80,829,045)               --     (80,829,045) 
        Restricted cash                                                                   467,931               --        (292,280)
        Repayment of note receivable                                                        9,000               --            9,000
        Expenditures for network construction in progress                             (6,560,612)               --      (8,300,394)
                                                                                 ----------------  ---------------  ---------------
Net cash used in investing activities                                               (245,331,704)         (98,833)    (248,268,514)
                                                                                 ----------------  ---------------  ---------------
Cash flows from financing activities:
     Issuance of voting and non-voting common stock                                            --               --            1,000
     Proceeds from sale of Series A preferred stock                                            --               --        1,000,000
     Proceeds from sale of Series B preferred stock                                            --        2,000,000        4,000,000
     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 sale of Series C preferred stock                                    19,999,998               --       30,000,052
     Exercise of employee common stock options                                                 81               --               81
     Issuance costs                                                                     (256,250)               --        (320,030)
     Financing costs                                                                 (11,301,859)               --     (11,552,287)
     Proceeds from bond offering                                                      350,000,000               --      350,000,000
     Proceeds from bridge loan                                                                 --               --          700,000
                                                                                 ----------------  ---------------  ---------------
Net cash provided by financing activities                                             358,441,970        2,000,000      374,128,816
                                                                                 ----------------  ---------------  ---------------
Net increase in cash and cash equivalents                                             107,990,012          576,472      115,821,396
Cash and cash equivalents, beginning of period                                          7,831,384        2,318,037               --
                                                                                 ----------------  ---------------  ---------------
Cash and cash equivalents, end of period                                         $    115,821,396  $     2,894,509  $   115,821,396
                                                                                 ================  ===============  ===============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.

                                        4
<PAGE>

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


1.       THE COMPANY

         Pathnet, Inc. (the Company) was incorporated in the State of Delaware
         on August 25, 1995. On August 28, 1995, Path Tel, Inc. (Path Tel), a
         shell company with no operations, was merged with and into the Company,
         with the Company being the surviving corporation. The sole owner of
         Path Tel was the founder (Founder) of the Company.

         The Company intends to offer high quality, low cost, long haul
         telecommunications capacity to telecom service providers as a
         "carrier's carrier." The Company plans to deploy its digital 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). By
         integrating the existing networks of Incumbents, the Company expects to
         obtain the equivalent of a nationwide spectrum license at minimal
         licensing costs. In return for providing equipment, designing systems
         and managing the construction of Incumbent networks, the Company will
         receive the exclusive contractual right to market excess capacity
         created and aggregated on Incumbent networks. The revenue generated
         from this activity may be shared with the Incumbents. 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 has in place several contracts requiring it to upgrade
         existing telecommunication systems. In addition, the Company is
         currently in the process of negotiating with several national long
         distance carriers who will likely be purchasers of the excess capacity
         created. The Company's first network upgrade has been completed and
         capacity is available for commercial sale.

2.       BASIS OF ACCOUNTING

         The Company's activities to date principally have been securing
         contractual alliances with Incumbents, designing and constructing
         network segments, obtaining capital and planning its proposed service.
         Accordingly, the Company's 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 Pathnet, Inc. and its subsidiaries contain all
         adjustments (consisting only of normal recurring accruals) necessary to
         present fairly the Company's consolidated financial position as of June
         30, 1998, and the results of operations and cash flows for the periods
         indicated. Certain information and footnote disclosures normally
         included in financial

                                        5
<PAGE>

         statements prepared in accordance with generally accepted accounting
         principles have been condensed or omitted. It is suggested that these
         condensed consolidated financial statements be read in conjunction with
         the financial statements and notes thereto included in the Company's
         Registration Statement on Form S-1 (Registration No. 333-52247). The
         results of operations for the six months ended June 30, 1998 are not
         necessarily indicative of the operating results to be expected for the
         full year.

3.       NEW ACCOUNTING PRONOUNCEMENTS

         In June 1998, the Financial Accounting Standards Board issued Statement
         of Financial Accounting Standards No. 133, "Accounting for Derivative
         Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective
         for fiscal years beginning after June 15, 1999 and cannot be applied
         retroactively. SFAS 133 establishes accounting and reporting standards
         requiring that every derivative instrument be recorded in the balance
         sheet as either an asset or liability measured at its fair value. SFAS
         133 requires that changes in the derivative's fair value be recognized
         currently in earning unless specific hedge accounting criteria are met.
         The Company currently plans to adopt SFAS 133 effective January 1,
         2000, and will determine both the method and impact of adoption prior
         to that date.

4.       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. Diluted earnings (loss) per share is computed by dividing
         net income (loss) by the weighted average common and potentially
         dilutive common equivalent shares outstanding. 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 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 June 30,
         1998, which could potentially dilute basic earnings per share in the
         future were not included in the computation of diluted loss per share
         because to do so would have been antidilutive for each of the periods
         presented.

