<PAGE>

                                 UNITED STATES

                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C.  20549
                                _______________

                                   FORM 10-K/A

(Mark One)

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

                  For the fiscal year ended December 31, 2000

                                      OR

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

            For the transition period from            to

                       Commission File Number: 333-59393

                          Rhythms NetConnections Inc.
            (Exact name of registrant as specified in its charter)

            Delaware                                     33-0747515
(State or other jurisdiction of            (I.R.S.  Employer Identification No.)
 incorporation or organization)

      9100 East Mineral Circle                             80112
            Englewood, CO                                (Zip Code)
(Address of principal executive offices)

      Registrant's telephone number, including area code: (303) 410-2000

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

                                                      Name of exchange
     Title of each class                             On which registered
     -------------------                             -------------------
            None.                                            None.

          Securities registered pursuant to section 12(g) of the Act:
                    Common Stock, par value $.001 per share
                               (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period as the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes [X]  No [_]

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

The aggregate market value of voting common equity held by non-affiliates of the
Registrant was approximately $115,395,998.  This calculation is based upon the
close price of such common equity on February 2, 2001 of $1.94 and the number of
shares held by non-affiliates, which was 59,482,473 shares on December 31, 2000.
As of December 31, 2000, the number of outstanding shares of the Registrant's
(1) $.001 par value Common Stock (Common Stock) was 79,739,764; (2) $.001 par
value 8 1/4% Series E Convertible Preferred Stock due 2015 was 250,000; (3)
Series 1 Junior Participating Preferred Stock was 0; and (4) $.001 par value 6
3/4% Series F Cumulative Convertible Preferred Stock was 3,000,000.

                               Explanatory Note

This first amendment to the Registrant's Annual Report on Form 10-K filed on
April 2, 2001 corrects Part II, Item 8. Specifically, under the Registrant's:
(1) table entitled "Consolidated Statement of Stockholders' Equity, for the
Fiscal Year ended December 31, 2000" the Registrant is (a) deleting "(568,164)"
from "Net loss"- "Additional Paid-In Capital" and "Net Loss" - "Deferred
Compensation" and adding "(568,164)" to "Net loss" -"Accumulated Deficit" and
"Net loss" - "Total Stockholders Equity (Deficit)" and (2) Note 3 to
Consolidated Financial Statements, the Registrant is (a) changing its entry
under "Furniture, fixtures and equipment, net: Office Furniture" for December
31, 1999 from "$14,773" to "$4,773," (b) adding to "Furniture, fixtures and
equipment, net:" the "Construction in process" line item, and (c) adding to
"Collocation fees, net:" the "Construction in process" line item. The contents
of the Annual Report on Form 10-K filed on April 2, 2001 are incorporated by
reference, and, except as modified hereby, remains in full force and effect.
<PAGE>


Item 8 - Financial Statements and Supplementary Data

The financial statements required pursuant to this item are included in Item 14
of this Form 10-K and are presented beginning on page F-1.

                                       38
<PAGE>

                       Report of Independent Accountants

To the Board of Directors and Stockholders
  of Rhythms NetConnections Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of comprehensive income (loss), of cash
flows, and of stockholders' equity (deficit) present fairly, in all material
respects, the financial position of Rhythms NetConnections Inc. and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a total stockholders' deficit.  In addition, one of the Company's
leasing companies has notified the Company that an event of default has occurred
for failure to maintain certain covenants.  These factors raise substantial
doubt about its ability to continue as a going concern.  Management's plans in
regard to these matters are also described in Note 1.  The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.



PricewaterhouseCoopers LLP
Denver, Colorado
February 22, 2001, except for Note 12,
as to which the date is March 29, 2001

                                      F-1
<PAGE>

                          RHYTHMS NETCONNECTIONS INC.
                          CONSOLIDATED BALANCE SHEETS
                     (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                            December 31,       December 31,
                                     ASSETS                                                     1999               2000
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>                <C>
Current assets:
Cash and cash equivalents                                                                   $   48,247            $ 11,444
Short-term investments                                                                         292,008             493,050
Restricted cash                                                                                 36,707              43,132
Accounts, loans, interest, and other receivables, net                                           10,844              36,371
Inventory                                                                                        4,071               7,911
Prepaid expenses and other current assets                                                        8,460              37,034
--------------------------------------------------------------------------------------------------------------------------
Total current assets                                                                           400,337             628,942
--------------------------------------------------------------------------------------------------------------------------
Furniture, fixtures and equipment, net                                                         124,831             256,837
Collocation fees, net                                                                           57,421              77,947
Restricted cash                                                                                 59,526              21,271
Deferred business acquisition costs, net of accumulated amortization of $4,765 and $10,280      18,425               8,145
Deferred debt issue costs, net of accumulated amortization of $924 and $1,434                   16,194              23,824
Other assets                                                                                     8,690              39,295
--------------------------------------------------------------------------------------------------------------------------

TOTAL ASSETS                                                                                 $ 685,424         $ 1,056,261
==========================================================================================================================


                      LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt                                                            $     333         $       110
Accounts payable                                                                                22,408              38,296
Cash overdrafts                                                                                  8,487                   -
Interest payable                                                                                 8,787              24,537
Accrued expenses and other current liabilities                                                  23,163              69,517
--------------------------------------------------------------------------------------------------------------------------
Total current liabilities                                                                       63,178             132,460
--------------------------------------------------------------------------------------------------------------------------
Long-term debt                                                                                     111                   -
Senior notes payable                                                                           505,696             832,168
Other liabilities                                                                                  110               7,812
--------------------------------------------------------------------------------------------------------------------------
Total liabilities                                                                              569,095             972,440
--------------------------------------------------------------------------------------------------------------------------

Mandatorily redeemable common stock warrants                                                        42                  42
Mandatorily redeemable preferred stock                                                               -             449,782
--------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $0.001 par value; 250,000,000 shares authorized;
      78,255,707 shares issued as of 1999 and 79,739,764 as of 2000                                 78                  80
Treasury stock, at cost; 988,894 shares as of 1999 and none as of 2000                            (469)                  -
Additional paid-in capital                                                                     373,604             424,330
Warrants                                                                                        10,397              58,506
Deferred compensation                                                                          (12,320)            (18,542)
Accumulated deficit                                                                           (257,636)           (825,800)
Accumulated comprehensive income                                                                 2,633              (4,577)
--------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit)                                                           116,287            (366,003)
--------------------------------------------------------------------------------------------------------------------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                         $ 685,424         $ 1,056,261
==========================================================================================================================
</TABLE>

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

                                      F-2
<PAGE>

                          RHYTHMS NETCONNECTIONS INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
              (In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
                                                                                           Year Ended
                                                                                          December 31,
                                                                     --------------------------------------------------
                                                                         1998                1999              2000
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                <C>                <C>
Revenue:
   Service and installation, net                                     $      528         $    11,089        $    46,138
-----------------------------------------------------------------------------------------------------------------------
Operating Expenses:
   Network and service costs                                              4,695              68,161            210,274
   Selling, marketing, general and administrative                        23,153             114,689            279,978
   Depreciation and amortization                                          1,081              12,639             49,968
   Amortization of deferred business acquisition costs                        -               4,765             10,280
-----------------------------------------------------------------------------------------------------------------------
       Total operating expenses                                          28,929             200,254            550,500
-----------------------------------------------------------------------------------------------------------------------

Loss from operations                                                    (28,401)           (189,165)          (504,362)
-----------------------------------------------------------------------------------------------------------------------

Other Income (Expense):
Interest income                                                           5,813              22,673             51,286
Interest expense (including amortized debt
   discount and issue costs)                                            (13,779)            (52,537)          (105,213)
 Litigation settlement                                                        -                   -             (7,588)
 Equity in losses of affiliates                                               -                   -             (2,432)
Other income                                                                 33                 149                145
-----------------------------------------------------------------------------------------------------------------------
       Total other income (expense)                                      (7,933)            (29,715)           (63,802)
-----------------------------------------------------------------------------------------------------------------------

=======================================================================================================================
Net Loss                                                             $  (36,334)        $  (218,880)       $  (568,164)
=======================================================================================================================

Preferred stock dividends and accretion                                       -                   -             38,753
=======================================================================================================================
Net Loss Available to Common Shareholders                            $  (36,334)        $  (218,880)       $  (606,917)
=======================================================================================================================

Net Loss Per Share:
   Basic                                                             $   (12.18)        $     (4.15)       $     (7.99)
=======================================================================================================================
   Diluted                                                           $   (12.18)        $     (4.15)       $     (7.99)
=======================================================================================================================

Shares Used in Computing Net Loss Per Share:
   Basic                                                              2,984,216          52,770,402         75,941,610
=======================================================================================================================
   Diluted                                                            2,984,216          52,770,402         75,941,610
=======================================================================================================================
</TABLE>

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

                                      F-3
<PAGE>

                          RHYTHMS NETCONNECTIONS INC.
            CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                                (In thousands)

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                  -------------------------------------------------
                                                     1998               1999                2000
---------------------------------------------------------------------------------------------------
<S>                                               <C>               <C>                 <C>
Net Loss                                          $ (36,334)        $ (218,880)         $ (568,164)

Cumulative translation adjustment                         -                  -                 110

Loss on available-for-sale securities                     -              2,633              (7,320)
---------------------------------------------------------------------------------------------------

Total comprehensive loss                          $ (36,334)        $ (216,247)         $ (575,374)
---------------------------------------------------------------------------------------------------
</TABLE>

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

                                      F-4
<PAGE>

                          RHYTHMS NETCONNECTIONS INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)

