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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549


                                  FORM 10-K/A
(Mark One)

     [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
                                                         -----------------

                                      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 number 333-53953

                        CONVERGENT COMMUNICATIONS, INC.
            (Exact name of registrant as specified in its charter)

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<S>                                                             <C>
                    Colorado                                                 84-1337265
(State or other jurisdiction of incorporation)                  (I.R.S. Employer Identification No.)
</TABLE>

                     400 Inverness Drive South, Suite 400
                           Englewood, Colorado 80112
                                (303) 749-3000
         (Address and telephone number of principal executive offices)

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

     Title of Each Class               Name of each exchange on which registered
     Common Stock                                 Nasdaq National Market


          Securities registered pursuant to section 12(g) of the Act:
                                Not Applicable

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

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

     On March 20, 2000, 28,932,281 shares of the registrant's Common Stock were
outstanding. On March 20, 2000, the aggregate market value of our common stock
held by non-affiliates was approximately $314.6 million, based on a price per
share of common stock of 10.875.

                      DOCUMENTS INCORPORATED BY REFERENCE

     The information called for by Part III is incorporated by reference to our
definitive Proxy Statement for the 2000 Annual Meeting of Stockholders which
will be filed with the Securities and Exchange Commission no later than 120 days
after December 31, 1999.
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                               TABLE OF CONTENTS

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<S>                                                                                                     <C>
PART I
Item 1. Business  ....................................................................................    1
Item 2. Properties  ..................................................................................   13
Item 3. Legal Proceedings  ...........................................................................   13
Item 4. Submission of Matters to a Vote of Security Holders  .........................................   13

PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters  .......................   14
Item 6. Selected Financial Data  .....................................................................   16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation  ........   18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk  .................................   28
Item 8. Financial Statements and Supplementary Data  .................................................   29
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure  ........   52

PART III
Item 10. Directors and Executive Officers of the Registrant  .........................................   52
Item 11. Executive Compensation  .....................................................................   52
Item 12. Security Ownership of Certain Beneficial Owners and Management  .............................   52
Item 13. Certain Relationships and Related Transactions  .............................................   52

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K  ...........................   53
</TABLE>

Note Concerning Forward-Looking Information

     Some of the information in this report contains forward-looking statements
that involve substantial risks and uncertainties. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You should
read statements that contain these words carefully because they: (1) discuss our
future expectations; (2) contain projections of our future results of operations
or of our financial condition; or (3) state other "forward-looking" information.
We believe that it is important to communicate our future expectations to our
investors. However, there may be events in the future that we have not
accurately predicted or over which we have no control. These events may include
future operating results and potential competition, among other things.
Cautionary language in this report provides examples of risks, uncertainties and
events that may cause our actual results to differ materially from the
expectations we describe in our forward-looking statements. You should be aware
that the occurrence of the events described in this report could have a material
adverse effect on our business, operating results and financial condition.
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                                    PART I

Item 1.   Business

Introduction

     We are a rapidly growing national provider of e-Sourcing solutions
primarily to businesses with 25 to 500 employees. "e-Sourcing" is the management
of communications solutions that allow businesses to leverage technology,
systems and networking resources -including broadband Internet Protocal based
applications- without having to "own" or internally build and manage those
resources. Inside our customers' premises we own communications networks and
provide professional services, such as the design, installation, management and
monitoring of those networks. Outside our customers' premises, we provide a full
range of data and voice transport services. By operating networks both inside
and outside our customers' premises, and by offering a broad range of Internet,
data and voice systems and services, we provide small and medium sized
businesses with state-of-the-art communications solutions, including data and
voice networks based on broadband Internet Protocol, electronic commerce,
connections to the Internet and sophisticated communications systems.

--------------------------------------------------------------------------------
                               Internet Protocol
                               -----------------

     Internet Protocol or IP is a standard industry method of identifying,
tracking and reassembling packets of information transferred over multiple
communications networks, including the Internet.
--------------------------------------------------------------------------------

     We offer each of our systems and services on a stand alone basis or as a
bundled communications solution under long-term service agreements in which we
may own all or a portion of the inside network, provide professional services
inside our customers' premises, supply data network services outside their
premises and provide equipment financing where the customer chooses to own their
inside network.  The comprehensive solution, which we call Enterprise Managed
Services, reduces our customers' capital needs, technical staffing requirements
and risks associated with evolving communications technologies.

     We are deploying Cisco Systems, Inc.'s multi-service data and voice switch
in each of the 35 metropolitan areas in which we currently operate and will also
deploy them in additional markets we expect to enter. These next-generation
switches will enable us to route our customers' external communications traffic
more efficiently and with lower capital outlay than with traditional switches.

Over the last three years, we have:

     .    rapidly established a nationwide presence in 35 metropolitan markets;

     .    grown our customer base and provided our systems and services to more
          than 33,000 customers in the last two years either directly or through
          businesses we have acquired;

     .    increased sales to $160.0 million in 1999 from $61.6 million in 1998
          and $10.2 in 1997;

     .    raised $338.6 million in debt and equity offerings;

     .    completed 18 acquisitions, expanding our market presence, technicians
          and capabilities to deliver our comprehensive service offerings;

     .    designed and implemented an  IP/ATM network that will connect our
          multi-service, data and voice switching platforms and carry our
          customers' traffic using ATM technology;

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                                      ATM
                                      ---

     Asynchronous Transfer Mode (or ATM) is a high-speed technology used to
transport information in packets.  ATM packets are fixed in size and allow the
transport of size-intensive and time-sensitive applications, such as video and
voice, quickly and efficiently.
--------------------------------------------------------------------------------

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     .    grown our employee base to more than 1,500, including an experienced
          sales team of 375, technical staff of 558 and customer care support
          staff of 180;

     .    devoted significant resources to the development, testing and
          implementation of our operational support system; and

     .    developed, tested and implemented our national network operations
          center.

Our Solutions

     We offer comprehensive communications solutions--ones that have
traditionally been readily available only to large enterprises--to small and
medium sized businesses. The combination of our focus on this market and our
national scale enables us to design sophisticated data and voice systems and
solutions tailored to these small and medium sized businesses.

     Our services utilize the data and voice networks, inside and outside of our
customers' enterprises.

     .    Inside our customers' enterprises we own networks and design, install,
          manage, maintain and monitor these networks (local area networks, wide
          area networks, computers, private branch exchanges, key systems,
          handsets, etc.) under long-term service agreements for which the
          customer pays a flat monthly fee. The IP-based integrated data and
          voice network solutions that we provide (including eCommerce, web
          application development and web hosting), and which we expect will
          become a larger portion of our business, can significantly reduce
          overall network administration and capital costs for our customers.

     .    Outside our customers' enterprises, we provide next generation data
          centric networks that connect the internal network to the Internet
          using broadband transport technology. As we continue to build our
          IP/ATM network, we will migrate many of these services to our own
          network.

                             [GRAPH APPEARS HERE]

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     With our premiere offering, Enterprise Managed Services, our most
comprehensive eSourcing solution, we become an outsourcing partner to our
clients by taking ownership and full responsibility for planning, installing,
provisioning and maintaining their communications systems and networks,
including their critical eBusiness integration projects. We offer this service,
in addition to owning all or a portion of the data and voice communications
systems inside our customers' enterprises, for a flat, monthly, per user fee
under a long-term contract. Using these inside networks in conjunction with our
comprehensive next generation IP/ATM networks, we lower our customers' costs by
reducing network outages and providing faster Internet access which allows them
to use their applications more efficiently. This offering can also reduce their
capital expenditures, technical staffing requirements and risks associated with
quickly evolving communications technologies.

Our Business Strategy

     Our business strategy is designed to generate a broad source of stable and
recurring revenue. In implementing this strategy, we will:

          Target Small and Medium Sized Businesses. The small and medium sized
business market has historically been underserved by national systems
integrators, outsourcers, data technology companies and telecommunications
providers, even though many small and medium sized businesses demand high-
performance communications solutions. Because we are focused on this market, we
have developed systems, services and solutions that are well suited for the
financial resources, growth characteristics, technological sophistication and
other needs of small and medium sized businesses.

          Provide Sophisticated, One-Stop, Integrated Communications Solutions.
Most small and medium sized businesses do not have the internal capability or
capital required to deploy, fully utilize and effectively manage evolving data
and voice systems. We are increasingly able to respond to substantially all of
our customers' communications needs and can offer equipment leasing and
maintenance contracts. This comprehensive approach is designed to reduce the
complexity and expense of owning and operating communications networks for our
customers. Our solutions are designed to facilitate the migration of traditional
communications systems to integrated IP-based data and voice networks.

          Own the Communications Network Inside Our Customers' Enterprises.
Through our Enterprise Managed Services, we seek to own the data and voice
networks inside our customers' premises and provide these networks to our
customers along with management, maintenance and monitoring services under long-
term service agreements. This approach is designed to:

     .    allow our customers to focus on their core business and outsource
          their communications needs;

     .    capture a large portion of our customers' communications spending;

     .    minimize customer turnover;

     .    generate high-margin revenue; and

     .    enhance our opportunities to sell additional systems and service
          upgrades to existing customers.

     Focus on Solutions-Based Selling. We market our systems and services, such
as Enterprise Managed Services, as solutions to business problems rather than as
stand-alone products. We do so by marketing to the senior management and
principals of our potential customers, providing them with an analysis of the
benefits of our comprehensive solutions. In the process we become the single
source provider (e-Sourcer) to these customers under long-term service
contracts.

     Provide Preeminent, Local Customer Care. We strive to provide best-in-care
service by offering our customers immediate and around-the-clock access to our
customer care staff. Our 180 customer care specialists are trained in all
aspects of the systems, services and solutions offered in their market.

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Our Systems and Services

     As a single-source provider of a wide array of communications systems,
services and solutions we have identified three core areas of expertise from
which these solutions are produced and supported. These areas, segmented by our
Strategic Management Units (SMUs), include eBusiness Solutions, Enterprise
Services and Enterprise Systems.


     eBusiness Solutions

     Our eBusiness capabilities allow growing enterprises to capitalize on the
power of the Internet to reach and support their customers. Managed through five
national eBusiness solution centers in Portland, Denver, Chicago, Atlanta and
San Francisco, services offered are as follows:

     .    Application Service Provider ("ASP") Services. We offer ASP Services,
          which are custom-tailored service offerings for growing enterprises
          seeking rapid delivery of cost-effective, high value-added,
          comprehensive solutions for their eBusiness initiatives. ASP Services
          consist of eCommerce applications, e-procurement, and other electronic
          Customer Relationship Management (eCRM) applications. These services
          transform the methods by which organizations connect buyers and
          sellers and process transactions, as well as customize and sell their
          systems and services.

     .    Strategic Web Development. We specialize in creating dynamic Web sites
          that perform beyond that of a "static" home page, incorporating
          features such as database integration, multimedia streaming and one-
          to-one marketing capabilities. In cases in which a business has an
          existing Web site, we provide enhancements that increase its
          functionality and performance. In either case, we help make the
          Internet presence an even more valuable part of their business.

     .    eCommerce. Our eBusiness Solutions Group uses creativity and digital
          technology to transform the way organizations connect buyers and
          sellers, process payments and customize and sell systems and services.
          We develop and implement custom eCommerce solutions to help clients
          generate new and additional sources of revenue, streamline business
          processes, extend marketing efforts and maximize efficiency. We also
          integrate those eCommerce solutions with our clients' existing
          database and back-office systems.

     .    Intranet Development. Our custom intranet solutions turn simple Web
          sites running on a corporate network into a strategy for information
          distribution across our client's company and the world. We implement
          dynamic and manageable intranets that streamline business processes,
          and maximize efficiency.

     .    Extranet Development. We extend the use of our clients' intranet to
          enable selected suppliers, distributors, and customers to communicate
          through a business-to-business extranet. We build and implement
          applications that allow selected users access to private data and
          applications via the World Wide Web. By applying an extranet
          application to business processes, we enhance marketing efforts and
          maximize efficiency.

     .    Custom Web Hosting. We offer three types of hosting environments:
          shared, dedicated and co-located. Our hosting solutions are customized
          on multiple platforms to meet our clients' online requirements and to
          ensure that the final online product is reliable. We have the
          facilities and manpower to ensure the connectivity, redundancy and
          security of our customers' online business objectives.

     .    e-WebBuilder. We offer e-WebBuilder, which allows businesses to
          realize the promise of online technology today, without having to
          divert funds from their operating budget to buy expensive equipment,
          or hire and retain the networking staff needed to design and maintain
          web-based programs. With e-WebBuilder Express, customers develop the
          information about their company that they want to place online. Then,
          choosing from more than 100 professionally designed templates, they
          select a look for the

                                       4
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          site that best reflects the image of their company. Our Catalog option
          adds the benefits of e-commerce by allowing customers to display
          products and services in an online catalog.



     Enterprise Services

     Our Enterprise Services SMU is focused on the support of both inside and
outside premises services and solutions, including:

 .    Enterprise Managed Services (EMS). We provide Enterprise Managed Services
     solutions under long-term service agreements for a flat, monthly, per user
     fee. We believe the EMS offering to be particularly attractive to our small
     and medium sized business customers because it:

     .    provides them with a broadband network platform with highspeed
          connectivity to the Internet;

     .    reduces their costs of long-term ownership while increasing their
          business effectiveness;

     .    reduces their risks and burdens associated with owning, operating and
          maintaining data and voice networks;

     .    replaces costly and unpredictable capital outlays with stable and
          predictible monthly expenses; and

     .    reduces their need to employ costly and difficult-to-recruit
          information technology personnel.

     Other services we offer in conjunction with EMS are as follows:

     -    EMS Connect. EMS Connect is a bundled solution delivering our most
          popular network services in a pre-designed format including DSL,
          dedicated long distance and frame relay service.

     -    EMS Telephony. EMS Telephony is a complete service offering of voice
          communications systems tailored to meet the needs of small and medium
          sized businesses.

     -    EMS Office. EMS Office is an offering that includes packaged voice and
          data desktop configurations, internet access, LAN and telephony
          servers offered at a flat rate based on the number of desktops.

     In addition, for customers that choose to own their internal network, we
provide leasing options to facilitate the purchase of their data and voice
systems. We use our existing credit arrangements, or obtain new credit
facilities, to provide lease alternatives to our customers. We believe that
these services enhance our ability to attract customers and act as their single-
source provider. We also believe that these services allow us to maintain
contact with customers and provide us with the opportunity to sell additional
systems and services to them.

 .    Professional Services. We design, install, manage, maintain and monitor
     networks and systems including local area networks, wide area networks and
     integrated IP-based networks, and assist our customers with adding and
     moving phone lines. The benefits to our customers include:

     .    A single point of contact for networking services;

     .    Improved reliability and quality of our customer's network through
          proactive trending analysis;

     .    Real-time, Web-based network performance reporting available 24 hours
          per day, 7 days a week; and

     .    Lower cost of network management through leveraging shared resources;

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 .    Broadband Services. Our Broadband Services include Internet access, frame
     relay (ATM and IP switching), long distance service, local telephone
     service and public phone service.

     .    Internet Access. We currently offer highspeed Internet access services
          in all of our markets through our EMS Connect service using
          interconnections with UUNet. Our network is connected to three primary
          Internet gateways located at Hearndon, Virginia, Santa Clara,
          California, and Chicago, Illinois.

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                                  Frame Relay
                                  -----------


Frame relay is a high-speed sevice which transports information in packets of
varying sizes.  Frame relay is a highly reliable digital service, efficient at
handling high-speed, "bursty" data over wide area network.
--------------------------------------------------------------------------------

     .    Transport Services. We are developing an ATM service in conjunction
          with our development and deployment of our national IP/ATM network. We
          also provide managed frame relay services to our customers allowing
          them to transmit data, voice and video traffic on a single digital
          facility. We are currently testing various types of digital subscriber
          line, or DSL, services with a leading provider. Once we select a
          primary provider of digital subscriber line services, we will begin
          providing those transport services to our customers.

--------------------------------------------------------------------------------
                                      DSL
                                      ---

Digital Subscriber Line (or DSL) enables high-speed local data transport over
the existing copper wire insfrastructure.
--------------------------------------------------------------------------------

     .    Long Distance Services. We provide resold inter-state and intra-state
          long distance services. We also provide enhanced services such as
          toll-free calling services and travel card services.

     .    Local Phone Services. We provide resold local phone services.

     Enterprise Systems

 .    Data Systems. We are a provider of systems from a large variety of
     suppliers needed to create data networks including routers, hubs, bridges,
     multiplexers, switches, servers, personal computers, and other equipment.
     We also market integrated IP-based private branch exchanges, or PBXs, and a
     broad range of other IP-based devices.

 .    Voice Systems. We are a provider of voice network systems such as private
     branch exchanges, key systems (smaller versions of PBXs), handsets, voice
     processing and messaging systems and call management software.

Sales and Marketing

     Since January 1, 1998, we have provided our systems or services to more
than 35,000 businesses, either directly or through businesses we have acquired.
As of December 31, 1999, we are selling all our data systems and services in 17
of our markets, voice systems and services in all of our markets and a full
suite of offerings, including EMS, in seven markets. We are developing
additional data, Internet and EMS expertise in the markets in which we do not
currently offer those systems and services. We anticipate being able to provide
all of our systems and services in an additional four of our markets by the end
of 2000, and in all of our existing markets by the second half of 2002.

     Our Sales Team. We sell our systems, services and solutions through our
staff of approximately 375 sales representatives and support and approximately
558 technicians in 49 offices in our 35 markets. Our sales force is supervised
by area and regional general managers, each of whom has responsibility for all
sales functions in one of our geographic regions. A significant portion of the
compensation of the sales force is tied to annual goal and quota programs with
incentive bonuses paid based on gross margin (rather than revenue) targets set
by us.

     Selling Our Enterprise Managed Services. We market our Enterprise Managed
Services to the upper level management of our current and potential customers as
a business solution rather than a technology solution. Our

                                       6
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sales teams seek to demonstrate to the business decision makers the quantifiable
benefits of not owning their inside communications systems and networks and
allowing us to own and manage the communications systems and networks inside
their premises. The analyses we use to accomplish this task include:

     .    Vendor Cost-Efficiency Analysis. A field audit of a customer's past
          communications bills for a variety of services from outside vendors
          identifies the total cost for these services, vendor billing errors,
          services billed but not provided, or services paid for but not
          utilized.

     .    Network Analysis. A physical audit of a customer's communications
          network assets quantifies the capital a customer has invested in their
          communications network and the costs associated with future upgrades
          to the customers network to meet their growing needs, and identifies
          design flaws in the customer's network.

     .    Resource and Skill Set Analysis. An audit of internal resources
          required to maintain the customer's communications system and network
          quantifies the labor costs and identifies the skill sets required to
          achieve the customer's stated business goals.

     .    Security Analysis. An audit of a customer's system and network
          determines the vulnerability of a customer's proprietary information
          to hackers and competitors.

     .    The Convergent Communications Solution. A custom-tailored proposal
          that presents our advanced communications solution to the customer's
          Internet, data and voice requirements.

