<PAGE>
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-K

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

<TABLE>
<C>        <S>
   /X/     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934

           FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
   / /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934

           FOR THE TRANSITION PERIOD FROM TO
</TABLE>

                            COMMISSION FILE NUMBER:
                                   333-62797

                              BIRCH TELECOM, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                            <C>
                  DELAWARE                                      43-1766929
        (STATE OR OTHER JURISDICTION                         (I.R.S. EMPLOYER
      OF INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NO.)

            2020 BALTIMORE AVENUE                                  64108
            KANSAS CITY, MISSOURI                               (ZIP CODE)
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

              Registrant's telephone number, including area code:

                                 (816) 300-3000

<TABLE>
<S>                                            <C>
Securities registered pursuant to              Securities registered pursuant to
Section 12(b) of the Act:                      Section12(g) of the Act:

14% senior notes due 2008                      None
(Title of Class)                               (Title of Class)
</TABLE>

    Indicate by check mark whether the Registrant (i) 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 (ii) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

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

    Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. There were 4,781,101
shares of common stock, $.001 par value, outstanding as of March 23, 2000.

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<PAGE>
                                     PART I

THIS FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH UNDER THE CAPTION "BUSINESS--RISK FACTORS" AND
ELSEWHERE IN THIS FORM 10-K. UNLESS THE CONTEXT SUGGESTS OTHERWISE, REFERENCES
IN THIS FORM 10-K TO "WE," THE "COMPANY" OR "BIRCH" MEAN BIRCH TELECOM, INC. AND
ITS WHOLLY-OWNED SUBSIDIARIES.

ITEM 1. BUSINESS

OVERVIEW

    We are a rapidly growing integrated communications provider. We seek to
become the leading provider of telecommunications services for small and
mid-sized businesses in each of the cities we serve. We offer state-of-the-art
telecommunications services to our customers, who today are located throughout
Missouri, Kansas and Texas. These voice and data service offerings include local
and long distance telephone service, Internet access, web hosting, integrated
voice and data transmission over broadband lines and customer premises equipment
sales and services. We offer these services to our customers through a
combination of leased and owned network facilities. We are currently deploying
collocations and transmission equipment throughout our markets to deliver
digital subscriber line service, which will support dedicated high-speed
Internet access and eventually voice services. We expect to have over 130
collocations operational by the end of this year. Our revenue for the year ended
December 31, 1999 was $60.5 million, a 132% increase over 1998.

BUSINESS STRATEGY

    We believe that our business is poised for rapid expansion and that our
experienced management team is well prepared to execute our focused business
strategy. The key elements of our strategy include:

    FOCUSING ON SMALL AND MID-SIZED BUSINESS CUSTOMERS

    We focus on meeting the needs of small and mid-sized businesses in each of
    the cities we serve. Our tailored service offerings, direct sales model, and
    proactive customer service approach allow us to differentiate ourselves and
    achieve significant penetration into this very large, established customer
    base. We believe small and mid-sized businesses have not received a
    satisfying level of attention from the incumbent telephone companies, are
    unaware of their telecommunications network options and value our
    consultative, direct sales approach.

    PROVIDING COMPLETE SERVICE PACKAGES THAT ARE TAILORED TO OUR CUSTOMERS

    Our service offerings are specifically designed for the needs of our target
    customers. We provide simplified, feature-rich packages of services,
    superior value and a single source for all of our customers' networking
    requirements, all conveniently billed on a single invoice. Our service
    offerings include features offered in packages that we believe are not
    generally available from other providers. Our packages are priced to offer
    savings of 10% to 40% from comparable services provided by the incumbent
    telephone company. Our direct sales representatives consult with our
    customers in person and assist them in selecting service packages
    appropriate for their needs.

                                       2
<PAGE>
    CREATING A STRONG BRAND PRESENCE

    We have quickly achieved a high level of brand awareness in our markets
    through an aggressive multi-media advertising campaign targeted at the
    incumbent telephone company. Our marketing efforts include billboard, radio
    and print advertising, as well as sponsorship of major local events,
    affiliations with local organizations and direct mailings. We believe we
    have been able to achieve a higher level of brand awareness in our markets
    than any other new market entrants. We plan to use our proven marketing and
    advertising strategy to help us achieve rapid and deep penetration in each
    new market we enter.

    DEPLOYING A DIRECT SALES FORCE IN EACH OF OUR MARKETS

    We deploy a large locally-based sales force focused on achieving a
    significant market share in each of our markets. We believe that our
    extensively marketed brand name, visible local presence, readily available
    services and emphasis on personal customer service have enabled our
    170-person sales force to achieve high levels of productivity and quickly
    penetrate new markets.

    INVESTING IN INDUSTRY-LEADING, SCALABLE BACK OFFICE SYSTEMS

    We believe our state-of-the-art billing and operating systems are capable of
    supporting a significant number of lines. These systems, which include
    Saville Convergent Billing Platform-TM-, MetaSolv Telecom Business
    Solution-TM- and Harris Network Management-TM-, have already withstood the
    test of high volumes and rapid growth within our operation. Over the past
    year, we have expanded our provisioning capacity from 3,000 lines per month
    to nearly 15,000 lines per month and believe that our existing
    infrastructure can support continued capacity increases.

    MAINTAINING MAXIMUM NETWORK FLEXIBILITY

    - INTEGRATING DATA AND VOICE NETWORK SERVICES. By integrating both data and
      voice services, we believe we will be able to deliver a broadband digital
      subscriber line connection to a significant percentage of our customers.
      We believe this integration will yield bandwidth flexibility to our
      customers and the strategic advantage of an improved product with reduced
      monthly costs.

    - CAPITALIZING ON OUR UNBUNDLED NETWORK ELEMENT PLATFORM. We provide service
      to a majority of our customers by leasing substantially all of the
      unbundled network elements from the incumbent telephone company and using
      our advanced back office systems to combine these elements into integrated
      Birch-branded voice services. This platform has allowed us to offer voice
      services to customers located virtually anywhere in our markets and
      achieve high gross margins and superior returns on incremental capital
      invested. The unbundled network element platform, or UNE-P, allows us to
      minimize current capital expenditures and maintain design flexibility for
      the next generation of telecommunications technology.

    - POSITIONING FOR MASS DEPLOYMENT OF BROADBAND. Our network objective is to
      mass-deploy broadband facilities (primarily digital subscriber lines) that
      support both voice and data over a single line. We are implementing
      collocations at central offices of the incumbent telephone company
      throughout our markets and intend to deploy packet switches that can
      handle voice and data over a single line as soon as they become available.

    EXPANDING OUR GEOGRAPHIC REACH

    We currently serve 17 markets that have populations ranging in size from
    95,000 to 4.5 million, and we intend to offer our services in 20 additional
    markets before the end of 2001. We expect to

                                       3
<PAGE>
    expand our operations in Texas and into Oklahoma in the second quarter of
    this year and to commence service in the regions served by Ameritech and
    BellSouth in 2001. We have developed systems, network capabilities and an
    experienced sales force and customer service team that position us to
    rapidly penetrate these new markets and regions.

    GROWING THROUGH ACQUISITIONS

    We have completed six acquisitions since our inception in December 1996 for
    total consideration of $27.7 million. From time to time, we consider making
    additional acquisitions to further complement our service capabilities or
    expand our geographic scope. We believe we have been highly successful in
    integrating our acquisitions. With our diverse sources of capital and highly
    sophisticated stockholders and board members, we believe we are well
    positioned to continue to evaluate a variety of these opportunities and make
    selected acquisitions where appropriate.

TELECOMMUNICATIONS SERVICES

    OFFERED SERVICES

    We design our voice and data services to appeal to small and mid-sized
businesses that value simple integrated communications service packages from a
single provider. We believe that the key to attracting and retaining our target
customers is to offer a comprehensive set of services. These services include
voice offerings of local lines, features and long distance at flat per-minute
rates, and data offerings including dedicated digital subscriber line and
dial-up Internet access, web hosting and other data services.

    We divide our service offerings generally into three broad categories:
voice, Internet and web hosting. The chart below sets forth the different
service packages and options provided within each of these categories.

                                       4
<PAGE>
SERVICE PACKAGES

<TABLE>
<CAPTION>
               VOICE
<S>
------------------------------------
BIRCH BASIC
  A standard line
BIRCH BELLS
  Birch Basic with any three non-
  premium customer-selected features
BIRCH BELLS AND WHISTLES
  Birch Basic with any seven
  customer-selected features
VOICE MAIL
  Call answering, messaging and
  message waiting indicator
  Optional features include fax
  mail, pager notification and
  extension mailboxes
LINEBACKER
  Inside wire protection plan
MIGHTY MOUTH
  A two-way dedicated connection to
  us, a trunk level one digital
  transmission link, direct inward
  dialing and number identification
  for inbound calls

<CAPTION>
              INTERNET
------------------------------------
DIAL
<S>
  Unlimited Internet access, two
  email boxes per account, remote
  access to email via the Web and
  five megabytes of storage space
  plus any customer-selected
  features
DIAL COMPLETE
  Dial plus extended period of
  inactivity before disconnect
ISDN COMPLETE
  A dedicated integrated services
  digital network, an on-premise
  integrated service digital network
  router, up to 25 email boxes,
  dedicated Internet protocol
  addresses for public applications,
  network address translation,
  custom domain services, plus any
  customer-selected features
DSL COMPLETE
  A symmetric digital subscriber
  line service, an on-premise
  router, up to 100 email boxes,
  Internet protocol addresses for
  public applications, network
  address translation, custom domain
  services, plus any customer-
  selected features
T1 COMPLETE
  A two-way dedicated connection to
  us, an on-premise router, up to
  100 email boxes, Internet protocol
  addresses for public applications,
  network address translation,
  custom domain services, plus any
  customer-selected features
THE INTEGRATOR
  A two-way dedicated connection to
  us, an on-premise integrated
  router for voice and data,
  customer selection of voice and
  data channels to a maximum of 48,
  selected voice features, up to 50
  email boxes, Internet protocol
  addresses for public applications,
  network address translation,
  custom domain services, plus any
  customer-selected features

<CAPTION>
            WEB HOSTING
------------------------------------
SPACE GENIE
<S>
  Space Genie web-building tool, 10
  megabytes of storage, 1,000
  megabytes of monthly traffic,
  online account status report, site
  submission to major search
  engines, custom domain services,
  10 email addresses,
  autoresponders, autoforwarders and
  web-based management of email
  tools plus any customer-selected
  features
SPACE CADET
  Space Genie plus 20 additional
  megabytes of storage, 1,000
  additional megabytes of monthly
  traffic, common gateway interface
  binary access, and script library,
  web-based management of common
  gateway interface script
  auto-install and statistics plus
  any customer-selected features
  Additional optional features
  include encryption services
  support for real audio/video and
  support for Microsoft FrontPage
  extensions
SPACE HOG
  Space Cadet plus an additional 45
  megabytes of storage, 3,000
  megabytes of monthly traffic, 10
  email addresses, autoresponders
  and autoforwarders and support for
  real audio/video
</TABLE>

                                       5
<PAGE>
    DELIVERY OF SERVICES

    UNE-P

    We lease all of the unbundled network elements necessary to provide service
from the incumbent local exchange carriers. We believe that our UNE-P strategy
allows us to enter into new markets more quickly than if we had initially
deployed our own network facilities. This strategy also reduces initial capital
requirements in each market, allowing us to focus our capital resources
initially on the critical areas of sales, marketing and operations support
systems. In addition, we believe UNE-P will allow us to avoid further deploying
circuit switches and maintain design flexibility for the next generation of
telecommunications technology.

    BROADBAND

    We intend to install digital subscriber line equipment at our collocation
sites, at our switch sites and at our customers' locations. We believe this
equipment will allow us to deliver multiple voice calls and data traffic over a
single, standard telephone line and is expected to provide us with substantial
cost savings. Using DSL technology, we believe we will increase the amount of
information we carry on a standard telephone line, which we refer to as
bandwidth, to up to 1.5 million bits per second. The bandwidth is the equivalent
of 24 regular voice telephone lines. Our digital subscriber line equipment will
be programmed to allocate the available bandwidth.

    We believe this technology will reduce our costs since we will lease a
reduced number of standard telephone lines per customer from the incumbent
carrier. For example, if a customer today has eight voice lines, we must order
from and provision through the incumbent carrier eight individual standard
telephone lines. If the same customer were to buy our service which uses digital
subscriber line technology, we would only order and provision one standard
telephone line from the incumbent carrier. Also, we expect that future products
and services designed to take advantage of the increased bandwidth provided by
digital subscriber line technology will allow us to generate incremental revenue
with attractive margins.

    CUSTOMER PREMISES EQUIPMENT

    We offer our customers equipment they need to run their internal phone
systems, including data routers and wiring, telephone equipment and integrated
access devices. We also sell and service standard key systems, private branch
exchanges and voice-mail systems, and provide inside-wire services for
commercial accounts, including wiring for data networking, in Kansas and
Missouri. We are an authorized equipment distributor for Northern
Telecom, Inc., Toshiba America Information Systems, Inc., NEC America, Inc.,
Executone Information Systems, Inc. and Tadiran Electronic Industries, Inc.

SALES AND MARKETING

    SALES

    As of March 23, 2000, we had a direct sales force of 170 representatives
operating from 23 offices throughout Missouri, Kansas and Texas. Of these
representatives, 28 were primarily selling customer premises equipment and the
remaining 142 were selling local, long-distance, data and Internet services. The
sales representatives are supported by sales managers. Over the next 12 months,
we plan to increase our sales staff in existing markets and open additional
sales offices in Texas and Oklahoma and in Ameritech's and BellSouth's regions.
We supplement our sales efforts through brand awareness efforts including local
and regional advertising, public relations and local sponsorships.

    We seek to convert small to mid-sized business customers from the incumbent
provider of telecommunications services in their market and to establish a
solid, long-term relationship with them.

                                       6
<PAGE>
Our sales representatives meet with prospective customers to gain a thorough
understanding of their business and telecommunications requirements. Sales
representatives then suggest alternatives for operation enhancements and cost
savings based on our service packages.

    We compensate our sales representatives with a competitive base salary,
stock options and commissions based on sales results. We use a revenue-based
commission structure that enables us to attract productive sales people
experienced in disciplined, activity-based sales. This commission structure is
based on incremental revenue and is not subject to a cap.

    We do not actively market to residential customers. Nonetheless, we have
found that our sales and promotional efforts attract residential customers, many
of whom are owners or employees of businesses using our telecommunication
services. Residential customers call our customer service center to receive
forms to apply for service. We do not pay sales commissions for residential
sales.

    ADVERTISING AND PROMOTION

    We conduct extensive marketing campaigns in our local markets. We make use
of advertising and public relations to attract small to mid-sized business
customers and contrast our service attributes with Southwestern Bell's. Our
marketing campaign includes billboard, radio and print advertising, as well as
sponsorship of major local events, affiliations with local organizations and
direct mailings focusing on public relations. We also believe that our
willingness to serve residential customers--unlike many other competitive local
exchange carriers--creates greater interest in our development among the news
media and general public. In the past, our market launches have attracted
extensive local media coverage.

    In keeping with our philosophy of being accessible to our customers, we
establish local sales and customer service offices in most of the cities and
towns that we serve. In many of these cities and towns, we are the only provider
of local telephone service that maintains an office. Our offices are open to
walk-in traffic and often are located in high-profile areas.

    Because we are able to deliver a comprehensive set of products to our target
customers, we believe we have strong customer loyalty. Our customer churn rates
have generally been less than 1.5% per month.

    PRICING

    We do not intend to position ourselves as the cheapest provider of services,
especially long distance services. We target customers who value the convenience
of our service offerings and personalized customer service. Customers who have
the highest price sensitivity are likely to move frequently among providers,
driving up churn rates. However, we do set our pricing so that our local
business customers can generally save from 10% to 40% on the incumbent
provider's rates. Internet, long distance and customer premises equipment are
generally priced at rates competitive with that of other service providers.

                                       7
<PAGE>
OUR MARKETS

    The following chart sets forth the markets in which we provide service or
expect to provide service by May 2000.

<TABLE>
<CAPTION>
                                                                                          BIRCH LINES IN SERVICE
                                                                                            AS OF FEBRUARY 29,
MARKET                                     ESTIMATED POPULATION*   INITIAL SERVICE DATE            2000
------                                     ---------------------   --------------------   ----------------------
<S>                                        <C>                     <C>                    <C>
St. Joseph, Missouri.....................           97,111                March 1998               2,402
Topeka, Kansas...........................          164,932                  May 1998               9,720
Wichita, Kansas..........................          530,508                  May 1998               9,098
Kansas City, Missouri....................        1,709,273                  May 1998              25,176
St. Louis, Missouri......................        2,557,806                  May 1998              17,125
Beaumont, Texas..........................          374,991                  May 1999               3,824
Fort Worth, Texas........................        1,404,904                  May 1999               8,202
Longview/Marshall, Texas.................          208,250                  May 1999                 742
Tyler, Texas.............................          166,723                  May 1999               2,017
Waco, Texas..............................          202,983                  May 1999               3,565
Houston, Texas...........................        4,320,041                 June 1999               7,985
Austin, Texas............................        1,071,023                 July 1999               4,520
Corpus Christi, Texas....................          387,100                 July 1999               2,888
Lubbock, Texas...........................          230,672               August 1999               2,705
Dallas, Texas............................        3,278,109             February 2000               1,834
San Antonio, Texas.......................        1,511,386             February 2000                 341
Amarillo, Texas..........................          208,165                March 2000                 125
Midland/Odessa, Texas....................          243,389                April 2000                 258
Wichita Falls, Texas.....................          137,103                April 2000                  19
Abilene, Texas...........................          121,456                  May 2000                  54
El Paso, Texas...........................          701,576                  May 2000                  31

Other....................................              N/A                       N/A              32,374
</TABLE>

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

*    Population data derived from the United States Bureau of the Census, State
    and Metropolitan Areas datebook 1997 to 1998.

BACK OFFICE SYSTEMS

    Back office systems refer to the hardware and software systems that support
the primary functions of our operations, including:

    - order entry and provisioning;

    - billing;

    - data center;

    - trouble management; and

    - sales support.

    Our goal is to have a back office that allows us to convert our customers'
service from their current local providers to our networks easily and quickly.
Over time, we strive to have "flow through" provisioning capabilities, allowing
services to be implemented through a single systems interface that updates all
ordering, inventory, billing and monitoring systems.

                                       8
<PAGE>
    We have implemented the primary elements of our back office, including order
entry, provisioning, billing and network management. We believe we have selected
the best application for each function. The following table describes our key
back office systems that provide crucial operational functionality, their
purpose and timeline for implementation.

<TABLE>
<CAPTION>
       SYSTEM                          PURPOSE                     IN-SERVICE DATE
---------------------  ----------------------------------------  --------------------
<S>                    <C>                                       <C>
Southwestern Bell      electronic direct ordering                Q1 1998
  Verigate             and provisioning for
                       local telephone service

Saville CBP(TM)        billing                                   Q1 1999

MetaSolv TBS(TM)       order management                          Q2 1999
                       inventory
                       provisioning
                       trouble management
                       customer service

Harris HNM(TM)         network management                        Q4 1998

DSET(TM)               electronic bonding gateway to incumbent   Q2 2000 (est.)
                       telephone company

HNC ATACS(TM)          fraud management                          Q2 2000 (est.)

TBD                    enhanced call record mediation            Q3 2000 (est.)

TBD                    application integration middleware        Q4 2000 (est.)

TBD                    customer care                             Q4 2000 (est.)
                       sales force automation
</TABLE>

    ORDER ENTRY AND PROVISIONING

    Order entry involves the initial loading of customer data into our
information systems. Currently, our sales executives take orders and our
customer care and provisioning representatives load the initial customer
information into our Saville billing system and our MetaSolv provisioning
system. We intend to increase the efficiency and data accuracy of these
provisioning activities by implementing a sales force automation system to be
combined with Saville CBP and MetaSolv TBS through application integration
middleware. This system will facilitate entry of sales orders from the sales
offices and transmit relevant account and order information to Saville CBP and
MetaSolv TBS. Implementing this system will eliminate several manual steps in
the provisioning process.

    We use the MetaSolv TBS-TM- system to manage and track the timely completion
of each step in the provisioning process. When MetaSolv is coupled with
capabilities of the DSET electronic bonding system, we believe we will be able
to submit orders to external business partners, including Southwestern Bell,
electronically, thereby minimizing implementation time, coordination
complexities and installation costs. Currently, we provision orders
electronically through Southwestern Bell's electronic provisioning system, or
Verigate.

    In addition to the cost benefits associated with the electronic installation
of access lines and inventory management system, the MetaSolv system improves
our internal processes in various other ways, including:

    - directing electronic customer orders to the appropriate employee,
      prompting them to complete required provisioning tasks, including network
      component assignments and management of outside vendor activities; and

                                       9
<PAGE>
    - tracking order progress and alerting operations personnel of steps
      required to fulfill orders within standard work intervals.

    The MetaSolv TBS system enables a customer care coordinator to keep an
installation on schedule and notify the customer of any potential delays. Once
an order has been completed, we update our billing system to initiate billing of
installed services.

    BILLING

    The Saville billing system provides our customers with a consolidated
invoice for all of our services. Customer calls generate billing records that
are transmitted from the call records to the Saville billing system. These
records are then processed by the billing software, which calculates usage
costs, integrates fixed monthly charges, calculates taxation and provides the
data necessary to create a simple customer invoice. We provide invoice
information to a third party printer, which prepares and distributes bills to
our customers. Our customers pay us directly.

    This Saville system allows us to add advanced features such as special
discounts based on call volume, or number of services used, complex local
taxation and discrete billing options by type of service ordered. We believe
these features are exceptionally important given our sophisticated client base.

    TROUBLE MANAGEMENT

    We use MetaSolv TBS-TM-, a customer care and trouble management system, to
provide high quality customer service. Our trouble management system is
integrated into the operational support system. It enables our customer care
personnel to track customer problems proactively, assign repair work to the
appropriate technical teams and provide employees and management access to
comprehensive reports on the status of service activity.

    NETWORK MANAGEMENT

    We use the Harris Network Management system to continuously monitor and
operate our switch networks. The information provided by the Harris system
allows our network operations staff to quickly repair problems in the networks,
thereby eliminating or minimizing impacts to our customers.

    SOUTHWESTERN BELL VERIGATE

    Verigate is the Southwestern Bell end-user interface system that allows our
customer service, trouble management and service provisioning representatives to
access the Southwestern Bell operating systems. Verigate allows us to send local
service requests to receive order commitments back from, reserve new telephone
numbers with, view an order's status at, and test or report customer problems to
Southwestern Bell.

    DATA CENTER

    During the second quarter 2000, we plan to occupy an 8,000 square foot data
center in Kansas City, Missouri. We believe this center has sufficient space to
support significant increases in our access lines, customers and employees.

NETWORK FACILITIES

    LEASED FACILITIES

    During 1999, we began to lease substantially all of the network elements
from Southwestern Bell and combine these elements into integrated Birch-branded
voice services without deploying a switch. By

                                       10
<PAGE>
using UNE-P, we are able to offer our services to a broader geographical area
than we can by using our own switches. Many of our competitors are limited to
serving customers that are located near their facilities. UNE-P allows us to
serve many customers in disparate geographic areas.

    Where we have installed switches, we lease transmission facilities from
Southwestern Bell to connect our switches to our collocated equipment in
Southwestern Bell's central offices and to unbundled loops. Given the current
capacity of existing local networks, we do not anticipate having to build local
transmission facilities in the future. Similarly, we believe that the capacity
of existing long-distance networks renders direct ownership of long distance
transmission facilities unnecessary.

    Leasing, rather than building, facilities supports our strategy of rapid
local market development because our sales activity is not constrained by
network expenditures. Moreover, by leasing transmission facilities, we can offer
our services throughout a metropolitan area and we are not constrained by the
limited number of locations in which we could build transmission facilities.

    OWNED FACILITIES

    We deploy data transmission packet switches in most of our markets. We use
these packet switches to transmit data over our leased transmission lines and
plan to use these packet switches to transmit our long distance voice traffic
once our conversion plan is implemented.

    We currently operate local/long distance circuit switches in Kansas City and
St. Louis, Missouri and Wichita, Kansas. We do not intend to deploy more circuit
switches because we believe voice-capable packet switches will be more
economical to operate in the future. Additionally, we collocate our electronic
equipment at Southwestern Bell's central offices to support future digital
subscriber line services and existing circuit switches. Collocation allows us to
connect to transmission lines we lease from Southwestern Bell.

    At the customer's premises, we connect unbundled loops directly to
customer-owned equipment. We may also deploy electronic equipment (intelligent
channel banks or access servers) that concentrate data and voice traffic. This
enables us to obtain higher capacity from the transmission line of the incumbent
local exchange carrier.

OPERATIONS

    EMPORIA AND KANSAS CITY SERVICE CENTERS

    Our service centers in Emporia, Kansas and Kansas City, Missouri are
critical to our ability to offer excellent service and to support growth. These
service centers process orders, interface with Southwestern Bell's operational
support systems and provide customer service, trouble resolution, billing and
collection services for our customers. These service centers provide rapid,
human assistance rather than the automated, cumbersome customer interface
currently used by many telecommunications providers.

    FIELD TECHNICAL OPERATIONS

    Our field technicians service our facilities and customer-owned facilities.
These technicians install, repair and maintain digital switches, transmission
equipment, private branch exchanges, key systems, data equipment and inside
wiring, including wiring for data networking. We believe field technicians are
often the most respected source of telecommunications advice for small and
mid-sized business customers. We believe that having a skilled, in-demand group
of technicians supports our customer base, provides expertise for data
deployment and strengthens customer loyalty.

                                       11
<PAGE>
COMPETITION

    The telecommunications industry is highly competitive. We believe we compete
principally on the basis of customer service, accurate billing, variety of
services and, to a lesser extent, pricing levels and less complex pricing
structures. Our ability to compete effectively depends upon our continued
ability to maintain high quality, market-driven services at prices generally
equal to or below those charged by competitors. To maintain our competitive
posture, we believe that we must be able to provide high quality integrated
communications services and be positioned to reduce our prices in response to
potential competition. Any of these reductions could adversely affect us. Many
of our current and potential competitors have financial, technical, marketing,
personnel and other resources, including brand name recognition, substantially
greater than ours, as well as other competitive advantages over us.

    INCUMBENT TELEPHONE COMPANIES

    In our existing markets, we compete principally with Southwestern Bell. As a
recent entrant in the telecommunications services industry, we may not achieve a
significant market share for any of our services in our markets. In particular,
Southwestern Bell and other local telephone companies have long-standing
relationships with their customers, have financial, technical and marketing
resources substantially greater than ours, have the potential to subsidize
competitive services with revenue from a variety of businesses and currently
benefit from existing regulations that favor these incumbent local exchange
carriers over us in some respects. While recent regulatory initiatives, which
allow competitive local exchange carriers such as us to interconnect with
incumbent local exchange carrier facilities, provide increased business
opportunities for us, these interconnection opportunities have been, and likely
will continue to be, accompanied by increased pricing flexibility for and
relaxation of regulatory oversight of the incumbent local exchange carriers.
Future regulatory decisions could grant incumbent local exchange carriers
increased pricing flexibility or other regulatory relief. These initiatives
could also have a material adverse effect on us.

    COMPETITIVE LOCAL EXCHANGE CARRIERS/INTEREXCHANGE CARRIERS/OTHER MARKET
     ENTRANTS

    We also face competition from other current and potential market entrants.
These market entrants include long distance carriers that compete with our long
distance services and seek to enter, reenter or expand into the local exchange
market. AT&T, GTE, MCI WorldCom and Sprint are among these carriers. Competitive
local exchange carriers, resellers of local exchange services, competitive
access providers, cable television companies, electric utilities, microwave
carriers, wireless telephone system operators and private networks built by
large end users also compete with us. In addition, consolidation and strategic
alliances within the telecommunications industry, or the development of new
technologies could put us at a competitive disadvantage. Not only does the
Telecommunications Act impose regulatory requirements on all local
telecomunications service providers, but it also grants the FCC expanded
authority to reduce the level of regulation applicable to any telecommunications
service provider, including any incumbent telecommunications service providers.
The manner in which these provisions of the Telecommunications Act are
implemented and enforced could have a material adverse effect on our ability to
compete successfully against incumbent local exchange carriers and other
telecommunications service providers.

    The changes in the Telecommunications Act radically altered the market
opportunity for new telecommunications service providers. Because the
Telecommunications Act requires local exchange carriers to unbundle their
networks, new telecommunications service providers are able to rapidly enter the
market by installing switches and leasing trunk and loop capacity. Newer
providers, like us and some competitors that we may encounter in some of our
markets, will not have to replicate existing facilities until traffic volume
justifies building them, and can be more opportunistic in designing and
implementing networks.

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<PAGE>
    In addition to the new telecommunications service providers, interexchange
carriers and other competitors listed above, we may face competition from other
market entrants such as electric utilities, cable television companies and
wireless companies. Electric utilities have existing assets and low cost access
to capital which could allow them to enter a market rapidly and accelerate
network development. Cable television companies are entering the
telecommunications market by upgrading their networks with fiber optics and
installing facilities to provide fully interactive transmission of broadband
voice, video and data communications. Finally, wireless companies intend to
develop wireless technology for deployment in the United States as a broadband
substitute for traditional wireline local telephones. Some Internet companies
are also developing applications to deliver switched voice communications over
the Internet.

    LONG DISTANCE SERVICES

    The long distance telecommunications industry has numerous entities
competing for the same customers and a high churn rate, as customers frequently
change long distance providers in response to offerings of lower rates or
promotional incentives. Prices in the long distance market have declined
significantly in recent years and are expected to continue to decline. Our
primary competitors are the major interexchange carriers and resellers of long
distance services. We believe that pricing levels are a principal competitive
factor in providing long distance service; however, we seek to avoid direct
price competition by packaging long distance service, local service, customer
premises equipment and Internet access service together with a simple pricing
plan.

    CUSTOMER PREMISES EQUIPMENT

    We compete with numerous equipment vendors and installers and
telecommunications management companies for the sale of customer premises
equipment and related services. We generally offer our products at prices
consistent with other providers and differentiate our service through our
product packages.

    DATA/INTERNET SERVICES

    The Internet services market is highly competitive, and we expect that
competition will continue to intensify. Internet service, meaning both Internet
access and on-line content services, is provided by Internet service providers,
satellite-based companies, long distance carriers and cable television
companies. Many of these companies provide direct access to the Internet and a
variety of supporting services to businesses and individuals. In addition, many
of these companies, such as America Online, Inc., MSN, Prodigy Services Company
and WebTV Networks, offer on-line content services consisting of access to
closed, proprietary information networks. Long distance companies, among others,
are aggressively entering the Internet access markets. Long distance carriers
have substantial transmission capabilities, traditionally carry data to large
numbers of customers and have an established billing system infrastructure that
permits them to add new services. Satellite companies are offering broadband
access to the Internet from desktop PCs. Cable companies are starting to provide
Internet services using cable modems to customers in major markets. Many of
these competitors have substantially greater financial, technological,
marketing, personnel, name-brand recognition and other resources than those
available to us.

