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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

(Mark One)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2001

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: 000-28-559

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

|Delaware(State or other jurisdiction of
incorporation or organization)                   |  | 36-4186543(I.R.S. Employer
Identification No.)
|---------------------------------------------------------------------------------------- |  | ----------------------------------------------
|233 S. Wacker Drive, Suite 600 Chicago, Illinois(Address of principal executive offices) |  | 60606(Zip Code)                               

(312) 660-5000(Registrant's telephone number, including area code)

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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 / /

The
number of shares outstanding of the issuer's common stock, par value $0.01, as of April 30, 2001 was 91,826,089 shares.

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Universal Access, Inc.  Form 10-Q  Table of Contents

|Part I                |  |                                                                                                               
|--------------------- |  | --------------------------------------------------------------------------------------------------------------
|Financial Information |  |                                                                                                               
|Item 1.               |  | Condensed Consolidated Financial Statements                                                                   
|                      |  | Condensed Consolidated Balance Sheets at December 31, 2000 and March 31, 2001 (Unaudited)                     
|                      |  | Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2000 and 2001 (Unaudited)
|                      |  | Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 2001 (Unaudited)
|                      |  | Notes to Condensed Consolidated Financial Statements                                                          
|Item 2.               |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                         
|Item 3.               |  | Quantitative and Qualitative Disclosures about Market Risk                                                    
|Part II               |  |                                                                                                               
|Other Information     |  |                                                                                                               
|Item 1.               |  | Legal Proceedings                                                                                             
|Item 6.               |  | Exhibits and Reports on Form 8-K                                                                              
|Signatures            |  | 28                                                                                                            

2

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PART I  FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNIVERSAL ACCESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

|ASSETS                                 |                                                                                                                        | Dec. 31,
2000              |                                            | March 31,
2001 |        
|-------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | -------------- | -------
|
|Current assets:                        |                                                                                                                        |                            |                                            |                |        
|                                       | Cash and cash equivalents                                                                                              |                            | $                                          | 56,931         |        
|                                       | Short-term investments                                                                                                 |                            |                                            | 50,425         |        
|                                       | Accounts receivable, less allowances for doubtful accounts of $1,003 and $1,498, respectively                          |                            |                                            | 15,404         |        
|                                       | Prepaid expenses and other current assets                                                                              |                            |                                            | 5,911          |        
|                                       |                                                                                                                        |                            |                                            |                |        
|                                       |                                                                                                                        | Total current assets       |                                            |                | 128,671
|Restricted cash                        |                                                                                                                        |                            | 10,751                                     |                |        
|Property and equipment, net            |                                                                                                                        |                            | 78,675                                     |                |        
|Intangible assets, net                 |                                                                                                                        |                            | 6,925                                      |                |        
|Long-term investments                  |                                                                                                                        |                            | 2,000                                      |                |        
|                                       |                                                                                                                        |                            |                                            |                |        
|                                       |                                                                                                                        | Total assets               |                                            | $              | 227,022
|                                       |                                                                                                                        |                            |                                            |                |        
|LIABILITIES AND STOCKHOLDERS' EQUITY   |                                                                                                                        |                            |                                            |                |        
|Current liabilities:                   |                                                                                                                        |                            |                                            |                |        
|                                       | Accounts payable and accrued expenses                                                                                  |                            | $                                          | 38,994         |        
|                                       | Unearned revenue                                                                                                       |                            |                                            | 7,971          |        
|                                       | Notes payable and current portion of term loans                                                                        |                            |                                            | 1,092          |        
|                                       | Other liabilities                                                                                                      |                            |                                            | 141            |        
|                                       |                                                                                                                        |                            |                                            |                |        
|                                       |                                                                                                                        | Total current liabilities  |                                            |                | 48,198 
|Notes payable and term loans           |                                                                                                                        |                            | 1,153                                      |                |        
|Other liabilities                      |                                                                                                                        |                            | 309                                        |                |        
|                                       |                                                                                                                        |                            |                                            |                |        
|                                       |                                                                                                                        | Total liabilities          |                                            |                | 49,660 
|Commitments and contingencies (Note 4) |                                                                                                                        |                            |                                            |                |        
|Stockholders' equity:                  |                                                                                                                        |                            |                                            |                |        
|                                       | Common stock, $.01 par value; 1,000,000,000 shares authorized; 90,856,330 and 91,733,373 shares issued and outstanding |                            |                                            | 909            |        
|                                       | Common stock warrants                                                                                                  |                            |                                            | 629            |        
|                                       | Additional paid-in-capital                                                                                             |                            |                                            | 252,736        |        
|                                       | Deferred stock plan compensation                                                                                       |                            |                                            | (6,735         | )      
|                                       | Accumulated deficit                                                                                                    |                            |                                            | (68,387        | )      
|                                       | Accumulated other comprehensive income                                                                                 |                            |                                            | 23             |        
|                                       | Notes receivableemployees                                                                                             |                            |                                            | (1,813         | )      
|                                       |                                                                                                                        |                            |                                            |                |        
|                                       |                                                                                                                        | Total stockholders' equity |                                            |                | 177,362
|                                       |                                                                                                                        |                            |                                            |                |        
|                                       |                                                                                                                        |                            | Total liabilities and stockholders' equity |                | $      
|                                       |                                                                                                                        |                            |                                            |                |        

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

3

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UNIVERSAL ACCESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)

|                                                              |                                                                 | Three Months Ended
March 31, |                         
|------------------------------------------------------------- | --------------------------------------------------------------- | ---------------------------- | ------------------------
|
|Revenues                                                      |                                                                 | $                            | 7,335                   
|Costs and expenses:                                           |                                                                 |                              |                         
|                                                              | Cost of circuit access                                          |                              |                         
|                                                              | Operations & administration (excluding stock plan compensation) |                              |                         
|                                                              | Operations & administration (stock plan compensation)           |                              |                         
|                                                              | Depreciation & amortization                                     |                              |                         
|                                                              |                                                                 |                              |                         
|                                                              |                                                                 |                              | Total costs and expenses
|                                                              |                                                                 |                              |                         
|                                                              |                                                                 |                              | Operating loss          
|                                                              |                                                                 |                              |                         
|Other income, net                                             |                                                                 |                              | 663                     
|                                                              |                                                                 |                              |                         
|Net loss                                                      |                                                                 | $                            | (9,074                  
|                                                              |                                                                 |                              |                         
|Basic and diluted net loss per share                          |                                                                 | $                            | (0.22                   
|Shares used in computing basic and diluted net loss per share |                                                                 |                              | 41,097                  