As part of our solution, we conclude by providing a comparative "total cost of
ownership analysis." This analysis is an economic comparison of our solution to
the customer's current communications system and network and management
approach. The comparison includes the potential cash infusion the customer will
receive from the sale of its network assets to us and the potential reduction in
expenses associated with reducing personnel and outside vendor costs.

     Marketing. We use a variety of marketing programs and media to raise
awareness of our systems, services and solutions and to generate sales leads and
opportunities. In addition, sales leads often come from our existing satisfied
customers. Our programs include:

     .    advertising in newspapers, magazines and trade journals;

     .    advertising on radio;

     .    sending direct mail solicitations;

     .    conducting business seminars;

     .    participating in trade shows;

     .    cross selling systems and services to the more than 81,000 customers
          who have previously purchased voice systems or services from us or
          companies we have acquired; and

     .    creating alliances and lead referral agreements with key vendors and
          suppliers.

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Customers and Markets

     Our Customers. We have provided our systems and services to more than
35,000 customers since January 1, 1998, either directly or through businesses we
have acquired.

     Our Markets. We currently provide our systems and services in 35
metropolitan areas and we intend to expand into an additional 15 markets over
the next two years. Our existing markets are:

                              [MAP APPEARS HERE]


Customer Care and Operations Support

     Our Customer Care Staff. Our sales and customer support functions are
highly integrated. Our 180 customer care specialists are trained in all aspects
of the systems, services and solutions offered in their markets. Our integrated
approach allows us to pursue our goal of providing best-in-care service starting
with the initial customer contact and continuing throughout the life of the
account.


     Commitment to Superior Service. In order to provide superior service we:

     .    Act Immediately. Our employees are specialists who will begin
          troubleshooting immediately to resolve any problem and reach a
          conclusion during the initial contact. Our national customer care
          center provides additional around-the-clock support, 365 days a year
          and the seven regional customer care centers are staffed nine hours a
          day, five days a week to handle the anticipated workload.

     .    Provide a Single Point of Contact. Our customers can call a single
          toll-free number for assistance in solving most problems. Because our
          customer care teams are trained in the entire suite of communication
          systems and services we offer, they are able to assist customers in
          solving problems that may involve more than one system or service
          issue.

                                       8
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     Our Operational Support System.   Our operational support system is
designed to integrate all of our internal support services. This integration
will permit customer care, sales engineering, service management, service
delivery, accounting and inventory sales management personnel to access a single
customer record. Accordingly, a customer can get support for any of our systems
and services with one phone call. By providing comprehensive, real-time customer
information, this system is designed to enable our customer support
representatives to respond faster to inquiries, provide greater quality customer
care, and identify more opportunities to sell additional systems and services.

     We are in the process of adding additional functionality to our operational
support system, including improved order entry systems, dispatch and other
logistics functions, improved trouble ticket systems and contract management
features. These enhancements are designed to increase our efficiency in
supporting our existing voice product and service customers and to increase our
sales of data systems and services to them.

     National Network Operations Center.  Our national network operations center
provides customer support and proactive and fully redundant network monitoring
systems. These systems provide us the ability to monitor all types of network
and customer devices installed in the field including routers, hubs, servers,
switches, desktop computers, printers and other peripheral devices. For these
devices, our system provides:

     .    logical depictions of our customers' networks for quick isolation of
          trouble;

     .    graphical presentations of equipment locations by bay, shelf and card
          for quick identification;

     .    remote connection and testing capability; and

     .    network administration to manage bandwidth and configure and manage
          equipment.

Network Architecture

     Our DS3 nationwide network connects our Cisco powered next generation
multi-services switching platforms (NG-MSSP) which we call our Enterprise Points
of Presence, or ePOPs. This nationwide network carries our customers' voice,
video, data and Internet traffic using Internet Protocol (IP) and ATM
technology, unlike traditional switches, which are designed to transport only
specific types of data or voice services. Our NG-MSSP allows for customers to
connect to the network via multiple technologies including XDSL, Frame Relay,
ATM, IP, Private Line, and wireless at speeds ranging from 64k (DS0) up to DS3.
We lease fiber capacity from Level 3 Communications, MCI Worldcom and Williams
Communications and install our equipment at the connection points. Our NG-MSSP
network is connected to three regional Internet aggregation private peering
gateways located in Hearndon, VA, Chicago, IL, and Santa Clara, CA. These
gateways provide redundant connectivity to the Internet, improve throughput
speed, allow private and public connections over the same customer connection,
and provide connectivity to hosting facilities. We have 16 nationwide
operational ePOPs. We expect to have 32 operational ePOPs by the end of 2000.

     As of December 31, 1999, we had deployed 16 ePOPs with 8 additional ePOPs
under construction with estimated completion by July 2000. During the next 30
months, we intend to deploy 34 additional ePOPs, including the 8 currently under
construction. This switching architecture allows us to offer more functionality
at a substantially lower capital and operating cost than the combination of
traditional switches necessary to carry the same types of traffic. Our agreement
with Cisco also makes us a Cisco Powered Network Partner, which is a designation
that recognizes a select group of service providers who are committed to
providing high-performance reliable networking services. In addition, we have a
$103.5 million financing facility with Cisco Systems Capital Corporation to
finance the purchase and installation of ePOPs.

Acquisitions

     Since our inception, we have completed 18 acquisitions that have aided in
establishing our operations in 28 of our 35 markets and have added to our skills
and areas of expertise. We are expanding the product and service

                                       9
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offerings available to the acquired sales and field personnel, thereby creating
new sales opportunities. We expect to continue to make selective acquisitions to
expand our expertise and broaden our geographic coverage.

     The key factors we have and will continue to use in evaluating potential
acquisitions are:

     .    cross-selling and up-selling opportunities;

     .    size and quality of the acquired customer base;

     .    acceleration of our new market entry or expansion of existing markets;

     .    additions to our sales force and technical personnel;

     .    costs of acquisition; and

     .    historical and projected financial performance.

Market Environment

     Although several larger data and voice companies have entered or will enter
our market, we believe that we will be successful because:

     .    we have expertise in providing integrated data and voice systems,
          services and solutions specifically tailored to the needs of small and
          medium sized business;

     .    we provide broad product and service offerings with a suitable
          solution and price point for nearly every business in our target
          market;

     .    we have already established a sizeable customer base and a well
          trained technical staff;

     .    we are focused on providing extremely high quality customer service
          and technical support;

     .    we are willing to lease our network solutions to our customers; and

     .    we intend to continue to offer new systems, services and solutions to
          enable small and medium sized businesses to take advantage of leading
          technology.

     We expect that we will face growing competition from a number of systems
integrators, outsourcers, data technology companies and telecommunications
providers, among others. Although we do not believe that a significant number of
other companies are providing Enterprise Managed Services solutions or a
comparable range of data and telephony systems, services and solutions to small
and medium sized businesses, we do face intense competition in each of our
individual product and service offerings.

Regulatory Environment

     Overview. Some of our offerings are subject to federal and state
regulation. At the federal level, we are subject to the Communications Act of
1934 and the regulations of the Federal Communications Commission (FCC) to the
extent that we provide interstate and international telecommunications services.
At the state level, we are subject to state laws and the jurisdiction of the
state public utility commissions. The degree of regulation varies from state to
state.

     The regulation of telecommunications services at all levels is in flux in
the aftermath of the Telecommunications Act of 1996, which comprehensively
amended the Communications Act of 1934 to promote competition in all areas of
telecommunications. The Telecommunications Act of 1996 amendments eliminated

                                       10
<PAGE>

many legal barriers to competition in various telecommunications marketplaces
and set many of the basic terms governing the relationships between competing
telecommunications carriers, particularly in the provision of local telephone
service. The implementation of the Telecommunications Act of 1996 is ongoing. It
is the subject of numerous administrative proceedings both before the FCC and
the various state public utility commissions, and litigation in both the federal
and state courts. These proceedings could, to varying degrees, significantly
alter the regulatory landscape. We cannot predict the outcome of any of these
proceedings or whether they will adversely affect our business.

     Federal Regulation. Our interstate and international "telecommunications
services", like those of all carriers, are subject to the regulations of the
FCC. By contrast, our "information services" offerings, network design and
maintenance services, network management services, and web page development and
hosting services are not regulated. Also unregulated is the equipment that we
provide to our customers to use with our telecommunications services, although,
as discussed below, the FCC does require that equipment connected to the public
network meet certain technical standards.

     There is some ambiguity regarding the regulatory status of certain of our
services. While we regard those services as unregulated, to date there has been
no ruling on their status by the FCC. It is possible that the FCC will
ultimately rule that they are telecommunications services and therefore are
subject to regulation. For example, under the current regulatory structure, we
believe our national IP/ATM network is an information service, and therefore
exempt from regulation. However, the regulatory classification of voice
communications using IP or ATM technology is in a state of flux, and there is a
possibility that voice communications using IP or ATM technology will be subject
to regulation in the near future. A determination that these products are not
information services could make them significantly less competitive.

     The FCC has established different levels of regulation for dominant and
nondominant carriers. The regional Bell operating companies, GTE, and other
incumbent local exchange telephone companies are classified as dominant. All
other carriers, including us, are classified as nondominant. As a nondominant
carrier, we are subject to much less regulation than are the dominant carriers.
Among other things, the FCC does not regulate the rates that we charge for our
interstate and international services or require us to obtain authorization in
advance for the installation, acquisition or operation of our domestic network
facilities.

     The FCC has also decided that nondominant carriers should not file tariffs
setting forth their rates for interstate services. That ruling, however, has
been stayed pending the resolution of a court challenge. Until the stay is
lifted, we are required to file tariffs for our interstate services, including
resold long-distance, frame relay, and operator services. If and when the
decision not to require the filing of tariffs becomes effective, we could
benefit from the decrease in compliance costs and the elimination of delays in
getting new products to market.

     Regardless of our nondominant status, we must comply with the provisions of
the Communications Act of 1934 pertaining to common carriers. We are subject to
the general requirement that the rates, terms, and conditions of our services be
"just and reasonable" and we may not make any "unjust or unreasonable"
discrimination in our rates, terms, and conditions. The FCC has the authority to
enforce our compliance with these requirements.

     We offer some services that are subject to specific regulatory
requirements, including operator services and public phone service. With respect
to our operator services, we are required to disclose to callers that they may
obtain a rate quote before placing a call and must file informational tariffs
with the FCC containing detailed information about our rates. With respect to
our public phone services, the FCC requires us to post certain consumer
information at each public phone location.

     The FCC also requires that equipment that is connected to the public
switched telephone network will not harm the network. The systems we install
must meet the FCC's technical standards. While we are ultimately responsible for
ensuring that our equipment complies with federal network standards, as a
practical matter, the burden of compliance lies with our suppliers.

                                       11
<PAGE>

     While the FCC recently ruled that calls to the Internet are interstate
calls and thus subject to the FCC's jurisdiction, the FCC currently does not
regulate the Internet and has said that it will refrain from doing so in the
future. No assurances can be given, however, as to the degree of the FCC's
regulation of the Internet in the future, or its effect on our website hosting
and other Internet-related systems or services. Potential negative effects could
include the increased costs to comply with any regulations which are imposed and
delays in getting new products and services to market.

     In addition to regulating interstate and international telecommunications
services, the FCC also has a significant new role under the Telecommunications
Act of 1996 in overseeing the opening of the intrastate telecommunications
marketplace to competition. The FCC has issued an extensive framework of rules
governing the terms under which incumbent local exchange companies are required
to open their networks to competing providers. Among other things, the incumbent
local exchange companies must allow competitors to interconnect with their
networks and must make their retail services available to competitors at
wholesale rates for resale. We have taken advantage of these rules to enter the
local telecommunications marketplace by reselling incumbent local exchange
companies' services. Numerous parties have challenged various portions of the
resale regulations both before the FCC and in the courts, including the
discounts at which the local exchange companies must make their services
available to us for resale. If the discounts available to us are decreased as a
result of those challenges, it would affect our costs of providing local
telephone service.

     State Regulation. Some of our resold local and long-distance services are
classified as intrastate and therefore are subject to state regulation. In most
states in which we do business, we are required to obtain a certificate of
public convenience and necessity and operating authority for the sale of long
distance and local phone services. In addition, we are often required to file
tariffs setting forth the terms, conditions, and prices for services which are
classified as intrastate, particularly local exchange services.

     The state public utility commissions also must approve the agreements that
we enter into allowing us to purchase the retail services of the incumbent local
exchange carriers at a discount for resale.

     Our Regulatory Status. We are authorized by the FCC to provide resold
international services. We also have tariffs on file with the FCC for interstate
long distance services, frame relay services and operator services. At the state
level, we are authorized to provide intrastate long distance services in 47
states and are certified to provide local telephone services in 17 states.

Employees

     As of December 31, 1999, we had 1,559 full-time employees, none of whom are
represented by unions.

<TABLE>
<CAPTION>
                                                                     Number of
Job Description                                                      Employees
---------------                                                      ----------
<S>                                                                  <C>
   Sales Representatives and Sales Management..................           375
   Technical Staff.............................................           558
   Customer Care...............................................           180
   Information Technology......................................            49
   Support Services...........................................            397
                                                                        -----
                                                                        1,559
                                                                        =====
</TABLE>

     Employee Retention. We believe that our ability to implement our business
plan and continue to grow will depend in large part on our ability to continue
to attract and retain qualified employees. In addition to fixed base
compensation, employees at all levels participate in our incentive compensation
plan. All employees are eligible to receive cash bonuses, while management may
receive bonuses including both cash and shares of our common stock. In addition,
we offer a comprehensive benefits package including a 401(k) plan with a
discretionary company match of shares of our common stock, insurance, cafeteria
plan, tuition reimbursement, and, for upper management, a deferred compensation
plan.

                                       12
<PAGE>

Item 2.   Properties

     We lease sales and support facilities in each of our markets. Our principal
corporate and support facilities are also leased, and are as follows:

<TABLE>
<CAPTION>
Location                     Size (sq. ft)  Lease Expiration         Use of Facility
--------                     -------------  ----------------         ---------------
<S>                          <C>            <C>                      <C>
Englewood, Colorado             28,488       April 30, 2003          Headquarters and support services

Englewood, Colorado             68,566       February 28, 2002       Information systems, information technology
                                                                     and other support services
Englewood, Colorado             16,700       November 30, 2000       National Operations Center and Denver
                                                                     Operations
</TABLE>

Item 3.   Legal Proceedings

     We are involved in legal proceedings from time to time, none of which we
believe, if decided adversely to us, would have a material adverse effect on our
business, financial condition or results of operations.

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

This item is inapplicable.

                                       13
<PAGE>

                                    PART II

Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters.

     Our common stock is quoted on The Nasdaq National Market under the symbol
"CONV."  Trading in our common stock began on July 19, 1999.  The following
table sets forth the high and low intra-day sales prices per share of our common
stock as reported on The Nasdaq National Market based on published financial
sources, for the periods indicated:

<TABLE>
<CAPTION>
     Period                High           Low
     ------                ----           ---
<S>                     <C>            <C>

1998
  First Quarter             n/a           n/a
  Second Quarter            n/a           n/a
  Third Quarter             n/a           n/a
  Fourth Quarter            n/a           n/a

1999
  First Quarter             n/a           n/a
  Second Quarter            n/a           n/a
  Third Quarter          $28,000        $8,500
  Fourth Quarter         $18,750        $8,563
</TABLE>

     As of March 20, 2000, there were 28,932,281 shares of our common stock
issued and outstanding held by approximately 6,000 shareholders of record.

     We have never paid cash dividends on our common stock. We currently intend
to retain future earnings, if any, to fund the development and growth of our
business. Therefore, we do not currently anticipate paying any cash dividends in
the foreseeable future. In addition, the terms of the indenture governing our
13% Series B Senior Notes due 2008 contain restrictions on our ability to pay
dividends or other distributions.

                                       14
<PAGE>

     The following tables summarize all equity securities issued or sold by us
during the fiscal year ended December 31, 1999 that were not sold pursuant to
registered offerings:

<TABLE>
<CAPTION>
                             Underwriters or Class of      Number of                                               Exemption
        Date                       Purchasers               Shares               Consideration ($)                  Claimed
-----------------            ------------------------      ---------      ----------------------------------      ------------
<S>                          <C>                           <C>            <C>                                     <C>
Feb. 12, 1999 and            Sellers in an acquisition         24,925     Substantially all of the assets of      Section 4(2)
 May 26, 1999........                                                     the target company
Mar. 31, 1999                Employee options                  48,250     $193,500                                 Rule 701
 through Aug. 2,
 1999 ...............
Apr. 19, 1999........        Sellers in an acquisition         37,000     100% equity interest in the target      Section 4(2)
                                                                          company
Apr. 23, 1999 and            Employees                         93,547     Deferred compensation plan payment      Section 4(2)
 May 7, 1999.........
Apr 23, 1999 through         Warrant Exercises              2,285,040     $13,130,195                             Section 4(2)
 Dec. 21, 1999.......
Jul. 19, 1999........        Series A Preferred Stock       2,666,677     Conversion of previously issued         Section 4(2)
                             Conversion                                   securities.  No additional
                                                                          consideration received.
Aug. 3, 1999.........        Employee options                  30,552     $54,800                                 Section 4(2)
Aug. 4, 1999.........        Employees                         27,500     Services performed                      Section 4(2)
Sep. 10, 1999........        Sellers in an acquisition          2,500     Additional consideration for purchase   Section 4(2)
                                                                          pursuant to earn-out provisions
Sep. 23, 1999........        Sellers in an acquisition         40,771     100% equity interest in the target      Section 4(2)
                                                                          company
Oct. 19, 1999........        Employees                          5,498     Incentive compensation plan payment     Section 4(2)
Oct. 29, 1999........        Sellers in an acquisition        217,671     100% equity interest in the target      Section 4(2)
                                                                          company
Nov. 30, 1999........        Sellers in an acquisition         84,165     Substantially all of the assets of      Section 4(2)
                                                                          the target company
Warrants

Mar. 17, 1999 and            Series A Preferred Stock         958,334     Additional consideration for Series A   Section 4(2)
 Mar. 31, 1999.......        holders                                      Preferred Stock purchase
Mar. 21, 1999........        Credit facility provider         200,000     Increase in credit facility             Section 4(2)
Jun. 3, 1999.........        Credit facility provider         375,000     $20 million credit facility             Section 4(2)
Jul. 16, 1999........        Credti facility provider         575,000     $105 million credit facility            Section 4(2)


Series A Preferred Stock

Mar. 17, 1999 and
Mar. 31, 1999........        Accredited investors             800,000     $20,000,000                             Section 4(2)
</TABLE>

                                       15
<PAGE>

Item 6.   Selected Financial Data

     The following selected financial data should be read along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and accompanying notes all
of which appear later in this Form 10-K. The selected financial data have been
derived from our consolidated financial statements and the financial statements
of our predecessor, which have been audited by PricewaterhouseCoopers LLP,
independent accountants. On December 17, 1996, we acquired Integrated
Communication Networks, L.C., which is referred to as the "predecessor" for the
period prior to the acquisition. Convergent Communications, since March 1, 1996,
together with Integrated Communication Networks, L.C., since December 17, 1996,
is referred to as the "successor." Share and per share information is not
presented for the predecessor as they are not relevant due to the predecessor's
different capital structure.