EMPLOYEES

    At December 31, 1999, we employed 935 persons. Additionally, we occasionally
hire temporary employees. We are not party to any collective bargaining
arrangements and believe that our relationship with our employees is good.

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<PAGE>
REGULATION

REGULATORY OVERVIEW

    We are subject to regulation by federal, state and local government
agencies. Historically, the FCC had jurisdiction over interstate long distance
services and international services, while state regulatory commissions had
jurisdiction over local and intrastate long distance services.

    In 1996, Congress passed the Telecommunications Act of 1996, opening the
local market to competition and allowing the Bell operating companies to compete
for the first time in the long distance market within their local service
regions once specified conditions were met. The Telecommunications Act
fundamentally changed the way telecommunications is regulated in this country.
The FCC was given a major role in writing and enforcing the rules under which
new competitors could compete in the local marketplace. Those rules, coupled
with additional rules and decisions promulgated by the various state regulatory
commissions, form the core of the regulatory framework under which we operate in
providing local exchange service.

    With a few limited exceptions, the FCC continues to retain exclusive
jurisdiction over our provision of interstate and international long distance
service, and the state regulatory commissions regulate our provision of
intrastate local and long distance service. Additionally, municipalities and
other local government agencies may regulate limited aspects of our business,
such as use of government-owned rights-of-way, and may require permits such as
zoning approvals and building permits.

    In the aftermath of the Telecommunications Act, the regulation of the
telecommunications industry has been in a state of flux. The FCC and state
regulatory commissions have adopted many new rules to implement this legislation
and encourage competition, but that implementation is ongoing. The following
summary of regulatory developments does not purport to describe all current and
proposed federal, state and local regulations and legislation affecting the
telecommunications industry. Many of these are currently the subject of judicial
proceedings, legislative hearings and administrative proposals, any of which
could change, in varying degrees, the manner in which this industry operates. We
cannot predict at this time the outcome of these proceedings or their impact
upon the telecommunications industry or on us.

THE TELECOMMUNICATIONS ACT

THE TELECOMMUNICATIONS ACT'S LOCAL COMPETITION FRAMEWORK

    One of the key goals of the Telecommunications Act is to encourage
competition in local telephone service. To do this, the Telecommunications Act
provides three means by which telecommunications service providers can enter the
local phone service marketplace. The three modes of entry are as follows:

    - RESALE.  Incumbent telephone companies are required to permit new
      telecommunications service providers to purchase their services for resale
      to the public at a wholesale rate that is less than the rate charged by
      the incumbent telephone companies to their retail customers.

    - ACCESS TO NETWORK ELEMENTS.  Incumbent telephone companies are required to
      lease to new telecommunications service providers the various elements in
      their network that are used to provide local telephone service. The leased
      parts of the incumbent telephone companies' networks are known as
      unbundled network elements. The incumbent telephone companies must make
      unbundled network elements available at rates that are based on their
      forward-looking economic costs.

    - CONSTRUCTION OF NEW FACILITIES.  New telecommunications service providers
      may also enter the local phone service market by building entirely new
      facilities. The incumbent telephone companies are required to allow new
      telecommunications service providers to interconnect their

                                       14
<PAGE>
      facilities with the incumbent telephone company's, so each carrier's
      customers can reach the other's.

    To facilitate new telecommunications service providers' entry into local
telephone markets using one or more or some combination of these three methods,
the Telecommunications Act imposes on incumbent telephone companies the
obligation to open their networks and markets to competition. When requested by
competitors, incumbent telephone companies are required to negotiate, in good
faith, agreements that lay out terms governing the interconnection of their
network, access to unbundled network elements and resale. Incumbent telephone
companies must also allow competing carriers to "collocate," or place their own
equipment in incumbents' central offices.

    In addition, all local exchange carriers, including both incumbent and new
telecommunications service providers, are subject to the following requirements:

    - INTERCONNECTION.  All local telecommunications service providers must
      permit their competitors to interconnect with their facilities either
      directly or indirectly. Incumbent telephone companies are additionally
      obligated to permit interconnection at any technically feasible point
      within their networks, on nondiscriminatory terms, at prices based on cost
      (which may include a reasonable profit);

    - NUMBER PORTABILITY.  All local telecommunications service providers must
      implement number portability technology that allows a customer to retain
      its existing phone number if it switches from one local exchange carrier
      to a competitor. This technology primarily benefits new telecommunications
      service providers, which can gather market share more easily if customers
      can switch to these carriers without changing telephone numbers;

    - RECIPROCAL COMPENSATION.  All local telecommunications service providers
      must complete local calls originated by other telecommunications service
      providers under reciprocal compensation arrangements. That is, the local
      provider terminating a local call is entitled to payment from the local
      provider originating a call. Charges assessed by the incumbent telephone
      company for terminating calls originated on a new telecommunications
      service provider's network must be based on a reasonable approximation of
      additional cost. The FCC recently determined that Internet service
      provider-bound traffic is interstate in nature, not local, and is
      therefore outside the scope of the Telecommunications Act's reciprocal
      compensation provisions. The FCC has initiated a proceeding to determine
      appropriate carrier-to-carrier compensation for Internet service
      provider-bound traffic. At the same time, the FCC has declined to overturn
      a multitude of state decisions requiring incumbent telephone companies to
      pay new telecommunications service providers compensation for delivering
      Internet traffic to Internet service providers that had selected a new
      telecommunications service provider as their local service provider. The
      FCC's decision is on appeal, and incumbent telephone companies are also
      expected to ask states or federal courts to reverse the existing state
      determinations;

    - DIALING PARITY.  Requires all local telecommunications service providers
      to provide nondiscriminatory access to telephone numbers, operator
      services, directory assistance and directory listing with no unreasonable
      dialing delays. Local dialing parity ensures that customers on one local
      exchange carrier do not have to dial extra digits to reach customers on a
      different local or toll carrier's network; and

    - ACCESS TO RIGHTS-OF-WAY.  Requires all local telecommunications service
      providers to permit competing providers access to poles, ducts, conduits
      and rights-of-way at reasonable and nondiscriminatory rates, terms and
      conditions. The FCC has opened a proceeding seeking to define in greater
      detail the scope of the incumbent telephone company's obligation to
      provide access to rights-of-way that it owns or controls, including those
      within its own central offices and other buildings, and buildings owned by
      private third parties.

                                       15
<PAGE>
    Executing an interconnection agreement does not guarantee a new
telecommunications service provider unfettered access to the incumbent telephone
company's market. Interconnection agreements between incumbent telephone
companies and new telecommunications service providers may have short terms,
requiring the new telecommunications service provider to renegotiate the
agreements on a regular basis. Incumbent telephone companies may not provide
timely provisioning or adequate service quality, thereby impairing a new
telecommunications service provider's reputation with customers who can easily
switch back to the incumbent telephone company. In addition, the prices set in
the agreements or through state regulatory commission arbitration proceedings
may be subject to changes mandated by state regulatory commissions as they
develop permanent rules governing interconnection and may not in all instances
be set at levels that allow new telecommunications service providers to compete
effectively.

THE FCC'S RULES IMPLEMENTING THE TELECOMMUNICATIONS ACT'S LOCAL COMPETITION
  PROVISIONS

    In August 1996, the FCC issued an order implementing the local competition
provisions of the Telecommunications Act. The FCC established rules about how
interconnection and collocation were to be provided, put forth a method that
state commissions should use to establish prices for interconnection and
unbundled network elements, and specified which parts of an incumbent's network
must be made available as unbundled network elements to competing carriers. The
FCC also held that incumbent telephone companies must provide new
telecommunications service providers with "combinations" of unbundled network
elements, making it possible for new telecommunications service providers, in
many instances, to provide service to customers by leasing all of the component
unbundled network elements from the incumbent telephone company. This method of
providing service is known as the unbundled network element platform, or UNE-P.
Specifically, among other rules, the FCC established a list of seven network
elements, comprising most of the significant facilities, features,
functionalities or capabilities of the network, that the incumbent telephone
companies must unbundle. In addition, the FCC mandated a particular
forward-looking pricing methodology for these network elements that produces
relatively low element prices that are favorable to competitors.

    After the FCC released its rules, numerous parties challenged the rules
before the United States Court of Appeals for the Eighth Circuit. The Eighth
Circuit overturned many of the FCC's rules on the grounds that the agency had
exceeded its authority and misinterpreted the law.

    On January 25, 1999, the United States Supreme Court largely reversed the
Eighth Circuit's decision, holding that the FCC has general jurisdiction to
implement the local competition provisions of the Telecommunications Act and
reestablishing the validity of many of the FCC's interconnection rules. In so
doing, the Supreme Court stated that the FCC has authority to set pricing
guidelines for unbundled network elements, to prevent incumbent telephone
companies from separating existing combinations of network elements, and to
establish "pick and choose" rules regarding interconnection agreements. "Pick
and choose" rules would permit a carrier seeking interconnection to pick and
choose among the terms of service from other interconnection agreements between
the incumbent and various new telecommunications service providers.

    Although it upheld the FCC's jurisdiction to establish unbundled network
element pricing guidelines, the Supreme Court did not evaluate the specific
"forward-looking" pricing methodology adopted by the FCC, and the case has been
remanded to the Eighth Circuit for further consideration of that specific
pricing methodology. Some incumbent telephone companies have argued that this
pricing methodology does not allow adequate compensation for the provision of
unbundled network elements. The Eighth Circuit heard oral arguments on this
pricing issue on September 16, 1999, but has not yet issued a ruling. We cannot
predict the outcome of this proceeding. If the Eighth Circuit fails to uphold
the FCC's forward-looking pricing methodology, it may materially adversely
affect our business.

                                       16
<PAGE>
    Additionally, the Supreme Court vacated the FCC rules defining what network
elements must be unbundled and made available to the new telecommunications
service providers by the incumbents. The Supreme Court held that the FCC must
provide a stronger rationale to support the degree of unbundling ordered.

    On November 5, 1999, in response to the Supreme Court's ruling, the FCC
released new rules specifying which portions of the incumbent telephone
companies' networks must be made available as unbundled network elements. The
FCC reaffirmed that incumbent telephone companies must provide unbundled access
to the following six network elements:

    - loops, including loops used to provide high-capacity and advanced
      telecommunications services such as digital subscriber lines;

    - network interface devices;

    - local circuit switching;

    - dedicated and shared transport;

    - signaling and call-related databases; and

    - operations support systems.

    The FCC removed from the list of unbundled network elements operator service
and directory assistance. The FCC concluded that the market has developed
sufficiently that new telecommunications service providers can and do
self-provide these services, or acquire them from alternative sources. The FCC
also noted that incumbent telephone companies remain obligated under the
non-discrimination requirements of the Communications Act of 1934 to comply with
the reasonable request of a new telecommunications service provider that
purchases these services from the incumbent telephone companies to rebrand or
unbrand those services, and to provide directory assistance listings and updates
in daily electronic batch files. In addition, the competitive checklist
contained in section 271 of the Communications Act of 1934 requires Bell
operating companies to provide nondiscriminatory access to these services.

    The FCC also modified the local switching unbundled network element,
concluding that incumbents need not provide access to unbundled local circuit
switching for customers with four or more lines that are located in the densest
parts of the top 50 metropolitan statistical areas so long as the incumbent
makes available an alternative arrangement for reaching customers, known as the
enhanced extended link. The enhanced extended link allows new telecommunications
service providers to gain access to customers without collocating in every
central office, because it combines the local loop with a multiplexer and
transport to the new telecommunications service provider's local existing
collocated facilities or switch. Notwithstanding the FCC's ruling, unrestricted
access to unbundled switching is available in Texas, where state rulings require
incumbent telephone companies to make switching available as an unbundled
network element.

    In addition to these changes, the FCC also:

    - Limited the scope of the shared transport unbundled network element,
      holding that the incumbent must only offer shared transport as a unbundled
      network element where unbundled local circuit switching is provided.

    - Held that incumbents are not required to offer packet switching as a
      unbundled network element in most cases.

    - Held that both the loop and transport unbundled network elements include
      access to "dark fiber." Dark fiber is distinguished from "lit fiber"
      transmission capacity in that dark fiber is sold independently from the
      electronics necessary to "light" the fiber and transmit information. The

                                       17
<PAGE>
      availability of dark fiber from incumbents as a unbundled network element
      could create an additional source of dark fiber in the market.

    - Ordered "sub-loop unbundling," which will allow new telecommunications
      service providers to connect at any feasible point along the local loop,
      and not just at the central office. In some incumbent networks, subloop
      unbundling will make it easier for new telecommunications service
      providers to use portions of the unbundled network element loop to offer
      advanced services, such as digital subscriber lines. In a separate order,
      the FCC also ordered the unbundling of the "high-frequency" portion of the
      loop, which also makes it easier and less expensive for new
      telecommunications service providers to use unbundled network elements to
      offer advanced services, such as digital subscriber lines.

    The FCC's decision regarding unbundled network elements is currently the
subject of petitions for reconsideration filed at the FCC by various parties,
including us. Some incumbent telephone companies have asked the FCC to expand
the limitation on switching by, among other things, extending its geographic
scope. We and other new telecommunications service providers have asked the FCC
to either do away with the limitation or make it applicable to only larger
customers. We cannot predict the outcome of this proceeding. If the FCC further
restricts the availability of unbundled switching, it could adversely affect our
ability to serve customers efficiently.

    Another open question is whether incumbent telephone companies are required
to combine network elements not currently combined in their networks for
requesting new telecommunications service providers. The FCC's rules requiring
the incumbent telephone companies to do so were vacated by the Eighth Circuit,
but the FCC and the new telecommunications service provider industry have asked
that court to reinstate the rules in the wake of the Supreme Court's decision.
If the rules are reinstated, it will significantly expand the ability of new
telecommunications service providers to provide service to customers using
network elements purchased from the incumbent telephone companies. Also
unsettled is the scope of the FCC's rule requiring incumbent telephone companies
to provide requesting new telecommunications service providers with combinations
of network elements that are "currently combined" in the incumbent telephone
company's network. The new telecommunications service provider industry has
taken a broad view of this requirement, interpreting it to mean that new
telecommunications service providers are entitled to purchase network element
combinations so long as they are combined anywhere in the incumbent telephone
company's network. The incumbent telephone companies, by contrast, have taken a
much narrower view, arguing that the rule requires the incumbent telephone
companies only to provide combinations of network elements that are currently in
service to a particular customer. The ultimate resolution of this question could
expand or restrict our ability to provide service to our customers using network
elements purchased from the incumbent telephone company.

    The Eighth Circuit is expected to rule on the pricing issue in the next
several months and may also rule on the incumbent telephone companies'
obligation to provide new network element combinations in the same decision. It
is not clear when the FCC or the courts will act to define the scope of
"currently combined." The possible impact of the resolution of these open issues
on existing interconnection agreements between incumbent telephone companies and
new telecommunications service providers or on agreements that may be negotiated
in the future cannot be determined at this time.

    In addition to its rulings regarding interconnection and unbundled network
elements, the FCC has issued a series of orders on the ability of new
telecommunications service providers to provide digital subscriber lines and
other high-bandwidth services to their customers for, among other things,
Internet access. Those orders have made clear that new telecommunications
service providers are entitled to collocate the equipment necessary to provide
those services in incumbent telephone companies' central offices; that incumbent
telephone companies must, where technically feasible, provide new

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<PAGE>
telecommunications service providers with high-quality loops capable of
supporting digital subscriber lines and that the incumbent telephone companies
must provide new telecommunications service providers with information
concerning the make-up of their networks to allow the new telecommunications
service provider to determine if a particular customer can be served with
digital subscriber line service. However, many of the details of the orders'
implementation are unsettled and we cannot assure you that the rules are
sufficient to ensure that the incumbent telephone companies meet their
obligations.

THE STATES' ROLE IN IMPLEMENTING THE LOCAL COMPETITION PROVISIONS

    Although the FCC establishes nationwide guidelines governing entry by new
telecommunications service providers under the Telecommunications Act, state
regulatory commissions also have major roles in implementing the local
competition provisions of the act. Among other things, state regulatory
commissions must approve or reject interconnection agreements, and they have
chief responsibility for arbitrating and mediating these agreements if the
negotiating carriers cannot reach an understanding on the agreement's terms.
State regulatory commissions are also charged with developing and implementing
cost-based prices for interconnection and unbundled network elements, in
accordance with the Telecommunications Act and the forward-looking pricing
guidelines set by the FCC. State regulatory commissions are also permitted to
establish additional unbundled network elements consistent with federal law and
policy.

BELL OPERATING COMPANIES ENTRY INTO LONG DISTANCE

    The Telecommunications Act also seeks to encourage local competition by
requiring the regional Bell operating companies to demonstrate on a
state-by-state basis that they have adequately opened their network and market
to competitors before they can provide long distance service to end users in
their own local service areas. Specifically, the Telecommunications Act lays out
a 14-point checklist which generally requires a regional Bell operating company
to prove to the FCC that it has complied with the interconnection and network
access obligations discussed above and that it faces effective competition in
the state where it seeks to provide long distance service. While the FCC has
ultimate responsibility for deciding whether the checklist conditions have been
met, the FCC is required to first consult with the appropriate state regulatory
commission.

    Southwestern Bell is in the process of applying for authority to provide
long distance service in Texas. The FCC is expected to rule on Southwestern
Bell's application in April 2000. Southwestern Bell has also begun the process
of applying for long distance authority in Kansas by making a preliminary filing
with the Kansas state regulatory commission. If Southwestern Bell receives
approval from the FCC as described above, Southwestern Bell will be able to
provide in-region long distance services, which will enable it to provide
customers with a full range of local and long distance telecommunications
services. The ability of Southwestern Bell to provide long distance services is
expected to be an additional source of competition for us.

OTHER FEDERAL REGULATION

    The FCC regulates our interstate and international service offerings. Those
services include our provision of interstate and international long distance
service and our provision of interstate access service. The FCC has established
different levels of regulation for dominant carriers and non-dominant carriers.
Incumbent telephone companies, such as the Bell operating companies and GTE, are
currently considered dominant carriers, and are subject to extensive rate and
operational regulation, while new telecommunications service providers such as
we are considered non-dominant carriers, and are subject to substantially less
regulation.

                                       19
<PAGE>
INTERSTATE AND INTERNATIONAL LONG DISTANCE SERVICES

    Interstate and international long distance services of non-dominant carriers
are subject to relatively little regulation by the FCC. Our provision of
international long distance services requires prior authorization by the FCC
under Section 214 of the Telecommunications Act, which we have obtained. We are
also required to file tariffs with the FCC for international long distance
service on an ongoing basis.

    Under the FCC's streamlined regulation of non-dominant carriers, we may
install and operate facilities for the transmission of domestic interstate
communications without prior FCC authorization.

    In addition, in October 1996, the FCC adopted an order in which it
eliminated the requirements that non-dominant interstate interexchange carriers
maintain tariffs on file with the FCC for domestic interstate services. The
order does not apply to the switched and special access services of the Bell
operating companies or other local exchange carriers. The FCC order was issued
under authority granted to the FCC in the 1996 Act to "forbear" from regulating
any telecommunications services provider under some circumstances. After a
nine-month transition period, relationships between interstate carriers and
their customers would be set by contract. At that point, long distance companies
would be prohibited from filing tariffs with the FCC for interstate, domestic,
interexchange services. Several parties filed notices for reconsideration of the
FCC order and other parties appealed the decision. On February 13, 1997, the
United States Court of Appeals for the District of Columbia Circuit stayed the
implementation of the FCC order pending its review of the order on its merits.
Currently, that stay remains in effect and interstate long distance telephone
companies are therefore still required to file tariffs.

    The D.C. Circuit heard oral argument on the merits of the FCC's detariffing
order on March 14, 2000, but has not yet issued an order. If the stay is lifted
and the FCC order becomes effective, telecommunications carriers will no longer
be able to rely on the filing of tariffs with the FCC as a means of providing
notice to customers of prices, terms and conditions on which they offer their
interstate services. The FCC has required that non-dominant interexchange
carriers post their rates, terms and conditions for all their interstate,
domestic services on their Internet web sites if they have one; this rule is
effective once the FCC's mandatory detariffing order takes effect. This may
result in significant administrative expenses for us. The obligation to provide
non-discriminatory, just and reasonable prices remains unchanged under the
Communications Act of 1934. Tariffs also allow a carrier to limit its liability
to its customers, including in connection with service interruptions. If tariffs
are eliminated, we may become liable for costs that we would have been able to
limit through tariff filings, and we cannot assure you that the potential
liabilities will not have a material adverse effect on our results of operations
and financial condition.

ACCESS SERVICES

    Unlike dominant carriers, which are subject to extensive rate regulation, we
and other non-dominant carriers are subject to relatively little regulation of
our interstate access services. The FCC has eliminated the requirement that
non-dominant carriers must file tariffs for their access services. While no
longer mandatory, carriers may continue to file access tariffs. We have chosen
to continue to do so.

    In August 1999, the FCC granted incumbent telephone companies subject to
price cap rate regulation, including the regional Bell operating companies,
substantial pricing flexibility with regard to some interstate access services.
Among other things, the FCC's new rules permit incumbent telephone companies,
upon a showing that the services in question are subject to sufficient levels of
competition, to offer volume and term discounts and contract tariffs for
particular access services. The new rules also allow incumbent telephone
companies, upon meeting a higher competitive standard, to file tariffs for their
access services free from many rate structure requirements. To the extent these
regulatory

                                       20
<PAGE>
initiatives enable or require incumbent telephone companies to offer selectively
reduced rates for some access services, the rates we may charge for these access
services will likely be constrained. In addition, the FCC has recently initiated
a proceeding to examine whether to regulate the rates that new
telecommunications service providers charge for their access services. While the
FCC has received considerable opposition from the new telecommunications service
provider industry and others to doing so, we cannot assure you that the FCC will
not adopt some form of regulation for new telecommunications service provider
access charges. The timing of the FCC's decision is uncertain.

    In addition to the pricing flexibility described above, the FCC is currently
considering a joint proposal from AT&T, Bell Atlantic, BellSouth, GTE, SBC
Communications and Sprint to lower significantly and deleverage interstate
access charges for participating price cap local exchange carriers. The FCC
could issue an order on this proposal in the first half of 2000. If adopted,
these pricing reforms could increase competition among carriers offering local
exchange and exchange access service in our operating area.

ADDITIONAL FEDERAL ISSUES

    ACCESS TO POLES, DUCTS, CONDUITS AND RIGHTS-OF-WAY.  An area of the law that
remains in flux concerns the extent of a carrier's obligations to provide access
to poles, ducts, conduits and rights-of-way. We are obligated under Section 224
of the Communications Act to permit other carriers reasonable access to our
poles, ducts, conduits and rights-of-way and the FCC has adopted comprehensive
rules governing how access is to be provided. The FCC is also currently
considering additional rules, including whether access to rooftops and space
inside buildings, including buildings owned by utilities, should be mandated
under the Telecommunications Act.

    EEO REPORT.  The FCC requires us to file an annual employment report to
comply with the FCC's equal employment opportunity policies.

    TRUTH IN BILLING.  The FCC has adopted new rules designed to make it easier
for customers to understand the bills of telecommunications carriers. These new
rules establish requirements regarding the formatting of bills and the
information that must be included on bills. These rules have been appealed in
federal court.

    ANTI-SLAMMING RULES.  The FCC implemented the so-called "anti-slamming"
rules, which protect consumers whose pre-subscribed carriers have been switched
without their consent. Under the rules, a carrier found to have slammed a
customer is subject to substantial fines and must remove from the consumer's
bill all charges incurred within 30 days of the slamming. While we do not engage
in these practices, a slamming fine, if levied, could have a material impact on
our business in the future.

    CUSTOMER PROPRIETARY NETWORK INFORMATION.  In February 1998, the FCC adopted
rules implementing Section 222 of the Communications Act of 1934, which governs
the use of customer proprietary network information by telecommunications
carriers. Customer proprietary network information generally includes any
information regarding a subscriber's use of a telecommunications service, where
it is obtained by a carrier solely by virtue of the carrier-customer
relationship. The FCC has clarified that customer proprietary network
information does not include a subscriber's name, telephone number, and address,
as this information is generally not derived from the carrier's provision of a
telecommunications service to a customer. Under the FCC's rules, a carrier may
only use a customer's proprietary network information to market services that
are "necessary to, or used in," the provision of a service that the carrier
already provides to the customer, unless it receives the customer's prior oral
or written consent to use that information to market other services. In
December 1999, the United States Court of Appeals for the Tenth Circuit vacated
the FCC's original and modified customer proprietary network information rules
on the grounds that they violate the First Amendment. However, Section 222 of
the Communications Act remains the law and that section, in addition to the
FCC's

                                       21
<PAGE>
now-vacated rules, provides some guidance on the use of customer proprietary
network information rules. Uncertainty regarding restrictions on the use of
customer proprietary network information rules may impede our ability to market
integrated packages of services effectively and to expand existing customers'
use of our services.

    UNIVERSAL SERVICE.  On May 8, 1997, the FCC released an order establishing a
significantly expanded federal universal service subsidy regime under the
Telecommunications Act. The universal service program provides support to
carriers serving low-income customers and customers who live in areas where the
cost of providing telecommunications services is high. In addition, the FCC
established new subsidies for telecommunications and some information services
provided to qualifying schools and libraries and for services provided to rural
health care providers. Providers of interstate telecommunications services, as
well as other entities, such as private carriers offering excess capacity to end
user customers, must pay for these programs. Our contribution to the federal
support funds would be calculated based on a percentage of our gross end-user
interstate and international telecommunications revenues. The assessment rate
for the second quarter of 2000 is 5.7101% of interstate and international
end-user telecommunications revenues. The contribution factor issued by the FCC
varies quarterly. The amounts contributed may be billed to customers. Currently,
the FCC is calculating assessments based on the prior year's revenues. Assuming
that the FCC continues to calculate contributions based on the prior year's
revenues, we believe that we will not be liable to contribute any material
amount to these programs during 2000 because we had limited interstate and
international end user revenues in 1999. The threshold before we are required to
contribute is a $10,000 contribution, which translates into roughly $175,000 in
interstate end user telecommunications revenues. With respect to subsequent
years, however, we are currently unable to quantify the amount of any
contributions that we will be required to make or the effect that these required
contributions will have on our financial condition.

    The FCC has recently adopted the cost model which it will use to determine
the support needed in high-cost areas and the inputs for the model. The new
high-cost support mechanism, which went into effect on January 1, 2000 for
non-rural carriers, substantially increases the amount of high-cost support
provided to non-rural carriers. The United States Court of Appeals for the Fifth
Circuit recently issued an order upholding in part, and reversing in part, the
May 8th FCC order implementing these funds. Numerous FCC orders revising these
funds are subject to petitions for reconsideration and further petitions for
appeal. The outcome of these proceedings or their effect cannot be predicted.

    In addition to the universal service mechanisms described above, the FCC is
currently considering a joint proposal from Bell Atlantic, BellSouth, GTE, SBC
Communications, AT&T, and Sprint to create a $650 million fund to provide
universal service support for interstate access charges. If adopted, this
proposal could significantly increase the contribution obligations of other
telecommunications carriers.

    COMMUNICATIONS ASSISTANCE FOR LAW ENFORCEMENT ACT.  Under this act,
telecommunications carriers are required to: (1) provide law enforcement
officials with call content and call identifying information under a valid
electronic surveillance warrant, and (2) reserve a sufficient number of circuits
for use by law enforcement officials in executing court authorized electronic
surveillance. If we provide facilities-based services, we may incur costs in
meeting both of these requirements. In particular, regarding the requirements
related to call content and identification, except in very limited circumstances
the government is required to compensate carriers only for the costs of making
equipment installed or deployed before January 1, 1995 compliant with this act.
While the telecommunications industry is attempting to negotiate legislative and
administrative changes to this reimbursement cut-off date, as it stands today,
we will be financially responsible for ensuring that our post-1995 equipment is
in compliance. Regarding the circuit capacity requirements, the government will
finance any necessary increases in capacity for equipment that we have
specifically identified as installed or deployed prior to September 8, 1998, and
we are responsible for paying only for any necessary increases in capacity for
equipment installed or deployed after that date.

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<PAGE>
STATE AND LOCAL REGULATION

    In general, state regulatory commissions have regulatory jurisdiction over
us when our facilities and services are used to provide local and other
intrastate services. Under the Telecommunications Act, state commissions
continue to set the requirements for providers of local and intrastate services,
including quality of services criteria. State regulatory commissions also can
regulate the rates charged by new telecommunications service providers for
intrastate and local services and can set prices for interconnection by new
telecommunications service providers with the incumbent telephone company
networks, in accordance with guidelines set by the FCC. In addition, state
regulatory commissions in many instances have authority under state law to adopt
additional regulations governing local competition, so long as the state's
actions are not inconsistent with federal law or regulation.

    Most state regulatory commissions require companies that wish to provide
intrastate common carrier services to register or be certified to provide these
services. These certifications generally require a showing that the carrier has
adequate financial, managerial and technical resources to offer the proposed
services in a manner consistent with the public interest. In most states, we are
also required to file tariffs setting forth the terms, conditions and prices for
services that are classified as intrastate, and to update or amend our tariffs
as rates change or new products are added. We may also be subject to various
reporting and record-keeping requirements.

    We are currently certified by the Missouri Public Service Commission, the
Kansas Corporation Commission, the Texas Public Utilities Commission and the
Oklahoma Corporation Commission to provide both local and intrastate long
distance service in those states. We have tariffs on file in each of these
states.

    If we choose to install our own transmission facilities, we may be required,
in some cities, to obtain street opening and construction permits, permission to
use rights-of-way, zoning variances and other approvals from municipal
authorities. We also may be required to obtain a franchise to place facilities
in public rights of way. In some areas, we may be required to pay license or
franchise fees for these approvals. We cannot assure you that fees will remain
at current levels, or that our competitors will face the same expenses, although
the Telecommunications Act requires that any fees charged by municipalities be
reasonable and non-discriminatory as among telecommunications carriers.

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<PAGE>
RISK FACTORS

RISKS RELATED TO OUR BUSINESS:

WE HAVE A HISTORY OF OPERATING LOSSES, AND WE MAY NOT BE PROFITABLE IN THE
FUTURE.

    We have incurred significant losses since we began operations as a
competitive telecommunications provider and expect to continue to incur losses
in the future as we build our network. For the year ended December 31, 1999, we
had operating losses of $49.7 million and a net loss of $61.8 million. As of
December 31, 1999, we had an accumulated deficit of $79.8 million. We expect to
experience losses during our network and service deployment, which will continue
for the foreseeable future. Prolonged effects of generating losses without
additional funding may restrict our ability to pursue our business strategy.

    If we cannot achieve profitability from operating activities, we may not be
able to meet:

    - our capital expenditure requirements;

    - our debt service obligations; or

    - our working capital needs.

OUR HIGHLY LEVERAGED CAPITAL STRUCTURE LIMITS OUR ABILITY TO OBTAIN ADDITIONAL
FINANCING AND COULD ADVERSELY AFFECT OUR BUSINESS IN SEVERAL OTHER WAYS.

    The level of our outstanding debt greatly exceeds the level of our revenue
and stockholders' equity. As of December 31, 1999, we had $125.8 million of
long-term indebtedness outstanding, including $10.0 million outstanding under
our senior credit facility and $114.7 million of senior notes outstanding. This
indebtedness represented 103.5% of our total capitalization at that date. We
may, and are also permitted under the terms of our debt instruments to, incur
substantial indebtedness in the future.