5.       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 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.

                                        6
<PAGE>

6.       PROPERTY AND EQUIPMENT

         Property and equipment, stated at cost, is comprised of the following
         at June 30, 1998 and December 31, 1997:

<TABLE>
<CAPTION>
                                                  June 30, 1998              December 31,
                                                   (unaudited)                   1997
                                            ------------------------- --------------------------
<S>                                         <C>                       <C>                       
Network construction in progress            $              13,149,730 $                6,831,795
Office and computer equipment                               1,258,312                    248,880
Furniture and fixtures                                        556,277                    120,093
Leasehold improvements                                        124,938                     62,344
                                            ------------------------- --------------------------
                                                           15,089,257                  7,263,112

Less accumulated depreciation                               (167,540)                   (56,018)
                                            ------------------------- --------------------------
Property and equipment net                  $              14,921,717 $                7,207,094
                                            ========================= ==========================
</TABLE>

7.       LONG-TERM DEBT.

         On April 8, 1998, the Company completed the issuance and sale of
         350,000 units, each consisting of a $1,000 principal amount of 12 1/4%
         Senior Notes due 2008 (the Notes) and a warrant to purchase 3.19 shares
         of common stock or 1,116,500 shares in total (the Warrants) at an
         exercise price of $0.01 per share for total gross proceeds of
         $350,000,000 less direct issuance costs of approximately $10,500,000.
         Approximately $345,900,000 of the gross proceeds have been allocated to
         the Notes and approximately $4,100,000 have been allocated to the
         Warrants based upon estimated fair values. The estimated value
         attributed to the Warrants has been recorded as a discount on the face
         value of the Notes 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 $102,375 of expense for the six months ended June
         30, 1998, related to the amortization of the discount. Interest on the
         Notes will accrue 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 six months ended June 30, 1998 was $9,765,973. The
         Company used $81,128,751 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 Notes through April 15, 2000. The
         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) April 15, 2003; 106% of the
         principal amount, (ii) April 15, 2004; 104% of the principal amount,
         (iii) April 15, 2005; 102% of the principal amount and (iv) April 15,
         2006;

                                        7
<PAGE>

         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 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 Notes remain
         outstanding. Upon a change in control, as defined, each holder of the
         Notes may require the Company to repurchase all or a portion of such
         holder's 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 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.

         The Warrants expire on April 15, 2008 and are not separately
         transferrable until the earlier of (i) October 15, 1998, (ii) a
         registered exchange offer for the Notes, (iii) the occurrence of an
         exercise event, as defined, (iv) an event of default, as defined, and
         (v) a date determined by the lead initial purchaser of the units.

8.       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 $20,000,000. There were no issuance costs associated with
         the sale.

9.       COMMON STOCK

         On May 8, 1998, the Company filed a Registration Statement with the
         Securities and Exchange Commission for an initial public offering (the
         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. 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.

10.      STOCK OPTIONS

         In April and May 1998, a total of 89,721 options were issued to
         employees at an exercise price of $3.67 per share. The Company has
         estimated the fair value of the underlying common stock to be $16.00
         per share, the midpoint of the price range for the Offering.
         Accordingly, the Company has recorded deferred compensation expense as
         a component of stockholders' equity (deficit) and is recognizing
         compensation expense over the vesting periods of these stock options.
         Compensation expense for the six months ended June 30, 1998 was
         $277,035.

                                        8
<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."

OVERVIEW

         The Company intends to offer high quality, low cost, long haul
telecommunications capacity to telecom service providers as a "carrier's
carrier." The Company plans to deploy its digital 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"). 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 of units consisting of senior
notes and warrants to purchase common stock (the "Debt Offering") in April 1998.
A substantial portion of the Company's activities to date has involved
developing strategic relationships with Incumbents. Due to Pathnet's focus on
developing strategic relationships with Incumbents, its historical revenues only
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.

BUSINESS DEVELOPMENT, CAPITAL EXPENDITURES AND ACQUISITIONS

         From inception (August 25, 1995) through June 30, 1998, expenditures
for property, plant and equipment, including construction in progress, totaled
$15.1 million. In addition, the Company incurred significant other costs and
expenses in the development of its business and has recorded cumulative losses
from inception through June 30, 1998 of $19.3 million.

