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# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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# FORM 10-K

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[X]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2000

OR

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

For the transition period from              
             to

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Commission File No. 0-30155

# Pathnet Telecommunications, Inc.

(Exact name of registrant as specified in its charter)

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Delaware                             
                                          
                                          
                                52-2201331
(State or other jurisdiction of                                     
                                          
                                     (I.R.S. Employer   
 
incorporation or organization)                                     
                                          
                                   Identification No.)

11720 Sunrise Valley Drive, Reston VA                         
                                          
                                   20191
(Address of principal executive offices)                                    
                                          
                       (Zip Code)

(703) 390-1000
(Registrant's telephone number, including area code)

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

None

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

None

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 [ ]

As of March 15, 2001
there were 3,681,851 shares of the Issuers common stock, par value $.01
per share, outstanding.

# DOCUMENTS
INCORPORATED BY REFERENCE

None

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# TABLE OF CONTENTS

# PART I

|Item 1.    Business                                            | 3 
|-------------------------------------------------------------- | --
|Item 2.    Properties                                          | 14
|Item 3.    Legal Proceedings                                   | 14
|Item 4.    Submission of Matters to a Vote of Security Holders | 15

# PART II

|Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters                 | 16
|------------------------------------------------------------------------------------------------- | --
|Item 6.     Selected Consolidated Financial Data                                                  | 16
|Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations | 18
|Item 7A. Quantitative and Qualitative Disclosures about Market Risk                               | 37
|Item 8.      Financial Statements and Supplementary Data                                          | 37
|Item 9.      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 37

# PART III

|Item 10.    Directors and Executive Officers of the Registrant              | 38
|--------------------------------------------------------------------------- | --
|Item 11.     Executive Compensation                                         | 42
|Item 12.     Security Ownership of Certain Beneficial Owners and Management | 46
|Item 13.     Certain Relationships and Related Transactions                 | 48

# PART IV

|Item 14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K | 56 
|--------------------------------------------------------------------------- | ---
|                                                                           
|Signatures                                                                  | 60 
|Index to Financial Statements                                               | F-1

---

This
discussion contains forward-looking statements that involve risks and
uncertainties including, without limitation, statements relating to our company
and our business units plans, strategies, objectives, expectations,
intentions and resources. Our actual results could differ materially from those
anticipated in forward-looking statements as a result of various factors,
including those described in the section of this Annual Report on Form 10-K
entitled RISK FACTORS. Unless we indicate otherwise, references to
our current or future business, strategies or plans are references to our
consolidated business, strategies or plans, including any other future
subsidiaries.

## PART I

## ITEM 1.        
BUSINESS

## Bankruptcy

On
April 2, 2001, we and several of our subsidiaries filed voluntary petitions for
Chapter 11 bankruptcy protection with the U.S. Bankruptcy Court for the District
of Delaware. We have petitioned the court to allow us to continue operating our
business as debtors-in-possession. Under Chapter 11, most of the obligations
that we incurred before the bankruptcy filing are frozen during the bankruptcy
proceeding. In general, this means that during this time we will be able to use
available resources to operate our business. We expect that expenses for goods
and services, including employee wages that we incur after the bankruptcy filing
will be paid in the ordinary course of business.We are exploring
opportunities and currently intend to sell all, part or parts of our business,
and we are currently in preliminary discussions with a potential bidder. We
cannot assure you that these discussions will result in a successful sale. If we
sell only a portion of our business or assets, or if we are unable to sell our
business as a going concern, we expect to liquidate our remaining assets and to
cease operations. We do not expect to generate sufficient cash to repay any of
your investment in full under any circumstances.

In
April 1998, our subsidiary, Pathnet, Inc., issued $350 million of 12 1/4%
senior notes and we have guaranteed the obligations under these notes. A
semi-annual interest payment is due on the notes on April 15, 2001. Neither we,
nor our subsidiary, Pathnet, Inc. will be able to use our remaining funds to pay
the semi-annual interest payment due on the Pathnet notes without the consent of
the bankruptcy court. We do not expect to seek or receive that consent.

## Recent Events

Effective  January 18, 2001,  we entered  into a swap with Enron  Broadband  Services  Inc. in which we provided six fibers on the
route between  Chicago,  Illinois and Denver,  Colorado and in return  received  four fibers on a route owned by Enron between  Aurora,
Colorado and Houston,  Texas,  by way of San Antonio,  Texas.  Pursuant to this swap,  we received an  indefeasible  right of use for a
period of 25 years of the swapped fibers,  associated  regeneration  sites and utilities.  As part of the terms and conditions for this
agreement,  each party is required to pay the other party to maintain the fibers that they  obtained.  In  addition,  Enron was granted
a security interest in the fibers that were swapped and received a non-disturbance from our lenders.

On March 1, 2001,  Thomas N. Hund of The Burlington  Northern and Santa Fe Railway  Company and David Lemmon,  President and Chief
Executive Officer of Colonial Pipeline Company, resigned from our Board of Directors.

## Going Concern

The accompanying  consolidated  financial statements and financial information has been prepared assuming that we will continue as
a going concern,  but there is substantial  doubt about our ability to continue as a going concern.  We incurred losses from operations
of  $334.2 million  and net losses of $369.8  million  during the fiscal year ended  December 31, 2000. We have not been  successful in
obtaining  additional  financing  to sustain our  operations  and will have  insufficient  liquidity  to meet our needs for  continuing
operations  and meeting our  obligations  unless a new source of financing is obtained or an acquirer is found.  We are exploring  ways
in which we might  restructure our debt  obligations,  including those under the Pathnet senior notes, but we expect that we would need
substantial  additional  financing to pursue our current  business  plan. As a result,  we cannot assure you that we will be successful
in any restructuring, refinancing or sale on a timely basis or on terms that are acceptable to us or our creditors.

## Asset Write down

During the fourth quarter of 2000, we identified  certain events and changes in our  operations,  which indicated the carrying
amount of certain  long-lived  assets was not recoverable.  As a result, we recorded  impairment charge of $273.6 million  for the year
ended December 31, 2000, consisting of the following:

- $184.9 million impairment of intangible assets - rights of way;
- $88.7 million impairment of communications network.

As the market for these assets is not well  developed,  our  valuations  are our best  estimates  only and it is possible that
these  assets  could be worth more or less than their  written  down  values in a future  asset sale or sale as part of a viable  going
concern.

On March 30,  2000,  we  completed  a  reorganization  transaction  whereby  Burlington  Northern  and Sante Fe  Railway,  CSX
Transportation, Inc. and Colonial  Pipeline  Company  contributed  certain assets including access rights to their rights of way to permit us to
build a fiber optic  telecommunications  network along their existing railroad and pipeline  corridors in return for series D preferred
stock.  These access  rights had an estimated  fair value of $187 million and were  recorded as an  intangible  asset.  In light of our
difficulty in procuring  sufficient  capital to fund the expansion of our fiber optic network and the availability of other fiber optic
networks,  we abandoned  our strategy of building  upon our access to these rights of way. As a result,  we estimated the fair value of
our access to rights of way based on the expected discounted future cash flows and recorded an impairment charge.

We utilize our  microwave  network to serve second and third tier  markets with  telecommunications  services,  which  include
local access and long  distance  services.  With the rapid  advancement  and  availability  of fiber optic and broadband  networks,  we
determined the potential for significant  customer  utilization  was limited.  As a result,  our microwave  network assets were written
down to their estimated fair value based upon an estimate of residual value resulting in an impairment charge of $73.7 million.

During  2000,  we began the  construction  of collocation  assets to be utilized as part of the rollout of our Digital
Subscriber  Line and other services.  However,  due to changes in market  conditions,  we have  cancelled  any rollout of those  services.  As such,
those  assets were written down to their  estimated  fair value based upon the  disposition  of the assets in  comparable  transactions
resulting in an impairment charge of $15.0 million.

## The Company

We
were formed on November 1, 1999 in order to facilitate a reorganization
transaction with Pathnet, Inc., which was founded in 1995 and is now our wholly
owned subsidiary. Our reorganization was completed on March 30, 2000. We are a
wholesale telecommunications carrier providing other wholesale and retail
telecommunications service providers with access to underserved and second and
third tier markets throughout the United States. In this Report, the words
we, us and our refer to Pathnet, Inc. for
periods prior to the reorganization and to the holding company and its
subsidiaries (including Pathnet, Inc.) for periods after the reorganization.

After
our founding, our business plan was to partner with owners of telecommunications
assets, including utility, pipeline and railroad companies
(Incumbents) to upgrade and aggregate wireless infrastructure to a
microwave network using high capacity Synchronous Optical Network Technology,
also known as SONET. Through 1998, we signed agreements with eight
Incumbents and had over 6,000 miles of wireless network under development.

In
early 1999, we expanded the scope of our business strategy to include fiber
optic technology to enable us to deliver high bandwidth services as well as dark
and dim fiber to inter-exchange carriers (IXCs), ILECs, Internet
service providers (ISPs), cellular operators and resellers.

On
March 30, 2000, we completed a strategic investment transaction with Colonial
Pipeline Company, The Burlington Northern and Santa Fe Corporation and CSX
Transportation, Inc. We received the right to develop over 12,000 miles of these
investors rights of way holdings, 8,000 of which have some form of
exclusivity. In addition to providing a portion of the rights of way access,
Colonial also made a contribution of $68.0 million in cash, consisting of $38.0
million as a first tranche cash investment, $1.0 million for options to purchase
additional shares of our stock, $4.0 million for rights in a single fiber optic
conduit and a second cash investment of $25.0 million, which was funded upon the
completion of our Chicago to Aurora (a suburb of Denver) fiber optic network
build. On August 10, 2000, the Company received the final tranche of this
investment.

In
May 2000, we engaged Goldman Sachs Group Inc. to advise us on potential equity
investments to help us fund our business plan. In March 2001, Goldman Sachs
terminated our engagement. In January 2001, we engaged Policano and Manzo to
advise us on potentially restructuring our debt obligations.In March
2001, we also engaged Houlihan Lokey Howard and Zukin to advise us on a
potential sale or other disposition of the Company.

In
April 2000, we formed a fiber subsidiary, Pathnet Operating, Inc., in part to
facilitate senior secured credit facilities we negotiated with Nortel Networks,
Inc. and Cisco Systems Capital Corporation. These credit facilities were
procured to provide vendor financing for the purpose of procuring equipment for
our network.

In April 1998, our subsidiary,  Pathnet,  Inc., issued  $350 million of 12 1/4% senior notes and we have guaranteed the obligations
under these notes.

## The Pathnet
Network

As
of December 31, 2000, our network consisted of over 6,300 wireless route miles
providing wholesale transport services and 1,500 miles of installed fiber with
an additional 250 route miles of network under construction.

We
have obtained CLEC certification or are otherwise authorized to provide our
telecommunication services in 42 states with applications pending in an
additional 5 states and have executed interconnection agreements with all
relevant ILECS serving our target markets.

As
of December 31, 2000, we had constructed 170 central office collocation
facilities in 106 cities at the premises of the existing local telephone
companies. We are able to obtain and use network elements from these companies.

In
order to connect our network with our customers, we have developed
interconnections from our backbone network into our targeted underserved and
second and third tier markets. We design and install our interconnections using
the most cost effective technology to meet the markets needs that may
include building fiber optic cable, acquiring existing fiber, installing
wireless components, or combinations of these technologies.

We
have attempted to establish a local presence in our target markets and deploy a
convergent local network access platform that enables multiple customer
applications to be combined at a single physical local access connection and
then travel onto our backbone infrastructure. This platform enables our
customers to launch their own services to better serve their customers.

In September  2000,  we announced  the first  implementation  of our VPOP (Virtual  Point of Presence)  Plus Service,  which is an
innovative  broadband  solution,  aggregating and delivering dial up PRI access and private line connections from under-served  markets
to a single DS-3 or OC-x level  connection in a major market.  VPOP Plus Service bundles  multiple types of traffic from several cities
with  long-haul  transport to deliver a national  access  solution  onto a single pipe.  The product  allows our customers to reach new
markets at a reduced cost.

Our network enables our customers,  including  existing local telephone  companies,  long distance  companies,  ISPs,  competitive
telecommunications  companies,  cellular  operators and other  telecommunications  providers,  to offer additional  services to new and
existing customers in these markets without having to expend their own resources to build, expand or upgrade their own networks.

Our architecture is based upon the use of small, low cost,  packet gateways that can be rapidly scaled,  and even relocated within
our network while being controlled by the same softswitch.  This approach lowers the cost of providing local service for a market.

In addition to our VPOP Plus Service,  we offer our Transport Service,  which is a family of high speed dedicated,  point-to-point
digital  bandwidth  services  that operate at speeds  between DS-1 (1.544  Mbps) and OC-48  (2.488  Gbps).  This service is designed to
provide wholesale high-speed  point-to-point  bandwidth for data, voice and video traffic for the Carrier and ISP marketplace in second
and third tier markets  where there is limited  network  choice.  Our  Transport  Service uses  state-of-the-art,  non-zero  dispersion
shifted  fiber and the latest in SONET fiber  equipment  to support a network  infrastructure,  which  transports  data at speeds up to
OC-192.

We
believe fiber has a currency value depending upon the value of the
route to specific telecommunications service providers. To date, we have
successfully swapped fibers between Chicago, Illinois and Denver, Colorado for
fibers between Denver, Colorado and Houston, Texas.

## Industry
Overview

We
believe that several factors create a market opportunity for our products and
services. These factors include increasing demand for high capacity access and
transport services, a growing disparity between telecommunications services
available in the largest markets and those services available in second and
third tier markets, the migration from circuit-based network architectures to
more efficient packet-based network technologies and the adoption of the
Telecommunications Act of 1996 and certain state regulatory initiatives to open
up local telecommunications markets to competition.

At
the same time as we see market opportunity, there are a number of elements in
the market that have weighed against these opportunities. Designing and building
a telecommunications network is capital intensive, and we have relied in very
large part on the capital markets to fund these activities. There has been
significant difficulty in obtaining financing for competitive telecommunications
companies, which is both a cause and effect of the declining market value of
these enterprises. A number of businesses in this sector of the market have
recently filed for bankruptcy protection. This has, in our opinion, lowered
investors confidence in these ventures. Recent bankruptcies have also
increased the amount of assets available in the market, and driven down their
recovery value, which has affected at least some investors willingness to
provide funding for competitive telecommunications companies. We believe that
these market conditions have had a direct effect on us.

## Business
Strategy

As
discussed above, we have petitioned the bankruptcy court to allow us to continue
operating our business as debtors-in possession. If our petitions are not
dismissed and our Chapter 11 cases are not converted to Chapter 7, we are
exploring opportunities and currently intend to sell all, part or parts of our
business as a going concern, and we are in discussions with a potential
purchaser of some or all of our ongoing business operations. If we sell only a
portion of our assets, we expect to liquidate our remaining assets and cease
operations.

Our
business objective has been to become the preferred facilities-based wholesale
telecommunications provider to customers in our target markets. In pursuit of
this strategy, we have:

- Attempted to design, build and acquire a low-cost network, sometimes pursuant to strategic
relationships;
- Focused on underserved and second and third tier markets;
- Concentrated our focus on the needs of telecommunications service providers and their customers; and
- Attempted to roll-out service rapidly in our target markets.

## Strategic
Relationships

## Fiber
Co-Development Partners

360
Networks (Worldwide Fiber).   In March 1999, we entered into a
co-development agreement with Worldwide Fiber, Inc. (now known as 360 Networks)
for the design, engineering and construction by Worldwide Fiber of a multiple
conduit fiber-optic system. One of the conduits contains a fiber optic cable
consisting of a specified number of fiber optic strands. The conduits and any
installed strands are equally divided between us and Worldwide Fiber, and the
costs to construct the route have been shared equally by the partners. In
addition, we have paid Worldwide Fiber a management fee equal to 10% of our
share of the development costs. The system is approximately 1,100 route miles
long, between Aurora, Colorado (a suburb of Denver) and Chicago, Illinois. The
entire build has been completed. We entered into a joint marketing agreement
with Worldwide Fiber under which both Worldwide Fiber and we sell certain
inactive fiber optic strands on the route, and share the revenues from such
sales. The joint marketing agreement also permits each party to retain fiber
optic strands for its own use, subject to certain restrictions on resale, and to
swap a certain number of fiber optic strands to third parties.

Tri-State.   In August 1999, we entered into a co-development agreement with
Tri-State Generation and Transmission Association, Inc. and four regional
electric cooperatives for the design, engineering and construction of an aerial
fiber system, approximately 420 route miles long, between Albuquerque, New
Mexico and Grand Junction, Colorado. This system, constructed on power
transmission lines, contains a specified number of fiber optic strands. The cost
to construct the system has been borne equally between us and the other parties.
In connection with the co-development agreement, we entered into a joint
marketing agreement under which each party will reserve a portion of the fiber
strands for its own operations, a subset of which are available for swaps with
third parties. The remaining fiber strands are available for sale, with us as
the exclusive marketing agent. Any revenues derived from the sale of those fiber
strands are shared equally between us and Tri-State, after deduction of our
marketing fee.

McLeodUSA
(CapRock).    In November 1999, Pathnet signed an agreement
with CapRock Teleommunications Corp. (now known as McLeodUSA) to design,
engineer, construct and install a four conduit telecommunications system between
El Paso, Texas and Albuquerque, New Mexico. One of the conduits contains a fiber
optic cable consisting of a specified number of fiber optic strands. The
conduits and any installed strands are equally divided between us and Caprock,
and the costs to construct the route have been shared equally by the partners.
In addition, Caprock pays us a management fee equal to 10% of their share of the
development costs. The system is approximately 250 miles long and is under
construction. We entered into a joint marketing agreement with CapRock under
which both CapRock and we sell certain inactive fiber strands on the route,
sharing any revenue from such sales. The joint marketing agreement also permits
each party to retain fiber optic strands for its own use, subject to certain
restrictions on resale, and to swap a certain number of fiber optic strands to
third parties.

Alliance
Program.   We have entered into capacity purchase agreements with
several other carriers enabling us to resell capacity on their networks. This
allows us to extend our network reach to points of presence throughout the
markets reached by these other carriers and to pre-sell capacity along routes we
intend to develop.

## Wireless
Co-Development Partners

Fixed
Point Microwave Services Agreements.   We have entered into several
fixed point microwave services agreements with co-development partners who own
existing wireless telecommunications assets. Typically, under these agreements
we lease an interest in the co-development partners sites and facilities
on which our network is built and in return we provide the co-development
partner with capacity on such network for its own internal use. We typically pay
the co-development partner a portion of the revenue derived from our selling the
excess bandwidth on that co-development partners route. Generally, the
co-development partner receives up to 20% of the revenues earned after the
systems have been in place for 48 months. In addition, these agreements
generally require the co-development partner to make capital investments toward
the upgrade of its systems infrastructure to make it suitable for installation
of the equipment used in our digital network which, in most cases, includes
significant modifications to structures, towers, battery plants and equipment
shelters. These agreements generally provide for a five or ten year term that is
subject to renewal by us upon the occurrence of certain events, for up to a
25-year term.

Tower
Lease Agreements.   We entered into a leasing arrangement with
American Tower Corporation under which American Tower granted us a 25-year
license to use certain of its towers to deploy several wireless portions of our
network.

## Products and
Services

We currently offer the following products and services:


Dark fiber and conduit for sale or grant of long lease terms.   We sell rights for dark fiber and related services as well as
rights to conduit. Dark fiber consists of fiber strands contained within a fiber
optic cable, which has been laid but does not yet have its transmission
electronics installed. A sale or grant of an indefeasible right to use our dark
fiber typically has a term, which approximates the economic life of a fiber
optic strand (generally 20 to 30 years). Purchasers of dark fiber rights
typically install their own electrical and optical transmission equipment. All
of our builds include spare conduits, and we may sell rights to use them.
Generally, we expect our customers to pay for dark fiber rights and conduit at
the time of delivery and acceptance of the fiber or conduit, although other
payment options may be available. In addition, depending upon the nature of our
contractual terms, we treat our sales of dark fiber and conduit as sales-type
leases or operating leases. We typically require our customers to make ongoing
payments for maintenance services.


Dark fiber for lease or lease to purchase.   We also lease
dark fiber for a term less than the period for which the indefeasible usage
rights are typically granted. Leases are typically structured with monthly
payments over the term of the lease. Generally, we realize a premium in lease
pricing for bearing the risk that the lease will not be renewed for the balance
of the life of the asset.


Wavelength lease.   In our network, we use Dense Wavelength
Division Multiplexing, or DWDM, a technology that allows multiple optical
signals to be combined so that they can be aggregated as a group and transported
over a single fiber to increase capacity. This allows us to sell a customer
exclusive long-term use of a portion of the transmission capacity of a fiber
optic strand rather than the entire strand. We derive up to 160 individual
wavelength channels at either OC-48 or OC-192 per fiber pair. OC is
a measure of digital transmission speed, and is equal to the corresponding
number of DS-3s. For example, OC-48 is equal to 48 DS-3s. In turn,
DS is a standard telecommunications industry digital signal speed
that is distinguishable by the relative binary digits transmitted per second.


Inter-city wholesale transport services.   Our inter-city
transport services are focused on second and third tier markets and are
comprised of point-to-point services offered as Time Division Multiplexing, or
TDM, which is an electronic process that combines multiple communication
channels into a single, higher-speed channel by interleaving portions of each in
a consistent manner over time-based private lines at high speed including DS-1,
DS-3, OC-3, OC-12, OC-48 and OC-192. As of December 31, 2000, we offered
inter-city wholesale transport services on our network as well as via our
Alliance Program.


Local access services.   We deliver local access services
from network presences we have established by collocating with the ILECs in
second tier and third tier markets and through the local networks we have
established using a combinations of unbundled network elements and other network
components from other communications carriers.


Virtual Points of Presence (VPOP).   We bundle our wholesale
transport services and local access services to offer our virtual points of
presence service, sometimes referred to as VPOP. Through this bundle of
services, we offer our customers the ability to establish a virtual point of
presence for their networks using our facilities, thus avoiding the need to
place any equipment at a collocation site. We focus this service on second and
third tier markets. VPOP PRI service allows our customers to offer dial up
internet access.

## Sales and
Marketing Strategy

Our
wholesale customers tend to be very knowledgeable about the nature of the
services and technology available in the marketplace. As a result, our marketing
efforts are largely limited to ensuring that our products and services are
visible and well represented in the market. As part of our marketing strategy,
we attempt to position ourselves as the provider of choice for telecommunication
service providers because of the quality of our service, the control we provide
customers over their service platforms, the reliability of our services and our
low cost position.

We
sell our services to large regional and national telecommunications service
providers through our direct sales team on a national account basis. Our sales
team consists of senior level management personnel and experienced sales
representatives with extensive knowledge of the industry and our products.

## Customers

We
have defined a range of products and services designed to meet the unique needs
of our customers and, as a result, we offer several types of services to these
types of customers:


Full service IXCs: We provide on-net and Alliance private line, VPOP PRI dial-up
internet service, VPOP private line.


CLECs and competitive IXCs: We extend the reach to new markets by providing a
more efficient means for CLECs to originate or terminate voice traffic and a
lower cost source of inter-city wholesale transport or infrastructure services;


ISPs: We offer VPOP PRI dial up internet service as well as VPOP private line.
ISPs use this service to extend their reach to new markets with limited capital
investment. We also provide low cost infrastructure services and wholesale
transport services.


ILECs: We provide private line service to lower network cost within the
ILECs own region.


Resellers: We provide private line services and expect to provide low cost
termination for switched traffic.

## Revenue Backlog

To date, the company has obtained contracts with several customers, which
constitute revenue backlog for VPOP PRI, VPOP Private Line, on-net private line
and Alliance private line services. The backlog represents potential future
revenue under contracts that are generally for a period of three to four years
with a minimum quantity of units required. Units must be in service for a
minimum period of 18-24 months once installed. Certain of the contracts contain
minimum payment language while other contracts contain provisions for an
increase in the effective price if the customer does not meet the minimum
quantities required. Our bankruptcy cases may have an impact on these contracts.
It is possible that we may attempt to transfer these assets in a sale of our
business or assets, however, we cannot predict our ability to effectively
transfer these contracts or their value to a purchaser.

## Network
Reliability

Our
network operations center, which is in Reston, Virginia, currently provides
real-time, end-to-end monitoring of our network operations 24 hours a day, seven
days a week, as well as pro-active customer care for all of our customers
services. The network operations center ensures the efficient and reliable
performance of the network through pro-active early identification and
prevention of potential network disruptions. In addition, our network operations
center enables us to schedule and conduct maintenance of our network while
minimizing interference with the use of the network by our customers. Specific
features provided by our network operations center include network fault and
event management, network and service level performance management and analysis
as well as remote configuration of all network elements. Our network operations
center has full fallback capability.

## Competition

Competition
in our segment of the telecommunications industry is intense. In our markets, we
face competition in the areas of price and performance, transmission quality,
breadth and reliability of our network, customer service and support, brand
recognition and critical relationships with third parties such as Internet
service providers. While we generally do not compete with telecommunications
service providers for end user customers, we may compete as a
carriers carrier with certain of those providers including
IXCs (such as AT&T Corp., MCI WorldCom, Inc. and Sprint Corporation),
wholesale providers (such as Qwest Communications International Inc., Williams
Communications Group, Inc., Global Crossing Ltd and Level 3 Communications,
Inc.), ILECs (such as Qwest, BellSouth, Verizon and SBC) and CLECs who would
otherwise be our customers in our target markets.

## Government
Regulation

Overview.   Our telecommunications businesses are subject to varying degrees
of federal, state and local regulation. We are a telecommunications carrier
under the terms of the federal Communications Act, as amended. As a
telecommunications carrier, we are subject to FCC and state utility commission
regulation of our activities. Local authorities also may regulate the permitting
and construction of our telecommunications facilities.

The FCC and state public
service commissions generally have the right to impose sanctions, forfeitures,
or other penalties mandating refunds if a carrier fails to comply with
applicable rules. We describe certain aspects of the regulatory environment
below in our discussion of risk factors in the section entitled
Managements Discussion and Analysis of Financial Condition and
Results of Operations.

Federal
Regulation.   The FCC regulates interstate and international
telecommunications services and holders of radio licenses. We are subject to FCC
regulation as a common carrier, which means that we are subject to longstanding
general requirements that our rates be just and reasonable and that
we not engage in unjust or unreasonable discrimination in serving
the public. As a common carrier, we also must file certain periodic reports and
applications with the FCC, and the FCC has jurisdiction to act on certain
complaints for failure to comply with regulatory obligations.

We
are not, however, subject to the particular laws and FCC regulations imposed by
the Telecommunications Act of 1996 on ILECs, which are the existing local
telephone companies including, among others, the former Bell operating
companies.

To
provide unbundled lines to connect each customer to our equipment, we use
networks owned by ILECs. The terms upon which we connect our network to
ILECs networks are specified in interconnection agreements that we have
negotiated with the ILECs operating in our target markets. Federal law requires
ILECs to provide access to their networks through interconnection agreements and
to offer network elements to other telecommunications carriers at rates which
generally must be cost-based and nondiscriminatory.

We
(and, in some cases, our co- development partners) also are regulated by the FCC
as the holder of a substantial number of common carrier fixed point-to-point
microwave licenses that we use on the wireless portion of our network. Under
these licenses, we must make routine regulatory filings and obtain the
FCCs prior consent for any assignment of the license or any substantial
change in control of the entity holding the license and for certain
modifications to a licensed facility. We cannot assure you that we, or any of
our co-development partners who desire to be the licensee for their portion of
our network, will obtain all of the licenses or approvals necessary for the
operation of our business, the transfer of any license or the modification of
any facility, or that the FCC will not impose burdensome conditions or
limitations on any such license, transfer or approval. We are subject to the
licensing processes of the FCC for our microwave licenses. We also generally
must apply to the FCC for its consent before assigning a radio license or
transferring control (for example, through the sale of stock) of any company
holding radio licenses.

State Regulation.   
The
Telecommunications Act preempts state statutes and regulations that restrict the
provision of competitive local telecommunications services. State commissions
can, however, impose reasonable terms and conditions upon the provision of
telecommunications service within their respective states. States also can
require that telecommunications providers apply for and obtain a certificate of
public convenience and necessity or other authorization prior to commencing
service in their respective states. We are in the process of becoming certified,
to the extent such certification is required, in the 48 contiguous states and
the District of Columbia as a competitive local exchange carrier
(CLEC) or other competitive telecommunications carrier under the
regulations of each states regulatory commission. We currently are
authorized or permitted to provide at least a portion of our proposed services
in 42 states: Alabama, Arkansas, California, Colorado, Connecticut, Delaware,
the District of Columbia, Florida, Georgia, Idaho, Illinois, Indiana, Iowa,
Kansas, Kentucky, Louisiana, Massachusetts, Michigan, Minnesota, Mississippi,
Missouri, Montana, Nebraska, Nevada, New Mexico, New York, North Carolina, North
Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota,
Tennessee, Texas, Utah, Vermont, Virginia, Washington state, Wisconsin, and
Wyoming. We have pending applications before an additional five state
commissions.

In
many states, we are required to file tariffs setting forth the general terms,
conditions and prices for services classified as intrastate by the particular
state commission in question. Many states require us to list the services
provided and the specific rate for each service. Under various states
rules, however, we have regulatory flexibility to set price ranges for specific
services and, in some cases, prices can be set on an individual customer basis.
Further, some states require licensees to meet certain financial standards. We
cannot assure you that we will be able to meet those standards.

We
may be required to file applications with some states for the assignment of our
state certifications to any other entity for any transfer of substantial control
that we decide to undertake in the future. Some states also may require a filing
prior to the issuance of substantial debt or equity securities or other
transactions that would result in a lien upon the property we use to provide
intrastate telecommunications services. States generally require us to file
various reports and pay certain fees, including state universal service
subsidies. Like the FCC, most state commissions are empowered to consider
complaints filed against carriers subject to their jurisdiction. We cannot
assure you that our state certificates will not be revoked or amended by state
commissions.