    Our large amount of indebtedness could significantly impact our business for
the following reasons:

    - it limits our ability to obtain additional financing to complete our
      roll-out plan, to develop new services or to otherwise respond to
      unanticipated competitive pressures;

    - it means that we will need to dedicate a substantial portion of our
      operating cash flow to fund interest expense on our senior credit facility
      and our senior notes, thereby reducing funds available for working
      capital, capital expenditures or other purposes;

    - it makes us vulnerable to interest rate fluctuations because our senior
      credit facility loans bear interest at variable rates;

    - it limits our ability to compete with companies who are not as highly
      leveraged, especially those who may be able to price their service
      offerings at levels below those we can or are willing to match; and

    - it limits our ability to expand into new markets and to react to changing
      market conditions, changes in our industry and economic downturns.

OUR EXISTING DEBT INCLUDES RESTRICTIVE AND FINANCIAL COVENANTS THAT LIMIT OUR
OPERATING FLEXIBILITY.

    Our senior credit facility and the indenture relating to our senior notes
contain covenants that, among other things, restrict our ability to take
specific actions, even if we believe them to be in our best interest. These
include restrictions on our ability to:

    - incur additional debt;

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<PAGE>
    - pay dividends or distributions on, or redeem or repurchase, capital stock;

    - create liens or negative pledges with respect to our assets;

    - make investments, loans or advances;

    - issue, sell or allow distributions on capital stock of specified
      subsidiaries;

    - enter into sale and leaseback transactions;

    - prepay or defease specified indebtedness;

    - enter into transactions with affiliates;

    - enter into specified hedging arrangements;

    - merge, consolidate or sell our assets; or

    - engage in any business other than telecommunications.

    The senior notes also require us to offer to purchase these notes from the
holders at 101% if we undergo a change of control. In addition, the senior
credit facility imposes financial covenants that require us to comply with
specified financial ratios and tests, including minimum revenues, minimum
EBITDA/maximum EBITDA losses, minimum access lines, senior secured debt to total
capitalization, maximum capital expenditures, maximum leverage ratios, minimum
interest coverage ratios and pro forma debt service coverage ratios. We cannot
assure you that we will be able to meet these requirements or satisfy these
covenants in the future. If we fail to do so, our debts could become immediately
payable at a time when we are unable to pay them. This could adversely affect
our ability to carry out our business plan and would have a negative effect on
our financial condition.

WE EXPECT TO GROW AND CANNOT GUARANTEE THAT WE WILL BE ABLE TO EFFECTIVELY
MANAGE OUR FUTURE GROWTH.

    If we successfully implement our business plan, our operations will expand
rapidly, and we will be providing packaged telecommunications services on a
widespread basis. This could place a significant strain on our management,
operational, financial and other resources and increase demands on our systems
and controls. Failure to manage our future growth effectively could adversely
affect the expansion of our customer base and service offerings. We cannot
assure you that we will successfully implement and maintain efficient
operational and financial systems, procedures and controls or successfully
obtain, integrate and manage the employees and management, operational,
financial and other resources necessary to manage a developing and expanding
business in our evolving, highly regulated and increasingly competitive
industry.

TO EXPAND AND DEVELOP OUR BUSINESS WE WILL NEED A SIGNIFICANT AMOUNT OF CASH,
WHICH WE MAY BE UNABLE TO OBTAIN.

    The expansion and development of our business and the deployment of our
networks, services and systems will require significant capital expenditures,
working capital and debt service and generate negative operating cash flows.

    The actual amount and timing of our future capital requirements may differ
materially from our estimates as a result of, among other things, the demand for
our services and regulatory, technological and competitive developments,
including additional market developments and new opportunities, in our industry.
Our revenue and costs may also be dependent upon factors that are not within our
control, including regulatory and legislative developments, the response of our
competitors to their loss of customers to us and to changes in technology, the
nature and penetration of services that we may offer and the number of
subscribers and the services for which they subscribe. Due to the uncertainty of

                                       25
<PAGE>
these factors, actual revenues and costs may vary from expected amounts,
possibly to a material degree, and these variations are likely to affect our
future capital requirements.

    We also expect that we will require additional financing or may require
financing sooner than anticipated to complete our roll-out plan or if our
development plans change or prove to be inaccurate. We may also require
additional financing in order to develop new services or to otherwise respond to
changing business conditions or unanticipated competitive pressures. Sources of
additional financing may include commercial bank borrowings, vendor financing,
or the private or public sale of equity or debt securities. If we decide to
raise additional funds through the incurrence of debt, our interest obligations
will increase, and we may become subject to additional or more restrictive
financial covenants, which could impair our ability to develop our business. We
cannot assure you that we will be successful in raising sufficient additional
capital on favorable terms or at all. Failure to raise sufficient funds may
require us to modify, delay or abandon some of our future expansion or
expenditure plans.

RESISTANCE BY POTENTIAL CUSTOMERS TO ACCEPT US AS A NEW PROVIDER OF
TELECOMMUNICATIONS SERVICES MAY REDUCE OUR ABILITY TO INCREASE OUR REVENUE.

    The success of our service offerings will depend upon, among other things,
the willingness of additional customers to accept us as a new provider of
integrated communications services. We cannot assure you that we will be
successful in overcoming the resistance of potential customers to change their
service provider, particularly those that purchase services from the traditional
telephone companies, or that customers will buy our services. Any lack of
customer acceptance would reduce our ability to increase our revenue.

IF WE ARE UNABLE TO DEVELOP OR INTEGRATE OUR SYSTEMS OR PROPERLY MAINTAIN AND
UPGRADE THEM, WE MAY NOT BE ABLE TO BILL OUR CUSTOMERS EFFECTIVELY OR PROVIDE
ADEQUATE CUSTOMER SERVICE.

    Sophisticated back office information and processing systems are vital to
our growth and our ability to monitor costs, bill customers, provision customer
orders, achieve operating efficiencies and maintain our operating margins. Our
plans for the development and implementation of these systems rely, for the most
part, on choosing products and services offered by third party vendors and
integrating these products and services in-house to produce efficient
operational solutions. We cannot assure you that we will successfully implement
these systems on a timely basis or that we will implement them at all. We also
cannot assure you that, once implemented, these systems will perform as we
expect. Risks to our business associated with our systems include:

    - failure by these vendors to deliver their products and services in a
      timely and effective manner and at acceptable costs;

    - failure by us to identify all of our information and processing needs
      adequately;

    - failure of our related processing or information systems; or

    - failure by us to effectively integrate new products or services.

    Furthermore, as our suppliers revise and upgrade their hardware, software
and equipment technology, we could encounter difficulties in integrating this
new technology into our business or the new systems may not be appropriate for
our business. In addition, our right to use these systems depends upon license
agreements with third party vendors. Vendors may cancel or elect not to renew
some of these agreements, which may adversely affect us.

                                       26
<PAGE>
WE MAY NEED TO RELY ON THE ESTABLISHED LOCAL TELEPHONE COMPANIES TO IMPLEMENT
OUR SERVICES SUCCESSFULLY. THEIR FAILURE TO COOPERATE WITH US COULD ADVERSELY
AFFECT THE SERVICES WE OFFER.

    We are a recent entrant into the local telecommunications services industry.
The local exchange services market in most states was only recently opened to
competition. There are numerous operating complexities associated with providing
these services. We will be required to develop new products, services and
systems and will need to develop new marketing initiatives to sell these
services. We cannot assure you that we will be able to develop these products
and services.

    We plan to deploy high capacity voice and data switches in most of the
markets we serve. We initially intend to rely on the networks of established
telephone companies or those of new market entrants for some aspects of
transmission. Federal law requires most of the traditional local telephone
companies to lease or "unbundle" elements of their networks and permit us to
purchase the elements we need, thereby decreasing our operating expenses. We
cannot assure you that this unbundling will continue to occur in a timely manner
or that the prices for these elements will be favorable to us. Our current
strategy depends in large part on our ability to provide service to our
customers by leasing all of the network elements necessary to provide local
telephone service from the incumbent telephone company rather than through the
use of our own equipment and facilities. UNE-P allows us to minimize capital
expenditures and permits us to enter new markets quickly, while allowing us to
maintain significant gross margins. If the incumbent local telephone companies
do not cooperate in making UNE-P available, our ability to provide service to
customers could be materially adversely affected.

    In addition, our ability to implement successfully our services will require
the negotiation of interconnection and collocation agreements with established
telephone companies and other new market entrants, which can take considerable
time, effort and expense and is subject to federal, state and local regulation.
Interconnection agreements are agreements between local telecommunications
services providers that set forth the terms and conditions governing how those
providers will interconnect their networks and/or purchase or lease network
facilities and services.

    Our interconnection agreements with Southwestern Bell provide that our
connection and maintenance orders will receive the same attention as
Southwestern Bell's end-user customers and that Southwestern Bell will provide
capacity at key telecommunications intersections to keep call blockage within
industry standards. Accordingly, we depend and will continue to depend on
Southwestern Bell and, as we expand our network, we will depend on other
traditional telephone companies to assure uninterrupted service and competitive
services. Blocked calls result in customer dissatisfaction and risk the loss of
business. Interconnection agreements, such as our agreements with Southwestern
Bell, typically have short terms, requiring us to renegotiate frequently. Some
of our agreements with Southwestern Bell have one year or less remaining before
we will have to renegotiate them. We cannot assure you that we will be able to
renegotiate these interconnection agreements in our existing markets, or
negotiate new interconnection agreements in new markets, on favorable terms. In
addition, the prices set forth in our interconnection agreements may be subject
to significant rate increases at the discretion of the regulatory authority in
each state in which we operate. Our profitability partially depends on these
state-regulated rate structures. We cannot assure you that the rates charged to
us under the interconnection agreements will allow us to offer low enough usage
rates to attract a sufficient number of customers and to operate our business
profitably or at favorable gross margins.

    Many new carriers have experienced difficulties in working with the
established telephone companies with respect to ordering, interconnecting,
leasing premises and implementing the systems used by these new carriers to
order and receive unbundled network elements and wholesale services. We cannot
assure you that established telephone companies will be accommodating to us. If
we are unable to obtain the cooperation of an established telephone company in a
region, our ability to offer local services in this region on a timely and
cost-effective basis would be adversely affected. In addition,

                                       27
<PAGE>
both proposed and recently completed mergers involving regional Bell operating
companies and other competitors could facilitate a combined entity's ability to
provide many of the services we offer, thereby making it more difficult to
compete against them.

DIGITAL SUBSCRIBER LINE TECHNOLOGY MAY NOT OPERATE AS EXPECTED ON INCUMBENT
LOCAL CARRIER NETWORKS AND MAY INTERFERE WITH OR BE AFFECTED BY OTHER TRANSPORT
TECHNOLOGIES.

    Our ability to provide digital subscriber line services to potential
customers depends on the quality, physical condition, availability and
maintenance of telephone lines within the control of the incumbent carriers. If
the telephone lines are not adequate, we may not be able to provide digital
subscriber line services to many of our target customers, and this will diminish
our expected revenue. We believe the current condition of telephone lines in
many cases may be inadequate to permit us to fully implement these services. We
also believe that the incumbent carriers may not maintain or improve the
telephone lines in a condition that will allow us to implement our digital
subscriber line services effectively. Further, the incumbent carriers may claim
their lines are not of sufficient quality to allow us to fully implement or
operate our digital subscriber line services. In addition, some customers use
technologies other than copper lines to provide telephone services, and as a
result, digital subscriber line services might not be available to these
customers.

    All transport technologies using copper telephone lines have the potential
to interfere with, or to be interfered with by, other traffic on adjacent copper
telephone lines. This interference could degrade the performance of our services
or make us unable to provide service on selected lines. In addition, incumbent
carriers may claim that the potential for interference by digital subscriber
line technology permits them to restrict or delay our deployment of this
technology. The telecommunications industry and regulatory agencies are still
developing procedures to resolve interference issues between telecommunications
providers, and these procedures may not be effective. We may be unable to
successfully negotiate interference resolution procedures with incumbent
carriers. Interference, or claims of interference, if widespread, would
adversely affect our speed of deployment, reputation, brand image, service
quality and customer retention and satisfaction.

IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY MANAGEMENT AND PERSONNEL, WE MAY NOT
BE ABLE TO IMPLEMENT OUR BUSINESS PLAN.

    We believe that our future success will be due, in part, to our experienced
management team, including Messrs. Scott, Goldman, Hollingsworth, Lawhon,
Moline, Shackelford and Vranicar, each of whom is party to an employment
agreement. Losing the services of one or more members of our management team
could adversely affect our business and our expansion efforts and possibly
prevent us from:

    - further deploying and improving our operational, financial and information
      systems and controls;

    - hiring and retaining qualified sales, marketing, administrative, operating
      and technical personnel; and

    - training and managing new personnel.

    In addition, competition for qualified employees has intensified in recent
years and may become even more intense in the future. Our ability to implement
our business plan depends on our ability to hire and retain a large number of
new employees each year. Inability to hire sufficient qualified personnel could
impair our ability to increase revenue, and customers could experience delays in
installation of service or experience lower levels of customer care.

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<PAGE>
WE MAY NOT HAVE THE ABILITY TO DEVELOP STRATEGIC ALLIANCES OR TO MAKE OR
SUCCESSFULLY INTEGRATE ACQUISITIONS NEEDED TO COMPLEMENT OUR EXISTING BUSINESS.

    As part of our growth strategy, we seek to develop strategic alliances and
to make investments or acquire assets or other businesses. We regularly engage
in discussions relating to potential acquisitions. We are unable to predict
whether or when any prospective acquisitions or strategic alliances will occur
or the likelihood of a material transaction being completed on favorable terms
and conditions. Our ability to finance acquisitions and strategic alliances may
be constrained by our degree of leverage at the time of the acquisition. In
addition, our senior credit facility and senior notes may significantly limit
our ability to make acquisitions or enter into strategic alliances and to incur
indebtedness in connection with acquisitions and strategic alliances.

    In addition, if we were to proceed with one or more significant strategic
alliances, acquisitions or investments in which the consideration consists of
cash, we could use a substantial portion of our available cash, to consummate
the strategic alliances, acquisitions or investments. The financial impact of
acquisitions, investments and strategic alliances could cause substantial
fluctuations in our quarterly and yearly operating results.

    The integration of any future acquisitions or strategic alliances would be
accompanied by the risks commonly encountered in these transactions. These risks
include, among others:

    - the difficulty of assimilating the acquired operations and personnel;

    - the potential disruption of our ongoing business and diversion of
      resources and management time;

    - the inability of management to maximize our financial and strategic
      position by the successful incorporation of licensed or acquired
      technology and rights into our service offerings;

    - the possible inability of management to maintain uniform standards,
      controls, procedures and policies;

    - the risks of entering markets in which we have little or no direct prior
      experience; and

    - the potential impairment of relationships with employees or customers as a
      result of changes in management or otherwise arising out of these
      transactions.

We cannot assure you that we will be able to integrate acquired businesses or
assets successfully.

A SYSTEM FAILURE COULD CAUSE DELAYS OR INTERRUPTIONS OF SERVICE, WHICH COULD
CAUSE US TO LOSE CUSTOMERS.

    Our success will require that our networks provide competitive reliability,
capacity and security. Some of the risks to our networks and infrastructure
include:

    - physical damage to access lines;

    - power surges or outages;

    - capacity limitations;

    - software defects;

    - lack of redundancy; and

    - disruptions beyond our control.

    These disruptions may cause interruptions in service or reduced capacity for
customers, any of which could cause us to lose customers.

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<PAGE>
ALL YEAR 2000 PROBLEMS MAY NOT HAVE BEEN ADDRESSED BY OUR SUPPLIERS, AND ANY
SERVICE INTERRUPTION WE EXPERIENCE AS A RESULT OF THESE PROBLEMS MAY CAUSE US TO
LOSE CUSTOMERS.

    The Year 2000 issue generally describes the various problems that may result
from the improper processing of dates and date-sensitive transactions by
computers and other equipment as a result of computer hardware and software
using two digits, rather than four digits, to identify the year in a date. Any
computer programs or systems of our suppliers that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000.
While we have experienced no Year 2000 issues to date, and we are not aware of
any material issues for our suppliers, we are continuing to evaluate and
determine whether our significant suppliers are in compliance or have
appropriate plans to remedy Year 2000 issues when their systems interact with
our systems. We do not expect that this will have a material impact on our
operations. However, we cannot assure you that the systems of other companies on
which we rely are Year 2000 compliant, that another company's failure to
successfully convert, or that another company's conversion to a system
incompatible with our systems, would not have an impact on our operations. The
failure of our principal suppliers to be Year 2000 compliant could result in
delays in service deliveries from those suppliers and materially impact our
ability to do business.

OUR OFFICERS AND DIRECTORS EXERT SUBSTANTIAL INFLUENCE OVER US.

    Our executive officers, directors and entities affiliated with them together
beneficially own a substantial percentage of our outstanding common stock. As a
result, these stockholders are able to exercise substantial influence over all
matters requiring approval by our stockholders, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership may also have the effect of delaying or preventing a change in our
control.

RISKS RELATED TO OUR INDUSTRY:

WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST OTHER COMPANIES.

    The telecommunications industry is highly competitive and is affected by the
introduction of new services by, and the market activities of, major industry
participants. Several of our competitors are substantially larger and have
greater financial, technical and marketing resources than we do. We have not
achieved, and do not expect to achieve, a significant market share for any of
the broadband telecommunications services we offer in our target markets. In
particular, larger competitors have advantages over us that could cause us to
lose customers and impede our ability to attract new customers, including:

    - long-standing relationships and brand recognition with customers;

    - financial, technical, marketing, personnel and other resources
      substantially greater than ours;

    - more funds to deploy telecommunications services;

    - potential to lower prices of competitive telecommunications services; and

    - fully-deployed networks.

    We face competition from other current and potential market entrants,
including:

    - domestic and international long distance providers seeking to enter,
      re-enter or expand entry into the local telecommunications marketplace;
      and

    - other domestic and international telecommunications providers, resellers,
      cable television companies, electric utilities and Internet companies.

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<PAGE>
    A continuing trend toward combinations and strategic alliances in the
telecommunications industry could give rise to significant new competitors. This
could cause us to lose customers and impede our ability to attract new
customers.

FCC AND STATE REGULATIONS MAY LIMIT THE SERVICES WE CAN OFFER OR IMPACT OUR
ABILITY TO CONDUCT OUR BUSINESS.

    Our networks and the provision of telecommunications services are
extensively regulated at the federal, state and local levels. Existing and
future governmental regulations may greatly influence how we operate our
business, our business strategy and ultimately, our viability. The costs of
complying with federal, state and local regulations and the delays in receiving
required regulatory approvals or the enactment of new adverse regulation or
regulatory requirements may be greater than we anticipate and divert our
resources from implementing our business plan. We cannot predict the future
regulatory framework for our business.

    Our provision of telecommunications services may be subject to the
requirement that we obtain proper authorizations from the FCC or state
commissions. We cannot assure you that the FCC or state commissions will grant
the required authority or refrain from taking action against us if we are found
to have provided services without obtaining the necessary authorizations. If we
do not fully comply with the rules of the FCC or state regulatory agencies,
third parties or regulators could challenge our authority to do business. These
challenges could cause us to incur substantial legal and administrative
expenses.

    Federal law governing the telecommunications industry remains in a state of
flux. The Telecommunications Act remains subject to judicial review and
additional FCC rulemaking, and thus it is difficult to predict what effect the
legislation or these FCC rules will have on us and our operations. There are
currently many regulatory actions underway and being contemplated by federal and
state authorities regarding interconnection pricing, universal service support,
access charge reform, and other issues that could result in significant changes
to the business conditions in the telecommunications industry.

    Our current business strategy depends in large part on our ability to
provide service to our customers through UNE-P. Our ability to provide service
to customers through UNE-P depends in turn on FCC and state commission rulings
requiring incumbent local telephone companies to lease us the necessary network
elements. If those rules are changed by the FCC or state commissions, or are
struck down by the courts, our ability to provide service to our customers
through UNE-P could be materially adversely affected. For example, the FCC could
remove one or more of the necessary elements from the list of elements that the
incumbent telephone companies are required to provide to us. The FCC could also
expand the scope of an existing exception in its rules that permits incumbent
telephone companies to opt not to make UNE-P available in the highest density
geographic areas within the largest 50 metropolitan statistical areas if they
meet certain conditions. If the FCC acts to expand the scope of the geographic
exception to include our target markets, our business could be materially
adversely affected. Some states in our current operating region, including Texas
and Missouri, have gone beyond the FCC's minimum requirements and independently
ordered Southwestern Bell to make UNE-P available throughout those states under
terms more favorable to new telecommunications service providers than those
required by the FCC. We cannot assure you that those favorable state rulings
will remain in place. If UNE-P does not continue to be available on the
favorable terms ordered by the states, our business could be materially
adversely affected.

    The United States Court of Appeals for the Eighth Circuit is currently
considering challenges to the pricing methodology established by the FCC for
setting the rates paid by telecommunications service providers to incumbent
telephone companies for access to network elements. If the court strikes down
some or all of the FCCs's pricing methodology and that methodology is ultimately
replaced with

                                       31
<PAGE>
a methodology that imposes higher rates for network elements, we could be
materially adversely affected.

    Federal universal service support mechanisms could increase the costs of
providing service to our customers. We derive revenue from the provision of
interstate and international telecommunications services to end users that may
be subject to the requirement that we contribute to the FCC's Universal Service
Fund based on a percentage of this revenue. The assessment for the first quarter
of 2000 is 5.8995%, and the assessment for the second quarter of 2000 is 5.7101%
of interstate and international end user telecommunications revenue. The
contribution factor varies quarterly at a rate set by the FCC. To the extent the
contribution factor increases, our costs of providing service will increase.

    Our Internet operations are not currently regulated directly by the FCC or
any other governmental agency, other than regulations applicable to businesses
generally. However, the FCC has recently indicated that the regulatory status of
some services offered over the Internet may have to be re-examined. New laws or
regulations relating to Internet services, or existing laws found to apply to
them, may adversely affect our Internet operations.

WE MAY BE UNABLE TO ADAPT TO TECHNOLOGICAL CHANGE.

    The telecommunications industry is subject to rapid and significant changes
in technology, including continuing developments in digital subscriber line
technology. This technology does not presently have widely accepted standards,
and alternative technologies for providing high speed data transport and
networking may develop. The absence of widely accepted standards may delay or
increase the cost of our market entry due to changes in equipment specifications
and customer needs and expectations. We may also rely on a third party for
access to new technologies. In addition, if we acquire new technologies, we may
not be able to implement them as effectively as other companies with more
experience with those technologies and in their markets.

WE MAY FAIL TO ACHIEVE ACCEPTABLE PROFITS ON OUR LONG DISTANCE BUSINESS DUE TO
DECLINING PRICES, LOW CUSTOMER RETENTION RATES AND OUR CONTRACTUAL OBLIGATIONS.

    Prices in the long distance business have declined substantially in recent
years and are expected to continue to decline. In addition, the long distance
industry has a low customer retention rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. We will rely on other carriers to provide us with a
major portion of our long distance transmission network. Agreements with these
carriers typically provide for the resale of long distance services on a
per-minute basis and may contain minimum volume commitments. The negotiation of
these agreements involves estimates of future supply and demand for transmission
capacity, as well as estimates of the calling patterns and traffic levels of our
future customers. In the event that we fail to meet these minimum volume
commitments, we may have to pay underutilization charges, and, in the event we
underestimate our need for transmission capacity, we may have to obtain capacity
through more expensive means.

AS A NEW DATA TRANSMISSION ENTRANT IN A MARKET, WE MAY INITIALLY GENERATE LOW OR
NEGATIVE GROSS MARGINS.

    As a new entrant in the data transmission business, we expect to generate
low or negative gross margins and substantial start-up expenses as we begin to
offer data transmission services. The success of our data transmission business
will depend upon, among other things, the effectiveness of our sales personnel
in the promotion and sale of our data transmission services, the acceptance of
these services by potential customers, and our ability to hire and train
qualified personnel and further enhance our services in response to future
technological changes. We cannot assure you that we will be successful in these
endeavors.

                                       32
<PAGE>
THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT MAY NOT BE ACCURATE
INDICATORS OF OUR FUTURE PERFORMANCE.

    This Form 10-K contains forward-looking statements within the meaning of the
federal securities laws. Discussions containing forward-looking statements may
be found in the material set forth in this section and under "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as in the Form 10-K generally. The words "believe,"
"estimate," "expect," "intend," "anticipate," "plan," and similar expressions
and variations of these expressions identify some of these forward-looking
statements that speak only as of the dates on which they were made. We caution
you that these forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual events or results may
differ materially from those discussed in the forward-looking statements as a
result of various factors, including, without limitation, the risk factors set
forth above and the matters set forth in this Form 10-K generally. All
subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements included in this document. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.

ITEM 2. PROPERTIES

    We lease 43,783 square feet in office space in Kansas City, Missouri for our
corporate headquarters. This lease expires December 2006. Recently, we leased an
additional 64,546 square feet of office space in Kansas City to expand our
corporate headquarters. This lease expires February 2008. In Emporia, Kansas, we
own two buildings totaling 58,500 square feet for our customer care center and
provisioning divisions. In addition, we lease an aggregate of 21,175 square feet
to house our four circuit switches in Kansas City and St. Louis, Missouri and
Wichita, Kansas. These leases expire March 2003, November 2008, August 2005 and
June 2008. We also lease space in 27 buildings, totaling approximately 110,823
square feet, in Missouri, Kansas, Texas and Oklahoma for our sales offices and
customer premises equipment sites. These leases are generally leased on a
month-to-month or annual basis.

                                       33
<PAGE>
ITEM 3. LEGAL PROCEEDINGS

    From time to time, we may be involved in claims or litigation that arise in
the normal course of business. We are not a party to any legal proceedings
which, if decided adversely, would have a material adverse effect on our
business or financial condition or results of operations.

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

MARKET INFORMATION

    There is no established public trading market for our common stock. However,
on March 23, 2000, we filed a registration statement on Form S-1 with the
Securities and Exchange Commission, contemplating our initial public offering in
the second quarter of 2000.

HOLDERS

    As of March 23, 2000, there were 81 holders of record of our common stock.

DIVIDENDS

    We have never paid or declared any cash dividends on our common stock and do
not anticipate paying cash dividends in the foreseeable future. We currently
intend to retain all future earnings, if any, for use in the operation of our
business and to fund future growth. The terms of our senior credit facility and
senior notes indenture restrict our ability to declare and pay dividends on our
common stock.

RECENT SALES OF UNREGISTERED SECURITIES

    During 1999 we issued the following securities which were not registered
under the Securities Act of 1933, as amended.

    In February 1999, we acquired American Local, a competitive local exchange
carrier based in the Dallas, Texas metropolitan area. The acquisition included
substantially all assets of American Local. The total purchase price was
approximately $1.6 million in cash and $211,000 in stock representing 70,334
shares. This issuance was exempt from registration pursuant to Section 4(2) of
the Securities Act.

    During July 1999 we completed a private placement to approximately 55 of our
existing investors in our series B preferred stock of 2,222,222 shares of
series D preferred stock at a purchase price of $4.50 per share for aggregate
net proceeds of approximately $10 million. This issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act.

    During August 1999, BTI Ventures, L.L.C., an affiliate of KKR, purchased
13,333,334 shares of our series F preferred stock at a purchase price of $4.50
per share for aggregate net proceeds of $60.0 million. On March 23, 2000, KKR
exercised its options to purchase an additional 5,263,158 shares of series F
preferred stock at $4.75 per share and 5,000,000 shares of series F preferred
stock at $5.00 per share. In connection with the private placement of the
series F preferred stock to BTI Ventures, L.L.C., which closed on August 5,
1999, and the related exercise of the KKR options, Lehman Brothers

                                       34
<PAGE>
Inc. earned compensation which included 646,300 shares of our series D preferred
stock. These issuances were exempt from registration pursuant to Section 4(2) of
the Securities Act.

    During August 1999, in connection with the series F preferred stock
offering, we repurchased 2,222,222 shares of our series C preferred stock for
$10 million from a board member.

    During August 1999, in connection with the series F preferred stock
offering, we converted each outstanding share of series B preferred stock into
one share of amended and restated series B preferred stock. The holders of
series B preferred stock, approximately 70 accredited investors, surrendered
their existing redemption and participating liquidation preference in exchange
for 0.2222 shares of our series E preferred stock. These issuances were exempt
from registration pursuant to Section 4(2) of the Securities Act. We redeemed
the series E preferred stock for a total of $8.6 million.

    In March 1999, Mr. Jalkut, a member of our board of directors, agreed to
purchase 26,667 shares of our common stock for $200,000, and Mr. Ejabat, a
member of our board of directors, agreed to purchase 66,667 shares of our common
stock for $500,000.

ITEM 6. SELECTED FINANCIAL DATA

    The following table sets forth our selected consolidated financial and
operating data for the periods indicated. Our statement of operations data and
other financial data for the years ended December 31, 1997, 1998 and 1999 and
our balance sheet data as of December 31, 1998 and 1999, as well as the
statement of operations data, other financial data and balance sheet data for
the predecessor company as of and for the year ended December 31, 1997, have
been derived from, and is qualified by reference to, consolidated financial
statements included elsewhere in this Form 10-K.

    EBITDA consists of earnings before interest, income taxes, depreciation and
amortization. EBITDA is provided because it is a measure of financial
performance commonly used in the telecommunications industry. EBITDA is used by
management and some investors as an indicator of a company's historical ability
to service debt. Management believes that an increase in EBITDA is an indicator
of improved ability to service existing debt, to sustain potential future
increases in debt and to satisfy capital requirements. We have presented EBITDA
to enhance your understanding of our operating results. You should not construe
it as an alternative to operating income, as an indicator of our operating
performance nor as an alternative to cash flows from operating activities as a
measure of liquidity determined in accordance with GAAP. We may calculate EBITDA
differently from other companies. For further information, see our consolidated
financial statements and the related notes elsewhere in this prospectus.

    The predecessor company is Valu-Line, which merged with us in
February 1998. Prior to February 1998, Birch had no revenues and was a
development stage company.

    We acquired Boulevard, Telesource and TFSnet in 1998 and American Local and
Capital in 1999. The statement of operations data, other financial data and
operating data in the table include the operations of these companies beginning
on the dates they were acquired. These acquisitions affect the comparability of
the financial data for the periods presented.

    For purposes of calculating the ratio of earnings to fixed charges, earnings
are defined as loss before income taxes plus fixed charges. Fixed charges
consist of interest expense and a reasonable approximation of the interest
factor included in rental payments on operating leases. Earnings were
insufficient to cover fixed charges for the years ended December 31, 1997, 1998
and 1999. See Exhibit 12.1 for the computation of the ratio of earnings to fixed
charges.