in thousands, except per share amounts

<TABLE>
<CAPTION>
                                      PREDECESSOR                                             SUCCESSOR
                             -------------------------------         ---------------------------------------------------------------
                                                 January 1,           March 1,
                             For the Year           1996                1996         For the Year       For the Year   For the Year
                                Ended             through             through          Ended              Ended          Ended
                             December 31,        December 16,        December 31,    December 31,        December 31,   December 31,
                                1995                1996                1996            1997                1998           1999
                            -------------        ------------        ------------    ------------       -------------  ------------
<S>                          <C>                 <C>                 <C>             <C>                <C>            <C>
Operating Statement Data:

Revenue.....................  $1,434              $1,496              $   98         $ 10,210            $ 61,600       $ 159,922

Cost of sales excluding
 depreciation...............     964               1,018                  79            7,368              43,703         104,045
Selling, general and
 administrative.............     405                 554                 552           10,983              47,862         125,350
Depreciation and
 amortization...............     127                 124                  41            1,453               7,493          17,295
Impairment of long-lived
 assets.....................      --                  --                  --               --                  --             650
                              ------              ------              ------         --------            --------       ---------
 Total operating expenses...   1,496               1,696                 672           19,804              99,058         247,340
 Operating loss.............     (62)               (200)               (574)          (9,594)            (37,458)        (87,418)
Interest expense............     (17)                (21)                 (1)            (156)            (17,502)        (25,491)
Interest income.............      --                  --                  --              251               4,632           4,880
Other expense, net..........      --                  --                  --             (156)               (248)           (231)
                              ------              ------              ------         --------            --------       ---------
Net loss....................     (79)             $ (221)             $ (575)        $ (9,655)           $(50,576)      $(108,260)
                              ======              ======              ======         ========            ========       =========

Net loss per share (basic
 and diluted)...............                                          $(0.15)        $  (0.92)           $  (3.68)      $   (5.32)
Weighted average shares
 outstanding (basic and
 diluted)...................                                           3,887           10,461              13,732          20,356

Other Operating Data:
Net cash provided by (used
 in) operating activities...      60              $  (31)             $ (242)        $ (6,698)           $(28,698)      $ (97,355)

Net cash used in investing
 activities.................      (8)                (36)             (1,446)         (11,648)            (94,647)        (61,143)
Net cash provided by (used
 in) financing activities...     (61)                 91               4,849           15,852             148,274         158,116

EBITDA(1)...................      65                 (76)               (534)          (8,141)            (29,965)        (69,473)
</TABLE>
---------------
(1)  As used in this report, EBITDA consists of earnings before interest (net),
     income taxes, depreciation and amortization, impairment of long-lived
     assets and other income (expense). EBITDA is a measure commonly used to
     analyze companies on the basis of operating performance. It is not a
     measure of financial performance under GAAP and should not be considered as
     an alternative to net income (loss) as a measure of performance or as an
     alternative to cash flow as a measure of liquidity. Our measure of EBITDA
     may not be comparable to similarly titled measures used by other companies.

                                       16
<PAGE>

Item 6.   Selected Financial Data-(Continued)

in thousands

<TABLE>
<CAPTION>
                                             PREDECESSOR                                    SUCCESSOR
                                            -------------       --------------------------------------------------------------------
                                                As of             As of                As of               As of           As of
                                             December 31,       December 31,        December 31,        December 31,    December 31,
                                                1995              1996                 1997                1998            1999
                                            -------------       --------------------------------------------------------------------
<S>                                         <C>                 <C>                 <C>                 <C>             <C>
Balance Sheet:
Cash, cash equivalents and short-term
 investments................................    $ 13               $3,161            $ 8,039             $ 25,597        $ 59,957
Restricted cash.............................      --                   --                406               51,350          38,469
Working capital.............................     (10)               1,890              5,334               28,500          76,975
Goodwill, net...............................     228                3,201              6,393               46,526          56,037
Total assets................................     797                9,887             24,922              185,656         295,213
Total debt..................................     440                1,456              1,933              168,268         205,474
Total liabilities  .........................     580                1,902              6,194              207,005         258,593
Shareholders' equity (deficit)..............     217                7,985             18,728              (21,349)         36,620
</TABLE>
-------------

                                       17
<PAGE>

Item 7.   Management's Discussion and Analysis of Financial Condition and
          Results of Operation

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

     The following discussion should be read along with the consolidated
financial statements and the accompanying notes included later in this Form 10-
K. This discussion includes forward-looking statements and is based on current
expectations which involve risks and uncertainties. Because of the uncertainty
of many factors, what actually occurs in the future may be very different from
what we project in our forward-looking statements.

Overview

     We are a rapidly growing national provider of e-Sourcing solutions
primarily to businesses with 25 to 500 employees. "e-Sourcing" is the management
of communications solutions that allow businesses to leverage technology,
systems and networking resources such as broadband Internet Protocol based
applications. Inside our customers' premises we own communications networks and
provide professional services, such as the design, installation, management and
monitoring of those networks. Outside our customers' premises, we provide a full
range of data and voice transport services. By operating networks both inside
and outside our customers' premises, and by offering a broad range of Internet,
data and voice systems and services, we enable small and medium sized businesses
to use state-of-the-art communications solutions, including data and voice
networks based on broadband Internet Protocol, electronic commerce, the Internet
and sophisticated communications systems. We intend to become the leading
provider of IP-based Internet, data and voice systems and services to small and
medium sized businesses.

     We were first capitalized in March 1996. Since that time, we have
successfully raised $338.9 million in capital, including $450,000 in founders'
capital, $24.0 million in two private placements of common stock in 1996 and
1997 (including an additional $450,000 from the founders), $160.0 million
through the 1998 sale of our 13% Senior Notes and related warrants, $20.0
million in a 1999 sale of our convertible preferred stock and warrants to
affiliates of Sandler Capital Group and $134.1 million in our Initial Public
Offering in July 1999. We also have borrowing capacity under our existing
Comdisco equipment lease facility of $30.0 million.

     In the last three years, we completed 18 strategic acquisitions, the most
significant of which was the 1998 acquisition of substantially all of the assets
of Tie Communications at a cost of approximately $51.4 million. With the
acquisition of these assets, we accelerated our growth by adding 24 new markets
and 452 employees with experience in voice systems and services. This
acquisition also gave us the opportunity to cross-market our data systems and
services, including Enterprise Managed Services, to customers that purchased
systems or services from Tie in the past.

     We began offering Enterprise Managed Services in December 1997 and, as of
December 1999, had entered into long-term Enterprise Managed Services contracts
with 64 customers with an aggregate of approximately 3,246 computers and
telephones. We expect these contracts to provide us with approximately $9.1
million in annual contract revenue, and over their terms we expect them to
produce total revenue of approximately $46.4 million.

                                       18
<PAGE>

Description of Financial Components

     We classify our business into three segments: eBusiness, Enterprise
Services and Enterprise Systems.

     Revenue and cost of sales.   The following chart outlines the components of
revenue and the related cost of sales excluding depreciation, by segment:

<TABLE>
<S>                                                  <C>
Revenue:                                                 Cost of Sales (excluding depreciation):
e Business
 . web design and hosting                              .  engineer and technician compensation and benefits
 .  eCommerce
 .  intranet and extranet development

                         -------------------------------------------------
Enterprise Services
Professional Services                                 .  engineer and technician compensation and benefits
 .  network planning, design, maintenance,
   and monitoring

  Broadband Services                                  .  leased line facilities' costs of connecting a
 .  frame relay (ATM and IP switching),                   customer's to  long distance or local network
   Internet access, long distance service,            .  capacity charges that long distance and local carriers,
   local telephone service and public phone              Internet service providers and others impose to use their
   service                                               equipment and network

Managed Services                                      .  all the costs associated with all the data and voice
 .  long-term contracts (typically three to five          systems and services described in this table
   years) under which we own, manage and are
   responsible for all or a portion of the
   network inside our customers' premises

                         -------------------------------------------------

Enterprise Systems
 .  sale and installation of data, voice and video     .  cost of data, voice and video network systems
   network systems
                                                      .  costs of installation, including technician
                                                         compensation and benefits
</TABLE>

                                       19
<PAGE>

     Selling, general and administrative expenses have increased significantly
and will continue to increase as we recruit additional management and support
personnel necessary for continued growth. However, we expect these expenses to
decline as a percentage of our revenue as we expand our customer base and begin
selling additional systems and services in each of our markets.

     .    Sales and marketing expenses include commissions paid in connection
          with our sales programs, marketing salaries and benefits, travel
          expenses, trade show expenses, consulting fees and promotional costs.
          Also included are the costs of soliciting potential customers such as
          telemarketing, brochures, targeted advertising and promotional
          campaigns. We expect these expenses to increase as we add additional
          sales and marketing personnel and further implement our business plan.

     .    General and administrative expenses primarily consist of salaries and
          related expenses of management and support services personnel,
          occupancy fees, professional fees and general corporate and
          administrative expenses. We also include costs associated with the
          development, support and expected enhancements of our operational
          support software platform, to the extent these costs are not
          capitalized.

     Depreciation and amortization expense includes depreciation of property,
network and equipment (over two to five years), including our assets located
inside our customers' premises provided under Enterprise Managed Services
contracts. Amortization expense includes the amortization of intangible assets
(over three to ten years), primarily goodwill (over ten years), that resulted
from business acquisitions. We had 56.0 million of goodwill, net of
amortization, on December 31, 1999. Depreciation and amortization will increase
as we install additional ePOP switching platforms and expand our Enterprise
Managed Services business and as a result of increased amortization of
intangibles expected to result from future acquisitions.

     Interest expense includes interest expense on our short-term and long-term
debt, including capital leases. The majority of the interest expense is related
to our 13% Senior Notes which mature in 2008. Interest expense will increase as
we continue to finance a significant portion of our capital expenditures,
including our purchase of Cisco Systems Inc.'s multi-service, data and voice
switches and additional Cisco Systems, Inc. equipment under our $103.5 million
equipment facility with Cisco Systems Capital Corporation.

                                       20
<PAGE>

Results of Operations

     Management evaluates and makes operating decisions about each of our
operating segments based on a number of factors. Two of the more significant
factors we use in evaluating operating performance are: revenue and gross margin
before depreciation. We do not account for assets by business segment. As a
result, depreciation and amortization are not factors used by management in
evaluating the operating performance of our segments.

     The percentages shown in the following table with respect to revenue
represent revenue for each business segment as a percentage of total revenue.
Percentages with respect to cost of sales excluding depreciation and gross
margin before depreciation are a percentage of revenue for the related segment.

<TABLE>
<CAPTION>
                                                                                    Years Ended December 31,
                                                              -----------------------------------------------------------------
                                                                     1997                   1998                   1999
                                                              ------------------     ------------------     -------------------
                                                                                   (dollars in thousands)
<S>                                                           <C>         <C>       <C>            <C>      <C>          <C>
Revenue:
 eBusiness................................................     $     -        -%     $     -          -%     $  1,742       1%
 Enterprise Services......................................       2,795       27       27,922         45        64,806      41
 Enterprise Systems.......................................       7,415       73       33,678         55        93,374      58
                                                               -------      ---      -------        ---      --------     ---
  Total revenue...........................................      10,210      100       61,600        100       159,922     100
                                                               -------      ---      -------        ---      --------     ---
Cost of sales excluding depreciation:
 eBusiness................................................           -        -            -          -           720      41
 Enterprise Services......................................       1,278       46       15,587         56        32,827      51
 Enterprise Systems.......................................       6,090       82       28,116         84        70,498      76
                                                               -------      ---      -------        ---      --------     ---
  Total cost of sales excluding depreciation..............       7,368       72       43,703         71       104,045      65
                                                               -------      ---      -------        ---      --------     ---
Gross margin before depreciation:
 eBusiness................................................           -        -            -          -         1,022      59
 Enterprise Services......................................       1,517       54       12,335         44        31,979      49
 Enterprise Systems.......................................       1,325       18        5,562         17        22,876      25
                                                               -------      ---      -------        ---      --------     ---
  Total gross margin before depreciation..................     $ 2,842       28%     $17,897         29%     $ 55,877      35%
                                                               =======               =======                 ========
</TABLE>

Summary Quarterly Financial Data

     The table below presents unaudited quarterly statement of operations data
for each of the last eight quarters through December 31, 1999. This information
has been derived from unaudited financial statements that have been prepared on
the same basis as the audited financial statements contained elsewhere in this
Form 10-K and, in our opinion, includes all adjustments, consisting only of
normal recurring adjustments, that are necessary for a fair presentation of the
information. You should read these unaudited quarterly results along with our
consolidated financial statements and the accompanying notes appearing later in
this Form 10-K. The operating results for any quarter are not necessarily
indicative of results for any future periods.

<TABLE>
<CAPTION>
                                                               1998                                      1999
                                          ------------------------------------------  ------------------------------------------
                                             1st    2nd        3rd(1)     4th          1st        2nd         3rd          4th
                                          --------------------------------------------------------------------------------------
                                                                     (in thousands, except per share amounts)
<S>                                       <C>       <C>        <C>        <C>        <C>        <C>         <C>         <C>
Quarterly Operating Data:
Revenue................................    $ 6,523   $  7,982   $ 22,316   $ 24,779   $ 31,709   $ 38,053   $ 42,422    $ 47,738
Cost of sales excluding depreciation...      4,798      5,772     14,717     18,416     20,743     23,714     26,977      32,610
Selling, general and administrative....      6,062      7,710     15,507     18,583     23,337     27,411     31,927      42,675
Depreciation and amortization..........        762      1,191      2,646      2,894      2,863      4,107      4,872       5,453
Impairment of long-lived assets........          -          -          -                     -          -          -         650
                                          --------------------------------------------------------------------------------------
 Operating loss........................     (5,099)    (6,691)   (10,554)   (15,114)   (15,234)   (17,179)   (21,355)    (33,650)
Net loss...............................    $(5,111)  $(11,169)  $(15,355)  $(18,941)  $(20,129)  $(22,960)  $(26,358)   $(38,813)
                                          ======================================================================================
EBITDA(2)..............................    $(4,337)  $ (5,500)  $ (7,908)  $(12,220)  $(12,372)  $(13,071)  $(16,483)   $(27,547)
                                          ======================================================================================

</TABLE>
---
(1)  On August 1, 1998, we completed our largest acquisition to date when we
     acquired substantially all of the assets of Tie Communications, Inc. for
     $51.4 million, including $40.0 million in cash plus other costs and assumed
     liabilities.

                                       21
<PAGE>

(2)  As used in this report, EBITDA consists of earnings before interest (net),
     income taxes, depreciation and amortization, impairment of long-lived
     assets and other income (expense). EBITDA is a measure commonly used to
     analyze companies on the basis of operating performance. It is not a
     measure of financial performance under GAAP and should not be considered as
     an alternative to net income (loss) as a measure of performance or as an
     alternative to cash flow as a measure of liquidity. Our measure of EBITDA
     may not be comparable to similarly titled measures used by other companies.

We have generated greater revenue in each successive quarter since our
inception, reflecting increases in the number of customers, mainly due to
acquisitions, and in sales to existing customers. Cost of sales excluding
depreciation has increased in every quarter, reflecting product and service
costs directly associated with revenue. Our selling, general and administrative
expenses have increased in every quarter and reflect sales and marketing costs
such as sales commissions, and the development and growth of regional and
corporate support staff. Depreciation and amortization has increased in each
quarter through December 31, 1999. The increases in depreciation are due to the
purchase of property, network and equipment inside and outside our customers'
premises associated with our expansion to 35 markets as of December 31, 1999,
and due to the deployment of our multi-service data and voice switching platform
in 16 markets. The increases in amortization are due to the increase in goodwill
and other intangible assets resulting from the completion of 18 acquisitions
through December 31, 1999. We have also experienced increasing operating, EBITDA
and net losses every quarter.

Year Ended December 31, 1998 Compared to the Year Ended December 31, 1999

Revenue for 1999 was approximately $159.9 million, $98.3 million greater than
revenue for 1998. The increase in revenue was a result of both acquisitions and
internal growth. We completed six acquisitions during 1999, one
telecommunications equipment provider and integrator and five data network
integration services providers. The increase in revenue was also largely due to
our growing operations and sales staff having pursued the cross selling
opportunities presented in new markets. The majority of the increase in revenue
was attributable to the enterprise systems segment of our business, which
increased $59.7 million while enterprise services increased $36.9 million. The
majority of the increase in enterprise systems revenue was from sales of voice
communications systems which is attributable to the influence of the sales force
obtained through the Tie acquisition which was a voice equipment provider and
long-distance reseller acquired in the third quarter of 1998. The increase in
enterprise services revenue consisted of increases of $29.8 million in
professional services, $4.1 million in broadband services and $3.0 million in
Enterprise Managed Services. Also, during 1999 we implemented a new segment,
eBusiness Solutions, which accounted for the remaining $1.7 million of the
increase in revenue for 1999.

A significant factor in our strategy to increase recurring enterprise services
revenue is through our Enterprise Managed Services offering. While revenue from
Enterprise Managed Services contributed $2.9 million to the increase in revenue
for 1999, contract value increased from $14.6 million as of December 31, 1998 to
$46.4 million as of December 31, 1999. This represents an increase in customers
from 18 at the end of 1998 to 64 at the end of 1999.

Cost of sales excluding depreciation increased $60.3 million from 1998 to 1999,
while declining as a percentage of total revenue from 71% for the year ended
December 31, 1998 to 65% for the year ended December 31, 1999. This decline as a
percentage of total revenue is a reflection of the decline in cost of sales
excluding depreciation for both systems and services. Cost of enterprises
systems sales excluding depreciation declined 8.0% as a percentage of enterprise
systems revenue, from 84% for 1998 to 76% for 1999. This decrease as a
percentage of product revenue is due to an increase in sales of voice systems,
which have a lower related cost of sales excluding depreciation than data
systems. Cost of enterprise services sales, as a percentage of enterprises
services revenue, decreased from 56% for 1998 to 51% for 1999. The decrease in
cost of service sales as a percentage of service revenue was primarily due to an
increase in our offering of professional services such as network and Web
design, maintenance and monitoring and Enterprise Managed Services, which have a
lower related cost.

Selling, general and administrative expenses increased $77.5 million from 1998
to 1999. This increase in selling, general and administrative expenses is
largely due to continued growth of the support services organization required to
support expanding field operations, which accounted for approximately $59.9
million or 48% of total selling, general and administrative expenses for the
year ended December 31, 1999. Salary and benefit related expenses increased
$53.5 million, as a result of adding 682 employees between December 31, 1998 and
December 31, 1999,

                                       22
<PAGE>

and as a result of having a full year of expenses related to the 452 employees
obtained through the Tie acquisition compared to five months of Tie related
expenses in 1998. The increase in expense is also a result of the six business
combinations completed during 1999. Selling, general and administrative expenses
remained constant as a percentage of revenue at 78% for both 1998 and 1999. We
expect selling, general and administrative expenses to decrease as a percentage
of revenue as we limit the growth of our corporate support services organization
and continue to expand our customer base and sell additional systems and
services in all of our markets.