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

4

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UNIVERSAL ACCESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

|                                                     |                                                       | Three Months Ended
March 31,                         |        
|---------------------------------------------------- | ----------------------------------------------------- | ---------------------------------------------------- | -------
|
|Cash flows from operating activities:                |                                                       |                                                      |        
|                                                     |                                                       | Net cash used for operating activities               |        
|                                                     |                                                       |                                                      |        
|Cash flows from investing activities:                |                                                       |                                                      |        
|                                                     | UTX capital expenditures                              |                                                      |        
|                                                     | Non-UTX capital expenditures                          |                                                      |        
|                                                     | Sale/(Purchase) of short-term investments             |                                                      |        
|                                                     |                                                       |                                                      |        
|                                                     |                                                       | Net cash provided by/(used for) investing activities |        
|                                                     |                                                       |                                                      |        
|Cash flows from financing activities:                |                                                       |                                                      |        
|                                                     | Debt repayments                                       |                                                      |        
|                                                     | Restriction on cash balance                           |                                                      |        
|                                                     | Proceeds from initial public offering of common stock |                                                      |        
|                                                     | Proceeds from exercise of stock options               |                                                      |        
|                                                     |                                                       |                                                      |        
|                                                     |                                                       | Net cash provided by financing activities            |        
|                                                     |                                                       |                                                      |        
|Effect of exchange rate changes on cash              |                                                       |                                                      |       
|Net increase/(decrease) in cash and cash equivalents |                                                       |                                                      | 134,835
|Cash and cash equivalents, beginning of period       |                                                       |                                                      | 38,024 
|                                                     |                                                       |                                                      |        
|Cash and cash equivalents, end of period             |                                                       | $                                                    | 172,859
|                                                     |                                                       |                                                      |        
|Non-Cash Financing Activities:                       |                                                       |                                                      |        
|                                                     | Issuance of restricted stock                          |                                                      |        

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

5

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by Universal Access, Inc. and its subsidiaries ("the Company"
or "we"), and reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to state fairly the financial position and the results of
operations for the interim periods. The statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. These statements
should be read in conjunction with the Financial Statements and Notes thereto included in the Company's 2000 Annual Report on Form 10-K. Results for fiscal 2001 interim periods are
not necessarily indicative of results to be expected for the fiscal year ending December 31, 2001.

Note 2Investments

The Company's short-term investments have original maturities of between three and twelve months, are classified as
held-to-maturity and are stated at amortized cost. Investments consist of the following at December 31, 2000 and March 31, 2001, (in thousands):

2000

2001Commercial paper

$
28,313

$
17,051Certificates of deposit


9,525


Corporate notes


8,614


8,337Government agencies


3,973


4,392Foreign debt securities





3,006Total investments

$
50,425

$
32,786


Note 3Property and Equipment, Net

Property and equipment consists of the following, stated at cost, at December 31, 2000 and March 31, 2001, respectively (in thousands):

2000

2001Furniture and fixtures

$
5,288

$
5,956Leasehold improvements


6,778


8,707UTX equipment


22,972


28,187Computer hardware and software


9,185


11,371Construction in progress


39,300


46,81783,523


101,038Less: Accumulated depreciation and amortization


(4,848
)

(6,423
)Property and equipment, net

$
78,675

$
94,615


Construction
in progress primarily relates to costs incurred during the expansion of the Company's Universal Transport Exchange ("UTX") facilities.

6

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Note 4Commitments and Contingencies

The Company is a party to certain litigation for which the claimants are seeking damages in excess of $10,000,000. The litigation arose out of a letter of
intent that the Company entered into in December 1998 relating to the Company's potential acquisition of a business. In the opinion of management, such litigation is without merit and will not
have a material adverse effect on the operations or financial condition of the Company. Accordingly, no amount has been accrued as a liability as of December 31, 2000 and March 31, 2001.

Note 5Comprehensive Income

Comprehensive income, which includes net income and all other non-owner changes in equity during a period, is as follows for the three months ended
March 31, 2001:

Net loss

$
(14,999
)Foreign currency translation adjustments


173Comprehensive net loss

$
(14,826
)


The
Company did not have any adjustments for comprehensive income for the three months ended March 31, 2000.

7

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ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that
are not statements of historical facts may be deemed to be forward-looking statements. For example, words such as "may", "will", "should", "estimates", "predicts", "potential", "continue", "strategy",
"believes", "anticipates", "plans", "expects", "intends", and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ
significantly from the results discussed in the forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those discussed under the
heading "Factors That May Affect Future Results." The following discussion provides information and analysis of our results of operations for the three month periods ended March 31, 2000 and
2001, and our liquidity and capital resources. You should read the following discussion in conjunction with our consolidated financial statements and the related notes included elsewhere in this
quarterly report as well as the other reports we file with the Securities and Exchange Commission.

Overview

We commenced operations on October 2, 1997 for the purpose of facilitating the provisioning, installation and servicing of dedicated communications
circuits for service providers who buy network capacity and transport suppliers who sell network capacity. To date, we have derived substantially all of our revenues from providing ongoing, dedicated
circuit access. Monthly recurring circuit revenues are generated under client contracts with terms ranging from 12 to 60 months, with an average length of 22 months as of
March 31, 2001. Contracts with our clients may be terminated by the client at any time, subject to additional payments. Circuit charges are billed monthly in advance, and circuit revenues are
recognized in the month that service is provided. Amounts billed in advance are recorded on the balance sheet as accounts receivable and unearned revenue. At March 31, 2001, unearned revenue
was $10.0 million.

Circuit
revenues include bundled charges for provisioning, network management and maintenance services. UTX billing and revenue recognition policies are the same as those described
above for circuit revenues.

Our
clients are communications service providers and transport suppliers, such as Internet service providers, competitive access providers, incumbent telecommunication service
providers and other
application and network service providers. Our two largest clients represented approximately 47% of total revenues for the quarter ended March 31, 2000. Our four largest clients represented
approximately 69% of total revenues for the quarter ended March 31, 2001.

To
date, cost of circuit access has primarily consisted of amounts paid to transport suppliers for circuits. We have negotiated volume discounts and network route-specific discounts
under contracts with many of our suppliers. These contracts generally have terms ranging from three to ten years and include minimum monthly purchase commitments that begin anywhere from six to twelve
months after we enter into the contract. At March 31, 2001, these minimum purchase commitments totaled approximately $3.9 million per month. However, actual purchases under these
contracts, which totaled approximately $13.2 million for the quarter ended March 31, 2001, have exceeded these minimum purchase commitments. In addition, as of March 31, 2001 we
were party to contracts that will impose additional minimum purchase commitments that we anticipate will total approximately $4.1 million per month by December 2001.

8

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Operations and administration expense consists of salaries and employee benefits, costs associated with the development, expansion and maintenance of our Universal Information
Exchange ("UIX") databases, and costs associated with sales, marketing, operations, administration and facilities.