                                       35
<PAGE>

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                              ---------------------------------------------------------------
                                                                     THE PREDECESSOR                       BIRCH
                                                              ------------------------------   ------------------------------
                                                                1995       1996       1997       1997       1998       1999
                                                              --------   --------   --------   --------   --------   --------
                                                                    (IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S>                                                           <C>        <C>        <C>        <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
  Revenue...................................................  $12,226    $13,217    $16,801    $    --    $ 26,087   $ 60,538
  Cost of services..........................................    8,284      8,749     11,842         --      18,886     46,358
                                                              -------    -------    -------    -------    --------   --------
  Gross margin..............................................    3,942      4,468      4,959         --       7,201     14,180
  Selling, general and administrative.......................    3,520      3,561      4,067      1,776      15,769     53,045
  Depreciation and amortization.............................      189        311        341         27       2,308     10,828
                                                              -------    -------    -------    -------    --------   --------
  Income (loss) from operations.............................      233        596        551     (1,803)    (10,876)   (49,693)
  Interest income (expense), net............................      (58)      (102)       (97)        14      (5,332)   (12,111)
                                                              -------    -------    -------    -------    --------   --------
  Income (loss) before income taxes.........................      175        494        454     (1,789)    (16,208)   (61,804)
  Provision for income taxes................................       81        205        186         --          --         --
                                                              -------    -------    -------    -------    --------   --------
  Net income (loss).........................................  $    94    $   289    $   268     (1,789)    (16,208)   (61,804)
                                                              =======    =======    =======
  Preferred stock dividends.................................                                        --      (1,696)    (3,550)
  Amortization of preferred stock issuance costs............                                        --         (29)      (292)
                                                                                               -------    --------   --------
  Loss applicable to common stock...........................                                   $(1,789)   $(17,933)  $(65,646)
                                                                                               =======    ========   ========

  Weighted average shares outstanding--basic and diluted....                                     1,235       3,809      4,956

  Loss per common share--basic and diluted..................                                   $ (1.45)   $  (4.71)  $ (13.25)

OTHER FINANCIAL DATA:
  Cash flows from operating activities......................  $  (267)   $   834    $   488    $(1,551)   $(10,643)  $(53,225)
  Cash flows from investing activities......................     (230)      (513)      (243)      (128)    (67,093)   (31,796)
  Cash flows from financing activities......................      259       (257)      (145)     1,889     117,271     50,329
  EBITDA....................................................      422        907        892     (1,776)     (8,568)   (38,865)
  Capital expenditures......................................      230        513        243        128      21,550     41,360
  Ratio of earnings to fixed charges........................      3.5x       5.2x       4.9x        --          --         --
  Deficiency of earnings to fixed charges...................       --         --         --      1,789      16,208     61,804

OPERATING DATA:
  Local Customers at end of period..........................                                        --      14,735     38,487
  Access Lines in service at end of period..................                                        --      39,323    112,518
  Average lines per business customer.......................                                        --        4.73       4.48
  Average lines per residential customer....................                                        --        1.25       1.22
  Circuit switches in service at end of period..............                                         1           1          4
  Data switches in service at end of period.................                                        --           1         19
  Employees at end of period................................                                        14         345        935
</TABLE>

<TABLE>
<CAPTION>
                                                                                       DECEMBER 31,
                                                              ---------------------------------------------------------------
                                                                     THE PREDECESSOR                       BIRCH
                                                              ------------------------------   ------------------------------
                                                                1995       1996       1997       1997       1998       1999
                                                              --------   --------   --------   --------   --------   --------
                                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>        <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................   $   96     $  158    $   258    $   210    $ 39,745   $  5,053
Pledged securities..........................................       --         --         --         --      37,785     23,420
Property and equipment......................................    2,265      2,721      2,964        128      26,900     70,192
Total assets................................................    3,971      3,868      4,802        534     134,149    146,971
Long-term debt and capital lease obligations................    1,431        792        681         --     115,791    125,785
Redeemable preferred stock..................................       --         --         --         --      14,063     63,550
Total stockholders' equity (deficit)........................    1,108      1,397      1,665         29      (7,099)   (67,757)
</TABLE>

                                       36
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

    YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS TOGETHER WITH THE FINANCIAL STATEMENTS AND RELATED NOTES
THAT ARE INCLUDED LATER IN THIS FORM 10-K. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK
FACTORS" OR IN OTHER PARTS OF THIS FORM 10-K.

OVERVIEW

    We were organized on December 23, 1996 to become a leading provider of
telecommunications services for small and mid-sized businesses in our target
markets. From that date until the February 1998 acquisition of Valu-Line, our
predecessor, we were a development stage company with no revenue and principal
activities consisting of procuring governmental authorizations, raising capital,
hiring management and other key personnel, designing and developing our
telephone networks, acquiring equipment and facilities, negotiating resale and
interconnection agreements and pursuing acquisition opportunities. We had no
assets, liabilities or financial activity prior to January 1, 1997.

    The following is a summary of our major transactions and events.

<TABLE>
<CAPTION>
DATE                                                    EVENT
----                         ------------------------------------------------------------
<S>                          <C>
February 1998                Merged with Valu-Line Companies, Inc., a provider of
                             switched long distance, resold services and customer
                             premises equipment sales and service in Kansas.

February/March 1998          Raised $13.0 million from the issuance of series B preferred
                             stock and convertible notes used to pay the cash portion of
                             the consideration in the Valu-Line merger, to repay debt and
                             for general corporate purposes.

March 1998                   Launched St. Joseph, Missouri market.

May 1998                     Acquired Boulevard Phone Company, a provider of shared
                             tenant service in the Kansas City, Missouri metropolitan
                             area.

May 1998                     Acquired Telesource Communications, Inc., a customer
                             equipment sales and service provider in the Kansas City,
                             Missouri metropolitan area.

May 1998                     Launched St. Louis and Kansas City, Missouri and Wichita and
                             Topeka, Kansas markets.

June 1998                    Completed a $115.0 million private offering of 14% senior
                             notes due June 2008 and 115,000 warrants to purchase
                             1,409,734 shares of common stock.

September 1998               Acquired TFSnet, Inc., a provider of Internet service in the
                             Kansas City, Missouri metropolitan area.

February 1999                Acquired American Local, a communications provider based in
                             the Dallas, Texas metropolitan area.

March 1999                   Acquired Capital Communications Corporation, a customer
                             equipment sales and service provider based in the St. Louis,
                             Missouri metropolitan area.

May 1999-August 1999         Launched 11 Texas markets.

July 1999/August 1999        Sold $60.0 million of series F preferred stock to an
                             affiliate of KKR, granted options to purchase an additional
                             $50.0 million of series F preferred stock, sold $10.0
                             million of series D preferred stock and redeemed $10.0
                             million of series C preferred stock and $8.6 million of
                             series E preferred stock.

December 1999/February 2000  Obtained a $75.0 million debt facility for general corporate
                             purposes of our subsidiaries and to finance
                             telecommunications equipment, inventory, network assets and
                             back office systems. The facility was increased to $125.0
                             million during syndication in February 2000.

March 2000                   KKR exercised its options to purchase an additional
                             $50.0 million series F preferred stock.

March 2000                   Filed a registration statement on Form S-1 with the SEC for
                             an underwritten initial public offering of common stock.
</TABLE>

                                       37
<PAGE>
FACTORS AFFECTING OPERATIONS

    REVENUE.  We generate most of our revenue from the sale of our voice and
data products, including local and long distance telephone service, Internet
access and customer premises equipment to small and mid-sized business customers
in various markets in Missouri, Kansas and Texas. Revenue from local services
consists of charges for basic local service and custom calling features. We
offer local telephone service at a discount to the competing incumbent provider
of telecommunications services and offer long distance service at flat
per-minute rates. We offer customer premises equipment and related services at
negotiated rates generally consistent with other competitors. We also offer data
services in select markets primarily at flat monthly rates. We expect that over
the near term these services will continue to be the principal components of our
revenue.

    Our revenue consists of monthly recurring charges and usage charges. Monthly
recurring charges include the fees paid by our customers for lines in service,
additional features on those lines and collocation space. Usage charges consist
of fees paid for each call made generally measured by the minute but also
measured by the call. Additionally, revenue from customer premises equipment
sales is recognized upon project completion.

    OPERATING EXPENSES.  Our primary operating expenses are cost of services and
selling, general and administrative expenses.

    COST OF SERVICES.  Our cost of services includes the cost of leasing
unbundled network elements from the incumbent telephone company for combination
into Birch-branded voice services and purchasing the complete "bundle" of
traditional incumbent telephone company services for resale to our local service
subscribers. We lease local telephone network components to provide service for
our customers under an interconnection agreement with the incumbent telephone
company in our target markets. In markets where we have a local circuit switch,
we can avoid leasing the switch and related features from the incumbent
telephone company, which improves our gross margins.

    Incumbent telephone companies typically charge both a start-up fee as well
as a monthly recurring fee for use of their central offices for collocation of
transmission equipment. Physically collocating our transmission equipment in or
near existing incumbent telephone company switching offices allows us to combine
leased digital subscriber lines with our data transmission switches to provide
high speed data services and, eventually, voice and data services over a single
digital subscriber line. We also invest in transmission and distribution
electronics equipment associated with our switches. All of these costs are
reflected in our cost of services.

    Our primary long distance expenses are expenses associated with network
access and our leased long distance network. We purchase long distance capacity
from third party providers for all calls terminating outside of our network.

    Our primary expense associated with providing data services to our customers
is the cost of leasing transmission facilities. Our primary expense associated
with customer premises equipment is the cost of purchasing equipment from
manufacturers and labor for service and equipment installation.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Our selling, general and
administrative expenses include selling and marketing costs and customer
service, billing, corporate administration, personnel and network maintenance
expenses.

    We employ a direct sales force in each of our target markets. To attract and
retain a highly qualified sales force, we offer our sales personnel a
compensation package that emphasizes commissions. We expect to incur significant
selling and marketing costs as we expand our operations.

    We have implemented and continue to refine tailored systems for operations
support systems and other back office systems that provision and track customer
orders from point of sale to the installation

                                       38
<PAGE>
and testing of service. Along with the development costs of these systems, we
also incur ongoing expenses for customer service and billing systems. As our
strategy stresses the importance of personalized customer service, we expect
that our customer service department will become a larger part of our ongoing
administrative expenses. We also expect billing costs to increase as the number
of our customers and the call volume increase. We incur other costs and
expenses, including the costs associated with maintenance of our network,
administrative overhead, office leases and bad debt. We expect that these costs
will grow significantly as we expand our operations and that administrative
overhead will be a large portion of these expenses during the expansion phase of
our business. However, we expect these expenses to become a smaller percentage
of our revenue as we build our customer base.

    We have experienced operating losses since inception as a result of efforts
to build our customer base, develop and construct network infrastructure, build
internal staffing, develop systems and expand into new markets. We expect to
continue to focus on increasing our customer base and geographic coverage.
Accordingly, we expect that cost of services, selling, general and
administrative expenses, and capital expenditures will continue to increase
significantly, all of which may have a negative impact on operating results. The
projected increases in capital expenditures will continue to generate negative
cash flows for at least the next several years as we develop and construct our
voice and data networks. We may also be forced to change our pricing policies to
respond to a changing competitive environment, and we cannot assure you that we
will be able to maintain our gross and operating margins. We cannot assure you
that growth in our revenue or customer base will continue or that we will be
able to achieve or sustain profitability or positive cash flows.

RESULTS OF OPERATIONS

BIRCH TELECOM, INC.

    YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

    REVENUE.  Revenue increased 132.1% to $60.5 million for 1999 compared to
$26.1 million for 1998. The increase in revenue was principally a result of new
customer sales in new and existing markets and the acquisitions of Capital in
March 1999 and American Local in February 1999. As a percentage of total
revenue, communications services were 87.5% for 1999 and 83.5% for 1998, and
equipment sales were 12.5% for 1999 and 16.5% for 1998.

    COST OF SERVICES.  Cost of services increased 145.5% to $46.4 million for
1999 compared to $18.9 million for 1998. The increase in cost of services was
primarily the result of associated revenue increases. Gross margins increased
96.9% to $14.2 million (23.4% of revenue) for 1999 compared to $7.2 million
(27.6% of revenue) for 1998. The decline in gross margin as a percentage of
revenue was principally the result of a greater percentage of revenue being
derived from resold local service during 1999 compared to 1998. Additionally,
long distance margins declined as a result of competitive pricing pressures.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and
administrative expenses increased 236.4% to $53.0 million for 1999 compared to
$15.8 million for 1998. The increase in expense was primarily a result of
supporting and attracting customers in new and existing markets, market launches
in Texas and the acquisitions of Capital and American Local each of which
affected wages, rent and advertising expense. Additionally, we had 935 employees
at December 31, 1999 compared to 345 employees at December 31, 1998. EBITDA, a
commonly used measure by securities analysts of earnings before deducting
interest, taxes, depreciation and amortization, decreased 353.6% to a loss of
$38.9 million for 1999 compared to a loss of $8.6 million for 1998.

    DEPRECIATION AND AMORTIZATION.  Depreciation and amortization increased
369.2% to $10.8 million for 1999 compared to $2.3 million for 1998. The increase
in depreciation and amortization was

                                       39
<PAGE>
primarily attributable to the depreciation of network assets added in our
markets and the amortization of intangible assets related to acquisitions.

    INTEREST.  Interest expense increased 82.2% to $15.0 million for 1999
compared to $8.3 million for 1998. The increase in interest expense was
primarily a result of a full year of interest charges on our senior notes sold
in June 1998. Interest income remained virtually unchanged at $2.9 million in
1999 and 1998. Interest income is primarily derived from pledged securities
purchased in connection with our senior notes.

    NET LOSS.  Net loss increased 281.3% to $61.8 million for 1999 compared to
$16.2 million for 1998.

    YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

    REVENUE.  Revenue was $26.1 million for 1998, resulting from the
acquisitions of Valu-Line, Boulevard, Telesource and TFSnet and new customer
sales from new markets. There was no revenue for 1997 because we were in the
developmental stage. In addition to revenue generated as a result of
acquisitions in 1998, revenue was generated from the sale of local telephone
services to new customers.

    COST OF SERVICES.  Cost of services and gross margin totaled $18.9 million
and $7.2 million, respectively, for 1998 as a result of the associated revenue
increases.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and
administrative expenses increased $14.0 million to $15.8 million for 1998
compared to $1.8 million for 1997. The increase in expense was primarily a
result of the Valu-Line, Boulevard, Telesource and TFSnet acquisitions and
opening five new markets in 1998. Additionally, we expanded our engineering and
operations staff in preparation for switch deployment. EBITDA decreased 382.4%
to a loss of $8.6 million for 1998 compared to a loss of $1.8 million for 1997.

    DEPRECIATION AND AMORTIZATION.  Depreciation and amortization increased to
$2.3 million for 1998 compared to $27,000 for 1997, most of which was
attributable to the fixed and intangible assets acquired in the Valu-Line,
Boulevard, Telesource and TFSnet acquisitions.

    INTEREST.  Interest expense was $8.2 million for 1998 primarily from
interest charges on the senior notes. There was no interest expense in 1997.
Interest income was $2.9 million in 1998 compared to $14,000 for 1997 primarily
as a result of invested funds received from the senior notes.

    NET LOSS.  Net loss was $16.2 million for 1998 compared to $1.8 million for
1997.

VALU-LINE COMPANIES, INC. (PREDECESSOR COMPANY)

    YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

    REVENUE.  Revenue increased 27.1% to $16.8 million for 1997 compared to
$13.2 million for 1996. The increase was primarily a result of entering the
local service market in March 1997 and long distance volumes increasing faster
than the decline in long distance pricing. Customer premises equipment sales
were 18% of revenue, or $3.0 million, for 1997 compared to 19.1% of revenue, or
$2.5 million, for 1996.

    COST OF SERVICES.  Cost of services increased 35.4% to $11.8 million for
1997 compared to $8.7 million for 1996. The increase was primarily a result of
associated revenue increases. Gross margin increased 11.0% to $5.0 million, or
29.5% of revenue, for 1997 compared to $4.5 million, or 33.8% of revenue, for
1996. The decrease in gross margin as a percentage of revenue was primarily a
result of low margins on resold local service, which started in March 1997.

                                       40
<PAGE>
    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and
administrative expenses increased 14.2% to $4.1 million for 1997 compared to
$3.6 million for 1996. The increase in expense was primarily a result of sales
commissions related to increased business volumes and increased customer service
expenditures associated with the commencement of local service. EBITDA decreased
1.7% to $892,000 for 1997 compared to $907,000 for 1996. The decrease in EBITDA
was primarily a result of the start-up costs associated with offering local
service.

    DEPRECIATION AND AMORTIZATION.  Depreciation and amortization increased 9.6%
to $341,000 for 1997 compared to $311,000 for 1996.

    INTEREST EXPENSE.  Interest expense was $97,000 for 1997 compared to
$102,000 for 1996.

    INCOME TAXES.  Income taxes decreased 9.3% to $186,000 for 1997 compared to
$205,000 for 1996.

    NET INCOME.  Net income was $268,000 for 1997 compared to $289,000 for 1996.

LIQUIDITY AND CAPITAL RESOURCES

    Our total assets increased to $147.0 million at December 31, 1999 from
$134.1 million at December 31, 1998. This increase was primarily the result of
capital outlays for expansion of our local and data networks and development of
operations support systems and automated back office systems, partially offset
by the use of cash to fund operations. At December 31, 1999, our current assets
of $38.8 million exceeded current liabilities of $25.4 million, resulting in
working capital of $13.4 million, representing a decrease of $36.3 million
compared to working capital of $49.7 million at December 31, 1998. At
December 31, 1998, our current assets of $61.1 million exceeded current
liabilities of $11.4 million. The decrease in working capital was primarily
attributable to the use of cash to fund operations and capital outlays for
expansion of our network, support systems and back office systems. Pledged
securities to satisfy interest payments on our senior notes amounted to
$23.4 million at December 31, 1999 and $37.8 million at December 31, 1998.

    OPERATING ACTIVITIES.  Net cash used in operating activities was
$53.2 million for the year ended December 31, 1999 compared to $10.6 million for
the year ended December 31, 1998. Net cash used in operating activities was
primarily used to fund our net losses of $61.8 million in 1999 and
$16.2 million in 1998.

    INVESTING ACTIVITIES.  Net cash used in investing activities was
$31.8 million for the year ended December 31, 1999 compared to $67.1 million for
the year ended December 31, 1998. In 1999, net cash used in investing activities
was primarily used for the purchase of property and equipment related to the
expansion of our networks, support systems and back office systems of
$41.4 million and acquisitions of $4.8 million, partially offset by net proceeds
from the sale of pledged securities of $16.1 million for the semi-annual
interest payments on the senior notes. In 1998, net cash used in investing
activities was primarily used for the purchase of pledged securities related to
our senior notes of $44.2 million, acquisitions of $7.8 million and purchases of
property and equipment related to the expansion of the network, support systems
and back office systems of $21.6 million, partially offset by net proceeds from
the sale of pledged securities of $7.7 million.

    FINANCING ACTIVITIES.  Net cash provided by financing activities was
$50.3 million for the year ended December 31, 1999 compared to $117.3 million
for the year ended December 31, 1998. In 1999, net cash provided by financing
activities was primarily a result of $70.0 million in proceeds from the sale of
series D and series F preferred stock and borrowings of $10.0 million under our
senior credit facility, partially offset by the redemption of series C and
series E preferred stock of $18.6 million and the payment of financing costs
related to the series D and series F preferred stock and on our senior credit
facility of $8.8 million.

                                       41
<PAGE>
    In 1998, net cash provided by financing activities was primarily a result of
proceeds of $114.7 million from the private offering of our senior notes. These
senior notes bear interest at a fixed rate of 14% per annum and are due in
June 2008. Subject to limitations, we may redeem a portion of these senior notes
prior to their maturity date if we pay a designated premium. The indenture with
respect to the senior notes contains a number of restrictive financial and
operational covenants with which we must comply.

    In February 2000, we increased the capacity of our $75.0 million senior
credit facility to $125.0 million. This credit facility provides for a
$25.0 million reducing revolver and $100.0 million in multi-draw term loans. The
revolver is available for general corporate purposes of our subsidiaries and the
term loans are to be used to finance telecommunications equipment, inventory,
network assets and back office systems. The senior credit facility is secured by
a perfected first priority security interest in substantially all of our assets
and capital stock of our subsidiaries and contains a number of financial and
operational covenants with which we must comply. Among other things, the
covenants require us to maintain specified levels of revenue, EBITDA, ratio
levels and access lines and restrict our ability to incur additional
indebtedness, pay dividends, enter into related party transactions or sell our
assets.

    In March 2000, KKR exercised its options to purchase an additional
$50.0 million of our series F preferred stock.

    The development and expansion of our business will continue to require
significant capital to fund capital expenditures, working capital and debt
service and will generate negative operating cash flows.

    Our principal capital expenditure requirements will include:

    - the purchase, installation, and expansion of switches and transmission
      equipment for our local and data networks; and

    - the further development of operations support systems and automated back
      office systems.

We do not believe that the growth of our long distance and customer premises
equipment business will require significant capital expenditures.

    Our business plan calls for us to offer our services in an additional 20
markets before the end of 2001. We expect to expand our operations in Texas and
into Oklahoma in the second quarter of this year and to commence service in the
regions served by Ameritech and BellSouth in 2001. We currently estimate that
the cash required to fund these capital expenditures will be approximately
$225.0 million over the next two years. We will need additional cash to fund our
working capital needs, debt service requirements and operating losses. Until we
begin to generate positive cash flow from operations, these liquidity
requirements will need to be financed with additional debt and equity capital.
In addition, depending on prevailing capital market conditions, we may choose to
repurchase all or a portion of our senior notes. We believe that our current
resources, including availability under our senior credit facility, together
with the net proceeds from our proposed initial public offering, planned for the
second quarter of 2000, will be sufficient to satisfy our liquidity needs for at
least the next 12 months.

    Thereafter, we will need substantial additional capital to finance our
business plan. If our plans or assumptions change, if our assumptions prove to
be inaccurate, or if we experience unexpected costs or competitive pricing
pressures, we will be required to seek additional capital sooner than we
currently expect. In particular, if we elect to pursue acquisition opportunities
or open additional markets, our cash needs may increase substantially. We cannot
assure you that our current projection of cash flow and losses from operations,
which will depend upon numerous future factors and conditions, many of which are
outside of our control, will be accurate. Actual results will almost certainly
vary materially from our current projections. The cost of expanding our network
services and sales efforts, funding

                                       42
<PAGE>
other strategic initiatives and operating our business will depend on a variety
of factors, including, among other things:

    - the number of subscribers and the services for which they subscribe;

    - the nature and penetration of services that we may offer;

    - regulatory and legislative developments; and

    - the response of our competitors to their loss of customers to us and to
      changes in technology.

    We intend to seek additional debt and equity financing to fund our future
liquidity needs. We cannot assure you that we will be able to raise additional
capital on satisfactory terms or at all. If we decide to raise additional funds
through the incurrence of debt, our interest obligations will increase and we
may become subject to additional or more restrictive financial covenants. In
addition, the terms of our senior credit facility and our senior notes each
restrict our ability to obtain additional debt financing. If we decide to raise
additional funds through the issuance of equity, the ownership interests
represented by the common stock will be diluted. In the event that we are unable
to obtain additional capital or to obtain it on acceptable terms or in
sufficient amounts, we may be required to delay the development of our network
and business plans or take other actions that could materially and adversely
affect our business, operating results and financial condition.

IMPACT OF THE YEAR 2000 ISSUE

    The Year 2000 issue results from computer programs being written using two
digits rather than four to define the year. Any of our computer programs or
systems, or those of our suppliers, that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculation causing the disruption of
operations, including among other things:

    - a temporary inability to process transactions;

    - a temporary inability to send invoices;

    - a temporary inability to engage in normal business activities; and

    - interruptions of customer care.

    We did not experience any problems on January 1, 2000 and to date, we have
not experienced, nor are we aware of, any material Year 2000 issues with any of
our internal systems or our services, and we do not anticipate experiencing any
issues in the future. Further, we are unaware of any issues with our vendors,
suppliers or customers that will materially affect us.

    We believe that we have identified all major computers, software
applications and related equipment used in connection with our internal
operations that will need to be modified, upgraded or replaced to minimize the
possibility of a material disruption to our business. We have completed
assessing the potential impact of Year 2000 issues on these computers, equipment
and applications and have modified, upgraded and replaced major systems that we
believe have Year 2000 issues.

    In addition to computers and related information, operation, and network
systems, the operation of office systems, facilities and equipment, such as fax
machines, security systems and other common office devices, may have Year 2000
issues that have not yet surfaced. We will continue to monitor the performance
of these office systems, equipment and facilities.

    We expect that we will be able to resolve any significant Year 2000 issues
we have identified with third party suppliers of components of
telecommunications services and our key subcontractors. However, because we have
no control over the actions of these parties, they may not remediate any or all
of the Year 2000 issues identified. Any failure of any of these third parties to
timely resolve Year

                                       43
<PAGE>
2000 issues with either their products sold to us, or their systems could have a
material adverse effect on our business, operating results and financial
condition. In addition, the delivery of our services also depends on the
operation of the networks of many local exchange carriers and long distance
carriers with whom we must interact as part of our normal business operations,
but with whom we do not have formal contractual arrangements. Consequently,
failure of these carriers' networks to fully operate as a result of Year 2000
issues could also affect our operations. To our knowledge, none of these
networks experienced any problems on or since January 1, 2000.

    Our total cost to date to proactively address our Year 2000 issues has not
been material. The cost of addressing Year 2000 issues is reported as a general
and administrative expense.

    We believe we identified and resolved all Year 2000 issues that could
materially and adversely affect our business operations. However, for the
reasons discussed above, we believe that it is not possible to determine with
complete certainty that all Year 2000 issues affecting us have been identified
or corrected and we may not know that this is true for several months. As a
result, we believe that the following consequences are possible:

    - operational inconveniences and inefficiencies for us that will divert our
      management's time and attention and our financial and human resources from
      ordinary business activities;

    - business disputes and claims for pricing adjustments or penalties by our
      customers due to Year 2000 issues, which we believe will be resolved in
      the ordinary course of business; and

    - business disputes alleging that we failed to comply with the terms and
      conditions of contracts or industry standards of performance that result
      in litigation or contract termination.

    We developed contingency plans to be implemented if our efforts to identify
and correct Year 2000 issues affecting our internal systems were ineffective. We
have adopted the Year 2000 contingency plans as our standard operational
contingency plans. Our contingency plans are designed to minimize the
disruptions or other adverse effects. Our plans include:

    - accelerated replacement of affected equipment or software;

    - short to medium-term use of backup equipment and software;

    - increased work hours for our personnel; and

    - use of contract personnel to correct on an accelerated schedule any Year
      2000 issues that arise or to provide manual workarounds for information
      systems.

    Our implementation of any of these contingency plans could require us to
expend additional funds and could have a material adverse effect on our
business, operating results and financial condition. Our efforts in this regard,
if necessary, will be to minimize expense associated with the implementation and
use of any contingency planning with our objective to employ the least costly
plan necessary to address the relevant operational issues.

IMPACT OF INFLATION

    We do not believe that inflation has had a significant impact on our
consolidated operations.

SEASONALITY

    Our business is not considered to be seasonal.

RECENTLY ISSUED ACCOUNTING STANDARDS

    In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which supersedes SFAS No. 80, "Accounting
for Futures Contracts," SFAS No. 105,

                                       44
<PAGE>
"Disclosure of Information About Financial Instruments with Off-Balance-Sheet
Risk and Financial Instruments with Concentration of Credit Risk," and SFAS
No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of
Financial Instruments," and also amends some aspects of other SFAS's previously
issued. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. SFAS No. 133 is effective for our
consolidated financial statements for the year ending December 31, 2001. We do
not expect the impact of SFAS No. 133 to be material in relation to our
consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    We do not have operations subject to risks of foreign currency fluctuations,
nor do we use derivative financial instruments in our operations or investment
portfolio. Our earnings are affected by changes in interest rates as our
long-term debt under our senior credit facility has variable interest rates
based on either the prime rate or LIBOR. Our exposure to variable interest rate
risk during 1999 was insignificant due to our level of floating rate borrowings.
However, if interest rates for our long-term debt under our senior credit
facility had averaged 10% more and the full amount available under our senior
credit facility had been outstanding for the entire year, our interest expense
would have increased, and loss before taxes would have increased by
$12.5 million for the year ended December 31, 1999. These amounts are determined
by considering the impact of the hypothetical interest rates on our borrowing
cost and outstanding debt balances. These analyses do not consider the effects
of the reduced level of overall economic activity that could existing in this
environment. Further, in the event of a change of this magnitude, management
would likely take actions to further mitigate our exposure to the change.
However, due to the uncertainty of the specific actions that would be taken and
their possible effects, the sensitivity analysis assumes no changes in our
financial structure. We had $114.7 million of senior notes outstanding as of
December 31, 1999. These notes bear interest at a fixed rate of 14% and are not
subject to risk from interest rate fluctuations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    For information required by Item 8, refer to the consolidated financial
statements included in the Financial Statements and Financial Statement Schedule
section filed as part of this document.

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

    None.

                                       45
<PAGE>
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES

    The following table sets forth information concerning our directors,
executive officers and other key personnel, including their ages as of
March 23, 2000:

<TABLE>
<CAPTION>
NAME                                       AGE      POSITION
----                                     --------   --------
<S>                                      <C>        <C>
Richard A. Jalkut......................     56      Chairman of the Board
David E. Scott.........................     40      President, Chief Executive Officer and Director
Donald H. Goldman......................     40      Executive Vice President and Chief Operating Officer
David M. Hollingsworth.................     35      Senior Vice President of Financial Operations
Gregory C. Lawhon......................     40      Senior Vice President of Public Policy and General
                                                    Counsel
Bradley A. Moline......................     33      Senior Vice President of Finance and Chief Financial
                                                    Officer
Jeffrey D. Shackelford.................     39      Senior Vice President of Sales
David W. Vranicar......................     41      Senior Vice President and Chief Information Officer
Henry H. Bradley.......................     54      Director
Adam H. Clammer........................     29      Director
Mory Ejabat............................     49      Director
James H. Greene, Jr....................     49      Director
Henry R. Kravis........................     55      Director
Alexander Navab, Jr....................     33      Director
Thomas R. Palmer.......................     33      Director
George R. Roberts......................     56      Director
</TABLE>

    RICHARD A. JALKUT is our chairman of the board and has been a director since
March 2000. Since 1997, he has been president and chief executive officer of
Pathnet, a privately held telecom company. From 1994 to 1997, Mr. Jalkut was the
president, chief executive officer and chairman of the board of Nynex
Telecommunications Group. From 1991 to 1994, he was the president, chief
executive officer and chairman of the board of New York Telephone Company, and
from 1990 to 1991, he was the executive vice president and chief operating
officer.

    DAVID E. SCOTT, a co-founder and director, is also our president and chief
executive officer. Mr. Scott has 17 years of managerial experience in the
telecommunications industry. Prior to joining us, Mr. Scott was president and
general manager of Kansas City FiberNet, a competitive local exchange carrier
owned jointly by the country's two largest cable operators, TCI and Time Warner.
Prior to his tenure at Kansas City FiberNet, Mr. Scott was vice president of
strategic development for Sprint, responsible for developing investment plans in
the competitive local exchange, wireless (PCS) and international marketplaces.
Mr. Scott also served as director of strategic planning for Sprint from 1988 to
1991. Mr. Scott also serves as a director of BizSpace, Inc., an Internet
publishing and E-commerce company he co-founded with Donald H. Goldman.
BizSpace, Inc. produces web sites that serve as on-line trade publications.
Their first website, www.clec.com, serves the competitive local exchange carrier
industry. Mr. Scott holds a Bachelor of Science degree in electrical
engineering, SUMMA CUM LAUDE, from the University of Missouri and a Master of
Business Administration degree from the University of Chicago.