Local
Regulation.   We may be required to obtain local permits for street
opening and construction permits to install and expand fiber optic networks.
Local zoning authorities often regulate our use of towers for microwave and
other telecommunications sites. We also are subject to general regulations
concerning building codes and local licensing. The Telecommunications Act of
1996 requires that fees charged to telecommunications carriers be applied in a
competitively neutral manner, but there can be no assurance that ILECs and
others with whom we will be competing will bear costs similar to those we will
bear in this regard.

Other
Laws and Regulations.   Although the foregoing discussion provides
an overview of the major regulatory issues that confront our business, this
discussion does not attempt to describe all current and proposed federal, state
and local rules and initiatives affecting the telecommunications industry. Other
federal and state laws and regulations are currently the subject of judicial
proceedings and proposed additional legislation.

## Intellectual
Property

We
use the name Pathnet as our primary business name and service mark,
and have registered that name with the United States Patent and Trademark
Office. In addition, we have registered our logo with the United States Patent
and Trademark Office.

We
regard our products, services and technology as proprietary and we attempt to
protect them with patents, copyrights, trademarks, trade secret laws,
restrictions on disclosure and other methods. These methods may not be
sufficient to protect our technology. We also enter into confidentiality or
license agreements with our employees and consultants, and generally control
access to and distribution of our documentation and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use our products, services or technology without
authorization, or to develop similar technology independently.

We
currently have a patent application pending and we intend to prepare additional
applications and seek patent protection for our systems to the extent possible.
These patents may not be issued to us, and if issued, they may not protect our
intellectual property from competitors that could seek to design around or
invalidate these patents.

## Employees

As
of January 31, 2001, we employed 251 people. As needed, we have also hired
temporary employees and independent contractors. Our current business strategy
calls on us to continue to operate our network as we examine strategic
alternatives. As part of this strategy, we reduced our staff by 36 fulltime
employees and 9 contractors on March 29, 2001. It is possible that we will be
required to further adjust the size of our staff in the future. Our employees
are not unionized. Our success will continue to depend in part on our ability to
attract and retain highly qualified employees. See RISK FACTORS 
Risks Relating to Our Company Operations.

## ITEM 2.        
PROPERTIES

Our
network and our component assets are the principal properties that we own. Our
installed fiber optic cable is laid on rights of way held by our co-development
partners, municipalities that have granted us written permission to use the
right of way, or us, and our digital wireless network is constructed on our
leasehold interests in telecommunications infrastructure. As discussed below, a
lawsuit has been filed against us, challenging our right to use some of our
rights of way for our network. We also own nine small parcels of one to five
acres of real property along our network backbone, on which we have constructed,
or plan to construct, telecommunications equipment shelters for the fiber optic
portions of our network. Finally, we have entered into approximately six leases
for property of two to six thousand square feet for POP locations in major
metropolitan areas.

Our
corporate headquarters are located in Reston, Virginia, and we lease this space
from 11720 Sunrisecorp, LLC, under a Lease Agreement dated November 1, 1999, as
amended. We also lease office space in Richardson, Texas under a lease that
expires in 2003.

We believe that all of our properties are well maintained.

## ITEM 3.        
LEGAL PROCEEDINGS

On April 19, 2000, we and our  subsidiary,  Pathnet,  Inc., were sued in Superior Court of the District of Columbia by several
plaintiffs  purporting  to  represent  a class of  landowners  damaged by us in  connection  with the  development  of our fiber  optic
network.  Specifically,  the complaint  alleges we installed or will install fiber optic  facilities on the property of the  landowners
in the class without  obtaining the necessary legal consents from the  landowners.  They are seeking to file as a class action law suit
for trespass and other  damages from the  construction  of fiber optic  telecommunications  system across the class  member's  land. On
July 18,  2000,  plaintiffs  significantly  narrowed the  purported  class to include only  landowners  on a particular  segment of our
network.  In addition,  we are seeking  indemnification  for these  claims from 360 networks  (USA) Inc.  ("360"),  our  co-development
partner  for the  project in these four  states.  We believe  that,  under our  development  agreement  with 360,  360 is  required  to
indemnify us for these types of claims.  We are presently in mediation  with 360 regarding  indemnification,  but we have not been able
to resolve this matter.

On May 17, 2000, MagTen Partners,  L.P. ("Magten"),  one of our bondholders,  filed suit against the Company and the investors
involved in our reorganization transaction (the "Reorganization") in the Supreme
Court  of the  State  of New  York,  county  of New  York.  The  Reorganization,
completed  on March 30,  2000,  was among us,  Colonial  Pipeline  Company,  The
Burlington  Northern and Santa Fe Corporation and CSX  Transportation, Inc.  On July 14,
2000, we served the plaintiffs with our response. Magten filed a response to our
motion  to  dismiss  on  September  14,  2000 and we  filed a reply to  Magten's
response on October 13, 2000. Oral argument on our motion to dismiss was held on
December 12, 2000;  we are awaiting the judge's  ruling on the motion.  Magten's
claims stem from their  contention  that we were not permitted to consummate the
March 2000  reorganization of our corporate  structure without unanimous consent
of the  holders of the Senior  Notes,  and that our  failure to obtain  Magten's
consent  triggered a provision in the Indenture  governing the Senior Notes (the
"Indenture"),  requiring us to repurchase the Senior Notes at 101% of their face
value. We do not agree with Magten's interpretation of the Indenture and intend
to defend the claim vigorously.

As we have  discussed  elsewhere in this annual  report on form 10-K,  on April 2, 2001 we, along with our direct and indirect
wholly-owned  subsidiaries,  Pathnet,  Inc.,  Pathnet Operating,  Inc.,  Pathnet Operating of Virginia,  Inc., Pathnet Real Estate LLC,
Pathnet Fiber  Equipment LLC,  filed  voluntary  petitions for Chapter 11 bankruptcy  protection in the U.S.  Bankruptcy  Court for the
District of  Delaware.  Among other  things,  we have asked the  bankruptcy  court to allow us to continue  operating  our  business as
debtors-in-possession.

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

None.

## PART II

## ITEM 5.        MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

We
have authorized 60,000,000 shares of Common Stock for which there is no
established public trading market. As of March 15, 2000 there were
51 record holders of our Common Stock. As of December 31, 2000, stock
option awards to purchase 4,067,884 shares of Common Stock were outstanding.

We
have not paid any cash dividends on our Common Stock in the past and do not
anticipate paying any cash dividends on our Common Stock in the foreseeable
future. Further, the terms of the Indenture by and between Pathnet, Inc. and The
Bank of New York, dated April 8, 1998 (the Indenture) as
supplemented by the Supplemental Indenture dated as of March 30, 2000, by and
between Pathnet, Inc. and the Bank of New York, relating to the Pathnet, Inc. 12
1⁄4% Senior Notes due 2008 restrict our ability to pay dividends on our
Common Stock, as described in Note 10 to the Companys Financial Statements
included in Item 14 elsewhere in this Annual Report on Form 10-K.

## ITEM 6.        
SELECTED CONSOLIDATED FINANCIAL DATA

We
present below selected historical consolidated financial information for Pathnet
Inc. and us. The summary historical statements of operations data for the years
ended December 31, 1998, 1999 and 2000 and the balance sheet data as of December
31, 1999 and 2000 have been derived from our and Pathnet Inc.s audited
financial statements that are included elsewhere in this Annual Report on Form
10-K. The summary historical statement of operations data for the year ended
December 31, 1996 and 1997 and the balance sheet data as of December 31, 1996,
1997 and 1998 have been derived from Pathnet, Inc.s audited financial
statements that are not included elsewhere in this Annual Report on Form 10-K.

`Year Ended December 31,
                                          -----------------------------------------------------------------------
                                              1996           1997            1998          1999             2000
                                          -----------    -----------    ------------   ------------    --------------

Statements of
  Operations Data:
Revenue..............................     $     1,000    $   162,500    $  1,583,539   $  3,311,096      $ 43,386,257
                                          -----------    -----------    ------------   ------------    --------------
Operating expenses:
 Cost of revenue ....................              --             --       7,547,620     12,694,909        49,502,318
 Selling, general and administrative.       1,333,294      4,247,101       9,615,867     14,669,747        38,429,805
 Contribution and reorganization
    expenses.........................              --             --              --      1,022,998         1,750,229

Impairment loss .....................              --             --              --             --       273,595,981

 Depreciation and amortization
    expense..........................           9,024         46,642         732,813      6,204,381        14,297,459
                                          -----------    -----------    ------------   ------------    --------------

Total operating expenses.............       1,342,318      4,293,743      17,896,300     34,592,035       377,575,792
                                          -----------    -----------    ------------   ------------    --------------
Net operating loss...................      (1,341,318)    (4,131,243)    (16,312,761)   (31,280,939)     (334,189,535)
Interest expense (a).................        (415,357)            --     (32,572,454)   (41,010,069)      (42,034,241)
Interest income......................          13,040        159,343      13,940,240     13,111,953         7,411,356
Write off of initial public offering
costs................................              --             --      (1,354,534)            --                --
Other income (expense), net..........              --         (5,500)          2,913        142,743          (983,041)
                                          -----------    -----------    ------------   ------------    --------------
Net loss.............................     $(1,743,635)   $(3,977,400)   $(36,296,596)  $(59,036,312)   $ (369,795,461)
                                          ===========    ===========    ============   ============    ==============

                                                                         As of December 31,
                                          ---------------------------------------------------------------------------
                                              1996           1997            1998          1999             2000
                                          -----------    -----------    ------------   ------------    --------------

Balance Sheet Data:
Cash, cash equivalents and marketable
securities excluding marketable
securities pledged as collateral (b)..    $ 2,318,037    $ 7,831,384    $227,117,417   $138,402,131    $   45,513,752
Property and equipment, net ..........         46,180      7,207,094      47,971,336    131,928,365       210,604,865
Intangible assets ....................             --             --              --             --         1,421,475
Total assets .........................      2,365,912     16,097,688     365,414,129    320,535,987       298,022,486
Long-term obligations (c).............             --             --     346,212,125    349,714,404       417,755,815
Total liabilities ....................        145,016      5,892,918     366,492,370    380,303,073       472,141,495
Redeemable preferred stock ...........      4,008,387     15,969,641      35,969,639     35,969,639        62,932,614
Stockholders' equity (deficit) .......     (1,787,471)    (5,764,871)    (37,047,880)   (95,736,725)     (237,051,623)
--------------------------

(a)      The 1996 expense relates to the beneficial conversion feature of a loan at December 31, 1996.
(b)      Cash, cash equivalents and marketable securities include investments in marketable securities available for sale.
(c)      As of  December  31,  2000  and  1999,  long-term  obligations  included  other  non-current liabilities of $5,836,260 and
         $3,092,779, respectively.`

## ITEM 7.         
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should assume for purposes of this section that all  references to our  business,  our actions or conditions  affecting us
prior to March 30, 2000 are references to Pathnet,  Inc.'s business,  actions or conditions affecting Pathnet,  Inc. Unless we indicate
otherwise,  references to our future  business,  strategies,  or plans,  are  references to our  consolidated  business,  strategies or
plans. You should read the following  discussion and analysis in conjunction with our combined  financial  statements and related notes
included in this Annual Report on Form 10-K. You can find additional  information  concerning our businesses and strategic  investments
and alliances in the section of this Annual Report on Form 10-K entitled "BUSINESS."

## Overview

The  accompanying  consolidated  financial  statements  and financial  information  have been  prepared  assuming that we will
continue as a going  concern.  However,  we have  incurred  significant  losses since our founding and our cash  resources and expected
revenues from operations are  insufficient  to meet our existing  obligations  and our long-term  needs for continuing  operations.  We
have been unable to obtain sufficient  additional  financing to sustain our operations.  Consequently,  on April 2, 2001 we, along with
several of our  subsidiaries,  filed voluntary  petitions for Chapter 11 bankruptcy  protection with the U.S.  Bankruptcy  Court of the
District  of  Delaware.  We have  petitioned  the  court  to  allow us to  operate  our  business  as  debtors-in-possession.  There is
substantial  doubt as to our  ability to continue as a going  concern.  We are  currently  pursuing a  strategic  alternative  and will
continue to pursue any other  alternative  that may be available to us,  including a potential sale of all or a substantial  portion of
our business or assets, and a liquidation of the remainder.

## Liquidity and
Capital Resources

## Background

Our business  strategy has been to develop and operate a  telecommunications  network  designed to provide other wholesale and
retail  telecommunications  service  providers  with access to  underserved  and second and third tier  markets  throughout  the United
States.  In  pursuing  this  strategy,  we  entered  into  strategic  relationships  with  owners  of  telecommunications   assets  and
co-development  partners,  developed and constructed  our digital  backbone  network,  and negotiated  collocation and  interconnection
agreements and installed collocations and interconnection agreements off our backbone network.

We have funded our network  development  and  operations  primarily  through  private  placements  of $99.0  million of equity
securities,  $338.7  million of net proceeds  raised from the issuance of notes issued in April 1998, and vendor  financing  facilities
negotiated  with Nortel  Networks and Cisco  Systems  Capital  Corporation.  In addition,  we have  generated  revenue from  management
services  (which  we do not  anticipate  providing  in the  future)  related  to the  construction  of our  digital  network,  sales of
infrastructure, wholesale transport services and local access services.

Our expenses to date have been  significant  and they include network design and  construction  expenses  (including  conduit,
fiber,  cable,  construction  services  and  acquisition  right  of  way),  local  exchange  carrier  charges,  leasing  capacity,  and
maintenance.  We have incurred  general and  administrative  expenses typical of other  telecommunications  service  providers.  In the
twelve months ended December 31, 2000, we incurred  significant  impairment of our right of way assets,  our microwave  network and our
remote collocation sites.  In addition, we incurred expenses associated with the depreciation of property, plant and equipment.

Since the beginning of 2000, we have made significant efforts to obtain additional financing, including the following:

- On March 30, 2000, we completed a strategic investment transaction with Colonial
Pipeline Company, The Burlington Northern and Santa Fe Corporation and CSX
Transportation, Inc. We received the right to develop over 12,000 miles of these
investors rights of way holdings. In addition to contributing some of the
rights of way access, Colonial made a contribution of $68.0 million cash in
return for equity and a single fiber optic conduit. This transaction is
discussed in greater detail elsewhere in this annual report on form 10-K,
including the section entitled Certain Relationships and Related
Transactions.
- In May 2000, we engaged Goldman Sachs Group Inc. to advise us on potential
equity investment avenues to help us fund our business plan. Goldman Sachs
continued to help us look for equity contributions through March 2001, at which
point, they terminated our engagement.
- During the year, we have, at different times, actively engaged in strategic
discussions with a number of companies to either contribute capital or purchase
or merge with the company. Our prospective partners have included
telecommunications, energy and utility companies.
- During the fourth quarter of 2000, we also actively explored selling all or
substantially all of our interest in our fiber backbone routes.
- Credit Facility with Nortel

                  In August 2000, our subsidiary,  Pathnet  Operating,  Inc. ("POI") entered into a senior secured credit facility with
         Nortel  Networks,  Inc., that would provide it with vendor  financing for the purchase of Nortel  Networks  telecommunications
         equipment  and  services.  The  agreement  consists of a $210  million  multiple-advance  term loan  facility and includes the
         following terms:

                     The  facility  has a three year draw down  period,  a three year  repayment  period and consists of two $105
         million tranches;

                     The loans bear interest based upon an index plus a specified margin;

                   Proceeds of the loans are used for the payment  when due for  purchases  of Nortel  Networks  equipment  and
         services for our telecommunications network.

                  Principal of the loans is repayable in twelve quarterly  installments,  generally  commencing on the earliest of June
         30, 2003. The entire principal  balance of the loans,  plus all accrued but unpaid interest  thereon,  generally,  are due and
         payable in on the third anniversary of the date on which the loans are fully funded.

                  Amounts not drawn under the vendor  facility will generally cease to be available to POI on June 30, 2003 or the date
         on which the loans are fully  funded.  The loans may be prepaid in whole or in part at any time  subject to notice  provisions
         acceptable to the lenders, payment of LIBOR breakage costs and a minimum prepayment amount of $1 million.

                  POI paid an  origination  fee for the first  tranche of $105  million and will owe an  origination  fee on the second
         tranche  on the date on which the  first  tranche  has been  fully  funded  and an  advance  against  the  second  tranche  is
         requested.  In addition, POI pays a commitment fee on unused commitments, due quarterly in arrears.

                  We currently have $28.5 million drawn on the Nortel facility.
- Credit Facility with Cisco

               In September 2000 POI entered into a senior  secured  credit  facility with Cisco Systems  Capital  Corporation  that
         would provide it with vendor financing for the purchase of  telecommunications  equipment and services.  In February 2001, POI
         and Cisco agreed to expand this  facility.  The agreement,  as amended  consists of a $95 million term debt divided into three
         tranches and includes the following terms:


   The first  tranche is $60 million,  to be used for the purchase of Cisco Systems  telecommunications  equipment and
         services;
                   The  second  tranche is $10  million,  to be used to finance  the  additional  costs  associated  with the  network

         installation and integration of networking hardware;
                    The third  tranche  is $25  million,  to be used to  finance  the  additional  costs  associated  with the  network

         installation and integration of networking hardware;
                    The loans bear interest based upon an index plus a specified margin;
                  Principal of the loans is repayable in sixteen quarterly  installments,  commencing on the second  anniversary of the
         closing date (September 2003). The entire principal  balance of the loans,  plus all accrued but unpaid interest thereon,  are
         due and payable in full on the sixth anniversary of the date on which the vendor facility was executed.

                  Amounts not drawn under the vendor  facility  will cease to be  available to POI twenty four months after the closing
         date of the  vendor  facility.  The loans may be prepaid in whole or in part at any time  subject  to payment by  borrower  of
         lender's expenses  incurred by lender in obtaining or liquidating or re-employing  deposits or other funds to fund or maintain
         the loans.

                  POI paid a  closing  fee for the  facility.  In  addition,  POI pays a  commitment  fee on  unused  commitments,  due
         quarterly in arrears, along with a facility fee.

         We currently have $35.4 million drawn on the Cisco facility.



         In concert with searching for capital,  we pursued  opportunities that would allow us to utilize our right to develop right of
way.  We  negotiated  with  potential  partners  on  projects  that  would  allow us to  procure  fibers on new  routes  in return  for
contributing  the rights of way. In addition,  we pursued dark fiber swaps,  which would allow us to extend our network  footprint with
minimal capital requirements.

As of December  2000, we had been  unsuccessful  in raising  sufficient  capital to continue to fund our prior  business plan.
With our capital  constrained,  we decided to abandon our strategy of developing our right of way, otherwise expanding our network, and
operating our network  indefinitely.  Our current plan calls for us to continue to operate our business for a relatively  short time as
we explore  opportunities  that may be available to us, including  selling all or a substantial  portion of our business or assets.  If
we are unable to sell of all of our business or assets, we currently intend to liquidate what is left.

## Current
Financial Condition and Strategy

We have incurred  significant  operating and net losses as a result of the  development and operation of our network.
As of December 31, 2000, we had  approximately  $472.1  million of  indebtedness
outstanding and total  stockholders'  deficit of $237.1  million.  In the fiscal
year ended  December  31, 2000,  we incurred  losses from  operations  of $334.2
million and net losses of $369.8 million, which included an impairment charge of
$273.6 million.  Capital  expenditures were approximately $109.7 million for the
twelve  months ended  December 31, 2000.  As of December 31, 2000 we had capital
commitments of  approximately  $27.8 million  relating to the development of our
network  pursuant to existing  agreements.  We expect that our operating  losses
will  continue as we operate our  network.  As of December 31, 2000 we had $45.5
million of cash and cash  equivalents  and marketable  securities  available for
sale.

As a result of our losses and our  inability to secure  additional  financing in
the current  market  environment,  we, along with  several of our  subsidiaries,
filed  petitions for bankruptcy  under Chapter 11 of the Bankruptcy  Code. We do
not currently plan to incur  additional  indebtedness  in operating our business
during  our  bankruptcy  cases.  Nonetheless,  as a  result  of our  filing  for
protection under the bankruptcy law, we will not be able to make any of our debt
service  requirements that are outstanding with the exception of certain capital
lease obligations.  Among other things, a semi-annual interest payment is due on
April 15, 2001 on the senior notes that Pathnet,  Inc. issued and we guaranteed.
Neither we nor our Pathnet,  Inc.  subsidiary  will be able to use our remaining
funds to pay the semi-annual  interest payment due on those notes. We have other
significant  debt  service  obligations,  most of which will not be met.  All of
these  amounts may be  discharged  in  bankruptcy,  subject to  distribution  of
proceeds from the sale of our assets.

We  estimate  that the  business  plan would  require  additional  financing  of
approximately  $150 to $200  million  dollars to complete  the  expansion of our
network.  We have not been  successful  in  obtaining  such  funding  and do not
foresee obtaining such funding in the future.

Due to our inability to obtain sufficient  resources -- either from our revenues
or financing -- we have  dramatically  altered our plans,  as we have  described
elsewhere in this annual report on form 10-K. During our bankruptcy  proceeding,
we will  continue  to operate  the active  portions of our network to the extent
feasible  (unless the bankruptcy court determines that we may not) and we expect
to generate some revenue from these operations. As part of our current strategy,
we expect to incur only those capital  expenditures  that will enhance the value
of our business or assets.

Although we intend to keep current  management in place  through the  bankruptcy
proceeding, we cannot be sure that we will be able to do so. We believe that our
filing of bankruptcy  petitions and the strategic staff reductions made by us on
March  30,  2001 may  adversely  affect  our  ability  to retain  employees  and
customers, to generate revenues, and operate our business. We may be required to
terminate  construction  of new and  uncompleted  portions of our network and to
terminate the operation of all or a portion of our current business.

While we operate our network,  we are actively  exploring  the possible  sale of
all,  part or parts of our  business  or assets.  If we are  unable to  complete
appropriate  transactions,  we anticipate that we would sell all or a portion of
our ongoing business operations and assets,  liquidate our remaining assets, and
cease  operations.  If  the  costs  of  conducting  our  operations  during  our
bankruptcy  case are greater than we expect or it takes longer than we expect to
find a buyer for our  business or assets,  our  inability  to obtain  additional
financing  could  lead  us to  terminate  our  operations  or to  liquidate  our
remaining assets sooner than we expect.

## Results of
Operations

## Year ended December 31, 2000 compared to year ended December 31, 1999

During the year ended
December 31, 2000, we completed our reorganization, which included our
acquisition of rights of way and cash from our investors. We also continued to
focus on:

- expanding the number of cities and collocations in our network,
- building out our fiber network,
- obtaining the regulatory approval and entering into interconnection agreements
in each of our target markets to enable us to obtain unbundled network elements
and central office space from existing local telephone companies,
- expanding our product line, and
- developing our infrastructure including the hiring of key management personnel.

Revenue.For the twelve months ended December 31, 2000 and 1999, we
generated revenues of approximately $43.4 million and $3.3 million,
respectively. This increase is mainly attributable to revenues from our
construction management services, which were approximately $38.3 million in 2000 as
compared to approximately $898,000 in 1999. Revenue from telecommunications
services more than doubled in 2000 to approximately $5.0 million as compared
with approximately $2.4 million in 1999. The increase in revenue from
construction services arises mainly from our co-development agreement with
Caprock Communications (Caprock) entered into during the fourth
quarter of 1999 and Tri-State Generation and Transmission Association, Inc.
(Tri-State) entered into during the third quarter of 1999. The
increase in telecommunications services revenue is a result of an increase in
the number of circuits sold.

Cost of revenue.  Expenses  for telecommunications  services
primarily  consist of the cost of operating the  Companys  network,  local
exchange carrier access charges and the cost of leased capacity.  For the twelve
months ended December 31, 2000 and 1999, we incurred telecommunications services
costs of approximately  $14.7 million and $8.2 million,  respectively.  The
increase is related to  operating  expenses  as we put more of our network  into
service.

Expenses     for    construction
services consist primarily of costs of sale on network  construction  contracts,
including  conduit,  fiber,  cable,  construction crews and rights of way. Costs
attributable  to the  construction  of the network for the Company's own use are
capitalized. For the twelve months ended December 31, 2000 and 1999, the Company
incurred  construction  services costs of  approximately  $34.8 million and $4.5
million,  respectively. The increase arises from the co-development of our route
with Caprock and Tri-State.

Selling,
General and Administrative.  Selling, general and administrative
(SG&A) expense includes the cost of salaries, benefits,
occupancy costs, commissions, sales and marketing expenses and administrative
expenses. For the twelve months ended December 31, 2000 and 1999, SG&A
expenses were $38.4 million and $14.7 million, respectively. The increase is
attributable to additional staff costs incurred as we continued to develop our
infrastructure, along with administrative costs related to obtaining regulatory
status and deferred compensation expense for stock options.

Reorganization  expenses.    Reorganization expenses are those expenses associated
with the strategic  investment  transaction we completed in March 2000. Expenses
for the  transaction  were $1.8 million and  $1.0  million  for the  twelve  months  ended
December 31, 2000, and 1999, respectively.

Impairment  loss.    For the twelve months ended December 31, 2000, we incurred an
impairment  loss of  approximately  $273.6  million.  This loss was  primarily a
result of an  indefinite  delay in the  rollout of our DSL  product,  a periodic
evaluation of the recoverability of our long-lived assets, and a reevaluation of
our business strategy in light of market conditions and our funding needs. There
were no comparable transaction costs for the similar periods in 1999.

Depreciation  expenses.  For the twelve months ended December 31, 2000 and 1999,
depreciation  expenses were $14.3 million and $6.2  million,  respectively.  The
increase is associated with more of our network coming on line.

Interest Expense.   Interest expense for the twelve months ended December 31, 2000
and 1999 was  approximately  $42.0  million  and  $41.0  million,  respectively.
Interest expense primarily  represents interest on Pathnet's 121/4% Senior Notes
due 2008 issued in April 1998 together with the amortization  expense related to
bond  issuance  costs in respect  to those  notes and the  amortization  expense
related to deferred financing costs.

Interest  Income.  Interest income for the twelve months ended December 31, 2000
and 1999 was  approximately  $7.4 million and $13.1 million,  respectively.  The
decrease in interest income reflects a decrease in cash and cash equivalents and
marketable securities as those funds were used in building our network,  funding
operations, and making interest payments on the senior notes.

## Year ended December 31, 1999 compared to year ended December 31, 1998

During the year ended December 31, 1999, we continued to focus on:

- developing relationships and strategic alliances with owners of valuable
telecommunications assets such as rights of way and with co-development
partners,
- building out our network,
- obtaining the regulatory status and entering into interconnection agreements in
each of our target markets to enable us to obtain unbundled network elements and
central office space from the ILECs, and
- developing our infrastructure including the hiring of key management personnel.

Revenue.  For the twelve months ended December 31, 1999 and 1998, we
generated revenues of approximately $3.3 million and $1.6 million, respectively.
This increase is attributable to revenues from our sales of telecommunications
services, which were $2.4 million in 1999 compared with approximately $165,000
in 1998. We expect that a substantial portion of our future revenue will be
generated from our sale of wholesale transport services, local access services
and backbone infrastructure services.

Operating
Expenses.  For the twelve months ended December 31, 1999 and 1998,
we incurred operating expenses of approximately $34.6 million and $17.9 million,
respectively. The increase is primarily a result of additional staff costs
incurred in developing our infrastructure, depreciation expenses as more of our
network came on line and administrative costs related to obtaining regulatory
status. Cost of revenue reflects direct costs we incurred in performing
construction and management services and providing telecommunications services.

Interest
Expense.  Interest expense for the twelve months ended December
31, 1999 and 1998 was approximately $41.0 million and $32.6 million,
respectively. Interest expense primarily represents interest on the notes issued
in April 1998 together with the amortization expense related to bond issuance
costs in respect of the notes and the amortization expense related to deferred
financing costs.

Interest
Income.  Interest income for the twelve months ended December 31,
1999 and 1998 was approximately $13.1 million and $13.9 million, respectively.
The decrease in interest income reflects a decrease in cash and cash equivalents
and marketable securities as those funds were used in building our network,
funding operations, and making interest payments on our notes in April and
September of 1999.

## Year ended December 31, 1998 compared to year ended December 31, 1997

During
the twelve months ended December 31, 1998, we focused on (1) developing
relationships and strategic alliances with owners of valuable telecommunications
assets such as rights of way and with co-development partners, (2) building out
our network, and (3) hiring key management and other personnel.

Revenue.  Substantially all of our revenue for the year ended December 31,
1998 consisted of fees received for services we provided to our wireless
co-development partners, including analysis of existing facilities and system
performance, advisory services relating to personal communication system (or
PCS) provider spectrum relocation matters, and turnkey network construction and
management services. For the years ended December 31, 1998 and 1997, we
generated revenue of approximately $1.6 million and $162,500, respectively. This
increase was attributable to fees we received for performing construction and
management services primarily for one customer.

Operating
Expenses.  For the twelve months ended December 31, 1998 and 1997,
we incurred operating expenses of approximately $17.9 million and $4.3 million,
respectively. This increase results primarily from accelerating the buildout of
our network and additional staff costs incurred in developing our
infrastructure. Cost of revenue reflects direct costs we incurred in performing
construction and management services and providing telecommunications services.

Interest
Expense.  Interest expense for the twelve months ended December
31, 1998 was approximately $32.6 million. We had no interest expense for the
twelve months ended December 31, 1997. Interest expense primarily represents
interest on the notes together with the amortization expense related to bond
issuance costs in respect of the notes.

Interest
Income.  Interest income for the twelve months ended December 31,
1998 and 1997 was approximately $13.9 million and $159,300, respectively. The
increase in interest income represents interest earned on the proceeds of the
notes issued in April 1998.

## Risk Factors

Our actual results could differ  materially  from those  anticipated in forward-
looking  statements  made in this section and  throughout  this annual report on
form  10-K as a result of many  factors.  You  should  carefully  consider  such
factors,  including  the  following  risk  factors,  together  with  all  of the
information included and incorporated by reference in this form 10-K.