<TABLE>
<CAPTION>
                                                                                             Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------
                                                                                     1998             1999            2000
------------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>             <C>            <C>
Cash Flows from Operating Activities:
     Net loss                                                                     $  (36,334)     $ (218,880)    $   (568,164)
     Adjustments to reconcile net loss to net cash used for operating activities:
         Depreciation and amortization of furniture, fixtures, equipment, and
           collocation fees                                                              539          12,639           49,968
         Amortization of deferred business acquisition costs                               -           4,765           10,280
         Amortization of debt discount and deferred debt issue costs                  13,882          23,939           27,906
         Amortization of deferred compensation                                           725           3,742           11,696
         Equity in losses of affiliates                                                    -               -            2,432
         Bad debt expense                                                                 50             317            5,233
         Other                                                                           387            (142)              52
         Changes in assets and liabilities:
            Increase in accounts, loans, interest, and other receivables, net         (2,426)         (8,785)         (30,760)
            Increase in inventory                                                       (340)         (3,731)          (3,840)
            Increase in prepaid expenses and other current assets                       (135)         (8,230)         (28,574)
            Increase in other assets                                                    (318)           (382)         (15,297)
            Increase in accounts payable                                               2,287          11,807           15,888
            Increase in interest payable                                                  39           8,748           15,750
            Increase in accrued expenses and other current liabilities                 2,440          20,347           46,354
            Increase in other liabilities                                                180              72            7,557
------------------------------------------------------------------------------------------------------------------------------
                Net cash used for operating activities                               (19,024)       (153,774)        (453,519)
------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
     Purchases of short-term investments                                            (451,870)       (451,660)      (6,685,550)
     Maturities of short-term investments                                            336,373         275,149        6,484,508
     Purchases (maturities) of government securities as restricted cash, net               -         (96,233)          31,830
     Investment in common stock and preferred stock                                        -          (5,325)         (25,000)
     Purchases of furniture, fixtures, and equipment                                  (9,973)       (147,358)        (175,343)
     Payments of collocation fees                                                    (13,562)        (45,974)         (27,104)
------------------------------------------------------------------------------------------------------------------------------
                Net cash used for investing activities                              (139,032)       (471,401)        (396,659)
------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
     Proceeds from leasing company for equipment                                       6,606          23,755                -
     Proceeds from issuance of senior notes and warrants                             150,365         325,000          300,000
     Payments of debt issue costs                                                     (6,519)        (10,598)          (9,064)
     Proceeds from borrowings on long-term debt                                          432               -                -
     Repayments of long-term debt                                                       (195)           (361)            (334)
     Proceeds from issuance of common stock                                              242         248,748            4,847
     Proceeds from issuance of preferred stock and warrants, net                      18,292          75,000          526,655
     Payments of equity issue costs                                                        -         (17,473)               -
     Bank overdraft                                                                        -           8,487           (8,487)
     Purchase of treasury stock                                                          (18)           (451)            (242)
------------------------------------------------------------------------------------------------------------------------------
                Net cash provided by financing activities                            169,205         652,107          813,375
------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents                                             11,149          26,932          (36,803)
Cash and cash equivalents at beginning of period                                      10,166          21,315           48,247
------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                                        $   21,315      $   48,247     $     11,444
------------------------------------------------------------------------------------------------------------------------------
Supplemental schedule of cash flow information:
     Cash paid for interest                                                       $       66      $   19,850     $     61,529
------------------------------------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing activities:
------------------------------------------------------------------------------------------------------------------------------
     Furniture, fixtures, and equipment purchases payable                         $    7,363      $      547     $      1,086
     Business acquisition costs from issuance of preferred stock and warrants     $        -      $   22,010     $          -
     Warrants issued to leasing companies                                         $        -      $    1,180     $          -
     Dividends paid with stock                                                    $        -      $        -     $     10,125
------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

                                      F-5
<PAGE>

                          RHYTHMS NETCONNECTIONS INC.
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                   (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                     Preferred           Common
                                       Stock             Stock          Treasury                                          Total
                                      $0.001            $0.001            Stock       Addit-                              Stock-
                                     par value         par value         at Cost      ional     Deferred       Accu-      holders'
                                -----------------  ----------------  --------------   Paid-In    Compen-      mulated      Equity
                                Shares     Amount  Shares    Amount  Shares  Amount   Capital    sation       Deficit     (Deficit)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>        <C>     <C>       <C>     <C>     <C>      <C>       <C>           <C>         <C>
Balance at December 31, 1997    12,490,000     12  2,482,222      2       -       -    14,012     (1,258)      (2,422)      10,346

Issuance of Series A
  preferred stock for cash         365,094      1          -      -       -       -       291          -            -          292
Issuance of Series B
  preferred stock for cash       4,044,943      4          -      -       -       -    17,996          -            -       18,000
Issuance of common stock
  upon exercise of options               -      -  5,560,308      6       -       -       236          -            -          242
Purchase of treasury stock
  for cash                               -      -          -      - 438,115     (18)        -          -            -          (18)
Deferred compensation from
  grants of options to
  purchase common stock                  -      -          -      -       -       -     4,908     (4,908)           -            -
Amortization of deferred
  compensation                           -      -          -      -       -       -         -        725            -          725
Reversal of deferred
  compensation from
  cancellatioin of grants
  to purchase common stock               -      -          -      -       -       -      (231)       231            -            -
Net loss                                 -      -          -      -       -       -         -          -      (36,334)     (36,334)
Balance at December 31, 1998    16,900,037 $   17  8,042,530 $    8 438,115  $  (18)  $37,212   $ (5,210)    $(38,756)    $ (6,747)
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                      F-6
<PAGE>

<TABLE>
<CAPTION>


                                           Preferred Stock         Common Stock       Treasury Stock
                                          $0.001 par value      $0.001 par value          at Cost      Additional
                                          -----------------    -----------------    ----------------    Paid-In
                                          Shares     Amount    Shares     Amount    Shares    Amount    Capital    Warrants
---------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>         <C>      <C>         <C>      <C>       <C>      <C>        <C>
Balance at December 31, 1998             16,900,037  $    17   8,042,530  $    8   438,115   $  (18)  $  37,212  $      -
Issuance of common stock
 in initial public offering                       -       -   10,781,250      11         -       -      226,395         -
Issuance of common stock upon
 exercise of options for cash                     -       -    2,711,247       3         -       -        3,333         -
Issuance of common stock in
 secondary offering                               -       -      594,279       -         -       -       17,233         -
Issuance of common stock upon
 cashless exercise of warrants                    -       -    4,954,085       5         -       -        6,520         -
Issuance of Series C preferred
 stock and warrants for cash              8,395,655       8            -       -         -       -       60,368     7,124
Issuance of Series D preferred
 stock and warrants for cash                441,176       -            -       -         -       -        6,317     1,183
Business relationship value
 arising from issuance of
  Series C and D preferred stock                  -       -            -       -         -       -       21,100         -
Costs arising from issuances of
 Series C and D preferred stock                   -       -            -       -         -       -         (245)        -
Conversion of preferred stock to
 common upon initial
  public offering                       (25,736,868)    (25)  51,076,051      51         -       -          (26)        -
Costs arising from
 public offerings                                 -       -            -       -         -       -      (17,224)        -
Purchase of treasury stock
 for cash                                         -       -            -       -   550,779    (451)           -         -
Issuance of warrants to
 leasing companies                                -       -            -       -         -       -            -     1,180
Issuance of warrants to business
 partner                                          -       -            -       -         -       -            -       910
Stock issuance under employee
 stock purchase plan                              -       -       96,265       -         -       -        1,769         -
Deferred compensation from grants
 of options to purchase
  common stock                                    -       -            -       -         -       -       11,428         -
Amortization of deferred compensation             -       -            -       -         -       -            -         -
Reversal of deferred compensation
 from cancellation of grants to
  purchase common stock                           -       -            -       -         -       -         (576)        -
Net loss                                          -       -            -       -         -       -            -         -
Unrealized gain on available-
 for-sale securities                              -       -            -       -         -       -            -         -
-------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999                      -     $ -   78,255,707     $78   988,894   $(469)    $373,604  $ 10,397


<CAPTION>
                                                                                   Accumulated
                                                                                     Other            Total
                                                    Deferred     Accumulated      Comprehensive    Stockholders'
                                                  Compensation    Deficit            Income      Equity (Deficit)
                                                  ---------------------------------------------------------------
<S>                                               <C>            <C>              <C>            <C>
Balance at December 31, 1998                      $  (5,210)     $  (38,756)      $      -         $  (6,747)
Issuance of common stock
 in initial public offering                              -                -              -           226,406
Issuance of common stock upon
 exercise of options for cash                            -                -              -             3,336
Issuance of common stock in
 secondary offering                                      -                -              -            17,233
Issuance of common stock upon
 cashless exercise of warrants                           -                -              -             6,525
Issuance of Series C preferred
 stock and warrants for cash                             -                -              -            67,500
Issuance of Series D preferred
 stock and warrants for cash                             -                -              -             7,500
Business relationship value
 arising from issuance of
  Series C and D preferred stock                         -                -              -            21,100
Costs arising from issuances of
 Series C and D preferred stock                          -                -              -              (245)
Conversion of preferred stock to
 common upon initial
  public offering                                        -                -              -                 -
Costs arising from
 public offerings                                        -                -              -           (17,224)
Purchase of treasury stock
 for cash                                                -                -              -              (451)
Issuance of warrants to
 leasing companies                                       -                -              -             1,180
Issuance of warrants to business
 partner                                                 -                -              -               910
Stock issuance under employee
 stock purchase plan                                     -                -              -             1,769
Deferred compensation from grants
 of options to purchase
  common stock                                     (11,428)               -              -                -
Amortization of deferred compensation                3,742                -              -            3,742
Reversal of deferred compensation
 from cancellation of grants to
  purchase common stock                                576                -              -                -
Net loss                                                 -         (218,880)             -         (218,880)
Unrealized gain on available-
 for-sale securities                                     -                -          2,633            2,633
-----------------------------------------------------------------------------------------------------------
Balance at December 31, 1999                      $(12,320)       $(257,636)       $ 2,633        $ 116,287
-----------------------------------------------------------------------------------------------------------
</TABLE>

                                      F-7
<PAGE>

                          RHYTHMS NETCONNECTIONS INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     (in thousands, except share amounts)
<TABLE>
<CAPTION>
                                    Common Stock
                                      $0.001        Treasury Stock                          Def-                          Total
                                     par value          at Cost      Additional            erred     Accumu-  Compre-  Stockholders'
                                  --------------------------------    Paid-In              Compen-    lated   hensive     Equity
                                  Shares    Amount  Shares  Amount    Capital    Warrants  sation    Deficit   Income   (Deficit)
--------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>        <C>    <C>      <C>     <C>        <C>      <C>       <C>        <C>      <C>
Balance at December 31, 1999      78,255,707 $ 78   988,894  $(469)  $ 373,604  $ 10,397 $(12,320) $(257,636) $ 2,633  $ 116,287