    DONALD H. GOLDMAN joined us in March 1998 as senior vice president of
Internet services and is currently our executive vice president and chief
operating officer. Mr. Goldman has over 15 years of managerial experience in the
telecommunications industry. Prior to joining us, Mr. Goldman served as

                                       46
<PAGE>
vice president, corporate development at Sprint where he developed strategy and
managed the acquisition of companies in the areas of systems integration,
Internet telephony, and wireless (PCS) services among others. While at Sprint,
Mr. Goldman led the team that founded Sprint PCS. Mr. Goldman also serves as
chairman of the board of BizSpace, Inc. Mr. Goldman holds a Bachelor of Arts
degree, with honors, from Johns Hopkins University and a Master of Business
Administration degree from the University of Chicago.

    DAVID M. HOLLINGSWORTH joined us in February 2000 as senior vice president
of financial operations. Prior to joining us, from 1998 to February 2000,
Mr. Hollingsworth was the vice president of finance and corporate development
for GST Telecommunications. From 1997 to 1998, Mr. Hollingsworth was a
telecommunications analyst at George K. Baum and Company. From 1993 through
1996, Mr. Hollingsworth served as director of finance and administration for
Kansas City FiberNet. Before FiberNet, Mr. Hollingworth was a mergers and
acquisitions manager for Sprint Corporation. Mr. Hollingsworth holds a Bachelor
of Arts in Business Administration, CUM LAUDE, from Washington State University.

    GREGORY C. LAWHON joined us in January 1997 as senior vice president of
public policy and general counsel. Prior to joining us, Mr. Lawhon practiced law
for twelve years with the 90-lawyer Kansas City firm of Spencer Fane Britt &
Browne. A partner in the firm since 1990, he was head of the firm's
communications and media group and a member of its business group. Mr. Lawhon's
areas of practice were mergers and acquisitions, with an emphasis on
communications industry acquisitions, cable television franchising, and
commercial and regulatory issues with respect to the telecommunications
industry. Mr. Lawhon holds a Bachelor of Arts degree in Economics, MAGNA CUM
LAUDE, from Vanderbilt University, and a law degree from Columbia University,
where he was a Harlan Fiske Stone Scholar.

    BRADLEY A. MOLINE joined us in July 1997 as senior vice president of finance
and chief financial officer. From 1994 to 1997, Mr. Moline was the treasurer and
chief financial officer of Covenant Transport, Inc., a transportation company in
Chattanooga, Tennessee that became publicly traded during his tenure. Prior to
joining Covenant Transport, Mr. Moline worked for Ernst & Young LLP in Kansas
City, Missouri and Grant Thornton in Lincoln, Nebraska, providing customer
services in the auditing and consulting areas. Mr. Moline holds a Bachelor of
Administration degree in Business Administration, with distinction, from the
University of Nebraska and is a certified public accountant.

    JEFFREY D. SHACKELFORD, a co-founder, is senior vice president of sales.
Mr. Shackelford has 13 years of experience in the telecommunications industry.
Prior to joining us, Mr. Shackelford served as director of sales and marketing
for Kansas City FiberNet. Prior to joining Kansas City FiberNet,
Mr. Shackelford was the Branch Manager for Sprint's commercial sales office in
Kansas City and was responsible for sales and service of small to large business
customers. During his tenure at Sprint, which began in 1988, Mr. Shackelford
also developed the long distance industry's first PC-based call management
system, FONVIEW. Mr. Shackelford holds a Bachelor of Science degree in Computer
Science from the University of Kansas.

    DAVID W. VRANICAR joined us in March 1997 and serves as senior vice
president and chief information officer. Prior to joining us, Mr. Vranicar was
vice president, international business development, at Sprint. Before joining
Sprint in 1992, Mr. Vranicar was vice president, Asia/Pacific operations, at
MPSI Systems Private Ltd., based in Singapore. MPSI is a software and
information services company that develops and markets decisions-support
software and databases to major retail companies. Mr. Vranicar was the company's
senior executive in the Asia/Pacific division, directing a staff of
approximately 80 engaged in software development, computer graphics, and
customer technical support. Mr. Vranicar holds a Bachelor of Business degree in
Marketing, with honors, from the University of Texas at Austin, and a Master of
Business Administration degree, with distinction, from the University of
Michigan at Ann Arbor.

                                       47
<PAGE>
    HENRY H. BRADLEY has been a director since January 1997. He is the chairman
of the board of News-Press & Gazette Company, or NPG, one of our co-founders.
NPG is a family-owned company that owns and operates a daily newspaper, cable
television systems, network affiliate broadcast television stations and FM and
AM radio stations. Mr. Bradley has held a number of other positions with NPG
since joining NPG in 1971, including terms as the editor and publisher of the
St. Joseph News-Press. Mr. Bradley holds a Bachelor's degree from the University
of Missouri.

    ADAM H. CLAMMER has been a director since August 1999. Prior to joining KKR
in 1995, he was with Morgan Stanley & Co. in its mergers and acquisitions
department. At KKR, Mr. Clammer has been involved in investments in Intermedia
Communications, Inc., CAIS Internet, Inc., Zhone Technologies, RELTEC and
Borden. He is also a director of AEP Industries, Inc. and a number of private
companies.

    MORY EJABAT has been a director since March 2000. Since September 1999,
Mr. Ejabat has been the chairman and chief executive officer of Zhone
Technologies, Inc. Prior to joining Zhone, Mr. Ejabat served as the president
and chief executive officer of Ascend Communications, Inc. from June 1995 to
June 1999. Before becoming the president and chief executive officer of Ascend
in 1995, Mr. Ejabat had served as vice president, operations from 1990 to 1992
and as executive vice president from 1992 to 1995.

    JAMES H. GREENE, JR. has been a director since August 1999 and is a member
of the limited liability company which serves as the general partner of KKR and
a general partner of KKR Associates. He is also a director of Accuride
Corporation, Owens-Illinois, Inc., Safeway Inc., Shoppers Drug Mart, Inc.,
Intermedia Communications, Inc., CAIS Internet, Inc., Tenovis, formerly a
division of Bosch Telecom, and Zhone Technologies.

    HENRY R. KRAVIS has been a director since March 2000. He is a founding
partner of KKR and since January 1996 a managing member of the executive
committee of the limited liability company that serves as the general partner of
Kohlberg Kravis Roberts & Co., L.P. He is also a director of Accuride
Corporation, Borden, Inc., The Boyds Collection, Ltd., Evenflo Company Inc., The
Gillette Company, IDEX Corporation, KinderCare Learning Centers, Inc., KSL
Recreation Group, Inc., Owens-Illinois, Inc., PRIMEDIA Inc., Regal Cinemas,
Inc., Safeway, Inc., Sotheby's Holdings, Inc., Spalding Holdings Corporation,
and TI Group plc. Messrs. Kravis and Roberts are first cousins.

    ALEXANDER NAVAB, JR. has been a director since August 1999. He has been an
executive of KKR and a limited partner of KKR Associates since 1993. From 1991
to 1993, Mr. Navab was an associate at James D. Wolfensohn, Inc. He is also a
director of Borden, Inc., KSL Recreation Group, Inc., Intermedia Communications,
Inc., CAIS Internet, Inc., Tenovis, formerly a division of Bosch Telecom, and
Zhone Technologies.

    THOMAS R. PALMER has been a director since April 1999. Since June 1997,
Mr. Palmer has been a general partner at Kansas City Equity Partners, and
focuses on investments in the telecommunications and information technology
sector. He joined the firm in August 1995. Prior to joining Kansas City Equity
Partners, he held positions at Ameritech and Trans National Group. Mr. Palmer
also serves on the boards of Net Sales, Vroom and several other private
companies. Mr. Palmer is a graduate of Dartmouth College and the Kellogg School
of Management at Northwestern University.

    GEORGE R. ROBERTS has been a director since March 2000. He is a founding
partner of KKR and since January 1996 a managing member of the executive
committee of the limited liability company that serves as the general partner of
Kohlberg Kravis Roberts & Co., L.P. He is also a director of Accuride
Corporation, Borden, Inc., The Boyds Collection, Ltd., Evenflo Company Inc.,
IDEX Corporation, KinderCare Learning Center, Inc., KSL Recreation Group, Inc.,
Owens-Illinois, Inc., PRIMEDIA Inc., Regal Cinemas, Inc., Safeway, Inc. and
Spalding Holdings Corporation. Messrs. Kravis and Roberts are first cousins.

                                       48
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

    During the year ended December 31, 1999, we did not have equity securities
registered pursuant to Section 12 of the Exchange Act and this item is,
therefore, non-applicable.

ITEM 11. EXECUTIVE COMPENSATION

DIRECTOR COMPENSATION

    Directors who are also our executive officers do not receive any additional
compensation for serving as members of the board of directors or any of its
committees. Beginning in 2000, non-employee directors are expected to receive a
cash stipend of $5,000 payable annually and reimbursement of expenses for
serving on the board of directors and any committees of the board, as well as an
annual option to purchase 5,000 shares of common stock. Each non-employee
director currently on the board will receive an option to purchase
10,000 shares of common stock upon completion of our initial public offering at
the offering price. These options will vest in equal annual installments over
the next four years. In addition, Messrs. Ejabat and Jalkut each received on
March 22, 2000 an additional option to purchase 30,000 shares of common stock at
an exercise price of $7.50 per share. These options will vest in equal annual
installments over the next two years.

COMPENSATION OF EXECUTIVE OFFICERS

    The following table sets forth the cash and non-cash compensation paid or
incurred on our behalf to our chief executive officer and each of the four other
most highly compensated executive officers that earned more than $100,000 during
1999:

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                          LONG-TERM
                                                                                        COMPENSATION
                                                                                           AWARDS
                                                          ANNUAL COMPENSATION       ---------------------
                                                       --------------------------   SECURITIES UNDERLYING    ALL OTHER
NAME AND                                                           OTHER ANNUAL            OPTIONS          COMPENSATION
PRINCIPAL POSITION                YEAR     SALARY($)   BONUS($)   COMPENSATION($)          (#)(1)              ($)(2)
------------------              --------   ---------   --------   ---------------   ---------------------   ------------
<S>                             <C>        <C>         <C>        <C>               <C>                     <C>
David E. Scott................    1999      203,846         --              --              200,000             8,153
  President and Chief             1998      175,000         --              --            1,052,362             7,000
  Executive Officer(3)            1997      164,904         --              --                   --                --
Donald H. Goldman.............    1999      192,892         --              --              150,000             7,716
  Executive Vice President        1998      101,346         --              --              263,750                --
  and Chief                       1997           --         --              --                   --                --
  Operating Officer(4)
Gregory C. Lawhon.............    1999      184,615         --              --               75,000             7,385
  Senior Vice President of        1998      175,000         --              --              328,863             5,386
  Public Policy and General       1997      164,904         --              --                   --                --
  Counsel(3)
David W. Vranicar.............    1999      177,331         --              --               75,000             7,093
  Senior Vice President           1998      150,000         --              --              274,052             6,000
  and Chief Information           1997      118,269         --              --                   --                --
  Officer(5)
Stephen L. Sauder.............    1999      216,561         --              --                   --             8,663
  Vice President(6)               1998      226,471         --              --                   --                --
                                  1997      134,577    128,667              --                   --                --
</TABLE>

                                       49
<PAGE>
------------------------

(1) Includes options to purchase shares of our common stock, which were issued
    under our 1998 employee stock option plan. Prior to the private placement of
    our series B preferred stock, we were a party to various stock option
    agreements with our employees, all of which were governed by our 1997 stock
    option plan. In connection with the 1998 private placement of series B
    preferred stock, the 1997 stock option plan was replaced with the 1998 stock
    option plan, and all stock option agreements governed by the 1997 stock
    option plan were terminated. Options issued to the members of management
    during 1998 were granted under our 1998 employee stock option plan and were
    exercisable immediately on grant at an exercise price of $0.001 per share.
    The shares issued under these options vest over a four-year period, at a
    rate of 6.25% per quarter. Options issued during 1999 were also granted
    under our 1998 stock option plan and vest 25% at the first anniversary of
    the grant, then 6.25% per quarter thereafter. All stock options have been
    adjusted to reflect a stock dividend made on June 23, 1998. Holders of
    exercised options have voting power with respect to all shares of common
    stock underlying the options. Upon termination of employment, we have the
    right to repurchase all options which have not vested as of that date,
    subject to some exceptions.

(2) Reflects matching contributions made by us under our 401(k) plan.

(3) Reflects compensation paid to Messrs. Scott and Lawhon commencing in
    January 1997.

(4) Mr. Goldman joined us in March 1998 as senior vice president of Internet
    services. In August 1999 Mr. Goldman was named senior vice president of
    operations and chief operating officer.

(5) Reflects compensation paid to Mr. Vranicar commencing in March 1997.

(6) Mr. Sauder joined us after the Valu-Line acquisition and currently serves as
    vice president. Compensation listed was paid by Valu-Line from January 1997
    to February 1998.

                                       50
<PAGE>
OPTIONS GRANTS

    The following table sets forth summary information regarding option grants
made during 1999 to our chief executive officer and each of our four other
highly paid executive officers. The exercise price per share is equal to the
fair market value of our common stock on the date of grant as determined by our
board of directors:

<TABLE>
<CAPTION>
                                                                                                     POTENTIAL
                                                                                                 REALIZABLE VALUE
                                                                                                    AT ASSUMED
                                                      INDIVIDUAL GRANTS                        ANNUAL RATES OF STOCK
                                  ---------------------------------------------------------            PRICE
                                    NUMBER OF       % OF TOTAL                                   APPRECIATION FOR
                                   SECURITIES        OPTIONS                                          OPTION
                                   UNDERLYING       GRANTED TO     EXERCISE OR                        TERM(3)
                                     OPTIONS       EMPLOYEES IN    BASE PRICE    EXPIRATION   -----------------------
NAME                              GRANTED(#)(1)   FISCAL YEAR(2)    ($/SHARE)       DATE       5%($)         10%($)
----                              -------------   --------------   -----------   ----------   --------      ---------
<S>                               <C>             <C>              <C>           <C>          <C>           <C>
David E. Scott..................     200,000            11.5%         4.50         10/7/09    566,005       1,434,368
Donald H. Goldman...............      50,000             2.8%         3.00         1/15/09     94,334         239,061
                                     150,000             8.4%         4.50         10/7/09    424,504       1,075,776
Gregory C. Lawhon...............      75,000             4.3%         4.50         10/7/09    212,252         537,888
David W. Vranicar...............      75,000             4.3%         4.50         10/7/09    212,252         537,888
Stephen L. Sauder...............          --               --           --              --         --              --
</TABLE>

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

(1) Options granted to purchase shares of our common stock were made under our
    1998 employee stock option plan. In the event that a purchaser ceases to
    provide service to us and our affiliates, we have the right to repurchase
    any of that person's unvested shares of common stock at the original option
    exercise price. Generally, these options vest 25% on the first anniversary
    of the grant date and quarterly thereafter at a rate of 6.25%.

(2) The percentage of total options was calculated based on options to purchase
    an aggregate of 1,794,800 shares of common stock granted to employees under
    the 1998 stock option plan in 1999.

(3) The potential realizable value was calculated based on the ten-year term of
    the options and assumed rates of stock appreciation of 5% and 10%,
    compounded annually from the date the options were granted to their
    expiration date based on the fair market value of the common stock on the
    date of grant.

                                       51
<PAGE>
1998 EMPLOYEE STOCK OPTION PLAN

    Under our 1998 employee stock option plan, as amended, options to purchase
shares of our common stock in the form of both incentive stock options and
nonqualified stock options were granted to our employees or employees of certain
of our subsidiaries. A total of 7,720,845 shares of our common stock were
reserved for issuance under this option plan. As of December 31, 1999, options
to acquire 2,030,850 shares were issued and outstanding with a weighted average
exercise price of $3.57 per share. These options generally vest 25% per year
over four years from the date of grant. Under a resolution of our board of
directors, no new options may be granted under this option plan.

401(K) PLAN

    We have adopted a tax-qualified employee savings and retirement plan, or
401(k) plan, covering all of our full-time employees. Under the 401(k) plan,
employees may elect to reduce their current compensation up to the statutorily
prescribed annual limit and have the amount of the reduction contributed to the
401(k) plan. The 401(k) plan is intended to qualify under Section 401 of the
Code so that contributions by employees to the 401(k) plan and income earned on
plan contributions are not taxable to employees until withdrawn from the 401(k)
plan. The trustees under the 401(k) plan, at the direction of each participant,
invest the participant's assets in the 401(k) plan in selected investment
options.

1999 OPTION VALUES

    The following table shows for the fiscal year ended December 31, 1999,
information regarding options granted to, exercised by, and held at year end by,
our chief executive officer and each of our four other most highly paid
executive officers during 1999:

<TABLE>
<CAPTION>
                                                             NUMBER OF SECURITIES                  VALUE OF
                                                                  UNDERLYING                     UNEXERCISED
                                                            UNEXERCISED OPTIONS(#)         IN-THE-MONEY OPTIONS($)
                               SHARES         VALUE     ------------------------------   ----------------------------
                            ACQUIRED ON     REALIZED                                                   UNEXERCISABLE
NAME                       EXERCISE(#)(1)    ($)(2)     EXERCISABLE   UNEXERCISABLE(3)   EXERCISABLE       (2)(3)
----                       --------------   ---------   -----------   ----------------   -----------   --------------
<S>                        <C>              <C>         <C>           <C>                <C>           <C>
David E. Scott...........     263,091       1,972,916          --          791,953            --       5,039,060

Donald H. Goldman........      65,938         494,465      12,500          335,859       168,750       1,562,547

Gregory C. Lawhon........      82,216         616,536          --          259,985            --       1,612,206

David W. Vranicar........      68,513         513,779          --          229,154            --       1,381,003

Stephen L. Sauder........          --              --          --               --            --             --
</TABLE>

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

(1) For purposes of this table alone, "exercise" means an employee's acquisition
    of shares of common stock which have already vested, "exercisable" means
    options to purchase shares of common stock which are subject to exercise and
    "unexercisable" means all other options to purchase shares of common stock.

(2) Amounts shown under the "Value Realized" and "Value of Unexercised
    In-the-Money Options" are based upon the estimated December 31, 1999
    estimated fair market value of our common stock of $7.50 per share minus the
    per share exercise price multiplied by the number of shares underlying the
    option.

(3) Includes options to purchase shares of common stock, which were issued under
    the 1998 employee stock option plan. Options issued during 1998 under the
    1998 employee stock option plan were granted at an exercise price of $0.001
    per share. Options issued during 1999 under the 1998 stock

                                       52
<PAGE>
    option plan were granted at an exercise price of $4.50 per share. All
    options vest 25% on the first anniversary of the grant date and quarterly
    thereafter at a rate of 6.25%.

EMPLOYMENT AGREEMENTS

    Each of Messrs. Scott, Goldman, Lawhon, Moline, Shackelford and Vranicar
entered into an amended and restated employment agreement with us in October
1999. In addition, Mr. Sauder entered into an employment agreement with us in
February 1998, and Mr. Hollingsworth entered into an employment agreement with
us in February 2000.

    The base salary under each of these agreements is $200,000 per year, except
that Mr. Scott's base salary is $250,000 per year, Mr. Goldman's is $225,000 per
year and Mr. Sauder's is $213,000 per year. Each of the executives is eligible
for a bonus based on achievement of performance criteria established by the
board for that executive.

    Each of the employment agreements provides that upon termination of
employment by us, other than for cause, disability or death, or termination of
the employment by the executive for good reason, we will pay the executive the
following severance. We will pay the executive's salary for the remainder, if
any, of the calendar month in which the termination is effective and, in the
case of each of Messrs. Scott, Vranicar, Shackelford and Goldman, 24 calendar
months thereafter and, in the case of each of Messrs. Lawhon, Sauder,
Hollingsworth and Moline, 12 calendar months thereafter. In addition, we will
pay each executive his prorated targeted incentive compensation for the year
during which the termination is effective plus, in the case of each of
Messrs. Scott, Vranicar, Shackelford and Goldman, two times the executive's
targeted incentive compensation for that year, and, in the case of each of
Messrs. Lawhon, Hollingsworth and Moline, the full amount of the executive's
targeted incentive compensation for that year. Upon termination of employment
for disability, we will pay the employee's salary through the remainder of the
calendar month during which the termination is effective and for the lesser of
(1) six calendar months thereafter or (2) the period until disability insurance
benefits commence. Upon termination of employment from death, we will pay the
employee's salary through the end of the calendar month in which his death
occurs. Each agreement provides for noncompetition, nonsolicitation and
nondisclosure covenants.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

    None of the members of the compensation committee of the board of directors
is currently or has been, at any time since our formation, our officer or
employee.

         REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS

    The following is a report of the Compensation Committee of our Board of
Directors (Committee), describing the compensation policies applicable to our
executive officers during the fiscal year ended December 31, 1999.

    GENERAL POLICIES

    The Committee is responsible for assisting the Chief Executive Officer (CEO)
in devising general compensation policies and compensation plans, as well as the
specific compensation levels for individual executive officers. The Committee
also administers the stock option, employee stock purchase and 401(k) plans and
determines the terms and conditions of grants thereunder. The Committee consists
of Messrs. Bradley, Greene, Navab and Mr. Scott, Birch's CEO. Prior to his
departure from the board in August 1999, Ian Bund was a member of the Committee.
Mr. Scott does not participate in Committee deliberations or decisions involving
his own compensation.

                                       53
<PAGE>
    The goals of the Committee are to:

    - align compensation with business objectives and performance;

    - adopt policies that enable us to attract, retain and reward executive
      officers and other key employees who contribute to Birch's long-term
      success; and

    - motivate executives and employees as we seek to enhance long-term
      stockholder value..

    In order to meet these goals, the Committee has adopted the following
policies:

    - Offer pay that is competitive with the practices of the leading
      telecommunications companies with which compete for talent. To ensure that
      pay is competitive, the Committee regularly compares its pay practices
      with these companies and sets it pay parameters based on this review.

    - Maintain annual incentive opportunities sufficient to provide motivation
      to achieve specific operating goals and to generate rewards that bring
      total compensation to competitive levels.

    - Provide significant equity-based incentives for executives and other key
      employees to ensure that they are motivated over the long-term. The
      Committee wants Birch's executives and employees to respond to business
      challenges and opportunities as owners and not just as employees.

    The compensation mix offered to employees reflects a balance of annual cash
payments, consisting of base salary and incentive bonus payments and long-term
stock-based incentives in the form of stock options.

    BASE SALARIES

    The salary component of executive compensation is based on the executive's
level of responsibility for meeting targeted objectives and their overall
performance. Base salaries for executives are reviewed and adjusted at least
annually based on information regarding competitive salaries, the results of
industry compensation surveys, individual experience and performance.

    CASH BONUSES

    Our incentive program for executive officers provides direct financial
incentives in the form of cash bonuses based on previous year performance.

    STOCK OPTIONS

    The Committee's long-term incentive program is centered around the granting
of stock options under the 1998 Stock Option Plan. These stock options, which
typically have vesting periods of four years, encourage key employees to
continue their service with Birch and motivate their performance. Executive
officers receive significant equity incentives to build long-term stockholder
value. Grants are made at 100% of fair market value on the date of grant.
Employees receive value from these grants only if Birch's common stock
appreciates over the long-term. The size of option grants is determined based on
competitive practices at leading companies in the telecommunications industry
and our philosophy of linking executive compensation with stockholder interests.
The Committee believes this approach creates an appropriate focus on longer term
objectives and promotes executive retention.

    COMPENSATION OF THE CHIEF EXECUTIVE OFFICER

    Mr. Scott has served as Birch's President and CEO since inception. In
February 1998, Mr. Scott entered into an employment agreement, the terms of
which are described in more detail in "Employment Agreements."

                                       54
<PAGE>
    During fiscal 1999, Mr. Scott received aggregate salary of $203,846, which
reflects the August 1999 increase in Mr. Scott's base salary from $175,000 to
$250,000. In addition, Mr. Scott was granted options to purchase an aggregate of
200,000 shares of our common stock in 1999. This compensation reflects the
August 1999 increase in Mr. Scott's base salary from $175,000 to $250,000.
Mr. Scott did not receive a cash bonus in 1999. In reviewing the compensation
paid to Mr. Scott in 1999, the Committee considered a number of factors,
including competitive market compensation packages, Mr. Scott's past performance
and the responsibilities he has assumed as CEO. Based on its internal review and
informal information reviewed by the Committee, the Committee believes that the
base salary level for Mr. Scott is commensurate with salaries paid to chief
executive officers of comparable companies in similar industries.

    Overall, the Committee believes that Mr. Scott is being appropriately
compensated in a manner that is consistent with the long-term interests of
stockholders.

    CONCLUSION

    A significant portion of the Committee's compensation program, including
Mr. Scott's compensation, are contingent on individual performance, and the
realization of benefits is closely linked to increases in long-term stockholder
value. The Committee remains committed to this philosophy of pay for
performance, recognizing that the competitive market for talented executives and
the volatility of the Company's business may result in highly variable
compensation for a particular time period.

    The members of the Committee submit the foregoing report.

    COMPENSATION COMMITTEE:

    Henry H. Bradley
    James H. Greene, Jr.
    Alexander Navab, Jr.
    David E. Scott

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The following table provides summary information regarding the beneficial
ownership of our outstanding capital stock as of March 23, 2000 for:

    - each person or group who beneficially owns more than 5% of our capital
      stock on a fully diluted basis;

    - each of the executive officers and the former executive officer named in
      the Summary Compensation Table;

    - each of our directors; and

    - all of our directors and executive officers as a group.

    Beneficial ownership of shares is determined under the rules of the
Securities and Exchange Commission and generally includes any shares over which
a person exercises sole or shared voting or investment power. Except as
indicated by footnote, and subject to applicable community property laws, each
person identified in the table possesses sole voting and investment power with
respect to all shares of common stock held by them. Shares of common stock
subject to options currently exercisable or exercisable within 60 days of
March 23, 2000 and not subject to repurchase as of that date are deemed
outstanding for calculating the percentage of outstanding shares of the person
holding these options, but are not deemed outstanding for calculating the
percentage of any other person. Unless otherwise

                                       55
<PAGE>
noted, the address for each director and executive officer is c/o Birch
Telecom, Inc., 2020 Baltimore Avenue, Kansas City, Missouri 64108.
<TABLE>
<CAPTION>
       NAME AND ADDRESS OF                              NUMBER OF SHARES
       BENEFICIAL OWNER(A)                             BENEFICIALLY OWNED
---------------------------------  ----------------------------------------------------------
                                                           PREFERRED STOCK SERIES
                                    COMMON     ----------------------------------------------
                                   STOCK (B)       B           C           D           F
                                   ---------   ---------   ---------   ---------   ----------
<S>                                <C>         <C>         <C>         <C>         <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Richard A. Jalkat(c).............    26,667           --          --          --           --
David E. Scott...................  1,190,768          --     189,900          --           --
Donald H. Goldman................   263,750           --          --          --          5.5
Gregory C. Lawhon................   380,137       49,453          --          --           --
Bradley A. Moline(d).............   297,932       74,509          --          --           --
Jeffrey D. Shackelford...........   794,162           --     126,600          --           --
David W. Vranicar................   316,780       36,266          --          --           --
Henry H. Bradley(e)..............        --    1,978,128   1,582,500     333,333           --
Adam H. Clammer(f)(l)............        --           --          --          --   23,596,492
Mory Ejabat(c)                       66,667           --          --          --           --
James H. Greene, Jr.(f)(l).......        --           --          --          --   23,596,492
Henry R. Kravis(f)(l)............        --           --          --          --   23,596,492
Alexander Navab, Jr.(f)(l).......        --           --          --          --   23,596,492
Thomas R. Palmer(g)(m)...........        --      945,108          --     666,667           --
George R. Roberts(f)(l)..........        --           --          --          --   23,596,492
Stephen L. Sauder(h).............        --       85,719   4,089,575          --           --
All directors and executive
  officers as a group (16
  persons).......................  3,336,862   3,169,183   5,988,575   1,000,000   23,596,492

5% OWNERS:
News-Press & Gazette Company(i)..        --    1,648,438   1,582,500     222,222           --
Advantage Capital Missouri
  Partners I, L.P.(j)............        --    1,318,750          --     145,550           --
Advantage Capital Missouri
  Partners II, L.P.(j)...........        --           --          --     417,450           --
Pacific Capital, L.P.(k).........        --    1,219,925          --          --           --
BTI Ventures L.L.C.(f)(l)........        --           --          --          --   23,596,492
Kansas City Equity Partners I,
  L.P.(g)(m).....................        --      945,108          --     111,111           --
Kansas City Equity Partners
  Ventures II, L.P. (g)(m).......        --           --          --     555,556           --
White Pines Limited
  Partnership I(n)...............        --      989,128          --          --           --
LBI Group, Inc. (o)..............        --           --          --     586,617           --

<CAPTION>
       NAME AND ADDRESS OF
       BENEFICIAL OWNER(A)                        PERCENTAGE OF CLASS OWNED
---------------------------------  --------------------------------------------------------
                                                          PREFERRED STOCK SERIES
                                    COMMON     --------------------------------------------
                                   STOCK (B)      B           C           D           F
                                   ---------   --------    --------    --------    --------
<S>                                <C>         <C>         <C>         <C>         <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Richard A. Jalkat(c).............    *             --%         --%         --%         --%
David E. Scott...................    24.9          --         3.0          --          --
Donald H. Goldman................    5.68          --          --          --          --
Gregory C. Lawhon................     8.0           *          --          --          --
Bradley A. Moline(d).............     6.2          --          --          --
Jeffrey D. Shackelford...........    16.6          --         2.0          --          --
David W. Vranicar................     6.6           *          --          --          --
Henry H. Bradley(e)..............      --%       23.1        25.2        11.6          --
Adam H. Clammer(f)(l)............      --          --          --          --       100.0
Mory Ejabat(c)                        1.4          --          --          --          --
James H. Greene, Jr.(f)(l).......      --          --          --          --       100.0
Henry R. Kravis(f)(l)............      --          --          --          --          --
Alexander Navab, Jr.(f)(l).......      --          --          --          --       100.0
Thomas R. Palmer(g)(m)...........      --        11.0          --        23.2          --
George R. Roberts(f)(l)..........      --          --          --          --          --
Stephen L. Sauder(h).............      --         1.0        65.2          --          --
All directors and executive
  officers as a group (16
  persons).......................    69.8        37.0        95.5        34.9       100.0
5% OWNERS:
News-Press & Gazette Company(i)..      --        19.2        25.2         7.8          --
Advantage Capital Missouri
  Partners I, L.P.(j)............      --        15.4          --         5.1          --
Advantage Capital Missouri
  Partners II, L.P.(j)...........      --          --          --        14.6          --
Pacific Capital, L.P.(k).........      --        14.2          --          --          --
BTI Ventures L.L.C.(f)(l)........      --          --          --          --       100.0
Kansas City Equity Partners I,
  L.P.(g)(m).....................      --        11.0          --         3.9          --
Kansas City Equity Partners
  Ventures II, L.P. (g)(m).......      --          --          --        19.4          --
White Pines Limited
  Partnership I(n)...............      --        11.5          --          --          --
LBI Group, Inc. (o)..............      --          --          --        20.5          --
</TABLE>

                                       56
<PAGE>

<TABLE>
<CAPTION>
NAME AND ADDRESS OF                                           PERCENTAGE OF TOTAL VOTING POWER OF
BENEFICIAL OWNER(A)                                               FULLY DILUTED COMMON STOCK
-------------------                                           -----------------------------------
<S>                                                           <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Richard A. Jalkat...........................................                    *%
David E. Scott..............................................                  3.0
Donald H. Goldman...........................................
Gregory C. Lawhon...........................................                    *
Bradley A. Moline(d)........................................                    *
Jeffrey D. Shackelford......................................                  2.0
David W. Vranicar...........................................                    *
Henry H. Bradley(e).........................................                  8.5
Adam H. Clammer(f)(l).......................................                 51.2
Mory Ejabat.................................................                    *
James H. Greene, Jr.(f)(l)..................................                 51.2
Henry R. Kravis.............................................                 51.2
Alexander Navab, Jr.(f)(l)..................................                 51.2
Thomas R. Palmer(g)(m)......................................                  3.5
George R. Roberts...........................................                 51.2
Stephen L. Sauder(h)........................................                  9.1
All directors and executive officers as a group (16
  persons)..................................................                 80.5
5% OWNERS:
News-Press & Gazette Company(i).............................                  7.5
Advantage Capital Missouri Partners I, L.P.(j)..............                  3.2
Advantage Capital Missouri Partners II, L.P.(j).............                    *
Pacific Capital, L.P.(k)....................................                  2.7
BTI Ventures L.L.C.(f)(l)...................................                 51.2
Kansas City Equity Partners I, L.P. (KCEP)(g)(m)............                  2.3
Kansas City Equity Partners Ventures II, L.P.
  (KCEP)(g)(m)..............................................                  1.2
White Pines Limited Partnership I(n)........................                  2.2
LBI Group, Inc.(o)..........................................                  1.3
</TABLE>

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

*   Less than one percent

(a) Beneficial ownership is determined in accordance with the SEC's rules and
    includes voting and investment power with respect to the shares.