In
each year since our inception, we have incurred operating losses and net losses, and have experienced negative cash flows from operations. At March 31, 2001, we had an
accumulated deficit of $83.4 million.

|                                                                                            |  | Three Months Ended
March 31, |       
|------------------------------------------------------------------------------------------- |  | ---------------------------- | ------
|
|
|Net loss                                                                                    |  | $                            | (9,074
|                                                                                            |  |                              |       
|Basic and diluted net loss per share                                                        |  | $                            | (0.22 
|Basic and diluted net loss per share (excluding non-cash stock option compensation expense) |  | $                            | (0.20 
|Shares used in computing net loss per share                                                 |  |                              | 41,097

Results of Operations

Comparison of Quarter Ended March 31, 2000 to Quarter Ended March 31, 2001

Revenues

Revenues increased from $7.3 million for the quarter ended March 31, 2000 to $25.7 million for the quarter ended March 31, 2001.
Substantially all of our revenues consisted of circuit revenues in each of these years. Most of the increase in revenues was attributable to an increase in the number of circuits sold to existing and
new customers, as well as sales of higher capacity circuits which generated greater revenues per circuit. In addition, our UTX facilities enable us to provision circuits more efficiently and therefore
directly contribute to increases in circuit revenues.

Cost of Circuit Access

Cost of circuit access increased from $5.9 million for the quarter ended March 31, 2000 to $17.6 million for the quarter ended
March 31, 2001. As a percentage of total revenues, cost of circuit access decreased from 81% for the quarter ended March 31, 2000 to 69% for the quarter ended March 31, 2001. The
increase in cost of circuit access in absolute dollars was primarily attributable to an increase in the volume of circuits sold to both an increased number of clients and additional sales to existing
clients. The decrease in cost of circuit access as a percentage of total revenues was primarily attributable to volume-pricing efficiencies created by the UIX and reflects the successful scaling of
our model and the growing efficiencies in our business.

Operations and Administration (Excluding Stock Plan Compensation)

Operations and administration expenses increased $11.8 million from $9.7 million to $21.5 million in the quarters ending March 31,
2000 and 2001, respectively. This increase was primarily attributable to significant increases in personnel, continued expansion of our UIX databases and the build-out of our corporate
infrastructure. Salaries and benefits increased $8.7 million for the quarter ended March 31, 2001 as compared to the quarter ended March 31, 2000. Similarly, facilities costs,
including rent and utilities for corporate offices and sales offices increased $2.7 million for the quarter ended March 31, 2001 as compared to March 31, 2000. Employee placement
fees decreased $1.4 million for the quarter ended March 31, 2001 as compared to March 31, 2000. Finally, sales and marketing costs,

9

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primarily for tradeshows, advertising and promotions, decreased $541,000 for the quarter ended March 31, 2001 as compared to March 31, 2000.

The
number of employees increased from 251 at March 31, 2000 to 443 at March 31, 2001. We expect headcount to remain relatively constant for the remainder of 2001.
During 2000, we began operations in London and Amsterdam to increase our presence in Europe, incurring a loss from these start-up operations of $1.9 million in the first quarter
ended March 31, 2001. We expect losses from our European operations to increase in the future, as we increase working capital requirements and build-out our UTX facilities.

We
expect total operations and administration expenses to continue to increase in absolute dollars as we expand the UIX databases and build-out corporate infrastructure.
Ultimately, we expect operations and administration expense to significantly decrease as a percentage of revenues as we fully leverage our operating systems, our UIX databases and our infrastructure.

Operations and Administration (Stock Plan Compensation)

During fiscal year 1999 and the first quarter of 2000, we granted stock options to employees and non-employees with per share exercise prices
deemed to be below the fair market value of our common stock at the dates of grant. These stock option issuances have resulted in stock plan compensation charges, which are initially deferred and
subsequently amortized over the vesting period of the related options.

Stock
plan compensation expense totaled $840,000 for the quarter ended March 31, 2000 and $1.2 million for the quarter ended March 31, 2001. The increase in stock
plan compensation charges between periods is due to the granting of a restricted stock award in the first quarter of 2001 to certain key employees, resulting in a one-time charge of
$418,000.

During
January and March of 2001, we granted 1.5 million and 650,000 shares, respectively, of restricted stock to certain members of the executive management team. The shares
had fair market values of $6.06 and $4.61 at the respective grant dates, and will begin vesting pursuant to our stock attaining a minimum closing price, or in the second quarter of 2002, whichever
occurs first. The Company expects to recognize related stock plan compensation charges of approximately $12.1 million from the grant date through the vesting terms of the grants.

There
were 11,892,979 and 15,562,518 stock options outstanding at March 31, 2000 and 2001, respectively. We expect to recognize total stock plan compensation charges of
approximately $3.2 million in the remainder of fiscal 2001 and $14.3 million over the three years thereafter.

Depreciation and Amortization

Depreciation expense includes depreciation of furniture, fixtures and equipment at our office facilities and of equipment at our UTX facilities. Depreciation
expense increased by $1.1 million in the quarter ended March 31, 2001, compared with the quarter ended March 31, 2000. We expect depreciation expense to increase substantially in
the future as we continue to place our UTX facilities into service and purchase additional equipment for existing UTX facilities.

Amortization
expense, which increased $159,000 in the quarter ended March 31, 2001, compared with the quarter ended March 31, 2000, relates to intangible assets acquired
in connection with the purchases of Pacific Crest Networks, Inc., Stuff Software, Inc. and Tri-Quad Enterprises, Inc. in July 1999, November 1999 and
July 2000, respectively.

10

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Other Income (Expense)

Other income increased $827,000 from $663,000 in the quarter ended March 31, 2000 to $1.5 million for the quarter ended March 31, 2001.
The increase in other income was attributable to our investment of substantially all of the proceeds from our public stock offering, in cash equivalents with original maturities of less than three
months and marketable securities with original maturities of three to twelve months. Interest income for the quarters ended March 31, 2000 and 2001 was partially offset by interest expense on
notes payable and capital lease obligations.

Income Taxes

From our inception through September 27, 1998, we elected to be treated as a subchapter S-corporation for income tax purposes. On
September 27, 1998, we converted to a C-corporation. At December 31, 2000, we had approximately $60,284,000 of federal and state net operating loss carryforwards. These
carryforwards may be available to offset future taxable income. Our federal and state net operating loss carryforwards expire at various dates beginning in 2018. Due to the uncertainty that we will
generate future earnings sufficient to enable us to realize the benefit of these net operating loss carryforwards, we have recorded a valuation allowance for the full amount of our deferred tax asset.
As a result, no income tax benefit has been recorded in our statement of operations. We assess the realizability of our deferred tax asset on an ongoing basis and adjust the valuation allowance based
on this assessment. Additionally, Section 382 of the Internal Revenue Code of 1986, as amended, imposes annual limitations on the use of net operating loss carryforwards if there is a change in
ownership, as defined, within any three year period. The utilization of certain net operating loss carryforwards may be limited due to our capital stock transactions.