Issuance of common stock
     upon exercise of
     options for cash                346,006    -         -      -       1,258         -        -          -        -      1,258
Issuance of treasury stock
     upon settlement
     of litigation                         -    -  (438,115)    18          71         -        -          -        -         89
Issuance of Series E
     preferred stock warrants
     for cash, net                         -    -         -      -           -    48,109        -          -        -     48,109
Beneficial conversion feature
     of Series E preferred
     stock                                 -    -         -      -      57,410         -        -          -        -     57,410
Purchase of treasury stock
     for cash                              -    -   358,959   (242)          -         -        -          -        -       (242)
Issuance of treasury stock
     upon cashless exercise
     of warrants                           -    -     9,041   (197)          -         -        -          -        -       (197)
Accrued Series E and F
     preferred stock dividends             -    -         -      -     (34,500)        -        -          -        -    (34,500)
Accretion of Series E and F
     preferred stock                       -    -         -      -      (4,253)        -        -          -        -     (4,253)
Stock issuance under employee
     stock purchase plan             282,916    -  (282,919)   434       3,155         -        -          -        -      3,589
Deferred compensation from
     grants of common stock                -    -  (635,860)   456      23,017         -  (23,473)         -        -          -
Amortization of deferred
     compensation                          -    -         -      -           -         -   11,696          -        -     11,696
Reversal of deferred
     compensation from
     cancellation of grants
     to purchase common stock              -    -         -      -      (5,555)        -    5,555          -        -          -
Series F preferred stock
     dividend paid                   855,135    2         -      -      10,123         -        -          -        -     10,125
Net loss                                   -    -         -      -           -         -        -   (568,164)       -   (568,164)
Cumulative translation adjustment          -    -         -      -           -         -        -          -      110        110
Unrealized loss on available-
     for-sale securities                   -    -         -      -           -         -        -          -   (7,320)    (7,320)
--------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000      79,739,764 $ 80         -  $   -   $ 424,330   $58,506 $(18,542) $(825,800) $(4,577) $(366,003)
--------------------------------------------------------------------------------------------------------------------------------


    The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>



                                      F-8
<PAGE>

RHYTHMS NETCONNECTIONS INC.
Notes to Consolidated Financial Statements


1.  THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Operations

Rhythms NetConnections Inc. (the Company), a Delaware corporation, was formed in
February 1997. The Company is in the business of providing broadband local
access communication services to large enterprises, telecommunications carriers
and their Internet service provider (ISP) affiliates and other ISPs. The
Company's services include a range of high-speed, "always on" connections that
offer its customers both cost and performance advantages when accessing the
Internet or private networks. The Company uses multiple digital subscriber line
(DSL) technologies to provide data transfer rates ranging from 128 kbps to 8.0
Mbps delivering data to the end user and from 128 kbps to 1.5 Mbps receiving
data from the end user. The Company began offering commercial services in the
U.S. in April 1998.

The Company has had losses since inception of approximately $825.8 million, had
negative cash flows from operations of $453.5 million in 2000, and has a net
stockholders' deficit of $367.5 million at December 31, 2000.  While the Company
estimates that  it has sufficient cash to fund its operations into January 2002,
the Company continues to use significant amounts of its available cash balances
to fund its operating needs and capital expenditures.  Also, in January 2001,
one of the Company's leasing companies, GATX Capital Corporation, notified the
Company that an Event of Default had occurred for failure to maintain certain
operating cash flow covenants (see Note 11).  These factors raise substantial
doubt about the Company's ability to continue as a going concern.  These
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

In March 2001, the Company's Board of Directors (Board) engaged Lazard Freres &
Co. LLC, an investment banking firm to provide financial advice and assist the
Company in evaluating strategic alternatives and other possible financial
transactions, including, but not limited to, a sale of the Company, a strategic
transaction, joint venture or partnership with a financial, strategic or
industry partner or other similar transaction,  a debt and/or equity financing
or restructuring, a public or private sale of debt or equity securities or
assets, and/or acquisition, merger, consolidation, reorganization,
recapitalization or other business combination.  While the Company will consider
all commercially reasonable alternatives, there can be no assurance that a
transaction will be consummated on terms acceptable to the Board, or at all.

The Company's ultimate success depends upon, among other factors, raising
substantial additional financing; attracting and retaining customers; rapidly
scaling operations and the systems that support those operations; effectively
responding to competitive developments; complying with governmental regulatory
requirements; and continuing to attract, retain and motivate qualified
personnel.  There can be no assurance that the Company will be successful in
addressing these matters and failure to do so could have a material adverse
effect on the Company's business, prospects, operating results and financial
condition. The Company's significant operating losses are expected to continue,
which will require additional financing.

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. The equity method of accounting is used for
companies and other investments in which the Company has significant influence.
Generally this represents ownership of at least 20% and not more than 50% (see
Note 7). All significant intercompany transactions have been eliminated in
consolidation.

                                      F-9
<PAGE>

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting periods. Actual results
could differ from those estimates and assumptions.

Revenue Recognition

Revenue consists of recurring fees for monthly DSL service and customer network
connectivity, and nonrecurring fees, which can include certain fees such as
service activation, equipment and installation.  Customer contracts are
renewable and range from one to three years in duration with payments due on a
monthly basis.  Monthly recurring service revenue is recorded in the month the
services are rendered.  Effective January 1, 2000, the Company adopted
Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101).  SAB 101 sets forth
certain SEC views on how revenue should be recognized and whether revenues can
be split among associated elements of a contract.  Based on the Company's review
of SAB 101, it determined that certain revenues associated with installation and
equipment sales should be deferred and recognized over the expected customer
life.  Costs associated with these revenues up to the amount of deferred
revenues are deferred and amortized over the expected customer life.  Costs in
excess of revenues are deferred and are being amortized over the contractual
life.  The adoption of SAB 101 had no impact on the Company's net loss or
earnings per share in 2000. Revenue deferred at December 31, 2000 was $12.4
million.  If SAB 101 had been adopted January 1, 1998, proforma revenue and
network service costs would have been $74,000 and $4.2 million, respectively, in
1998 and $8.1 million and $65.1 million, respectively, in 1999.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, money market funds, certificates
of deposit, obligations of the U.S. government and its agencies and commercial
paper with a maturity of three months or less at the time of purchase.  Included
in accounts payable are outstanding checks in excess of cash balances of $8.5
million at December 31, 1999 and none at December 31, 2000.

Short-Term Investments

Short-term investments consist of obligations of the U.S. government and its
agencies and commercial paper that have a maturity between 91 days and one year
from the date of purchase. Management determines the appropriate classification
of marketable debt and equity securities at the time of purchase.

Restricted Cash

Restricted cash is made up of a portfolio of U.S. government securities
purchased to secure payment of the first six scheduled interest payments, of
which three payments remain, on the 1999 senior notes.

Fair Value of Financial Instruments

The carrying amounts reported in the balance sheets for cash and cash
equivalents, short-term investments, accounts receivable, and accounts payable
approximate fair value because of the immediate or short-term maturity of these
financial instruments.  The carrying amounts reported for long-term debt other
than the 12 3/4% senior notes, 13 1/2% senior discount notes, and 14% senior
notes, approximate fair value based upon management's best estimates of what
interest rates would be available for the same or similar instruments.  The
senior notes are publicly traded securities.  The combined quoted fair market
value and the combined carrying

                                      F-10
<PAGE>

amount of the senior notes at December 31, 1999 are $471.9 million and $505.7
million, respectively, and $194.2 million and $832.2 million, respectively, at
December 31, 2000.

Inventory

Inventory consists of communications equipment that will be installed at
customer locations. Inventory is accounted for using the first-in, first-out
method at the lower of cost or market.

Furniture, Fixtures, and Equipment

Furniture, fixtures, and equipment consists of purchased equipment, furniture,
internal use software, and leasehold improvements. Furniture, fixtures, and
equipment is recorded at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, generally three to seven
years or the lease term, if shorter. When items are retired, sold or otherwise
disposed of, the cost and related accumulated depreciation are removed from the
accounts, and gains and losses resulting from such transactions are reflected in
operations.  Depreciation expense for the years ended December 31, 1998, 1999,
and 2000 was $454, $10,285, and $43,391, respectively.

Collocation Fees

Collocation fees represent nonrecurring fees paid to secure central office space
for location of certain Company equipment. The fees are amortized over their
estimated useful lives of ten years.  Amortization expense for the years ended
December 31, 1998, 1999, and 2000 was $85, $2,354, and $6,577, respectively.

Impairment of Long-Lived Assets

The Company investigates potential impairments of its long-lived assets
periodically in accordance with the provision of Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the impairment of long-lived
assets and for long-lived assets to be disposed of.  An impairment review is
performed when events or changes in circumstances indicate that the carrying
value may not be recoverable.  Factors the Company considers important which
could trigger an impairment review include, but are not limited to, significant
underperformance relative to historical or projected future operating results,
significant changes in the manner of use of the acquired assets in the strategy
for the Company's overall business, significant negative industry or economic
trends, a significant decline in the Company's stock price for a sustained
period, and the Company's market capitalization relative to net book value.
When the Company determines that the carrying value of long-lived assets may not
be recoverable based upon the existence of one or more of the above indicators
of impairment, the Company evaluates the projected undiscounted cash flows
related to the asset.  If these cash flows are less than the carrying value of
the asset, the Company measures the impairment using discounted cash flows or
other methods of determining fair value.

Concentrations of Credit Risk

Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist primarily of cash equivalents and short-term
investments. Cash in excess of operating requirements is invested in money
market funds, certificates of deposit with high quality financial institutions,
obligations of the U.S. government and its agencies, and commercial paper rated
A-1, P-1 to minimize risk.

At December 31, 1999 and 2000, accounts receivable balances from two significant
customers were 33.2% and 28.0%, respectively, of the total net accounts
receivable balance and 40.8% and 37.5%, respectively, of revenues.  A portion of
the Company's revenue is derived from companies with unproven business models.
Ongoing credit evaluations of customers' financial conditions are performed and,
generally, no collateral is required.  The Company maintains an allowance for
potential credit losses. At December 31, 1999 and 2000, the allowance for
doubtful accounts was $0.4 million and $5.6 million, respectively.  The
Company's customer base is widespread geographically.