(b) Includes options to purchase shares of the common stock, which were issued
    pursuant to our 1998 Stock Option Plan. Certain options are exercisable
    immediately on grant at an exercise price of $.001 per share, and vest over
    a four-year period, at a rate of 6.25% per quarter. All other options are
    exercisable at a price of $4.50 per share subject to a four-year vesting
    period, at a rate of 6.25% per quarter. Holders of exercised options have
    voting power with respect to all shares of common stock underlying the
    options. Upon termination of employment with us, we have the right to
    purchase all options which have not vested as of that date, subject to
    certain exceptions.

(c) In March 1999, Mr. Jalkat, chairman of our board of directors, agreed to
    purchase 26,667 shares of our common stock for $200,000 and Mr. Ejabat, a
    member of our board of directors, agreed to purchase 66,667 shares of our
    common stock for $500,000.

(d) Includes 19,275 shares of Series B Preferred Stock held by Mr. Moline's
    immediate family subject to options exercisable within 60 days of
    February 29, 2000

(e) Includes 1,648,438 shares of Series B Preferred Stock, 1,582,500 shares of
    Series C Preferred Stock and 222,222 shares of Series D Preferred Stock held
    by News-Press & Gazette Company.

                                       57
<PAGE>
    Mr. Bradley and his brother hold voting power of News-Press & Gazette
    Company. Also includes 329,690 shares of Series B Preferred Stock and
    111,111 shares of Series D Preferred Stock held by various trusts and
    relatives of the Bradley family.

(f) All of the shares indicated are owned of record by BTI Ventures L.L.C. and
    are included because of Messrs. Clammer's, Greene's, Kravis', Navab's and
    Roberts' affiliation with BTI Ventures L.L.C. These individuals disclaim
    beneficial ownership of the shares within the meaning of Rule 13d-3 under
    the Exchange Act.

(g) Includes 945,108 shares of Series B Preferred Stock and 111,111 shares of
    Series D Preferred Stock held by Kansas City Equity Partners Ventures I and
    555,556 shares of Series D Preferred Stock held by Kansas City Equity
    Partners Ventures II. Mr. Palmer holds voting power of Kansas City Equity
    Partners Ventures.

(h) Includes 65,937 shares of Series B Preferred Stock held by Mr. Sauder's
    father, 1,544,787 shares of Series C Preferred Stock held in trust by his
    wife and 1,000,000 shares of Series C Preferred Stock held in trust by S.L.
    Sauder LTP. L.L.P.

(i) The principal business address of News-Press & Gazette Company is 825 Edmond
    Street, St. Joseph, MO 64501.

(j) The principal business address of Advantage Capital Missouri Partners L.P.
    is 7733 Forsyth Boulevard, Suite 1850, St. Louis, MO 63105.

(k) The principal business address of Pacific Capital, L.P. is 2401 Plymouth
    Road, Suite B, Ann Arbor, MI 48105.

(l) The principal business address of BTI Ventures L.L.C. is 9 W. 57(th) Street,
    Suite 4200, New York, NY 10019.

(m) The principal business address of Kansas City Equity Partners is 233 West
    47(th) Street, Kansas City, MO 64112.

(n) The principal business address of White Pines Limited Partnership I is 2401
    Plymouth Road, Suite B, Ann Arbor, MI 48105.

(o) The principal business address of LBI Group, Inc. is 3 World Financial
    Center, 200 Vesey Street, New York, NY 10285.

                                       58
<PAGE>
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

SERIES D PREFERRED STOCK OFFERING

    In July 1999, we completed a private placement of 2,222,222 shares of
series D preferred stock at a purchase price of $4.50 per share for aggregate
proceeds of approximately $10.0 million. The transaction was consummated
pursuant to the purchasers rights agreement described below and the series D
preferred stock purchase agreement. Under the series D preferred stock purchase
agreement, NPG, a stockholder that owned in excess of 5% of our voting
securities at the time of the series D preferred stock offering, purchased
$1.0 million of series D preferred stock, and parties affiliated with NPG,
including Henry H. Bradley, chairman of our board of directors at that time and
of NPG, purchased $500,000 of series D preferred stock. Advantage Capital
Missouri Partners I, L.P., a stockholder that owned in excess of 5% of our
voting securities at the time of the series D preferred stock offering,
purchased $655,000 of the series D preferred stock. In addition, Ian R. N. Bund,
one of our directors at the time of the series D preferred stock offering,
purchased $82,000 of the series D preferred stock. Affiliates of KCEP I and
KCEP II also purchased $3.0 million of our series D preferred stock.
Mr. Palmer, one of our directors at the time of the series D preferred stock
offering, holds voting power of KCEP I and KCEP II.

SERIES F PREFERRED STOCK OFFERING

    In August 1999, we issued and sold 13,333,334 shares of our series F
preferred stock at a purchase price of $4.50 per share to BTI Ventures, L.L.C.,
an affiliate of KKR, for aggregate proceeds of $60.0 million. KKR received three
seats on our then seven-seat board of directors. Additionally, on March 23,
2000, KKR exercised its options to purchase 5,263,158 shares of series F
preferred stock at $4.75 per share and 5,000,000 shares of series F preferred
stock at $5.00 per share. Giving effect to this exercise KKR's investment would
have represented a 51.2% equity interest as of March 23, 2000. In connection
with their exercise of these options, KKR received two additional seats on our
eleven-seat board of directors.

    In connection with the series F preferred stock offering, we repurchased
2,222,222 shares of our series C preferred stock from Stephen L. Sauder, a
stockholder who owned more than 5% of our voting securities at the time of the
series F preferred stock offering, for $10.0 million.

    Also, in connection with the series F preferred stock offering, we converted
each outstanding share of our series B preferred stock into one share of amended
and restated series B preferred stock. In addition, the holders of series B
preferred stock surrendered their existing redemption and participating
liquidation preference in exchange for 0.2222 shares of our series E preferred
stock. We redeemed the series E preferred stock issued to the series B preferred
stock holders for a total of $8.6 million. The rights and preferences of the
series B preferred stock were amended and restated to remove mandatory
redemption rights and change the liquidation rights.

    In connection with the series F preferred stock offering, NPG, a stockholder
that owned in excess of 5% of our voting securities at the time of the series F
preferred stock offering, received 366,320 shares of series E preferred stock,
which were redeemed for an aggregate total of $1.6 million, and parties
affiliated with NPG, including Henry H. Bradley, chairman of our board of
directors and of NPG, received 73,264 shares of series E preferred stock, which
were redeemed for an aggregate total of $329,690. Advantage Capital Missouri
Partners I, L.P., a stockholder which owned in excess of 5% of our voting
securities at the time of the series F preferred stock offering, received
293,056 shares of the of the series E preferred stock, which were redeemed for
an aggregate total of $1.3 million. Bradley A. Moline, our senior vice president
of finance and chief financial officer, received 15,385 shares of series E
preferred stock, which were redeemed for an aggregate total of $69,234. Pacific
Capital, L.P., a stockholder which owned in excess of 5% of our voting
securities at the time of the series F preferred stock offering, received
271,095 shares of the of the series E preferred stock, which were redeemed for

                                       58
<PAGE>
an aggregate total of $1.2 million. Steven L. Sauder, our vice president,
together with his father, Earl W. Sauder, received an aggregate of 19,048 shares
of series E preferred stock, which were redeemed for an aggregate total of
$85,718. KCEP I and KCEP II together received an aggregate of 210,022 shares of
series E preferred stock, which were redeemed for an aggregate total of
$945,099.

PURCHASERS RIGHTS AGREEMENT

    Our current stockholders are parties to the purchasers rights agreement,
which provides that they vote their respective shares in a manner as to elect
persons specified in the agreement to serve as directors. The holders of
series F preferred stock have agreed to vote their shares to elect
Messrs. Greene, Navab and Clammer. The two additional designees of the holders
of series F preferred stock are Messrs. Kravis and Roberts. In addition, the
holders of series B preferred stock, series C preferred stock and series D
preferred stock have agreed to vote their shares to elect Henry H. Bradley and
Thomas R. Palmer. The holders of common stock have agreed to vote their shares
for the election of David E. Scott. So long as the purchasers rights agreement
is in effect, these investors will effectively control the election of our board
of directors.

    REGISTRATION RIGHTS

    The parties to the purchasers rights agreement, subject to some conditions,
have registration rights with respect to shares of common stock, including
shares of common stock issuable upon conversion or redemption of shares of
series F preferred stock or upon conversion of shares of series B preferred
stock, series C preferred stock, or series D preferred stock. These purchasers
have, subject to some conditions, demand and "piggy-back" registration rights.
The purchasers rights agreement provides that each purchaser of stock is subject
to lock-up restrictions in the event of a public offering of our securities.

    RESTRICTIONS ON TRANSFER

    Our outstanding common stock (including shares issued pursuant to options)
and each series of preferred stock are subject to restrictions on transfer.
Holders of common stock and each series of preferred stock that are parties to
the purchasers rights agreement, subject to some exceptions, may not transfer
their shares without first giving us the opportunity to purchase the shares. In
addition, subject to some exceptions, the holders of common stock or any series
of preferred stock that are parties to the purchasers rights agreement may not
transfer their shares without first giving the other purchasers under the
purchasers rights agreement the opportunity to participate in the transfer.

    PRE-EMPTIVE RIGHTS

    Holders of our common stock and each series of preferred stock that are
parties to the purchasers rights agreement have the right to purchase a pro rata
portion of any common stock or preferred stock that we propose to sell and
issue, subject to some exceptions.

    SIZE OF THE BOARD OF DIRECTORS

    The purchasers rights agreement provides that so long as at least 6,666,667
shares of series F preferred stock remain outstanding, the holders of series F
preferred stock are entitled to elect and remove directors in accordance with
our restated certificate. In the event that less than 6,666,667 shares of
series F preferred stock remain outstanding, but BTI Ventures L.L.C. and its
affiliates, which include KKR, beneficially own at least 10% of our outstanding
common stock, BTI has the right to designate the number of persons to serve as
members of the board determined in accordance with a formula set forth in the
purchasers rights agreement. Currently there are five BTI nominees sitting on
our eleven seat board of directors.

                                       59
<PAGE>
    For so long as at least 8,532,394 shares of series B preferred stock,
series C preferred stock and series D preferred stock remain outstanding, the
holders of this stock, voting together as a class, are entitled to elect and
remove directors pursuant to our restated certificate.

    BTI DRAG-ALONG RIGHTS

    Holders of common stock and each series of preferred stock that are parties
to the purchasers rights agreement are required to sell their shares in the
event that BTI Ventures L.L.C. or its affiliates agree to sell or transfer their
shares, or to sell all or substantially all of our assets, to a third party.

    BTI VETO RIGHTS

    The purchasers rights agreement provides that for so long as BTI or any of
its affiliates beneficially owns at least 6,666,667 shares of our common stock
or series F preferred stock, the approval of at least one BTI nominee on our
board will be required for our board of directors to approve and authorize any
of the following: any changes in our capital structure, such as increases or
decreases in the total authorized shares of our common stock and issuances of
our capital stock; any payment of dividends or distributions on our capital
stock; subject to limited exceptions, any reclassification, combination, split,
redemption or other acquisition of any shares of our capital stock; any
incurrence of indebtedness exceeding $5.0 million; any change in the size or
composition of our board or any board committee or creation of any board
committee; subject to limited exceptions, any affiliate transaction; any hiring
or termination of a chief executive officer or other key officer; any adoption
or modification of our annual budget and business plan; any amendment or
modification of any material provision of our senior notes indenture, senior
credit facility or any other material contract; any adoption, renewal or
material modification of any material compensation or benefit plan or
arrangement; any authorization of entering into a new line of business or the
expansion outside of Missouri, Kansas and Texas; any consolidation,
reorganization, recapitalization, merger or similar transaction; any transfer of
our assets, including by pledge, in excess of $5.0 million; subject to limited
exceptions, any acquisition of assets or securities for more than $5.0 million;
any amendment to our certificate of incorporation or bylaws; any voting or
similar arrangement regarding our capital stock; any payment, discharge or
satisfaction of any material claim or liability or the commencement of a
material suit; any joint venture involving material assets or the payment or
receipt of more than $5.0 million; any material license, contract or agreement;
or any liquidation, dissolution or winding up of our company.

OTHER TRANSACTIONS WITH AFFILIATES

    VALU-LINE LOANS

    As of December 31, 1997, Valu-Line of Kansas, Inc., which merged into us on
February 10, 1998, had notes payable of $240,000 in the aggregate from Stephen
L. Sauder and Mr. Sauder's father. Mr. Sauder was the president and principal
stockholder of Valu-Line at the time the loan was made and currently owns more
than 5% of our voting securities. The loans were due on demand. As of
December 31, 1998, the amounts outstanding under these loans were fully repaid.

    DEALINGS WITH VALU-BROADCASTING, INC.

    In 1999, 1998, and 1997 we, and our predecessor, Valu-Line, provided
services principally related to rent and operating costs to
Valu-Broadcasting, Inc., an affiliate of Valu-Line, which is owned by Stephen L.
Sauder, one of our stockholders who owned more than 5% of our voting securities
at the time of the transactions, in the amounts of $29,187, $30,000 and $81,000,
respectively. Valu-Line also received services principally related to
advertising from Valu-Broadcasting in the amounts of $30,360, $40,000 and
$41,000 in 1999, 1998 and 1997, respectively.

                                       60
<PAGE>
    SHARES ISSUANCES TO DIRECTORS

    In March 2000, Mr. Jalkut, chairman of our board of directors, agreed to
purchase 26,667 shares of our common stock for $200,000, and Mr. Ejabat, a
member of our board of directors, agreed to purchase 66,667 shares of our common
stock for $500,000.

PART IV.

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

(a)   Documents filed as part of this report

      (1)  Financial Statements

      See "Item 8. Financial Statements and Supplementary Data" for financial
statements included with this Annual Report on Form 10-K.

      (2)  Financial Statement Schedules

      Schedule II--Consolidated Valuation and Qualifying Accounts

                              BIRCH TELECOM, INC.
          SCHEDULE II--CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

<TABLE>
<CAPTION>
                                                                  ADDITIONS
                                                            ---------------------
                                                 BALANCE    CHARGED    CHARGED TO                   BALANCE
                                                BEGINNING      TO        OTHER        OTHER          END OF
                                                 OF YEAR     INCOME     ACCOUNTS    DEDUCTIONS        YEAR
                                                ---------   --------   ----------   ----------      --------
                                                                       (IN THOUSANDS)
<S>                                             <C>         <C>        <C>          <C>             <C>
1997
  Valuation allowance--deferred income tax
    assets...................................    $    0     $   681       $  0         $   0        $   681
                                                 ------     -------       ----         -----        -------

1998
  Allowance for doubtful accounts............    $    0     $   140       $133         $ (39)(1)    $   234
                                                 ------     -------       ----         -----        -------
  Valuation allowance--deferred income tax
    assets...................................    $  681     $ 5,118       $  0         $   0        $ 5,799
                                                 ------     -------       ----         -----        -------

1999
  Allowance for doubtful accounts............    $  234     $   561       $125         $(464)(1)    $   456
                                                 ------     -------       ----         -----        -------
  Valuation allowance--deferred income tax
    assets...................................    $5,799     $22,942       $  0         $   0        $28,741
                                                 ------     -------       ----         -----        -------
</TABLE>

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

(1) Accounts written off, net of recoveries.

                                       61
<PAGE>
      (3)  Exhibits

<TABLE>
<CAPTION>
       EXHIBIT
         NO.                               DESCRIPTION OF EXHIBIT
       -------          ------------------------------------------------------------
<S>                     <C>
        2.1             Agreement and plan of merger among Birch Telecom, Inc.,
                        Valu-Line Companies, Inc., Stephen L. Sauder, Paula K.
                        Sauder, Richard L. Tidwell, Sarah J. Tidwell, Stormy Supiran
                        and Carla S. Supiran. (incorporated by reference to Exhibit
                        2.1 to Birch Telecom, Inc.'s registration statement on Form
                        S-4, as amended (SEC File No. 333-62797), originally filed
                        September 3, 1998 (Form S-4)).

        3.1             Restated certificate of incorporation of Birch Telecom, Inc.
                        (incorporated by reference to Exhibit 3.1 to Birch Telecom
                        Inc.'s registration statement on Form S-1 filed March 23,
                        2000.)

        3.2             Restated bylaws of Birch Telecom, Inc. (incorporated by
                        reference to Exhibit 3.2 to the Form S-4).

       10.1             Birch Telecom, Inc. securities purchase agreement
                        (incorporated by reference to Exhibit 10.1 to the Form S-4).

       10.2             Birch Telecom, Inc. amended and restated purchasers rights
                        agreement, dated August 5, 1999 (incorporated by reference
                        to Exhibit 10.2 to the Form 10-Q).

       10.3             Amended employment agreement dated as of October 7, 1999
                        between Birch Telecom, Inc. and David E. Scott.
                        (incorporated by reference to Exhibit 10.3 to Birch Telecom
                        Inc.'s registration statement on Form S-1 filed March 23,
                        2000.)

       10.4             Amended employment agreement dated as of October 7, 1999
                        between Birch Telecom, Inc. and Gregory C. Lawhon.
                        (incorporated by reference to Exhibit 10.4 to Birch Telecom
                        Inc.'s registration statement on Form S-1 filed March 23,
                        2000.)

       10.5             Amended employment agreement dated as of October 7, 1999
                        between Birch Telecom, Inc. and Donald H. Goldman.
                        (incorporated by reference to Exhibit 10.5 to Birch Telecom
                        Inc.'s registration statement on Form S-1 filed March 23,
                        2000.)

       10.6             Amended employment agreement dated as of October 7, 1999
                        between Birch Telecom, Inc. and David W. Vranicar.
                        (incorporated by reference to Exhibit 10.6 to Birch Telecom
                        Inc.'s registration statement on Form S-1 filed March 23,
                        2000.)

       10.7             Employment agreement dated as of February 10, 1998 between
                        Birch Telecom, Inc. and Stephen L. Sauder (incorporated by
                        reference to Exhibit 10.7 to the Form S-4).

       10.8             General agreement between Birch Telecom, Inc. and Lucent
                        Technologies Inc. (incorporated by reference to Exhibit
                        10.12 to the Form S-4).

       10.9             Interconnection agreement under Sections 251 and 252 of the
                        Telecommunications Act of 1996 by and between Southwestern
                        Bell Telephone Company and Birch Telecom of Missouri, Inc.
                        (Missouri Interconnection Agreement) (incorporated by
                        reference to Exhibit 10.13 to the Form S-4).

       10.10            Amendment No. 1 dated May 27, 1998 to Missouri
                        interconnection agreement (incorporated by reference to
                        Exhibit 10.10 to Birch Telecom, Inc.'s annual report on form
                        10-K for the fiscal year ended December 31, 1998, originally
                        filed on March 31, 1999 (Form 10-K)).

       10.11+           Software license agreement between Birch Telecom, Inc. and
                        Saville Systems Inc. (incorporated by reference to Exhibit
                        10.14 to the Form S-4).

       10.12            Interconnection agreement under Sections 251 and 252 of the
                        Telecommunications Act of 1996 by and between Southwestern
                        Bell Telephone Company and Birch Telecom of Kansas, Inc.
                        (incorporated by reference to Exhibit 10.12 to the Form
                        10-K).
</TABLE>

                                       62
<PAGE>

<TABLE>
<CAPTION>
       EXHIBIT
         NO.                               DESCRIPTION OF EXHIBIT
       -------          ------------------------------------------------------------
<S>                     <C>
       10.13            Interconnection agreement under Sections 251 and 252 of the
                        Telecommunications Act of 1996 by and between Southwestern
                        Bell Telephone Company and Birch Telecom of Texas Ltd., LLP.
                        (incorporated by reference to the Exhibit 10.13 to the Form
                        10-K).

       10.14            1998 stock option plan (incorporated by reference to Exhibit
                        10.14 to Birch Telecom Inc.'s annual report on Form 10-K for
                        the fiscal year ended December 31, 1998, as amended, filed
                        on May 7, 1999 (Form 10-K/A)).

       10.15            Form of incentive stock option agreement under 1998 stock
                        option plan (incorporated by reference to Exhibit 10.15 to
                        the Form 10-K/A).

       10.16            Form of nonstatutory stock option agreement under 1998 stock
                        option plan (incorporated by reference to Exhibit 10.16 to
                        the Form 10-K/A).

       10.17            Lease agreement between Francor, L.L.C. and Birch Telecom,
                        Inc. dated July 20, 1998 (incorporated by reference to
                        Exhibit 10.17 to the Form 10-K/A).

       10.18            Series D preferred stock purchase agreement, dated July 2,
                        1999 (incorporated by reference to Exhibit 10.18 to Birch
                        Telecom Inc.'s quarterly report or Form 10-Q for the period
                        ended September 30, 1999, filed November 15, 1999 (Form
                        10-Q)).

       10.19            Series F preferred stock purchase agreement, dated July 13,
                        1999 (incorporated by reference to Exhibit 10.19 to the Form
                        10-Q).

       10.20            Amended and restated credit agreement among Birch Telecom
                        Finance, Inc., Birch Telecom, Inc., Lehman Brothers Inc.,
                        Lehman Commercial Paper Inc., Bankers Trust Company and Bank
                        of America, Inc., as agents and lenders, and the other
                        lenders party thereto dated February 2, 2000. (incorporated
                        by reference to Exhibit 10.20 to Birch Telecom Inc.'s
                        registration statement on Form S-1 filed March 23, 2000.)

       10.21            Amended and restated guarantee and collateral agreement,
                        dated as of February 2, 2000, among Birch Telecom Finance,
                        Inc., Birch Telecom, Inc. and Lehman Commercial Paper, Inc.,
                        as collateral agent. (incorporated by reference to Exhibit
                        10.21 to Birch Telecom Inc.'s registration statement on
                        Form S-1 filed March 23, 2000.)

       10.22            Amended employment agreement dated as of October 7, 1999
                        between Birch Telecom, Inc. and Bradley A. Moline.
                        (incorporated by reference to Exhibit 10.22 to Birch Telecom
                        Inc.'s registration statement on Form S-1 filed March 23,
                        2000.)

       10.23            Amended employment agreement dated as of October 7, 1999
                        between Birch Telecom, Inc. and Jeffrey D. Shackelford.
                        (incorporated by reference to Exhibit 10.23 to Birch Telecom
                        Inc.'s registration statement on Form S-1 filed March 23,
                        2000.)

       10.24            Employment agreement dated as of February 2000 between Birch
                        Telecom, Inc. and David M. Hollingsworth. (incorporated by
                        reference to Exhibit 10.24 to Birch Telecom Inc.'s
                        registration statement on Form S-1 filed March 23, 2000.)

       10.25            Indenture, dated as of June 23, 1998, between Birch Telecom,
                        Inc. and Norwest Bank Minnesota, National Association, as
                        trustee, relating to $115,000,000 aggregate principal amount
                        of 14% senior notes due 2008 (incorporated by reference to
                        Exhibit 4.1 to the Form S-4).

       10.26            Specimen certificate of 14% senior notes due 2008 (Exchange
                        Notes) (included in Exhibit 4.1, which is incorporated by
                        reference to Exhibit 4.1 to the Form S-4).

       10.27            Collateral pledge and security agreement, dated as of June
                        23, 1998 from Birch Telecom, Inc., Pledgor, to Norwest Bank
                        Minnesota, National Association, Trustee (incorporated by
                        reference to Exhibit 4.5 to the Form S-4).

       10.28            Letter agreement dated as of March 22, 2000 between Birch
                        Telecom, Inc. and Mory
</TABLE>

                                       63
<PAGE>

<TABLE>
<CAPTION>
       EXHIBIT
         NO.                               DESCRIPTION OF EXHIBIT
       -------          ------------------------------------------------------------
<S>                     <C>
                        Ejabat. (incorporated by reference to Exhibit 10.28 to Birch
                        Telecom Inc.'s registration statement on Form S-1 filed
                        March 23, 2000.)

       10.29            Letter agreement dated as of March 22, 2000 between Birch
                        Telecom, Inc. and Richard A. Jalkut. (incorporated by
                        reference to Exhibit 10.29 to Birch Telecom Inc.'s
                        registration statement on Form S-1 filed March 23, 2000.)

       10.30            Amendment number one dated as of March 23, 2000 to the
                        amended and restated purchasers rights agreement.
                        (incorporated by reference to Exhibit 10.30 to Birch Telecom
                        Inc.'s registration statement on Form S-1 filed March 23,
                        2000.)

       12.1*            Computation of Ratio of Earnings to Fixed Charges.

       21.1             Subsidiaries of Birch Telecom, Inc. (incorporated by
                        reference to Exhibit 21.1 to the Form S-4).

       24.1*            Power of attorney (included on the signature page).

       27.1*            Financial data schedule.
</TABLE>

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

*   Filed herewith.

+  Portions of this exhibit have been omitted pursuant to a request for
    confidential treatment. Such portions have been filed separately with the
    Commission.

(b)   Reports on Form 8-K.

    On March 23, 2000 we filed Form 8-K with respect to a registration statement
filing with the SEC as part of a proposed initial public offering of common
stock. We attached a copy of our press release issued that same day.

                                       64
<PAGE>
                                   SIGNATURES

    PURSUANT TO THE REQUIREMENTS OF THE SECTION 13 OR 15(D) OF THE SECURITIES
AND EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF KANSAS CITY, STATE OF MISSOURI.

<TABLE>
<S>                                                    <C>  <C>
                                                       BIRCH TELECOM, INC.

                                                       By:              /s/ DAVID E. SCOTT
                                                            -----------------------------------------
                                                                          David E. Scott
                                                              PRESIDENT AND CHIEF EXECUTIVE OFFICER

Date: March   , 2000
</TABLE>
<PAGE>
POWER OF ATTORNEY

    KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David E. Scott and Bradley A. Moline, and each of
them, his attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign any and all amendments to this Report on Form 10-K, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission granting unto such
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming that all such attorneys-in-fact
and agents, or any of them or their or his substitute or substituted, may
lawfully do or cause to be done by virtue hereof.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND AS OF THE DATES INDICATED.

<TABLE>
<CAPTION>
SIGNATURE                                                          TITLE                    DATE
---------                                                          -----                    ----
<S>                                                    <C>                             <C>
                                                       President, Chief Executive
-------------------------------------------            Officer and Director            March 30, 2000
DAVID E. SCOTT                                         (Principal Executive Officer)

                                                       Senior Vice President of
                                                       Finance and Chief Financial
-------------------------------------------            Officer (Principal Financial    March 30, 2000
BRADLEY A. MOLINE                                      and Accounting Officer)

-------------------------------------------            Director                        March 30, 2000
HENRY H. BRADLEY

-------------------------------------------            Director                        March 30, 2000
ADAM H. CLAMMER

-------------------------------------------            Director                        March 30, 2000
JAMES H. GREENE, JR.

-------------------------------------------            Director                        March 30, 2000
ALEXANDER NAVAB, JR.

-------------------------------------------            Director                        March 30, 2000
THOMAS R. PALMER
</TABLE>
<PAGE>
         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<S>                                                           <C>
BIRCH TELECOM, INC.
Report of Independent Auditors..............................     F-2
Consolidated Balance Sheets as of December 31, 1998 and
  1999......................................................     F-3
Consolidated Statements of Operations for the years ended
  December 31, 1997, 1998 and 1999..........................     F-4
Consolidated Statements of Stockholders' Equity (Deficit)
  for the years ended December 31, 1997, 1998 and 1999......     F-5
Consolidated Statements of Cash Flows for the years ended
  December 31, 1997, 1998 and 1999..........................     F-7
Notes to Consolidated Financial Statements..................     F-8
Schedule II - Consolidated Valuation and Qualifying
  Accounts..................................................    F-21

VALU-LINE COMPANIES, INC.
Report of Independent Auditors..............................    F-22
Consolidated Balance Sheet as of December 31, 1997..........    F-23
Consolidated Statement of Income and Retained Earnings for
  the year ended December 31, 1997..........................    F-24
Consolidated Statement of Cash Flows for the year ended
  December 31, 1997.........................................    F-25
Notes to Consolidated Financial Statements..................    F-26
</TABLE>

                                      F-1
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS

THE BOARD OF DIRECTORS AND STOCKHOLDERS
BIRCH TELECOM, INC.

    We have audited the accompanying consolidated balance sheets of Birch
Telecom, Inc. (Birch) as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1999. Our
audit also included the financial statement schedule listed in the Index to
Financial Statements and Financial Statement Schedule. These financial
statements and schedule are the responsibility of Birch's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

    We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Birch
Telecom, Inc. at December 31, 1998 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material aspects the
information set forth therein.

                                          Ernst & Young LLP

Kansas City, Missouri
February 17, 2000, except for note 19, as to
which the date is March 23, 2000

                                      F-2
<PAGE>
                              BIRCH TELECOM, INC.