## Risks Relating To Operations

We have filed voluntary
petitions under Chapter 11 of the Bankruptcy Code, which could result in the
termination of our operations, the liquidation of our assets, and the loss of
all or a portion of your investment.

Since our inception we have sustained  significant operating and net losses from
the construction and deployment of our network and related business  operations.
As a result of these losses and our  inability to secure  additional  sources of
financing to cover them, we and several of our subsidiaries have filed voluntary
petitions  under  Chapter  11 of  the  Bankruptcy  Code  in  the  United  States
Bankruptcy Court for the District of Delaware.  In the Chapter 11 cases, we have
petitioned  the  court  to  allow  us to  continue  operating  our  business  as
debtors-in-possession.  While we expect to be  permitted to operate our business
as  debtors-in-possession,  we cannot assure you that our petitions  will not be
dismissed or converted to Chapter 7, under which our assets would be liquidated.
If our petitions are not dismissed and our Chapter 11 cases are not converted to
Chapter 7, we intend to sell all, part or parts of our business. If we sell only
a portion of our business or assets, we expect to liquidate our remaining assets
and to cease  operations.  If our Chapter 11 petitions are dismissed,  we may be
forced to  liquidate  our  business  more  quickly.  If our Chapter 11 cases are
converted to Chapter 7, we will cease to operate as debtors-in-possession  and a
bankruptcy  trustee will be appointed to liquidate  our assets for us. In any of
these  events,  we do not  expect  to  generate  sufficient  cash to repay  your
investment in full.

## Neither we nor our subsidiary Pathnet, Inc., intends to use our funds to pay the April 15 interest payment on the pathnet senior
notes.

Our subsidiary Pathnet, Inc. issued senior notes in 1998, and we have guaranteed
Pathnet, Inc.'s obligations under those notes. A semi-annual interest payment is
due on the notes on April 15, 2001. Neither we nor our Pathnet,  Inc. subsidiary
will be able to use our remaining funds to pay the semi-annual  interest payment
due on the Pathnet notes.

## Our liabilities are significantly greater than our assets, and in the event of our liquidation, the amount available for recovery on
our indebtedness is likely to be substantially less than the face value of our debts, which could result in the loss of all or part
of your investment.

Based on the current value of our assets in the  telecommunications  market,  we believe that our  liabilities  far exceed the
fair market value of our assets. The market value of such  telecommunications  assets has declined  substantially over the past several
months and we cannot predict  whether this decline will  continue.  In the event of our  liquidation,  we believe that our equity would
have no value,  and any sale or  restructuring  of our  business  would be  unlikely  to result in any  residual  value for the current
holders of our  capital  stock.  Because we do not  currently  know  whether we will be able to sell our  business or a part of it as a
going  concern,  or will only be able to liquidate and sell our assets,  we cannot  predict the value of any recovery to the holders of
our debt.

The holders of our
unsecured debt will likely receive substantially less than the holders of our
secured debt

A substantial  portion of our assets and the assets of our subsidiaries is pledged to secure our  indebtedness  obligations to
equipment  vendors and  construction  contractors.  Under  applicable law,  secured  creditors will have a priority claim to recoveries
upon the sales of these assets,  and our unsecured  creditors will recover only from those assets  remaining after the  satisfaction of
our secured debts.  As a result,  we believe that the value of our assets in a liquidation  would be  substantially  less than the face
value of our unsecured debt.

## We cannot predict the timing of our bankruptcy case, its impact on our business, or the ultimate outcome of our case, all of which
could adversely affect the value of our obligations.

We  currently expect to complete
our bankruptcy case during the third quarter of 2001. However, the participation
of our creditors and the bankruptcy  court in our case means that we have little
ability to control the timing and outcome of our case. We cannot assure you that
the outcome or timing of our case will not adversely affect the ongoing portions
of our  business or our ability to pay our  creditors.  We  currently  intend to
continue  operating  the active  portions of our network  during our  bankruptcy
case,  to  the  extent   feasible  and  consistent   with  our   obligations  as
debtors-in-possession. However, our filing of bankruptcy petitions may adversely
affect our ability to retain employees and customers,  to generate revenues, and
to operate our  business.  In  addition,  because of our  bankruptcy  filing and
financial  condition,  our  competitors  may elect to pursue our customers  more
aggressively,  further hampering our ability to retain our customers and convert
our revenue backlog into revenue.  We may be required to terminate  construction
of new and uncompleted portions of our network and to terminate the operation of
all or a portion of our current  business.  Because we cannot predict the timing
of such  developments  or the length of time that it will take to  complete  the
orderly  disposition  of our business or assets,  we cannot  ensure that we will
have  sufficient  employees or funds to enable us to continue  operations and to
complete the orderly  disposition  of our assets  through the  conclusion of the
bankruptcy process.

We may be unable to
secure additional financing for our business, which could affect the outcome of
our bankruptcy case.

Although we have been pursuing potential sources of additional financing to fund
our ongoing business operations, we have not been successful in these efforts to
date. If the costs of  conducting  our  operations  during our  bankruptcy  case
(including the costs that we will incur in connection with the bankruptcy  case)
are greater than we expect or it takes longer than we expect to find a buyer for
our business or assets, our inability to obtain additional  financing could lead
us to terminate our operations or to liquidate our remaining  assets sooner than
we expect.

We are exploring
strategic opportunities for the company, but cannot be sure that we will be able
to reach appropriate agreements.

We  are  exploring  strategic  opportunities  for  the  disposition  of all or a
substantial  portion of our current  business or assets.  Since this  process is
ongoing, we cannot assure you that we will be able to reach agreement with third
parties over the definitive terms of any strategic agreements. Nor can we assure
you that if an agreement is reached,  we will be able to complete an  acceptable
strategic transaction. Because we have filed for bankruptcy protection, we would
have to obtain bankruptcy court approval of any transaction outside the ordinary
course of business. If we are unable to enter into an appropriate agreement,  it
is likely that we will not be able to meet all or some of our  obligations,  and
we may be required to cease operations and liquidate our assets.  Further, if we
were to sell a substantial  portion of our business or assets,  we may be unable
to operate our  remaining  businesses  and could be required  to  liquidate  our
remaining assets.

We may be unable to
retain sufficient qualified personnel, and the loss of any of our key employees
could materially and adversely affect our ability to operate our network and
implement our business strategy.

Our products and services are technical in nature,  and the market for employees
in the telecommunications  industry is competitive and dynamic. As a result, our
ability to  maintain  and  operate  our  network  effectively  and to retain the
overall  value in our assets will depend in  significant  part on our ability to
retain a substantial number of highly skilled, knowledgeable,  sophisticated and
qualified  managerial,  professional and technical personnel.  The filing of the
bankruptcy  petitions and the strategic staff reductions made by us on March 30,
2001  likely  will have a  negative  effect  on our  ability  to retain  (and if
necessary,  in the short term to attract new) employees. We expect that a number
of  employees  may leave the company in light of its current  posture and future
prospects.  In addition to our bankruptcy  filing, we have  experienced,  and we
expect to continue to experience,  significant and increasing  competition  from
other  companies in attracting  and  retaining  personnel who possess the skills
that we require.  We therefore may be unable to retain senior management,  other
key employees,  or other skilled  personnel in the future.  Losing key employees
could have a material  adverse  effect on our ability to implement the essential
components of our bankruptcy plan.

The loss or interruption
of relationships with or services from key suppliers and third-party contractors
could increase costs associated with the operation of our network.

We depend on third-party  suppliers for a number of components and parts used in
our network. The filing of the bankruptcy petitions could have a negative effect
on our ability to obtain these  components  and parts as long as we maintain and
operate our network.  Further,  we may be unable to obtain  supplies or services
from our  usual  suppliers  for  reasons  beyond  our  control.  Any  nationwide
shortage,  or extended  interruption in the supply of any of the key components,
change in the pricing arrangements with our suppliers and manufacturers or delay
in transitioning a replacement supplier's product into the network could further
disrupt our operations and affect the value of our assets.

We operate in a rapidly
evolving industry and our business and financial performance may suffer if
market and technological developments render our chosen technologies and
strategies obsolete or unresponsive to market demand.

Our business strategy is to provide an integrated  bundle of  telecommunications
services.  We operate in a rapidly evolving  industry.  As a result our business
will be subject to a variety of factors in  addition to those  described  in the
other  "risk  factors"  set  forth in this  Annual  Report on Form  10-K.  These
additional risks include:

- market pricing pressures for the services and products we offer;
- operating and technical problems; and
- variations in market growth rates for our products and services.

These factors could  adversely  affect our business  strategies by affecting our
ability  to  enter  into  a  strategic  transaction,  increasing  the  cost  and
difficulty of continuing to operate our network, or making it more difficult for
us to realize funds upon the sale of our business or assets.

If we do not
successfully manage our strategic alliances and joint ventures our financial and
operational performance may be adversely affected, and the value of our jointly
owned assets may be impaired.

To operate our network,  we must maintain our existing  strategic  alliances and
joint ventures.  Our financial  circumstances  and the consequences of filing of
our  bankruptcy  petitions may cause us to breach our  obligations  to strategic
alliance or joint  venture  partners.  As a result,  to realize the value of our
strategic  alliances in any sale or other  disposition of our business or assets
in our  bankruptcy  case,  we may need to enter  into  negotiations  with  these
partners  to  permit  us to sell  our  interests  in such  alliances  and  joint
ventures.  If we are  unable to reach such  agreements,  the value of our assets
associated with these joint ventures and alliances may be impaired.

We agreed to indemnify
BNSF, CSX and Colonial from certain losses and liabilities in deploying and
operating our network, and these losses and liabilities could be significant.

In the agreements by which we obtained certain of our rights of way we agreed to
release and indemnify BNSF, CSX and Colonial from claims,  losses or liabilities
resulting from damage to property,  personal injury to personnel, and many other
circumstances  while we construct  and operate our network.  In some cases,  our
release and  indemnity  applies  even to  circumstances  outside of our control,
including where the claim, loss or liability arises from the negligence or gross
negligence of BNSF, CSX, Colonial or their employees or contractors within their
control.  We have constructed our network on only a very small percentage of the
right of way that we acquired,  and our current  business plan does not call for
any additional construction on this right of way. Nonetheless,  if our insurance
coverage is inadequate,  or unavailable to cover existing but unreported  claims
arising from the construction  that has already taken place, we could be exposed
to significant losses and liabilities, and these liabilities would further erode
the amounts available to repay your investment.

## A portion of our  telecommunications  network has been  constructed on rights of
way acquired  from BNSF,  CSX and Colonial  and may not be  assignable  to third
parties without appropriate consent.

Each of the  agreements  in which we  obtained  right of way from BNSF,  CSX and
Colonial  contain  provisions  restricting the assignment of these agreements to
third parties.  It is unclear whether BNSF, CSX and Colonial would agree to such
assignments.  However,  the  bankruptcy  court  may be  able  to  authorize  the
assignment of such agreements to a third party,  notwithstanding such assignment
provisions.  The law is  unsettled  in this  area and  while we  believe  that a
transfer by the bankruptcy  court may be possible,  we cannot be sure that these
assets could be assigned to any  potential  purchaser  absent the consent of the
appropriate entity.

A portion of our
telecommunications network is constructed on rights of way used by railroad and
a utility and those could affect our ability to provide our services.

BNSF,  CSX and  Colonial  use the  rights  of way on which we have  installed  a
portion of our  telecommunications  network for railroad and pipeline  purposes.
Events  could  occur,  including  the  derailment  of a train,  the  breach of a
pipeline or damage resulting from track or pipeline  maintenance or construction
that could  interrupt  telecommunications  services on or  otherwise  damage our
network. If any of those events occur, our ability to provide telecommunications
services to our customers could be compromised,  and our relationship with those
customers could be seriously damaged.

## Risks Relating To Our Financing

We have filed voluntary
petitions in Bankruptcy Court and we expect negative operating cash flows and
substantial operating losses for the foreseeable future.

As discussed above, we, along with several of our subsidiaries,  filed voluntary
petitions  under  Chapter  11 of  the  Bankruptcy  Code  in  the  United  States
Bankruptcy Court for the District of Delaware.  As stated above, we believe that
this could make it  difficult  for us to obtain  additional  financing.  We have
incurred  operating losses and negative cash flow since  inception.  From August
25, 1995 through  December 31, 2000, our operations  have resulted in cumulative
net losses of $471.3 million.  We expect to incur continued operating losses and
negative cash flow as we continue  operating the business  during our bankruptcy
case. If these losses  increase,  or if the bankruptcy case takes longer than we
expect to complete,  we may be unable to fund our  operations as planned  during
our bankruptcy case, leading to a further decline in the value of our assets and
further impairing the amount available as a recovery of your investment.

We have guaranteed and
may in the future incur a substantial amount of debt that could lead to a
further impairment in the value of assets remaining to satisfy your claims.

As of December  31, 2000 we had  approximately  $472.1  million of  indebtedness
outstanding  and  total  stockholders'  deficit  of  $237.1  million.  We do not
currently plan to incur additional indebtedness in operating our business during
our  bankruptcy  case,  but if we did incur any such  debt,  it would  likely be
senior to your  claims for  payment on the  Pathnet  Inc.  notes.  The  priority
payment of any senior  indebtedness would reduce the pool of assets available to
repay your notes.

## We may not have sufficient funds from our own cash flow or other sources to service our debt.

We do not expect to be able to meet our debt  obligations  under our guarantees,
nor do we expect  Pathnet Inc.  independently  to be able to satisfy its payment
obligations  under the notes. If we fail to satisfy the requirements of our debt
agreements, we will be in default.  Moreover, the filing of the Chapter 11 cases
constitutes a default under the notes and guarantees. A default under the notes,
which may  include a material  default  under  other  indebtedness,  permits the
holders of the notes (and other debt for which we will be directly or indirectly
responsible)  to  require  payment  before the  scheduled  due date of the debt,
resulting  in further  financial  strain on us and causing  additional  defaults
under our other indebtedness.

Although the
Companys notes are referred to as Senior Notes they are, and
will continue to be, effectively subordinated to our secured debt.

The notes are  unsecured  and  therefore  are  effectively  subordinated  to any
secured debt we may incur to the extent of the value of the assets securing that
debt.  Pursuant to our  bankruptcy  filing,  our assets that serve as collateral
will be available to satisfy the  obligations  under any secured debt before any
payments  are made on the  notes,  unless  the lien  that  secures  such debt is
capable of avoidance under the bankruptcy  laws. If there is any shortfall after
the  application to the secured claims of the net proceeds of these assets,  our
secured creditors would have a claim for that shortfall ranking equally with the
noteholder's claim against us under the guarantees.

We depend on payments
from our subsidiaries to repay our debts, and other creditors of our
subsidiaries other than Pathnet, Inc. will have claims against the assets of
those subsidiaries that may be structurally senior to the notes.

We are a holding  company that receives a substantial  part of our revenues from
our  subsidiaries.  Our ability to obtain payments from our  subsidiaries may be
restricted  by the  profitability  and cash flows of our  subsidiaries  and laws
relating to the payment of dividends by a subsidiary to its parent  company.  If
our  subsidiaries  are unable to pay dividends,  we may be unable to service our
debt,  including  our  obligations  under  the  supplemental  indenture  and the
guarantees.  Moreover,  some  of our  subsidiaries  have  filed  for  bankruptcy
protection, and each of their creditors will generally be entitled to payment of
their  claims  from the  assets of that  subsidiary  before  any assets are made
available for distributions to us, except to the extent we may also have a claim
as a creditor that is not otherwise subordinated.  In that situation,  creditors
of our subsidiaries and holders of preferred stock, if any, of our subsidiaries,
have claims on the assets of the subsidiaries with priority over our claims.

## Other than Pathnet,  Inc., our  subsidiaries  do not guarantee nor are otherwise
responsible  for  making  funds  available  to us or to  Pathnet,  Inc.  to make
payments on the notes or guarantees.

Like the notes, the rights under the guarantees are structurally subordinated to
both secured and  unsecured  debts of our  subsidiaries  other than Pathnet Inc.
Under the terms of the existing indenture,  Pathnet Inc. formed new subsidiaries
that are  separate  legal  entities  with no  obligations  under the notes.  The
supplemental  indenture  extended this  structure to us. They have no obligation
under the  supplemental  indenture  or the  guarantees  to make  payments  or to
provide  dividends  or other funds to us or  Pathnet,  Inc. to permit us to make
payments on the notes or guarantees.

## Pursuant  to  vendor  financing   arrangements  we  formed   subsidiaries   with
substantial assets that are not obligated to guarantee the notes.

In order to take advantage of vendor financing in constructing  our network,  we
formed a new subsidiary and contributed to this subsidiary a substantial portion
of  our  fiber   assets  and  rights  of  way  and  included   additional   cash
contributions. This subsidiary does not guarantee the notes.

Our indebtedness
contains restrictive covenants, which could expose us to additional defaults and
restrict our operations.

By entering into the  supplemental  indenture,  we became subject to a number of
restrictive   covenants  parallel  to  those  contained  in  the  indenture  and
applicable  to Pathnet Inc.  These  restrictions  affect,  and, in certain cases
significantly  limit (and in some  cases  prohibit),  among  other  things,  our
ability and the ability of our subsidiaries to:

- incur additional indebtedness;
- create liens;
- make investments;
- pay dividends;
- issue stock; and
- sell assets.

These restrictive covenants may also adversely affect our ability to finance our
future  operations or capital needs,  or to engage in other business  activities
that may be in our interest.

As we have stated above,  the filing of our  bankruptcy  petition  constitutes a
default under the supplemental indenture. However, the automatic stay imposed by
the  Bankruptcy  Code  upon the  filing  of the  bankruptcy  petition  generally
prevents persons from taking any action against  companies subject to Chapter 11
protection without relief from the bankruptcy court.

Provisions in our
certificate of incorporation and bylaws, the Stockholders Agreement to which it
is a party and the terms of the Indenture and Supplemental Indenture could
hinder investment in us or acquisition of us or our assets.

Our certificate of  incorporation,  bylaws and  stockholders  agreement  contain
provisions that will make any acquisition or investment in us or our business or
assets more difficult, including restrictions on sales of assets without certain
approvals of the holders of our equity. Our ability to attract purchasers of our
business or assets may be hindered because of these provisions, thereby limiting
our ability to sell portions of our business or assets as we may plan.  However,
as a result of seeking Chapter 11 protection,  under federal  bankruptcy law, we
may be  permitted to take  certain  actions with the approval of the  bankruptcy
court  and/or  with  the  approval  of  certain   majorities  of  creditors  and
parties-in-interest  that  ordinarily  would be  restricted or prohibited by the
terms of our  certificate  of  incorporation,  the bylaws,  the indenture or the
supplemental indenture.

## Risks Relating To Our Network Business

We may not be able to
maintain appropriate rights of way and other access rights that we may need to
operate our network which would limit our ability to implement our business
plan, depriving us of a source of revenue necessary to implement our business
plan.

Whether  as the  result  of  our  financial  circumstances,  the  filing  of our
bankruptcy  petitions,  or independently as the result of property disputes,  we
cannot  assure you that we will  continue to have  access to existing  rights of
way,  leases and licenses  after the  expiration or  termination  of our current
agreements,  or that we will obtain  additional  rights necessary to operate our
network on  reasonable  terms.  In addition,  if a  franchise,  license or lease
agreement  is  terminated  and we are forced to remove or abandon a  significant
portion of our network, our business, results of operations and the value of our
underlying  assets  available for  liquidation  will be materially and adversely
affected.

Third-party challenges
to our use of rights of way obtained from others may delay, hinder or otherwise
limit the operation of our network, depriving us of the revenues necessary to
implement our business plan.

To maintain our fiber optic and wireless  network,  we have obtained  easements,
leases,  rights of way,  franchises and licenses from various  private  parties,
including railroads,  pipelines, utilities, actual and potential competitors and
local governments. Some of our agreements with right-of-way providers require us
to acknowledge  that others who question the right-of-way  providers'  ownership
claim to the easement or property right may challenge our claim to the rights of
way being  granted.  Third  parties have  challenged,  and it is possible in the
future that  additional  third parties may  challenge,  our use of rights of way
obtained by or from others. If we are unable to resolve any of these challenges,
or if the  cost  of  addressing  them  is  higher  than  we  contemplate,  these
challenges may hinder or delay the sale of our business or assets.  However, the
automatic stay imposed by the Bankruptcy  Code upon the filing of our bankruptcy
petition  generally  prevents a person from taking any action against  companies
subject to Chapter 11  protection  without  relief  from the  bankruptcy  court.
Please see our discussion above of our bankruptcy proceeding.

## If we are unable to maintain  permits and  agreements  necessary  to operate our
network, we may be unable to generate sufficient revenues.

We cannot  guarantee  that we, or our operating  companies or partners,  will be
able to maintain  existing  permits,  pole attachment and conduit use agreements
needed to operate our network and provide our planned products and services. Our
failure  to  maintain  necessary  permits,  pole  attachments  and  conduit  use
agreements  could have a material  adverse  effect on our ability to operate our
network. The filing of our bankruptcy petition may result in the cancellation or
termination of all or a portion of these permits and agreements.

## Disagreements with our co-development partners or difficulties we may experience
in our other strategic relationships could hinder the operation of our network.

As part of our business strategy we formed strategic alliances and relationships
which allowed us to enter certain markets for telecommunications services sooner
than if we had made the attempt independently.

Any disagreements  with our  co-development  partners or companies with which we
have a  strategic  alliance  could  impair or  adversely  effect our  ability to
conduct  our  business.   In  addition,   the  bankruptcy  or  insolvency  of  a
co-development  partner could result in the termination of its agreement with us
and any related right of way agreements.  It is possible that our own bankruptcy
filing  will have a  negative  effect on these  relationships.  In some cases it
could  lead  to the  termination  of  the  relationship.  The  effect  of  those
terminations or the failure of a co-development partner to make required capital
contributions would have a material adverse effect on us.

If existing local
telephone companies on whom we depend for interconnection and other network
elements refuse to cooperate or fail to perform their agreements with us, we may
be prevented from operating our network.

We  interconnect  with and use existing local telephone  companies'  networks to
provide local access services to our customers.  This strategy presents a number
of challenges because we depend on existing local telephone companies to:

- allow us to use their technology and capabilities of their
networks to service our customers;
- cooperate with us to provide and repair facilities; and
- provide the services and network components that we order, for which they depend
significantly on unionized labor. Labor issues have in the past and may in the
future hurt the existing local telephone companies performance.

Our dependence on existing local telephone  companies may make it more difficult
to realize the full value of our businesses and assets that are associated  with
such relationships.

## Wireless  path failures or cable cuts on our network  could  interfere  with our
network operations,  damage our relationships with our customers or expose us to
liability.

We do not have route diversity on our digital network to maintain  services if a
wireless  path  failure  or  fiber  cable  cut  occurs.  If we were to  suffer a
deterioration in the perceived quality or reliability of our service as a result
of a path failure,  cable cut, or other network outage,  our customer  relations
would be  materially  adversely  affected  and we could be exposed to  liability
claims.

## Risks Relating To Our Industry

Our business and
industry are very competitive and increased competition could require us to
lower our prices or provide more expensive service that would adversely affect
our financial performance.

Our  segment  of  the  telecommunications  industry  is  extremely  competitive,
particularly  with  regard  to  price  and  service.  Many of our  existing  and
potential competitors have significantly greater financial, personnel, marketing
and other  resources  than we do.  For  example,  some of our  competitors  have
already made substantial  long-term  investments in the construction of wireless
and  fiber  optic  networks  and  the  acquisition  of  bandwidth.  Many  of our
competitors also have the added competitive  advantage of an established network
and existing customer base. For example, some communications  carriers and local
cable companies have extensive networks in place that could be upgraded to fiber
optic cable.  Those  companies  also have more  employees  and more  substantial
capital resources to begin those upgrades. If communications  carriers and local
cable companies decide to equip their existing  networks with fiber optic cable,
they could become  significant  competitors to our business in a short period of
time. In addition, because of our bankruptcy filing and financial condition, our
competitors  may  elect to  pursue  more  aggressively  our  customers,  further
hampering our ability to retain our  customers  and convert our revenue  backlog
into revenue.

If we encounter
increased competition from existing and future telecommunications systems on
routes where we provide infrastructure services and wholesale transport
services, we may be unable to compete effectively for those services or we may
need to reduce our prices in a manner that adversely affects our financial
performance or the value of our assets.

Other  companies  may  choose to  compete  with us in our  markets by selling or
leasing  network  assets  or  wholesale   transport  services  to  our  targeted
customers.  This  competition  could  have  a  material  adverse  effect  on our
business. Our competitors for these products and services include:

- long distance companies, such as AT&T Corp., MCI WorldCom, Inc. and Sprint Corporation;
- wholesale  providers,   such  as  Qwest  Communications   International  Inc.,  Williams   Communications   Group,  Inc.,  IXC
              Communications, Inc., DTI Holdings, Inc., Global Crossing Ltd. and Level 3 Communications, Inc.;
- existing local telephone companies, such as Qwest, BellSouth, Verizon and SBC,
which currently dominate their local telecommunications markets and have
obtained or may soon obtain, and in some instances have obtained authority to
provide long distance services in certain of their local markets;
- competitive  telecommunications  companies  often  referred to as CLECs,  such as  ITC/Deltacom,  Inc.  and  Metromedia  Fiber
              Network, Inc.; and
- potential competitors capable of offering services similar to those we offer,
such as communications service providers, cable television companies, electric
utilities, microwave carriers, satellite carriers, wireless telephone operators
and large end users with private networks.

## Additional    competition    from   local    telephone    companies   or   other
telecommunications  service  providers  as they begin to provide or expand their
local access services in the markets that we have targeted,  may prevent us from
achieving our sales goals or impair the value of our assets.

Our principal  competitor  in the provision of local access  services in each of
our markets is the existing local telephone company. Although changes in federal
law over the past few years  afford us  increased  opportunities  to  compete in
providing these services,  some aspects of this law also benefit  existing local
telephone  companies.  In addition,  potential  changes in federal law regarding
telecommunications  services including legislative  initiatives designed to make
it  easier  for  local  telephone  companies  to  offer  data  telecommunication
services,  could deprive us of some  competitive  advantages  that we now enjoy,
which could harm our business.

Significant  new   competitors   also  could  enter  the  local  market  through
consolidation  and strategic  alliances in the industry,  foreign carriers being
allowed to compete  in the U.S.  market,  technological  advances,  and  further
deregulation and other regulatory initiatives.  The introduction of any of these
new  competitors  into our  markets  for local  services  could  materially  and
adversely affect our business or the value of our assets.

Our product and service
offerings are subject to risks of industry over-capacity and resulting downward
pricing pressures.

Since shortly after the AT&T divestiture in 1984, the long-distance transmission
industry  generally has experienced  over-capacity and declining  prices.  These
trends have exerted downward pricing pressures on a number of telecommunications
services,  including our wholesale  transport  services,  and we anticipate that
prices for these  services  will continue to decline over the next several years
because:

- existing  long  distance  carriers  and  potential  new  carriers  are  constructing  new fiber optic and other  long-distance
                  transmission networks;
- regulatory changes already permit some, and are likely in the future to permit
other existing local telephone companies to provide long-distance services
out-of-region;
- expansion and new construction of transmission networks, particularly optic
cable networks, are likely to create substantial excess capacity relative to
demand in the short or medium term; and
- recent technological advances may greatly expand the capacity of new fiber optic cable.

Dramatic and substantial price reductions in the long distance  industry,  or an
increase in the capacity of any of our competitors to provide transport services
could  require  us to reduce our  prices  significantly  or to revise the mix of
products and services we plan to offer.  Either of these results could adversely
affect the value of our business or assets.

If we fail to recognize
or make the investments necessary to keep pace with rapid technological changes,
our services may become less desirable or obsolete and we may face higher costs
or be required to sell our business or assets for less favorable prices.

The  telecommunications  industry  is  characterized  by rapid  and  significant
changes in technology.  We cannot predict the effect of technological changes on
our business.  The  introduction of new products or technologies  may reduce the
cost or  increase  the supply of services  similar to those that we provide,  or
could  render  those  services  and our network  assets less  desirable  or even
obsolete, reducing the amount recoverable on your investment.

## Risks Relating To Regulation

## Regulatory changes could require us to postpone or modify our business plans or deprive us of the means to establish our network in
our target markets.

Communications  services are subject to  significant  regulation at the federal,  state and local levels.  Our business  plans
require us to exploit  opportunities  afforded by recent  regulatory  changes.  However,  the regulatory  environment  could  adversely
affect us in a number of ways, including:

- delays in receiving required regulatory approvals or the imposition of onerous conditions for these approvals;
- difficulties  in completing and obtaining  regulatory  approval of  interconnection  agreements  with existing local telephone
              companies; and
- enactment of new and adverse  legislation  or regulatory  requirements  or changes in the  interpretation  of existing laws or
              regulations.

Many  regulatory  proceedings  regarding  issues  that are  important  to our  business  are  currently  underway or are being
contemplated  by federal and state  authorities.  Changes in  regulations  or future  regulations  adopted by  federal,  state or local
regulators,  or other  legislative  or judicial  initiatives  relating to the  telecommunications  industry could cause our pricing and
business models to fluctuate dramatically or otherwise could have a material adverse effect on us.

## The FCC may implement the provisions of the Telecommunications Act of 1996 in a manner that is adverse to our business plan and
strategies.

The  Telecommunications  Act of 1996 was intended,  among other things,  to foster  competition in the local telephone market.
However,  the FCC and the states are still  implementing  many of its rules and policies and it remains  uncertain how successfully the
Telecommunications  Act will promote  competition.  Moreover,  the  Telecommunications  Act and other recent federal laws regarding the
U.S.  telecommunications  industry remain subject to legislative revision,  judicial review, additional FCC rule-making proceedings and
legislative  revision.  Our business  strategy  involves  taking  advantage of some of the  competitive  opportunities  advanced by the
Telecommunications  Act.  The  FCC  may  promulgate  regulations  implementing,   and  Congress  may  enact  legislation  revising  the
Telecommunications Act that are adverse to our business.