Liquidity and Capital Resources

On March 17, 2000 we completed an initial public offering of our common stock that resulted in the issuance of 12,650,000 shares of common stock at an
offering price of $14.00 per share. Net proceeds related to this offering totaled $161.9 million. Until the time of our initial public offering, we had financed our operations primarily through
private placements as well as through borrowings from stockholders and financial institutions. Since inception through December 31, 1999, we raised $63.4 million in capital through
private placements of common and convertible preferred stock and common and preferred stock warrants. Our principal uses of cash are to fund operating losses, working capital requirements and capital
expenditures. At March 31, 2001, we had $40.1 million in cash and cash equivalents and $32.8 million in short-term investments with original maturities between three
and twelve months.

In
March 2000, we entered into a lease commitment for office space located in Chicago, Illinois which serves as our corporate headquarters. This commitment will result in lease
payments of $4.7 million during fiscal 2001 and $67.2 million of future minimum lease payments through July 2012.

In
March 1999, we entered into a credit agreement with a bank under which we may request the bank to issue letters of credit or we may borrow up to a total of
$4.0 million. The agreement provides that outstanding borrowings bear interest at the bank's prime rate. This agreement expired in April 2000 and we did not renew this line of credit.
The collateral cash balance in the amount of our outstanding letters of credit at March 31, 2001 was $553,000 and expired April 10, 2001.

In
December 1999, we entered into a credit agreement with a bank and borrowed $3.3 million. Outstanding borrowings bear interest at approximately 15% and are secured by
specifically identified assets. The agreement expires in November 2002 and requires that we maintain an unrestricted cash balance of at least $15.0 million. As of March 31, 2001,
the outstanding balance of this loan was $2.0 million.

11

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In June 2000, we entered into a credit agreement with a bank under which we may request the bank to issue letters of credit or we may borrow up to a total of
$18.0 million. The agreement expires in June 2001, and consists of Part A and Part B. Under Part A of the agreement we may request the bank to issue letters of
credit or we may borrow up to a total of $12.0 million. Part A requires that we maintain a cash balance in a custodial account in an amount equal to the amount of borrowings and letters
of credit outstanding up to $12.0 million. Letters of credit totaling $10.6 million were outstanding under Part A of the agreement as of March 31, 2001 and a
$11.1 million cash balance was in a custodial account as of March 31, 2001.

Under
Part B of the agreement we may request the bank to issue letters of credit or we may borrow up to a total of $6.0 million. Outstanding borrowings under the
agreement bear interest at the bank's prime rate and are secured by substantially all of our assets. Part B of the agreement requires that we maintain specified covenants. We were in compliance
with all covenants at March 31, 2001. Letters of credit totaling $1.7 million were outstanding under Part B of the agreement as of March 31, 2001.

Net
cash used in operating activities increased from $7.1 million for the quarter ended March 31, 2000 to $18.5 million for the quarter ended March 31,
2001. The increase in net cash used was primarily due to a decrease in accounts payable in the first quarter of 2001.

Net
cash used in investing activities decreased from $19.2 million for the quarter ended March 31, 2000 to $824,000 of net cash provided for investing activities in the
quarter ended March 31, 2001. The decrease in net cash used in investing activities relates to the sale of short-term investments, primarily offset by purchases of property and
equipment. We expect to continue to invest in facilities and equipment in the near term as we increase the number of our UTX facilities.

In
December 2000, we purchased $21.2 million of equipment for deployment in our UTX facilities. This purchase was recorded within accounts payable at year-end. In March 2001,
approximately $5.0 million of this equipment was paid for and deployed. We intend to pay for the remaining payable of undeployed equipment as financing is arranged.

In
addition to our nineteen UTX facilities at March 31, 2001, we intend to complete construction of twelve additional facilities during the remainder of 2001, for a total of
thirty-one UTX facilities. Construction, equipment and facility leasing costs incurred in connection with the construction of a UTX facility are capitalized until the facility is placed
into operations. Once the facility is placed into operations, these costs are amortized over the lesser of the term of the lease, ranging from seven to 15 years, or the estimated useful life of
the equipment. At March 31, 2001 we had UTX construction in process of $46.3 million, and had entered into outstanding UTX equipment orders of approximately $20.4 million and
future minimum lease payments of approximately $47.2 million related to UTX facilities.

We
plan to spend approximately $16.0 million in the remainder of 2001 to complete construction of twelve smaller UTX facilities in North America, support the continued
enhancement of our UIX, and upgrade UTX facilities for additional service demands. The smaller UTX facilities can range in size from 500 square feet to 2,000 square feet and are less capital intensive
than the facilities that are currently operational.

Net
cash provided by financing activities decreased from $161.2 million for the quarter ended March 31, 2000 to $745,000 for the quarter ended March 31, 2001. The
decrease was primarily due to the receipt of net proceeds of $161.9 million from the public issuance of our common stock in the quarter ended March 31, 2000. For the quarter ended
March 31, 2001, net cash provided by financing activities was due to proceeds from the exercise of stock options, partially offset by debt repayments and restrictions on our cash balance.

12

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On April 27, 2001, we filed a Form S-3 Registration Statement with the SEC. This filing enables us, from time to time, to offer to sell debt securities, warrants and
stock purchase contracts, either individually or in units, as well as preferred stock, either directly or represented by depositary shares. We may also offer common stock issuable upon the conversion
of debt securities or preferred stock, the exercise of
warrants or pursuant to stock purchase contracts. On May 15, 2001, we filed with the SEC to withdraw our Form S-3 Registration Statement.

Our
future capital requirements will depend on a number of factors, including market acceptance of our services, the resources we devote to developing, selling and marketing our
services and the rate at which we expand our UTX facilities. In addition, we plan to continue to evaluate possible investments in complementary businesses, products and technologies. Although we
believe that the net proceeds from our initial public offering in March 2000, together with existing cash balances, will be sufficient to fund our operations at least until we become
self-funding through operations, we may require additional financing within this time frame. Additional funding may not be available on terms acceptable to us, or at all.

FACTORS THAT MAY AFFECT FUTURE RESULTS

In addition to the factors discussed elsewhere in this Form 10-Q and the Company's other reports filed with the SEC, the following are
important factors which could cause actual results or events to differ materially from those contained in any forward-looking statements we make.

We have incurred substantial losses since our inception, and if we fail to increase our revenues, we will be unable to achieve and maintain profitability.

We have incurred significant losses since inception and expect to continue to incur losses in the future. As of March 31, 2001, we had an accumulated
deficit of $83.4 million. Our revenues have grown from $14.3 million in the year ended December 31, 1999 to $51.1 million in the year ended December 31, 2000 and our
revenues of $25.7 million for the first quarter of 2001 were 252% higher than for the same period in 2000. We cannot be certain that our revenues will continue to grow, or that we will achieve
sufficient revenues to achieve profitability. We expect to continue to incur increasing expenses in order to:



As
a result, we will need to generate significantly higher revenues to achieve and maintain profitability. If we fail to generate higher revenues, we may continue to incur operating
losses and net losses.

Our limited operating history makes forecasting difficult.