                                      F-11
<PAGE>

Advertising Costs

Advertising costs are expensed as incurred.  Approximately $0.7 million, $6.9
million, and $16.3 million of advertising costs were incurred in 1998, 1999, and
2000, respectively.

Income Taxes

The Company provides for income taxes utilizing the liability method. Under the
liability method, current income tax expense or benefit represents income taxes
expected to be payable or refundable for the current period. Deferred income tax
assets and liabilities are established for both the impact of differences
between the financial reporting bases and tax bases of assets and liabilities
and for the expected future tax benefit to be derived from tax credits and tax
loss carryforwards. Deferred income tax expense or benefit represents the change
during the reporting period in the net deferred income tax assets and
liabilities. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized.

Net Loss Per Share

Basic earnings per share (EPS) is calculated by dividing the income or loss
available to common stockholders by the weighted average number of common shares
outstanding for the period without consideration for common stock equivalents.
Diluted EPS is computed by dividing the income or loss available to common
stockholders by the weighted average number of common shares and common stock
equivalents outstanding for the period. Shares subject to repurchase by the
Company are considered common stock equivalents for purposes of this
calculation. Shares issuable upon conversion of preferred stock, upon the
exercise of outstanding stock options and warrants and shares issued subject to
repurchase by the Company totaling 52,958,513, 6,897,060, and 36,628,231,
respectively, for the years ended December 31, 1998, 1999, and 2000, have been
excluded from the computation since their effect would be antidilutive.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) of  $2.6 million and ($4.6)
million at December 31, 1999 and December 31, 2000, respectively, is primarily
attributable to the unrealized gain (loss) on the Axxent, Inc. common stock
which is held as an available-for-sale security that is carried at fair value.
No gains or losses have been realized on this investment.

Assets and liabilities denominated in foreign functional currencies are
translated at the exchange rate as of the balance sheet date.  Translation
adjustments are recorded as a separate component of shareholders' equity.
Revenues, costs and expenses denominated in foreign functional currencies are
translated at the weighted-average exchange rate for the period.  The cumulative
translation adjustment at December 31, 2000 was $110,000 compared to none
recorded at December 31, 1999.

Stock Options, Stock Awards and Stock Purchase Warrants

The Company uses the intrinsic value method of accounting for all employee stock
option, stock award and stock purchase warrant arrangements.  Compensation cost
is recognized for all stock options, stock awards and stock purchase warrants
granted to employees when the exercise price is less than the market price of
the underlying common stock on the date of grant.  Statement of Financial
Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based
Compensation" requires pro forma disclosures regarding earnings (loss) as if
compensation cost for stock options and stock purchase warrants had been
determined in accordance with the fair value based method prescribed in SFAS No.
123.  Estimates of the fair market value are made for each stock option and
stock purchase warrant at the date of grant by the use of the Black-Scholes
option pricing model.

                                      F-12
<PAGE>

New Accounting Pronouncements

In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities".  SFAS No. 133, as amended by SFAS Nos. 137 and 138, is effective
for fiscal years beginning January 1, 2001.  SFAS No. 133 requires that all
derivative instruments be recorded on the balance sheet at fair value.  Changes
in the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction, the type of hedge, and the extent of hedge
ineffectiveness.  The adoption will not have a material impact on the Company's
financial position or results of operations.

Reclassifications

Certain balances in the 1998 and 1999 financial statements have been
reclassified to conform to the 2000 presentation.  The reclassifications had no
effect on financial condition, results of operations or cash flows.


2.  SHORT-TERM INVESTMENTS

The Company's marketable debt securities are classified as held-to-maturity and
carried at amortized cost, which approximates fair value, therefore there were
no significant unrealized gains or losses.  Short-term investments consist of
the following:

================================================================================
                                                               December 31,
                                                       -------------------------
(In thousands)                                            1999            2000
--------------------------------------------------------------------------------

Commercial paper                                       $  75,902       $ 470,322
U.S. government securities                               216,106          22,728
--------------------------------------------------------------------------------
                                                       $ 292,008       $ 493,050
--------------------------------------------------------------------------------

                                      F-13
<PAGE>

3.  COMPOSITION OF CERTAIN BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
=========================================================================================
                                                                        December 31,
                                                                -------------------------
(In thousands)                                                     1999            2000
-----------------------------------------------------------------------------------------
<S>                                                             <C>             <C>
Accounts, loans, interest and other receivables, net:
   Trade, net of allowance for doubtful accounts of
      $367 in 1999 and $5,600 in 2000, respectively             $   4,016       $  23,358
   Interest                                                         5,011           6,105
   Other receivables from third parties                             1,701           6,351
   Employee expense advances and loans                                116             557
-----------------------------------------------------------------------------------------
                                                                $  10,844       $  36,371
=========================================================================================

Furniture, fixtures and equipment, net:
   Operating equipment                                          $  86,814       $ 147,774
   Office furniture                                                 4,773           9,639
   Leasehold improvements                                           2,995           5,540
   Computer software                                                7,993          34,409
   Computer equipment                                              17,239          33,117
   Land and buildings                                                   -           5,431
   Lab equipment                                                      605             658
   Construction in process                                         15,043          74,237
   Accumulated depreciation                                       (10,631)        (53,968)
-----------------------------------------------------------------------------------------
                                                                $ 124,831       $ 256,837
=========================================================================================

Collocation fees, net:
   Collocation fees                                                49,316          86,964
   Construction in process                                         10,544               -
   Accumulated amortization                                        (2,439)         (9,017)
-----------------------------------------------------------------------------------------
                                                                 $ 57,421        $ 77,947
=========================================================================================

Accrued expenses and other current liabilities:
   Accrued payroll                                                $ 8,851        $ 13,773
   Carrier services and other operating costs                       8,492          50,436
   Other                                                            5,820           5,308
-----------------------------------------------------------------------------------------
                                                                 $ 23,163        $ 69,517
=========================================================================================
</TABLE>

4.  DEBT

Outstanding debt consists of the following:
<TABLE>
<CAPTION>
=======================================================================================================
                                                                                     December 31,
                                                                              -------------------------
(In thousands)                                                                  1999            2000
-------------------------------------------------------------------------------------------------------
<S>                                                                           <C>             <C>
Note payable to bank; due in monthly installments of $28;
   interest at prime plus 0.25% (8.0% and 8.75%, respectively);
   collateralized by certain assets; matures April 2001                       $     444       $     110
13 1/2% senior discount notes; due May 2008; net of unamortized
   discount of $109,304 in 1999 and $82,832 in 2000; unsecured                  180,696         207,168  (a)
12 3/4% senior notes; due April 2009; unsecured                                 325,000         325,000  (b)
14% senior notes; due February 2010; unsecured                                        -         300,000  (c)
-------------------------------------------------------------------------------------------------------
Total debt                                                                      506,140         832,278
Less current portion                                                               (333)           (110)
-------------------------------------------------------------------------------------------------------
                                                                              $ 505,807       $ 832,168
-------------------------------------------------------------------------------------------------------
</TABLE>

                                      F-14
<PAGE>

(a) The sale of the 1998 senior discount notes included warrants to purchase
4,732,800 shares of common stock at an exercise price of $0.004 per share.  The
notes were issued at a discount, and cash proceeds from the issuance of the
notes and warrants were $150.4 million. The value ascribed to the warrants of
$6.6 million resulted in additional debt discount. The debt issue costs are
being amortized to interest expense using the effective interest method over the
period that the notes are outstanding. The notes will accrete in value through
May 15, 2003, at a rate of 13 1/2% per annum, compounded semi-annually; no cash
interest will be payable prior to that date. Upon a change in control or upon
certain asset sales, the Company must offer to repurchase all or a portion of
the outstanding notes. In addition, the Company has the option to repurchase the
notes upon payment of a premium of accreted value at that point in time. The
notes contain restrictive covenants including limitations on future
indebtedness, restricted payments, transactions with affiliates, liens, sale of
stock of subsidiaries, dividends, mergers and transfers of assets.

Effective November 20, 1998, the Company completed an exchange offer of the 13
1/2% senior discount notes that allowed for registration of such notes under the
Securities Act of 1933, as amended.  Of the original issue notes, $289.0 million
were tendered for exchange. The registered notes have substantially the same
terms and conditions as the unregistered notes, except that the registered notes
are not subject to the restrictions on resale or transfer that applied to the
unregistered notes.

(b) Net cash proceeds from the issuance of the 1999 senior notes were
approximately $314.5 million of which approximately $113.2 million was used to
purchase a portfolio of U.S. government securities to secure payment of the
first six scheduled interest payments on the 1999 senior notes.  These senior
notes are unsecured obligations of the Company and mature on April 15, 2009.
The notes are redeemable at the Company's option, in whole or in part, at any
time after April 15, 2004, at predetermined redemption prices, together with any
accrued and unpaid interest through the date of redemption.  Upon a change of
control, each holder of the senior notes may require the Company to purchase the
notes at 101% of the principal amount thereof, plus any accrued and unpaid
interest to the date of purchase.  The 1999 senior notes contain restrictive
covenants, including limitations on future indebtedness, restricted payments,
transactions with affiliates, liens, sale of stock of subsidiaries, entering new
lines of business, dividends, mergers and transfers of assets.

Effective September 17, 1999, the Company completed an exchange offer of the 12
3/4% senior notes that allowed for registration of such notes under the
Securities Act of 1933, as amended.  The original issue notes of $325.0 million
were tendered for exchange. The registered notes have substantially the same
terms and conditions as the unregistered notes, except that the registered notes
are not subject to the restrictions on resale or transfer that applied to the
unregistered notes.

(c) Net cash proceeds from the issuance of the 2000 senior notes were
approximately $291.3 million. These senior notes are unsecured obligations of
the Company and mature on February 15, 2010.  The notes are redeemable at the
Company's option, in whole or in part, at any time after February 15, 2005, at
predetermined redemption prices, together with any accrued and unpaid interest
through the date of redemption.  Upon a change of control, each holder of the
senior notes may require the Company to purchase the notes at 101% of the
principal amount thereof, plus any accrued and unpaid interest to the date of
purchase.  The 2000 senior notes contain restrictive covenants, including
limitations on future indebtedness, restricted payments, transactions with
affiliates, liens, sale of stock of subsidiaries, entering new lines of
business, dividends, mergers and transfers of assets.