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998

         The Company's principal activity from inception through the third
quarter of 1996 involved introducing its business plan to over 300 Incumbents
with significant private networks through face to face meetings. As the Company
began to enter into formal relationships with Incumbents in 1996, additional
engineering, legal, and financial personnel were recruited to support the
increased workflow and to negotiate Incumbent contracts. By the first quarter of
1997, the Company initiated construction on the first segment of the network,
and additional engineering and management personnel were recruited, including
Mr. Richard A. Jalkut, the Company's President and Chief Executive Officer. The
Company has also begun marketing and sales efforts, and hired Mr. Kevin J.
Bennis to develop and execute its sales and marketing plan.

                                        9
<PAGE>

REVENUE

         In establishing relationships with Incumbents, the Company has acted as
a provider of services for transitioning the Incumbents from their old network
system onto the Company's network. The services provided by the Company to
Incumbents, including analysis of existing facilities and system performance,
advisory services relating to PCS relocation matters, and turnkey network
construction management, provided substantially all of the Company's historical
revenues. The Company expects substantially all future revenue to be generated
from the sale of telecommunications services. During the three months ended June
30, 1998 the Company entered into its first agreement for the sale of
telecommunications services and began providing such services on a portion of
its network. For the three months ended June 30, 1998 and 1997, the Company
generated revenues of $475,000 and $52,500, respectively. The increase is
attributable to the continued performance of construction management services
and the commencement of telecommunications services in the 1998 period. For the
six months ended June 30, 1998 and 1997 the Company generated revenues of
$575,000 and $62,500, respectively. This increase is attributable to continued
performance of construction management services. For the year ended December 31,
1997, the Company generated revenues of $162,500, of which $100,000 was derived
from construction management services and $62,500 from PCS relocation advisory
services compared with revenues of $1,000 from PCS relocation advisory services
for the year ended December 31, 1996. The Company generated no revenue during
the period from inception (August 25, 1995) to December 31, 1995.

COSTS AND EXPENSES

         For the three months ended June 30, 1998 and 1997, the Company incurred
operating expenses of approximately $5.6 million and $0.8 million, respectively.
For the six months ended June 30, 1998 and 1997 the Company incurred operating
expenses of $7.9 million and $1.4 million, respectively. For the year ended
December 31, 1997, the Company incurred operating expenses of approximately $4.3
million compared to operating expenses of $1.3 million for the year ended
December 31, 1996 and $429,000 for the period from inception through December
31, 1995. The increase in expense was directly related to an increase in
selling, general and administrative expenses ("SG&A") as the Company expanded
its engineering, technical, legal, finance, and general management personnel in
connection with the continued signing of new Incumbent agreements and the
ongoing construction of the Company's network. The Company expects SG&A 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 for telecommunications services.

LIQUIDITY AND CAPITAL RESOURCES

         The Company expects 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.

                                       10
<PAGE>

         On April 8, 1998, the Company completed the issuance and sale of the
350,000 units (collectively, the "Units"), consisting of 12 1/4% Senior Notes
due 2008 (the "Notes") and warrants (the "Warrants") to purchase shares of
common stock, par value $.01 per share ("Common Stock") resulting in net
proceeds to the Company of $339.5 million, after reduction for offering costs of
approximately $10.5 million. The Company used $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
Notes through April 15, 2000 and which have been pledged as security for
repayment of the Notes. The indenture relating to the 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.

         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 an initial public offering of the Company's Common Stock (the
"Initial Public Offering"). On August 13, 1998, the Company announced that it
will 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.

         In addition, the Company is currently exploring several equipment
financing and other financing alternatives. Although the Company has received
commitments (subject to definitive documentation) from prospective lenders in
connection with two such proposed financing facilities, the Company has not
decided to pursue any one particular proposed facility.

         The Company anticipates that, for the twelve month periods ending June
30, 1999 and 2000, it will require approximately $100 million and $215 million,
respectively, to fund capital expenditures, working capital and operating losses
aggregating $290 million, $10 million and $15 million, respectively, at which
time it expects to have completed a 21,000 route mile network. The Company also
expects that during the next two years, approximately 75% of its capital
requirements will be for telecommunications and transmission equipment. The
majority of the remaining capital requirements of the Company will be for
installation and other site construction related costs. Proceeds from the Debt
Offering, the Initial Public Offering and the 1998 Private Equity Investment,
together with other cash on hand, are expected to provide the Company with
adequate resources to meet these projected capital requirements. The Company
intends to use any additional available funds to accelerate its development
plans.

         The Company expects that a majority of future capital expenditures will
result from customer orders for additional capacity. 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 financings and operating cash

                                       11
<PAGE>

flow to fund future growth. 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.

INFLATION

         Management does not believe that the Company's business is affected by
inflation to a significantly different extent than the general economy.