We have a limited operating history and, therefore, limited meaningful historical financial data upon which to base our planned operating expenses.
Specifically, our UTX business model is relatively new, and we have not operated our UIX databases in conjunction with our UTX facilities long enough to accurately predict trends in our business.
Moreover, we have not built out enough UTX facilities to be able to test whether our strategy to utilize these facilities will work. Accordingly, we are subject to all of the risks that are associated
with companies in an emerging industry and in an early stage of development, including:



13

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For
example, from time to time we enter into long-term agreements with communications transport suppliers for the supply and installation of communications network
capacity. These agreements generally provide for monthly minimum revenue commitments from us, which we must negotiate based on forecasts of our future network capacity requirements. As of
March 31, 2001, we were party to contracts that will impose minimum purchase commitments that we anticipate will total approximately $4.1 million per month by December 2001. If we
fail to forecast our network capacity requirements accurately or fail to accurately forecast other aspects of our business, it will be difficult for us to become profitable.

We have an unproven business model, and we cannot be sure that clients will widely accept our services.

Our business strategy is unproven. To be successful, we must convince prospective clients to entrust their network capacity data and transport requirements to
a company without a long and proven track record. We are not aware of any companies that have a directly comparable business, and we cannot be sure that clients will widely accept our services.

Our
ability to expand our client base may be limited by the following factors:



We
may not be able to execute our business model if the markets for our services fail to develop or grow more slowly than anticipated, if competitors enter the market or if we are
unable to expand our client base.

Our ability to implement and maintain our UIX databases is unproven. If we cannot increase the scope and accuracy of these databases as planned, our ability to
cost-effectively facilitate the obtaining of circuits for our clients will be at risk.

To be successful, we must increase and update information about pricing, capacity, availability and location of circuits contained in our databases. Our
ability to cost effectively facilitate the supplying of circuits and to provide ongoing dedicated line circuit access depends upon the information we collect from our transport suppliers regarding
their networks, which we include in our UIX databases. Our suppliers are not obligated to provide us with this information and could decide to stop providing this information to us at any time.
Moreover, we cannot be certain that the information that our suppliers share with us is completely accurate or current. If we cannot continue to maintain and expand our UIX databases as planned, we
may be unable to increase our revenues or to cost-effectively facilitate the supplying of the circuits, and we may never achieve profitability.

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The market for our UTX services is new and unproven, and we have limited experience providing our UTX services.

The market for our UTX services is new and unproven. Our ability to generate revenues will suffer if the market for these services fails to develop, or
develops more slowly than we expect. The growth of this market depends on several uncertain events or occurrences including:



To
date, we have derived substantially all of our revenues from providing on-going circuit access, and we have only limited experience providing our UTX services. At
March 31, 2001, we had operational UTX facilities in Amsterdam, the Netherlands, Atlanta, Boston, Chicago (2 locations), Dallas, London, United Kingdom, Los Angeles, Miami, New York City
(3 locations), Phoenix, Portland, San Francisco, Santa Clara, Seattle, Washington D.C., and Vienna, Virginia.

However,
clients may terminate their UTX contracts at any time, and our ability to generate revenues will suffer if we fail to maintain our existing clients and to attract new clients
for our UTX services.

One
of our key strategies is to expand our business by opening additional UTX facilities in geographically diverse locations. In addition to our nineteen operational UTX facilities,
we expect to construct twelve additional smaller UTX facilities in North America during the remainder of 2001, for a total of 31 completed UTX sites. Construction of UTX facilities is expensive and
time-consuming and will cause a significant strain on the capital resources and operation of our business. If we are unable to generate sufficient cash flows or raise sufficient funds, we
may have to delay or abandon some or all of our development and expansion plans. A delay in the expansion of our UTX facilities may make it more difficult for us to respond to competitive pressures
and establish our presence in the market.

It
usually takes us at least six months to select an appropriate location for a new UTX facility, construct the facility, install equipment and communications network infrastructure
and hire operations and sales personnel. We must incur these costs before we have clients who purchase our services to be delivered from the UTX facilities. If the demand does not develop as we
anticipate, we will have fixed costs without corresponding revenue and our business will be harmed.

Our ability to open UTX facilities is subject to a number of risks, including the following:



In
addition, our costs will increase as we continue to open UTX facilities. These increased costs include:



15

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An
inability to establish additional UTX facilities as planned, to effectively manage our expansion or to attract sufficient clients to our UTX facilities would harm our ability to
generate revenues.

If we cannot successfully aggregate circuits, this could limit our ability to increase our margins.

We plan to actively manage circuits through our UTX facilities to deliver circuits to customers more quickly and to increase margins. We plan to achieve this
by physically aggregating circuits on the same route. In order to physically aggregate circuits, we plan to deploy optical switches that would allow circuits to be optically switched between networks.
However, we have not tested optical switches in our UTX facilities, and we cannot be sure that this equipment will function as expected. We may also face delays in installing optical switches. In
addition, we cannot be sure that there will be enough circuits on routes between existing UTX facilities to allow us to cost-effectively aggregate these circuits. If we cannot successfully
deploy optical switches or physically aggregate circuits, this could limit our ability to increase our margins.

If we cannot successfully operate our network operations center, we will be unable to provide monitoring, maintenance and restoration services to our clients.

One of our primary business objectives is to provide our clients with network monitoring, maintenance and restoration services 24 hours a day, seven
days a week through a network operations center. We recently began operating a network operations facility, however, we have only limited experience implementing services of this type. As a
consequence, we cannot be sure that our efforts to provide these services will be successful. Our ability to implement this strategy will depend on many factors, including our ability to train, manage
and retain employees. If we fail to successfully operate a network operations center, we may not be able to monitor network operations effectively or troubleshoot circuits in a
cost-effective manner, which would cause us to lose clients and make it difficult for us to attract new clients.

Although we plan to continue expanding international operations, we have limited experience operating internationally.

An important component of our strategy is to expand into international markets, such as Europe, Asia and South America, and we recently opened offices in
London, United Kingdom, and Amsterdam, the Netherlands. However, we have limited experience operating internationally. The risks inherent in conducting our business internationally include:



16

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In
addition, in order to expand internationally, we may enter into joint ventures or outsourcing agreements with third parties, acquire complementary businesses or operations, or
establish and maintain new operations outside of the United States. We may not control or manage some or all of these operations. As a result, we may be required to depend on third parties for the
management of these international operations. If these foreign operations are not successful, they could significantly damage our reputation, which would harm our ability to attract new clients and
retain existing clients.

Competition in our industry is intense and growing, and we may be unable to compete effectively.

The market for the services we provide is highly fragmented. In addition, the market in which we operate is new, rapidly evolving and highly competitive. We
believe that at this time no single competitor competes directly with us with respect to all of the services we offer; however, we currently or potentially compete with a variety of companies,
including some of our transport suppliers, with respect to our products and services individually, including:



We
expect to face additional competition from new market entrants in the future as there are few substantial barriers to entry in our market. Significant new competitors could arise
from increased consolidation and strategic alliances in the telecommunications industry. Other new entrants could enter the market with a business model similar to ours. Our target markets may support
only a limited number of competitors. Operations in such markets with multiple competitive providers may be unprofitable for one or more of such providers. Prices in both the long distance business
and the data transmission business have declined significantly in recent years and are expected to continue to decline.