Effective May 23, 2000, the Company completed an exchange offer of the 14%
senior notes that allowed for registration of such notes under the Securities
Act.  Of the original issue notes, $300.0 million were tendered for exchange.

Future maturities of outstanding debt are $0.1 million in 2001, none in 2002,
none in 2003, none in 2004, none in 2005, none in 2006 and $915.0 million
thereafter.

                                      F-15
<PAGE>

5.  STOCKHOLDERS' EQUITY

The Company was initially capitalized in February 1997 with common stock.

On July 3, 1997, the Company issued 12,280,000 shares of its Series A Preferred
Stock to new and existing investors for an aggregate purchase price of $12.3
million, which converted into 29,472,000 shares of Common Stock upon the closing
of the initial public offering (IPO) of the Company's Common Stock as discussed
below.  In addition, 210,000 shares of Series A Preferred Stock were sold to
certain investors for an aggregate purchase price of $0.2 million, which
converted into 504,000 shares of Common Stock upon the closing of the IPO of the
Company's Common Stock as discussed below.  The Company also issued 365,094
shares of Series A Preferred Stock at a purchase price of $0.80 per share which
converted into 876,226 shares of Common Stock upon the closing of the IPO of the
Company's Common Stock in April 1999 as discussed below.

On March 12, 1998, the Company issued 4,044,943 shares of its Series B Preferred
Stock to new and existing investors at a price of $4.45 per share.  The Company
received proceeds totaling $18.0 million, which converted into 9,707,863 shares
of Common Stock upon the closing of the IPO of the Company's Common Stock in
April 1999 as discussed below.

In March 1999, the Company issued 3,731,410 shares of Series C Preferred Stock
to WorldCom Ventures' (f/k/a MCI WorldCom Ventures Fund, Inc.) (WorldCom
Ventures) for an aggregate purchase price of $30.0 million, which converted into
4,477,692 shares of Common Stock upon the closing of the IPO of the Company's
Common Stock in April 1999 as discussed below.  The terms of the transaction
also provided for the Company and WorldCom, Inc. (f/k/a MCI WorldCom, Inc.)
(WorldCom) to enter into various business relationships, including WorldCom's
commitment to sell 100,000 of the Company's DSL lines over a period of five
years, subject to penalties for failure to reach target commitments.  This
transaction included certain warrants as discussed in Note 8.

In March 1999, the Company issued 3,731,409 shares of Series C Preferred Stock
to Microsoft for an aggregate purchase price of $30.0 million, which converted
into 4,477,691 shares of Common Stock upon the closing of the IPO of the
Company's Common Stock in April 1999 as discussed below. The terms of the
transaction also provided for the Company and Microsoft to enter into various
business relationships.  In connection with these business relationships, the
Company capitalized $10.0 million in business acquisition costs that was being
amortized to operating expense over a three-year period.  This transaction
included certain warrants as discussed in Note 8.  At December 31, 2000, the
Company determined that this asset was impaired and expensed the remaining
capitalized costs of $4.0 million.

In April 1999, the Company issued 932,836 shares of Series C Preferred Stock to
Qwest, which converted into 1,119,403 shares of Common Stock upon the closing of
the IPO of the Company's Common Stock in April 1999, as discussed below.  Also
included was 441,176 shares of Series D Preferred Stock, that converted into
441,176 shares of Common Stock upon the closing of the IPO of the Company's
Common Stock.  The aggregate purchase price for these transactions was $15.0
million.  In accordance with provisions of the agreement underlying this
investment, the Company and Qwest have entered into certain business
relationships.  In connection with these business relationships, the Company
capitalized $11.1 million in business acquisition costs that is being amortized
to operating expense over a five-year period.  This transaction included certain
warrants as discussed in Note 8.

Effective April 12, 1999, the Company completed an IPO of its Common Stock.  A
total of 10,781,250 Common Shares were issued at $21.00 per share; net proceeds
to the Company were approximately $210.1 million after payment of underwriting
fees and related issue costs.  Upon completion of the offering, all classes of
Preferred Stock automatically converted to Common Stock, resulting in an
additional 51,076,051 shares of Common Stock being issued leaving no shares of
Preferred Stock issued and outstanding.

                                      F-16
<PAGE>

Effective August 17, 1999, the Company completed a secondary public offering of
its Common Stock in a transaction that allowed  holders of warrants issued in
connection with the 13 1/2% senior discount notes to exercise those warrants and
sell the resulting Common Stock at $29.00 per share. A total of 3,961,862 shares
were issued in the transaction; the company received no proceeds from the sale
of these shares.  In connection with the secondary offering, the underwriters of
the offering were allowed to purchase 594,279 shares of Common Stock from the
Company for $29.00 per share.  The sale of these shares was completed on
September 14, 1999, and the Company received proceeds of $16.4 million, net of
underwriting discount.

Effective November 4, 1998, the Company completed a two-for-one split of its
Common Stock.  Effective March 19, 1999, the Company completed a six-for-five
split of its Common Stock. The accompanying consolidated financial statements
have been restated for all periods presented to reflect the stock splits.

6.  MANDATORILY REDEEMABLE PREFERRED STOCK

In March 2000, the Company sold $250.0 million of 8 1/4% Series E Convertible
Preferred Stock (Series E Preferred Stock) to Hicks, Muse, Tate & Furst
Incorporated (HMTF).  The Company received approximately $236.3 million of net
proceeds from the sale.  Each share of Series E Preferred Stock is convertible
into shares of Common Stock at any time at a conversion price of $37.50 per
share, subject to adjustment.  In addition, the Company issued HMTF warrants to
purchase (a) 1,875,000 shares of Common Stock at an exercise price of $45.00 per
share, exercisable for three years; (b) 1,875,000 shares of Common Stock at an
exercise price of $50.00 per share, exercisable for five years; and (c)
1,875,000 shares of Common Stock at an exercise price of $55.00 per share,
exercisable for seven years.  Since the effective conversion price of the Series
E Preferred Stock was below the fair market value of the Common Stock at the
issuance date, the Company has recognized a beneficial conversion feature of
$57.4 million.  This amount has been recorded as an increase in additional paid
in capital and a reduction of mandatorily redeemable preferred stock.

Holders of Series E Preferred Stock are entitled to vote on all matters upon
which the holders of Common Stock  are entitled to vote.  In addition, holders
of Series E Preferred Stock affiliated with HMTF have the right to appoint one
representative to the Company's Board of Directors so long as they continue to
hold 40% of the Series E Preferred Stock originally purchased by them or the
underlying Common Stock into which such shares of Series E Preferred Stock are
convertible, or any combination of the two.  In March 2000, HMTF appointed
Michael J. Levitt, a partner of HMTF, to the Company's Board of Directors.

Upon a change of control of the Company, each holder of Series E Preferred Stock
may require the Company to purchase any or all of its shares of Series E
Preferred Stock at 101% of the liquidation preference, plus any accrued and
unpaid dividends to the date of purchase and the special dividend amount, if
any, as defined in the Series E Preferred Stock certificate of designation.  The
Series E Preferred Stock is subject to mandatory redemption on or after March
31, 2015.

In February and March 2000, the Company issued 3,000,000 shares of 6 3/4% Series
F Cumulative Convertible Preferred Stock (Series F Preferred Stock) to qualified
investors in a private placement.  The Company received approximately $291.0
million of net proceeds from the sale.  Each share of Series F Preferred Stock
is convertible into 2.35 shares of Common Stock at any time at a conversion
price of $42.56 per share, subject to adjustment.  Holders of Series F Preferred
Stock are entitled to dividends on a cumulative basis at an annual rate of 6
3/4%, payable quarterly in cash. The Company has the right to defer payment of
these dividends.  During 2000, the Company paid dividends totaling $10.1 million
and elected to defer dividends in the amount of $5.1 million.  The Series F
Preferred Stock is redeemable at the Company's option, in whole or in part, at
any time after March 6, 2003, at predetermined redemption prices, together with
any accrued and unpaid dividends through the date of redemption.  Upon a change
of control of the Company, each holder of Series F Preferred Stock may require
the Company to purchase any or all of its shares of Series F Preferred Stock
at 100% of the liquidation preference, plus any accrued and unpaid dividends to
the date of purchase.  The Series F Preferred Stock is subject to mandatory
redemption on March 3, 2012.  The holders of the Series F Preferred Stock have
limited voting rights.

                                      F-17
<PAGE>

7.  INVESTMENTS

On October 29, 1999, the Company completed a strategic investment in Axxent
Communications Inc. (Axxent), a provider of telecommunications services in
Canada.  In exchange for a $5.3 million cash investment, the Company received
warrants convertible into 763,680 shares of Class B non-voting stock in Axxent.
These warrants were converted in December 1999.  As part of this investment, the
Company received various rights, including the ability to appoint a
representative to Axxent's Board of Directors. This investment is classified as
an available-for-sale security and is carried at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of stockholders'
equity. At December 31, 2000, the investment balance was $0.6 million.

In January 2000, the Company formed a Canadian corporate joint venture, known as
Rhythms Canada, Inc. (Rhythms Canada) with Axxent Corp., a wholly-owned
subsidiary of Axxent, to offer DSL-based services in select Canadian markets.
The Company and Axxent Corp. each received 100,000 shares of Class A voting
stock of Rhythms Canada.  Axxent Corp. also purchased 10,000,000 shares of
Series A preferred stock with a  redemption amount of U.S. $1.00 per share for
$10.0 million.  The Series A preferred stock has no voting or conversion rights,
but will earn dividends at a rate of six percent per annum payable only upon
redemption. To the extent the joint venture is unable to receive sufficient
financing through third parties, the Company and Axxent shall have the option to
provide additional capital contributions through installments.  In December
2000, the Company and Axxent Corp. each made additional capital contributions of
$2.5 million (see Note 12).  At December 31, 2000, the investment balance in the
joint venture was $1.2 million.  Accounting for the joint venture is on the
equity method.