If we are unable to
maintain the necessary FCC licenses, we may be unable to operate the wireless
portions of our network.

Portions of our network are  wireless,  meaning that we provide  access  services  via  over-the-air  microwave  transmissions
instead of through fiber optic cables.  Our  arrangements  with certain of our wireless  co-development  partners  contemplate that the
wireless  portion of our digital  network will largely  provide  "common  carrier fixed  point-to-point  microwave"  telecommunications
services  under Part 101 of the FCC's  rules.  These  services  are  subject to  regulation  by federal,  state and local  governmental
agencies.  Changes in existing laws and regulations  governing our provision of these services could have a material  adverse effect on
our business, financial condition, and value of our assets.

## ITEM 7A.        
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to minimal  market risks.  We manage  sensitivity of our results of operations to market risks by maintaining a
conservative investment portfolio,  (which primarily consists of debt securities,  that typically mature within one year), and entering
into long-term debt obligations with appropriate pricing and terms. We do not hold or issue derivative,  derivative  commodity or other
financial  instruments  for trading  purposes.  Financial  instruments  held for other than  trading  purposes do not impose a material
market risk on us.

Although all of our long-term  debt bears fixed  interest  rates,  the fair market value of our fixed rate  long-term  debt is
sensitive to changes in interest  rates.  We have no cash flow or earnings  exposure due to market  interest rate changes for our fixed
long-term debt obligations.  As of December 31, 2000, the fair value of our debt was approximately $45.5 million.

## ITEM 8.        
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The
Companys financial statements and supplementary data, together with the
report of the independent accountants, are included or incorporated by reference
elsewhere herein. Reference is made to the Index to Financial
Statements following the signature pages hereto.

## ITEM 9.          
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

## PART III

## ITEM 10.        
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

## Directors and
Executive Officers

The table below sets forth certain information concerning the directors and
executive officers of the Company. Directors of the Company are elected at the
annual meeting of stockholders. Executive officers of the Company generally are
appointed at the Board of Directors first meeting after each annual
meeting of stockholders.

`Name                                         Age           Position(s) with Company
Richard A. Jalkut ..........................   56          President, Chief Executive Officer and Director
James M. Craig .............................   44          Executive Vice President, Chief Financial
                                                             Officer and Treasurer
William R. Smedberg, V......................   40          Executive Vice President, Corporate Development
Shawn F. O'Donnell .........................   35          Executive Vice President, Network Services
Mary McDermott..............................   46          Senior Vice President, General Counsel and Secretary
Peter J. Barris ............................   48          Director
Kevin J. Maroni ............................   38          Director
Patrick J. Kerins ..........................   45          Director
Stephen A. Reinstadtler ....................   34          Director
Randall Evans ..............................   53          Director
____________________________________`

Richard A. Jalkut has served as  President,  CEO and director of the Company  since August  1997.  Mr.  Jalkut has over 30 years of
telecommunications  experience.  From 1995 to August 1997,  he served as  President  and Group  Executive  of NYNEX  Telecommunications
Group, where he was responsible for all activities of the NYNEX  Telecommunications  Group, an organization with over 60,000 employees.
From 1991 until 1995,  Mr.  Jalkut  served as President  and CEO of New York  Telephone  Co.  Inc.,  the  predecessor  company to NYNEX
Telecommunications  Group.  Mr. Jalkut currently serves as a member of the board of directors of HSBC Bank USA, a commercial bank; Ikon
Office Solutions, Inc., a company engaged in wholesale and retail office equipment;  Digex Incorporated;  and Home Wireless Networks, a
start-up company developing a wireless product for home and business premises.

James M. Craighas served as Executive Vice President, Chief Financial Officer and
Treasurer of the Company since April 1999. Mr. Craig has 22 years of accounting
and finance experience, including 15 years specifically in the communications
industry. From February 1997 to April 1999, Mr. Craig served as the Senior
Director Treasury Management for Omnipoint Communications, where he was
responsible for corporate planning and forecasting. In this position, he also
served as a point of contact for investment banks, sell-side analysts and rating
agencies. Before that, Mr. Craig assisted in the launch of two start-up
telecommunications companies, from February 1996 to February 1997 at UniSite and
from September 1995 to February 1997 at National Telecom PCS, Inc. While with
UniSite, he established regional and national alliances between UniSite and
telecommunications tower owners. Mr. Craig also spent a total of 11 years, from
1983 to 1995, with MCI, holding positions such as Director of Wireless
Communications, Director of Corporate Development, Director of
Telecommunications Group Planning and Director of Corporate Treasury Group. From
1982 through 1983 and from 1977 through 1980, Mr. Craig served as a Senior
Accountant at the Cowper Group and from 1980 to 1982 he practiced as a certified
public accountant with Touche Ross and Co.

William
R. Smedberg, Vjoined the Company initially as a consultant in 1996, served
as Vice President, Finance and Corporate Development of the Company from January
1997 to February 1999 and assumed the position of Executive Vice President,
Corporate Development of the Company in March 1999. Before joining the Company,
Mr. Smedberg served as Director, Strategic Planning and Corporate Development
for Jamont, a European consumer products joint venture among Nokia Oy,
Montedison S.p.A. and James River Corporation of Virginia, Inc., from 1991 to
1996, where he was responsible for Jamonts corporate finance, strategic
planning and corporate development.

Shawn
ODonnelljoined the Company inAugust 1999 and served as Senior
Vice President of Engineering and Construction of the Company until August 2000
when he assumed the position of Executive Vice President, Network Services, in
September 2000. Mr. ODonnell has more than 14 years of engineering
experience in the telecommunications industry. Before joining the Company, Mr.
ODonnell served as Director of Transmissions and Facility Standards and
Engineering with MCI WorldCom from November 1996 to August 1999. In that
position, he was in charge of a 340+ person team that was responsible for
overall transmission and facility engineering for local, long distance and
Internet networks. From April 1988 to November 1996, he also held a variety of
other positions at MCI WorldCom, including Senior Manager of Transmission
Engineering Implementation and Senior Manager of Switched Network Planning.
Before joining MCI WorldCom, from June 1986 to April 1988, Mr. ODonnell
was a Control Engineer with Potomac Edison. While there, he was responsible for
the management of communications networks associated with high voltage control
systems.

Mary
McDermott has served as Senior Vice President and General Counsel since
March 2000. Before joining the company, she served as Senior Vice President and
Chief of Staff for Government Relations for the Personal Communications Industry
Association (PCIA) from 1998 to 2000. In that capacity she advocated
the views of the associations diverse wireless industry membership before
the FCC, Congress and the Executive Branch. Prior to her service at PCIA, she
served 4 years as Vice President - Legal and Regulatory Affairs for the U.S.
Telephone Association (USTA) where she was responsible for the
associations legal and regulatory strategies and represented the
association before the FCC and other agencies within the federal government.
Prior to joining USTA in 1984, she spent 12 years with the NYNEX companies where
her last assignment was leading a team of lawyers responsible for advising
strategic planning and marketing clients and representing NYNEX before the FCC.
She is a member of the New York, Massachusetts and Florida Bar Associations as
well as the Federal Communications Bar Association.

Peter J. Barrishas been a director of the Company  since August 1995.  Since 1992,  Mr.  Barris has been a partner;  in 1994,  was
appointed a General Partner;  and, in 1999, was appointed  Managing General Partner of New Enterprise  Associates,  a firm that manages
venture  capital  investments.  Mr.  Barris is also a member of the board of directors of Mobius  Management  Systems,  Inc.,  which is
quoted on the NASDAQ National Market.

Kevin J. Maroni has been a director of the Company since August 1995.  Since 1994,  Mr. Maroni has been a principal,  and, in 1995,
was appointed a General  Partner of Spectrum  Equity  Investors,  which  manages  private  equity funds  focused on growth  capital for
Telecommunications  companies.  Prior to Spectrum,  Mr.  Maroni  worked at Time Warner and Harvard  Management  Company.  Mr. Maroni is
currently on the board of directors of several private  companies and CTC  Communications  Corp (which is quoted on the NASDAQ National
Market).

Patrick
J. Kerinshas been a director of the Company since July 1997. Since March
1997, Mr. Kerins has served as Managing Director of Grotech Capital Group, which
is engaged in venture capital and other private equity investments. From 1987 to
March 1997, he worked in the investment banking division of Alex Brown &
Sons, Incorporated, including serving as Managing Director beginning in January
1994.

Stephen
A. Reinstadtlerhas been a director of the Company since October 1997. Since
August 1995, Mr. Reinstadtler has served as Vice President and Director at
Toronto Dominion Capital (U.S.A) Inc., where he has been involved in private
equity and mezzanine debt investments. From April 1994 to July 1995, he was
Manager at The Toronto-Dominion Bank, where he was involved in commercial
lending activities to the telecommunications industry. From August 1992 to April
1994, Mr. Reinstadtler also served as Associate at Kansallis-Osake-Pankki, where
he was involved in commercial lending activities to the telecommunications
industry. Mr. Reinstadtler is a member of the board of directors at Mountain
Union Telecom, an owner/operator of tower sites for the wireless
telecommunications industry.

Randall
Evans has been a director of the Company since October 2000. Since 1999, Mr.
Evans has served as Vice President, Real Estate & Industrial Development at
CSX Transportation, Inc. He has been with CSX Transportation, Inc, since September 1991
where he has served in a variety of capacities with the most recent being
Superintendent, Jacksonville Division in 1995, General Manager, Florence Service
Lane through 1997 and Vice President, Acquisition Development through 1999.

## Limitation of
Liability and Indemnification

We are incorporated under the laws of the State of Delaware.

Section
102(b)(7) of the Delaware General Corporation Law permits a provision in the
certificate of incorporation of each corporation organized thereunder,
eliminating or limiting, with certain exceptions, the personal liability of a
director to the corporation or its stockholders for monetary damages for certain
breaches of fiduciary duty as a director.

Our
certificate of incorporation limits, to the fullest extent permitted by law, the
liability of our directors to us and our stockholders for monetary damages for
breach of their fiduciary duty. This provision is intended to afford our
directors the benefit of the Delaware General Corporation Law. This limitation
on liability does not extend to:

- Any breach of a director's duty of loyalty to us or our stockholders;
- Acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law;
- Violations of the Delaware General Corporation Law regarding the improper payment of dividends; or
- Any transaction from which the director derived any improper personal benefit.

Section
145 of the Delaware General Corporation Law, in summary, empowers a Delaware
corporation, within certain limitations, to indemnify its officers, directors,
employees and agents against expenses (including attorneys fees),
judgments, fines and amounts paid in settlement, actually and reasonably
incurred by them in connection with any suit or proceeding other than by or on
behalf of the corporation, if they acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to a criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful.

With
respect to actions by or on behalf of the corporation, Section 145 of the
Delaware General Corporation Law permits a corporation to indemnify its
officers, directors, employees and agents against expenses (including
attorneys fees) actually and reasonably incurred in connection with the
defense or settlement of such action or suit, provided such person meets the
standard of conduct described in the preceding paragraph, except that no
indemnification is permitted in respect of any claim where such person has been
found liable to the corporation, unless the Court of Chancery or the court in
which such action or suit was brought approves such indemnification and
determines that such person is fairly and reasonably entitled to be indemnified.

Our
certificate of incorporation requires us to indemnify our directors and officers
to the extent not prohibited by law for actions or proceedings arising because
of their positions as directors or officers.

Our
stockholders agreement provides for indemnification of us, our directors and
officers, and persons who control us within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act for certain liabilities,
including liabilities under the Securities Act. Indemnification claims could
impair amounts available to you, to the extent not covered by our insurance.

In addition, we maintain standard directors' and officers' insurance policies.

## ITEM 11.        
EXECUTIVE COMPENSATION

The
following table sets forth certain information concerning the cash and non-cash
compensation earned by or awarded to the Chief Executive Officer and each of the
four other Named Executive Officers of the company for services rendered in all
capacities in each of the last three fiscal years. The officers listed in the
table below are referred to as the Named Executive Officers:

`Long - Term
                                                           Annual                  Other             Compensation
                                                           ------
                                                        Compensation *             Annual         Securities Underlying
                                                        --------------
Name And Principal Position              Year        Salary          Bonus      Compensation *      Options Granted **
---------------------------              ----        ------          -----      --------------    ----------------------
Richard A. Jalkut                        2000       $440,520        $142,750  $    47,736  (1)           858,754
   President and Chief Executive         1999        400,000         300,000       40,733  (2)                --
   Officer                               1998        400,000              --       40,289  (3)                --
Mary McDermott                           2000        146,851 (4)     132,063           --                100,000
   Senior Vice President, General
Counsel
    and  Secretary
William R. Smedberg V                    2000        186,946         166,017           --                 50,000
   Executive Vice President,             1999        182,886         139,000           --                 50,000
   Corporate Development                 1998        111,250          28,267           --                 78,656
James M. Craig                           2000        186,183         142,750           --                 50,000
   Executive Vice President, Chief       1999        122,206 (5)      78,750           --                125,000
   Financial Officer and Treasurer
Shawn F. O'Donnell                       2000        170,908         132,000           --                 50,000
   Executive Vice  President,  Network   1999         58,739 (6)      52,500           --                 50,000
Services
___________________________________`

*        
Except as stated herein, none of the above Named Executive Officers received
perquisites or other personal benefits in excess of the lesser of $50,000 or 10%
of such individuals salary plus annual bonus. 

**             We have not issued any stock appreciation rights or long-term incentive plans.
(1)         Consists of $9,607 for club dues; $13,245 for lodging; $14,751 for airfare;
$6,133 for other transportation and $4,000 for consulting services. 
(2)             Consists of $7,227 for club dues; $13,368 for lodging; $15,090 for airfare; and $5,048 for other transportation.
(3)              Consists of $16,277 for club dues; $7,756 for lodging; $11,685 for airfare; and $4,571 for other transportation.
(4)             Ms. McDermott began her employment with Pathnet on March 20, 2000, and her salary was $190,000 per annum in 2000.
(5)              Mr.Craig began his employment with Pathnet on April 19, 1999, and his salary was $175,000 per annum in 1999.
(6)              Mr. O'Donnell began his employment with Pathnet on August 9, 1999, and his salary was $150,000 per annum in 1999.

## Stock Option
Grants and Exercises

The
following table sets forth the aggregate number of stock options granted to each
of the Named Executive Officers during the fiscal year ended December 31, 2000.
Stock options are exercisable to purchase Common Stock of the Company.

# Option
Grants in Last Fiscal Year

`Number of       Percent of                               Potential Realizable Value at
                               Securities    Total Options                               Assumed Annual Rate of Stock
                               Underlying      Granted to     Exercise                Price Appreciation for the Option
                                Options       Employees in      Price    Expiration                  Term
                                Granted       Fiscal Year      $/Share      Date         0%         5%           10%
                                --------      -----------      -------      ----         --         --           --

Richard A. Jalkut ........       858,754         37.73%       $ 11.00    08/04/2010   $  --    $5,940,724   $15,054,960
William R. Smedberg ......        20,000          0.88          11.00    03/29/2010      --       138,357       350,623
                                  30,000          1.32          11.00    09/14/2010      --       207,535       525,935
James M. Craig............        20,000          0.88          11.00    03/29/2010      --       138,357       350,623
                                  30,000          1.32          11.00    09/14/2010      --       207,535       525,935
Shawn F. O'Donnell .......        20,000          0.88          11.00    03/29/2010      --       138,357       350,623
                                  30,000          1.32          11.00    09/14/2010      --       207,535       525,935
Mary McDermott ...........        70,000          3.08          11.00    03/29/2010      --       484,249     1,227,182
                                  30,000          1.32          11.00    09/14/2010      --       207,535       525,935
________________________`

(1)
        
The information disclosed assumes, solely for purposes of demonstrating
potential realizable value of the stock options, that the estimated fair market
value per share of Common Stock was $11.00 per share as of December 1, 2000 and
increases at the rate indicated during the option term.

(2)
        
The options vest ratably over a four-year period. The option may be transferred
only by will or by the laws of descent and distribution. Upon a change of
control of the Company and termination of optionees employment without
cause, the options that would otherwise become vested within one year will be
deemed vested immediately before such optionees termination.

## Option
Exercises and Fiscal Year-End Option Values

None
of the Named Executive Officers exercised any options during the fiscal year
ended December 31, 2000. The following table sets forth as of December 31, 2000,
the aggregate number of options held by each of the Named Executive Officers.

# Fiscal
Year-End Option Values

`Number of Securities Underlying
                                         Unexercised Options at December         Value of Unexercised In-the-
                                               December 31, 2000                      Money Options (1)
                                               -----------------                      ----------------
Name                                       Exercisable      Unexercisable      Exercisable    Unexercisable
----                                       -----------      -------------      -----------    -------------

Richard A. Jalkut .....................        858,754            858,754      $ 8,475,902        $      --
William R. Smedberg ...................         96,156             82,500          816,785          188,500
James M. Craig.......................           31,250            143,750          181,250          543,750
Shawn F. O'Donnell ....................         12,500             87,500           72,500          217,500

Mary McDermott ........................             --            100,000               --               --

______________________________`

(1)        
Based on an assumed market price of the Common Stock of $11.00 per share as of December 31, 2000.

## Jalkut
Employment Agreement

We
are currently a party to an employment agreement with Mr. Jalkut. Under this
employment agreement, Mr. Jalkut will receive a minimum annual base salary of
$500,000 (or any greater amount approved by a majority of the board of
directors), bonuses and other benefits determined by the board of directors.
Additionally, Mr. Jalkut is entitled to receive reimbursement of certain
expenses, all of which expenses may not exceed $100,000 per year. In accordance
with his employment agreement, on August 4, 2000, Mr. Jalkut received
nonqualified stock options for 858,754 shares of common stock at an exercise
price of $11.00 per share. These options vest ratably over three years. If we
terminate Mr. Jalkuts employment he may elect, within 10 business days of
his termination, to have us pay him, subject to the terms of the Indenture and
the Supplemental Indenture, the aggregate fair value of his options then vested
or held by him. We will be required to make any payments in accordance with his
employment agreement.

During
his employment and for two years after his termination, Mr. Jalkuts
employment agreement prohibits him from investing in businesses or activities
that compete with us, soliciting our employees or otherwise competing with us,
by, for example, working with or for one of our competitors. Mr. Jalkuts
employment agreement also prevents him from disclosing or using our confidential
or proprietary information at any time.

Other
than the restrictions on Mr. Jalkut described above and our obligation to pay
severance for two years following the termination of Mr. Jalkuts
employment (depending on the basis for his termination), Mr. Jalkuts
employment agreement will terminate in the event of his death and may be
terminated:

        
By us:

(a)         
Immediately without cause (as defined in his employment agreement); or

(b)         
Immediately for cause, generally subject to written notice of the board's intention to terminate him for cause;

(c)        
 Upon Mr. Jalkut's disability (as defined in his employment agreement) by giving 15 days prior written notice; and

        
 By Mr. Jalkut:

(a)         
Without cause, by giving 90 days' prior written notice; and

(b)         
Immediately, upon a constructive termination (as defined in his employment agreement).

Unless we terminate Mr. Jalkuts employment for cause or disability, or Mr. Jalkut
terminates his employment without cause, Mr. Jalkut is entitled to continue to
receive his salary for 24 months following the termination of his employment
with us.

## Other
Agreements

Messrs. ODonnell,
Craig and Smedberg and Ms. McDermott each have entered into an agreement with us
which requires each of them to (1) assign to us all inventions developed by them
during their employment, (2) maintain the confidentiality of our proprietary
information, and (3) refrain from working with or for a competitor of ours for
two years after his or her termination.

## Director
Compensation

Currently,
our directors do not receive directors fees or other compensation and they
are not compensated or reimbursed for their out-of-pocket expenses incurred in
serving as directors or for attending meetings of the board of directors or its
committees.

## Compensation
Committee Interlocks and Insider Participation

The  compensation  committee of the board of directors is  responsible  for the setting the Company's  compensation  policies.
The compensation  committee during 2000 consisted of Messrs.  Maroni,  Reinstadtler,  Evans and Barris.  The report of the committee on
executive officer compensation for 2000 is set forth below.

During the fiscal  year ended  December  31,  2000,  none of our  executive  officers  served as a member of our  compensation
committee  or as a director of any entity of which any of  directors  served as an  executive  officer.  No member of our  compensation
committee is currently our employee.

## Compensation Principles

The Company's executive  compensation  principles are guided by the need to attract and retain highly qualified  management in
building  our  business.  As a  relatively  new  technology  business  we have  sought  executives  who have both  knowledge  about our
competitive  environment  and an  ability  to build  infrastructure,  products,  and a  customer  base.  We have  offered  compensation
arrangements  that are  competitive  with  comparable  companies,  including many of our  competitors.  For  management,  a significant
portion of total  compensation  is tied to our, and the  individual's,  performance.  Toward this end we have, in addition to salaries,
paid bonuses and offered stock options.

## Executive
Officer Compensation

Although  compensation for each executive  position  generally falls within an established range, we do not apply a formula in
determining  executive  compensation.  We  believe  instead  that our  interests  are  served  by a policy  that  enables  us to tailor
compensation  to the  particular  skills and duties of an  executive.  As a result we have  relied  heavily on  subjective  criteria in
setting  compensation  for our executives.  The  compensation  committee  meets  periodically to discuss and recommend to our board the
salary,  bonus  and  stock  options,  if any,  to be  awarded  to our CEO.  This  recommendation  is based in large  part on the  CEO's
performance,  our performance,  in examining the compensation of CEOs of comparable companies,  and considering our historical payments
to the CEO.  The board may accept or reject  this  recommendation.  Mr.  Jalkut's  employment  agreement  is  described  in this annual
report on Form 10-K.

The  compensation  committee  generally  applies the same criteria in  recommending  the salaries of our  executive  officers.
Consistent  with our other  compensation  policy,  bonuses are determined on performance of the individual,  the business,  and what is
competitive in our business.  As with our other compensation policies, we do not apply a formula in determining bonuses.

We currently have two stock option plans under which  5,500,500  shares of our common stock have been reserved for issuance to
executive  officers  and other  employees.  We awarded  2,275,754  options in 2000,  at an  exercise  price of $11.00 to our  executive
officers and  employees.  These  options were  determined  on a subjective  basis in an effort to reward  outstanding  performance  and
provide  financial  incentives to our executives and other employees.  In 2000,  1,108,754  options were awarded to the Named Executive
Officers.

## ITEM 12.         
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The table below provides some information regarding beneficial ownership of our capital stock as of December 31, 2000 for:
                 
Each of the Named Executive Officers.
                
Each of our directors.
                
All of our executive officers and directors as a group.
                
Each other person, entity or group who we know beneficially owns 5% or more of
any class of our stock.

All
share amounts in the table have been adjusted and are presented assuming that
the Contribution and Reorganization Transaction was closed as of December 31,
2000. Unless otherwise noted, the address of each of our Named Executive
Officers and directors is 11720 Sunrise Valley Drive, Reston, VA 20191.

`Stockholder (a)                       Issued and
---------------                       -----------
                                      outstanding
                                      -----------
                                      Common Stock       Series A Preferred Series B Preferred Series C Preferred Series D Preferred Series E Preferred        Beneficial Ownership
                                      ------------      ------------------- ------------------ ------------------ ------------------ ------------------
                                             Percentage           Percentage        Percentage        Percentage       Percentage         Percentage    Stock    of Common Stock
                                             ----------           ----------        ----------        ----------       ----------         ----------             ---------------
                                                  of                  of                of                 of               of                 of      Options Total   Percentage
                                                  --                  --                --                 --               --                 --      ------- -----   ----------
                                     Shares      Class    Shares    Class     Shares   Class    Shares   Class    Shares    Class   Shares    Class       (b)  Shares      (c)
                                     ------      -----    ------    -----     ------   -----    ------   -----    ------    -----   -------   -----       ---  ------      ---
Spectrum Equity Investors, L.P. (d)      --       --   1,372,668    47.3%  1,220,099   25.5%  1,363,406  16.7%        --      --        --       --       --  3,956,173   52.3%
Spectrum Equity Investors II, L.P.       --       --          --       --         --     --   1,363,406  16.7%        --      --        --       --       --  1,363,406   27.4%
(d) ...........................
New Enterprise Associates VI,
Limited Partnership (e) .......          --       --     522,000    18.0%    685,014   14.3%  1,374,051  16.8%        --      --        --       --       --  2,581,065   41.7%
Onset Enterprise Associates II,          --       --     522,000    18.0%    463,976    9.7%    817,672  10.0%        --      --        --       --       --  1,803,648   33.3%
L.P. (f) ......................
Onset Enterprise Associates III,         --       --          --       --         --     --     272,553   3.3%        --      --        --       --       --    272,553    7.0%
L.P. (f) ......................
Paul Capital Partner Funds  (g)   1,286,555    35.6%     245,989     8.5%    125,144    2.6%    136,275   1.7%        --      --        --       --       --  1,793,963   43.6%
Thomas Domencich (h) ..........          --       --     145,000     5.0%     62,573    1.3%         --    --         --      --        --       --       --    207,573    5.4%
Toronto Dominion Capital (USA)           --       --          --       --    884,146   18.5%  1,006,500  12.3%        --      --        --       --       --
Inc. (i) ......................                                                                                                                               1,890,646   34.4%
Grotech Partners IV, L.P. (j) .          --       --          --       --    884,146   18.5%  1,006,500  12.3%        --      --        --       --       --  1,890,646   34.4%
Utech Climate Challenge Fund, L.P.       --       --          --       --    442,076    9.2%    136,276   1.7%        --      --        --       --       --    578,352   13.8%
(k) ...........................
BNSF (l).......................          --       --          --       --         --     --          --    --  3,413,746    40.1%        --       --       --  3,413,746  48.6%
Colonial Pipeline (m)..........          --       --          --       --         --     --          --    --  1,684,115    19.8%  1,729,631   60.3%       --  3,413,746  48.6%
CSX (n)........................          --       --          --       --         --     --          --    --  3,413,746    40.1%  1,137,915   39.7%       --  4,551.661  55.8%
BancBoston Capital Inc. .......     416,667    11.5%          --       --         --     --          --    --         --      --        --       --       --     416,667  11.5%
1DCM-PN Holdings, L.L.C. ......     420,833    11.7%          --       --         --     --          --    --         --      --        --       --       --     420,833  11.7%
J. F. Shea Co., Inc. as Nominee     500,000    13.9%          --       --         --     --          --    --         --      --        --       --       --     500,000  13.9%
David Daigle ..................     212,197     5.9%          --       --         --     --          --    --         --      --        --       --       --     212,197   5.9%
Richard A. Jalkut (o) ........           --       --          --       --         --     --          --    --         --      --        --       --  572,502     572,502  13.7%
William R. Smedberg (p) .......          --       --          --       --         --     --          --    --         --      --        --       --   79,906      79,906   2.2%
Mary McDermott (q).............          --       --          --       --         --     --          --    --         --      --        --       --       --          --    --
Shawn F. O'Donnell (r).........          --       --          --       --         --     --          --    --         --      --        --       --       --          --    --
James M. Craig (s).............          --       --          --       --         --     --          --    --         --      --        --       --       --          --    --
Kevin J. Maroni (t) ...........          --       --   1,372,668    47.3%  1,220,099   25.5%  2,726,812  33.3%        --      --        --       --       --   5,319,579  59.6%
Peter J. Barris (u) ...........          --       --     522,000    18.0%    685,014   14.3%  1,374,051  16.8%        --      --        --       --       --   2,581,065  41.7%
Patrick J. Kerins (v) .........          --       --          --       --    884,146   18.5%  1,006,500  12.3%        --      --        --       --       --   1,890,646  34.4%
Stephen A. Reinstadtler (w) ...          --       --          --       --    884,146   18.5%  1,006,500  12.3%        --      --        --       --       --   1,890,646  34.4%
Randall Evans (x) .............          --       --          --       --         --     --          --    --  3,413,746    40.1%       --       --       --   3,413,746  48.6%
All Directors and Named Executive
Officers as a Group (o) (p) (q)          --       --   1,894,668    65.3% 3,673,405  76.7%    6,113,863  74.8% 3,413,746    40.1%       --       --  652,408  15,748,098   9.7%
(r) (s) (t) (u) (v) (w) (x).....
__________________`

(a)
        
In accordance with the rules of the Securities and Exchange Commission, each
beneficial owners holding has been calculated assuming full exercise of
outstanding warrants and options exercisable or convertible by the holder within
60 days after December 31, 2000.

(b)
        
      Only Options exercisable within 60 days after December 31, 2000 are listed.

(c)
        
The pro forma percentages of beneficial ownership of common stock as to each
beneficial owner assumes the exercise or conversion into common stock of all
outstanding options, warrants and convertible securities held by such owner that
are exercisable or convertible within 60 days of December 31, 2000, but not the
exercise or conversion of options, warrants and convertible securities held by
others shown in the table.

(d)
             Spectrum  Equity  Investors,  L.P.'s and Spectrum  Equity  Investors II, L.P.'s address is One  International  Place,  Boston,
         Massachusetts, 02110.

(e)        New Enterprise  Associates VI, Limited Partnership's  address is 11911 Freedom Drive, One Fountain
Square,  Reston,  Virginia,
         20190.

(f)
        Onset Enterprise Associates II, L.P.s and Onset Enterprise Associates III,
L.P.s address is 2000 Sand Hill Road, Suite 150, Menlo Park, California,
94025.

(g)              The Paul Capital  Partner  Funds are eight funds that  constitute a "group"  under  Section
13(d) of the Exchange  Act.  Each
         fund's address is: c/o Paul Capital Partners,  50 California Street,  Suite 3000, San Francisco,  California,  94111. The five
         funds are Paul  Capital  Partners V L.P.,  Paul  Capital  Partners V  (Domestic  Annex  Fund) L.P.,  Paul  Capital  Partners V
         International,  L.P., Paul Capital  Partners VI, L.P., PCP  Associates,  L.P., Paul Capital  Management  L.L.C.,  Paul Capital
         Partners VI Holdings and Paul Capital Partners V Holdings.