Depreciation and amortization expense increased approximately $9.8 million from
1998 to 1999. The increase is a direct result of an increase of $49.3 million in
property, network and equipment and $15.1 million in goodwill. Other intangible
assets increased $2.8 million. As of December 31, 1999 we had $56.0 million in
goodwill, net of amortization, which is being amortized over ten years. The
increase in property, network and equipment is largely due to:

     .    the addition and expansion of new and existing markets;

     .    the completion of six acquisitions;

     .    the development and deployment of 16 of our multi-functional,
          integrated data and voice switching platforms;

     .    continued development of our operational support system;

     .    the increase in assets managed under Enterprise Managed Services
          contracts; and

     .    office equipment and furniture related to the growth of our support
          services organization.

Impairment of long-lived assets resulted from the writeoff of certain of our
operating systems which are no longer being utilized.

Interest expense increased by approximately $8.0 million from 1998 to 1999. The
increase is primarily a result of a full year of interest expense in 1999
compared to nine months of interest in 1998 on $160.0 million in principal
amount of our 13% Senior Notes issued in April 1998. The increase is also a
result of:

     .    assumed indebtedness from acquisitions;

     .    increased indebtedness under our equipment financing facilities with
          Comdisco and GATX Capital;

     .    indebtedness under the Goldman Sachs Credit Partners L.P. senior
          secured credit facility;

     .    indebtedness incurred under the financing facility with Cisco Systems
          Capital Corporation; and

     .    indebtedess for proceeds received in discounted long-term receivables
          transactions.

We expect that interest expense will increase as we continue to finance a
significant portion of our capital expenditures, including equipment purchased
for installation at our customers' offices in connection with the provision of
Enterprise Managed Services and equipment purchased under our $103.5 million
equipment facility with Cisco Systems Capital Corporation.

Interest income increased approximately $248,000 from 1998 to 1999. The
increase in interest income is due to earnings on the remaining proceeds from
the $160.0 million in principal amount of our 13% Senior Notes issued in April
1998, proceeds from the sale of convertible preferred stock in March 1999, a
$10.0 million credit facility entered into in June 1999 and net proceeds of
approximately $122.3 million from our initial public offering in July 1999
compared to interest income on the proceeds of the $160.0 million in principal
amount of our 13% Senior Notes in 1998.

                                       23
<PAGE>

Other income (expense), net which consists of miscellaneous other non-operating
types of income and expenses, changed slightly from net other expense of
approximately $248,000 in 1998 to net other expense of approximately $231,000 in
1999. Net other expense for 1999 is primarily due to a loss recognized on the
termination of a stock purchase agreement and sale of an investment.

                                       24
<PAGE>

Year Ended December 31, 1997 Compared to the Year Ended December 31, 1998

     Revenue increased by $51.4 million in 1998, to approximately six times 1997
     revenue. The increase in revenue was primarily due to our expansion from
     eight markets at December 31, 1997 to 32 markets at December 31, 1998, as a
     result of the six acquisitions we completed during the year. The increase
     in revenue was also due to internal growth of our operations and sales
     staff. The most significant acquisition was the acquisition of the assets
     of Tie, which occurred in the third quarter of 1998. The Tie acquisition
     contributed most of the sizable increase in enterprise systems revenue and
     an even greater increase in enterprise services revenue. The balance of the
     growth in enterprise systems revenue was primarily a result of the
     development and growth of existing markets and a full year of operations in
     1998 compared to a partial year of operations in 1997 for those markets we
     entered in late 1997. As a result of the Tie acquisition and our strategy
     to increase our service offerings, our overall revenue mix shifted from
     approximately 27% in services in 1997, to 45% in services in 1998.

     Cost of sales excluding depreciation increased $36.3 million from 1997 to
     1998. While it declined slightly as a percentage of total revenue from 72%
     in 1997 to 71% in 1998, cost of enterprise services sales as a percentage
     of enterprise services revenue increased from 46% in 1997 to 56% in 1998.
     The increase as a percentage of enterprise services revenue was primarily
     due to a shift in service mix to services such as long-distance which have
     a higher related cost of sales. Cost of enterprise systems sales excluding
     depreciation, as a percentage of enterprise systems revenue, remained
     relatively constant, increasing from 82% in 1997 to 84% in 1998.

     Selling, general and administrative expenses increased $36.9 million from
     1997 to 1998, but decreased as a percentage of revenue from 108% in 1997 to
     78% in 1998. However, we expect selling general and administrative expenses
     to increase as a percentage of revenue over the short term as we incur
     costs associated with the aligning of our operations to capitalize on our
     eBusiness Solutions and IP-based (Internet Protocol) infrastructure areas
     of our business and also the growth of our support services organization
     required to support expanding field operations.

     The $36.9 million increase was primarily a result of:

          .    the expansion from eight to 32 markets;

          .    the completion of six acquisitions, including the assets of Tie;

          .    an increase from 165 employees at December 31, 1997 to 877 at
               December 31, 1998 (452 of which were hired as a result of the Tie
               acquisition); and

          .    continued growth of the support services organization required
               for expanding field operations, which accounted for approximately
               $20.2 million or 42% of total selling, general and administrative
               expenses for 1998.

     Depreciation and amortization expense increased approximately $6.0 million
     from 1997 to 1998. This increase was a direct result of an increase of
     $22.7 million in property, network and equipment from 1997 to 1998 and an
     increase in goodwill (before 1998 amortization) of $42.6 million and other
     intangible assets of $1.7 million as a result of the six acquisitions
     completed in 1998. As of December 31, 1998 we had $46.5 million in
     goodwill, net of amortization, which will be amortized over the next ten
     years. The increase in property, network and equipment is largely due to:

          .    the expansion from eight to 32 markets;

          .    the development and deployment of our multi-service data and
               voice switching platform in three markets;

          .    continued development of our operational support system;

          .    the increase in assets managed under Enterprise Managed Services
               contracts; and

                                       25
<PAGE>

          .    office equipment and furniture related to the growth of our
               support services organization.

     Interest expense increased by approximately $17.3 million as a result of
     the April 1998 issuance of our 13% Senior Notes, which consisted of $160
     million in principal amount of promissory notes and warrants to purchase
     864,000 shares of common stock. Approximately $1.2 million of this increase
     relates to accretion of the debt discount resulting from the value assigned
     to the warrants and amortization of debt issuance costs, neither of which
     are cash expenses. Interest expense also increased as a result of assumed
     indebtedness from acquisitions, as well as increased indebtedness under our
     equipment financing facilities with Comdisco and Sun Financial Group, Inc.
     due to property, network and equipment purchased for our networks both
     inside and outside our customers' premises.

     Interest income increased approximately $4.4 million as a result of the
     temporary investment of the proceeds of the offering of our 13% Senior
     Notes, prior to the use of these proceeds in our business.

     Other expense (net) increased by approximately $92,000 and primarily
     consisted of losses on disposal of assets and miscellaneous other non-
     operating types of expenses.

Liquidity and Capital Resources

     Since inception, in addition to borrowings under our credit facilities we
     have funded our net losses and capital expenditures through financing
     activities as outlined in the following table. In the table below, net
     proceeds equals the gross proceeds of the offering less advisors' fees,
     underwriting discounts and other expenses associated with the offering.

<TABLE>
<CAPTION>
                                                                                     Gross           Net
Securities Sold                                                                     Proceeds       Proceeds
-----------------------------------------------------------------------------       --------       --------
                                                                                         (in thousands)
<S>                                                                                 <C>            <C>
 Initial sale of 3,750 shares of common stock to founders
  (April through October 1996)...............................................        $    450       $    450
 3,500 shares of common stock and 1,750 warrants
  (December 1996 through February 1997)......................................           7,000          6,296
 3,410 shares of common stock and 1,705 warrants
  (October through November 1997)............................................          17,050         15,340
 13% Senior Notes and 864 warrants (April 1998)..............................         160,000        152,378
 Sale of 800 shares of Series A Convertible Preferred Stock and
  958 warrants (March 1999)..................................................          20,000         19,300
 Initial Public Offering of 8,937 shares of common stock (July 1999).........         134,051        122,281
                                                                                     --------       --------
  Total funds raised.........................................................        $338,551       $316,045
                                                                                     ========       ========
</TABLE>

     Our principal uses of cash are to fund working capital requirements,
capital expenditures, business acquisitions, operating losses and interest
expenses. We expect that our expansion will require additional capital
expenditures and direct operating costs and expenses. As a result, we expect to
incur net losses for at least the next 36 months. However, if our customer base
grows and we are successful in offering all of our data services and systems, we
believe revenue will increase in larger proportion than operating expenses.

     As of December 31, 1999, we had current assets of $141.4 million,
including cash, cash equivalents and short-term investments of $60.0 million and
restricted cash of $20.8 million, and working capital of $77.0 million. In
addition, we also had $17.7 million in non-current restricted cash. The majority
of our restricted cash, along with the interest we earn on this cash, will be
used to make the interest payments through April 2001 on our 13% Senior Notes.
We invest excess funds in short-term investments until these funds are needed
for debt payments, capital investments, acquisitions and operations of the
business.

                                       26
<PAGE>

Cash Flows From Operating Activities. Operating activities used cash of
approximately $97.4 million during 1999, $28.7 million during 1998 and $6.7
million during 1997. Cash used in operating activities in 1999 was primarily due
to the net loss of $108.3 million, an increase in trade accounts receivable and
other current asset categories of $23.2 million and a decrease in other accrued
liabilities of $3.0 million. These uses of cash were partially offset by $27.3
million in non-cash expenses such as depreciation and amortization and stock
compensation and an increase in trade payables and accrued compensation of $9.7
million. While cash used in operating activities as a percentage of revenue
declined from 66% in 1997 to 47% in 1998, the percentage, as a percentage of
revenue increased in 1999 to 61%. The primary reason for this increase is due to
our vendor credit lines not increasing adequately to support the significant
increase in our purchasing activity. The strengthening of our liquidity
position, as a result of the expected proceeds from the sales of our preferred
stock and borrowing under the $50.0 million credit facility ( see "Cash Flow
From Financing Activities" and "Future Capital Requirements" below), should
allow us to negotiate better credit terms with our vendors.

     The majority of the increase from 1997 to 1998 was due to an increase in
trade accounts receivable of approximately $11.0 million and a $40.9 million
increase in the operating loss, which were partially offset by an increase in
trade accounts payable of approximately $12.4 million, an increase of $5.2
million of accrued interest expense, and non-cash expenses such as depreciation
and amortization and other changes in working capital. Cash used in operating
activities during 1997 was primarily due to our net loss of $9.7 million,
partially offset by non-cash expenses such as depreciation and amortization and
changes in working capital.

     Cash Flows From Investing Activities. Investing activities used cash of
$61.1 million during 1999, $94.6 million during 1998 and $11.6 million during
1997. The majority of the cash used in investing activities in 1999 consisted of
short-term investments of $34.3 million, capital expenditures of $20.8 million,
acquisitions of $10.5 million and investment in leases receivable of $8.2
million. An additional $28.3 million of capital expenditures were financed under
our financing facilities, including approximately $9.5 million for our ePOP
deployment and $3.3 million in assets being utilized in Enterprise Managed
Services contracts.

     Cash used in investing activities during 1998 consisted primarily of
restricted cash investments in U.S. government securities of $50.9 million in
connection with the sale of our 13% Senior Notes, acquisitions of $42.4 million
($40.0 million of which was used for the Tie acquisition) and capital
expenditures of $6.9 million. These cash uses were partially offset by maturing
short-term investments of $7.4 million. Cash used for investing activities
during 1997 consisted of $7.4 million used for short-term investments, $2.0
million in capital expenditures and $1.5 million for business combinations.

     Cash Flows From Financing Activities. Financing activities provided cash of
approximately $158.1 million during 1999, $148.3 million during 1998 and $15.9
million during 1997. Cash provided by financing activities during 1999 consisted
of $122.3 million in net proceeds from our initial public offering, $19.2
million in net proceeds from the sale of our convertible preferred stock, $16.2
million, net of financing costs, in new borrowing under the senior secured
credit facility ($9.5 million) and discounting of long-term receivables with
lendors ($6.7 million). We received an additional $13.3 million in new proceeds
from the exercise of options and warrants. Cash provided was partially offset by
approximately $12.8 million in payments on long-term borrowings.

     Cash provided by financing activities during 1998 consisted of
approximately $152.4 million in net proceeds from the sale of our 13% Senior
Notes and warrants, which was partially offset by approximately $4.3 million in
payments on long-term borrowings. In 1997 cash flows from financing activities
consisted of $17.3 million in net proceeds from the sale of shares of our common
stock and warrants, which was partially offset by approximately $1.4 million in
debt repayments.

The following is a description of the significant financing activities that have
funded our operations to date:

     In November 1997, we entered into an agreement with Comdisco, Inc. through
which we can receive up to $50 million of equipment lease financing. At December
31, 1999, $30 million was available to us under this facility of which a total
of approximately $24.8 million had been utilized. The remaining $20 million will
become available upon the satisfaction of additional conditions. This facility
will expire on June 30, 2000.

                                       27
<PAGE>

     On April 2, 1998 we completed the offering of our 13% Senior Notes, in the
aggregate principal amount of $160.0 million and warrants to purchase 864,000
shares of common stock. At the closing, we deposited $56.8 million of the
proceeds from that offering in a collateral account. The amount in the
collateral account along with the interest earned, will be sufficient to pay the
first six interest payments on the 13% Senior Notes, of which two have been made
as of April 1, 1999. We received approximately $95.6 million after deducting
offering costs of approximately $7.6 million and funding the collateral account.
The 13% Senior Notes contain certain covenants that restrict our ability to
incur additional debt and make certain payments, including dividends.

     In March 1999, we sold to affiliates of the Sandler Capital Group 800,000
shares of our convertible preferred stock and warrants to purchase 958,333
shares of our common stock, for total consideration of $20.0 million. The
proceeds from the sale, net of related offering costs, were approximately $19.2
million. These shares of preferred stock were converted to 2,666,667 shares of
our common stock in conjunction with our initial public offering in July 1999.

     In June 1999, we entered into a $10.0 million senior secured credit
facility with Goldman Sachs Credit Partners L.P. The proceeds of this facility
are being used for working capital and other general corporate purposes.
Interest accrues at the greater of 13.0% or LIBOR plus 6.0% with interest
payments due monthly. The principal amount outstanding along with any accrued
interest is due in June, 2002. We cannot re-borrow amounts repaid under this
facility. In connection with this facility, we also issued to Goldman Sachs
Credit Partners L.P. a warrant to acquire 375,000 shares of common stock at an
exercise price of $15.00 per share, none of which had been exercised as of
December 31, 1999. We have obtained waivers for non-compliance with certain
financial covenants of this facility as of December 31, 1999. We have borrowed
the full amount available under this facility and anticipate repaying it in full
during the second quarter of 2000 with a portion of the proceeds from the sale
of our preferred stock, discussed below.

     In July 1999, we entered into a six-year $103.5 million credit facility
with Cisco Systems Capital Corporation. This credit facility will provide the
financing for the purchase and installation of our Cisco Systems, Inc. multi-
service data and voice switching platform and for other Cisco equipment. Under
the terms of this agreement, Cisco Systems, Inc. also received a warrant to
purchase 575,000 shares of our common stock, none of which had been exercised as
of December 31, 1999. The warrant has an exercise price of $15.00 per share and
is exercisable for three years from the date of issuance. The facility will be
available in three tranches over a three year period with quarterly payments due
over three years beginning one year from the availability of each tranche. As of
December 31, 1999, we had borrowed $9.5 million under this facility.

     We have an agreement with GATX Capital Corporation, that was used to
finance our internal capital needs under which $4.7 million was outstanding on
December 31, 1999.

     In April 2000, we entered into  a $50.0 million Senior Secured Revolving
Line of Credit Facility with Foothill Capital Corporation. Under the terms of
this $50.0 million credit facility we are able to borrow up to 85% of eligible
receivables, as defined in the agreement, and the lessor of $12.0 million or 50%
of eligible inventory, as defined in the agreement.

     In April 2000 we sold to an investment group led by Texas Pacific Group
(TPG), 175,000 shares of our 8% convertible redeemable preferred stock, 700,000
warrants exercisable at $20 per share and 1.17 million warrants exercisable at
$25 per share. The investment was a combination of $150 million from TPG and $25
million from affiliates of Sandler Capital Management. The preferred stock is
convertible into shares of our common stock at a conversion price of $13 per
share. As a condition of the investment, TPG has designated two members to our
board of directors. In addition, in connection with this transaction, we have,
with the approval of TPG, appointed Joseph Zell as our President and CEO.

     Future Capital Requirements. We have significant debt in relation to our
equity. At December 31, 1999, we had $205.5 million in debt and $36.6 million in
shareholders' equity, which includes paid-in capital of $205.0 million. Our
business plan will continue to require a substantial amount of capital to fund
our expansion of existing markets and acquisitions. Our business plan includes
the following:

                                       28
<PAGE>

     .    deploying our multi-service data and voice switching platform in all
          of our markets and leasing of our IP/ATM network connecting our
          switches;

     .    funding the purchase, installation and ownership of the enterprise
          networks of our Enterprise Managed Services customers (which includes
          providing these customers with all necessary hardware, software,
          transmission facilities and management, maintenance and monitoring
          services);

     .    continuing to develop customer care and sales organizations;

     .    continuing to develop our operational support system; and

     .    funding operating losses and debt service requirements.

     .    evaluate acquisitions and investments

     We estimate that our existing funds at December 31, 1999, our available
borrowing under our financing and leasing facilities currently in place and
additional funds from the sale of our 8% preferred stock and the $50.0 million
senior secured credit facility will be sufficient to meet our capital
requirements for the foreseeable future. We may require additional capital
sooner than anticipated if there are material shortfalls in our operating and
financial performance or if we are more aggressive in our expansion than
currently contemplated. We cannot be certain that we would be successful in
raising sufficient debt or equity capital to fund our operations on a timely
basis or on acceptable terms. If needed financing were not available on
acceptable terms, we could be compelled to alter our business strategy, delay or
abandon some of our future plans or expenditures or fail to make interest
payments on our debt.  Any of these events would have a material adverse effect
on our business, financial condition, results of operations and liquidity and on
the price of our common stock.

Recent Accounting Standards

     In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance in applying generally accepted accounting
principles to selected revenue recognition issues. We are currently evaluating
changes to our current revenue recognition policies that may result from the
application of this SAB.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

     This item is inapplicable.

                                       29
<PAGE>

Item 8.  Financial Statements and Supplementary Data


                       Report of Independent Accountants

To the Board of Directors of Convergent Communications, Inc.

     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of shareholders' equity (deficit)
and of cash flows present fairly, in all material respects, the financial
position of Convergent Communications, Inc. at December 31, 1998 and 1999, and
the results of their operations and their cash flows for the years ended
December 31, 1997, 1998, and 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.