In April 2000, the Company entered into a multiyear strategic relationship with
Excite@Home (@Home).  @Home is a leading broadband provider.   On July 12, 2000,
the Company, through its wholly-owned subsidiary, RATHM, Inc., purchased 473,335
shares of Series B Preferred Stock of @Home Solutions (Solutions), an affiliate
of @Home, for $14,999,986.  The Series B Preferred Stock is convertible into
shares of common stock  of Solutions at a conversion price of $10.56 per share,
subject to standard protective conversion price adjustments.  In addition, the
Company is entitled to earn warrants to purchase up to 5,250,000 shares of
Solutions' common stock, over the next four years, based upon the number of
customers subscribing to Solutions' DSL at a price of $5.01 per share for the
first 3,000,000 warrant shares and $6.44 per share for the last 2,250,000
warrant shares (see Note 12). At December 31, 2000, the investment balance was
$14.4 million.  Accounting for this investment is on the equity method.

On June 28, 2000, the Company, through its wholly-owned subsidiary, RGarnet,
Inc. ("RGarnet"), formed a Japanese joint venture, Garnet Connections Planning
Inc. ("Garnet Connections"), with Mitsui & Co. Ltd. and certain other Japanese
partners to explore the deployment of DSL based services in Japan.  RGarnet owns
3,400 shares of common stock of Garnet Connections (representing 34.34% of the
total outstanding shares of Garnet Connections), for which it paid $1.6 million.
Accounting for the joint venture is on the equity method.  At December 31, 2000,
the investment balance was $1.5 million.

In September 2000, the Company entered into a strategic relationship with
FireTap, Inc. (FireTap), an affiliate of Homestore.com.  FireTap intends to
offer DSL, internet service provider (ISP) and other telecom services through
alliances with persons in the real estate industry and key technology providers.
As part of this transaction, the Company, through its wholly-owned subsidiary,
RHOMS, Inc., acquired three percent of the shares of FireTap's common stock (on
a fully-diluted basis) in exchange for certain past services and other non-cash
consideration.  The Company also received the right to acquire up to an
additional two percent of the shares of FireTap's common stock (on a fully-
diluted basis) in exchange for certain future services and other non-cash
consideration, including Catherine Hapka's (the Company's Chairman and CEO)
services as a director.  In addition, over the next six months, the Company has
the right to earn up to an additional 0.1% of the shares of FireTap's common
stock (on a fully-diluted basis) for every $1.0 million of investment accepted
by FireTap from an investor that the Company identifies, refers to or otherwise
introduces to FireTap (see Note 12).  At December 31, 2000, there was no
investment balance in FireTap.

                                      F-18
<PAGE>

In October 2000, the Company, through its wholly-owned subsidiary, Rhythms
Winfire, Inc. (f/k/a RWinfire, Inc.), purchased 2,659,575 shares of Series C
Convertible Participating Preferred Stock of Winfire, Inc. (Winfire) (a/k/a
Steel Enterprise Holdings, Inc.) for $5.0 million. Each share of Series C
Convertible Participating Preferred Stock is convertible into four shares of
Series A Common Stock of Winfire, subject to standard protective conversion
price adjustments. In addition, the Company entered into a one year strategic
relationship whereby, (a) the Company is Winfire's preferred data local exchange
carrier (DLEC) supplier of line shared DSL circuits and (b) Winfire agreed to
provide the Company with 30,000 line sharing circuit orders. (see Note 12). At
December 31, 2000, the investment balance was $4.7 million. Accounting for this
investment is on the equity method.

In December 2000, the Company, through its wholly-owned subsidiary, RMegaPath,
Inc., purchased 1,000,000 shares of Series D Preferred Stock of MegaPath
Networks Incorporated (MegaPath) for $2.5 million.  The Series D Preferred Stock
is convertible into shares of common stock of MegaPath at a conversion price of
$2.50 per share, subject to standard protective conversion price adjustments.
At December 31, 2000, the investment balance was $2.4 million.  Accounting for
this investment is on the equity method.

8.   STOCK OPTIONS, STOCK AWARDS AND WARRANTS

The Company has established the 1999 Stock Incentive Plan (the 1999 Plan) as the
successor equity incentive program to the 1997 Option/Stock Issuance Plan (the
1997 Plan). The 1999 Plan provides for the grant of options to employees,
directors and outside consultants for purchase of up to an aggregate of
17,173,530 shares of common stock.  All outstanding options under the 1997 Plan
were incorporated into the 1999 Plan, and no further options grants may be made
under the 1997 Plan. Options granted under the 1997 Plan are immediately
exercisable and expire within ten years after the date of grant. Shares acquired
upon exercise are subject to repurchase by the Company ratably over a four-year
period from the date of grant, at the option of the Company and at the exercise
price. Options granted under the 1999 Plan are exercisable ratably over a four-
year period from date of grant and expire within ten years of the date of the
grant. The 1999 Plan provides for both incentive option and non-statutory option
grants and for accelerated vesting in the event of a 50% or more change in
control of the Company.

The Plan activity is as follows:

<TABLE>
<CAPTION>
===============================================================================================
                                                                   Weighted        Weighted
                                                  Number of         Average         Average
                                                   Shares         Fair Value     Exercise Price
-----------------------------------------------------------------------------------------------
<S>                                             <C>             <C>             <C>
   Outstanding at December 31, 1997               5,481,256                         $      0.04

Granted, below market                             3,364,680         $   2.62        $      0.84
Exercised                                        (5,560,308)                               0.04
Canceled                                           (136,348)                               0.22
-----------------------------------------------------------------------------------------------
   Outstanding at December 31, 1998               3,149,280                         $      0.89

Granted, at market                                6,160,030         $  13.21        $     31.58
Granted, below market                             2,081,298             7.44               6.36
Exercised                                        (2,711,247)                               1.23
Canceled                                           (962,100)                              13.65
-----------------------------------------------------------------------------------------------
   Outstanding at December 31, 1999               7,717,261                         $     25.12

Granted, at market                                8,175,577         $  10.89        $     16.60
Granted, below market                                50,000            24.81              20.00
Exercised                                          (346,006)                               3.29
Canceled                                         (4,406,962)                              31.07
-----------------------------------------------------------------------------------------------
   Outstanding at December 31, 2000              11,189,870                         $     19.80
-----------------------------------------------------------------------------------------------
</TABLE>

                                      F-19
<PAGE>

The following summarizes the outstanding and exercisable options under the 1999
Plan at December 31, 2000:

<TABLE>
<CAPTION>
        =============================================================================================
                                          Options Outstanding                 Options Exercisable
                               -----------------------------------------   --------------------------
                                               Weighted       Weighted                       Weighted
                                               Average        Average                        Average
             Exercise             Shares      Remaining       Exercise        Shares         Exercise
              Price            Outstanding      Life           Price        Exercisable        Price
        ---------------------------------------------------------------------------------------------
        <S>                    <C>            <C>            <C>           <C>             <C>
        $0.21 to $0.25              88,490    7.51 years         $0.22           88,490         $0.22
        $1.09 to $1.88           1,226,810    9.70 years         $1.18          950,000         $1.09
        $2.50 to $8.63           1,892,194    9.14 years         $4.95                -             -
        $12.00 to $16.00         2,701,224    9.09 years        $14.23                -             -
        $18.00 to $29.19         2,117,415    9.14 years        $24.25                -             -
        $31.52 to $56.94         3,163,737    8.85 years        $38.19                -             -
        ---------------------------------------------------------------------------------------------
</TABLE>

In May 2000, the Company adopted its 2000 Stock Award Plan (the 2000 Plan), a
new incentive compensation program, providing for the direct award to employees,
at no cost, of up to 1,200,000 shares of Common Stock.  In July 2000, the
Company amended and restated the 2000 Stock Award Plan (the Amended Plan) to
increase (a) the maximum number of shares of Common Stock available for grant
under the Amended Plan by 1,800,000 shares, from 1,200,000 shares to 3,000,000
shares, and (b) increase the maximum number of stock award shares that may be
granted to any employee in any calendar year under the Amended Plan by 270,000
shares, from 30,000 shares to 300,000 shares.  On June 27, 2000, the Company
granted 417,850 shares of Common Stock under the 2000 Plan.  In July 2000, these
grants were cancelled and replaced by awards under the Amended Plan with
substantially the same terms.  The new grants vest in two tranches, with 50% at
various times beginning in November 2000 continuing through May 2001.  The
remaining 50% vest ratably over the subsequent four quarters.  As of December
31, 2000, the Company has awarded 3,172,245 shares under the 2000 Plan to more
than 700 employees.

The 2000 Stock Award Plan activity is as follows:

                                                                    Weighted
                                                   Number of         Average
                                                     Shares        Fair Value
        ---------------------------------------------------------------------
        Outstanding at December 31, 1999                   -       $        -
        Granted                                    3,172,245       $     7.13
        Vested                                      (677,527)      $     8.37
        Canceled                                    (366,892)      $     9.63
        ---------------------------------------------------------------------
        Outstanding at December 31, 2000           2,127,826       $     6.31
        ---------------------------------------------------------------------

During 1998, 1999, and 2000, options and awards were granted to employees at
less than fair value on the date of grant, resulting in $4.9 million, $11.4
million, and $23.5 million, respectively, of deferred compensation recorded as a
reduction of stockholders' equity. These amounts are being amortized as a charge
to selling, marketing, general and administrative expense over the vesting
periods of the applicable options and awards; such amortization totaled $0.7
million, $3.7 million and $11.7 million for the periods ended December 31, 1998,
1999, 2000, respectively.

Had compensation expense for the Company's option grants been determined based
on the fair value method of accounting for stock-based compensation, the
Company's net loss and net loss per share, basic and diluted, for the periods
ended December 31, 1998, 1999, and 2000 would have been increased by $60,000,
$10.8 million, and $12.5 million, and $0.02, $0.20, and $0.17, per share,
respectively. For purposes of determining this

                                      F-20
<PAGE>

compensation expense, the fair value of each option grant is estimated on the
grant date using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants during the periods ended December
31, 1998, 1999, and 2000, respectively: no dividend yield; risk-free interest
rates of 4.9%, 5.5%, and 6.2%, respectively; expected volatility of nil for pre-
IPO grants; and 105% for post-IPO grants and expected term of four years for
common options.