(h)              Thomas Domencich's address is 104 Benevolent Street, Providence, Rhode Island, 02906.

(i)              Toronto Dominion Capital (USA) Inc.'s address is 31 West 52nd Street, New York, New York, 10019.

(j)             Grotech Partners IV, L.P.'s address is 9690 Deereco Road, Timonium, Maryland, 21093.

(k)
        
Utech Climate Challenge Fund, L.P.s and Utility Competitive Advantage
Fund, L.L.C.s address is c/o Aretê Ventures, 3 Bethesda Metro Center,
Suite 770, Bethesda, Maryland, 20814.

(l)             BNSF's address is 2500 Lou Menk Drive, Fort Worth, Texas, 76131.

(m)        Colonial Pipeline
Companys address is 945 East Paces Ferry Road, NE, Atlanta, Georgia,
30326.

(n)        CSX's address is c/o CSX Real Property, Inc., 301 West Bay Street, J915, Jacksonville, Florida, 32202.

(t)          Mr.  Maroni,  who is a limited  partner of the general  partner of Spectrum  and a general  partner
of the general  partner of
         Spectrum Equity Investors II, L.P.,  disclaims  beneficial  ownership of the shares owned by Spectrum Equity  Investors,  L.P.
         and Spectrum Equity Investors II, L.P.

(u)
        Mr. Barris, who is general partner of the general partner of New Enterprise
Associates VI, Limited Partnership, disclaims beneficial ownership of the shares
owned by New Enterprise Associates VI, Limited Partnership.

(v)
        Mr.
Kerins, Managing Director of the general partner of Grotech Partners IV, LP,
disclaims beneficial ownership of the shares owned by Grotech Partners IV, LP.

(w)         Mr.  Reinstadtler,  Vice President and Director of Toronto Dominion Capital (USA) Inc.,  disclaims
beneficial ownership of the
         shares owned by Toronto Dominion Capital (USA) Inc.

(x)
        
Mr. Evans, Vice President, Real Estate & Industrial Development at CSX
Transportation, Inc. disclaims beneficial ownership of the shares owned by CSX
Transportation, Inc.

## ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

## Contribution Agreements with CSX, BNSF and Colonial.

On November 4, 1999,  we entered into  definitive  contribution  agreements  with each of CSX,  BNSF and Colonial to issue our
shares of series D and series E preferred  stock and obtain  right of way access
rights along their railroad and pipeline  properties  and  easements.  We closed
these  transactions  on March 30, 2000. At the conclusion of these  transactions
each of CSX,  BNSF and Colonial  beneficially  owned more than five percent of a
class of our stock.  We  summarize in this section  selected  material  terms of
these agreements.  For a more complete description of these agreements, we refer
you to the copies of these  agreements  filed as an exhibit to  Pathnet,  Inc.'s
quarterly  report filed on form 10-Q on November 15, 1999 (file no.  000-24745).
If there is an inconsistency  between this summary and these  agreements,  these
agreements will control.

Each of CSX,  BNSF and Colonial  have  significant  property and easement  holdings in areas where,  as of March 30, 2000,  we
expected to build and expand our fiber optic telecommunications network. Under those contribution agreements:

        
CSX agreed to enter into a Fiber Optic Access and License Agreement by which CSX
provided us with access to portions of CSXs extensive railroad corridors
covering the eastern United States;

        
BNSF agreed to enter into a Fiber Optic Access Agreement by which BNSF provided
us with access to portions of BNSFs extensive railroad corridors covering
the western United States; and

        
 Colonial agreed to
contribute access to portions of its pipeline corridors covering the eastern
United States.

These fiber optic rights of way agreements are described below.

In  exchange  for  granting us these  rights of way,  we issued to CSX,  BNSF and  Colonial  8,511,607  shares of our series D
preferred  stock.  In addition,  Colonial  contributed  $38 million in cash in exchange for 1,729,631  shares of our series E preferred
stock.  Colonial  paid this  amount on March 30,  2000,  and paid  another $25  million in the third  quarter of 2000 in  exchange  for
1,137,915  additional  shares of series E preferred  stock  following  our  substantial  completion  of the fiber  optic build  between
Chicago, Illinois and Aurora, a suburb of Denver, Colorado.

Colonial  also paid an  additional  $4 million on March 30, 2000 in return for the future right to receive a specified  number
of "conduit miles" of installed fiber optic conduit or the equivalent value in other telecommunications assets.

Under the contribution  agreements with BNSF, CSX and Colonial,  we made a variety of  representations  and warranties to each
of the new investors  with respect to the  reorganization,  our securities  issued to each of them,  and the then current  business and
financial  condition  of Pathnet.  We also agreed to  indemnify  the new  investors  against  any breach of those  representations  and
warranties.

## Fiber Optic
Access and Lease Agreements

On March 30, 2000,  pursuant to the  contribution  agreements,  we entered into agreements with each of CSX, BNSF and Colonial
relating to the rights of way on which we intended to build part or our  network.  Each of these fiber optic  agreements  are  attached
as  exhibits  to our  quarterly  report on form 10-Q filed with the SEC on May 15,  2000.  If there is an  inconsistency  between  this
summary and any of those agreements, those agreements will control.

These  agreements set forth the basic  structure of our right to develop the rights of way,  identify the particular  segments
in which we have a right of way  interest,  address  the number of miles  available  for  development,  the nature and  duration of any
exclusive  rights we will have in the  rights of way,  and any  obligation  we have to  provide  additional  benefits  to BNSF,  CSX or
Colonial.  These agreements also require that our  construction  and operational  activities do not interfere with any of the grantors'
rail or pipeline  businesses,  including any other  contractual  obligations to which that grantor is a party.  Further,  each of BNSF,
CSX and Colonial may purchase  telecommunications  capacity on our telecommunications network at prices at least as favorable as we are
then offering to our other  customers.  Under these  agreements,  we are required to maintain certain levels of insurance and indemnify
these  entities for certain  specified  liabilities.  In addition,  where the easement or other limited  property  interests may permit
railroad or pipeline uses, but not fiber optic  development,  we are responsible for all costs required to obtain  additional  property
or legal rights necessary to develop each right of way.

## BNSF Agreements

The agreement we entered into with BNSF provides that we may enter into a lease,  or leases,  to develop certain of its rights
of way. The agreement  provides that pursuant to such a lease,  or leases,  we have an exclusive right to develop  approximately  4,000
miles of its right of way.  In  addition,  the  agreement  provides  that for a period of time,  any party that  requests  the right to
develop BNSF rights of way for fiber optic uses must first  negotiate with us to provide for their  communications  needs. If we do not
reach agreement  within a specified time period,  the party may proceed to negotiate its development  directly with BNSF. The agreement
provides that we could lose these  exclusivity  rights in certain  specified  circumstances.

The form of lease agreement with BNSF that applies to our rights,  addresses conditions of construction and operations,  calls
for a term of 35 years and permits us to install an unlimited  number of fibers and conduits.  It requires us to use BNSF personnel for
supervising all construction and to pay all costs associated with using these personnel.  It also contains other provisions  associated
with construction and operation of our facilities,  including  indemnification,  insurance provisions and mechanisms for complying with
BNSF safety and operations regulations.

## CSX Agreements

The CSX  access  agreement  authorizes  us to develop up to a  specified  number of miles of CSX's  right of way on the former
Conrail  system and an  additional  specified  number of miles on the  remainder of CSX's  system.  For the three years after March 30,
2000, we have the exclusive  right to develop up to 2,000 miles of the former  Conrail  system rights of way,  subject to  restrictions
concerning the length and location of specific  developments.  For an additional  four years after the end of this  exclusivity  period
on the CSX rights of way, any party that  requests the right to develop a segment of the former  Conrail  system rights of way where we
have commenced  construction  must first negotiate with us to provide for their  communications  and development  needs.  The agreement
provides that if we do not reach an agreement  within a specified time period,  the party can proceed to negotiate its development with
CSX.  If we fail to  develop at least 500 miles of CSX  rights of way in each year  after the date of the  access  agreement,  or if at
least 75% of our  development is not in contiguous  segments of 200 miles each, we will lose our  exclusivity for all segments of right
of way on which  development  is not complete.  Further,  the agreement  provides that we will construct  certain  conduits along these
rights of way.

The  CSX  lease  agreement  is  for  a  term  of  30  years  and  addresses  the  terms  of  constructing  and  operating  our
telecommunications  network  on the CSX rights of way.  Under  this  lease we must use CSX  personnel  to  supervise  our  construction
activities and are responsible for all costs  associated with using these  personnel.  We may install an unlimited amount of fibers but
we may not install more than eight conduits (plus the conduits that we provide to CSX) without CSX's permission.

On March 30, 2001,  CSX notified us that,  in their view,  we are in material  breach of our  operating  agreement and license
agreement  with them and that a failure to cure these  alleged  breaches will result in their  termination  of the  agreements.  We are
investigating the merits of their assertions and assessing an appropriate response and course of action.

## Colonial
Agreements

The Colonial access  agreement  authorizes us to develop our network along the entire route of Colonial's right of way up to a
specified  number of miles.  We have the  exclusive  right to develop  these  rights of way until  March 30,  2010.  Any segment of the
Colonial  right of way that we have not  designated  for  development  by March 30, 2005, or on which  development  is not completed by
March 30, 2007, reverts to Colonial and we have no further right to develop those segments.

Colonial  paid us $4 million  for our  obligation  to  construct  a single  conduit  for  Colonial  along up to 2,200 miles of
Colonial's  right of way. If the full amount of conduit is not available by March 30, 2005, the agreement  provides that we may provide
alternate  telecommunications  services or assets of equivalent value on other portions of our network.  Until March 30, 2005, Colonial
may use the  Colonial  conduit  only for its internal  communications.  After that date,  Colonial may sell its conduit on any terms it
desires.  However,  subject to certain  limitations,  if Colonial desires to sell any portion of its conduit,  it must first give us an
opportunity to purchase that portion on the same terms. If we decide not to purchase that portion, Colonial may proceed with the sale.

The Colonial  lease  agreement is for a term of 30 years,  which we may renew for one term of 10 years by paying a fair market
value rental rate. Like the lease  agreements with BNSF and CSX, the Colonial lease agreement  addresses  construction  and operational
issues  affecting  the Colonial  right of way, and provides  that we may not install more than ten conduits  (including  the conduit we
provide to Colonial).

## Colonial Option
Agreement

In addition to the  contribution  and conduit purchase  investments  outlined above, our contribution  agreement with Colonial
provided for a separate  option  agreement  which  permits  Colonial to purchase
1,593,082 additional shares of our series E redeemable preferred stock for 21.97
per shares. Colonial paid us a non-refundable fee of $1 million for the purchase
of these options.  Under the Colonial option  agreement,  we agreed to grant two
options to Colonial in exchange  for its cash  contribution.  The first  option,
which may be exercised by a number of Colonial's affiliated  companies,  permits
those  affiliates  to  purchase up to $35  million of  additional  shares of our
series E  preferred  stock at the same  purchase  price as that paid by Colonial
under  the  Colonial  contribution  agreement.  Colonial  also has the  right to
exercise up to $10  million of the $35 million on its own behalf.  The option to
purchase  1,593,082  shares of the our series E preferred  stock expired in July
2000.

The  option  agreement  also  allows us  during  the same  period  to enter  into  agreements  with one or more of  Colonial's
designated  affiliated  entities,  where those entities would contribute rights of way in exchange for shares of our series D preferred
stock at $21.97 per share.

The second  option  permits  Colonial to purchase a number of shares of our common  stock equal to 10% of the total  number of
shares of common  stock that we  actually  sell in any  initial  public  offering  of our common  stock.  This  second  option  must be
exercised  by  Colonial  at least ten days prior to the filing of our  registration  statement  for an initial  public  offering of our
common stock, but the shares will be issued only if and when we close on a firm commitment  underwritten  initial public offering.  The
price at which  Colonial may  purchase  our shares under this option will be 90% of the price per share of the common stock  offered by
us to the public, as reflected in the final prospectus filed with respect to our initial public offering.

## Warrant
Agreements

As of March 30, 2000, we entered into a series of agreements  that,  along with agreements that Pathnet,  Inc. entered into in
1998,  govern our warrants.  Spectrum Equity  Investors,  L.P., New Enterprise  Associates VI, Limited  Partnership,  Onset  Enterprise
Associates II, L.P., FBR Technology  Venture  Partners,  L.P.,  Toronto Dominion Capital (U.S.A.) Inc.,  Grotech Partners IV, L.P., and
Richard A. Jalkut are holders of more than five percent of a class of our  securities  who hold warrants and are parties to a number of
these agreements.

These agreements are as follows:  (1) a Supplemental  Warrant  Agreement dated as of March 30, 2000 between us and the Bank of
New York; (2) a Warrant  Agreement dated as of April 8, 1998 between  Pathnet,  Inc. and the Bank of New York; (3) a Warrant  Agreement
Amendment  and Waiver  dated as of March 30, 2000  between  Pathnet,  Inc. and the Bank of New York;  (4) Warrant  Registration  Rights
Agreement dated as of April 8, 1998 among Pathnet,  Inc. and Spectrum  Equity  Investors,  L.P., New Enterprise  Associates VI, Limited
Partnership,  Onset Enterprise  Associates II, L.P., FBR Technology  Venture  Partners,  L.P.,  Toronto Dominion Capital (U.S.A.) Inc.,
Grotech Partners IV, L.P.,  Richard A. Jalkut and certain other purchasers that are not beneficial  owners of us or Pathnet,  Inc., (5)
Warrant  Registration  Rights  Agreement  Waiver  dated as of March 30, 2000 by  Pathnet,  Inc.  with the  consent of  Spectrum  Equity
Investors,  L.P., New Enterprise  Associates VI, Limited  Partnership,  Onset  Enterprise  Associates II, L.P., FBR Technology  Venture
Partners,  L.P., Grotech Partners IV, L.P. and Richard A. Jalkut; (6) Amended and Restated Warrant  Registration Rights Agreement dated
as of March 30, 2000 among us, Spectrum Equity Investors,  L.P., New Enterprise  Associates VI, Limited  Partnership,  Onset Enterprise
Associates II, L.P., FBR Technology  Venture  Partners,  L.P.,  Toronto  Dominion  Capital  (U.S.A.) Inc.,  Grotech  Partners IV, L.P.,
Richard A. Jalkut; and (7) the form of warrant certificate issued March 30, 2000.

The  agreements  dated as of March 30, 2000 are  attached as  exhibits to our  quarterly  report on form 10-Q filed on May 15,
2000. The Agreements  dated as of April 8, 1998 are attached as exhibits to Pathnet,  Inc.'s  registration  statement on Form S-1 filed
with SEC on May 8, 1998.  If there is an  inconsistency  between  this  summary  and any of those  agreements,  those  agreements  will
control.

On March 30, 2000, in connection with the  reorganization,  we issued warrants to purchase a total of 1,116,500  shares of our
common  stock at $0.01 per share to holders of, and in  exchange  for,  similar  warrants  issued by Pathnet,  Inc. in 1998 to purchase
shares of Pathnet, Inc.'s common stock.  Our warrants are exercisable upon the earliest to occur of:

        
the time immediately prior to the occurrence of a Change of Control (as defined
in the indenture between Pathnet, Inc. and the Bank of New York, as trustee
dated as of April 8, 1998 and filed as an exhibit to Pathnet, Inc.s
Registration Statement on Form S-1 filed with the SEC on May 8, 1998);

        
the 180th day (or an earlier date determined by us) following the closing of an
Initial Public Equity Offering (as defined in the Warrant Agreement
between Pathnet, Inc. and the Bank of New York, as warrant agent dated as of
April 8, 1998 and filed as an exhibit to Pathnet, Inc.s Registration
Statement on Form S-1 filed with the SEC on May 8, 1998);

        
upon the closing of an Initial Public Equity Offering but only for those
warrants required to be exercised to permit their holders to sell Warrant Shares
(as defined in the Warrant Agreement) pursuant to their respective registration
rights;

        
the time when a class of our equity securities is listed on a national
securities exchange, authorized for quotation on the Nasdaq National Market or
its otherwise subject to registration under the Exchange Act; or

        
  April 30, 2001.

## Contribution
Agreements with Pathnet, Inc.s existing Preferred Stockholders.

Concurrent with our  contribution  agreements with BNSF, CSX and Colonial,  we entered into  contribution  agreements with the
then holders of Pathnet,  Inc.'s  series A, B and C preferred  stock under which
they  agreed  to  exchange  their  shares  of  Pathnet,  Inc.  series A, B and C
preferred  stock  solely for shares of our  series A, B and C  preferred  stock,
respectively,  with substantially  similar terms for each corresponding  series.
The  contribution  agreement  with the then  existing  Pathnet,  Inc.  preferred
stockholders  also  required  that  those   stockholders   enter  into  our  new
stockholders  agreement.  For  a  discussion  of  the  provisions  of  that  new
stockholders  agreement,  please  refer  to  the  section  below  entitled  "Our
Stockholders Agreement." These contribution agreements closed on March 30, 2000.
Also on March 30, 2000, Mr. Schaeffer signed a separate  contribution  agreement
with us under which he also agreed to exchange  his entire stock and interest in
Pathnet for shares of our common stock.

Under the contribution  agreements with the Pathnet, Inc.  stockholders,  we have made a limited number of representations and
warranties with respect to our  reorganization  and our securities to be issued.
However, these contribution agreements do not contain
representations  and  warranties  with  respect  to the  business  and  financial  condition  of  Pathnet,  nor  do  they  contain  the
indemnification provisions contained in the contribution agreements with CSX, BNSF and Colonial.

## Our
Stockholders Agreement

## Overview

On March 30, 2000, we entered into a  stockholders  agreement with certain  holders of our stock,  including the following who
beneficially own five percent or more of a class of our stock,  Spectrum Equity  Investors,  L.P.,  Spectrum Equity Investors II, L.P.,
New Enterprise  Associates VI Limited Partnership,  Onset Enterprise  Associates II, L.P., Onsent Enterprise Associates III, L.P., Paul
Capital Partner Funds,  Thomas  Domencich,  Toronto  Dominion Capital (USA) Inc.,  Grotech  Partners IV, L.P., Utech Climate  Challenge
Fund,  L.P.,  Utility  Competitive  Advantage  Fund, LLC, FBR Technology  Venture  Partners,  L.P., The Burlington  Northern&Santa Fe
Railroad Company, Colonial Pipeline Company, CSX Transportation, Inc. and David Schaeffer (who no longer holds any of our stock).

Our  stockholders  agreement put in place at our level many of the provisions  that applied under Pathnet,  Inc.'s  investment
and stockholders agreement. Pathnet, Inc.'s investment and stockholders agreement was terminated after our reorganization.

In  accordance  with our  stockholders  agreement,  each  stockholder  agreed to vote in favor of the  election  of a board of
directors consisting of 10 members:

Two designees of the series A preferred  stockholders  (initially,  a designee of Spectrum Equity Investors L.P. and the other
was initially a designee of New Enterprise Associates VI Limited Partnership);

- One designee of the
series B preferred stockholders (initially, a designee of Grotech Partners, IV,
L.P.);
- One designee of the series C preferred  stockholders  (initially,  a designee of Toronto Dominion Capital (U.S.A.),  Inc.) who
              may not be a partner or associate of Spectrum,  New Enterprise Associates or Grotech for so long as they have designation
              rights under our stockholders agreement;
- Three designees of the series D and E preferred stockholders (one designated by BNSF, one by CSX and one by Colonial);
- Our CEO;
- One independent "outside" director, who is neither a member of management nor an affiliate of any stockholder; and
- One director who will be elected by all voting stockholders voting together as a
single class, as provided by our certificate of incorporation.

Under the  stockholders  agreement,  we are  subject to  covenants  substantially  similar to those that were in effect  under
Pathnet,  Inc.'s  investment  and  stockholders  agreement.  For so long as at least 25% of the shares of preferred  stock  outstanding
immediately  after March 30, 2000 remain  outstanding,  these covenants  require
that we obtain the approval of the holders of two-thirds
of the  outstanding  shares of  preferred  stock (all  voting as a single  class)  before we  undertake  certain  fundamental  actions,
including mergers,  dispositions,  acquisitions,  amendments to our certificate of incorporation and bylaws,  affiliated  transactions,
and certain  issuances  of  securities.  In addition,  certain  actions that would  adversely  affect the rights of a single  series of
preferred stock relative to any other series of preferred stock would require the majority vote of each adversely affected series.

Each party to our stockholders  agreement  represented and warranted to the other  stockholders that they, he or it (1) has no
present  intention  or plan,  formally or  informally,  on March 30, 2000 to transfer or dispose of any of the shares  received by such
party under their, his or its contribution  agreement,  and (2) intends for their, his or its contribution of Pathnet, Inc.'s shares or
other  property  to us in  accordance  with  their,  his or its  contribution  agreement  to be treated as part of a single  integrated
transaction in which gain or loss will not be recognized for tax purposes.  Each party  represented  and warranted to the other parties
that it intends its contribution of Pathnet,  Inc. shares to us to qualify as a tax-free  reorganization  under Section 368(a)(1)(B) of
the tax code, pursuant to which gain or loss will not be recognized.

Registration
   Rights

In our  stockholders  agreement,  we granted  registration  rights to our  preferred  stockholders  and to Mr.  Jalkut.  These
registration rights are generally  substantially  similar to the registration rights granted to these same holders in the Pathnet, Inc.
investment and stockholders  agreement.  The holders of securities  subject to registration  rights have both "demand" and "piggy back"
registration rights.

## Demand Rights

We  granted  "demand"  registration  rights  for two  separate  groups  of our  equity  securities.  The  groups  are  broadly
distinguished  by the identity of the holders who can demand that we register  their shares under the  Securities  Act. The first group
consists of the holders of:

- Shares of common stock issued to our preferred stockholders, or issuable to our
preferred stockholders upon the conversion of their shares of preferred stock;
and
- Shares of common stock
issued or issuable to Mr. Jalkut upon the exercise of his options.

We refer to these groups of shares as  "registrable  securities." On three separate  occasions,  by the vote of the holders of
the applicable  percentage of the registrable  securities  outstanding in this first group, the holders of the shares in this group may
require us to use our best efforts to file a registration  statement with the SEC in respect of their  registrable  securities.  Before
we make an initial  "qualified public offering" (which the stockholders  agreement  defines as an underwritten  public offering of more
than $75 million in value of our  securities  at a per share price that  implies a valuation  in excess of $600  million for all of the
shares  of our  capital  stock),  the  holders  of at  least  67% of the  total  number  of  outstanding  registrable  securities  must
affirmatively  vote to exercise any of these demand rights.  After we make an initial qualified public offering,  the holders of 20% of
the total number of outstanding registrable securities may make the demand.

In exercising these demand  registration  rights,  the stockholders must in all cases have selected an underwriter  reasonably
acceptable to us who is prepared to underwrite the offering of the shares on a firm commitment  basis.  We have additional  obligations
to assist in the  registration and  underwriting of any shares that these holders seek to sell pursuant to their  registration  rights.
We have a right to defer each of those  demand  registrations  for up to 60 days,  if our legal  counsel  has  advised us that filing a
registration  statement  relating  to such a demand  registration  would  require  us  either  (1) to  disclose  a  material  impending
transaction  and we have determined in good faith that the disclosure  would have a material  adverse effect on us, or (2) to conduct a
special audit.

## Piggyback Rights

We also  granted to each of these  groups of our  stockholders  (and,  since we assumed  Pathnet,  Inc.'s  obligations  to the
holders of its warrants,  then also to those warrant holders) so-called  "piggyback"  registration rights, under which they can require
us to register  their  shares of common  stock  whenever we register  any of our equity  securities  under the  Securities  Act.  These
piggyback  registration  rights are subject to underwriter  "cutbacks,"  which means that our managing  underwriter may decide to limit
the number of shares added to a  registration  that we initiate  because the  underwriter  has concluded  that including the additional
"piggyback"  shares would have an adverse  impact on the marketing of the  securities to be sold in the  underwritten  offering.  These
piggyback  registration  rights do not apply to any registration  relating to a public offering pursuant to demand  registration rights
granted to the Pathnet,  Inc.  warrantholders,  to the registration of securities with our employee benefit plans, on any SEC form that
does not permit secondary offerings, or to securities we issue in a merger, exchange offer or similar transaction.

We are  required  to bear up to  $60,000  of  registration  expenses  for each  demand  registration  under  our  stockholders
agreement.  In  addition,  we have  agreed to  indemnify  the  registration  rights  holders  against,  and provide  contribution  for,
liabilities  under the Securities  Act, the Exchange Act or other federal or state laws regarding the  registration  of our securities.
However,  we are not obligated to and have not indemnified the registration  rights holders against,  or provide them contribution for,
any untrue  statements or omissions  made by us in reliance on and in  conformity  with  information  furnished to us in writing by the
registration rights holders.

## Preemptive Rights

Under our stockholders  agreement,  each of our preferred  stockholders  have the right to participate in certain of our sales
of securities.  Specifically,  on each occasion between March 30, 2000 and an initial  "qualified public offering" that we issue shares
of our capital stock (or other securities  convertible or exchangeable  for our capital stock),  our preferred  stockholders  will have
the right to  purchase  their pro rata share of the newly  issued  securities.  In  addition,  in the event  that any of our  preferred
stockholders  elects not to purchase his or its pro rata share of the newly issued  securities,  the remaining  preferred  stockholders
have the right to purchase those shares as well.

## PART IV

## ITEM 14.        
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)         The following documents are filed as part of this report:

(1)         Financial Statements

Consolidated Balance Sheets as of December 31, 2000 and 1999

Consolidated Statements of Operations for the years ended December 31, 2000,
            1999 and 1998

Consolidated Statements of Comprehensive Loss for the years ended December
            31, 2000, 1999, and 1998

Consolidated Statements of Cash Flows for the years ended December 31, 2000,
            1999 and 1998

Consolidated
Statement of Stockholders Equity (Deficit) for the years ended December
31, 2000, 1999 and 1998

Notes to Consolidated Financial Statements

(2)        
 Financial Statement Schedules

Schedule II - Valuation and Qualifying Accounts

All other  schedules  are omitted  because they are not  applicable  or not
required or because the required information is incorporated herein by reference
or included in the financial  statements or notes thereto included  elsewhere in
this report.

## (b) Reports on
Form 8-K.

None

## (c) Exhibits.

The following exhibits are filed as a part of this Annual Report on Form 10-K:

`Exhibit Number      Description of Document
--------------      -----------------------

Item 14 Exhibits

3.1(ii)             Amended  and  Restated   Certificate  of   Incorporation  of
                    Pathnet,   Inc.  and   Certificate   of  Amendment  to  such
                    Certificate of Incorporation.

3.2(ii)             Amended and Restated  Bylaws of Pathnet  Telecommunications,
                    Inc.

4.1 (i)             Indenture,  dated as of April 8, 1998,  between Pathnet,
                    Inc. and The Bank of New York, Inc. as Trustee

4.4 (i)             Form of Note

4.5 (i)             Pledge Agreement,  dated as of April 8, 1998, among Pathnet,
                    Inc.,  The Bank of New York as  Trustee  and The Bank of New
                    York as the Securities Intermediary

10.1 (i) (2)        Pathnet, Inc. 1995 Stock Option Plan

10.2 (i) (2)        Pathnet,  Inc.  1997  Stock  Incentive  Plan as  amended  by
                    Amendment No. 1to 1997 Stock Incentive Plan.

10.3(iv)            Contribution  Agreement,   dated  as  of  November 2, 1999,
                    by and among Pathnet Telecommunications, Inc.,  Pathnet,
                    Inc. and The Burlington Northern Santa Fe Railway Company

10.4(iv)            Contribution Agreement, dated as of November 2, 1999, by and
                    among Pathnet  Telecommunications,  Inc., Pathnet,  Inc. and
                    Colonial Pipeline Company

10.5(iv)            Contribution Agreement, dated as of November 2, 1999, by and
                    among Pathnet  Telecommunications,  Inc., Pathnet,  Inc. and
                    CSX Transportation, Inc.

10.6(iv)            Contribution Agreement, dated as of November 2, 1999, by and
                    among Pathnet  Telecommunications,  Inc., Pathnet,  Inc. and
                    The Preferred Stockholders of Pathnet, Inc.

10.7(iv)            Contribution Agreement, dated as of November 2, 1999, by and
                    among Pathnet  Telecommunications,  Inc., Pathnet,  Inc. and
                    Common Stockholders of Pathnet, Inc.

10.8(i)             Warrant  Agreement,  dated  as of  April  8,  1998,  between
                    Pathnet, Inc. and The Bank of New York, as warrant agent

10.9(i)             Warrant Registration Rights Agreement,  dated as of April 8,
                    1998, among Pathnet, Inc., Spectrum Equity Investors,  L.P.,
                    New Enterprise  Associates VI,  Limited  Partnership,  Onset
                    Enterprise  Associates  II,  L.P.,  FBR  Technology  Venture
                    Partners,  L.P.,  Toronto  Dominion  Capital  (U.S.A.) Inc.,
                    Grotech  Partners  IV,  L.P.,   Richard  A.  Jalkut,   David
                    Schaeffer and the Initial Purchasers

10.10(i)            Notes Registration Rights Agreement, dated April 8, 1998, by
                    and among Pathnet, Inc. and Merrill Lynch & Co., Merrill
                    Lynch, Pierce, Fenner & Smith Incorporated, Bear Stearns
                    & Co. Inc., TD Securities (USA). and Solomon Brothers

10.11(vi)           Assignment and Acceptance,  by and between Pathnet, Inc. and
                    Pathnet Telecommunications, Inc.