Our report on the consolidated financial statements referred to above previously
contained an explanatory paragraph indicating that there was substantial doubt
about the Company's ability to continue as a going concern. As discussed in Note
1 to the consolidated financial statements, on April 18, 2000 the Company
obtained additional financing, which alleviated this uncertainty..


PricewaterhouseCoopers LLP



Denver, Colorado
March 13, 2000, except for
Note 7 as to which the date is March 28, 2000 and
Note 1 as to which the date is April 18, 2000

                                       30
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
                          CONSOLIDATED BALANCE SHEETS
                                (in thousands)
<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                    -------------------------
                                                                                       1998           1999
                                                                                    ----------     ----------
<S>                                                                                 <C>            <C>
                                          ASSETS
Current assets:
  Cash and cash equivalents........................................................  $ 25,597       $  25,215
  Short-term investments...........................................................        --          34,742
  Restricted cash..................................................................    20,800          20,800
  Trade accounts receivable, net of allowance for doubtful accounts of
    $1,909 and $2,512, respectively................................................    17,661          37,778
  Inventory........................................................................     6,827          13,810
  Prepaid expenses, deposits, leases receivable and other..........................     2,134           9,070
                                                                                     --------       ---------
     Total current assets..........................................................    73,019         141,415

Property, network and equipment....................................................    28,139          77,455
Less accumulated depreciation......................................................    (4,883)        (15,292)
                                                                                     --------       ---------
     Total property, network and equipment.........................................    23,256          62,163

Restricted cash....................................................................    30,550          17,669
Goodwill, net of amortization of $2,967 and $8,528, respectively...................    46,526          56,037
Other intangible assets, net of amortization of $1,470 and $3,589, respectively....    10,281          10,967
Leases receivable, net of current portion..........................................       797           6,150
Investments and other assets.......................................................     1,226             812
                                                                                     --------       ---------
     Total assets..................................................................  $185,655       $ 295,213
                                                                                     ========       =========

                  LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Trade accounts payable...........................................................  $ 15,061       $  25,086
  Accrued compensation.............................................................     4,583          10,423
  Accrued interest.................................................................     5,214           5,308
  Other accrued liabilities........................................................     8,666           5,990
  Deferred revenue and customer deposits...........................................     5,212           6,312
  Current portion of notes payable.................................................       604           1,788
  Current portion of capital leases................................................     5,179           9,533
                                                                                     --------       ---------
     Total current liabilities.....................................................    44,519          64,440
Long-term notes payable, less current portion......................................   153,731         177,995
Long-term capital leases, less current portion.....................................     8,754          16,158
                                                                                     --------       ---------
     Total liabilities.............................................................   207,004         258,593
                                                                                     --------       ---------
Commitments (Note 8)
Shareholders' equity (deficit):
  Preferred stock, 1 million shares authorized, none issued........................        --              --
  Common stock, no par value, 100 million shares authorized, 13,924 and
   28,642 shares issued and outstanding, respectively..............................    27,487         196,937
  Additional paid-in-capital.......................................................    11,719           8,025
  Treasury stock...................................................................      (502)           (919)
  Deferred compensation obligation.................................................       502             919
  Accumulated other comprehensive income...........................................        --             573
  Unearned compensation............................................................      (150)           (250)
  Accumulated deficit..............................................................   (60,405)       (168,665)
                                                                                     --------       ---------
     Total shareholders' equity (deficit)..........................................   (21,349)         36,620
                                                                                     --------       ---------
        Total liabilities and shareholders' equity (deficit).......................  $185,655       $ 295,213
                                                                                     ========       =========
</TABLE>

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

                                       31
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                   (in thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                                 Years Ended December 31,
                                                                          ----------------------------------------
                                                                             1997           1998           1999
                                                                          ----------     ----------     ----------
<S>                                                                       <C>            <C>            <C>
Revenue.................................................................   $10,210        $ 61,600       $ 159,922
                                                                           -------        --------       ---------

Cost of sales, excluding depreciation...................................     7,368          43,703         104,045
Selling, general and administrative.....................................    10,983          47,862         125,350
Depreciation and amortization...........................................     1,453           7,493          17,295
Impairment of long-lived assets.........................................        --              --             650
                                                                           -------        --------       ---------
     Total operating expenses...........................................    19,804          99,058         247,340
                                                                           -------        --------       ---------

Operating loss..........................................................    (9,594)        (37,458)        (87,418)

Interest expense........................................................      (156)        (17,502)        (25,491)
Interest income.........................................................       251           4,632           4,880
Other income (expense)..................................................      (156)           (248)           (231)
                                                                           -------        --------       ---------

     Net loss...........................................................    (9,655)        (50,576)       (108,260)

Other comprehensive income,
 unrealized holding gains on investments................................        --              --             573
                                                                           -------        --------       ---------
Comprehensive loss......................................................   $(9,655)       $(50,576)      $(107,687)
                                                                           =======        ========       =========

Net loss per share (basic and diluted)..................................   $ (0.92)       $  (3.68)      $   (5.32)
                                                                           =======        ========       =========

Weighted average shares outstanding (basic and diluted).................    10,461          13,732          20,356
                                                                           =======        ========       =========
</TABLE>

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

                                       32
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                (in thousands)
<TABLE>
<CAPTION>
                                                                                    Additional                     Deferred
                                                       Common         Common          Paid-in       Treasury       Compensation
                                                       Shares         Stock           Capital        Stock          Obligation
                                                      --------       ---------      -----------    ----------     --------------
<S>                                                   <C>            <C>            <C>            <C>            <C>
Balance, December 31, 1996........................      7,870         $  8,007       $   152        $   --            $  --
 Sale of stock in private placement...............      4,530           15,846         3,415            --               --
 Offering costs...................................         --           (2,780)          777            --               --
 Stock issued to SONeTech.........................        187              375            --            --               --
 Stock issued in acquisitions.....................        437            2,112            --            --               --
 Exercise of stock options........................        475              262            --            --               --
 Stock purchases..................................       (100)             (12)           --            --               --
 Compensation.....................................         30              194            --            --               --
 Warrants.........................................         --               --           430            --               --
 Other comprehensive income:
  Unrealized loss on securities...................         --               --            --            --               --
 Net loss.........................................         --               --            --            --               --
                                                       ------         --------       -------         ------           -----
Balance, December 31, 1997........................     13,429           24,004         4,774            --               --
 Common stock issued for:
  401(k) match....................................         69              436            --            --               --
  Payments to consultants.........................         10               55            --            --               --
  Correction of private placement.................         10               --            --            --               --
  Business combinations...........................        240            2,267            --            --               --
  Exercise of stock options.......................         44               17            --            --               --
  Exercise of warrants............................         35              129           (21)           --               --
 Compensation.....................................         87              579            --            --               --
 Deferred stock compensation......................         --               --            --          (502)             502
 Warrants issued in private placement.............         --               --         6,886            --               --
 Warrants issued to consultants...................         --               --            80            --               --
 Other comprehensive income:
  Reclassification adjustment for loss
   included in net loss...........................         --               --            --            --               --
 Net loss.........................................         --               --            --            --               --
                                                       ------         --------       -------         -----            -----
Balance, December 31, 1998........................     13,924           27,487        11,719          (502)             502
 Common stock issued for:
  Initial Public Offering, net of
   offering costs.................................      8,937          122,281            --            --               --
  401(k) match....................................        257            2,751            --            --               --
  Business combinations...........................        405            4,234            --            --               --
  Exercise of stock options.......................         79              248            --            --               --
  Exercise of warrants............................      2,285           19,346        (6,325)           --               --
 Preferred stock conversion.......................      2,667           19,206            --            --               --
 Compensation.....................................        130            1,388            --            --               --
 Shares repurchased...............................        (38)              (4)           --            --               --
 Distribution of deferred stock...................         (4)             (50)           --           180             (180)
 Deferred stock compensation......................         --               --            --          (597)             597
 Warrants issued in connection with financing.....         --               50         2,459            --               --
 Options issued to employees......................         --               --           172            --               --
 Other comprehensive income:
 Unrealized gain on investments...................         --               --            --            --               --
 Net loss.........................................         --               --            --            --               --
                                                       ------         --------       -------         -----            -----
Balance, December 31, 1999........................     28,642         $196,937       $ 8,025         $(919)           $ 919
                                                       ======         ========       =======         =====            =====

<CAPTION>
                                                                          Accumulated
                                                                             Other
                                                        Unearned          Comprehensive          Accumulated
                                                      Compensation           Income                Deficit            Total
                                                      ------------        --------------         -------------       --------
<S>                                                   <C>                 <C>                    <C>                 <C>
Balance, December 31, 1996........................     $  --                  $  --               $    (174)          $   7,985
 Sale of stock in private placement...............        --                     --                      --              19,261
 Offering costs...................................        --                     --                      --              (2,003)
 Stock issued to SONeTech.........................        --                     --                      --                 375
 Stock issued in acquisitions.....................        --                     --                      --               2,112
 Exercise of stock options........................      (205)                    --                      --                  57
 Stock purchases..................................        --                     --                      --                 (12)
 Compensation.....................................        --                     --                      --                 194
 Warrants.........................................        --                     --                      --                 430
 Other comprehensive income:
  Unrealized loss on securities...................        --                   (17)                      --                 (17)
 Net loss.........................................        --                     --                  (9,655)             (9,655)
                                                       ------                 -----               ---------           ---------
Balance, December 31, 1997........................      (205)                  (17)                  (9,829)             18,727
 Common stock issued for:
  401(k) match....................................        --                     --                      --                 436
  Payments to consultants.........................        --                     --                      --                  55
  Correction of private placement.................        --                     --                      --                  --
  Business combinations...........................        --                     --                      --               2,267
  Exercise of stock options.......................        --                     --                      --                  17
  Exercise of warrants............................        --                     --                      --                 108
 Compensation.....................................        55                     --                      --                 634
 Deferred stock compensation......................        --                     --                      --                  --
 Warrants issued in private placement.............        --                     --                      --               6,886
 Warrants issued to consultants...................        --                     --                      --                  80
 Other comprehensive income:
  Reclassification adjustment for loss
   included in net loss...........................        --                     17                      --                  17
 Net loss.........................................        --                     --                 (50,576)            (50,576)
                                                       ------                 -----               ---------           ---------
Balance, December 31, 1998........................      (150)                    --                 (60,405)            (21,349)
 Common stock issued for:
  Initial Public Offering, net of
   offering costs.................................        --                     --                      --             122,281
  401(k) match....................................        --                     --                      --               2,751
  Business combinations...........................        --                     --                      --               4,234
  Exercise of stock options.......................        --                     --                      --                 248
  Exercise of warrants............................        --                     --                      --              13,021
 Preferred stock conversion.......................        --                     --                      --              19,206
 Compensation.....................................      (100)                    --                      --               1,288
 Shares repurchased...............................        --                     --                      --                  (4)
 Distribution of deferred stock...................        --                     --                      --                 (50)
 Deferred stock compensation......................        --                     --                      --                  --
 Warrants issued in connection with financing.....        --                     --                      --               2,509
 Options issued to employees......................        --                     --                      --                 172
 Other comprehensive income:
 Unrealized gain on investments...................        --                    573                      --                 573
 Net loss.........................................        --                     --                (108,260)           (108,260)
                                                       ------                 -----               ---------           ---------
Balance, December 31, 1999........................     $(250)                 $ 573               $(168,665)          $  36,620
                                                       =====                  =====               =========           =========
</TABLE>
  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       33
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
<TABLE>
<CAPTION>
                                                                             Years Ended December 31,
                                                                     ----------------------------------------
                                                                        1997           1998           1999
                                                                     ----------     ----------     ----------
<S>                                                                  <C>            <C>            <C>
Cash flows from operating activities
 Net loss...........................................................  $ (9,655)      $(50,576)      $(108,260)
 Adjustments to reconcile net loss to net cash used in
  operating activities:
 Depreciation and amortization......................................     1,453          7,493          17,295
 Impairment of long-lived assets....................................        --             --             650
 Amortization of deferred financing costs and accretion of
  debt discount.....................................................        --          1,162           1,984

 Provision for uncollectible accounts...............................        --            197           3,153
 Stock compensation expense.........................................       195            634           1,460
 401k contributions through the issuance of stock...................        --            436           2,751
 Warrants issued for the payment of consulting fees.................        --             80              --
 Loss from sale of equipment and investment.........................        91             --             221
 Change in working capital (net of acquisitions):
  Trade accounts receivable.........................................    (1,527)       (10,970)        (16,489)
  Inventory.........................................................      (230)        (2,068)         (2,527)
  Prepaid expenses, deposits and other current assets...............       (43)          (870)         (4,181)
  Trade accounts payable............................................     1,327         12,357           4,194
  Accrued compensation..............................................     1,468          2,592           5,459
  Accrued interest..................................................        --          5,214              94
  Deferred revenue and customer deposits............................        62          3,300            (194)
  Other accrued liabilities.........................................       161          2,321          (2,965)
                                                                      --------       --------       ---------
 Net cash used in operating activities..............................    (6,698)       (28,698)        (97,355)
Cash flows from investing activities
 Additions of property and equipment................................    (2,042)        (6,877)        (20,820)
 Acquisitions, net of cash acquired.................................    (1,542)       (42,364)        (10,545)
 Short-term investments.............................................    (7,388)         7,388         (34,343)
 Restricted cash....................................................      (406)       (50,944)         12,880
 Leases receivable..................................................        --         (1,174)         (8,242)
 Proceeds from sale of investment...................................        --             --             155
 Intangible and other assets........................................      (270)          (675)           (228)
                                                                      --------       --------       ---------
 Net cash used in investing activities..............................   (11,648)       (94,646)        (61,143)
Cash flows from financing activities
 Proceeds from initial public offering, net.........................        --             --         122,281
 Proceeds from private placements of debt and equity, net...........    17,257        152,378          19,206
 Payments on notes payable..........................................    (1,450)        (1,397)         (5,642)
 Payments on capital leases.........................................        --         (2,941)         (7,193)
 Proceeds from borrowings, net of costs.............................        --            109          16,199
 Proceeds from exercise of stock options and warrants...............        57            125          13,269
 Repurchase of common shares........................................       (12)            --              (4)
                                                                      --------       --------       ---------
 Net cash provided by financing activities..........................    15,852        148,274         158,116
                                                                      --------       --------       ---------
Net increase (decrease) in cash and cash equivalents................    (2,494)        24,930            (382)
Cash and cash equivalents at beginning of period....................     3,161            667          25,597
                                                                      --------       --------       ---------
 Cash and cash equivalents at end of period.........................  $    667       $ 25,597       $  25,215
                                                                      ========       ========       =========
Supplemental disclosure of other cash and non-
 cash investing and financing activities:
 Acquisition of equipment through financing facilities..............  $  1,675       $ 13,039       $  28,304
 Interest paid......................................................  $    145       $ 11,125       $  23,413
</TABLE>
  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       34
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Organization and Basis of Presentation:

     References in these footnotes to "Convergent Communications," "us," "we,"
and "our" refer to Convergent Communications, Inc. and its subsidiaries.

     We are a rapidly growing national provider of e-Sourcing solutions
primarily to businesses with 25 to 500 employees. "e-Sourcing" is the purchase
of managed communications solutions over broadband Internet Protocol based
applications. Inside our customers' premises we own communications networks and
provide professional services, such as the design, installation, management and
monitoring of those networks. Outside our customers' premises, we provide a full
range of data and voice transport services. By operating networks both inside
and outside our customers' premises, and by offering a broad range of Internet,
data and voice systems and services, we enable small and medium sized businesses
to use state-of-the-art communications solutions, including data and voice
networks based on broadband Internet Protocol, electronic commerce, the Internet
and sophisticated communications systems. We intend to become the leading
provider of IP-based Internet, data and voice systems and services to small and
medium sized businesses. We provide the following systems and services:

 .    eBusiness which includes Web development and hosting;

 .    Enterprise Services which include integration services, enterprise managed
     services and broadband services;

 .    Enterprise Systems which consists of data and voice systems.

     Our ultimate success depends upon, among other factors, establishment of
our nationwide network, funding the development of our enterprise networks,
continuing to develop our customer care and sales organizations, integrating
acquired businesses, attracting and retaining customers, continuing to develop
and integrate our operational support system and other back office systems,
responding to competitive developments, continuing to attract, retain and
motivate qualified personnel, and continuing to upgrade our technologies and
commercialize our services incorporating such technologies. There is no
assurance that we will be successful in addressing these matters and failure to
do so could have a material adverse effect on our business prospects, operating
results and financial condition. Our business plan will continue to require a
substantial amount of capital to fund our expansion of our existing and acquired
markets. As we continue to expand our business, we will seek additional sources
of financing to fund our development. If we are unsuccessful in obtaining such
financing, we would be compelled to alter our business strategy or delay or
abandon some of our future plans.

     In April 2000, we entered into a three year $50.0 million Senior Secured
Revolving Line of Credit Facility with Foothill Capital Corporation. Under the
terms of this $50.0 million credit facility we are able to borrow up to 85% of
eligible receivables, as defined in the agreement, and the lessor of $12.0
million or 50% of eligible inventory, as defined in the agreement. The facility
will automatically renew for one year periods unless earlier terminated and
carries an interest rate of 1.0% above the Wells Fargo Bank, N.A., base rate.

     In April 2000 we sold to an investment group led by Texas Pacific Group
(TPG), 175,000 shares of our 8% convertible redeemable preferred stock, 700,000
warrants exercisable at $20 per share and 1.17 million warrants exercisable at
$25 per share. The investment was a combination of $150 million from TPG and $25
million from affiliates of Sandler Capital Management. The preferred stock is
convertible into shares of our common stock at a conversion price of $13 per
share. As a condition of completing the investmentTPG has designated two members
to our board of directors. In addition, in connection with this transaction, we
have, with the approval of TPG, appointed Joseph Zell as our President and CEO.

                                       35
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


2.   Summary of Significant Accounting Policies:

Principles of Consolidation:

     The accompanying consolidated financial statements include our accounts and
the accounts of our wholly-owned subsidiaries. All intercompany amounts and
transactions have been eliminated

Use of Estimates:

     Our management is required to make estimates and assumptions in order to
prepare the financial statements in conformity with generally accepted
accounting principles. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and also affect the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

Cash and Cash Equivalents:

     We consider all highly liquid investments with an original maturity of
three months or less to be cash equivalents.

Short-term Investments:

     Short-term investments are classified as available-for-sale securities at
December 31, 1999. Gains or losses on the sale of short-term investments are
recognized on the specific identification method. Unrealized gains or losses are
treated as a separate component of comprehensive income until the security that
the unrealized gain or loss was recorded on is sold.

Restricted Cash:

     Restricted cash primarily represents funds held in collateral accounts for
paying semi-annual interest payments on our 13% Senior Notes through April 1,
2001. The cash is invested in U.S. Government Securities, which mature semi-
annually on October 1 and April 1 through April 1, 2001 (see Note 7). Restricted
cash also represents cash used to collateralize letters of credit, which are
held as collateral for certain of our office leases, capital lease obligations
and performance bonds. The amounts invested are classified as held to maturity
and carried at amortized cost which approximates fair value.