The following summarizes the issued, outstanding, and exercised warrants at
December 31, 2000:

<TABLE>
<CAPTION>
======================================================================================================================
                                                   Number of
                                                   Original     Number of    Number of
                                                   Warrants     Warrants      Warrants    Exercise Price    Expiration
                                                    Issued      Exercised   Outstanding      Per Share         Date
----------------------------------------------------------------------------------------------------------------------
<S>                                                <C>          <C>         <C>           <C>               <C>
Warrants issued with 13 1/2% senior
   discount notes                                   4,732,800    4,701,973        30,827  $        0.004     May 2008
Warrants issued with Series C Preferred Stock       1,440,000            -     1,440,000            6.70    March 2004
Warrants issued with Series C Preferred Stock         136,996            -       136,996           21.00    April 2004
Warrants issued with Series D Preferred Stock         180,000            -       180,000            6.70    April 2004
May 1998 warrants issued with lease agreement         574,380      337,707       236,673            1.85    March 2009
March 1999 warrants issued with lease agreement        45,498            -        45,498           10.55    March 2009
April 1999 warrants issued with lease agreement        75,000            -        75,000           10.55    April 2002
July 1999 warrants issued with lease agreement         10,000            -        10,000           50.00     July 2004
Warrants issued with Series E Preferred Stock       1,875,000            -                         45.00    March 2003
Warrants issued with Series E Preferred Stock       1,875,000            -                         50.00    March 2005
Warrants issued with Series E Preferred Stock       1,875,000            -                         55.00    March 2007
----------------------------------------------------------------------------------------------------------------------
</TABLE>


In August 1999, after a "net exercise" of the warrants associated with the 13
1/2% senior discount notes, 3,961,862 of these shares were sold and an
additional 740,111 shares were sold by the selling stockholders in November
1999. The Company received no proceeds from these sales.  The remaining warrants
have an expiration date of May 15, 2008. The warrants may be required to be
repurchased by the Company for cash upon the occurrence of a repurchase event,
such as a consolidation, merger, or sale of assets to another entity, as defined
in the provisions of the Warrant Agreement, at a price to be determined by an
independent financial expert selected by the Company. In the event a repurchase
event occurs, the difference between the repurchase price and the carrying value
of the warrants would be charged to equity.

During May 1998, the Company entered into a 36-month lease line that provides
for $24.5 million in equipment on an operating lease basis. In connection with
this lease agreement, the Company issued 574,380 warrants to purchase common
stock at a price of $1.85 per share, exercisable immediately. In March 1999, the
Company entered into additional 36-month lease lines for an aggregate of up to
$24.0 million in lease financing. In connection with these March 1999 lease
lines, the Company issued warrants to purchase an aggregate of 45,498 shares of
common stock at a price of $10.55 per share.  These warrants are immediately
exercisable. In April 1999, the Company entered into an agreement for up to
$20.0 million in equipment lease financing and issued a warrant to purchase up
to 75,000 shares of common stock at an exercise price per share of $10.55.  This
warrant is immediately exercisable.  In July 1999, the Company entered into an
additional 36-month lease line for an aggregate of up to $26.0 million in lease
financing to be used for equipment.  In connection with this July 1999 lease,
the Company issued a warrant to purchase 10,000 shares of common stock at a
price of $50.00 per share.  This warrant is immediately exercisable.

9.  INCOME TAXES

As of December 31, 1999 and December 31, 2000, the Company had net operating
loss carryforwards of approximately $210.2 million and $711.5 million,
respectively, which are available to offset future taxable income through 2020
for federal tax. A portion of these loss carryforwards will be subject to the
limitations of Internal Revenue Code Section 382 relating to changes in
ownership of the Company.  The deferred tax asset arising from the loss
carryforwards has been fully offset by a valuation allowance since the
utilization is

                                      F-21
<PAGE>

uncertain. The valuation allowance increased by approximately $13.9 million,
$84.0 million, and $212.7 million, during 1998, 1999, and 2000, respectively,
primarily as a result of the losses in each of these periods.

Components of deferred income taxes are as follows:

        =======================================================================
        (In thousands)                                    1999          2000
        -----------------------------------------------------------------------
        Deferred tax assets:
           Net operating loss carryforwards             $ 85,028      $ 277,494
           Original issue discount and other              13,885         34,129
        -----------------------------------------------------------------------
        Gross deferred tax asset                          98,913        311,623
        Valuation allowance                              (98,913)      (311,623)
        -----------------------------------------------------------------------
        Net deferred income taxes                       $    -        $     -
        -----------------------------------------------------------------------

The provision for (benefit from) income taxes reconciles to the statutory
federal tax rate as follows:

==============================================================================
                                                 1998        1999        2000
------------------------------------------------------------------------------
Statutory federal tax rate                      (34.0%)     (35.0%)     (35.0%)
State income tax, net of federal benefit         (5.4%)      (5.3%)      (3.9%)
Other (including non-deductible items)            0.9%        1.7%        1.0%
Deferred tax asset valuation allowance           38.5%       38.6%       37.9%
------------------------------------------------------------------------------
                                                   - %         - %         - %
------------------------------------------------------------------------------

10.  RELATED PARTY TRANSACTIONS

The Company's former in-house legal counsel is also a partner in a law firm used
externally by the Company. During 1998, 1999, and 2000, the Company incurred
legal fees and expenses of approximately $1.3 million, $2.4 million, and $4.7
million, respectively, to the external firm in addition to the salary paid to
the in-house counsel.  At December 31, 2000, the Company had a balance payable
of approximately $0.2 million to this entity.   In connection with the
termination of Mr. Blumenfeld's employment effective as of March 31, 2001, the
Company paid Mr. Blumenfeld $290,000, plus miscellaneous benefits.

Two members of the Company's Board of Directors serve as directors to Paradyne
Networks, Inc. a supplier of equipment to the Company. The total net purchases
during 1998, 1999, and 2000 from the equipment supplier were approximately $13.0
million, $54.0 million, and $4.4 million, respectively.  In addition, during
2000, the Company acquired additional equipment from this supplier of
approximately $18.6 million through vendor lease financing.  At December 31,
2000, the Company had a balance payable of approximately $4.8 million to this
entity.

One member of the Company's Board of Directors serves as President of WorldCom
Venture and a Senior Vice President of WorldCom. Total purchases from WorldCom
during 1998, 1999 and 2000 were approximately $0.4 million, $12.8 million, and
$46.3 million, respectively. In March 1999, the Company entered into a strategic
arrangement with WorldCom.  There was no revenue received from WorldCom in 1998
and 1999 under this arrangement.  The Company received $1.3 million in revenue
during 2000 under this arrangement.


11.  COMMITMENTS AND CONTINGENCIES

The Company leases office space and certain office equipment, telecommunications
equipment, network equipment and furniture under non-cancelable operating lease
agreements. The leases range in term from 24 months to 60 months and, in certain
instances, provide for options to extend.  Rent expense under the operating

                                      F-22
<PAGE>

leases for 1998, 1999, and 2000 totaled $2.0 million, $21.0 million, and $66.4
million, respectively. Future minimum rental payments under the leases are $98.1
million in 2001, $81.5 million in 2002, $42.3 million in 2003, $4.0 million in
2004, $2.9 million in 2005, and $7.6 million thereafter.

On January 31, 2001, GATX  notified the Company that an Event of Default had
occurred and is continuing for failure to satisfy the operating cash flow
covenants for the periods ending September 30, 2000 and December 31, 2000.  GATX
has reserved its rights related to a variety of remedies, including but not
limited to, equipment repossession and/or declaration of all sums immediately
due and payable.  The Company is in discussions with GATX about waiving or
curing such default.  Total remaining lease payments due under the GATX lease
were approximately $94.0 million at December 31, 2000.

Lafleur Litigation - On February 18, 1999, the Company filed a complaint for
declaratory relief in San Diego County Superior Court, North County against
Thomas R. Lafleur, seeking a determination as to the ownership of 438,115 shares
of the Company's stock option shares previously granted to him.  The trial in
this matter began on May 5, 2000.  On June 2, 2000, the court entered a
Stipulated Statement of Decision holding that Thomas R. Lafleur became fully
vested in ownership of the 438,115 shares of Common Stock in question on June 5,
1998.  On June 3, 2000, the Company entered into an Agreement of Settlement and
Compromise, pursuant to which the Lafleurs agreed to release and dismiss, with
prejudice, all of their claims against the Company and the Company agreed to
deliver 438,115 shares of treasury stock and to make a cash payment of $8.8
million to the Lafleurs.  In addition, the Company incurred legal fees relating
to this litigation totaling $3.1 million. The Company filed claims with its
insurance carriers seeking reimbursement for litigation and legal fees relating
to this case.  As of December 31, 2000, the Company had received $15.0 million,
subject to a reservation of right by the insurors. Furthermore, on November 14,
2000, Reliance Insurance Company (Reliance) filed a legal action in the Superior
Court of California, County of San Diego seeking declaratory relief and
restitution for the $5.0 million of insurance payments made by Reliance in
connection with the Lafleur litigation.  On January 5, 2001, the Company filed a
general denial of the Reliance claims and a cross complaint against Reliance,
Agricultural Excess and Surplus Insurance Company (AESIC), and Executive Risk
Specialty Insurance Company (Executive Risk) for declaratory relief.  The
Company intends to vigorously defend its claim to reimbursement of the
settlement and defense costs associated with the Lafleur litigation.

i2 Technologies, Inc., filed an action in the U.S. District Court in the
Northern District of Texas on January 7, 2000, challenging the Company's use of
the name "Rhythms" on various grounds and alleging that the Company' use of that
name infringes certain trademarks owned by i2 Technologies. The Company denied
that it infringed any legitimate trademark rights of i2 Technologies, in part on
the grounds that the Company has priority in the Rhythms name with respect to
the goods and services provided by it and that the Company's use of those marks
is not likely to cause confusion among the consumers of the Company's services,
and the services provided by i2 Technologies, respectively. On February 12, 2001
the Company and i2 agreed to dismiss their claims with prejudice, except for the
Company's claim for cancellation of certain i2 marks, which claim was dismissed
without prejudice.

Guild Litigation - On December 11, 2000, Guild Colorado, LLC filed an action in
the Texas State Court for Dallas County alleging that the Company breached a
construction contract.  The Company intends to vigorously defend these claims
and file counterclaims as appropriate.