10.12(i)(2)         Non-Qualified Stock Option Agreement,  dated August 4, 1997,
                    by and between Pathnet, Inc. and Richard A. Jalkut

10.13(vi)(3)        IXC Master Services  Agreement,  dated June 17, 1999, by and
                    between IXC Communications Services, Inc. and Pathnet, Inc.,
                    as  amended by  Amendment  No. 1 dated  August 26,  1999 and
                    Amendment No. 2, dated October 13, 1999

10.14(i)            Master  Agreement,  dated August 8, 1997,  between  Pathnet,
                    Inc. and NEC America,  Inc. as amended by Amendment No. 1 to
                    Master Agreement, dated November 9, 1997, Amendment No. 2 to
                    Master  Agreement,  dated April 2, 1998,  Amendment No. 3 to
                    Master Agreement,  dated May 4, 1998, and Amendment No. 4 to
                    Master Agreement, dated July 10, 1998

10.15(iii)          Amendment  No. 5 to Master  Agreement,  dated  November  20,
                    1998, by and between Pathnet, Inc. and NEC America, Inc.

10.16(iv)           Agreement, dated March 31, 1999, between Pacific Fiber Link,
                    LLC and Pathnet, Inc.

10.17(iv)           Marketing  Agreement,  dated March 31, 1999, between Pacific
                    Fiber Link, LLC and Pathnet, Inc.

10.17(iv)           Dark Fiber Network  Agreement,  dated August 5, 1999, by and
                    among Pathnet,  Inc.,  Tri-State Generation and Transmission
                    Association,  Inc.,  Empire Electric  Association,  Inc., La
                    Plata Electric Association,  Inc.,  Delta-Montrose  Electric
                    Association, Inc. and San Miguel Power Association, Inc.

10.19(vi)           License of Marks,  dated  November 10, 1999,  by and between
                    Pathnet, Inc. and Pathnet Telecommunications, Inc.

10.20(v)            Investment and Stockholders  Agreement,  dated as of October
                    31, 1997 (the Investment and Stockholders Agreement") by and
                    among  Pathnet,  Inc. and certain  stockholders  of Pathnet,
                    Inc.

10.21(v)            Consent  Waiver and  Amendment,  dated as of March 19, 1998,
                    relating to the Investment and Stockholders Agreement

10.22(v)            Amendment No. 1 to the Investment and Stockholders Agreement
                    dated as of April 1, 1998.

10.23(vii)          Credit  Agreement dated August 9, 2000, by and among Pathnet
                    Operating,  Inc.,  Pathnet Fiber Equipment LLC, Pathnet Real
                    Estate LLC and Nortel Networks, Inc.

10.24(vii)          Credit  Agreement  dated  September 7, 2000,  by and between
                    Pathnet   Operating,   Inc.   and  Cisco   Systems   Capital
                    Corporation.

10.25(vii)          Lease  Agreement,  dated  November  1, 1999,  by and between
                    11720 Sunrisecorp., L.L.C and Pathnet, Inc., relating to the
                    company's offices in Reston, VA.

10.26(1)(2)         Employment  Agreement,  effective  August  4,  2000,  by and
                    between  Pathnet  Telecommunications,  Inc.  and  Richard A.
                    Jalkut.

10.27(1)(3)         First Amendment to Credit Agreement dated September 7, 2000,
                    by and between  Pathnet  Operating,  Inc. and Cisco  Systems
                    Capital Corporation.

10.28(1)(3)         IRU  Agreement  made and entered into as of January 18, 2001
                    by and between Pathnet Operating, Inc., as grantor and Enron
                    Broadband Services, Inc. as grantee

10.29(1)(3)         Amended and restated IRU Agreement  made and entered into as
                    of January 18, 2001 by and between Enron Broadband Services,
                    Inc. as grantor and Pathnet Operating, Inc., as grantee

21.1(1)             List of Subsidiaries of Pathnet Telecommunications, Inc.

27.1(1)             Financial Data Schedule

___________________________

(i)  Incorporated by reference to the corresponding  exhibit to Pathnet,  Inc.'s
     Registration  Statement on Form S-1  (Registration  No. 333-52247) filed by
     Pathnet,   Inc.  with  the   Securities   and  Exchange   Commission   (the
     "Commission")  on May 8,  1998,  as  amended  by  Amendment  No.  1 to such
     Registration  Statement  filed with the Commission on July 16, 1998, and as
     further  amended by Amendment No. 2 to such  Registration  Statement  filed
     with the Commission on July 27, 1998,  and as further  amended by Amendment
     No. 3 to such  Registration  Statement  filed with the Commission on August
     10, 1998.

(ii) Incorporated by reference to Pathnet, Inc.'s Form 10-K (File No. 000-24745)
     filed by Pathnet, Inc. with the Commission on March 18, 1999.

(iii)Incorporated   by  reference  to  Pathnet,   Inc.'s  Form  10-Q  (File  No.
     000-24745) filed by Pathnet, Inc. with the Commission on August 9, 1999.

(iv) Incorporated by reference to Pathnet, Inc.'s Form 10-Q (File No. 000-24745)
     filed by Pathnet, Inc. with the Commission on November 15, 1999.

(v)  Incorporated by reference to the corresponding  exhibit to Pathnet,  Inc.'s
     Registration  Statement on Form S-4  (Registration  No. 333-53467) filed by
     Pathnet,  Inc. with the Commission on May 22, 1998, as amended by Amendment
     No. 1 to such  Registration  Statement  filed with the Commission on August
     12, 1998,  and as further  amended by Amendment No. 2 to such  Registration
     Statement  filed with the  Commission  on August 21,  1998,  and as further
     amended by Amendment No. 3 to such  Registration  Statement  filed with the
     Commission on August 31, 1998.

(vi) Incorporated  by  reference  to  the   corresponding   exhibit  to  Pathnet
     Telecommunications, Inc.'s Registration Statement on Form S-1 (Registration
     No.  333-91469)  filed  by  Pathnet   Telecommunications,   Inc.  with  the
     Securities and Exchange Commission (the "Commission") on November 22, 1999,
     as amended by Amendment No. 1 to such Registration Statement filed with the
     Commission on December 16, 1999, and as further  amended by Amendment No. 2
     to such  Registration  Statement  filed with the Commission on February 22,
     2000.

(vii)Incorporated by reference to Pathnet  Telecommunications,  Inc.'s Form 10-Q
     (File No. 333-91469) filed by Pathnet, Inc. with the Commission on November
     14, 2000.

(1) Filed herewith.

(2) Constitutes management contract or compensatory arrangement.

(3) Certain portions of this exhibit have been omitted based on a request for
    confidential treatment filed separately with the Commission.`

---

# SIGNATURES

Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the State of Virginia on this 11th day
of April 2001.

`PATHNET TELECOMMUNICATIONS, INC.

                                   By: /s/    Richard A. Jalkut
                                   ----------------------------
                                   Name: Richard A. Jalkut
                                   Title:   Chief Executive Officer and Director`

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

`Signature                               Title                         Date
 ---------                               -----                         ----

/s/  Richard A. Jalkut                  Chief Executive Officer and    April 11, 2001
----------------------                    Director
Richard A. Jalkut

/s/  James M. Craig                     Executive Vice-President       March 31, 2001
----------------------                   Chief Financial Officer
James M. Craig                            and Treasurer (Principal
                                           Financial Officer and
                                           Controller

/s/  Peter J. Barris                    Director                       March 31, 2001
----------------------
Peter J. Barris

/s/ Kevin J. Maroni                     Director                       March 31, 2001
----------------------
Kevin J. Maroni

/s/ Patrick J. Kerins                   Director                       March 31, 2001
----------------------
Patrick J. Kerins


/s/ Stephen A. Reinstadtler              Director                      March 31, 2001
---------------------------
Stephen A. Reinstadtler


/s/ Randall Evans                        Director                      March 31, 2001
----------------------
Randall Evans`

---

# PATHNET
TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

# INDEX TO FINANCIAL STATEMENTS

Page

Report of Independent Accountants                                  
                                          
                                          
          
F-2

Consolidated Balance Sheets as of December 31, 2000 and 1999
                                          
                                        
                               F-3

Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998
                            
 F-4

Consolidated Statements of Comprehensive Loss for the years ended December
            31, 2000, 1999, and 1998
          
                                                              F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2000,
            1999 and 1998
                           
F-6

Consolidated Statement of Stockholders' Equity (Deficit) for the years ended
                   December 31, 2000, 1999 and 1998      
                                          
                                          
                                          
 F-7

Notes to Consolidated Financial Statements
                                          
                                          
                                
                                               F-8

Financial Statement Schedule:

Schedule II - Valuation and Qualifying Accounts
                                          
                                          
                    
                                          F-30

F-1

---

# Report of
Independent Accountants

To the Board of Directors and Stockholders
Pathnet Telecommunications, Inc.

In  our  opinion,  the
consolidated  financial  statements  listed in the index  appearing  under  Item
14(a)(1) on page 56 present  fairly,  in all material  respects,  the  financial
position of Pathnet Telecommunications,  Inc. and its subsidiaries (the Company)
at December  31, 2000 and 1999,  and the results of their  operations  and their
cash flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index  appearing  under Item  14(a)(2) on page 56,  present  fairly,  in all
material  respects,  the  information set forth therein when read in conjunction
with the related consolidated  financial statements.  These financial statements
and financial  statement  schedule are the  responsibility of the Companys
management;  our  responsibility  is to express  an  opinion on these  financial
statements and financial  statement  schedule based on our audits.  We conducted
our audits of these statements in accordance with auditing  standards  generally
accepted in the United States,  which require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and  disclosures in the financial  statements,  assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

The  accompanying  financial  statements  have been  prepared  assuming the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 2 to the
consolidated  financial  statements,  on April 2, 2001,  the  Company  filed for
protection  under Chapter 11 of the United States  Bankruptcy Code, which raises
substantial  doubt about the Company's  ability to continue as a going  concern.
Management's  plans in regard to these matters are also described in Note 2. The
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.

PricewaterhouseCoopers LLP

McLean, VA
April 13, 2001

---

# PATHNET TELECOMMUNICATIONS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANYCONSOLIDATED BALANCE SHEETS

`December 31,   December 31,
                                                                                                            2000            1999
                                                                                                       -------------   -------------

                                                                  ASSETS
Cash and cash equivalents                                                                               $ 40,367,594    $ 90,661,837
Accounts receivable, net of allowance for doubtful accounts of $134,000 and $0, respectively               9,413,368         254,894
Interest receivable                                                                                          368,094       1,048,417
Marketable securities available for sale                                                                   5,146,158      42,651,836
Prepaid expenses and other current assets                                                                  1,127,355       1,182,570
                                                                                                        ------------    ------------
      Total current assets                                                                                56,422,569     135,799,554
Property and equipment, net                                                                              210,604,865     131,928,365
Intangible assets - rights of way                                                                          1,421,475               -
Deferred financing costs, net                                                                             17,770,743       9,649,680
Restricted cash                                                                                           11,192,681      16,921,559
Marketable securities available for sale                                                                           -       5,088,458
Pledged marketable securities held to maturity                                                                     -      20,796,563
Other assets                                                                                                 610,153         351,808
                                                                                                       -------------   -------------
     Total assets                                                                                      $ 298,022,486   $ 320,535,987
                                                                                                       =============   =============
                                           LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
                                                    AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable                                                                                        $ 34,997,792    $ 18,543,195
Accrued interest                                                                                           9,604,657       8,932,293
Accrued expenses and other current liabilities                                                             9,783,231       3,113,181
                                                                                                       -------------   -------------
   Total current liabilities                                                                              54,385,680      30,588,669
Long-term debt                                                                                           405,640,450     346,621,625
Deferred revenue                                                                                           6,279,105               -
Other noncurrent liabilities                                                                               5,836,260       3,092,779
                                                                                                       -------------   -------------
   Total liabilities                                                                                     472,141,495     380,303,073
                                                                                                       -------------   -------------
Commitments and contingencies
Mandatorily redeemable preferred stock:
   Series A convertible preferred stock, $0.01 par value, 0 and 1,000,000 shares authorized, issued
     and outstanding at December 31, 2000 and 1999, respectively (liquidation preference $1,000,000)               -       1,000,000
   Series B convertible preferred stock, $0.01 par value, 0 and 1,651,046 shares authorized, issued
     and outstanding at December 31, 2000 and 1999, respectively (liquidation preference $5,033,367)               -       5,008,367
   Series C convertible preferred stock, $0.01 par value, 0 and 2,819,549 shares authorized, issued
     and outstanding at December 31, 2000 and 1999, respectively (liquidation preference $30,000,052)              -      29,961,272
   Series E convertible preferred stock, $0.01 par value, 4,506,145 and 0 shares authorized,  2,867,546
      and 0 issued and outstanding at December 31, 2000 and 1999, respectively (liquidation
      preference $63,000,000)                                                                             62,932,614               -
                                                                                                       -------------   -------------
   Total mandatorily redeemable preferred stock                                                           62,932,614      35,969,639
                                                                                                       -------------   -------------
Stockholders' equity (deficit):
   Series A convertible preferred stock, $0.01 par value, 2,899,999 and 0 shares authorized, issued
     and outstanding at December 31, 2000 and 1999, respectively                                              29,000               -
   Series B convertible preferred stock, $0.01 par value, 4,788,030 and 0 shares authorized,  issued
     and outstanding at December 31, 2000 and 1999, respectively                                              47,880               -
   Series C convertible preferred stock, $0.01 par value, 8,176,686 and 0 shares authorized,  issued
     and outstanding at December 31, 2000 and 1999, respectively                                              81,767               -
   Series D convertible preferred stock, $0.01 par value, 9,250,000 and 0 shares authorized, 8,511,607
     and 0 shares issued and outstanding at December 31, 2000 and 1999, respectively                          85,116               -
   Common stock, $0.01 par value, 60,000,000 shares authorized, 3,611,120 and 3,068,218
     shares issued and outstanding at December 31, 2000 and 1999, respectively                                36,111          30,682
   Deferred compensation                                                                                  (4,580,846)       (441,760)
   Additional paid-in capital                                                                            238,547,060       6,264,362
   Accumulated other comprehensive loss                                                                       (2,481)        (90,240)
   Accumulated deficit                                                                                  (471,295,230)   (101,499,769)
                                                                                                       -------------   -------------
     Total stockholders' equity (deficit)                                                               (237,051,623)    (95,736,725)
                                                                                                       -------------   -------------
     Total liabilities, mandatorily redeemable preferred stock and stockholders' equity (deficit)      $ 298,022,486   $ 320,535,987
                                                                                                       =============   =============

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

                                       F-3`

# PATHNET TELECOMMUNICATIONS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANYCONSOLIDATED STATEMENTS OF OPERATIONS

`For the year ended December 31,
                                                                                                      December 31,
                                                                                  -----------------------------------------------------
                                                                                     2000                 1999                 1998
                                                                                 ------------        ------------          ------------
Revenue:
     Telecommunications                                                         $   5,041,802        $  2,413,351           $   165,342
     Construction                                                                  38,344,455             897,745             1,418,197
        Total revenue                                                              43,386,257           3,311,096             1,583,539
                                                                                -------------        ------------          ------------
Operating expenses:
     Cost of revenue (exclusive of depreciation shown separately below):
        Telecommunications                                                         14,694,278           8,179,390             4,780,409
        Construction                                                               34,808,040           4,515,519             2,767,211
     Selling, general and administrative                                           38,429,805          14,669,747             9,615,867
     Reorganization expenses                                                        1,750,229           1,022,998                     -
     Impairment loss                                                              273,595,981                   -                     -
     Depreciation expense                                                          14,297,459           6,204,381               732,813
                                                                                -------------        ------------          ------------
        Total operating expenses                                                  377,575,792          34,592,035            17,896,300
                                                                                -------------        ------------          ------------
Net operating loss                                                               (334,189,535)        (31,280,939)          (16,312,761)
Interest expense                                                                  (42,034,241)        (41,010,069)          (32,572,454)
Interest income                                                                     7,411,356          13,111,953            13,940,240
Write-off of initial public offering costs                                                  -                   -            (1,354,534)
Other income (expense), net                                                          (983,041)            142,743                 2,913
                                                                                -------------        ------------          ------------
Net loss                                                                         (369,795,461)        (59,036,312)          (36,296,596)
Preferred stock accretion                                                             (60,648)                 -                     -
                                                                                -------------        ------------          ------------
     Net loss applicable to common stockholders                                 $(369,856,109)       $(59,036,312)         $(36,296,596)
                                                                                =============        ============          ============










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

                                      F-4`

# PATHNET TELECOMMUNICATIONS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

`For the year ended December 31,
                                                                                                December 31,
                                                                                ----------------------------------------------------
                                                                                    2000              1999                 1998
                                                                                -------------    ------------         -------------
Net loss                                                                        $(369,795,461)   $(59,036,312)        $ (36,296,596)

Other comprehensive income (loss):
    Net unrealized gain (loss) on marketable
       securities available for sale                                                   87,759        (298,451)              208,211
                                                                                -------------    ------------         -------------
Comprehensive loss                                                              $(369,707,702)   $(59,334,763)        $ (36,088,385)
                                                                                =============    ============         =============










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

                                      F-5`

# PATHNET TELECOMMUNICATIONS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANYCONSOLIDATED STATEMENTS OF CASH FLOWS

`For the year ended December 31,
                                                                                2000               1999             1998
                                                                            --------------     -------------    -------------
Cash flows from operating activities:
   Net loss                                                                 $ (369,795,461)    $ (59,036,312)   $ (36,296,596)
   Adjustment to reconcile net loss to net cash used in operating activities:
      Depreciation expense                                                      14,297,459         6,204,381          732,813
      Amortization of deferred financing costs                                   1,984,631         1,138,722          842,790
      Impairment loss                                                          273,595,981                 -                -
      Provision for write down of spare parts                                      480,000                 -                -
      Bad debt expense                                                             134,000                 -                -
      Loss on sale of equipment                                                     83,041            17,370                -
      Gain on disposal of marketable securities                                          -          (157,983)               -
      Write off of deferred financing costs                                              -                 -          581,334
      Cost of right of way sold                                                  1,421,475                 -                -
      Interest expense resulting from amortization of discount on the                                                       -
        bonds payable                                                              409,500           409,500          307,125
      Amortization of premium on pledged securities                               (115,166)          537,251                -
      Amortization of deferred compensation                                      4,295,511           536,304          701,295
   Changes in assets and liabilities:
      Accounts receivable                                                       (9,292,474)                -                -
      Interest receivable                                                          680,323         3,370,552       (4,846,952)
      Prepaid expenses and other current assets                                     55,215        (1,583,767)        (156,935)
      Accounts payable                                                           5,259,164           689,533            6,709
      Accrued interest                                                             672,364                 -        8,932,294
      Deferred revenue                                                           6,279,105                 -                -
      Accrued expenses and other liabilities                                     6,381,247         2,816,674          339,688
      Other and intangible assets                                                 (258,344)               -                -
                                                                            --------------     -------------    -------------
        Net cash used in operating activities                                  (63,432,429)      (45,057,775)     (28,856,435)
                                                                            --------------     -------------    -------------
Cash flows from investing activities:
   Expenditures for network in progress                                       (102,236,536)      (79,378,740)     (33,619,342)
   Expenditures for property and equipment                                      (7,450,214)         (910,668)      (2,769,076)
   Expenditures for right of way                                                  (500,000)                -                -
   Proceeds on sale of equipment                                                    47,866             5,624                -
   Sale and maturity of marketable securites available for sale                 48,870,212       170,446,259       51,542,384
   Purchase of marketable securities available for sale                         (6,188,317)      (48,531,491)    (221,129,703)
   Purchase of pledged marketable securities held to maturity                  (20,779,272)                -      (83,097,655)
   Sale and maturity of pledged marketable securities held to maturity          41,691,001        39,452,000       22,271,181
   Restricted cash                                                               5,728,878        (5,721,563)      (9,971,142)
   Issuance of note receivable                                                           -                 -       (3,206,841)
   Repayment of note receivable                                                          -         3,206,841            9,000
                                                                            --------------     -------------    -------------
        Net cash provided by (used in) investing activities                    (40,816,382)      78,568,262      (279,971,194)
                                                                            --------------     -------------    -------------
Cash flows from financing activities:
   Issuance of manditorily redeemable convertible preferred stock               63,000,000                 -       19,999,998
   Proceeds from bond offering                                                           -                 -      350,000,000
   Proceeds from option to purchase Series E manditorily redeemable convertible
       preferred stock                                                           1,000,000                 -                -
   Exercise of employee common stock options                                       540,388           109,614               81
   Payment of deferred financing costs                                         (10,585,820)         (280,151)     (11,681,947)
                                                                            --------------     -------------    -------------
        Net cash provided by (used in) financing activities                     53,954,568          (170,537)     358,318,132
                                                                            --------------     -------------    -------------
Net (decrease) increase in cash and cash equivalents                           (50,294,243)       33,339,950       49,490,503
Cash and cash equivalents at the beginning of period                            90,661,837        57,321,887        7,831,384
                                                                            --------------     -------------    -------------
Cash and cash equivalents at the end of period                              $   40,367,594     $  90,661,837    $  57,321,887
                                                                            ==============     =============    =============
Supplemental disclosure:
   Cash paid for interest                                                   $   43,609,766     $  43,081,220    $  22,271,234
                                                                            ==============     =============    =============
   Noncash investing and financing transactions:
      Acquisition of network equipment financed by accounts payable
       and vendor financing                                                 $   92,657,688     $  20,095,646    $  10,200,650
                                                            `               ==============     =============    =============

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

                                      F-6`

# PATHNET TELECOMMUNICATIONS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANYSTATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

`Series A,                           Note
                                               B, C and D                       Receivable                Additional       Other
                                               Preferred       Common Stock        From       Deferred      Paid-in    Comprehensive   Accumulated
                                                           -------------------
                                                 Stock     Shares     Amount    Stockholder Compensation    Capital         Loss          Deficit          Total
                                               ----------  --------- ---------  ----------- ------------  -----------  -------------  -------------- -------------
   Balance at December 31, 1997                $        -  2,900,000 $  29,000  $    (9,000) $         -  $   381,990  $           -  $   (6,166,861)$  (5,764,871)
Exercise of stock options                               -      2,358        24            -            -           57              -               -            81
Repayment of note receivable                            -          -         -        9,000            -            -              -               -         9,000
Deferred compensation expense related to issuance of
   employee common stock options                        -          -         -            -   (1,679,359)   1,679,359              -               -             -
Amortization of compensation expense related to
   issuance of employee common stock options            -          -         -            -      701,295            -              -               -       701,295
Fair value of warrants to purchase common
   stock                                                -          -         -            -            -    4,095,000              -               -     4,095,000
Net unrealized gain on marketable securities
   available for sale                                   -          -         -            -            -            -        208,211               -       208,211
Net loss                                                -          -         -            -            -            -              -     (36,296,596)  (36,296,596)
                                               ----------  --------- ---------  ----------- ------------  -----------  -------------  -------------- -------------
   Balance at December 31, 1998                $        -  2,902,358  $ 29,024  $         -   $ (978,064) $ 6,156,406      $ 208,211  $  (42,463,457)$ (37,047,880)
Exercise of stock options                               -    165,860     1,658            -            -      107,956              -               -       109,614
Amortization of compensation expense related to
   issuance of employee common stock options            -          -         -            -      536,304            -              -               -       536,304
Net unrealized gain on marketable securities
   available for sale                                   -          -         -            -            -            -       (298,451)              -      (298,451)
Net loss                                                -          -         -            -            -            -              -     (59,036,312)  (59,036,312)
                                               ----------  --------- ---------  ----------- ------------  -----------  -------------  -------------- -------------
   Balance at December 31, 1999                $        -  3,068,218  $ 30,682  $         -   $ (441,760) $ 6,264,362      $ (90,240) $ (101,499,769)$ (95,736,725)
Exercise of stock options                               -    542,902     5,429            -            -      534,959              -               -       540,388
Amortization of compensation expense related to
   issuance of employee common stock options            -          -         -            -    5,135,085            -              -               -     5,135,085
Deferred compensation expense related to issuance of
   employee common stock options                        -          -         -            -  (10,603,775)  10,603,775              -               -             -
Deferred compensation expense reversal                  -          -         -            -    1,329,604   (2,169,178)             -               -      (839,574)
Conversion of series A, B and C from manditorily
   redeemable to convertible preferred stock      158,647          -         -            -            -   35,810,992              -               -    35,969,639
Issuance of series D convertible preferred stock   85,116          -         -            -            -  186,914,890              -               -   187,000,006
Issuance costs related to series D convertible
   preferred stock                                      -          -         -            -            -     (352,092)             -               -      (352,092)
Option to purchase 1,593,082 shares of series E
   preferred stock                                      -          -         -            -            -    1,000,000              -               -     1,000,000
Net unrealized gain on marketable securities
   available for sale                                   -          -         -            -            -            -         87,759               -        87,759
Series E accretion                                      -          -         -            -            -      (60,648)             -               -       (60,648)
Net loss                                                -          -         -            -            -            -              -    (369,795,461) (369,795,461)
                                               ----------  --------- ---------  ----------- ------------ ------------  -------------  -------------- -------------
                                               $  243,763  3,611,120  $ 36,111  $         - $ (4,580,846)$238,547,060  $      (2,481) $ (471,295,230)$(237,051,623)
                                               ==========  ========= =========  =========== ============ ============  =============  ============== =============

   The accompanying notes are an integral part of these consolidated financial statements.
                                      F-7`

---

# PATHNET
TELECOMMUNICATIONS, INC. AND SUBSIDIARIES

# AND
PREDECESSOR COMPANY

# NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

## 1.         THE COMPANY

Pathnet  Telecommunications,  Inc. and its  subsidiaries  (the Company) is a wholesale  telecommunications  carrier  providing
other  wholesale  and retail  telecommunications  service  providers  with  access to  underserved  and  second and third tier  markets
throughout the United States.

The Company's  telecommunications  network enables its customers,  including existing local telephone companies, long distance
companies,  internet service providers,  competitive  telecommunications  companies,  cellular  operators and other  telecommunications
providers to offer additional  services to new and existing  customers in the markets the Company serves without having to expend their
own resources to build, expand or upgrade their own networks.

As of December 31, 2000, the Company's  network  consisted of over 6,300 wireless route miles  providing  wholesale  transport
services  and 1,500 miles of  installed  fiber,  with  collocations  in 106 cities.  The Company has an  additional  250 route miles of
network under construction.

## 2.          SIGNIFICANT
ACCOUNTING POLICIES

## Basis of
Presentation

Pathnet  Telecommunications,  Inc.  (Pathnet  Telecommunications)  was formed on  November  1, 1999 in order to  facilitate  a
reorganization  transaction with Pathnet,  Inc.  (Pathnet),  which was founded in 1995. The  reorganization  was completed on March 30,
2000, resulting in Pathnet becoming a wholly owned subsidiary of Pathnet  Telecommunications.  Pathnet  Telecommunications  and Pathnet
are considered  companies under common control.  Consequently,  for purposes of the  accompanying  consolidated  financial  statements,
Pathnet has been treated as a "predecessor"  entity.  Therefore,  the  consolidated  financial  statements  financial  statements as of
December  31,  1999 and for the two years then ended  represent  the  historical  financial  information  of Pathnet,  the  predecessor
entity.  Hereafter, Pathnet Telecommunications and its subsidiaries are referred to as the Company.

The  accompanying  financial  statements  have been  prepared on a basis which  assumes the Company  will  continue as a going
concern and which contemplates the realization of assets and the satisfaction of
liabilities and  commitments in the normal course of business.  On April 2, 2001
the  Company and  several of its  subsidiaries  filed  voluntary  petitions  for
Chapter 11 bankruptcy protection with the U.S. Bankruptcy Court for the District
of  Delaware.  The  Company  has  petitioned  the court to allow it to  continue
operating  its business as  debtors-in-possession.  The Company  intends to sell
all, part or parts of its  business.  If it sells only a portion of its business
or assets, it expects to liquidate its remaining assets and cease operations. It
does not expect to  generate  sufficient  cash to repay any  investment  in full
under any circumstances.  Under the Bankruptcy Code, the rights and treatment of
pre-petition  creditors and stockholders may be substantially  altered.  At this
time,  it is not  possible  to predict  the  outcome of the  Chapter 11 cases in
general  or the  effect  of the cases on our  business  or on the  interests  of
creditors  and  stockholders.  The Company has incurred  losses from  operations
since inception and has a net  stockholders'  deficit.  The Company has not been
successful in obtaining  additional financing to sustain its operations and will
have insufficient  liquidity to fund operations or meet its obligations unless a
new source of capital is obtained.  These  circumstances raise substantial doubt
about the Company's ability to continue as a going concern. Although,  management  continues to pursue  these plans,  there is no
assurance  the Company will be successful on a timely basis or on terms that are
acceptable  to the Company or its  creditors.  The  financial  statements do not
include  any   adjustments   that  might   result  from  the  outcome  of  these
uncertainties. The bankruptcy process described above could ultimately result in
the sale of substantially all or a portion of the Company's assets. Although the
Company and its creditors  are not required to accept any offer,  it is possible
the   Company's   creditors   would  accept  an  offer  or  offers  to  purchase
substantially  all of the Company's  assets for less than the current book value
of those  assets.  Such a  transaction  could  result in further  impairment  of
assets.

## Consolidation

The consolidated  financial statements include the accounts of Pathnet  Telecommunications  and its wholly owned subsidiaries,
Pathnet Inc.,  Pathnet Operating,  Inc., Pathnet Operating of Virginia,  Inc., Pathnet Equipment Leasing LLC (a wholly owned subsidiary
of Pathnet  Operating  Inc.),  Pathnet Real Estate LLC (a wholly owned  subsidiary of Pathnet  Operating,  Inc.),  Pathnet/Idaho  Power
Equipment,  LLC and Pathnet/Idaho Power License,  LLC (a wholly owned subsidiary of Pathnet).  All material  intercompany  accounts and
transactions have been eliminated in consolidation.

## Use of
Estimates

The preparation of the financial  statements in conformity with generally accepted  accounting  principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent  assets and liabilities at the date
of the financial  statements  and the reported  amounts of revenues and expenses
during the reported  period.  The estimates  involve  judgments with respect to,
among other things,  various  future  factors which are difficult to predict and
are beyond the control of the Company.  Actual  amounts  could differ from these
estimates.