Moreover,
while recent regulatory initiatives allow carriers such as us to interconnect with incumbent local exchange carrier facilities and to obtain unbundled network elements from
incumbent local exchange carriers, certain initiatives also provide increased pricing flexibility for, and relaxation of regulatory oversight of, the incumbent local exchange carrier. This may present
incumbent local exchange carriers with an opportunity to subsidize services that compete with our services with revenues generated from non-competitive services. This would allow incumbent
local exchange carriers to offer competitive services at lower prices. Existing laws also restrict the regional Bell operating companies from fully competing with us in the market for interstate and
international long distance telecommunications services, but also permit the Federal Communications Commission, the FCC, to lessen or remove some restrictions. If FCC decisions under existing law, or
future amendments to Federal telecommunications laws, permit the regional Bell operating companies to compete fully with us in this market, our revenues from these services could be reduced if these
companies are able to attract a substantial portion of our customers.

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We must distinguish ourselves through the quality of our client service, our service offerings and brand name recognition. We may not be successful in doing this.

Many
of our potential competitors have certain advantages over us, including:



Our
competitors may be able to use these advantages to:



If
we are unable to compete successfully against our current and future competitors, our gross margins could decline and we could lose market share, either of which could materially
and adversely affect our business.

If we have difficulties or delays in delivering circuits to our clients, our ability to generate revenue will suffer and we may lose existing and potential new clients.

It typically takes 30 to 90 days to supply a circuit for a client, and we do not begin to recognize revenue until a circuit has been installed and
accepted by the client. Once we agree to facilitate the supply of a circuit for a client, we negotiate with one or more transport suppliers and manage the personnel and field technicians of multiple
vendors. A client can withdraw its order with minimal liability at any time before accepting the circuit. We may experience difficulties in facilitating the supply of circuits if our transport
suppliers run out of capacity, forcing us to look for alternative sources of capacity on short notice. If we are unable to facilitate the supply of a circuit in a timely manner or fail to obtain
client acceptance of the circuit, we will be unable to recognize access revenues for that circuit, and our operating results would be adversely affected. Furthermore, since our clients may cancel
orders at any time before accepting the circuit, we may find it difficult to forecast revenue and plan our expenses accordingly.

The unpredictability of our quarterly results may adversely affect the trading price of our common stock.

Our revenues and operating results will vary significantly from quarter to quarter due to a number of factors, many of which we cannot control and any of which
may cause our stock price to fluctuate. These factors include the following:



18

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In
addition, we depend on decisions by our clients to expand their Internet infrastructure, which in turn depend upon the success and expected demand for the services these clients
offer.

We
expect our operating expenses to increase significantly in future periods. Our operating expenses are largely based on anticipated revenue trends, and a high percentage of our
expenses are, and will continue to be, fixed in the short term due in large part to our construction of our UTX facilities. As a result, fluctuations in our revenue for the reasons set forth above, or
for any other reason, could cause significant variations in our operating results from quarter to quarter and could result in substantial operating losses.

Because
of these factors, we believe that quarter-to-quarter comparisons of our operating results are not, and will not be, a good indication of our future
performance. It is likely that, in some future quarters, our operating results may not meet the expectations of public market analysts and investors. In that event, the price of our common stock may
fall.

Our facilities and the networks on which we depend may fail, which would interrupt the circuit access we provide and make it difficult for us to retain and attract clients.

Our clients depend on our ability to provide ongoing dedicated circuit access. The operation of these circuits depends on the networks of third party transport
suppliers, such as MCI WorldCom or Williams Communications. The networks of transport suppliers and clients who may use our UTX facilities may be interrupted by failures in or damage to these
facilities. Our facilities and the ongoing circuit access we provide may be interrupted as a result of various events, many of which we cannot control, including:



We
may be subject to legal claims and be liable for losses suffered by our clients for disruptions to circuits or damage to client equipment resulting from failures at our facilities
or on the networks of third party providers. In addition, we may be subject to legal claims and be liable for losses suffered by clients and carriers who use our UTX facilities. Our contracts with our
clients and with carriers who use our UTX facilities attempt to eliminate our liability for consequential or punitive damages and for damage to client equipment not caused by our gross negligence or
willful acts. However, those provisions may not protect us from being held liable for those damages. We generally provide outage credits to our clients if circuit disruptions occur. If our circuit
failure rate is high, we may incur significant expenses related to circuit outage credits, which would reduce our revenues. We would also

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incur significant expenses in investigating and addressing the causes of such circuit failures, which would divert resources from the expansion of our services and cause our business to suffer.
Clients may seek to terminate their contracts with us if there is a circuit failure. In addition, if our circuit failure rate is high, our reputation could be harmed, which would make it difficult for
us to retain and attract clients.

We depend on several large clients, and the loss of one or more of these clients, or a significant decrease in total revenues from any of these clients, could significantly
reduce our revenue and income.

Historically, a substantial portion of our revenues has come from a limited number of clients. For example, for the year ended December 31, 1999, our
largest client accounted for approximately 38% of our total revenues, and for the year ended December 31, 2000, our four largest clients accounted for approximately 61% of our total revenues.
In the quarter ended March 31, 2000, our two largest clients
accounted for approximately 47% of our total revenues, while in the first quarter of 2001 our four largest clients accounted for approximately 69% of our total revenues. We have a number of
significant revenue contracts with these customers. These contracts expire on various dates between November 2000 and March 2005. If we lose one or more large clients, or if one or more
of our large clients reduces the services they purchase from us and we fail to add new clients, our revenues could decline and our results of operations would suffer.

Our clients may fail to pay or be unable to pay their obligations to us in a timely manner or at all.

Some of our clients may have limited operating histories and may have inadequate financial resources to meet all of their obligations. We have recorded a
substantial bad debt expense during the year ended December 31, 1999 and the quarter ended March 31, 2001 primarily in connection with the failure by certain clients to pay their bills.
Although we continue to improve our credit approval process, if other clients are unable to meet their obligations to us, we may incur additional bad debt expenses, which could harm our cash flows and
results of operations.

The regulatory framework under which we operate and new regulatory requirements or new interpretations of existing regulatory requirements could require substantial time and
resources for compliance, which could make it difficult for us to operate our business.

Our communications services are subject to both federal and state regulation. In providing our interstate and international communications services, we must
comply with federal telecommunications laws and regulations prescribed by the FCC. At the state level, we are subject to state laws and to regulation by state public utility commissions. As we expand
internationally, we will also become subject to regulation by foreign authorities and, in some markets, supra-national authorities, such as the European Union.