Fair Value of Financial Instruments:

     The carrying amounts reported in the balance sheets for cash and cash
equivalents, short-term investments, accounts receivable, accounts payable and
short-term borrowings approximate fair value because of the immediate or short-
term maturity of these financial instruments. The carrying amounts reported for
long-term debt other than the 13% Senior Notes approximate fair value based upon
management's best estimates of what interest rates would be available for the
same or similar instruments. The 13% Senior Notes are publicly traded
securities. The quoted fair market value and the carrying amount of the 13%
Senior Notes at December 31, 1998 and 1999 are as follows:

                                       36
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

<TABLE>
<CAPTION>
                                          Carrying     Fair Market
                                           Amount         Value
                                       -------------  -------------
<S>                                    <C>            <C>
  1998...........................       $160,000,000   $ 76,800,000
  1999...........................       $160,000,000   $120,000,000
</TABLE>

Property, Network and Equipment:

     Property, network and equipment are recorded at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets or the lease term if shorter, which range from two to five years.
Expenditures which significantly increase asset values or extend useful lives
are capitalized. Maintenance and repairs are expensed as incurred. When
property, network and equipment is retired, sold or otherwise disposed of, the
cost and related accumulated depreciation are removed from the accounts, and
resulting gains and losses are reflected in operations.


Inventory:

     Inventory primarily consists of new and refurbished equipment for resale
and is valued at the lower of cost or market using the first-in, first-out
method. We evaluate the need and establish reserves associated with obsolete and
excess inventory.


Intangible Assets:

     .    Intangible assets consist of the following:

     .    Goodwill represents the excess purchase price over the net assets
          acquired in acquisitions and is being amortized over ten years.

     .    Customer lists were obtained through business combinations and are
          being amortized over five years.

     .    Debt offering costs represent costs incurred in connection with an
          offering of 13% senior notes (see Note 7) and are being amortized over
          the term of the notes, ten years.

     .    Deferred finance costs are costs associated with obtaining certain
          financing arrangements and are amortized over the life of the
          financing arrangements, two to four years.

     .    Site location contracts are exclusive rights to operate public
          telephones at various locations we acquired through business
          combinations. The site location contracts are being amortized over the
          average lives of the contracts, primarily three years.

     .    Software license fees represent proprietary rights to software
          associated with our public telephones which are being amortized over
          five years, the estimated life of the related equipment.

     We periodically evaluate the carrying amount of our intangible assets based
on undiscounted cash flows, or other indicators of fair value, to determine
whether adjustments to these amounts are required.


Long-Lived Assets:

     We evaluate the recoverability of long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be

                                       37
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


Disposed Of" ("SFAS 121"). SFAS 121 requires an evaluation of indicators of
impairment and future undiscounted cash flows to be generated by those assets.
Impairment is measured as the amount by which the asset's carrying amounts
exceed the future discounted cash flows estimated to be generated by those
assets. Certain of our long-lived operating assets were written off during 1999
in accordance with SFAS 121.


Investments:

     Investments consist of ownership interests of less than 20% in unrelated
entities and are accounted for as available for sale securities. Changes in
market value of the investments are included as a component of other
comprehensive income.


Software:

     We capitalize certain internal and external costs of developing software
for internal use in accordance with SOP 98-1. These costs are amortized on a
straight line basis over three years, which is the estimated useful life of the
software.

Revenue Recognition:

     Revenue is recognized for product sales when the product is shipped.
Revenue from non-recurring services are recognized when the services are
provided. Revenue for long-term service and maintenance contracts is recognized
over the term of the contract as the services are provided. Revenue from
reselling of long distance service is recognized at the time of performance
based on customer usage. Revenue from sales of equipment under sales type leases
is recognezed at the inception of the lease.


Deferred Revenue:

     Deferred revenue represents the unearned portion of revenue related to our
long-term service and maintenance contracts, which is recognized over the term
of the contract, generally one year.


Income Taxes:

     Deferred tax assets and liabilities are recognized for future tax
consequences attributable to the differences between the financial statement
carrying value of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured by using enacted tax
rates that are applicable to the future years in which deferred tax assets or
liabilities are expected to be realized or settled. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized in net earnings
in the period in which the tax rate change is enacted. We establish a valuation
allowance when it is more likely than not that a deferred tax asset will not be
recovered.


Stock-Based Compensation:

     We use the intrinsic value method under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," to account for our
employee stock-based compensation plans. We account for options and warrants
granted to non-employees in accordance with Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"),
which requires that we recognize an amount based on the fair value of the option
or warrant at the time of grant.


Concentrations of Credit Risk:

                                       38
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


     We sell systems and services to small and medium sized businesses on open
account and do not obtain collateral for our receivables. We also offer services
and systems and lease equipment to our customers under long-term contracts,
generally three to five years, in which we maintain ownership in the underlying
equipment. We believe our reserves for potential credit losses are adequate and
we perform on-going credit evaluations.

     All of our cash, cash equivalents and investments are maintained at three
financial institutions. The investments consist of high-quality commercial
paper.


Reclassifications:

     Certain reclassifications have been made to the prior year data to make it
consistent with the 1999 presentation. These reclassifications had no impact on
net loss.


Recent Accounting Standards:

     In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance in applying generally accepted accounting
principles to selected revenue recognition issues. We are currently evaluating
changes to our current revenue recognition policies that may result from the
application of this SAB.


3.   Acquisitions:

     Communication Services of Iowa, Inc.   In April 1997, we acquired
Communication Services of Iowa, Inc. (CSI), an Iowa reseller of telephony
keyboard PBX telephone equipment to businesses. We paid $100,000 cash, issued a
$100,000 one-year promissory note at 8% and issued 25,000 shares of our common
stock valued at $50,000 for total consideration of $250,000. The note was paid
in March 1998.

     A.T.T.ex Corporation.   In September 1997, we acquired A.T.T.ex Corporation
(A.T.T.ex) of Des Moines, Iowa, a telecommunications service company that
provided direct telephony service support to corporate customers. The purchase
price consisted of $450,000 in cash and the issuance of 37,500 shares of our
common stock valued at $187,500 for total consideration of $637,500.

     Vital Integration Solutions, Inc.   In September 1997, we acquired Vital
Integration Solutions, Inc. (Vital) of Des Moines, Iowa and Omaha, Nebraska, a
full service integration solutions provider which specialized in comprehensive
information management and networking solutions. Vital provided its clients with
the hardware, software and integration services necessary to build information
systems and networks. We paid $500,000 in cash and issued 375,000 shares of our
common stock valued at $1,875,000 for total consideration of $2,375,000.

     Telephone Communications Corporation.   In February 1998, we acquired the
assets and assumed certain liabilities of Telephone Communications Corporation
(TCC) of Vail, Colorado. TCC was a long distance switchless reseller providing
1+, 0+, 800, and Calling Card services to cities such as Dillon, Frisco and the
Vail Valley. We paid $400,000 in cash, issued a $200,000 one-year note at 8% and
issued 5,000 shares of our common stock which for purchase accounting purposes
were assigned a value of $8.00 per share. We also assumed a note with National
Network Corporation of approximately $287,000, which was paid in April 1998.
Total consideration for the purchase was $927,000. We negotiated an early
discounted payoff of the $200,000 note in the total amount of $180,000
(including accrued interest of $2,250) in May 1998.

     Network Computer Solutions, LLC.   In February 1998, we acquired the assets
and assumed certain liabilities of Network Computer Solutions (NCS) of Greenwood
Village, Colorado. NCS provided network integration services. We paid $500,000
in cash, issued 50,000 shares of our common stock which for purchase

                                       39
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


accounting purposes were assigned a value of $8.00, assumed liabilities of
$438,372 and paid a finders fee of $150,000 for total consideration of
$1,488,372.

     Communication Services of Colorado.   In May 1998, we completed a merger
with Communication Services of Colorado (CSC) of Englewood, Colorado. CSC was a
long distance switchless reseller providing 1+, 0+, 800, and Calling Card
services. The purchase price consisted of $475,000 in cash, the issuance of a
$530,000 one-year note at 8% and assumed liabilities of $341,054 for total
consideration of $1,346,054.

     HH&H Communications Technologies, Inc.   In May 1998, we completed the
acquisition of the assets and certain liabilities of HH&H Communications
Technologies, Inc. (CTI), a voice equipment provider in Texas. We paid $200,000
in cash, issued 15,000 shares of our common stock, which for accounting purposes
were assigned a value of $8.50 per share, and assumed liabilities of $151,383
for total consideration of $478,883.

     CMB Holdings, Inc. d/b/a Independent Equipment Company.   In June 1998, we
completed the acquisition of substantially all of the assets of CMB Holdings,
Inc. d/b/a Independent Equipment Company (IEC), an equipment remarketer in
Florida. The purchase price consisted of the issuance of 170,000 shares of our
common stock, which for accounting purposes were assigned a value of $10.00 per
share, for total consideration of $1.7 million.

     Tie Communications, Inc.   Effective August 1, 1998 we completed the
acquisition of substantially all the assets and certain of the liabilities of
Tie Communications, Inc. (Tie). The purchase price consisted of $40.0 million in
cash and the assumption of certain liabilities, which with legal and
professional and other costs resulted in a total purchase price of approximately
$51.4 million. Tie was a telecommunications equipment provider and a nationwide
reseller of long-distance service.

     Kansas Communications, Inc. In February 1999, we acquired the assets and
assumed certain liabilities of Kansas Communications, Inc. (KCI). KCI was a
telecommunications equipment provider and integrator. The purchase price
consisted of $1.5 million in cash, $4.5 million in notes payable and 24,925
shares of our common stock, which, for purchase accounting purposes, were
assigned a value of $10.00 per share, and assumed liabilities of $2.4 million
resulting in total consideration of $8.7 million. In April 1999, $1.5 million of
the notes payable were paid with the proceeds from the sale of our Series A
Convertible Preferred Stock. In July 1999 $2.0 million of the notes payable was
repaid and the remaining balance was paid in November 1999.

     BSSi Innovations, Inc. In April 1999, we acquired BSSi Innovations, Inc.
(BSSi). BSSi was a data network integration services provider based in Chicago,
Illinois. The purchase price consisted of $455,000 in cash, 37,000 shares of our
common stock, which for purchase accounting purposes were assigned a value of
$10.00 per share, and assumed debt of approximately $525,000, resulting in total
consideration of $1.4 million. An additional 20,000 shares may be issued if
certain financial conditions are met.

     Choice Solutions, Inc. In June 1999 we purchased the majority of the assets
and assumed certain liabilities of Choice Solutions, Inc. (CSI). CSI was a data
network integration services provider based in Dallas, Texas. The purchase price
consisted of $1.1 million in cash. Up to $225,000 in additional shares of our
common stock may be issued if certain financial conditions are met.

     Network Technologies Group. In September 1999, we purchased the majority of
the assets and assumed certain liabilities of Network Technologies Group (NTG).
NTG was a data network integration services provider based in Miami, Florida.
The purchase price consisted of $675,000 in cash and $475,000 in shares of our
common stock for a total purchase price of $1.2 million. Up to an additional
$500,000 in shares of our common stock may be issued if certain financial
conditions are met.

     Entre Business Technology Group. In October 1999, we acquired Video
Enterprises Corporation, d/b/a Entre Business Technology Group (EBTG). EBTG was
a data network integration services provider based in Atlanta, Georgia. The
purchase price consisted of $2.0 in cash, $2.1 million in shares of our common
stock, and assumed debt of approximately $2.6 million, resulting in total
consideration of $6.7 million. Up to $700,000 in additional shares of our common
stock may be issued if certain financial conditions are met.

                                       40
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


     Classic Datacom, Inc. In November 1999, we purchased the majority of the
assets and assumed certain liabilities of Classic Datacom, Inc. (CDI). CDI was a
data network integration services provider based in Hartford, Connecticut. The
purchase price consisted of $1.7 million in cash and $1.0 million in common
stock for total consideration of $2.7 million. Up to $600,000 in additional
shares of our common stock may be issued if certain financial conditions are
met.

     We accounted for these acquisitions as business combinations, which were
accounted for by the purchase method of accounting. We valued the acquisitions
at the fair market value of the consideration given. With regard to our common
stock and warrants, prior to our initial public offering, we determined the fair
market value based upon a number of factors including a market analysis of
publicly traded companies and a discounted cash flow analysis. An option pricing
model was also used to value our warrants. In connection with the acquisitions,
the excess of consideration given over the fair market value of the net assets
acquired is being amortized on a straight line basis over the estimated life of
the intangible assets acquired which is five to ten years. The accompanying
financial statements include the accounts of the acquired companies from the
effective dates of the acquisitions.

     In addition to the business acquisitions previously discussed, we have also
completed purchases of certain assets of other companies as follows:

     Big Planet, Inc.   In October 1997, we acquired certain assets and assumed
certain liabilities of Big Planet, Inc., of Portland, Oregon. Big Planet is an
Internet service provider (ISP) offering a full range of Internet services,
including Internet access, Web hosting, maintenance, and site design. We paid
$250,000 in cash for the assets and the assumption of certain trade payables.

     Sigmacom Corporation.   In December 1997, we acquired certain data
integration assets of Cavion Technology, Inc. (formerly Sigmacom Corporation).
Cavion is a systems integrator for corporate audio, video and data
communications, providing state-of-the-art systems that combine
telecommunications and computer network technologies. Cavion is also developing
Internet application software for financial institutions such as credit unions.
We paid $875,000 in cash and issued Sigmacom a warrant to purchase 25,000 shares
of our common stock at an exercise price of $15.00 per share, which expired in
December 1999. We valued the warrants, at an aggregate value of $30,000
utilizing an option pricing model and a number of factors including a market
analysis of publicly traded companies and a discounted cash flow analysis. We
also acquired a minority interest in Cavion's software development business to
which we allocated $350,000 of the purchase price. The value of this minority
interest as of December 31, 1999 was approximately $520,000.

The consideration paid for acquisitions in 1997, 1998 and 1999, and the
allocation of such consideration to the acquired assets and assumed liabilities
is as follows:

<TABLE>
<CAPTION>

                                                                   1997           1998           1999
                                                                ----------     -----------    ----------
                                                                              (in thousands)
<S>                                                             <C>            <C>            <C>
  Cash paid, net of cash acquired.............................   $1,542         $42,364        $10,545
  Common stock issued to the former owners....................    2,113           2,266          4,234
  Notes payable and liability to former owners................      100             908          4,490
  Warrants issued.............................................       55              --             --
                                                                 ------         -------        -------
    Total amount to be allocated..............................   $3,810         $45,538        $19,269
                                                                 ======         =======        =======
  Allocation to acquired assets and assumed
    liabilities:
    Goodwill..................................................   $3,384         $42,544        $15,344
    Accounts receivable.......................................      400           4,813          6,959
    Inventory.................................................      116           4,586          4,300
    Equipment.................................................      356           2,945          1,202
    Customer lists............................................       --           1,684             --
</TABLE>

                                       41
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

<TABLE>
<S>                                                             <C>            <C>            <C>
    Prepaid expenses, deposits and other
     current assets...........................................        4             669            153
    Investment................................................      350              --             --
    Accounts payable and accrued liabilities..................     (637)         (6,804)        (6,903)
    Deferred revenue, net of costs............................       --          (1,912)        (1,602)
    Debt......................................................     (163)         (2,987)          (184)
                                                                 ------         -------        -------
  Amounts allocated...........................................   $3,810         $45,538        $19,269
                                                                =======         =======        =======
</TABLE>

     On a pro forma basis, as though the above combinations had taken place at
the beginning of the periods presented, revenue, net loss and net loss per share
would have been as follows (unaudited):

<TABLE>
<CAPTION>
                                                                            1998                1999
                                                                        -------------     ---------------
                                                                             (in thousands, except
                                                                               per share amounts)
<S>                                                                    <C>               <C>
  Revenue  ......................................................       $   109,667        $    192,895
  Net loss  .....................................................       $   (59,462)       $   (110,041)
  Net loss per share  ...........................................       $     (2.14)       $      (5.33)
  Weighted average shares  ......................................            27,847              20,628
</TABLE>


     4.   Short-Term Investments:

     All of our short-term investments as of December 31, 1999 are classified as
available for sale. The investments had an amortized cost basis of $34.3 million
at December 31, 1999 and a fair value of $34.7 million at December 31, 1999. The
unrealized gain at December 31, 1999 related to these investments which matured
in 2000 was $398,881.


     5.   Leases Receivable:

     Our wholly owned subsidiary, Convergent Capital Corporation (CCC), leases
data and telephony equipment to our customers under direct financing and sales
type leases. The receivables, which are due over two to five years, are
collateralized by the equipment being leased. The current portion of leases
receivable is included in other current assets. The components of leases
receivable and the future minimum payments receivable are as follows:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                    1999
                                                                 ------------
                                                                (in thousands)
<S>                                                             <C>
Receivable:
    2000...................................................        $ 3,858
    2001...................................................          3,446
    2002...................................................          2,582
    2003...................................................          1,055
    2004...................................................            505
      Thereafter...........................................             76
                                                                   -------
  Gross receivables........................................         11,522
  Unearned income..........................................         (1,747)
                                                                   -------
  Lease receivables........................................          9,775
  Less: current portion....................................         (3,625)
                                                                   -------
  Long-term lease receivables..............................        $ 6,150
                                                                   =======
</TABLE>

                                       42
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)



6.   Property, Network and Equipment:

Property, network and equipment consists of the following:

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                             ------------------------
                                                                              1998             1999
                                                                             --------        -------
                                                                                  (in thousands)
<S>                                                                           <C>            <C>
  Office furniture and equipment...........................................   $14,057        $27,424
  Network equipment........................................................     8,608         37,843
  Enterprise Managed Services network equipment............................     4,297          7,611
  Leasehold improvements...................................................       939          2,875
  Company vehicles.........................................................       238          1,702
                                                                              -------        -------
                                                                               28,139         77,455
  Less accumulated depreciation............................................    (4,883)       (15,292)
                                                                              -------        -------
  Net property, network and equipment......................................   $23,256        $62,163
                                                                              =======        =======
</TABLE>

     Depreciation expense was $515,317 for the year ended December 31, 1997,
$4.3 million for the year ended December 31, 1998 and $10.6 million for the year
ended December 31, 1999.