## Fair Value of
Financial Instruments

The Company  believes that the carrying  amount of certain of its financial  instruments,  which include cash  equivalents and
accounts  payable,  approximate  fair value due to the  relatively  short maturity of these  instruments.  As of December 31, 2000, the
fair value of the Company's 121/4% Senior Notes was approximately $44.5 million.

## Cash and Cash Equivalents

The Company  considers all highly  liquid  instruments  with an original or remaining  maturity of three months or less at the
date of purchase to be cash  equivalents.  Cash  equivalents  are stated at amortized cost plus accrued  interest,  which  approximates
fair value.

## Concentration of
Credit Risk

Financial  instruments,  which  potentially  subject the Company to  concentrations  of credit risk,  consist of cash and cash
equivalents,  marketable  securities and associated  interest  receivable,  note
receivable, restricted cash and trade accounts receivable. Marketable securities
and associated  interest  receivable  include U.S. Treasury  securities and debt
securities of U.S. Government agencies, certificates of deposit and money market
funds, and corporate debt  securities.  The Company has invested its excess cash
in a money  market  fund  with a  commercial  bank.  The  money  market  fund is
collateralized  by the underlying  assets of the fund. The Company's  restricted
cash is maintained in an escrow account (see note 9) at a major bank. During the
year ended  December 31, 2000,  the Company  provided  $900,000 for  anticipated
losses on  short-term  investments  included  in cash and cash  equivalents  and
restricted cash.  During the years ended December 31, 1999 and 1998, the Company
did not  experience any losses on its cash and cash  equivalents  and restricted
cash.

At December 31, 2000 and 1999, four and one customers  accounted for 75% and 27% of gross accounts  receivable,  respectively.
For the year ended  December 31, 2000,  1999 and 1998,  two, one and one  customers  accounted  for 87%, 60% and 98% of total  revenue,
respectively.

## Marketable
Securities

Management  determines the appropriate  classification of its investments in marketable securities at the time of purchase and
reevaluates  such  determinations  at each balance sheet date.  Debt securities are classified as held to maturity when the Company has
the positive intent and ability to hold the securities to maturity.  The Company has classified  certain securities as held to maturity
pursuant to a pledge  agreement.  Held to maturity  securities are stated at amortized cost. Debt securities for which the Company does
not have the  intent or ability to hold to  maturity  are  classified  as  available  for sale,  along with any  investments  in equity
securities.  Securities are classified as current or noncurrent based on the maturity date.  Securities  available for sale are carried
at fair  value  based on quoted  market  prices at the  balance  sheet  date,  with  unrealized  gains and losses  reported  as part of
accumulated other comprehensive income (loss).

The amortized cost of debt securities is adjusted for  amortization  of premiums and accretion of discounts to maturity.  Such
amortization  and  interest  are  included  in interest  income or  expense.  Realized  gains and losses are  included in other  income
(expense),  net in the  consolidated  statements of  operations.  The cost of securities  sold is based on the specific  identification
method.  The Company's  investments in debt and equity  securities are diversified  among high credit quality  securities in accordance
with the Company's investment policy.

## Property and
Equipment

Property and equipment,  consisting of network in progress,  communications network, office and computer equipment,  furniture
and  fixtures  and  leasehold  improvements,  is stated at cost.  Network in progress  costs  incurred  during  development,  including
interest,  are capitalized.  Depreciation of the completed  communications  network  commences when the network  equipment is ready for
its intended use and is computed using the  straight-line  method with estimated  useful lives of network assets ranging  between three
to twenty years.  Depreciation  of the office and computer  equipment and  furniture and fixtures is computed  using the  straight-line
method,  generally over three to five years,  based upon estimated useful lives,  commencing when the assets are available for service.
Leasehold  improvements  are  amortized  over the  lesser  of the  useful  lives of the  assets  or the lease  term.  Expenditures  for
maintenance  and repairs  are  expensed  as  incurred.  When  assets are  retired or  disposed,  the cost and the  related  accumulated
depreciation are removed from the accounts, and any resulting gain or loss is recognized in operations for the period.

## Impairment of
Long-Lived Assets

The Company evaluates the  recoverability  of its long-lived assets when events or changes in circumstances  indicate that the
carrying amount of an asset may not be recoverable.  This evaluation  consists of a comparison of the carrying value of the assets with
the assets'  expected future cash flows,  undiscounted  and without  interest costs.  Estimates of expected future cash flows represent
management's  best estimate  based on  reasonable  and  supportable  assumptions  and  projections.  If the expected  future cash flow,
undiscounted  and without interest  charges,  exceeds the carrying value of the asset, no impairment is recognized.  Impairment  losses
are measured as the difference  between the carrying  value of long-lived  assets and their  estimated  fair value.  The estimated fair
value of the asset is determined  based on the quoted market prices in an active market,  if available,  the present value of estimated
expected  future cash flows using a discount  rate  commensurate  with the risks  involved,  option  pricing  models,  matrix  pricing,
appraisals, and fundamental analysis or other methods.

## Deferred
Income Taxes

The  Company  uses the  liability  method of  accounting  for income  taxes.  Deferred  income  taxes  result  from  temporary
differences  between the tax bases of assets and liabilities and their financial  reporting amounts at each year-end,  based on enacted
laws and statutory tax rates  applicable  to the periods in which the  differences  are expected to affect  taxable  income.  Valuation
allowances are  established  when  necessary,  to reduce net deferred tax assets to the amount  expected to be realized.  The provision
for income taxes  consists of the  Company's  current  provision for federal and state income taxes and the change in the Company's net
deferred tax assets and liabilities during the period.

## Revenue
Recognition

Revenue is recognized  when  persuasive  evidence of an  arrangement  exists,  terms are fixed or  determinable,  services are
performed and collection is probable.

Telecommunication  revenue is recognized as services are  provided.  Amounts  billed in advance of the service are recorded as
deferred revenue.  Telecommunications  revenue includes revenue earned under  indefeasible  right to use agreements for long-term fiber
and conduit  leases.  Long term fiber and conduit lease  contracts are accounted for as operating  leases unless title transfers to the
lessee.

Construction  revenue is recognized  over the related  project period as cost are incurred plus a management  fee. The Company
defers revenue when contractual payments are received in advance of the performance of services.

During the fourth quarter of 2000, the Company  adopted Staff  Accounting  Bulletin (SAB) No. 101,  Revenue  Recognition.  The
adoption of this standard had no material impact on the results of operations, financial position and cash flows.

## Deferred
Financing Costs

The Company has incurred costs related obtaining  debt-financing  arrangements.  Such costs are amortized over the term of the
debt or financing arrangement.

## Accounting for
Stock Based Compensation

Employee  stock awards under the Company's  compensation  plans are accounted for in  accordance  with  Accounting  Principles
Board Opinion No. 25 "Accounting  for Stock Issued to Employees"  ("APB 25"),  and related  interpretations.  The Company  provides the
disclosure required by Statement of Financial Accounting Standard No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS 123), and
related interpretations.  Stock-based awards to non-employees are accounted for under the provisions of SFAS 123.

## Redeemable
Preferred Stock

The carrying value of mandatorily  redeemable  convertible preferred stock is increased by periodic accretions so the carrying
amount  will equal the  redemption  amount at the  redemption  date.  These  increases  are  effected  through  charges to the net loss
attributable to common stockholders.

## Recent
Accounting Pronouncements

In March 2000,  the  Financial  Accounting  Standards  Board (FASB)  issued  interpretation  No. 44,  "Accounting  for Certain
Transactions  involving Stock  Compensation,"  an  interpretation  of Accounting  Principles Board opinion No. 25. This  Interpretation
clarifies the application of Opinion 25 for certain issues:  a) the definition of employee for purposes of applying  Opinion 25, b) the
criteria for determining  whether a plan qualifies as a noncompensatory  plan, c) the accounting  consequence of various  modifications
to the terms of a  previously  fixed stock  option  award,  and d) the  accounting  for an exchange of stock  compensation  awards in a
business  combination.  This  interpretation  became effective July 1, 2000. The adoption of this Interpretation had no material effect
on our financial position, the results of operations or cash flows.

The Company  has adopted the  Statement  of  Financial  Accounting  Standards  No. 33 (SFAS 33),  "Accounting  for  Derivative
Instruments and Hedging  Activities"  effective on January 1, 2001. As the Company has no derivative  instruments  effective January 1,
2001, the effect of the adoption had no impact to the financial statements.

## Reclassifications

Certain reclassifications have been made in the accompanying consolidated financial statements for prior periods to conform
with the December 31, 1999 presentation.

## 3.          SEGMENT
REPORTING

The Company  identifies  its  reportable  segments on the basis of management  responsibility.  The Company's  chief  decision
maker monitors  segment  performance on the basis of segment income (loss) exclusive of depreciation.  The  telecommunications  segment
operating  loss  represents the  telecommunications  revenue less the direct cost of revenue and impairment  losses.  The  construction
segment  operating  income (loss)  represents  the  construction  revenue less the direct cost of revenue.  Other includes all selling,
general and administrative  cost,  reorganizations  expenses and depreciations  expenses.  All of the Company's revenue is attributable
to customers in the United States, and all of its assets are located in the United States.

The following tables reflect the financial information for the reportable segments:

`Year ended December 31, 2000
                                                              ----------------------------
                                         Telecommunications      Construction       Other         Consolidated
                                         ------------------      ------------       -----         ------------
Revenue                               $            5,041,802  $    38,344,455  $          --   $     43,386,257
Operating expenses                               288,290,259       34,808,040     54,477,493        377,575,792
                                      ----------------------  ---------------  --------------  ----------------
Operating income (loss)               $         (283,248,457) $     3,536,415  $  (54,477,493) $   (334,189,535)
                                      ======================  ===============  ==============  ================

                                                                Year ended December 31,1999
                                                                ---------------------------
                                        Telecommunications       Construction       Other         Consolidated
                                        -------------------      ------------       -----         ------------
Revenue                               $            2,413,351  $       897,745  $           --  $      3,311,096
Operating expenses                                 8,179,390        4,515,519      21,897,126        34,592,035
                                      ----------------------  ---------------  --------------  ----------------
Operating loss                        $           (5,766,039) $    (3,617,774) $  (21,897,126) $    (31,280,939)
                                      ======================  ===============  ==============  ================


                                                               Year ended December 31, 1998
                                                               ----------------------------
                                         Telecommunications      Construction        Other        Consolidated
                                         ------------------       ------------       -----        ------------
Revenue                               $              165,342  $     1,418,197  $            --  $      1,583,539
Operating expenses                                 4,780,409        2,767,211       10,348,680        17,896,300
                                      ----------------------  ---------------  --------------   ----------------
Operating loss                        $           (4,615,067) $    (1,349,014) $   (10,348,680) $   ( 16,312,761)
                                      ======================  ===============  ===============  ================`

## 4.        
REORGANIZATION

On March 30, 2000, the Company completed a strategic  investment  transaction with Colonial  Pipeline  Company,  The Burlington
Northern and Santa Fe  Corporation  and CSX  Transportation, Inc.  As part of the  transaction,  the Company  received a  contribution  of over
12,000 miles of access to rights of way with an estimated value of  approximately  $187.0  million.  During the fourth quarter of 2000,
these intangible assets were impaired and the carrying value reduced (see note 7).

In return  for the  access to rights of way,  the  Company  issued  8,511,607  shares of the  Company's  Series D  convertible
preferred  stock. In addition to providing a portion of the rights of way access,  Colonial  Pipeline paid $43.0 million in cash to the
Company,  comprised of $38.0 million at the initial closing for 1,729,631 shares of the Company's Series E redeemable  preferred stock,
$1.0 million for the issuance of an option to purchase  1,593,082  shares of the  Company's  Series E  redeemable  preferred  stock for
$21.97 per share in  connection  with an initial  public  offering  and $4.0  million for rights in 2,200  conduit  miles of our future
network.  Colonial Pipeline paid an additional $25.0 million for 1,137,915 shares of the Company's Series E redeemable  preferred stock
upon the  completion of a  fiber-optic  network  segment that the Company  completed  during the third  quarter of 2000.  The option to
purchase 1,593,082 shares of the Company's Series E preferred stock expired unexercised in July 2000.

Upon the  closing  of the  transaction,  all of the  Pathnet's  common  stock  was  exchanged  for  common  stock  of  Pathnet
Telecommunications  resulting in Pathnet  becoming a  wholly-owned  subsidiary of Pathnet  Telecommunications  and all of the Pathnet's
5,470,595 shares of mandatorily  redeemable preferred stock being converted into 15,864,715 of Pathnet  Telecommunications  convertible
preferred stock.

The Company  obtained  consents to the waiver and the amendment of certain  provisions of the indenture  from the holders of a
majority of Pathnet's  Senior Notes.  In return for such consents,  (i) Pathnet made consent fee payments to consenting  noteholders of
approximately  $6.6 million  in the  aggregate  and  purchased  and pledged to the trustee  under the  indenture for the benefit of the
noteholders,  additional U.S.  Treasury  Securities as security  covering the October 16, 2000 interest payment on the Senior Notes and
(ii) Pathnet  Telecommunications  issued its senior guarantees of the Senior Notes. The $6.6 million consent payment to the bondholders
increased  deferred  financing  costs and is being  amortized  over the remaining term of the Senior Notes.  In addition,  for the year
ended December 31, 2000, the Company  expensed  approximately  $1.8 million of  reorganization  expenses  related to fees for printing,
legal, solicitation and other transaction fees, which is reflected as reorganization expenses in the statement of operations.

## 5.          MARKETABLE
SECURITIES

The Company's  marketable  securities are considered  "available for sale," and, as such, are stated at market value.  The net
unrealized gains and losses on marketable  securities are reported as part of accumulated other comprehensive  income (loss).  Realized
gains or losses from the sale of marketable securities are based on the specific identification method.

The following is a summary of the investments in marketable securities at December 31, 2000:

`Gross Unrealized
                                                                         -------------------
                                                            Cost           Gains      Losses           Market Value
                                                     ------------------ ----------- -------------    -----------------
  Available for sale securities:
    U.S. Treasury securities and debt securities
      of U.S. Government agencies                    $        1,150,239 $        --  $        492   $        1,149,747
    Corporate debt securities                                 3,998,400          --         1,989            3,996,411
                                                     ------------------ -----------  ------------   ------------------

                                                     $        5,148,639 $        --  $      2,481   $        5,146,158
                                                     ================== ===========  ============   ==================

         The following is a summary of the investments in marketable securities at December 31, 1999:

                                                                           Gross Unrealized
                                                                        -------------------
                                                            Cost           Gains      Losses           Market Value
                                                     ------------------ ----------- -------------    -----------------
    Available for sale securities:
    U.S. Treasury securities and debt securities
      of U.S. Government agencies                    $       19,363,417 $        --  $     59,490   $       19,303,927
    Corporate debt securities                                26,959,695       8,800        30,088           26,938,407
    Debt Securities issued by foreign
      governments                                             1,507,422          --         9,462            1,497,960
                                                     ------------------ -----------  ------------   ------------------
                                                     $       47,830,534 $     8,800  $     99,040   $       47,740,294
                                                     ================== ===========  ============   ==================`

Gross realized gains on sales of available for sale  securities  were  approximately  $158,000  during the year ended December
31, 2000.  Gross realized gains and gross realized losses on sales of available for sale  securities  were immaterial  during the years
ended December 31, 1999 and 1998.

The  amortized  cost and market value of available  for sale  securities  by  contractual  maturity at December 31, 2000 is as
follows:

`Cost            Market Value
                                                                ------------------     -------------

         Due in one year or less                                $        5,148,639      $ 5,146,158
                                                                ==================      ===========`

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

## 6.          PROPERTY
AND EQUIPMENT

Property and equipment, stated at cost, is comprised of the following at December 31, 2000 and 1999:

`2000                   1999
                                                                   -----------------         ---------------

         Network in progress                                      $      79,207,598       $       63,123,322
         Communications network                                         125,170,187               71,604,029
         Office and computer equipment                                    9,058,173                2,262,934
         Furniture and fixtures                                           1,474,130                1,555,771
         Leasehold improvements                                           1,607,917                  337,181
                                                                   ----------------       ------------------
                                                                        216,518,005              138,883,237
         Less: accumulated depreciation                                  (5,913,140)              (6,954,872)
                                                                  -----------------       ------------------
         Property and equipment, net                               $    210,604,865       $      131,928,365
                                                                  =================       ==================`

Network in progress  includes  (i) all direct  material  and labor costs  together  with  related  allocable  interest  costs,
necessary to construct  components of a high capacity  digital  wireless and fiber optic network,  and (ii) network  related  inventory
parts and  equipment.  When a portion of the network has been  completed and made  available  for its intended use by the Company,  the
accumulated costs are transferred from network in progress to communications network and depreciated.

## 7.          ASSET
IMPAIRMENT

During the fourth quarter of 2000, the Company  identified  certain events and changes to their operations which indicated the
carrying  amount  of  certain  long-lived  assets  was  not  recoverable.  As a  result  the  Company  recorded  impairment  charge  of
$273.6 million for the year ended December 31, 2000, consisting of the following:

- $184.9 million impairment of intangible assets - rights of way;
- $88.7 million impairment of communications network.

On March 30, 2000, the Company completed a reorganization  transaction whereby Burlington  Northern and Sante Fe Railway,  CSX
Transportation, Inc. and Colonial  Pipeline  Company  contributed  certain assets  including  access rights to their rights of way to permit the
Company to build a fiber optic  telecommunications  network along their existing railroad and pipeline corridors in return for series D
preferred  stock (see note 4). These  access  rights had an estimated  fair value of $187  million and were  recorded as an  intangible
asset. In light of the Company's  difficulty in procuring  sufficient  capital to fund the expansion of the fiber optic network and the
availability  of other fiber optic  networks,  the Company  abandoned  its strategy of building upon its access to these rights of way.
As a result the Company  estimated  the fair value of its access to rights of way based on the  expected  discounted  future cash flows
and recorded an impairment charge.

The Company's  microwave network is utilized to serve second and third tier markets with  telecommunications  services,  which
include local access and long distance  services.  With the rapid  advancement and availability of fiber optic and broadband  networks,
the Company  determined the potential for significant  customer  utilization  was limited.  As a result,  the microwave  network assets
were written down to their  estimated  fair value based upon an estimate of residual value  resulting in an impairment  charge of $72.8
million.

During 2000 the Company began the construction of remote  collocation  assets to be utilized as part of the Company's  rollout
of a Digital  Subscriber  Line service.  However,  due to changes in market  conditions,  management  has cancelled any rollout of that
service.  As such,  those assets were written down to their estimated fair value based upon the disposition of the assets in comparable
transactions resulting in an impairment charge of $9.7 million.

## 8.        
 DEFERRED
FINANCING COSTS

The Company incurred approximately  $11.3 million related to the debt offering of senior notes and approximately  $6.6 million
related to the amendment to the Senior Notes in connection  with the  reorganization  transaction.  During 2000,  the Company  incurred
financing  costs of  approximately  $4.0 million  related  to  obtaining  debt-financing  arrangements  with  vendors.  Such  costs are
amortized over the term of the debt or financing arrangement.

## 9.          RESTRICTED
CASH

Restricted cash comprises amounts held in escrow to collateralize  the Company's  obligations under certain of its development
agreements.  The funds in each escrow account are available only to fund the projects to which the escrow is related.  Generally, funds
are  released  from  escrow to pay  project  costs as  incurred.  During  the year ended  December  31,  2000,  the  Company  deposited
approximately  $16.8 million in escrow, was credited interest on the account of $1.2 million,  and released approximately $23.4 million
from escrow.

## 10.          LONG-TERM DEBT

As of December 31, long-term debt consisted of the following:

`2000          Interest         1999           Interest
                                                          ----          --------         ----           --------


             Senior Notes                           $     347,031,125    12.25 %     $   346,621,625     12.25 %
             Vendor financing                              58,609,325    11.14                    --        --
                                                    -----------------                ---------------
                                                    $     405,640,450                $   346,621,625
                                                    =================                ===============`

## Senior Notes

During 1998,  the Company  completed a debt  offering  (Senior  Notes) for gross
proceeds of $350.0 million less issuance costs of  approximately  $11.3 million.
Upon issuance, approximately $345.9 million of the gross proceeds were allocated
to the Senior Notes and approximately $4.1 million was allocated to the warrants
to purchase  common stock based upon estimated fair values.  The warrants expire
on April 15,  2008.  The  estimated  value  attributed  to the warrants has been
recorded as a discount on the face value of the Senior  Notes and as  additional
paid-in  capital.  This  discount is being  amortized as an increase to interest
expense  and the  carrying  value of the debt over the  related  term  using the
interest method. As of December 31, 2000 and 1999, the unamortized bond discount
was  $2,968,875  and  $3,378,375,  respectively.  Interest  on the Senior  Notes
accrues  at an  annual  rate  of 12 1/4 %,  payable  semiannually,  in  arrears,
beginning  October 15,  1998,  with  principal  due in full on April 15, 2008. A
semi-annual  interest  payment is due on the Senior Notes on April 15, 2001. The
Company will not be able to pay this  semi-annual  interest  payment without the
consent of the bankruptcy  court. The Company does not expect to seek or receive
that consent.  Interest on the Senior Notes was approximately  $42.9 million for
each of the years  ended  December  31,  2000 and 1999,  respectively,  of which
approximately  $4.8 million and $3.6 million,  respectively,  was capitalized as
network under development.  The Company used approximately  $81.1 million of the
proceeds  related  to  the  debt  offering  to  purchase  U.S.  Government  debt
securities,  which are restricted and pledged as collateral for repayment of all
interest due on the Senior Notes  through April 15, 2000 which have a balance of
$0 and  $20,796,563 as of December 31, 2000 and 1999,  respectively.  The Senior
Notes are  redeemable,  in whole or part, at any time on or after April 15, 2003
at the option of the Company,  at the following  redemption  prices plus accrued
and  unpaid  interest  (i) on or after  April 15,  2003;  106% of the  principal
amount, (ii) on or after April 15, 2004; 104% of the principal amount,  (iii) on
or after April 15, 2005; 102% of the principal amount and (iv) on or after April
15, 2006; 100% of the principal amount. In addition,  at any time prior to April
15, 2001,  the Company may redeem within sixty days,  with the net cash proceeds
of one or more public equity  offerings,  up to 35% of the  aggregate  principal
amount  of the  Senior  Notes at a  redemption  price  equal to  112.25%  of the
principal amount plus accrued and unpaid interest  provided that at least 65% of
the original  principal  amount of the Senior Notes remain  outstanding.  Upon a
change in control,  as defined,  each holder of the Senior Notes may require the
Company  to  repurchase  all or a portion  of such  holder's  Senior  Notes at a
purchase  price of cash equal to 101% of the  principal  amount plus accrued and
unpaid interest and liquidated damages if any.

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

## Vendor
Financing

On August 10,  2000,  the Company  entered  into credit  facility  agreement  with one of the  Company's  vendors.  The credit
facility is available  for six years and can be used for the purchase of  telecommunications  equipment  and services  from the vendor.
The agreement consists of a $210 million multiple-advance term loan facility and includes the following terms:

- The facility has a three year draw down period, a three year repayment period
and consists of two $105 million tranches;
- The loans bear interest based upon an index plus a specified margin;
- Proceeds of the loans are used for the payment when due for purchases of the vendor's  equipment and services for our
telecommunications network.

Principal  of the loans is  repayable  in twelve  quarterly  installments,  generally  commencing  on the earliest of June 30,
2003. The entire principal  balance of the loans, plus all accrued but unpaid interest  thereon,  generally,  are due and payable in on
the third anniversary of the date on which the loans are fully funded.

Amounts not drawn under the vendor  facility will generally  cease to be available to the Company on June 30, 2003 or the date
on which  the  loans  are  fully  funded.  The loans  may be  prepaid  in whole or in part at any time  subject  to  notice  provisions
acceptable to the lenders, payment of LIBOR breakage costs and a minimum prepayment amount of $1 million.

The Company  paid an  origination  fee for the first  tranche of $105  million and will owe an  origination  fee on the second
tranche on the date on which the first  tranche  has been fully  funded and an advance  against  the second  tranche is  requested.  In
addition, the Company pays a commitment fee on unused commitments, due quarterly in arrears.

As of December 31, 2000, $28.1 million was outstanding under this vendor facility.

On September 8, 2000,  the Company  entered into a $50 million  credit  facility with another of the  Company's  vendors.  The
credit facility is available for six years and can be for the purchase of telecommunications equipment and services from the vendor.

The loans  bear  interest  based  upon an index  plus a  specified  margin.  Principal  of the loans is  repayable  in sixteen
quarterly  installments,  commencing on the second  anniversary of the closing date (September  2003). The entire principal  balance of
the loans,  plus all accrued but unpaid  interest  thereon,  are due and payable in full on the sixth  anniversary of the date on which
the vendor facility was executed.

Amounts not drawn under the vendor  facility  will cease to be available  to the company  twenty four months after the closing
date of the vendor  facility.  The loans may be prepaid in whole or in part at any time  subject  to payment by  borrower  of  lender's
expenses incurred by lender in obtaining or liquidating or re-employing deposits or other funds to fund or maintain the loans.

The Company paid a closing fee for the facility.  In addition,  the Company pays a commitment fee on unused  commitments,  due
quarterly in arrears, along with a facility fee.

As of December 31, 2000, $30.5 million was outstanding under this vendor facility.

As of December 31, 2000, the future maturities of all long-term debt, excluding the unamortized discount, is as follows:

`2003                                                          $             10,728,809
         2004                                                                        18,406,813
         2005 and thereafter                                                        376,504,828
                                                                       ------------------------
                                                                       $            405,640,540
                                                                       ========================`

## 11.               RELATED PARTY TRANSACTION

As part of the March 30, 2000  reorganization,  Pathnet received  $4,000,000 from Colonial Pipeline Company (Colonial) for the
Company's  sale to  Colonial  of rights in a  specified  number of  conduit  miles of network to be built in the  future.  The  Company
received  $275,000 in rights of way from CSX  Transportation,  Inc. (CSX) for the Company's sale to CSX of rights of a specified number
of conduit  miles to its future  network.  The Company has no plans to build the required  conduit and has recorded  theses  amounts as
other current liabilities as of December 31, 2000.

## 12.         
CAPITAL
STOCK

As of December 31, 2000, the authorized capital stock consisted of the following:

`Authorized Shares
                                                                  -----------------
             Common Stock                                              60,000,000
                                                                       ----------

             Preferred Stock:
                Series A Convertible Preferred Stock                     2,899,999
                Series B Convertible Preferred Stock                     4,788,030
                Series C Convertible Preferred Stock                     8,176,686
                Series D Convertible Preferred Stock                     9,250,000
                Series E Convertible Preferred Stock                     4,506,145
                Blank Check Preferred Stock                             10,000,000
                                                                        ----------
                Total Preferred Stock                                   39,620,860
                                                                        ----------
                    Total                                               99,620,860
                                                                         ==========`

## Common Stock

The  common  stockholders  are  entitled  to one vote per  share of  common  stock  on all  matters  to be voted  upon by the
stockholders  generally.  Holders of common stock also will be entitled to receive dividends, if any, declared from time to time by the
board of directors out of funds legally available for dividends. If we are liquidated,  dissolved or wound-up,  holders of common stock
will share  proportionately  in all assets available for  distribution.  However,  both dividend and distribution  rights of the common
stockholders are subject to the rights of the preferred  stockholders as described below.  The common  stockholders  have no preemptive
or conversion  rights (other than the preemptive rights granted to a founder under the stockholders  agreement).  The common stock does
not have cumulative voting rights.  There are no redemption or sinking fund provisions applicable to the common stock.

On May 8, 1998, the Company filed a Registration  Statement with the Securities and Exchange  Commission for an initial public
offering of common stock  (Initial  Public  Offering).  The Company  subsequently  postponed the Initial  Public  Offering and expensed
approximately $1.4 million,  consisting  primarily of legal and accounting fees, printing costs, and Securities and Exchange Commission
and Nasdaq Stock Market fees.

## Preferred Stock

Subject to the limitations  described  below,  our certificate of  incorporation  gives the board of directors the authority,
without further  stockholder  action, to issue up to 10 million shares of preferred stock in one or more series and to fix the relative
powers, preferences, rights, qualifications, limitations or restrictions of the preferred stock, including:

- Dividend rates;
- Conversion rights;
- Voting powers;
- Terms of redemption;
- Redemption prices;
- Amounts payable upon liquidation; and
- The number of shares constituting any series or the designation of those series.

## Series A, B,
C, D and E Convertible Preferred Stock

Voting. The  preferred  stock is voted on an "as  converted"  basis  with the  common  stock.  This  means that each share of
preferred  stock will  initially  have one vote,  representing  the number of votes those shares would have if they were converted into
shares of the common  stock.  In the event that the number of shares of common  stock into which the shares of any series of  preferred
stock may be  converted  is adjusted in the future,  the number of votes which  shares of that series of  preferred  stock may exercise
will be adjusted accordingly.

Veto Rights. The consent of holders of 67% of the preferred  stock voting  together as a single class is required for actions
that:

- Redeem or otherwise acquire for value any shares of the capital stock or capital
stock of subsidiaries, except for certain redemption rights provided in the
certificate of incorporation for the holders of the Series E preferred stock and
other redemptions in accordance with stockholders agreements, option agreements
or employment agreements approved by the board of directors;
- Issue any equity securities or securities convertible into equity securities other than as provided in the stockholders
              agreement;
- Increase or decrease the total number of authorized shares of preferred stock,
other than by conversion as permitted under the certificate of incorporation;
- Pay or declare any dividends on any capital stock;
- Enter into a merger, consolidation, reorganization or recapitalization transaction;
- Amend the certificate of incorporation or bylaws in any way that adversely affects the rights or preferences of the
              preferred stockholders; or
- Incur indebtedness, other than indebtedness existing on the completion of the
reorganization, indebtedness of $5 million or less or indebtedness incurred in
the ordinary course of business.