                          CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1998 AND 1999

                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                1998       1999
                                                              --------   --------
<S>                                                           <C>        <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 39,745   $  5,053
  Pledged securities........................................    15,888     15,936
  Accounts receivable, net..................................     4,039     11,612
  Inventory.................................................       916      3,735
  Prepaid expenses and other................................       526      2,443
                                                              --------   --------
Total current assets........................................    61,114     38,779
Property and equipment......................................    26,900     70,192
Less: accumulated depreciation..............................       747      8,080
                                                              --------   --------
Property and equipment, net.................................    26,153     62,112
Pledged securities--noncurrent..............................    21,897      7,484
Goodwill, net...............................................    16,863     19,316
Other intangibles, net......................................     7,620     16,911
Other assets................................................       502      2,369
                                                              --------   --------
Total assets................................................  $134,149   $146,971
                                                              ========   ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
  Current maturities of long-term debt and capital lease
  obligations...............................................  $    335   $  1,300
  Accounts payable..........................................     8,503     13,300
  Accrued expenses..........................................     2,556     10,793
                                                              --------   --------
Total current liabilities...................................    11,394     25,393
Senior credit facility......................................        --     10,000
14% senior notes............................................   114,681    114,715
Capital lease obligations, net of current maturities........       778        836
Other long-term debt, net of current maturities.............       332        234
Series B redeemable preferred stock, 8,572,039 shares issued
  and outstanding in 1998 (stated at redemption and
  aggregate liquidation value)..............................    14,063         --
Series F redeemable preferred stock, 13,333,334 shares
  issued and outstanding in 1999 (stated at redemption and
  aggregate liquidation value)..............................        --     63,550
Stockholders' deficit:
  Series B preferred stock, 8,572,039 shares issued and
    outstanding in 1999.....................................        --          8
  Series C preferred stock, 8,492,749 and 6,270,527 shares
    issued and outstanding..................................         8          6
  Series D preferred stock, 2,222,222 shares issued and
    outstanding in 1999.....................................        --          2
  Common stock, $.001 par value, 80,000,000 shares
    authorized, 5,016,889 and 4,687,767 shares issued and
    outstanding.............................................         5          5
  Warrants..................................................       337        337
  Additional paid-in capital................................    10,548     11,686
  Accumulated deficit.......................................   (17,997)   (79,801)
                                                              --------   --------
Total stockholders' deficit.................................    (7,099)   (67,757)
                                                              --------   --------
Total liabilities and stockholders' deficit.................  $134,149   $146,971
                                                              ========   ========
</TABLE>

                            See accompanying notes.

                                      F-3
<PAGE>
                              BIRCH TELECOM, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                  YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                1997       1998       1999
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Revenue:
  Communications services...................................  $    --    $ 21,783   $ 52,980
  Equipment sales...........................................       --       4,304      7,558
                                                              -------    --------   --------
Total revenue...............................................       --      26,087     60,538
Cost of services:
  Cost of communications services...........................       --      16,339     41,870
  Cost of equipment sales...................................       --       2,547      4,488
                                                              -------    --------   --------
Total cost of services......................................       --      18,886     46,358
                                                              -------    --------   --------
Gross margin................................................       --       7,201     14,180
Selling, general and administrative expenses................    1,776      15,769     53,045
Depreciation and amortization expense.......................       27       2,308     10,828
                                                              -------    --------   --------
Loss from operations........................................   (1,803)    (10,876)   (49,693)
Interest expense............................................       --      (8,254)   (15,036)
Interest income.............................................       14       2,922      2,925
                                                              -------    --------   --------
Net loss....................................................   (1,789)    (16,208)   (61,804)
Preferred stock dividends...................................       --      (1,696)    (3,550)
Amortization of preferred stock issuance costs..............       --         (29)      (292)
                                                              -------    --------   --------
Loss applicable to common stock.............................  $(1,789)   $(17,933)  $(65,646)
                                                              =======    ========   ========
Loss per common share--basic and diluted....................  $ (1.45)   $  (4.71)  $ (13.25)
                                                              =======    ========   ========
Weighted average number of common shares outstanding........    1,235       3,809      4,956
</TABLE>

                            See accompanying notes.

                                      F-4
<PAGE>
                              BIRCH TELECOM, INC.
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                  YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                  SERIES A    SERIES B    SERIES C    SERIES D    SERIES E     COMMON                 COMMON
                                  PREFERRED   PREFERRED   PREFERRED   PREFERRED   PREFERRED    STOCK     WARRANTS      STOCK
                                    STOCK       STOCK       STOCK       STOCK       STOCK     $.01 PAR   $.01 PAR    $.001 PAR
                                  ---------   ---------   ---------   ---------   ---------   --------   ---------   ---------
<S>                               <C>         <C>         <C>         <C>         <C>         <C>        <C>         <C>
Balance at December 23, 1996
  (date of inception) and
  December 31, 1996.............    $ --        $ --        $ --        $ --        $ --        $ --       $ --        $ --
Issuance of common stock and
  warrants......................      --          --          --          --          --          18         18          --
Net loss and comprehensive
  loss..........................      --          --          --          --          --          --         --          --
                                    ----        ----        ----        ----        ----        ----       ----        ----
Balance at December 31, 1997....      --          --          --          --          --          18         18          --
Recapitalization................      --          --           2          --          --         (18)       (18)         --
Merger with Valu-Line...........       3          --           6          --          --          --         --          --
Issuance of warrants in
  connection with 14% senior
  notes.........................      --          --          --          --          --          --         --          --
Redemption of series A preferred
  stock.........................      (3)         --          --          --          --          --         --          --
Stock dividend..................      --          --          --          --          --          --         --           1
Option exercise.................      --          --          --          --          --          --         --           4
Restatement of series B
  preferred stock dividends.....      --          --          --          --          --          --         --          --
Amortization of series B
  preferred stock issuance
  costs.........................      --          --          --          --          --          --         --          --
Series A preferred stock
  dividends.....................      --          --          --          --          --          --         --          --
Accretion of series B preferred
  stock dividends...............      --          --          --          --          --          --         --          --
Net loss and comprehensive
  loss..........................      --          --          --          --          --          --         --          --
                                    ----        ----        ----        ----        ----        ----       ----        ----
Balance at December 31, 1998....      --          --           8          --          --          --         --           5

<CAPTION>
                                              ADDITIONAL
                                  WARRANTS     PAID-IN     ACCUMULATED
                                  $.001 PAR    CAPITAL       DEFICIT       TOTAL
                                  ---------   ----------   ------------   --------
<S>                               <C>         <C>          <C>            <C>
Balance at December 23, 1996
  (date of inception) and
  December 31, 1996.............     $--       $     --      $     --     $     --
Issuance of common stock and
  warrants......................      --          1,782            --        1,818
Net loss and comprehensive
  loss..........................      --             --        (1,789)      (1,789)
                                     ---       --------      --------     --------
Balance at December 31, 1997....      --          1,782        (1,789)          29
Recapitalization................      --             34            --           --
Merger with Valu-Line...........      --         14,741            --       14,750
Issuance of warrants in
  connection with 14% senior
  notes.........................     337             --            --          337
Redemption of series A preferred
  stock.........................      --         (4,747)           --       (4,750)
Stock dividend..................      --             (1)           --           --
Option exercise.................      --             --            --            4
Restatement of series B
  preferred stock dividends.....      --            464            --          464
Amortization of series B
  preferred stock issuance
  costs.........................      --            (29)           --          (29)
Series A preferred stock
  dividends.....................      --           (168)           --         (168)
Accretion of series B preferred
  stock dividends...............      --         (1,528)           --       (1,528)
Net loss and comprehensive
  loss..........................      --             --       (16,208)     (16,208)
                                     ---       --------      --------     --------
Balance at December 31, 1998....     337         10,548       (17,997)      (7,099)
</TABLE>

                                      F-5
<PAGE>
                              BIRCH TELECOM, INC.
      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)(CONTINUED)
                  YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                SERIES A    SERIES B    SERIES C    SERIES D    SERIES E     COMMON                    COMMON
                                PREFERRED   PREFERRED   PREFERRED   PREFERRED   PREFERRED    STOCK     WARRANTS        STOCK
                                  STOCK       STOCK       STOCK       STOCK       STOCK     $.01 PAR   $.01 PAR      $.001 PAR
                                ---------   ---------   ---------   ---------   ---------   --------   ---------   --------------
<S>                             <C>         <C>         <C>         <C>         <C>         <C>        <C>         <C>
Balance at December 31,
  1998........................    $ --         $--         $ 8         $--         $--        $ --       $ --           $ 5
Issuance of series D preferred
  stock.......................      --          --          --           2          --          --         --            --
Issuance of series E preferred
  stock.......................      --          --          --          --           2          --         --            --
Issuance of common stock......      --          --          --          --          --          --         --            --
Restatement of series B
  preferred stock.............      --           8          --          --          --          --         --            --
Redemption of series C
  preferred stock.............      --          --          (2)         --          --          --         --            --
Redemption of series E
  preferred stock.............      --          --          --          --          (2)         --         --            --
Retirement of common stock....      --          --          --          --          --          --         --            --
Amortization of series F
  preferred stock issuance
  costs.......................      --          --          --          --          --          --         --            --
Accretion of series F
  preferred stock dividends...      --          --          --          --          --          --         --            --
Net loss and comprehensive
  loss........................      --          --          --          --          --          --         --            --
                                  ----         ---         ---         ---         ---        ----       ----           ---
Balance at December 31,
  1999........................    $ --         $ 8         $ 6         $ 2         $--        $ --       $ --           $ 5
                                  ====         ===         ===         ===         ===        ====       ====           ===

<CAPTION>
                                WARRANTS    ADDITIONAL
                                  $.001      PAID-IN     ACCUMULATED
                                   PAR       CAPITAL       DEFICIT       TOTAL
                                ---------   ----------   ------------   --------
<S>                             <C>         <C>          <C>            <C>
Balance at December 31,
  1998........................    $337       $ 10,548      $(17,997)    $ (7,099)
Issuance of series D preferred
  stock.......................      --          9,998            --       10,000
Issuance of series E preferred
  stock.......................      --             (2)           --           --
Issuance of common stock......      --            211            --          211
Restatement of series B
  preferred stock.............      --         13,760            --       13,768
Redemption of series C
  preferred stock.............      --         (9,998)           --      (10,000)
Redemption of series E
  preferred stock.............      --         (8,570)           --       (8,572)
Retirement of common stock....      --           (449)           --         (449)
Amortization of series F
  preferred stock issuance
  costs.......................      --           (262)           --         (262)
Accretion of series F
  preferred stock dividends...      --         (3,550)           --       (3,550)
Net loss and comprehensive
  loss........................      --             --       (61,804)     (61,804)
                                  ----       --------      --------     --------
Balance at December 31,
  1999........................    $337       $ 11,686      $(79,801)    $(67,757)
                                  ====       ========      ========     ========
</TABLE>

                            See accompanying notes.

                                      F-6
<PAGE>
                              BIRCH TELECOM, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                  YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                1997       1998       1999
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
OPERATING ACTIVITIES
Net loss....................................................  $(1,789)   $(16,208)  $(61,804)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation..............................................       27         720      7,948
  Amortization..............................................       --       1,588      2,880
  Provision for losses on accounts receivable...............       --         140        561
  Other.....................................................       50          16         34
  Changes in operating assets and liabilities, net of
    effects of acquisitions:
    Accounts receivable.....................................       --      (1,905)    (7,633)
    Inventory...............................................       --        (300)      (989)
    Prepaid expenses........................................       (7)       (370)    (1,907)
    Other intangibles.......................................       --          --     (2,065)
    Other assets............................................      (87)       (198)    (2,357)
    Accounts payable........................................      255       3,888      4,592
    Accrued expenses........................................       --       1,986      7,515
                                                              -------    --------   --------
  Net cash used in operating activities.....................   (1,551)    (10,643)   (53,225)
INVESTING ACTIVITIES
  Purchase of property and equipment........................     (128)    (21,550)   (41,360)
  Business acquisitions, net of cash acquired...............       --      (7,757)    (4,801)
  Amortization of discount on pledged securities............       --      (1,231)    (1,725)
  Maturity of pledged securities............................       --       7,692     16,100
  Purchase of pledged securities............................       --     (44,247)       (10)
                                                              -------    --------   --------
  Net cash used in investing activities.....................     (128)    (67,093)   (31,796)
FINANCING ACTIVITIES
  Proceeds from long-term debt..............................       --         123     10,000
  Proceeds from 14% senior notes............................       --     114,663         --
  Proceeds from convertible notes...........................       --       3,500         --
  Proceeds from issuance of preferred stock.................       --       9,500     70,000
  Proceeds from issuance of common stock and warrants.......    1,768         342         --
  Payment of financing costs................................     (129)     (4,922)    (8,804)
  Repayment of long-term debt...............................       --        (321)      (773)
  Repayment of capital lease obligations....................       --        (172)    (1,073)
  Payment of series A preferred stock dividends.............       --        (168)        --
  Borrowing (repayment) of notes payable to stockholders....      250        (524)        --
  Redemption of preferred stock.............................       --      (4,750)   (18,572)
  Redemption of common stock................................       --          --       (449)
                                                              -------    --------   --------
  Net cash provided by financing activities.................    1,889     117,271     50,329
                                                              -------    --------   --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........      210      39,535    (34,692)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..............       --         210     39,745
                                                              -------    --------   --------
CASH AND CASH EQUIVALENTS AT END OF YEAR....................  $   210    $ 39,745   $  5,053
                                                              =======    ========   ========
Supplementary schedule of non-cash investing and financing
  activities:
  Amounts recorded in connection with acquisitions:
    Fair value of net assets acquired, net of cash
     acquired...............................................  $    --    $  5,064   $  2,693
    Fair value of intangible assets.........................       --      20,900      4,130
    Assumption of liabilities...............................       --      (2,430)      (939)
    Assumption of long-term debt and capital lease
     obligations............................................       --      (1,027)      (872)
    Issuance of series A preferred stock....................       --      (4,750)        --
    Issuance of series C preferred stock....................       --     (10,000)        --
    Issuance of common stock................................       --          --       (211)
  Common stock issued in exchange for other assets..........       50          --         --
  Property and equipment additions acquired through capital
    lease...................................................       --         728      2,099
  Property and equipment additions included in accounts
    payable.................................................       --       2,157      5,873
Supplemental disclosure of cash flow information:
  Cash payment for interest, net of interest capitalized of
    $436 in 1998 and $1,324 in 1999.........................       --       7,725     13,690
</TABLE>

                            See accompanying notes.

                                      F-7
<PAGE>
                              BIRCH TELECOM, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY

    Birch Telecom, Inc. was incorporated on December 23, 1996, as a Delaware
corporation for the purpose of providing local, long distance, Internet access,
and other communications services to business and residential customers. The
consolidated financial statements of Birch Telecom, Inc. include the accounts of
Birch Telecom, Inc. and the accounts of its wholly-owned subsidiaries
(collectively, Birch). Birch currently serves certain markets in Missouri,
Kansas and Texas. Birch's business is highly competitive and is subject to
various federal, state and local regulations.

    Birch was in the development stage for the period from December 23, 1996
(date of inception) to February 10, 1998. Accordingly, Birch had no operating
revenue and incurred operating losses and operating cash flow deficits during
that period.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    CASH AND CASH EQUIVALENTS

    For purposes of reporting cash flows, Birch includes as cash and cash
equivalents highly liquid investments with original maturities of three months
or less.

    REVENUE RECOGNITION

    Revenue for communications services is recognized when customers use the
associated services. Equipment revenue is recognized when systems or services
are substantially complete. Revenue on billings to customers in advance of
providing services is deferred and recognized when earned. Customers are not
charged fees to activate initial service.

    COST OF SERVICES

    Cost of services includes local and long-distance services purchased from
incumbent local exchange carriers, interexchange carriers and certain providers
of fiber optic telephone networks. Cost of services also includes costs
associated with the sale and installation of telephone systems.

    INVENTORY

    Inventory is carried at the lower of average cost or market determined on a
first-in, first-out basis and consists primarily of parts and equipment used in
the maintenance and installation of telephone systems.

    ADVERTISING COSTS

    Advertising costs are expensed as incurred and totaled $895,000 in 1998 and
$3.0 million in 1999. There were no advertising costs in 1997.

                                      F-8
<PAGE>
                              BIRCH TELECOM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    PROPERTY AND EQUIPMENT

    Property and equipment is stated at cost and depreciated using the
straight-line method over the following estimated useful lives of the assets:

<TABLE>
<CAPTION>
                                                               YEARS
                                                              --------
<S>                                                           <C>
Communications network......................................    2-10
Buildings, furniture, fixtures and equipment................    2-40
</TABLE>

    GOODWILL AND OTHER INTANGIBLES

    Goodwill represents the excess of the purchase price paid over the fair
value of the net assets acquired in Birch's acquisitions. Goodwill is being
amortized over 25 years using the straight-line method. Accumulated amortization
on goodwill totaled $599,000 at December 31, 1998 and $1.4 million at
December 31, 1999.

    Other intangibles consist primarily of customer lists related to Birch's
acquisitions, deferred financing costs and deferred line installation costs.
Customer lists are amortized over 5 years using the straight-line method. The
deferred financing costs are amortized over 5 to 10 years, the term of the
associated financing, using the straight-line method. Deferred line installation
costs are being amortized over 2 years, the approximate average life of customer
contracts, using the straight-line method (see Note 6).

    Birch reviews its long-lived assets in accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-lived Assets and Long-lived Assets to be Disposed of," for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If such events or changes in circumstances are
present, a loss is recognized if the carrying value of the asset is in excess of
the sum of the undiscounted cash flows expected to result from the use of the
asset and its eventual disposition. An impairment loss is measured as the amount
by which the carrying amount of the asset exceeds the fair value of the asset.

    INCOME TAXES

    Birch accounts for income taxes in accordance with SFAS No. 109, Accounting
for Income Taxes. Birch recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Net
deferred tax assets are reduced by a valuation allowance when appropriate (see
Note 14). Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.

    STOCK OPTIONS

    Birch has adopted the disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, which establishes a fair value based method for the
financial reporting of its stock-based employee compensation plans. However, as
allowed by SFAS No. 123, Birch has elected to continue to measure compensation
using the intrinsic value based method as prescribed by Accounting Principles

                                      F-9
<PAGE>
                              BIRCH TELECOM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Board Opinion No. 25, Accounting for Stock Issued to Employees. Under this
method, compensation is measured as the difference between the market value of
the stock on the grant date, less the amount required to be paid for the stock.
The difference, if any, is charged to expense over the vesting period of the
options. The estimated market value used for the stock options granted was
determined on a periodic basis by Birch's board of directors. In accordance with
APB No. 25, Birch has recorded no compensation expense related to options
granted because the exercise price is equal to the estimated market value of the
stock on the date of grant (see Note 15).

    FAIR VALUES OF FINANCIAL INSTRUMENTS

    The carrying amount of cash and cash equivalents approximates fair value due
to the short maturity of the instruments. The fair value of Birch's pledged
securities was $38 million at December 31, 1998 and $23.3 million at
December 31, 1999. The fair value of Birch's senior notes is estimated to be
$106 million at December 31, 1998 and $115 million at December 31, 1999 based on
the quoted market rates for the debt. The fair value of other long-term debt,
accounts receivable, accounts payable and accrued expenses approximates the
recorded value.

    USE OF ESTIMATES IN FINANCIAL STATEMENTS

    The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.

    LOSS PER SHARE

    The net loss per share amount reflected on the consolidated statement of
operations is based on the weighted-average number of common shares outstanding.
Stock options and convertible preferred stock are anti-dilutive, and therefore
excluded from the computation of earnings per share. In the future, these stock
equivalents may become dilutive.

    RECLASSIFICATIONS

    Certain items in the 1997 and 1998 consolidated financial statements have
been reclassified to be consistent with the classification in the 1999
consolidated financial statements.

    NEW ACCOUNTING PRONOUNCEMENTS

    In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which
supersedes SFAS No. 80, Accounting for Futures Contracts, SFAS No. 105,
Disclosure of Information About Financial Instruments with Off-Balance-Sheet
Risk and Financial Instruments with Concentration of Credit Risk, and SFAS
No. 119, Disclosures about Derivative Financial Instruments and Fair Value of
Financial Instruments, and also amends certain aspects of other SFAS's
previously issued. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. SFAS No. 133 is effective for our
consolidated financial statements for the

                                      F-10
<PAGE>
                              BIRCH TELECOM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
year ending December 31, 2001. We do not expect the impact of SFAS No. 133 to be
material in relation to its consolidated financial statements.

3. ACQUISITIONS

    In February 1998, Birch merged with Valu-Line Companies, Inc. (Valu-Line) in
a transaction valued at $19.5 million, consisting of $4.75 million in cash,
2,968,750 shares of series A preferred stock having an aggregate liquidation
preference of $4.75 million and 6,250,000 shares of series C preferred stock
having an aggregate liquidation preference of $10.0 million. Since 1982,
Valu-Line has been primarily providing switched long distance services, customer
premises equipment (CPE) sales and services and, since March 1997, local
service.

    In May 1998, Birch acquired Boulevard Phone Company (Boulevard), a shared
tenant service provider in the Kansas City metropolitan area, for $300,000 in
cash and Telesource Communications, Inc. (Telesource), a CPE provider in the
Kansas City metropolitan area, for $325,000 in cash.

    In September 1998, Birch acquired TFSnet, Inc. (TFSnet), an Internet service
provider based in the Kansas City metropolitan area, for $2.65 million.

    In February 1999, Birch acquired American Local Telecommunications, LLC
(ALT), a competitive local exchange carrier based in the Dallas, Texas
metropolitan area. The acquisition included substantially all assets of ALT. The
total purchase price was approximately $1.6 million in cash and $211,000 in
common stock.

    In March 1999, Birch acquired the stock of Capital Communications
Corporation (Capital), a telecommunications equipment provider based in the St.
Louis, Missouri metropolitan area. The total purchase price was approximately
$3.0 million plus additional cash consideration, recorded as additional purchase
price, based on local service lines converted to Birch's service from Capital's
existing customer base, which totaled approximately $161,000 through
December 31, 1999.

    All of the acquisitions referenced above were recorded using the purchase
method of accounting. Accordingly, the operations of each are included in the
consolidated statements of operations and cash flows from the date of
acquisition.

    The following is unaudited pro forma information reflecting the effect of
the 1998 acquisitions on the results as though they had been completed effective
January 1, 1997 and 1998:

<TABLE>
<CAPTION>
                                                                 YEARS ENDED
                                                                DECEMBER 31,
                                                            ---------------------
                                                              1997        1998
                                                            ---------   ---------
                                                            (IN THOUSANDS, EXCEPT
                                                               PER SHARE DATA)
<S>                                                         <C>         <C>
Revenue...................................................   $18,847     $29,193
Net loss..................................................    19,325      28,921
Loss per common share.....................................     15.65        8.05
</TABLE>

    The impact of the 1999 acquisitions was not material to our results of
operations.

                                      F-11
<PAGE>
                              BIRCH TELECOM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. ACCOUNTS RECEIVABLE

    The composition of accounts receivable, net as of December 31, 1998 and 1999
is as follows:

<TABLE>
<CAPTION>
                                                               1998       1999
                                                             --------   --------
                                                               (IN THOUSANDS)
<S>                                                          <C>        <C>
Billed.....................................................   $3,144    $ 9,312
Unbilled...................................................    1,129      2,756
                                                              ------    -------
                                                               4,273     12,068
Less allowance for doubtful accounts.......................      234        456
                                                              ------    -------
                                                              $4,039    $11,612
                                                              ======    =======
</TABLE>

5. PROPERTY AND EQUIPMENT

    The composition of property and equipment as of December 31, 1998 and 1999
is as follows:

<TABLE>
<CAPTION>
                                                              1998       1999
                                                            --------   --------
                                                              (IN THOUSANDS)
<S>                                                         <C>        <C>
Communications network....................................  $ 5,966    $28,525
Buildings, furniture, fixtures and equipment..............    6,529     38,662
Construction in progress..................................   14,405      3,005
                                                            -------    -------
                                                             26,900     70,192
Less accumulated depreciation and amortization............      747      8,080
                                                            -------    -------
Property and equipment, net...............................  $26,153    $62,112
                                                            =======    =======
</TABLE>

6. OTHER INTANGIBLES

    The composition of other intangible assets, net as of December 31, 1998 and
1999 is as follows:

<TABLE>
<CAPTION>
                                                               1998       1999
                                                             --------   --------
                                                               (IN THOUSANDS)
<S>                                                          <C>        <C>
Customer lists.............................................   $3,525    $ 4,225
Preferred stock issuance costs.............................      325      6,989
Deferred financing costs...................................    4,630      6,412
Deferred installation costs................................       --      2,363
Other......................................................      153        330
                                                              ------    -------
                                                               8,633     20,319
Less accumulated amortization..............................    1,013      3,408
                                                              ------    -------
Other intangibles, net.....................................   $7,620    $16,911
                                                              ======    =======
</TABLE>

7. DEBT, PLEDGED SECURITIES AND WARRANTS

    During December 1999, Birch completed a $75 million senior credit facility
which increased to $125 million during syndication in February 2000. The
financing provides for a $25 million reducing revolver and $100 million in
multi-draw term loans. The revolver is available for general corporate

                                      F-12
<PAGE>
                              BIRCH TELECOM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. DEBT, PLEDGED SECURITIES AND WARRANTS (CONTINUED)
purposes of Birch's subsidiaries and the term loans are to be used to finance
the development, design, installation and acquisition of telecommunications
equipment, inventory network assets and back office systems. At Birch's
election, the borrowings bear interest at either the Prime Rate plus a margin
ranging from 1.50% to 2.50% or the London Interbank Offered Rate (LIBOR) plus a
margin ranging from 2.75% to 3.75%. The applicable margins are based upon
Birch's debt to EBITDA ratio, as defined by the senior credit facility. Interest
is paid quarterly in arrears for loans bearing interest based upon Prime and/or
on the last day of each relevant interest period, for periods not in excess of
three months, for LIBOR loans. For LIBOR loans with interest periods of longer
than three months, interest is paid each day which is three months after the
first day of such interest period and the last day of such interest period.
Commitment fees are paid quarterly in arrears on the average unused committed
portion of the Facility, ranging from 0.75% to 1.25%. The applicable percentages
are based upon Birch's average borrowings in relation to the average borrowing
availability, as defined by the senior credit facility. For the year ended
December 31, 1999 commitment fees totaled $25,174. Principal payments begin
March 2003 and the credit facility matures December 30, 2006. The senior credit
facility is secured by a perfected first priority security interest in
substantially all of Birch's assets and capital stock. Deferred financing costs
incurred amounting to $1.5 million at December 31, 1999 are being amortized over
the life of the credit facility using the straight-line method. Amortization for
the year ended December 31, 1999 was not significant.

    During June 1998, Birch completed a $115 million private offering of 14%
senior notes due June 2008 and 115,000 warrants to purchase 1,409,734 shares of
common stock. Interest on the senior notes is payable semi-annually in arrears
on June 15 and December 15 of each year. Warrants are exercisable at $0.01 per
share and expire June 2008. Birch received net proceeds from the senior notes of
$110.2 million and concurrently purchased pledged securities of $44.2 million.
The pledged securities are restricted for interest payments on the senior notes
and, together with the interest accruing thereon, will be used to satisfy such
interest payments through June 2001. Birch classifies its pledged securities,
consisting of $37.8 million at December 31, 1998 and $23.4 million at
December 31, 1999 of U.S. Treasury securities, as held to maturity recorded at
amortized cost and maturing between six and eighteen months. A portion of the
proceeds from the senior notes, $337,000, was allocated to the warrants, and the
resulting debt discount is being amortized over the life of the debt on the
straight-line method, which does not differ materially from the effective
interest method. Unamortized discount was $319,000 at December 31, 1998 and
$285,000 at December 31, 1999. The amount allocated to the warrants represents
the estimated fair value of the warrants at the date of issuance. Deferred
financing costs incurred amounting to $4.9 million at December 31, 1999 are
being amortized over the life of the senior notes using the straight-line
method. Accumulated amortization on the financing costs totaled $1.5 million at
December 31, 1999. The senior notes rank pari pasu in right of payment to all
existing and future senior indebtedness of Birch and rank senior in the right of
payment to all existing and future subordinated indebtedness of Birch.

    A Registration Statement on Form S-4, registering Birch's 14% senior notes
and exchanging the outstanding senior notes for exchange notes, was declared
effective by the Securities and Exchange Commission (SEC) in March 1999. The
terms and conditions of the exchange notes are identical to those of the senior
notes in all material respects.

    The senior credit facility and the senior notes indenture contain certain
covenants which, among other things, restrict the ability of Birch to incur
additional indebtedness, pay dividends or make

                                      F-13
<PAGE>
                              BIRCH TELECOM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. DEBT, PLEDGED SECURITIES AND WARRANTS (CONTINUED)
distributions of Birch's or its subsidiaries' stock, enter into sale and
leaseback transactions, create liens, enter into transactions with affiliates or
related persons, consolidate, merge or sell all of its assets. Birch was in
compliance with these covenants at December 31, 1999.

    Birch's debt consisted of the following at December 31, 1998 and 1999:

<TABLE>
<CAPTION>
                                                            1998       1999
                                                          --------   --------
                                                            (IN THOUSANDS)
<S>                                                       <C>        <C>
14% senior notes........................................  $114,681   $114,715
                                                          ========   ========
Senior credit facility:
  Equipment term loans..................................  $     --   $ 10,000
                                                          --------   --------
    Total senior credit facility........................  $     --   $ 10,000
                                                          ========   ========
Other long-term debt, interest accruing between 8.6% and
  9.8%, maturing through 2013, secured by buildings.....  $    345   $    244
Less current maturities.................................        13         10
                                                          --------   --------
                                                          $    332   $    234
                                                          ========   ========
</TABLE>

    Assets securing the other long-term debt totaled $814,000 at December 31,
1998 and $766,237 at December 31, 1999, net of accumulated depreciation of
$19,000 at December 31, 1998 and $35,037 at December 31, 1999.

    Principal payments required on the outstanding debt during each of the next
five years are as follows (IN THOUSANDS):

<TABLE>
<S>                                                           <C>
2000........................................................  $      10
2001........................................................         10
2002........................................................         11
2003........................................................      5,012
2004........................................................      5,014
Thereafter..................................................    114,902
                                                              ---------
                                                              $ 124,959
                                                              =========
</TABLE>

8. CAPITAL LEASE OBLIGATIONS

    Birch leases telecommunications equipment, computer equipment and
automobiles under capital leases with imputed interest between 8.0% and 12.0%.
Assets under capital leases totaled $1.5 million at December 31, 1998 and
$3.6 million at December 31, 1999, net of accumulated amortization of $210,000
at December 31, 1998 and $1.1 million at December 31, 1999. The future minimum
lease

                                      F-14
<PAGE>
                              BIRCH TELECOM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. CAPITAL LEASE OBLIGATIONS (CONTINUED)
payments under the capital leases and the present value of the net minimum lease
payments as of December 31, 1999 are as follows (IN THOUSANDS):

<TABLE>
<S>                                                           <C>
2000........................................................   $1,528
2001........................................................      545
2002........................................................       92
2003........................................................       57
2004........................................................       --
                                                               ------
Total minimum lease payments................................    2,222
Less amount representing interest...........................       96
                                                               ------
Present value of net minimum lease payments.................    2,126
Less current maturities.....................................    1,290
                                                               ------
                                                               $  836
                                                               ======
</TABLE>

    Amortization expense for assets under capital leases was $157,000 for 1998
and $974,165 for 1999.