We enter into capital leases for various equipment. Equipment under capital
leases is as follows:

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                             ------------------------
                                                                              1998             1999
                                                                             --------        -------
                                                                                  (in thousands)
<S>                                                                          <C>             <C>
Network equipment.........................................................   $11,865         $15,189
Furniture and equipment...................................................     4,020          16,072
Vehicles..................................................................         -           1,431
                                                                             -------         -------
                                                                              15,885          32,692
Less accumulated depreciation.............................................    (2,906)         (7,872)
                                                                             -------         -------
                                                                             $12,979         $24,820
                                                                             =======         =======
</TABLE>

7.   Notes Payable and Capital Leases:

Notes Payable

Notes payable consist of the following:

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                                 ------------------------
                                                                                   1998            1999
                                                                                 --------        --------
                                                                                      (in thousands)
<S>                                                                              <C>             <C>
      13% Senior Notes payable, (i) below..................................      $153,630        $154,319
      $10.0 Million Senior Facility, (ii) below............................             -           9,631
      $103.5 Million Credit Facility, (iii) below..........................             -           9,537
      Notes payable for discounted long-term receivables, (iv) below.......             -           6,193
      Note payable for acquisition, interest at 8%, principal and
         accrued interest due May 1999.....................................           530               -
      Other................................................................           175             103
                                                                                 --------         -------
                                                                                  154,335         179,783
      Less current portion.................................................          (604)         (1,788)
                                                                                 --------         -------
      Long term portion....................................................      $153,731        $177,995
                                                                                 ========        ========
</TABLE>

                                       43
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)

---------------
(i)    On April 2, 1998 we completed a private offering of $160.0 million of 13%
Senior Notes and 640,000 warrants to purchase 864,000 of our common shares. The
13% Senior Notes mature on April 1, 2008 and interest is payable semi-annually
in arrears on April 1 and October 1 of each year beginning October 1, 1998. At
the same time as the closing of the 13% Notes Offering, we deposited U.S.
Government Securities in a collateral account. The amount deposited in the
collateral account together with the interest earned on those securities, will
be enough to pay the first six interest payments on the 13% Senior Notes. The
first payment was made on October 1, 1998. The 13% Senior Notes contain certain
covenants that restrict our ability to incur additional debt and to make certain
payments, including dividends. Each Warrant entitles the holder to purchase 1.35
shares of our common stock at an exercise price of $.02 per share. The Warrants
are currently exercisable and expire on April 1, 2008. Each Warrant was assigned
a value of $21.52 using an option pricing model, a market analysis of publicly
traded companies and a discounted cash flow analysis. The proceeds that were
attributable to the Warrants were treated as a discount to the 13% Senior Notes
and allocated to shareholders' equity. We received proceeds approximately of
$95.6 million after deducting offering costs of approximately $7.6 million and
making the deposit of $56.8 million into the collateral account. As of December
31, 1999 the amount outstanding, net of the unaccreted discount of $6.4 million
resulting from the allocation of the warrants, was $154.3 million.

(ii)   In June 1999, we entered into a $10.0 million senior secured credit
facility with Goldman Sachs Credit Partners L.P. The proceeds of this facility
are being used for working capital and other general corporate purposes.
Interest accrues at the greater of 13.0% or LIBOR plus 6.0% with interest
payments due monthly. The principal amount outstanding along with any accrued
interest is due in June, 2002. We cannot re-borrow amounts repaid under this
facility. In connection with this facility, we also issued to Goldman Sachs
Credit Partners L.P. a warrant to acquire 375,000 shares of common stock at an
exercise price of $15.00 per share, which are exercisable through July 23, 2002.
As of December 31, 1999 none of these warrants had been exercised. We have
obtained waivers for non-compliance with certain financial covenants of this
facility as of December 31, 1999. We have borrowed the full amount available
under this facility.

(iii)  In July 1999, we entered into a six-year $103.5 million credit facility
with Cisco Systems Capital Corporation. This credit facility will provide the
financing for the purchase and installation of our Cisco Systems, Inc. multi-
service data and voice switching platform and for other Cisco equipment. Under
the terms of this agreement, Cisco Systems, Inc. also received a warrant to
purchase 575,000 shares of our common stock, none of which had been exercised as
of December 31, 1999. The warrant has an exercise price of $15.00 per share and
is exercisable for three years from the date of issuance. The facility will be
available in three tranches over a three year period with quarterly payments due
over three years beginning one year from the availability of each tranche.  As
of December 31, 1999, we had borrowed $9.5 million under this facility.

(iv)   We have entered into financing arrangements in which we have assigned, on
a non-recourse basis, certain of our long-term receivables resulting from
equipment leasing and Enterprise Managed Services contracts, to financing
institutions. The indebtedness resulting from these transactions is paid down
over the term of the corresponding receivables which is two to five years.
Interest on this borrowing ranges from 6% to 12% and is collateralized by the
equipment provided under the contract with our customer.

     Scheduled maturities on debt outstanding are as follows:

<TABLE>
<CAPTION>
                                                                                                December 31,
                                                                                                    1999
                                                                                               ---------------
Due in:                                                                                        (in thousands)
<S>                                                                                          <C>
  2000......................................................................................     $  1,788
  2001......................................................................................        5,099
  2002......................................................................................       14,939
  2003......................................................................................        3,701
  2004......................................................................................          240
</TABLE>

                                       44
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


<TABLE>
<S>                                                                                                <C>
 Thereafter.....................................................................................   160,066
                                                                                                  --------
                                                                                                   185,833
 Less unaccreted discount.......................................................................   (6,050)
                                                                                                  --------
   Total debt...................................................................................  $179,783
                                                                                                  ========
</TABLE>

Capital Leases

     Some of our equipment and equipment used by our customers is leased under
capital leases. The following is a schedule of the minimum lease payments under
capital leases together with the present value of the minimum lease payments.

<TABLE>
<CAPTION>
                                                                                                December 31,
                                                                                                    1999
                                                                                                ------------
                                                                                               (in thousands)
Due in:
<S>                                                                                               <C>
2000.........................................................................................    $14,816
2001..........................................................................................    12,824
2002..........................................................................................     9,458
2003..........................................................................................       823
2004..........................................................................................        42
                                                                                                  ------
Total minimum lease payments..................................................................    37,963
Less amount representing interest.............................................................   (12,272)
                                                                                                 -------
Present value of minimum lease payments.......................................................    25,691
Less current portion..........................................................................    (9,533)
                                                                                                 -------
Long-term portion.............................................................................   $16,158
                                                                                                 =======
</TABLE>

     Comdisco Facility.   In November 1997 we entered into an agreement with
Comdisco, Inc. (Comdisco) which provides for up to $50 million of equipment
lease financing. At December 31, 1999, $30 million of the $50.0 million was
available for us to use of which $24.8 million was being utilized. The remaining
$20.0 million will be available upon the satisfaction of additional conditions.
This facility will expire on June 30, 2000.

The Comdisco facility is collateralized by the equipment being financed. In
addition, we are required to issue a warrant to acquire shares of our common
stock in an amount equal to ten percent (10%) of the facility, divided by the
exercise price per share. The exercise price per share is equal to the price
paid by investors in recent equity offerings, not less than $6.00 per share. The
warrants will be issued in three installments based upon amounts available under
the facility. We issued a warrant in 1997 for the purchase of 166,666 shares of
our common stock at an exercise price of $6.00 per share for the first $10
million of the facility. We issued a warrant in 1999 for the purchase of 200,000
shares of our common stock at an exercise price of $10.00 per share for the
second $20.0 million of the facility. The warrants were valued utilizing an
option pricing model, and a number of factors including a market analysis of
publicly traded companies and a discounted cash flow analysis. The warrants, all
of which were outstanding as of December 31, 1999, are being amortized into
interest expense over three years.

     GATX Financing.   In May 1997, we entered into a Master Equipment Lease
with GATX Technology Services Corporation (GATX) to lease equipment, facilities
and related items for our internal expansion as well as equipment to be used for
customer installations. The facility is collateralized by a $100,000 standby
letter of credit. In connection with the establishment of the facility, we
issued a warrant to GATX for the purchase of 40,285 shares of our common stock
at an exercise price of $6.00 per share. We valued the warrant utilizing an
option pricing model and a number of other factors including a market analysis
of publicly traded companies and a discounted cash flow analysis. The warrant is
being amortized into interest expense over three years. We had amounts
outstanding under this facility of $4.4 million as of December 31, 1998 and $4.7
million as of December 31, 1999.

                                       45
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


8.   Commitments:

We lease a portion of our buildings and equipment under operating leases. Future
minimum payments under operating leases are as follows:

<TABLE>
<CAPTION>
                                                                      December 31,
                                                                          1999
                                                                      ------------
                                                                     (in thousands)
<S>                                                                   <C>
Due in:
2000.................................................................   $ 7,941
2001.................................................................     6,762
2002.................................................................     6,013
2003.................................................................     4,789
2004.................................................................     3,517
Thereafter...........................................................     3,324
                                                                        -------
                                                                        $32,346
                                                                        =======
</TABLE>

Rent expense under operating leases was $431,930 for the year ended December 31,
1997, $4.3 million for the year ended December 31, 1998, and $7.0 million for
the year ended December 31, 1999.


9.   Shareholders' Equity (Deficit):

We have 1,000,000 shares of preferred stock authorized none of which were
outstanding as of December 31, 1998 and 1999.

On October 31, 1996, we issued 187,500 shares of our common stock in exchange
for a 10% equity interest in Services-oriented open Network Technologies, Inc.
(SONeTech) and an exclusive engineering and consulting agreement. In May, 1999,
we reacquired 37,500 shares of our common stock for $4,500 and sold our equity
interest. A loss of $220,500 was recognized in the transaction.

In February 1997, we completed the second of two tranches of an offering of an
aggregate of 3,500,000 units. Each of the units consisted of one share of common
stock and one-half warrant to purchase a share of common stock (the first
tranche of 2,369,763 units closed in late 1996). The units were sold at a price
of $2.00 each. One warrant entitled the holder to purchase one share of common
stock for a price of $3.00 per share for five years from the date of the
offering. As part of the offering, we issued warrants to purchase 1,750,000 of
our common shares to investors, which were exercisable at $3.00 per share. As of
December 31, 1999, 173,115 of these warrants had been exercised and 872 had been
cancelled. We also issued warrants to purchase 370,625 of our common shares to
the placement agents, which are exercisable at $2.40 per share through November
7, 2001. As of December 31, 1999, all of these warrants remained outstanding.

In October 1997, we completed an offering of 3,410,000 units consisting of one
share of our common stock and one-half warrant to purchase a share of our common
stock. The units were sold at a price of $5.00 each. The proceeds, net of
related offering costs, were approximately $15.2 million. One warrant entitles
the holder to purchase one share of our common stock for a price of $7.50 per
share, beginning in November 1998 through July 14, 1999. As of December 31,
1999, 1,667,250 of these warrants had been exercised and 37,750 were cancelled.
We also issued warrants to purchase 307,930 of our common shares to the
placement agents exercisable at $6.00 per share beginning in May 1998 through
November 14, 2002. As of December 31, 1999 12,053 of these warrants had been
exercised and 1,627 had been cancelled.

In connection with the signing of financing agreements with Comdisco, Inc. and
GATX, we granted Comdisco warrants to purchase 166,666 shares of our common
stock and granted GATX warrants to purchase 40,285 shares of our common stock.
All of these warrants are exercisable at $6.00 per share. The Comdisco warrants
are currently

                                       46
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


exercisable and expire on July 23, 2004. The GATX warrants are exercisable
beginning in May 1998 and expire in May 2002. As of December 31, 1999, all of
these warrants remained outstanding.

In August 1998, we entered into a consulting agreement under which the
consultant recruited senior management personnel on behalf of our wholly-owned
subsidiary, Convergent Capital Corporation. As a result of the services
performed under this agreement, we issued warrants to the consultant to purchase
62,500 shares of our common stock at $10.00 per share. The warrants are
currently exercisable and expire on August 3, 2008. We valued the warrants using
an option pricing model and recognized consulting expense of $79,883. As of
December 31, 1999, all of these warrants remained outstanding.

Certain holders of our common stock and the holders of certain warrants have the
right to demand that we file a registration statement to register their shares
and the shares underlying their warrants.

Stock Option Plans:

We have adopted the 1996 and 1997 Incentive and Non-Statutory Option Plans, the
1998 and 1999 Stock Option Plan and the Stock Incentive Plan (the "Plans") which
authorize us to grant up to 6,450,000 shares of our common stock to employees,
consultants and directors under incentive stock options within the meaning of
Section 422A of the Internal Revenue Code of 1986, as amended, and to grant non-
statutory stock options.

The Plans require that the exercise price of options we grant must be at least
equal to the fair market value of a share of our common stock on the date of the
grant and must be exercisable over a period of up to ten years. However, if an
employee owns more than 10% of our outstanding common stock, then the exercise
price of an incentive option must be at least 110% of the fair market value of a
share of our common stock on the date of grant and must be exercisable over a
period of five years. All of our options vest over five years.

The Plans are administered by our Board of Directors or a committee of the
Board which determines the terms of the options granted, including the exercise
price, the number of shares of our common stock subject to the option, and the
terms and conditions of exercise. No option granted under the Plan is
transferable by the optionee other than by will or the laws of descent and
distribution and each option is exercisable during the lifetime of the optionee
only by such optionee.

In May 1997, we accelerated the vesting provisions related to options of
certain employees to purchase 475,000 shares with an exercise price of $0.12 per
share and all of the options were exercised. The underlying shares are subject
to a repurchase agreement over a five year period whereby we can repurchase a
portion of the shares upon termination of employment. The amount available for
repurchase is reduced by 20% each year of employment. In late 1997, we
repurchased 100,000 shares for $0.12 per share, upon the termination of one of
the exercising employees. The repurchased shares are included in the authorized
but unissued shares of common stock. At December 31, 1999, approximately 105,000
shares were subject to repurchase.

                                       47
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


The following table sets forth our stock option activity:
<TABLE>
<CAPTION>
                                                                                           Weighted              Weighted
                                                                                            Average               Average
                                                                      Number of            Exercise             Grant Date
                                                                       Shares                Price              Fair Value
                                                                     -----------       --------------         --------------
                                                                                       (in thousands)
<S>                                                                 <C>                   <C>                <C>
  Outstanding at December 31, 1996...............................          $ 905                 $ 1.02                 $  --
    Granted
       Above market value........................................          1,405                   3.60                  0.52
       At market value...........................................            493                   3.90                  1.12
    Exercised  ..................................................           (475)                  0.12                    --
    Canceled.....................................................             (6)                  2.66                    --
                                                                          ------                  -----                 -----
  Outstanding at December 31, 1997...............................          2,322                   3.38                    --
    Granted
       Above market value........................................          1,361                  11.26                  0.16
       At market value...........................................            321                   7.48                  1.74
    Exercised  ..................................................            (44)                  0.38                    --
    Canceled.....................................................           (638)                  5.26                    --
                                                                           -----                  -----                 -----
  Outstanding at December 31, 1998...............................          3,322                   6.50                    --
    Granted
       Above market value........................................            475                  14.49                  5.65
       At market value...........................................            549                  10.43                  5.87
       Below market value........................................            103                  14.28                 17.35
    Exercised  ..................................................            (98)                  4.76                    --
    Canceled.....................................................           (567)                  7.13                    --
                                                                           -----                  -----                 -----
  Outstanding at December 31, 1999...............................        $ 3,784                 $ 8.30                $   --
                                                                         =======                 ======                ======
</TABLE>

The following table indicates the number of shares exercisable and the weighted
average exercise prices at December 31:

<TABLE>
<CAPTION>
                                                                           1997                1998                 1999
                                                                         --------            --------            ----------
<S>                                                                       <C>                <C>                 <C>
Options exercisable...................................................    172,500             495,050             1,025,200
Weighted average exercise price.......................................   $   2.58            $   3.32            $     5.27
</TABLE>


At December 31, 1999, the range of exercise prices and weighted average
remaining contractual life for options outstanding was as follows:

<TABLE>
<CAPTION>
                                                           Weighted Average
                                     Option Price        Remaining Contractual
Number of Shares                         Range                   Life
----------------                   ----------------      ---------------------
<S>                                  <C>                   <C>
1,265,250 . . . . . . . . . . .     $ 2.00 to $ 5.00              5.6 years
  842,700 . . . . . . . . . . .     $ 5.01 to $10.00              6.4 years
1,574,750 . . . . . . . . . . .     $10.01 to $15.00              8.4 years
  100,500 . . . . . . . . . . .     $15.01 to $20.00              9.3 years
      750 . . . . . . . . . . .     $20.01 to $21.50              9.6 years
</TABLE>

                                       48
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


If the compensation cost for the Plan was determined based on the fair value at
the grant dates for awards using the method prescribed by SFAS 123, our pro
forma net loss and net loss per share would have been as follows:

<TABLE>
<CAPTION>

                                                                         Years Ended December 31,
                                                               --------------------------------------------
                                                                  1997             1998            1999
                                                               ---------=       ----------      -----------
                                                                  (in thousands, except per share amounts)
<S>                                                            <C>             <C>              <C>
  Net loss:
    As reported............................................     $(9,655)        $(50,576)        $(108,260)
    Pro-forma..............................................     $(9,703)        $(50,958)        $(109,073)
  Net loss per share:
    As reported............................................     $ (0.92)        $  (3.68)        $   (5.32)
    Pro-forma..............................................     $ (0.92)        $  (3.72)        $   (5.36)

</TABLE>

     The fair value of each option grant is estimated on the date of grant using
the minimum value method prior to our Initial Public Offering IPO) on July 19,
1999 and the Black Scholes method from July 19, 1999 forward, with the following
assumptions:

<TABLE>
<CAPTION>

                                                                         Years Ended December 31,
                                                               ----------------------------------------------
                                                                   1997             1998             1999
                                                               ----------       -----------       -----------
<S>                                                            <C>             <C>               <C>
  Dividend yield............................................            -                 -                 -
  Volatility................................................            -                 -               141
  Risk-free interest rate...................................    5.65-6.84%        5.38-5.71%        4.60-6.30%
  Expected lives............................................      5 years           5 years           5 years

</TABLE>

     Because we expect to make additional option grants, the above pro forma
disclosures are not necessarily representative of pro forma effects on net
income to be reported for future years.

     We recognized compensation expense for employee stock grants and stock
options of $194,517 for the year ended December 31, 1997, $633,828 for the year
ended December 31, 1998, and $1.5 million for the year ended December 31, 1999.

                                       49
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


10.  Business Segments:

     We classify our business into three fundamental areas: eBusiness Solutions,
Enterprise Services and Enterprise Systems. Senior management evaluates and
makes operating decisions about each of these operating segments based on a
number of factors. We do not account for assets by business segment and,
therefore, depreciation and amortization are not factors used in evaluating
operating performance. Two of the most significant factors used in evaluating
the operating performance are: revenue and gross margin before depreciation as
presented below:

<TABLE>
<CAPTION>
                                                                                   Years Ended December 31,
                                                                 --------------------------------------------------------------
                                                                     1997                    1998                    1999
                                                                 --------------        ----------------        ----------------
                                                                                        (in thousands)
<S>                                                            <C>                    <C>                     <C>
Revenue:
  eBusiness Solutions.......................................     $           --        $             --        $          1,742
  Enterprise Services.......................................              2,795                  27,922                  64,806
  Enterprise Systems........................................              7,415                  33,678                  93,374
                                                                 --------------        ----------------        ----------------
    Total...................................................             10,210                  61,600                 159,922
                                                                 --------------        ----------------        ----------------
Gross margin before depreciation:
  eBusiness Solutions.......................................                 --                      --                   1,022
  Enterprise Services.......................................              1,517                  12,335                  31,979
  Enterprise Systems........................................              1,325                   5,562                  22,876
                                                                 --------------        ----------------        ----------------
    Total...................................................              2,842                  17,897                  55,877
                                                                 --------------        ----------------        ----------------
Reconciliation to net loss:
  Selling, general and administrative.......................            (10,983)                (47,862)               (125,350)
  Depreciation and amortization.............................             (1,453)                 (7,493)                (17,295)
  Impairment of long-lived assets...........................                 --                      --                    (650)
                                                                 --------------        ----------------        ----------------
  Operating loss............................................             (9,594)                (37,458)                (87,418)
  Interest expense..........................................               (156)                (17,502)                (25,491)
  Interest income...........................................                251                   4,632                   4,880
  Other income (expense)....................................               (156)                   (248)                   (231)
                                                                 --------------        ----------------        ----------------
    Net loss................................................     $       (9,655)       $        (50,576)       $       (108,260)
                                                                 ==============        ================        ================
</TABLE>

11.  Deferred Compensation:

     We have a Deferred Compensation plan whereby certain management employees
can elect to defer a portion of their compensation which will be paid in shares
of our common stock at a future date. The plan requires that we issue shares of
common stock into a rabbi trust which will then be distributed to the employee
at a specified date in the future not less than one year from the deferral date.
We have recorded the deferred compensation amount as treasury stock (for
accounting purposes) and as a deferred compensation obligation in the
shareholders' equity (deficit) section of the balance sheet. As of December 31,
1999, 148,171 shares of our common stock are being held in the rabbi trust.