Dividends. The Company  cannot pay any  dividends  on the common  stock  unless the  Company  has first paid a  corresponding
dividend on the preferred stock.

Liquidation  Preference.  The preferred  stockholders are entitled to a liquidation preference equal to their initial purchase
price of the preferred shares (as adjusted for stock splits, stock dividends,  recapitalizations  and similar events) plus any declared
but unpaid  dividends.  The  Series E  preferred  stock  ranks  prior to all of the other  shares of  capital  stock upon  liquidation,
including the other shares of all preferred  stock.  Following  payment to the holders of the Series E preferred  stock,  the remaining
shares of all  preferred  stock are ranked  prior to the common  stock,  and on a parity with each  other.  This  preference  currently
entitles the stockholders to payments of the following amounts upon the liquidation:

- $0.34 for each share of Series A Convertible Preferred Stock;
- $1.13 for each share of Series B Convertible Preferred Stock;
- $3.67 for each share of Series C Convertible Preferred Stock;
- $21.97 for each share of Series D Convertible Preferred Stock; and
- $21.97 for each share of Series E Convertible Preferred Stock.

Redemption. The  holders of the Series E  preferred  stock have the right to  require  the  Company to redeem  some or all of
their shares of Series E preferred  stock at a price equal to the original  purchase price paid for the Series E preferred stock if the
Company has not either  undergone  an initial  public  offering  (IPO),  listed the common  stock for trading on a national  securities
exchange,  or had the stock  traded  in an  over-the-counter  market  and  quoted  in an  automated  quotation  system of the  National
Association of Securities  Dealers,  Inc. on or before November 3, 2001. This redemption right is inoperable  provided the Senior Notes
(see note 10) remain outstanding.

The Company is not required to redeem the Series A, B, C or D preferred  stock.  Accordingly,  the holders of series A, B, and
C preferred stock who exchanged their preferred  stock in connection with  reorganization  (see note 4) lost their existing  redemption
rights under the certificate of incorporation.

Conversion  and  Anti-dilution.
The  preferred  stockholders  may convert each share of preferred  stock at any time into one
share of the  Company's  common  stock.  The  conversion  ratio may be increased or decreased as a result of stock  splits,  dividends,
recapitalizations  and similar  events.  If the Company  issue  shares of common stock for prices less than the  applicable  conversion
prices (which equals the liquidation  preferences indicated above),  anti-dilution  provisions in the certificate of incorporation will
increase the number of shares of common stock into which each share of the affected series of preferred  stock would be converted.  The
shares of Series E preferred stock possess more favorable  conversion  rights than do the Series A, B, C and D preferred  stock. In the
event of any sale of shares  of common  stock (or  securities  convertible  into  shares  and  common  stock) at a price  less than the
applicable  conversion  price,  the  conversion  formula  for the shares of Series E preferred  stock will adjust to convert  shares of
Series E  preferred  stock into that  number of shares of common  stock that would  have been  available  to those  holders if they had
originally  purchased  their shares of Series E stock for any reduced  price at which the Company  issues any shares of common stock or
securities convertible into common stock.

The  preferred  stock  automatically  converts  into common  stock if the Company  completes  an IPO or if the common stock is
either  listed for trading on a national  securities  exchange or is traded in an  over-the-counter  market and quoted in an  automated
quotation system of the National  Association of Securities  Dealers,  Inc. and, in each case, the Company satisfy certain proceeds and
valuation requirements.

## 13.        STOCK
OPTIONS

On August 25, 1995,  the Company  adopted the 1995 Stock  Option Plan (1995 Plan),  under which  incentive  stock  options and
non-qualified  stock  options could be granted to the  Company's  employees  and certain other persons and entities in accordance  with
law. The Compensation  Committee,  which  administers the 1995 Plan,  determined the number of options granted,  the vesting period and
the exercise price of each award made under the 1995 Plan. The 1995 Plan will terminate  August 28, 2005 unless  terminated  earlier by
the Board of Directors.  During 1998,  the  Compensation  Committee  determined  that no further awards would be granted under the 1995
Plan.  As of December 31, 2000, the Company had reserved 495,126 shares of common stock to issue under the 1995 Plan.

Options  granted  to date  under the 1995 Plan  generally  vest over a three  year  period  and  expire  either 30 days  after
termination of employment or 10 years after date of grant.

On August 1, 1997,  the Company  adopted the 1997 Stock  Incentive  Plan (1997 Plan),  under which  incentive  stock  options,
non-qualified stock options, stock appreciation rights,  restricted stock,  performance awards and certain other types of awards may be
granted to the Company's  employees and certain other  persons and entities in  accordance  with the law. To date,  only  non-qualified
stock options have been granted under the 1997 Plan.  The  Compensation  Committee,  which  administers  the 1997 Plan,  determines the
number of options  granted,  the vesting  period and the exercise  price of each award granted under the 1997 Plan.  The 1997 Plan will
terminate  July 31, 2007 unless  earlier  terminated  by the Board of  Directors.  As of December  31,  2000,  the Company had reserved
5,004,874 shares of common stock to issue under the 1997 Plan.

Options  granted  under the 1997 Plan  generally  vest over a three to seven year period and  expire:  (1) ten years after the
date of grant,  (2) two years after the date of the  participant's  termination  without cause,  disability or death,  (3) three months
after the date of the  participant's  resignation,  (4) on the date of the  participant's  termination with cause or (5) on the date of
any material  breach of any  confidentiality  or  non-competition  covenant or agreement  entered into between the  participant and the
Company.

During the year ended  December  31, 1998,  667,373,  89,721 and 350,000  options were issued at an exercise  price of $1.13,
$3.67 and  $5.20  per  share,  respectively.  The  estimated  fair  value of the  Company's  underlying  common  stock in each case was
determined to be $1.99, $16.00 and $5.20 per share,  respectively.  Accordingly,  the Company calculated deferred  compensation expense
of approximately $1.7 million related to these options to be recognized as compensation expense over their vesting period.

During the years ended December 31, 2000 and 1999,  2,275,754 and 726,450 options,  respectively,  were issued at an exercise
price of $11.00 and $5.20 per share,  respectively,  which at times was less than the  estimated  fair value of the  underlying  common
stock.  The  estimated  fair value of the Company's  underlying  common stock was  determined  to range  between  $11.00 and $21.97 per
share.  Accordingly,  the Company calculated deferred  compensation  expense of approximately $10.6 million related to these options to
be recognized as compensation expense over their vesting period.

During the year ended December 31, 2000, 1999 and 1998, the Company incurred non-cash amortization expense related to the
stock compensation of:

`For the year ended December 31,
                                                            ----------------------------------------------------
                                                                  2000                1999              1998
                                                            ---------------    -----------------  --------------
          Cost of revenue - Telecommunications              $       266,684    $              --  $           --
          Cost of revenue - Construction                                 --               82,331          61,851
          Selling, general and administrative                     4,028,826              453,973         639,444
                                                            ---------------    -----------------  --------------
             Total                                          $     4,292,510    $         536,304  $      701,295
                                                            ===============    =================  ==============

         Stock option activity was as follows:

                                                          1995 Plan                       1997 Plan
                                             -----------------------------------   --------------------
                                                              Non-                   Non-                  Weighted
                                               Incentive    Qualified             Qualified                 Average
                                                 Stock       Stock                  Stock                   Exercise
                                                Options     Options      Price     Options         Price      Price
                                                -------     -------      -----     -------         -----      -----

    Options outstanding, December 31, 1997      424,395       77,805     $0.034    1,289,167    $1.13-$3.67  $ 1.430

    Options granted                                  --           --         --    1,107,094    $1.13-$5.20  $ 2.622
    Options exercised                                --       (2,358)    $0.034           --             --    --
    Options cancelled                                --       (4,716)    $0.034       (5,554)   $1.13-$5.20  $ 3.145
                                                -------   ----------              ----------
    Options outstanding at December 31, 1998    424,395       70,731     $0.034    2,390,707    $1.13-$5.20  $ 1.888


    Options granted                                  --           --         --      726,450          $5.20  $5.2000
    Options exercised                           (70,733)          --     $0.034      (95,127)   $0.03-$1.13  $0.6609
    Options cancelled                                --           --         --     (770,826)   $1.13-$5.20  $2.9313
                                                -------   ----------              ----------
    Options outstanding at December 31, 1999    353,662       70,731     $0.034    2,251,204    $1.13-$5.20  $2.5636

    Options granted                                  --          --          --    2,275,754   $5.20-$11.00 $10.8981
    Options exercised                          (353,662)         --      $0.034     (189,240)  $1.13-$11.00  $0.9954
    Options cancelled                                --          --          --     (340,565)  $0.03-$11.00  $8.1952
                                                -------   ----------              ----------
    Options outstanding at December 31, 2000         --       70,731     $0.034    3,997,153   $1.13-$11.00   $6.9641
                                                ========      ======               =========

    Options exercisable at December 31, 2000       --        70,731      $0.034    1,378,066   $1.13-$11.00   $2.2571`

The Company  measures  compensation  expense for its employee  stock-based  compensation  using the intrinsic value method and
provides pro forma disclosures of net loss as if the fair value method had been applied in measuring  compensation  expense.  Under the
intrinsic  value method of accounting for  stock-based  compensation,  when the exercise price of options  granted to employees is less
than the fair  value of the  underlying  stock on the date of grant,  compensation  expense  is to be  recognized  over the  applicable
vesting period.

`Year Ended December 31,
                                                        -----------------------------------------------
                                                        2000               1999                  1998
                                                        ----               ----                  ----
      Net loss as reported                          $ 369,795,461      $59,036,312          $36,296,596
      Pro forma net loss                            $ 371,232,734      $59,222,962          $36,859,594`

The fair value of each
option is estimated on the date of grant using a type of Black-Scholes option
pricing model with the following weighted-average assumptions used for grants
during the years ended December 31, 1999 and 1998, respectively: dividend yield
of 0%, expected volatility of 0%, risk-free interest rate of 5.16 % and 6.55%
and expected terms of 5.8 and 5.5 years. The following weighted average
assumptions were used for grants during the year ended December 31, 2000:
dividend yield of 0%, expected volatility of 0%, risk-free interest rate of
6.38% and expected terms of 6.5 years.

As of  December  31,  2000 and 1999,  the  weighted  average
remaining  contractual  life  of  the  options  is  8.3  years  and  7.9  years,
respectively.

## 14.        
COMMITMENTS AND CONTINGENCIES

## Operating
Lease Commitments

The  Company  maintains  office  space in  Virginia  and  Texas.  The most  significant  leases  relate to the  Company's  new
headquarters facilities in Reston.

On December 30, 1998, the Company entered into an operating  lease agreement for the lease of tower site space,  sufficient to
perform its obligations  under a fixed point microwave  agreement  (FPMA) with an incumbent.  Under the terms of the lease, the Company
is obligated to rent of $130,000 per month for a period  expiring on the later of (i) the  expiration  of the FPMA as to that site,  or
(ii) ten years from the  effective  date of the  agreement.  The agreement  provides for an increase in the rent payable  commencing on
December 1, 1999 and on each  succeeding  year  thereafter  to December  1, 2008,  by an amount  equal to 4 percent of the rent then in
effect.

`2001                                                                          $       4,068,448
         2002                                                                                  4,190,431
         2003                                                                                  4,192,042
         2004                                                                                  4,044,828
         2005 and thereafter                                                                  19,218,072
                                                                                       -----------------
         Total                                                                         $      35,713,821
                                                                                       =================`

Rent expense for the years ended  December 31, 2000,  1999 and 1998 was  approximately  $3.7 million,  $821,000 and  $390,000,
respectively.

The Company earns  microwave  telecommunication  capacity  revenue under an  indefeasible  right of use (IRU)  agreement dated
  December 1, 1998, of $137,000 per month  commencing  December 1998 and expiring on the later of (i) the  expiration of the FPMA as to
  that site,  or (ii) ten years from the  effective  date of the  agreement.  The IRU  agreement  provides  for an increase in the rent
  receivable  commencing  on December 1, 1999 and on each  succeeding  year  thereafter  to December 1, 2008,  by an amount  equal to 4
  percent of the rent then in effect.

As of December  31,  2000,  the Company had capital  commitments  of  approximately  $27.8 million  relating to  purchases  of
telecommunication and transmission equipment.

## Contingencies

On April 19, 2000,  the Company was sued by several  plaintiffs  purporting to represent a class of landowners  damaged by the
Company in connection  with the  development of the Company's  fiber optic  network.  Specifically,  the complaint  alleges the Company
installed or will install fiber optic  facilities on the property of the landowners in the class without  obtaining the necessary legal
consents from the landowners.  On July 18, 2000, the plaintiffs  significantly  narrowed the purported class to include only landowners
on a particular  segment of the  Company's  network.  In addition,  we are seeking  indemnification  for these claims from 360 networks
(USA) Inc. (360),  our  co-development  partner for the project in these four states.  The Company believes that, under its development
agreement  with 360, 360 is required to  indemnify  the Company for these types of claims.  The Company is presently in mediation  with
360 regarding indemnification, but has not been able to resolve this matter.

On May 17, 2000,  MagTen Partners,  L.P.  (Magten),  one of the bondholders,  filed suit against the Company and the investors
involved in the Company's  reorganization  transaction  (see note 4). The  reorganization,  completed on March 30, 2000,  was among the
Company,  Colonial  Pipeline  Company,  The Burlington  Northern and Santa Fe Corporation  and CSX  Transportation, Inc.  On July 14, 2000, the
Company  served the  plaintiffs  with its  response.  Magten filed a response to Pathnet's  motion to dismiss on September 14, 2000 and
the  Company  filed a reply to Magten's  response  on October  13,  2000.  Oral  argument  on  Pathnet's  motion to dismiss was held on
December 12, 2000; the Company is awaiting the judge's  ruling on the motion.  Magten's  claims stem from their  contention the Company
was not permitted to consummate the March 2000  reorganization  of the corporate  structure without unanimous consent of the holders of
the Senior Notes,  and the Company's  failure to obtain Magten's  consent  triggered a provision in the Indenture  governing the Senior
Notes (the  Indenture),  requiring the Company to repurchase  the Senior Notes at 101% of their face value.  The Company does not agree
with Magten's interpretation of the Indenture and intends to defend the claim vigorously.

From time to time,  other than items listed above,  the Company is subject to other claims  arising in the ordinary  course of
business.  In the opinion of  management,  no other claims  individually  or in aggregate,  exists which is expected to have a material
effect on the results of operations, cash flows or financial position of the Company.

## 15.          INCOME
TAXES

The tax effect of temporary  differences that give rise to significant  portions of the net deferred tax asset  (liability) at
December 31, 2000 and 1999, is as follows:

`December 31,
                                                                                     ---------------
                                                                                   2000             1999
                                                                                   ----             ----

     Deferred revenue                                                      $    2,448,851    $        3,646
     Capitalized start-up costs                                                   639,650         1,005,353
     Capitalized research and development costs                                    30,852            48,482
     Depreciation                                                             (25,278,127)       (2,844,859)
     Net operating loss carryforward                                           84,368,638        40,571,930
     Other timing differences                                                      49,140           110,078
                                                                           ---------------   --------------
                                                                              112,815,258        38,894,630
     Less valuation allowance                                                (112,815,258)      (38,894,630)
                                                                           --------------    --------------
     Net deferred tax asset                                                $           --    $           --
                                                                           ==============    ==============`

Capitalized  costs  represent  expenses  incurred in the  organization  and  start-up of the Company.  For federal  income tax
purposes, these costs are being amortized over sixty months.

The ultimate  realization  of deferred tax assets is dependent  upon the generation of future taxable income in the periods in
which those temporary  differences are deductible.  The Company has provided a valuation  allowance  against its deferred tax assets as
they are long-term in nature and their ultimate realization cannot be determined.

A reconciliation between
income taxes computed using the statutory federal income tax rate and the
effective rate, for the years ended December 31, 2000 and 1999, is as follows:

`December 31,
                                                                                       ------------
                                                                                   2000              1999
                                                                                   ----              ----
        Federal income tax benefit at statutory rate                               (34.0)%           (34.0)%
        State income tax benefit                                                    (5.0)             (5.0)
        Other                                                                       (0.4)              1.5
        Impairment loss - right of way                                               9.1                --
        Net change in valuation allowance                                           30.3              37.5
                                                                                  ------            ------
                                                                                      -- %              --%
                                                                                  ======            ======`

## 16.          FIBER
AGREEMENTS

In March 1999, the Company  entered into a  co-development  agreement with 360  Communications  (formerly WFI) for the design,

engineering  and  construction  by  360  Communications  of a  multiple  conduit
fiber-optic  system. One of the conduits contains a fiber optic cable consisting
of a specified  number of fiber optic  strands.  The conduits and any  installed
strands are equally divided  between the parties,  and the cost to construct the
route will be shared  equally by the Company and WFI. In  addition,  the Company
pays 360  Communications a management fee equal to 10% of the Company's share of
the  development  costs.  The system is  approximately  1,100  route miles long,
between Aurora,  Colorado (a suburb of Denver) and Chicago,  Illinois. The first
segment,  Chicago,  Illinois to Omaha,  Nebraska,  was  completed  in the fourth
quarter 1999, and the second segment,  Omaha to Aurora, was completed during the
second quarter of 2000. The entire buold has been completed.  In connection with
the  co-development  agreement,  the  Company  entered  into a  joint  marketing
agreement with 360  Communications  under which both 360  Communications and the
Company will attempt to sell certain  inactive fiber optic strands on the route,
and will share the revenues from such sales. The joint marketing  agreement also
permits  each party to retain  fiber optic  strands for its own use,  subject to
certain  restrictions on resale, and to swap a certain number of the fiber optic
strands to third parties.

In August 1999, the Company entered into a co-development  agreement with Tri-States and four regional electric  cooperatives
for our design,  engineering and construction of an aerial fiber system,  approximately 420 route miles long, between Albuquerque,  New
Mexico and Grand  Junction,  Colorado.  This  system,  completed in January  2001,  was  constructed  on power  transmission  lines and
contains a specified  number of fiber optic  strands.  The cost to construct the system has been borne equally  between the Company and
the  other  parties.  The  total  projected  combined  cost for this  route was  approximately  $48  million.  In  connection  with the
co-development  agreement,  the Company entered into a joint marketing agreement under which each party reserved a portion of the fiber
strands for its own  operations,  a subset of which are available  for swaps with third  parties.  The remaining  strands are available
for sale with the Company as the  exclusive  marketing  agent.  Any revenues  derived  from the sale of those fiber  strands are shared
equally between the Company and Tristates, after deduction of a Company marketing fee.

In November  1999,  Pathnet  signed an agreement  with CapRock  Teleommunications  Corp.  (now known as  McLeodUSA) to design,
engineer,  construct and install a four-conduit  telecommunications  system between El Paso, Texas and Albuquerque,  New Mexico. One of
the conduits  contains a fiber optic cable  consisting  of a specified  number of fiber optic  strands.  The conduits and any installed
strands are equally  divided  between the Company and  Caprock,  and the costs to construct  the route have been shared  equally by the
partners.  In addition,  Caprock pays the Company a management  fee equal to 10% of their share of the  development  costs.  The system
is approximately 250 miles long and is under  construction.  The Company entered
into a joint marketing agreement with CapRock under
which both CapRock and the Company sell certain  inactive  fiber strands on the route,  sharing any revenue from such sales.  The joint
marketing  agreement also permits each party to retain fiber optic strands for its own use, subject to certain  restrictions on resale,
and to swap a certain number of fiber optic strands to third parties.

## 17.         CONDENSED
CONSOLIDATING FINANCIAL STATEMENTS

The following condensed  consolidating  financial  statements as of and for the year ended December 31, 2000 are presented for
Pathnet  Telecommunications,  Inc. the parent guarantor of the senior notes,  Pathnet,  Inc. the issuer and Pathnet  Operating Inc. the
subsidiary non-guarantor.

## Condensed
Consolidating Balance Sheet As of December 31, 2000

`Pathnet
                                                Telecommunications,                Other     Consolidating
                                                        Inc.       Pathnet,Inc.  Subsidiaries Adjustments   Consolidated
                                                  ---------------  ------------  ------------ ------------  ------------
                     ASSETS
Cash and cash equivalents                         $    14,280,244 $     68,013   $ 26,019,337  $         --  $ 40,367,594                                                                                          --
Accounts receivable                                            --    1,686,959      7,860,409            --     9,547,368
Allowance for doubtful accounts                                --     (134,000)            --            --      (134,000)
Marketable securities available for sale                       --    1,148,563      3,997,595            --     5,146,158
Prepaid expenses and other current assets                     606      827,683        299,066            --     1,127,355
Interest receivable                                        90,632   10,333,246        254,633   (10,310,417)      368,094
                                                  ---------------  -----------   ------------  ------------  ------------
     Total current assets                              14,371,482   13,930,464     38,431,040   (10,310,417)   56,422,569
Investments in subsidiaries                           (60,657,740)          --             --    60,657,740            --
Non-current indebtedness of subsidiaries                7,501,328  128,349,409         33,881  (135,884,618)           --
Property and equipment                                         --   22,664,626    193,853,379            --   216,518,005
Accumulated depreciation                                            (3,529,778)    (2,383,362)           --    (5,913,140)
Intangible assets - right of way                               --           --      1,421,475            --     1,421,475
Other assets                                                   --   24,480,751      5,092,826            --    29,573,577
                                                  --------------- ------------   ------------  ------------  ------------
    Total assets                                  $   (38,784,930)$185,895,472   $236,449,239  $(85,537,295) $298,022,486
                                                  =============== ============   ============  ============  ============
LIABILITIES, MANDITORILY REDEEMABLE PREFERRED STOCK AND
STOCK HOLDERS' EQUITY (DEFICIT)
Accounts payable                                          306,902   13,386,987     21,303,903            --    34,997,792
Other current liabilities                              14,585,417   14,057,534      1,055,354   (10,310,417)   19,387,888
                                                  --------------- ------------   ------------  ------------  ------------
    Total current liabilities                          14,892,319   27,444,521     22,359,257   (10,310,417)   54,385,680
Long-term debt                                                 --  347,031,125     58,609,325            --   405,640,450
Indebtedness to subsidiaries  s                       120,441,760    4,748,219     10,694,639  (135,884,618)           --
Other non-current liabilities                                  --    3,336,260      8,779,105            --    12,115,365
                                                  ---------------  -----------   ------------  ------------  ------------
     Total liabilities                                135,334,079  382,560,125    100,442,326  (146,195,035)  472,141,495
                                                  --------------- ------------   ------------  ------------  ------------
Mandatorily redeemable preferred stock                 62,932,614           --             --            --    62,932,614
                                                  --------------- ------------   ------------  ------------  ------------
Stockholders' equity (deficit):
  Preferred stock                                         243,763           --             --            --       243,763
  Common stock                                             36,111      188,423              1      (188,424)       36,111
  Other stockholders' equity (deficit)               (237,331,497)(196,853,076)   136,006,912    60,846,164  (237,331,497)
                                                  ---------------- -----------   ------------  ------------  ------------
    Total stockholders' equity (deficit)             (237,051,623)(196,664,653)   136,006,913    60,657,740  (237,051,623)
                                                  ---------------- -----------   ------------  ------------  ------------
    Total liabilities, mandatorily redeemable
preferred stock and stockholders' equity (deficit)$   (38,784,930)$185,895,473   $236,449,239  $(85,537,296) $298,022,486
                                                  =============== ============   ============  ============  ============


Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2000
                                                      Pathnet
                                                 Telecommunications,              Other         Consolidating
                                                        Inc.       Pathnet, Inc.  Subsidiaries  Adjustments   Consolidated
                                                  ---------------  ------------  ------------   ------------  -------------

Revenue                                           $    15,331,740  $ 29,507,558  $ 23,963,479   $(25,416,520) $  43,386,257
                                                  ---------------  ------------  ------------   ------------   ------------

Cost of revenue                                        16,703,072    11,664,420    24,056,938     (2,922,112)    49,502,318
Selling, general and administrative                     8,234,320    37,858,078    14,831,815    (22,494,408)    38,429,805
Other operating costs and expenses                    125,474,255    91,823,576    72,345,838             --    289,643,669
                                                  ---------------  ------------  ------------   ------------   ------------
    Total operating costs                             150,411,647   141,346,074   111,234,591    (25,416,520)   377,575,792
                                                  ---------------  ------------  ------------   ------------   ------------
Net operating loss                                   (135,079,907) (111,838,516)  (87,271,112)            --   (334,189,535)
Interest expense                                      (10,310,417)  (40,562,525)    1,471,716)    10,310,417    (42,034,241)
Interest income                                         1,693,125    15,055,216       973,432    (10,310,417)     7,411,356
Share of subsidiary losses                           (225,798,262)           --            --    225,798,262             --
Other income (expense)                                   (300,000)      (83,041)     (600,000)            --       (983,041)
Preferred stock accretion                                 (60,648)           --            --             --        (60,648)
                                                  ---------------  ------------- ------------   ------------  -------------
Net  loss                                         $  (369,856,109) $(137,428,866 $(88,369,396)  $225,798,262  $(369,856,109)
                                                  ===============  ============= ============   ============  -============





Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2000
                                                       Pathnet
                                                 Telecommunications,  Pathnet,     Other      Consolidating
                                                           Inc.         Inc.     Subsidiaries    Adjustments  Consolidated
                                                  ---------------  ------------  ------------  ------------   ------------

Net cash used in operating activities             $   (7,202,681)  $(47,277,512) $ (8,952,236)          --     (63,432,429)
                                                  --------------   ------------  ------------  -----------    ------------

                                                                                                        --
Cash flows from investing activities:
  Expenditures for network in progress               (22,663,694)   (64,221,959)  (15,350,883)          --    (102,236,536)
  Expenditures for property and equipment                     --     (6,434,056)   (1,016,158)          --      (7,450,214)
  Sale and maturity of marketable securities
    available for sale                                        --     48,870,212            --           --      48,870,212
  Purchase of marketable securities available for
    sale                                                      --     (2,188,943)   (3,999,374)          --      (6,188,317)
  Purchase of pledged marketable securities held to
    maturity                                                  --    (20,779,272)           --           --     (20,779,272)
  Sale and maturity of pledged marketable securities
    held to maturity                                          --     41,691,001            --           --      41,691,001
  Cash investment in subsidiaries                    (61,163,214)            --            --   61,163,214              --
  Restricted cash                                             --      7,490,132    (1,761,254)          --       5,728,878
  Other cash flows from investing activities                  --         47,866      (500,000)          --        (452,134)
                                                 ---------------    -----------  ------------  -----------   -------------
    Net cash (used in) provided by investing
      activities                                     (83,826,908)     4,474,981   (22,627,669)  61,163,214     (40,816,382)
                                                 ---------------    -----------  ------------  -----------   -------------


Cash flows from financing activities:
  Issuance of manditorily redeemable convertible
    preferred stock                                   63,000,000             --            --           --      63,000,000
  Issuance of common stock                                    --             --    61,163,214  (61,163,214)             --
  Cash loan due to (received from) subsidiary         41,249,571    (41,249,571)           --           --              --
  Payment of deferred financing costs                   (480,126)    (6,541,722)   (3,563,972)          --     (10,585,820)
  Other cash flows from investing activities           1,540,388            --             --           --       1,540,388
                                                 ---------------    -----------  ------------  -----------   -------------
    Net cash provided by (used in) financing
         activities                                  105,309,833    (47,791,293)   57,599,242  (61,163,214)     53,954,568
                                                 ---------------    -----------  ------------  -----------   -------------

Net increase (decrease) in cash and cash              14,280,244    (90,593,824)   26,019,337           --     (50,294,243)
equivalents
Cash and cash equivalents at the beginning of the
period                                                       --      90,661,837            --           --      90,661,837
                                                 ---------------    -----------  ------------  -----------   -------------
Cash equivalents at end of period                $    14,280,244    $    68,013  $ 26,019,337  $        --   $  40,367,594
                                                 ===============    ===========  ============  ===========   =============`

## 18.         SUBSEQUENT EVENT

Effective  January 18, 2001,  Pathnet entered into a swap with Enron Broadband  Services Inc. in which Pathnet
provided six fibers on the route between  Chicago IL and Denver CO and in return  received four fibers on a route owned
by Enron  between  Aurora  CO and  Houston  TX,  by way of San  Antonio  TX.  Pursuant  to this  swap,  Pathnet  has an
indefeasible  right of use (IRU) for a period of  twenty-five  years for the swapped  fibers,  associated  regeneration
sites and utilities.  As part of the terms and conditions for this  agreement,  each party is required to pay the other
party to maintain  the fibers that they  obtained.  In addition,  Enron was granted a security  interest in the fibers,
which were swapped and received a non-disturbance from Pathnet's lenders.

---

# PATHNET,
INC. AND SUBSIDIARIES

# A
DEVELOPMENT STAGE ENTERPRISE

# SCHEDULE II

# VALUATION
AND QUALIFYING ACCOUNTS

`Balance at          Charged
                                                       beginning           to cost                             Balance at
                                                       of period         and expenses       Deductions       end of period
                                                    ---------------   ---------------     -------------    ----------------
Tax valuation allowance:
     Year ended December 31, 2000                   $    38,894,630   $   112,229,578     $ (38,308,950)   $     112,815,258
     Year ended December 31, 1999                        16,763,481        22,131,149                --           38,894,630
     Year ended December 31, 1998                   $     2,222,018   $    14,541,463     $          --    $      16,763,481

Allowance for doubtful accounts receivable:
     Year ended December 31, 2000                   $            --   $       134,000     $          --    $              --
     Year ended December 31, 1999                                --                --                --                   --
     Year ended December 31, 1998                   $            --   $            --     $          --    $              --

Allowance for spare parts:
     Year ended December 31, 2000                   $            --   $       480,000     $          --    $         480,000
     Year ended December 31, 1999                                --                --                --                   --
     Year ended December 31, 1998                   $            --   $            --     $          --    $              --`