YEAR 2000

         The Company has established processes for evaluating and managing the
risks and costs associated with Year 2000 software failures. Management is in
the process of taking steps to ensure a smooth Year 2000 transition, including
working with its software vendors to assure that by the end of the first quarter
of 1999, the Company is fully prepared for the Year 2000. The Company has
identified and analyzed both internally developed and acquired software that
utilizes date embedded codes that may experience operational problems when the
Year 2000 is reached. The Company is making and intends to complete necessary
modifications to the identified software by the end of the first quarter of
1999. The Company is also communicating with Incumbents, suppliers, financial
institutions and others with which it does business to coordinate Year 2000
compliance. Management does not anticipate that the Company will incur
significant operating expenses or be required to invest heavily in computer
systems improvements to be Year 2000 compliant, and does not anticipate that
business operations will be disrupted or that its customers will experience any
interruption of service as a result of the millennium change.

NEW ACCOUNTING STANDARDS

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective for fiscal
years beginning after June 15, 1999 and cannot be

                                       12
<PAGE>

applied retroactively. SFAS 133 establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS 133 requires that
changes in the derivative's fair value be recognized currently in earning unless
specific hedge accounting criteria are met. The Company currently plans to adopt
SFAS 133 effective January 1, 2000, and will determine both the method and
impact of adoption prior to that date.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not Applicable.

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 the
         Units, consisting of an aggregate of $350 million principal amount of
         12 1/4% Senior Notes due 2008 and 350,000 Warrants. Each Warrant
         entitles the holder thereof to purchase 3.19 shares of Common Stock at
         an exercise price of $.01 per share. The Units were sold to Merrill
         Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear,
         Stearns & Co., Inc., TD Securities and Salomon Brothers Inc (together,
         the "Initial Purchasers") for resale pursuant to Rule 144A and
         Regulation S under the Securities Act. The aggregate purchase price of
         the Notes and Warrants was $350,000,000 with net proceeds to the
         Company of approximately $339,500,000 after deduction of offering
         expenses. Also 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 June 30, 1998, the Company has used such
         net proceeds, along with proceeds from previous capital contributions,
         as follows: (i) $81.l million to purchase Pledged Securities to provide
         payment in full of the first four interest payments due on the Senior
         Notes, (ii) $5.0 million for the purchase of property and equipment,
         and (iii) to fund general corporate purposes.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None

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

         On April 1, 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
         approve a proposal to increase the size of the Debt Offering to an
         aggregate amount of $350.0 million. Effective April 1, 1998, the
         Company received written consents approving such proposal from holders
         representing an aggregate

                                       13
<PAGE>

         of 2,900,000 shares of Common Stock and an aggregate of 3,590,896
         shares of Series A Convertible Preferred Stock, Series B Convertible
         Preferred Stock and Series C Convertible Preferred Stock. The remaining
         holder representing 2,358 shares of Common Stock did not respond.

         On April 24, 1998, the Company solicited written consents from the
         holders of its Series A Convertible Preferred Stock, Series B
         Convertible Preferred Stock and Series C Convertible Preferred Stock to
         (i) ratify all of the issuances of Common Stock and the grants of all
         stock options issued or granted by the Company from inception until
         April 24, 1998, (ii) ratify the execution, delivery and performance of
         all agreements and arrangements entered into by the Company from
         inception until April 24, 1998, which agreements and arrangements
         involved a transaction exceeding $50,000 in amount and (iii) ratify the
         terms and provisions of the Company's insurance policies, including the
         Company's directors and officers insurance. Effective April 24, 1998,
         the Company received written consents approving such proposal from
         holders representing 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 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, 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

                                       14
<PAGE>

         suppliers of network equipment and the risk that its technology will
         become obsolete or otherwise not economically viable; the Company's
         ability to conduct its business in a regulated environment; and the
         other factors described in conjunction with the forward-looking
         statements in this Report. The Company does not intend to update these
         forward-looking statements.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)    EXHIBITS

         27.1   Financial Data Schedule.

         99.1   Press release, dated as of August 13, 1998.

         (b)    REPORTS ON FORM 8-K

         The Company did not file any reports on Form 8-K during the quarter
ended June 30, 1998.

                                       15
<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


Date:  August 14, 1998                  By: /s/ RICHARD A.  JALKUT
                                        --------------------------
                                        Richard A.  Jalkut
                                        President and Chief Executive Officer


Date:  August 14, 1998                  By: /s/ WILLIAM R. SMEDBERG, V
                                        ------------------------------
                                        William R. Smedberg, V
                                        Vice President, Finance
                                        (principal accounting
                                        and financial officer)

                                       16
<PAGE>

                                  EXHIBIT INDEX

                     PURSUANT TO ITEM 601 OF REGULATION S-K


         Exhibit No.                Description of Exhibit
         -----------                ----------------------

            27.1                    Financial Data Schedule.

            99.1                    Press Release, dated as of August 13, 1998.