12.  Income Taxes:

     For federal income tax purposes we had net operating loss carryforwards of
$152.2 million as of December 31, 1999. Section 382 of the Internal Revenue Code
places certain limitations on the annual amount of net operating loss
carryforwards which can be utilized if certain changes in ownership occur. As a
result, our ability to use these net operating loss carryforwards, which will
begin to expire in 2011, may be limited.

                                       50
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


The components of the net deferred tax assets are as follows:

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                          ----------------------------
                                                                             1998              1999
                                                                          ---------          --------
                                                                                 (in thousands)
<S>                                                                       <C>                <C>
Deferred tax assets:
    Net operating loss carryforwards..................................     $17,058            $57,828
    Deferred revenue..................................................       1,924              2,441
    Accrued vacation and bonus........................................       1,342              1,635
    Intangibles.......................................................         549              1,031
    Allowance for doubtful accounts...................................         528                747
    Deferred gain on sales-type leases................................           -                646
    Charitable contributions..........................................           -                 16
    Property and equipment............................................         462                367
    Self-insurance and warranty liabilities...........................         449                135
    Original issue discount...........................................         384                201
    Valuation allowance...............................................     (22,696)           (65,047)
                                                                          --------           --------
       Total net deferred tax assets..................................    $      -           $      -
                                                                          =========          ========
</TABLE>

The increase in the valuation allowance of $19.1 million in 1998 and $42.4
million in 1999 are due to increased losses during each year. We have recorded a
full valuation allowance on the net deferred tax assets due to continuing
losses.

Our actual income taxes differed from the expected federal statutory rate as
follows:

<TABLE>
<CAPTION>

                                                                                       Years Ended December 31,
                                                                       ----------------------------------------------------
                                                                              1997               1998                1999
                                                                       --------------      -------------       ------------
<S>                                                                     <C>                 <C>                 <C>
  Statutory tax rate...............................................               34%                34%                35%
  State taxes, net of federal benefit..............................                4                  4                  3
  Valuation allowance..............................................              (38)               (38)               (38)
                                                                       --------------      -------------       ------------
  Effective tax rate...............................................                -%                 -%                 -%
                                                                       ==============      =============       ============
</TABLE>

13.  Net Loss Per Share:

     The net loss available to common shareholders consists of the following:

<TABLE>
<CAPTION>

                                                                                  Years Ended December 31,
                                                                     ----------------------------------------------------
                                                                         1997                1998                1999
                                                                     -----------         ------------        ------------
                                                                                      (in thousands)
<S>                                                                  <C>                 <C>                 <C>
  Net loss.....................................................      $    (9,655)         $  (50,576)        $ (108,260)
                                                                     ===========          ==========         ==========
  The weighted average shares consist of the following:
  Weighted average common shares used for
    basic and fully diluted earnings per share.................           10,461              13,732             20,356
                                                                     ===========          ==========         ==========
  Anti-dilutive options and warrants not included in
    the calculation............................................            3,827               6,975              8,868
                                                                     ===========          ==========         ==========
 </TABLE>

14.  Employee Benefit Plans:

     We adopted an employee benefit 401(k) plan for all employees effective
March 1, 1997. Under the plan, employees may voluntarily elect to have up to 15%
of their salaries deducted from earnings and placed in the plan. We may elect to
match up to 6% of the employee contributions by contributing our common stock to
the plan. Our contributions are determined on a quarterly basis and the number
of shares to be contributed is based upon the

                                       51
<PAGE>

                        CONVERGENT COMMUNICATIONS, INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)


estimated fair value of the stock at the end of each quarter. During 1998 we
contributed $182,792 of our common stock for the year ended December 31, 1997
match and contributed $253,102 of our common stock for the first and second
quarters of 1998. During 1999, we contributed $712,596 for the third and fourth
quarters 1998 and contributed $2.0 million for the first, second, and third
quarters of 1999. An additional $932,498 was accrued as of December 31, 1999 for
the fourth quarter of 1999 which was contributed in February, 2000.

15.  Related Party Transactions:

     In August 1998, we entered into a two year agreement with Strategic
Healthcare Solutions, LLC (SHS) under which SHS was engaged to provide new
customers in the healthcare industry to us. One of our directors is a principal
of Strategic Asset Management which has an ownership interest in SHS. Under the
agreement, we pay SHS a monthly fee and commissions (an aggregate of
approximately $125,000 in 1998 and $227,336 in 1999). In addition, we issued a
warrant to SHS which entitles them to purchase up to a maximum of 131,250 shares
of our common stock at an exercise price of $12.00.

      The warrant includes performance objectives which are reviewed
semiannually. If SHS does not meet those performance objectives, all or a
portion of the shares available for each six-month period (32,813 shares) is
reduced. The warrant is not exercisable until August 1, 2000 and expires August
1, 2003. During 1999, 64,331 shares applicable to the warrant were cancelled as
a result of not meeting the performance objectives.

     In October 1999, we entered into a long-term Enterprise Managed Services
agreement with Cavion Technologies, Inc. (Cavion). Under this agreement we have
designed a network which we now own, maintain and monitor and support
connectivity, including providing equipment and related services for the
network. In connection with this agreement we purchased $286,000 of equipment
from Cavion. In exchange for the use of our equipment and services provided,
Cavion will pay us a monthly fee over a term of five years. In October 1999,
John Evans was elected as a member of the Board of Directors of Cavion. In
addition, through a business combination we completed in 1997, we own 67,603
shares of Cavion which represents a less than 2% ownership percentage. In
connection with the EMS agreement we recognized revenue of approximately
$135,000 during 1999 of which, approximately $85,000 remained in trade accounts
receivable as of December 31, 1999.

                                       52
<PAGE>

Item 9.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure

     None

                                   PART III

Item 10.  Directors and Executive Officers of the Registrant

     The information required by this item is incorporated herein by reference
to our definitive proxy statement for our 2000 Annual Meeting of Stockholders.

Item 11.  Executive Compensation

     The information required by this item is incorporated herein by reference
to our definitive proxy statement for our 2000 Annual Meeting of Stockholders.

Item 12.  Security Ownership Of Certain Beneficial Owners And Management
          Principal Shareholders

     The information required by this item is incorporated herein by reference
to our definitive proxy statement for our 2000 Annual Meeting of Stockholders.

Item 13.  Certain Relationships And Related Transactions

     The information required by this item is incorporated herein by reference
to our definitive proxy statement for our 2000 Annual Meeting of Stockholders.

                                       53
<PAGE>

                                    PART IV

Item 14.  Exhibits, Financial statements schedules, and reports on form 8-K

     (a)(1) The following consolidated financial statements of Convergent
Communications, Inc. are included in Item 8 of this Report on Form 10-K:

     Report of Independent Accountants

     Consolidated Balance Sheets as of December 31, 1998 and 1999

     Consolidated Statements of Operations for the years ended December 31,
     1997, 1998 and 1999

     Consolidated Statements of Shareholders' Equity (Defecit) for the years
     ended December 31, 1997, 1998 and 1999

     Consolidated Statements of Cash Flows for the years ended December 31,
     1997, 1998 and 1999

     Notes to Consolidated Financial Statements

     (a)(2) The following financial statement schedules of Convergent
Communications for the three years ended December 31, 1999 are included in this
Report on Form 10-K, as required by Item 14(d):

     .    Report of Independent Accountants on Financial Statement Schedule

     .    Schedule II--Valuation and Qualifying Accounts

     All other schedules have been omitted because the information is not
required or is included in the consolidated financial statements.

  (a)(3) List of Exhibits (including management contracts or compensatory plans
or arrangements required to be filed)

<TABLE>
<CAPTION>
     Exhibit
       No.
------------------
<S>                  <C>
  3.1***             Amended and Restated Articles of Incorporation of Convergent Communications, Inc.

  3.2**              Articles of Amendment to the Amended and Restated Articles of Incorporation of Convergent
                     Communications, Inc.

  3.3+               Articles of Amendment to the Amended and Restated Articles of Incorporation of Convergent
                     Communications, Inc.

  3.4+++             Third Articles of Amendment to Amended and Restated Articles of Incorporation of Convergent
                     Communications, Inc.

  3.5                Articles of Amendment to Amended and Restated Articles of Incorporation of Convergent
                     Communications, Inc.

  3.6                Amended and Restated Bylaws of Convergent Communications, Inc.
</TABLE>

                                       54
<PAGE>

<TABLE>
<S>                  <C>
  4.1***             Indenture, dated as of April 2, 1998, by and among the Company and Norwest Bank Colorado, N.A.

  4.2***             Warrant Agreement, dated as of April 2, 1998

  4.3***             Warrant Registration Rights Agreement, dated as of April 2, 1998

  4.4***             Collateral Account Control Agreement, dated as of April 2, 1998

  4.5***             Custody and Security Agreement, dated as of April 2, 1998

  4.6**              Investor Rights Agreement, dated as of March 17, 1999

  4.7**              Warrant Agreement, dated as of March 17, 1999

  4.8++              Warrant Agreement, dated as of June 3, 1999

  4.9++++            Warrant to Purchase Common Stock of Convergent Communications, Inc. dated as of July 16, 1999

  4.10               Securities Purchase Agreement, dated as of April 4, 2000

  4.11               Investor Rights Agreement, dated as of April 18, 2000

  4.12               Warrant Agreement, dated as of April 18, 2000

  10.1               Employment Agreement, dated April 17, 2000, between Joseph R. Zell and the Company

  10.2               First Amendment to Employment Agreement, dated April 9, 2000, between Brian R. Ervine and the Company

  10.3++++++         Employment Agreement, dated March 9, 2000, between Martin E. Freidel and the Company

  10.4++++++         Employment Agreement, dated March 9, 2000, between Brian R. Ervine and the Company

  10.5++++++         Employment Agreement, dated March 9, 2000, between Michael Dozier and the Company

  10.6++++++         Employment Agreement, dated March 9, 2000, between D. Randall Hake and the Company

  10.7++++++         Employment Agreement, dated March 9, 2000, between Gregory P. McGraw and the Company

  10.8***            Asset Purchase Agreement, dated June 16, 1998 (as amended) by and between Convergent
                     Communications Services, Inc. and Tie Communications, Inc., Debtor-in-Possession

  10.9***            Master Lease Agreement, dated November 11, 1997, between Comdisco, Inc. and the Company

  10.10***           Master Lease Agreement, dated November 17, 1997, between Convergent Capital Corporation
                     and the Company

  10.11***           Program Agreement, dated November 19, 1997, among Comdisco, Inc., Convergent
                     Communications Services, Inc. and the Company

  10.12              Loan and Security Agreement by and between Convergent Communications Services, Inc. and
                     Foothill Capital Corporation, as agent, dated as of April 18, 2000
</TABLE>

                                       55
<PAGE>

<TABLE>
<S>            <C>
10.13          Secured Continuing Guaranty by Convergent Communications, Inc. in
               favor of Foothill Capital Corporation, as agent, dated as of
               April 18, 2000

10.14++        Purchase and License Agreement by and between Cisco Systems, Inc.
               and Convergent Communications Services, Inc. dated July 16, 1999

10.15++++      Credit Agreement dated as of July 16, 1999 between Convergent
               Communications Services, Inc. and Cisco Systems Capital
               Corporation

10.16++++      Guaranty dated as of July 16, 1999 by Convergent Communications,
               Inc. in favor of Cisco Systems Capital Corporation

21.1++++++     Subsidiaries

23.1           Consent of PricewaterhouseCoopers LLP

24.1           Power of Attorney (included on page 58)

27.1           Financial Data Schedule

99.1++++++     Audit Committee Charter effective March 9, 2000

*              Previously filed and incorporated by reference to the 1999 annual
               report on Form 10-K (SEC File No. 333-53953)

**             Previously filed and incorporated by reference to the 1998 annual
               report on Form 10-K (SEC File No. 333-53953).

***            Previously filed and incorporated by reference to the
               Registration Statement on Form S-4 (Reg. No. 333-5393).

+              Previously filed and incorporated by reference to the
               Registration Statement on Form S-1 (Reg. No. 333-78483) filed May
               14, 1999.

++             Previously filed and incorporated by reference to Amendment No. 1
               to Registration Statement on Form S-1 (Reg. No. 333-78483) filed
               on June 28, 1999.

+++            Previously filed and incorporated by reference to Amendment No. 2
               to Registration Statement on Form S-1 (Reg. No. 333-78483) filed
               on July 15, 1999.

++             Previously filed and incorporated by reference to Amendment No. 3
               to Registration Statement on Form S-1 (Reg. No. 333-78483) filed
               on July 16, 1999

++++           Previously filed and incorporated by reference to Amendment No. 4
               to Registration Statement on Form S-1 (Reg. No. 333-78483) filed
               on July 19, 1999.

++++++         Previously filed and incorporated by reference to the 1999 annual
               report on Form 10-K (SEC File No. 333-53953).
</TABLE>


         (b) Reports on Form 8-K

         Report on Form 8-K filed April 20, 2000

     SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.

     The registrant has not sent to security holders any annual report covering
the registrant's last fiscal year or any proxy material relating to a meeting of
security holders. Copies of such annual report and proxy will be furnished to
the Commission when it is sent to security holders.

                                       56
<PAGE>

                                  SIGNATURES

     Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on April 24, 2000.


                                       Convergent Communications, Inc.


                                       By:  /s/ Joseph R. Zell
                                          --------------------------------------
                                          Joseph R. Zell
                                          President and Chief Executive Officer

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

<TABLE>
<CAPTION>
              Signature                                    Title                             Date
--------------------------------------     ---------------------------------------    ------------------
<S>                                        <C>                                          <C>


        /s/   JOSEPH R. ZELL               President, Chief Executive                   April 24, 2000
--------------------------------------     Officer and Director
            Joseph R. Zell                 (Principal ExecutiveOfficer)


       /s/   BRIAN R. ERVINE               Chief Financial Officer and                  April 24 2000
--------------------------------------     Treasurer (Principal Financial and
          Brian R. Ervine                  Principal Accounting Officer)


                                           Director                                     April 24, 2000
--------------------------------------
           Jeffrey A. Shaw


                                           Director                                     April 24, 2000
--------------------------------------
          Richard W. Boyce
</TABLE>

                                       57
<PAGE>

<TABLE>
<CAPTION>
                 Signature                                            Title                                   Date
--------------------------------------------       --------------------------------------------       ---------------------
<S>                                                <C>                                                   <C>


          /s/ Spencer I. Browne*                   Director                                              April 24, 2000
--------------------------------------------
            Spencer I. Browne


         /s/ Michael J. Marocco*                   Director                                              April 24, 2000
--------------------------------------------
           Michael J. Marocco


       /s/   Richard G. Tomlinson*                 Director                                              April 24, 2000
--------------------------------------------
          Richard G. Tomlinson

*  By  /s/ MARTIN E. FREIDEL

Martin E. Freidel, attorney in fact.
</TABLE>

     KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Martin E. Freidel, as such person's true
and lawful attorney-in-fact and agent with full power of substitution for such
person and in such person's name, place and stead, in any and all capacities, to
sign and to file with the Securities and Exchange Commission a report of
Convergent Communications, Inc., a Colorado corporation (the "Corporation"), on
Form 10-K, with exhibits thereto and other documents in connection therewith,
granting unto each said attorney-in-fact and agent full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as such person
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or any substitute therefor, may lawfully do or cause
to be done by virtue thereof.



                                       58
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS
                        ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors of
Convergent Communications, Inc.

     Our audits of the consolidated financial statements referred to in our
report dated March 13, 2000 except for Note 7 as to which the date is March 28,
2000 and Note 1 as to which the date is April 18, 2000, appearing in Item 8 of
this Annual Report on Form 10-K also included an audit of the financial
statement schedule listed in the index in Item 14(a)(2) of this Form 10-K. In
our opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.


PricewaterhouseCoopers LLP


Denver, Colorado
March 13, 2000

                                       59
<PAGE>

                                  SCHEDULE II

                       Valuation and Qualifying Accounts
                                (in thousands)
<TABLE>
<CAPTION>
                                        Balance           Charged
                                          at              to Costs                                                      Balance at
                                       Beginning            and                 Deductions/                               End of
                                       of Period          Expenses               Writeoffs            Other               Period
                                      ------------       -----------           --------------        --------          -------------
<S>                                  <C>                <C>                   <C>                   <C>               <C>
Allowance for uncollectible trade
receivables:
 Year ended December 31, 1997         $    --            $    21                  $    --            $   --               $    21
                                      -------            -------                  -------            ------               -------
 Year ended December 31, 1998         $    21            $   401                  $  (205)           $1,691  (i)          $ 1,908
                                      -------            -------                  -------            ------               -------
 Year ended December 31, 1999         $ 1,908            $ 3,154                  $(2,550)           $   --               $ 2,512
                                      -------            -------                  -------            ------               -------
Allowance for obsolete or excess
  inventory:
 Year ended December 31, 1997         $    --            $    --                  $    --            $   --               $    --
                                      -------            -------                  -------            ------               -------
 Year ended December 31, 1998         $    --            $    68                  $    --            $   --               $    68
                                      -------            -------                  -------            ------               -------
 Year ended December 31, 1999         $    68            $ 1,368                  $   (88)           $   --               $ 1,348
                                      -------            -------                  -------            ------               -------
Valuation allowance for deferred
 tax assets:
 Year ended December 31, 1997         $    --            $ 3,582  (ii)            $    --            $   --               $ 3,582
                                      -------            -------                  -------            ------               -------
 Year ended December 31, 1998         $ 3,582            $19,114  (ii)            $    --            $   --               $22,696
                                      -------            -------                  -------            ------               -------
 Year ended December 31, 1999         $22,696            $42,351  (ii)            $    --            $   --               $65,047
                                      -------            -------                  -------            ------               -------

</TABLE>
(i)  Represents amount from acquisition of certain assets of Tie
     Communications, Inc.
(ii) Represents a full valuation against the net deferred tax assets.

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