9. CAPITAL STRUCTURE

    During 1997, $1.8 million of common stock and $18,000 of warrants were sold
to management and equity investors for $1.00 and $0.01 per share, respectively.
The warrants entitled the holders to purchase an additional 1.8 million shares
of common stock at $1.00 per share.

    During February and March 1998, Birch issued $9.5 million of series B
preferred stock at $4.50 per share and $3.5 million of convertible notes
generating net proceeds of $12.4 million, converted all existing common stock to
series C preferred stock, terminated common stock warrants, canceled the 1997
stock option plan, created the 1998 stock option plan and issued 474,750 shares
of common stock to employees of Birch. Also during February 1998, Birch issued
$4.75 million of series A preferred stock and $10.0 million of series C
preferred stock in connection with the Valu-Line merger. Birch redeemed the
series A preferred stock in June 1998. Also in June 1998, the convertible notes
were converted into series B preferred stock.

    During July and August 1999, Birch issued $10 million of series D preferred
stock and $60 million of series F preferred stock at $4.50 per share. Options
were granted to purchase $25 million of series F preferred stock at $4.75 per
share and $25 million of series F preferred stock at $5.00 per share which
expire on April 13, 2000. Additionally, Birch repurchased $10 million of
series C preferred stock at $4.50 and recapitalized the series B preferred stock
converting it into a new series B preferred stock and a new series E preferred
stock. The series E preferred stock was then redeemed for $8.6 million. Net
proceeds generated from these transactions totaled $44.4 million.

    AUTHORIZED SHARES

    At December 31, 1999, Birch had shares authorized totaling 80 million shares
of common stock and 55 million shares of preferred stock. The preferred stock
has designations of 8.75 million shares of series B, 8.5 million shares of
series C, 2.2 million shares of series D, 1.9 million shares of series E and
30 million shares of series F.

                                      F-15
<PAGE>
                              BIRCH TELECOM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. CAPITAL STRUCTURE (CONTINUED)
    RIGHTS

    All classes of preferred stock are convertible and contain certain voting
rights. The common stock also has voting rights similar to the series C
preferred stock. The series B, series D and series F preferred stock have
additional voting rights in certain circumstances. Additionally, the series F
preferred stock contains mandatory redemption rights based on certain senior
management retention. In the event of mandatory redemption, the shares are
redeemable for amounts similar to the liquidation preference discussed below.

    LIQUIDATION RIGHTS

    Birch's series D and series F preferred stock have a liquidation preference
over the series B and series C preferred stock and common stock at the greater
of (i) the purchase price plus accrued but unpaid dividends or (ii) the amount
the holders would have received upon liquidation if such shares of series D and
series F preferred stock had been converted to common stock immediately prior to
liquidation. Birch's series B preferred stock has a liquidation preference only
over series C preferred stock and common stock at an amount equal to the sum of
the purchase price plus accrued but unpaid dividends. Series C preferred stock
has preference only over common stock at an amount equal to the sum of the
purchase price plus accrued but unpaid dividends.

    DIVIDENDS

    The series B preferred stock accrued cumulative compounding dividends at 15%
per annum until the series B was converted and restated into new series B. At
that time, the rights and preferences were amended and restated to remove the
mandatory dividend rights and now the series B cumulates cash dividends at 15%
per annum, amounting to $814,000 at December 31, 1999. The series C preferred
stock has a 10% non-cumulative cash dividend and the series D preferred stock
cumulates cash dividends at a rate of 15% per annum, totaling $750,000 at
December 31, 1999. Only the series F preferred stock contains mandatory dividend
rights. Accrued cash dividends on series F preferred stock totaled $3.6 million
at December 31, 1999, as reflected in stockholders' equity. Common stock
dividends, if any, will be declared at the discretion of Birch's board of
directors. Birch has not paid any cash dividends on common stock since inception
and does not intend to pay any in the foreseeable future. Restrictions contained
in the senior credit facility agreement and the senior notes indenture prohibit
Birch from paying certain dividends on its capital stock.

    On June 23, 1998, Birch paid a stock dividend, in the amount of 0.055 shares
per share, to the holders of Birch's series B preferred stock, series C
preferred stock and common stock as of June 15, 1998. Dividends paid on
series A preferred stock in 1998 totaled $168,000.

                                      F-16
<PAGE>
                              BIRCH TELECOM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. RELATED-PARTY TRANSACTIONS

    During December 1997, Birch borrowed $250,000 from Birch's principal
stockholder under a note payable. The note payable was fully repaid in
February 1998.

    Birch acquired notes payable to Valu-Line shareholders totaling $274,000 in
the Valu-Line merger. These notes were fully repaid during 1998.

    A broadcasting company owned by one of the Birch's shareholders rented
office space from Birch for $30,000 during 1998 and $29,187 during 1999. Birch
purchased advertising from the broadcasting company totaling $40,000 in 1998 and
$30,360 in 1999.

    A real estate company owned by the President of Birch's equipment division
was paid $3,588 for building maintenance in 1998 and $12,587 in 1999.

11. COMMITMENTS AND CONTINGENCIES

    Future minimum rental commitments at December 31, 1999 for all noncancelable
operating leases, consisting mainly of leases for office space and equipment,
are as follows (IN THOUSANDS):

<TABLE>
<S>                                                           <C>
2000........................................................  $ 2,766,794
2001........................................................    3,042,829
2002........................................................    2,925,940
2003........................................................    2,567,295
2004........................................................    2,443,322
Thereafter..................................................    7,769,655
                                                              -----------
Total.......................................................  $21,515,835
                                                              ===========
</TABLE>

    Total rent expense was $81,000 in 1997, $485,000 in 1998 and $1.5 million in
1999. Birch may renew leases on its corporate offices in terms ranging from
three to ten years at rates approximating the prevailing market. Renewal rentals
are excluded from the table.

    Various suits arising in the ordinary course of business are pending against
Birch. Management cannot predict the final outcome of the actions, but believes
they will not be material to Birch's financial statements.

12. EMPLOYEE BENEFIT PLAN

    Birch sponsors a 401(k) profit-sharing plan covering substantially all
employees under which employees can contribute up to 15% of their annual salary
subject to annual maximum limitations. Employees can participate after meeting
the plan's eligibility requirements. Birch may also make discretionary
contributions. Birch contributions to the plan were $148,000 in 1998 and
$594,925 in 1999.

13. EMPLOYMENT AGREEMENTS

    Birch has entered into employment agreements with certain executive
employees which provide for payments to be made in connection with certain
termination of employment or change of control. The benefits include cash
compensation, immediate vesting of outstanding stock options and coverage under
Birch's group health plan.

                                      F-17
<PAGE>
                              BIRCH TELECOM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. INCOME TAXES

    Net deferred taxes consist of the following as of December 31, 1998 and
1999:

<TABLE>
<CAPTION>
                                                             1998       1999
                                                           --------   --------
                                                             (IN THOUSANDS)
<S>                                                        <C>        <C>
Deferred tax assets:
  Net operating loss carryforwards.......................  $ 5,528    $ 28,770
  Accruals and reserves not currently deductible.........       91         182
  Other..................................................      668         614
                                                           -------    --------
                                                             6,287      29,566
  Valuation allowance....................................   (5,799)    (28,741)
                                                           -------    --------
                                                               488         825
Deferred tax liabilities:
  Property and equipment.................................      488         825
                                                           -------    --------
                                                           $    --    $     --
                                                           =======    ========
</TABLE>

    Net income tax benefits of approximately $5.1 million in 1998 and $22.9 in
1999 have been offset by increases in the valuation allowance. At December 31,
1999, Birch had operating loss carryforwards for federal income tax purposes of
approximately $71.9 million, expiring in 2013 and 2014.

    The primary difference that caused the effective tax rate to vary from the
statutory federal income tax rate of 35% was the valuation allowance.

15. STOCK OPTION PLAN

    At December 31, 1997, Birch had granted options to purchase common stock
under the 1997 stock option plan. The options granted had a term of 10 years and
vested over a four-year period. This plan was terminated and superseded in 1998
by the 1998 employee stock option plan. No options were or ever will be
exercised and no shares were or will ever be issued under the terminated and
superseded 1997 stock option plan.

    Stock option activity under the 1997 stock option plan was as follows:

<TABLE>
<CAPTION>
                                                                     WEIGHTED-
                                                                    AVERAGE PER
                                                                   SHARE EXERCISE
                                                        SHARES         PRICE
                                                      ----------   --------------
<S>                                                   <C>          <C>
Granted.............................................   2,783,000       $ 1.00
Exercised...........................................          --           --
Forfeited...........................................          --           --
                                                      ----------
Outstanding at December 31, 1997....................   2,783,000         1.00
Terminated..........................................  (2,783,000)        1.00
                                                      ----------
Outstanding at December 31, 1998....................          --           --
                                                      ==========
</TABLE>

                                      F-18
<PAGE>
                              BIRCH TELECOM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. STOCK OPTION PLAN (CONTINUED)
    Stock option activity under the 1998 employee stock option plan was as
follows:

<TABLE>
<CAPTION>
                                                                    WEIGHTED-
                                                                   AVERAGE PER
                                                                  SHARE EXERCISE
                                                       SHARES         PRICE
                                                      ---------   --------------
<S>                                                   <C>         <C>
Granted.............................................  5,093,064       $0.242
Exercised...........................................  4,566,889        0.001
Forfeited...........................................     14,250        2.500
                                                      ---------
Outstanding at December 31, 1998....................    511,925        2.334

Granted.............................................  1,794,800        3.845
Exercised...........................................         --           --
Forfeited...........................................    275,875        3.038
                                                      ---------
Outstanding at December 31, 1999....................  2,030,850        3.574
                                                      =========
</TABLE>

    At December 31, 1998, 5,363 options were exercisable with a weighted average
exercise price of $0.001. At December 31, 1999, 107,468 options were exercisable
with a weighted average exercise price of $2.175.

    The 1998 employee stock option plan authorized the grant of options for up
to 6,195,845 shares of Birch's common stock. The options have a term of
10 years and vest over a four-year period. All options exercised during 1998
were for options granted with an early exercise provision. The shares from
exercised options continue to be subject to the four-year vesting period. No
options expired during 1998 or 1999.

    Options granted in 1998 and 1999 had exercise prices approximating the
market value of the common stock. Exercise prices for options outstanding at
December 31, 1999 ranged from $0.001 to $4.50. The weighted-average remaining
contractual life of those options is 9.4 years. The weighted-average fair values
of options granted during the years ended December 31, 1998 and 1999 equaled
$0.05 and $0.73, respectively. At December 31, 1999, Birch has reserved
1,628,956 shares of common stock for issuance under the 1998 stock option plan.

    Birch estimated the fair value of each option grant using the minimum value
method permitted by SFAS No. 123 for entities not publicly traded. Birch used
the following assumptions in the calculation: risk-free interest rate of 5.25%,
expected life of four years and no dividends being paid over the life of the
options. Under the minimum value method, the volatility factor is excluded. Had
compensation cost for the stock based compensation plan been determined as
prescribed by SFAS No. 123, the net loss and loss per common share would have
been as follows for the years ended December 31, 1997, 1998 and 1999:

<TABLE>
<CAPTION>
                                                    1997        1998        1999
                                                  ---------   ---------   ---------
                                                   (IN THOUSANDS, EXCEPT PER SHARE
                                                                DATA)
<S>                                               <C>         <C>         <C>
Net loss--as reported...........................   $(1,789)   $(16,208)   $(61,804)
Net loss--pro forma.............................    (1,921)    (16,384)    (62,411)
Loss per share--Basic and Diluted--Pro Forma....     (1.56)      (4.75)     (13.36)
</TABLE>

                                      F-19
<PAGE>
                              BIRCH TELECOM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16. SIGNIFICANT SUPPLIERS

    Birch purchased telephone services from Southwestern Bell Telephone
amounting to 35% of cost of services in 1998 and 65% in 1999. Birch is dependent
upon incumbent telephone companies, such as Southwestern Bell, for the supply of
fiber optic networks that we use. Birch purchased switches and other network
equipment and software from Lucent Technologies amounting to $12.9 million in
1998 and $9.9 million in 1999.

17. YEAR 2000 ISSUE--UNAUDITED

    The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of Birch's
computer programs that have date-sensitive software may recognize the date using
"00" as the year 1900 rather than the year 2000. Birch completed all Year 2000
readiness work and experienced no significant problems as a result of the new
year. Birch does not believe it has continued exposure to the Year 2000 problem
and does not expect further costs incurred in relation to the Year 2000 issue to
be substantial.

18. QUARTERLY DATA--UNAUDITED

    The following table includes summarized quarterly financial data for the
years ended December 31:

<TABLE>
<CAPTION>
                                                                        QUARTERS
                                                        -----------------------------------------
                                                         FIRST      SECOND     THIRD      FOURTH
                                                        --------   --------   --------   --------
                                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                     <C>        <C>        <C>        <C>
1998:
Revenue...............................................  $ 3,705    $  6,060   $  7,478   $  8,844
Gross margin..........................................    1,063       1,628      2,305      2,205
Loss from operations..................................     (567)     (1,486)    (2,996)    (5,827)
Net loss..............................................     (623)     (1,766)    (5,468)    (8,351)
Loss per common share--basic and diluted..............    (0.79)      (0.55)     (1.19)     (1.76)

1999:
Revenue...............................................  $10,636    $ 13,975   $ 17,022   $ 18,905
Gross margin..........................................    2,711       3,574      3,753      4,142
Loss from operations..................................   (7,128)     (9,525)   (13,710)   (19,330)
Net loss..............................................   (9,936)    (12,639)   (16,690)   (22,539)
Loss per common share--basic and diluted..............    (2.06)      (2.59)     (3.43)     (5.30)
</TABLE>

19. SUBSEQUENT EVENTS

    Since December 31, 1999, Birch has borrowed an additional $40 million
through March 23, 2000 under the term loan portion of the senior credit
facility.

    On March 23, 2000 an affiliate of Kohlberg Kravis Roberts & Co. exercised
its options to purchase an additional $50.0 million of Birch's series F
preferred stock (see note 9).

    Also on March 23, 2000, Birch filed a registration statement on Form S-1
relating to a proposed initial public offering of its common stock. All
outstanding shares of Birch's preferred stock will automatically convert into
shares of common stock upon completion of the proposed offering. In addition
Birch expects to declare a 1.795 for 1 split of its common stock prior to
completion of the offering. The conversion ratio for the preferred stock will be
adjusted accordingly.

                                      F-20
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Valu-Line Companies, Inc.

    We have audited the accompanying consolidated balance sheet of the Valu-Line
Companies, Inc. (the Company) as of December 31, 1997, and the related
consolidated statements of income and retained earnings, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

    We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Valu-Line
Companies, Inc. at December 31, 1997 and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.

                                             Ernst & Young LLP
Kansas City, Missouri

May 15, 1998

                                      F-21
<PAGE>
                           VALU-LINE COMPANIES, INC.

                           CONSOLIDATED BALANCE SHEET

                               DECEMBER 31, 1997

                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<S>                                                           <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................   $  258
  Accounts receivable, net of allowance of $70..............    1,790
  Other receivables--related parties........................       97
  Inventories...............................................      530
  Prepaid expenses..........................................       37
  Income taxes receivable...................................       30
  Other assets..............................................       60
  Deferred income taxes.....................................       71
                                                               ------
Total current assets........................................    2,873
Property and equipment, net.................................    1,612
Other assets................................................      317
                                                               ------
Total assets................................................   $4,802
                                                               ======

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current maturities of long-term debt and capital lease
    obligation..............................................   $  110
  Notes payable--related parties............................      240
  Accounts payable..........................................    1,262
  Accrued expenses..........................................      225
  Customer deposits.........................................       39
  Accrued salaries and commissions..........................      266
  Deferred revenue..........................................      287
                                                               ------
Total current liabilities...................................    2,429
Long-term debt, net of current maturities...................      345
Capital lease obligation, net of current maturities.........      336
Deferred income taxes.......................................       27

STOCKHOLDERS' EQUITY
Common stock, no par value, 100,000 shares authorized;
  10,360 issued and outstanding.............................      181
Retained earnings...........................................    1,484
                                                               ------
Total stockholders' equity..................................    1,665
                                                               ------
Total liabilities and stockholders' equity..................   $4,802
                                                               ======
</TABLE>

                            See accompanying notes.

                                      F-22
<PAGE>
                           VALU-LINE COMPANIES, INC.

             CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS

                          YEAR ENDED DECEMBER 31, 1997

                (IN THOUSANDS EXCEPT SHARES AND PER SHARE DATA)

<TABLE>
<S>                                                           <C>
Revenue:
  Communications services, net..............................  $13,785
  Equipment sales, net......................................    3,016
                                                              -------
Total revenue...............................................   16,801
Cost of services:
  Cost of communications services...........................    9,859
  Cost of equipment sales...................................    1,983
                                                              -------
Total cost of services......................................   11,842
                                                              -------
Gross margin................................................    4,959
Selling, general and administrative.........................    4,067
Depreciation and amortization...............................      341
                                                              -------
Income from operations......................................      551
Interest expense............................................       97
                                                              -------
Income before income taxes..................................      454
Income tax expense..........................................      186
                                                              -------
Net income..................................................      268
Retained earnings, beginning of year........................    1,216
                                                              -------
Retained earnings, end of year..............................  $ 1,484
                                                              =======
Earnings per share--basic and diluted.......................  $ 25.87
                                                              =======
Common shares outstanding--basic and diluted................   10,360
</TABLE>

                            See accompanying notes.

                                      F-23
<PAGE>
                           VALU-LINE COMPANIES, INC.

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                          YEAR ENDED DECEMBER 31, 1997

                                 (IN THOUSANDS)

<TABLE>
<S>                                                           <C>
OPERATING ACTIVITIES
Net income..................................................    $268
Adjustments to reconcile net income to net cash from
  operating activities:
  Depreciation and amortization.............................     341
  Deferred income taxes.....................................     (14)
  Income tax expense........................................      73
  Changes in operating assets and liabilities:
    Accounts receivable.....................................    (660)
    Other receivables--related parties......................     (52)
    Inventory...............................................     (94)
    Income taxes receivable/payable.........................     (56)
    Accounts payable........................................     520
    Accrued expenses and other current liabilities..........     304
    Other...................................................    (142)
                                                                ----
Net cash provided by operating activities...................     488
INVESTING ACTIVITIES
Purchase of property and equipment..........................    (243)
                                                                ----
Net cash used in investing activities.......................    (243)
FINANCING ACTIVITIES
Payment of notes payable....................................     (11)
Payment of notes payable--related parties...................     (44)
Payment of capital lease obligation.........................     (90)
                                                                ----
Net cash used in financing activities.......................    (145)
                                                                ----
Net increase in cash and cash equivalents...................     100
Cash and cash equivalents, beginning of year................     158
                                                                ----
Cash and cash equivalents, end of year......................    $258
                                                                ====
</TABLE>

                            See accompanying notes.

                                      F-24
<PAGE>
                           VALU-LINE COMPANIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          YEAR ENDED DECEMBER 31, 1997

1. THE COMPANY

    These consolidated financial statements include the accounts of Valu-Line
Companies, Inc., a Kansas Corporation, and its wholly-owned subsidiaries
(collectively, the "Company"), Valu-Line of Kansas, Inc. and IS Advertising. The
Company was acquired by Birch Telecom, Inc. in February 1998 (see NOTE 10). The
accounts of Valu Broadcasting, Inc. and Steve Sauder Real Estate, respectively,
a wholly-owned subsidiary of and a division of Valu-Line Companies, Inc., both
of which were spun off in December 1997, have been excluded for all periods from
these consolidated financial statements in order to reflect financial position
and operating results on a basis consistent with the businesses acquired by
Birch Telecom, Inc. All intercompany balances and transactions have been
eliminated in consolidation.

    The Company provides local, long distance, Internet, customer premises
equipment and other communications services to business and residential
customers in the state of Kansas.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    CASH AND CASH EQUIVALENTS

    For purposes of reporting cash flows, the Company includes as cash and cash
equivalents, cash and marketable securities with original maturities of three
months or less.

    REVENUE RECOGNITION

    Revenue from communications services is recognized when the services are
provided. Revenue on billings to customers in advance of providing services is
deferred and recognized when earned.

    CONCENTRATION OF CREDIT RISK

    The Company is exposed to concentrations of credit risk principally from
customer accounts receivable. At December 31, 1997, the Company's customers are
located in the state of Kansas. The Company performs ongoing credit evaluations
of its customers as a means to reduce credit risk.

    FAIR VALUES OF FINANCIAL INSTRUMENTS

    As of December 31, 1997, the fair values of the Company's financial
instruments, including cash equivalents and notes payable--related parties,
approximate their carrying value.

    INVENTORIES

    Inventories, which consist of customer premises communications equipment
held for sale and supplies, are valued at lower of average cost or market.

    PROPERTY AND EQUIPMENT

    Property and equipment, including assets held under capital leases, are
stated at cost and are depreciated using the straight-line method over the
estimated useful lives of the related assets or lease term.

                                      F-25
<PAGE>
                           VALU-LINE COMPANIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          YEAR ENDED DECEMBER 31, 1997

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    USE OF ESTIMATES IN FINANCIAL STATEMENTS

    The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.

3. PROPERTY AND EQUIPMENT

    The components of property and equipment at December 31, 1997 are as
follows:

<TABLE>
<CAPTION>
                                                     ESTIMATED
                                                    USEFUL LIVES        1997
                                                    ------------   --------------
                                                                   (IN THOUSANDS)
<S>                                                 <C>            <C>
Telecommunications and other equipment............  5 years        $        1,103
Office equipment, furniture and other.............  3-7 years               1,178
Buildings and improvements........................  40 years                  683
                                                                   --------------
                                                                            2,964
Accumulated depreciation and amortization.........                         (1,352)
                                                                   --------------
                                                                   $        1,612
                                                                   ==============
</TABLE>

    Telecommunication equipment under capital lease was $607,000 at
December 31, 1997. Accumulated amortization totaled $194,000 as of December 31,
1997. Amortization of assets under capital lease is included in depreciation and
amortization expense. Interest expense associated with the obligations under
these leases amounted to $47,000 in 1997.

4. CAPITAL LEASE OBLIGATION

    The Company leases telecommunications equipment under a capital lease. The
future minimum lease payments under the capitalized lease and the present value
of the net minimum lease payments as of December 31, 1997 are as follows (IN
THOUSANDS):

<TABLE>
<S>                                                           <C>
1998........................................................    $137
1999........................................................     137
2000........................................................     137
2001........................................................      57
2002........................................................      57
2003........................................................      57
                                                                ----
Total minimum lease payments................................     582
Less amount representing interest...........................    (147)
                                                                ----
Present value of net minimum lease payments with interest at
  10.0%.....................................................     435
Less current maturities.....................................     (99)
                                                                ----
                                                                $336
                                                                ====
</TABLE>

                                      F-26
<PAGE>
                           VALU-LINE COMPANIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          YEAR ENDED DECEMBER 31, 1997

5. LONG TERM DEBT AND NOTES PAYABLE

    The Company entered into a note payable with a financial institution in the
amount of $300,000 in 1992 to finance the remodeling of a building. The note is
payable in monthly installments through 2007. Interest is payable at prime plus
1 1/2% (10.0% at December 31, 1997). The note is secured by the building and the
deposit accounts of the Company with the financial institution. The outstanding
principal balance on the note was $262,000 at December 31, 1997.

    In 1996, the Company issued a note payable of $100,000 to finance the
purchase of an office building. The note is payable in monthly installments
through 2011. Interest is payable at a variable rate (8.90% at December, 31,
1997). The note is secured by the building. The outstanding principal balance on
the note was $94,000 at December 31, 1997.

    Maturities on the aforementioned notes payable are as follows (IN
THOUSANDS):

<TABLE>
<S>                                                           <C>
1998........................................................    $ 11
1999........................................................      13
2000........................................................      14
2001........................................................      15
2002........................................................      17
Thereafter..................................................     286
                                                                ----
Total.......................................................    $356
                                                                ====
</TABLE>

    The Company also has notes payable to officers of the Company and members of
their families. The notes are unsecured and payable on demand. Interest is
payable at the treasury rate (5.85% at December 31, 1997). The outstanding
principal balance on these notes was $240,000 at December 31, 1997. Principal
and interest payments were $128,000 in 1997.

    Total interest paid in 1997 was $97,000.

6. EMPLOYEE BENEFIT PLAN

    The Company sponsors a 401(k) profit-sharing plan covering substantially all
employees under which employees can contribute up to 15% of their annual salary
subject to annual Internal Revenue Code maximum limitations. Employees can
participate after meeting the plan's eligibility requirements. The Company may
make a discretionary contribution. Company contributions to the plan were
$81,000 in 1997.

                                      F-27
<PAGE>
                           VALU-LINE COMPANIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          YEAR ENDED DECEMBER 31, 1997

7. INCOME TAXES

    The income tax expense (benefit) consisted of the following:

<TABLE>
<CAPTION>
                                                                    YEAR ENDED
                                                                 DECEMBER 31, 1997
                                                                 -----------------
                                                                  (IN THOUSANDS)
<S>                                                              <C>
Current:
  Federal.................................................             $175
  State...................................................               25
                                                                       ----
Total Current.............................................              200
Deferred:
  Federal.................................................              (12)
  State...................................................               (2)
                                                                       ----
Total deferred............................................              (14)
                                                                       ----
Income tax expense........................................             $186
                                                                       ====
</TABLE>

    The differences between the amount computed by applying the statutory
federal income tax rate to income before income taxes and the provision for
income taxes are as follows:

<TABLE>
<CAPTION>
                                                                    YEAR ENDED
                                                                 DECEMBER 31, 1997
                                                                 -----------------
                                                                  (IN THOUSANDS)
<S>                                                              <C>
Tax computed at statutory rate............................             $159
State taxes, net of federal effect........................               22
Other, net................................................                5
                                                                       ----
Income tax expense........................................             $186
                                                                       ====
</TABLE>

    Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for federal and state income tax purposes.
Significant components of the Company's deferred tax assets and liabilities at
December 31, 1997 are as follows (IN THOUSANDS):

<TABLE>
<S>                                                           <C>
Deferred tax assets (current):
  Accrued liabilities.......................................    $32
  Allowance for doubtful accounts...........................     28
  Inventory capitalization..................................     11
                                                                ---
                                                                 71
Deferred tax liability (noncurrent):
  Depreciation..............................................     27
                                                                ---
Net deferred tax assets.....................................    $44
                                                                ===
</TABLE>

    Net cash paid for income taxes for the year ended December 31, 1997 was
$225,000.

                                      F-28
<PAGE>
                           VALU-LINE COMPANIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          YEAR ENDED DECEMBER 31, 1997

8. ADDITIONAL FINANCIAL INFORMATION

    RELATED PARTIES

    In 1997 Valu-Line provided services principally related to rent and
operating costs to Valu-Broadcasting, Inc., an affiliate of Valu-Line at the
time of the transactions, in the amount of $81,000. Valu-Line also received
services principally related to advertising from Valu-Broadcasting, Inc. in the
amount of $41,000 in 1997. In February 1998, Valu-Line merged with and into the
Company pursuant to the Merger.

    MAJOR SUPPLIER INFORMATION

    Cost of communications services provided by Southwestern Bell approximated
40% of the total cost of communication services for the year ended December 31,
1997. Equipment purchases from Toshiba approximated 59% of cost of equipment
sales for the year ended December 31, 1997.

9. COMMITMENTS AND CONTINGENCIES

    Minimum rental commitments at year-end 1997 for all noncancelable operating
leases, consisting mainly of leases for office space and vehicles, are as
follows (IN THOUSANDS):

<TABLE>
<S>                                                           <C>
1998........................................................    $30
1999........................................................     19
2000........................................................      9
                                                                ---
Thereafter..................................................    $58
                                                                ===
</TABLE>

    Total rent expense for 1997 was $56,000.

10. SUBSEQUENT EVENT

    In February 1998, the Company was acquired by Birch Telecom, Inc. for
$19,500,000. Shareholders of the Company received $4,750,000 of cash and
$14,750,000 of preferred stock in Birch Telecom, Inc.

11. YEAR 2000 COMPLIANCE--UNAUDITED

    Year 2000 issues arise from computer programs written using two digits
rather than four to define the applicable year. Any of the Company's computer
programs that have time-sensitive software may recognize a date using 00 as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculation causing disruptions of operations, including, among other things,
a temporary inability to process transactions, send invoices or engage in
similar normal business activities.

    Based on ongoing assessments, the Company determined that it will be
required to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The Company presently believes that with modifications to existing
software and conversions to new software, the year 2000 issue will not pose
significant operational problems for its computer systems. The Company estimates
it will incur minimal expenses to modify and convert its systems and anticipates
completing the year 2000 project by the year ending December 31, 1998.

                                      F-29
<PAGE>
                           VALU-LINE COMPANIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                          YEAR ENDED DECEMBER 31, 1997

11. YEAR 2000 COMPLIANCE--UNAUDITED (CONTINUED)
    While the Company believes that its systems will be year 2000 compliant,
there can be no assurance until the year 2000 occurs that all systems will
function adequately. In addition, the Company interconnects and uses various
local exchange companies' facilities to service its customers, and such
facilities currently utilize numerous, date-sensitive computer applications. If
these facilities are not year 2000 compliant, or if the systems of other local
exchange companies, long distance carriers and others upon which the Company
relies are not year 2000 compliant, it could have a material effect on the
Company's business, operating results and financial condition.

                                      F-30
<PAGE>
                              BIRCH TELECOM, INC.
          SCHEDULE II--CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

<TABLE>
<CAPTION>
                                                                  ADDITIONS
                                                            ---------------------
                                                 BALANCE    CHARGED    CHARGED TO                   BALANCE
                                                BEGINNING      TO        OTHER        OTHER          END OF
                                                 OF YEAR     INCOME     ACCOUNTS    DEDUCTIONS        YEAR
                                                ---------   --------   ----------   ----------      --------
                                                                       (IN THOUSANDS)
<S>                                             <C>         <C>        <C>          <C>             <C>
1997
  Valuation allowance--deferred income tax
    assets...................................    $    0     $   681       $  0         $   0        $   681
                                                 ------     -------       ----         -----        -------

1998
  Allowance for doubtful accounts............    $    0     $   140       $133         $ (39)(1)    $   234
                                                 ------     -------       ----         -----        -------
  Valuation allowance--deferred income tax
    assets...................................    $  681     $ 5,118       $  0         $   0        $ 5,799
                                                 ------     -------       ----         -----        -------

1999
  Allowance for doubtful accounts............    $  234     $   561       $125         $(464)(1)    $   456
                                                 ------     -------       ----         -----        -------
  Valuation allowance--deferred income tax
    assets...................................    $5,799     $22,942       $  0         $   0        $28,741
                                                 ------     -------       ----         -----        -------
</TABLE>

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

(1) Accounts written off, net of recoveries.