Lacey Litigation - On January 22, 2001, John Lacy, a former Rhythms employee,
filed an action in the U.S. District Court for the District of Colorado alleging
breach of contract and demanding relief in the amount of $1.3 million.  The
Company intends to vigorously defend against this claim.

The Company does not believe the ultimate outcome of any of these legal cases
will have a material impact on the Company's financial position, results of
operations or cash flows.

                                     F-23
<PAGE>

In addition, the Company is subject to state commission, FCC and court decisions
as they relate to the interpretation and implementation of the 1996 Act, the
interpretation of CLEC interconnection agreements in general and its
interconnection agreements in particular.  In some cases, the Company may be
deemed to be bound by the results of ongoing proceedings of these bodies. The
Company therefore may participate in proceedings before these regulatory
agencies or judicial bodies that affect, and allow it to advance, its business
plans.


12.  SUBSEQUENT EVENTS

First quarter 2001 restructuring charge

In January 2001, as a result of its intention to focus on, and provide services
in, only its top 40 markets and in connection with its plans to reduce its
workforce by 450 employees, the Company announced its intent to take a one time,
2001 first quarter restructuring charge.

2001 Retention Program

In February 2001, the Company's Compensation Committee approved a key management
retention plan whereby key managers received cash and stock bonuses for
remaining with the Company for specified periods of time.

Winfire Agreement

In March 2001, the Company entered into an Assignment of DSL Lines and Mutual
Release with Steel Enterprise Holding, Inc. (f/k/a Winfire, Inc.) (SEH).
Pursuant to that agreement and in exchange for a mutual release by both parties
of any claims either may have against the other: (a) SEH agreed to assign to the
Company  all of its rights to the line shared DSL circuits installed by the
Company or ordered from the Company and not yet installed; and (b) the Company
agreed to convert approximately $1.0 million of accounts receivable that SEH
owed it as of February 28, 2001, and approximately $2.9 million in funds the
Company prepaid to SEH for marketing and development into 2,034,878 additional
shares of Series C Preferred Stock of SEH.  SEH is attempting to restructure its
balance sheet.  If it is unable to do so, it has advised the Company that it may
consider filing for protection under the federal bankruptcy laws.

Solutions

In March 2001, the Company's representatives resigned as directors of Solutions
and requested, on the Company's behalf, that Solutions redeem its shares of
Solutions Series B Preferred Stock for their liquidation value.  The Solutions
board of directors is currently soliciting the consents of the other Solutions
stockholders for such redemption.

Rhythms Canada.

In March 2001, the Company made an additional $2.7 million capital-call
contribution to Rhythms Canada and received 635,323 additional shares of Class A
voting stock of Rhythms Canada.


13.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table sets forth certain unaudited consolidated statements of
income data for each of the Company's last eight quarters. This data has been
derived from unaudited consolidated financial statements that have been prepared
on the same basis as the annual audited consolidated financial statements,
except as discussed below, and, in the opinion of the Company, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of such information. These unaudited quarterly results should
be read in conjunction with the

                                     F-24

<PAGE>

consolidated financial statements and notes. The consolidated results of
operations for any quarter are not necessarily indicative of the results for any
future period.

<TABLE>
<CAPTION>
                                                                                     Quarter Ended
-------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)                           March 31         June 30       Sept. 30         Dec. 31
-------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>             <C>            <C>             <C>
1999:
Revenue                                                        $      660      $    1,641     $    3,317      $    5,471

Total costs and expenses                                       $   20,716      $   37,370     $   55,980      $   86,188

Loss from operations                                           $  (20,056)     $  (35,729)    $  (52,663)     $  (80,717)
Net loss                                                       $  (23,899)     $  (42,857)    $  (61,778)     $  (90,346)
-------------------------------------------------------------------------------------------------------------------------
Net loss per share (basic and diluted)                         $    (5.38)     $    (0.68)    $    (0.89)     $    (1.23)
-------------------------------------------------------------------------------------------------------------------------

2000:
Revenue, before impact of SAB 101 (a)                          $    8,137      $   12,172     $   17,199      $        -

Revenue, as restated for impact of SAB 101 (a)                 $    6,251      $    9,073     $   13,568      $   17,246

Total costs and expenses, before impact of SAB 101 (a)         $  112,314      $  132,805     $  150,573      $        -

Total costs and expenses, as restated for
    impact of SAB 101 (a)                                      $  110,428      $  129,706     $  146,942      $  163,424

Loss from operations                                           $ (104,177)     $ (120,633)    $ (133,374)     $ (146,178)

Net loss                                                       $ (118,031)     $ (139,657)    $ (147,619)     $ (162,857)

Preferred stock dividends and accretion (b)                    $    2,609      $   11,675     $   11,609      $   12,860

Loss available to common shareholders                          $ (120,640)     $ (151,332)    $ (159,228)     $ (136,964)
-------------------------------------------------------------------------------------------------------------------------

Net loss per share (basic and diluted)                         $    (1.63)     $    (2.00)    $    (2.07)     $    (2.25)
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a)  As discussed in Note 1, the Company was required to adopt SAB 101 effective
     January 1, 2000. The first three quarters of 2000 have been restated to
     reflect the adoption of SAB 101.

(b)  At the November 2000 Emerging Issues Task Force meeting, the SEC indicated
     that registrants who had not applied the "accounting conversion price"
     method for accounting for beneficial conversion features in past filings
     for convertible securities issued after May 21, 1999, would be required to
     adopt this method via a cumulative catch-up adjustment in the fourth
     quarter of 2000.  The Company had one security that met this criteria, the
     Series E Preferred Stock.  Accordingly, the Company has adopted this method
     in the fourth quarter of 2000.  Under the "accounting conversion price
     method", the Company is required to use the accounting value assigned to
     the Series E Preferred Stock to determine an accounting conversion price.
     This price is then compared to the actual conversion price to determine if
     there is a beneficial conversion feature.  Using this method, the Company
     determined that there was a beneficial conversion feature associated with
     the Series E Preferred Stock which was assigned a value of $57.4 million.
     The Company has recorded this amount as a component of stockholders' equity
     and reduced the value of the Series E Preferred Stock accordingly.  The
     additional reduction in the value of the Series E Preferred Stock is being
     accreted similar to a dividend on preferred stock over the mandatory
     redemption period of the Series E Preferred Stock.  The cumulative catch-up
     impact of the adoption on the fourth quarter net loss available to common
     shareholders and net loss per share was $1.2 million and $.02 per share,
     respectively.

                                      F-25
<PAGE>

                       Report of Independent Accountants
                        on Financial Statement Schedule

To the Board of Directors of
Rhythms NetConnections Inc.

     Our audits of the consolidated financial statements referred to in our
report dated February 22,2001, except for Note 12, as to which the date is March
29, 2001, included in this Annual Report on Form 10-K also included an audit of
the financial statement schedule listed in the index in Item 14 of this Form 10-
K.  In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.


PricewaterhouseCoopers LLP


Denver, Colorado
February 22, 2001

                                      F-26
<PAGE>

                       Valuation and Qualifying Accounts
                                (in thousands)
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------------------
                                                   Balance at      Charged to Costs           Deductions/        Balance at End
                                                   Beginning         and Expense              Write-offs            of Period
                                                   of Period
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>             <C>                      <C>                  <C>
Allowance for uncollectible trade receivables:
     Year ended December 31, 1997                  $        -      $              -         $          -         $           -
     Year ended December 31, 1998                  $        -      $             50         $          -         $          50
     Year ended December 31, 1999                  $       50      $            325         $         (8)        $         367
     Year ended December 31, 2000                  $      367      $          7,709         $     (2,476)        $       5,600
-------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                                   Balance at      Charged to Costs           Deductions/        Balance at End
                                                   Beginning         and Expense              Write-offs            of Period
                                                   of Period
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>             <C>                      <C>                  <C>
Valuation allowance for deferred tax assets:
     Year ended December 31, 1997                  $       -       $           (997)        $          -         $        (997)
     Year ended December 31, 1998                  $    (997)      $        (13,905)        $          -         $     (14,902)
     Year ended December 31, 1999                  $ (14,902)      $        (84,011)        $          -         $     (98,913)
     Year ended December 31, 2000                  $ (98,913)      $       (212,710)        $          -         $    (311,623)
-------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                                   Balance at      Charged to Costs           Deductions/        Balance at End
                                                   Beginning         and Expense              Write-offs            of Period
                                                   of Period
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>             <C>                      <C>                  <C>
Valuation of Inventory:
     Year ended December 31, 1997                  $       -       $              -         $          -         $           -
     Year ended December 31, 1998                  $       -       $              -         $          -         $           -
     Year ended December 31, 1999                  $       -       $              -         $          -         $           -
     Year ended December 31, 2000                  $ 689,305       $     (1,675,000)        $          -         $    (985,695)
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                     F-27

<PAGE>

                                  SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this amendment No. 1 to
Annual Report on Form 10-K filed April 2, 2001 to be signed on its behalf by the
undersigned, thereunto duly authorized.

                           RHYTHMS NETCONNECTIONS INC.

Dated: April 5, 2001       By:  /s/ J.  W. Braukman
                              --------------------------------------------------
                                    J. W. Braukman,
                                    Chief Financial Officer
                                    (Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.


Dated: March 30, 2001               By:  /s/ Steve Stringer*
                                       ----------------------------------
                                    Steve Stringer
                                    President and Chief Operating Officer

Dated: March 30, 2001               By:  /s/ J. W. Braukman*
                                       ----------------------------------
                                    J. W. Braukman
                                    Chief Financial Officer

Dated: March 30, 2001               By:  /s/ Susan Mayer*
                                       ----------------------------------
                                    Susan Mayer
                                    Director

Dated: March  30, 2001              By:  /s/ William R. Stensrud*
                                       ----------------------------------
                                    William R. Stensrud
                                    Director

Dated: March 30, 2001               By:  /s/ Keith B. Geeslin*
                                       ----------------------------------
                                    Keith B. Geeslin
                                    Director
<PAGE>

Dated: March 30, 2001               By:  /s/ Kevin R. Compton*
                                       ----------------------------------
                                    Kevin R. Compton
                                    Director

Dated: March 30, 2001               By:  /s/ Michael J. Levitt*
                                       ----------------------------------
                                    Michael J. Levitt
                                    Director

* J.W. Braukman, Attorney-in-fact