These
laws and regulations are subject to frequent changes and different interpretations, and therefore, it is difficult for us to assess the impact of these factors on our
operations. The current domestic and international trend is toward deregulation of telecommunications and Internet services. However, we cannot be certain that this trend will continue, and it is
possible that changes in regulatory policies could limit our ability to compete in some markets. The implementation, modification, interpretation and enforcement of laws and regulations vary and can
limit our ability to provide many of our services.

We
have been required to obtain authorization from the FCC and many state public utilities commissions to offer particular types of telecommunications services. Pursuant to these
authorizations, we have to comply with a variety of regulatory obligations on an ongoing basis. We cannot assure you that the FCC or state commissions will grant us required authority (or do so in a
timely manner), or refrain from taking action against us if we are found to have violated any requirements of their rules. If authority is not obtained or if our schedules of prices, terms, and
conditions are not filled, or are not updated, or otherwise do not fully comply with the rules of the FCC or state regulatory agencies, third

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parties or regulators could challenge our ability to offer our services. Such challenges could cause us to incur substantial legal and administrative expenses.

Required regulatory approvals may interfere with or delay corporate transactions.

As a regulated company, we are required to obtain the approval of the FCC and certain state regulators before engaging in certain types of transactions,
including mergers, acquisitions of other regulated companies, sales of all or substantial parts of our business, issuance of stock, and incurrence of debt obligations. The particular types of
transactions that require approval differ in each jurisdiction. In several states, any transaction that results in a transfer of 10% or more of our voting stock may require prior approval. If we
cannot obtain the required approvals, or if we encounter substantial delays in obtaining them, we may not be able to enter into transactions on favorable terms and our flexibility in operating our
business will be limited. If our flexibility is limited, we may not be able to optimize our operating results.

Telecommunications regulations of other countries may restrict our operations.

We will be subject to the regulatory regimes in each of the countries in which we conduct business. Local regulations range from permissive to restrictive,
depending upon the country. Changes to existing regulations of foreign countries may decrease the opportunities that are available for us to enter into those markets, or may increase our legal,
administrative or operational costs, or may constrain our activities in other ways that we cannot necessarily anticipate. Any of these developments could impair our efforts to develop foreign
operations.

We expect to incur operational and management inefficiencies when we acquire new businesses.

Part of our expansion strategy includes acquiring businesses and technologies that we believe will complement our existing business. For example, in 1999 we
acquired two companies, in July 2000 we completed our third acquisition, and we may acquire additional companies in the future. These acquisitions will likely involve some or all of the
following risks:



We
may need to complete these transactions in order to remain competitive. We cannot be sure that we will be able to obtain required financing for these transactions or that these
transactions will occur.

We expect to require additional third-party financing, and if we cannot obtain this financing on commercially reasonable terms, our ability to expand our business will suffer.

Although we believe our existing cash balances will be sufficient to fund our business until we become self-funding through operations, our ability
to meet our planned growth may require substantial cash resources. We expect that the anticipated expansion of our UTX facilities, construction of twelve additional facilities in the remainder of 2001
(at an estimated average cost of $500,000 per facility), and our anticipated funding of negative cash flow from operating activities, will require substantial capital.

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In addition, part of our expansion strategy includes acquiring complementary businesses and technology, which may require us to raise additional funds. We do not expect to generate significant cash
flow from operations in the near term. Accordingly, our ability to meet our additional future capital needs will depend upon our ability to renegotiate, extend or replace our credit facilities, obtain
supplemental financing or raise additional capital. Additional debt financing may limit our financial and operating flexibility. We may not be able to renegotiate or replace our credit and equipment
lease facilities on a timely basis, on acceptable terms or at all. Additional equity financing may not be available or may be dilutive to existing stockholders. If we are unable to obtain future
financing when needed or on acceptable terms we may have to delay or abandon our development and expansion plans, which could materially adversely affect our growth and ability to compete.

We must continue our marketing and sales initiatives to increase market awareness and sales of our services.

Our services require a sophisticated sales and marketing effort that targets key people within our prospective clients' organizations. This sales effort
requires the efforts of select personnel as well as specialized system and consulting engineers within our organization. Our ability to execute our sales and marketing initiatives depends on many
factors, including our ability to train, manage and retain employees. If we are unable to effectively staff our marketing and sales operations, or our marketing efforts are not successful, we may not
be able to increase market awareness or sales of our products and services, which may prevent us from achieving and maintaining profitability.

If we do not continue to train, manage and retain employees in our client support organization, clients may significantly reduce purchases of our services.

Our client support organization is responsible for providing our clients with technical and operational support, and for identifying and developing
opportunities to provide additional services to our existing clients. Competition for qualified client support personnel is intense because few people have the necessary level of technical skills and
experience in telecommunications provisioning and network management. If we fail to train, manage and retain employees in our client support organization, we may be limited in our ability to gain more
business from existing clients, and we may be unable to obtain or maintain current information regarding our clients' and suppliers' communications networks, which could limit our ability to provision
future circuits for our clients.

If we do not establish and maintain key client relationships, our revenues may decline.

Our success will depend upon our ability to develop and manage key client relationships in order to generate additional revenues from existing clients. Our
ability to develop and manage our client relationships depends on, among other things:



If
we fail to establish and maintain these client relationships, our revenues may stagnate or decline.

If we fail to manage expansion effectively, our ability to increase our services and client base could suffer.

Our ability to successfully offer our services and implement our business plan in a rapidly evolving market requires effective planning and management. We
continue to increase the scope of our

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operations and have substantially increased the number of our employees. At December 31, 1997, we had five employees while at March 31, 2001, we had approximately 443
full-time employees. This growth has placed, and our anticipated growth in future operations will continue to place, a significant strain on our management systems and resources. We expect
that we will need to continue to improve our financial and managerial controls, reporting systems and procedures, and will need to continue to expand, train and manage our work force. Furthermore, we
expect that we will be required to manage multiple relationships with various clients, suppliers and other third parties. We cannot be sure that we will be able to manage our expansion effectively.

If we fail to successfully complete the implementation of our management information systems, we may not be able to operate or manage our business effectively.

We are in the process of augmenting our management information systems to facilitate management of client orders, client service, billing and financial
applications. Our ability to manage our business could be harmed if we fail to successfully and promptly:



In
addition, our ability to efficiently operate our business could suffer if the software which runs our information systems malfunctions.

We depend on our key personnel to manage our business effectively in a rapidly changing market, and our ability to generate revenues will suffer if we are unable to retain our
key personnel and hire additional personnel.

Our future success depends upon the continued services of our executive officers and other key sales, marketing and support personnel. We do not have "key
person" life insurance policies covering any of our employees. In addition, we depend on the ability of a relatively new management team to effectively execute our strategies. We recently hired
several of our key employees. Because some members of our management team have worked together only for a short period of time, we need to integrate these officers into our operations.

We
will need to hire additional personnel in our communications provisioning, sales, marketing and support areas in the future, and we believe our success depends, in large part, upon
our ability to attract and retain our key employees. Competition for these persons is intense, especially in the communications provisioning area. In particular, we have experienced difficulty in
hiring qualified network engineers, and we may not be successful in attracting and retaining these individuals. The loss of the services of any of our key employees, the inability to attract or retain
qualified personnel in the future, or delays in hiring required personnel could limit our ability to generate revenues.

Because we have no patented technology and have limited ability to protect our proprietary information, competitors may more easily enter our market and harm our ability to
generate revenues.

We have no patented technology that would preclude or inhibit competitors from entering our market. We rely on a combination of copyright, trademark, service
mark and trade secret laws and

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contractual restrictions to establish and protect our intellectual property. We have applied for registration of certain of our service marks in the United States and in other countries, and have
obtained a registration for one of our service marks in Switzerland. Even if additional registrations are granted, we may be limited in the scope of services for which we may exclusively use our
service marks. We enter into confidentiality agreements with our employees, consultants and partners, and we control access to, and distribution of, our proprietary information. Our intellectual
property may be misappropriated or a third party may independently develop similar intellectual property. Moreover, the laws of certain foreign countries may not protect our intellectual property
rights to the same extent as do the laws of the United States. Unauthorized use of any of our proprietary information could expose us to competition, which would harm our ability to attract new and
existing clients and generate revenues.

Certain stockholders will continue to have substantial control over Universal Access, Inc. and could delay or prevent a change in corporate control.

Internet Capital Group, Inc., funds affiliated with ComVentures and other stockholders, directors and officers, in the aggregate, beneficially own
approximately 53% of our outstanding common stock. These stockholders, acting alone or together, are potentially able to influence significantly all matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other business combination transactions.

Provisions of our charter documents may have anti-takeover effects that could prevent a change in corporate control.

Provisions of our amended and restated certificate of incorporation, bylaws, and Delaware law could make it more difficult for a third party to acquire us,
even if doing so would be a benefit to our stockholders.

There may be sales of a substantial amount of our common stock that could cause our stock price to fall.

Our current stockholders hold a substantial number of shares of our common stock, substantially all of which they are able to sell in the public market. Sales
of a substantial number of shares of our common stock or market expectations that these sales may occur could cause our stock price to fall. In addition,
the sale of these shares could impair our ability to raise necessary capital to issue additional common stock.

We expect to experience volatility in the trading of our stock, which could negatively affect its value.

The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including:



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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we may invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount
of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk, we maintain our portfolio of cash equivalents and short-term investments in a variety of securities,
including commercial paper, money market funds, government and non-government debt securities. In general, money market funds are not subject to market risk because the interest paid on
such funds fluctuates with the prevailing interest rate. As of March 31, 2001, all of our investments were in cash equivalents and short-term investments, except for a
$2.0 million long-term minority investment.

We
have operated primarily in the United States and all sales to date have been made in U.S. dollars. Accordingly, we have not had any material exposure to foreign currency rate
fluctuations.

Interest Rate Sensitivity

We maintain our cash equivalents and short-term investments primarily in a portfolio comprised of commercial paper, money market funds, and
investment grade debt securities. As of March 31, 2001, all of our investments had maturities of less than twelve months. Accordingly, we do not believe that our investments have significant
exposure to interest rate risk.

Exchange Rate Sensitivity

We currently operate primarily in the United States, and substantially all of our revenues and expenses to date have been in U.S. dollars. Accordingly, we have
had no material exposure to foreign currency rate fluctuations.

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PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

In February 2000, a complaint was filed in the Superior Court of California, County of Santa Clara, against us, certain of our directors and officers and other
parties by Point West Ventures, LP, previously known as Fourteen Hill Capital, LP and certain other shareholders in Vaultline Incorporated. The claim arises out a letter of intent that we entered into
in December 1998 relating to our potential acquisition of Vaultline. The letter stated that it was not binding on the parties except with respect to a $250,000 advance to be made by us and certain
obligations of Vaultline. The letter contemplated that we would undertake a due diligence investigation of Vaultline. After performing the due diligence, we determined not to complete the transaction
and entered into a mutual settlement agreement and release. Subsequently, Vaultline ceased doing business. The claimants contend that the mutual settlement agreement executed by the president of
Vaultline was unauthorized. They allege that we, certain of our officers and directors and others conspired to deprive them of their interests in Vaultline. They are seeking damages in excess of
$10,000,000. We believe all of our legal obligations were satisfied and intend to vigorously contest any claims asserted against us relating to this matter. On May 4, 2000, the Superior Court
granted our petition to compel arbitration and to stay proceedings pending arbitration. On July 17, 2000, the Superior Court granted the petition made by certain of our directors and officers
to compel arbitration and to stay proceedings pending arbitration.

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ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K



|Exhibit
Number |  | Description of Document                                                                                                                                                                                                                                                
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1**          |  | Certificate of Incorporation of the Company.                                                                                                                                                                                                                           
|3.1.1*         |  | Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock                                                                                                                                                             
|3.2**          |  | Amended and Restated Bylaws of the Company.                                                                                                                                                                                                                            
|4.1**          |  | Form of Company's Common Stock certificate.                                                                                                                                                                                                                            
|4.2**          |  | Form of warrant to purchase shares of Common Stock of the Company issued to Internet Capital Group.                                                                                                                                                                    
|4.3**          |  | Amended and Restated Registration and Informational Rights Agreement, dated June 28, 1999.                                                                                                                                                                             
|4.4**          |  | Amended and Restated Registration and Informational Rights Agreement, dated June 30, 1999.                                                                                                                                                                             
|4.5**          |  | Registration Rights Agreement, dated November 10, 1999.                                                                                                                                                                                                                
|4.6**          |  | Form of warrant to purchase shares of Common Stock of the Company issued to Advanced Equities.                                                                                                                                                                         
|4.7*           |  | Preferred Stock Rights Agreement, dated as of July 31, 2000, between Universal Access, Inc. and Wells Fargo, including the Certificate of Designation, the form of Rights Certificate and the
Summary of Rights attached thereto as Exhibits A, B, and C, respectively.
|4.8****        |  | Registration Rights Agreement dated July 1, 2000.                                                                                                                                                                                                                      
|21.1***        |  | Subsidiaries of Company.                                                                                                                                                                                                                                               

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|*    |  | Filed with the Company's Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on August 9, 2000                                                                                                  
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|**   |  | Filed with the Company's Registration Statement on Form S-1 (No. 333-93039) filed with the Securities and Exchange Commission by the Company in connection with its initial public offering which became effective March 16,
2000.
|***  |  | Filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000.                                                                                                                             
|**** |  | Filed with the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000.                                                                                                                              
|(b)  |  | Reports on Form 8-K: None.                                                                                                                                                                                                        

27

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|                  |  | UNIVERSAL ACCESS, INC.(Registrant)
|----------------- |  | ----------------------------------
|Date May 15, 2001 |  | By                                

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