<PAGE>
                                          
                         SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON, DC  20549
                                          
                                          
                                     ----------
                                          
                                          
                                     FORM 10-Q
                                          
                                          
                                          
              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                          SECURITIES EXCHANGE ACT OF 1934
                                          
                                          
                   FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
                                          
                                          
                                          
                                          
                                          
                                          
                         Commission File Number  333-59393
                                          
                                          
                            RHYTHMS NETCONNECTIONS INC.


State of Incorporation:  Delaware            I.R.S. Employer ID #:  33-0747515


Address:   6933 South Revere Parkway              Telephone #:  (303) 476-4200
           Englewood, Colorado  80112












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

As of May 14, 1999, a total of 71,955,625 shares of the Registrant's Common 
Stock, $0.001 par value, were issued and outstanding.

<PAGE>

                            RHYTHMS NETCONNECTIONS INC.
                                          
                                       PART I
                               FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

The following are three-month quarterly consolidated financial statements of the
Registrant as of and through March 31, 1999.

                                      2

<PAGE>

                          RHYTHMS NETCONNECTIONS INC.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                  (Unaudited)
                                                                                    December 31     March 31
ASSETS:                                                                                1998           1999
                                                                                  -------------  -------------
<S>                                                                               <C>            <C>          
    Current assets:
       Cash and cash equivalents                                                  $  21,315,000  $  33,752,000
       Short-term investments                                                       115,497,000    115,556,000
       Accounts, loans, and other receivables, net                                    2,376,000      2,470,000
       Inventory                                                                        340,000      1,020,000
       Prepaid expenses and other current assets                                        230,000        147,000
                                                                                  -------------  -------------

          Total current assets                                                      139,758,000    152,945,000
    Equipment and furniture, net                                                     11,510,000     48,912,000
    Collocation fees, net                                                            13,804,000     25,828,000
    Deferred business acquisitions costs, net                                                 -     10,119,000
    Deferred debt issue costs, net                                                    6,304,000      7,386,000
    Other assets                                                                        350,000        357,000
                                                                                  -------------  -------------

                                                                                  $ 171,726,000  $ 245,547,000
                                                                                  -------------  -------------
                                                                                  -------------  -------------

LIABILITIES AND STOCKHOLDERS' EQUITY:
    Current liabilities:
       Current portion of long-term debt                                          $     333,000  $     333,000
       Accounts payable                                                              10,601,000     29,622,000
       Accrued expenses and other current liabilities                                 2,855,000      3,846,000
                                                                                  -------------  -------------

          Total current liabilities                                                  13,789,000     33,801,000
    Long-term debt                                                                      472,000        361,000
    13.5% senior discount notes, net                                                157,465,000    162,990,000
    Other liabilities                                                                   180,000        217,000
                                                                                  -------------  -------------

          Total liabilities                                                         171,906,000    197,369,000
                                                                                  -------------  -------------

    Mandatorily redeemable Common Stock warrants                                      6,567,000      6,567,000
                                                                                  -------------  -------------

    Stockholders' equity:
       Series A Convertible Preferred Stock, $0.001 par value; 12,900,000 shares
          authorized in 1998 and 1999; 12,855,094 shares issued
          and outstanding in 1998 and 1999                                               13,000         13,000
       Series B Convertible Preferred Stock, $0.001 par value; 4,044,943
          shares authorized in 1998 and 1999; 4,044,943 shares issued
          and outstanding in 1998 and 1999                                                4,000          4,000
       Series C Convertible Preferred Stock, $0.001 par value; no shares
          authorized in 1998,  7,462,819 shares in 1999; no shares issued
          and outstanding in 1998, 7,462,819 shares in 1999                                   -          7,000
       Common Stock, $0.001 par value; 80,049,892 shares authorized in
          1998, 89,005,274 shares in 1999; 8,042,530 shares issued in
          1998, 9,619,720 shares in 1999                                                  8,000         10,000
       Treasury Stock, at cost; 438,115 shares                                          (18,000)       (18,000)
       Additional paid-in capital                                                    37,212,000    107,543,000
       Warrants                                                                               -      4,714,000
       Deferred compensation                                                         (5,210,000)    (8,007,000)
       Accumulated deficit                                                          (38,756,000)   (62,655,000)
                                                                                  -------------  -------------

          Total stockholders' equity (deficit)                                       (6,747,000)    41,611,000
                                                                                  -------------  -------------

                                                                                  $ 171,726,000  $ 245,547,000
                                                                                  -------------  -------------
                                                                                  -------------  -------------

</TABLE>

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

                                      3

<PAGE>

                           RHYTHMS NETCONNECTIONS INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                                          (Unaudited)
                                                                                       Three Months Ended
                                                                                  ---------------------------
                                                                                    March 31       March 31
                                                                                      1998           1999
                                                                                  ------------   ------------
<S>                                                                               <C>            <C>         
REVENUE:
    Service and installation, net                                                 $     10,000   $    660,000
                                                                                  ------------   ------------

OPERATING EXPENSES:
    Network and service costs                                                          198,000      6,138,000
    Selling and marketing                                                              284,000      1,685,000
    General and administrative                                                       2,038,000     12,111,000
    Depreciation and amortization                                                       16,000        782,000
                                                                                  ------------   ------------

       Total operating expenses                                                      2,536,000     20,716,000
                                                                                  ------------   ------------

LOSS FROM OPERATIONS                                                                (2,526,000)   (20,056,000)
                                                                                  ------------   ------------

OTHER INCOME AND EXPENSE:
    Interest  income                                                                   158,000      1,749,000
    Interest expense (including amortized debt discount and issue costs)               (12,000)    (5,627,000)
    Other                                                                                    -         35,000
                                                                                  ------------   ------------

NET LOSS                                                                          $ (2,380,000) $ (23,899,000)
                                                                                  ------------   ------------
                                                                                  ------------   ------------

NET LOSS PER SHARE:
    Basic                                                                         $      (1.10)  $      (5.38)
                                                                                  ------------   ------------
                                                                                  ------------   ------------
    Diluted                                                                       $      (1.10)  $      (5.38)
                                                                                  ------------   ------------
                                                                                  ------------   ------------

SHARES USED IN COMPUTING NET LOSS PER SHARE:
       Basic                                                                         2,161,764      4,440,052
                                                                                  ------------   ------------
                                                                                  ------------   ------------
       Diluted                                                                       2,161,764      4,440,052
                                                                                  ------------   ------------
                                                                                  ------------   ------------

</TABLE>

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


                                      4

<PAGE>

                                   RHYTHMS NETCONNECTIONS INC.
                              CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                                              (Unaudited)
                                                                                                           Three Months Ended
                                                                                                      ----------------------------
                                                                                                        March 31        March 31
                                                                                                          1998            1999
                                                                                                      ------------    ------------
<S>                                                                                                   <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                                                         $ (2,380,000)   $(23,899,000)
     Adjustments to reconcile net loss to net cash used for operating activities:
            Depreciation of equipment and furniture                                                         12,000         564,000
            Amortization of collocation fees                                                                 4,000          87,000
            Amortization of deferred business acquisition costs                                                  -         131,000
            Amortization of debt discount and deferred debt issue costs                                          -       5,612,000
            Amortization of deferred compensation                                                           94,000         601,000
            Gain on sale of equipment to leasing company                                                         -         (35,000)
            Changes in assets and liabilities:
                Increase in accounts, loans, and other receivables, net                                   (214,000)        (94,000)
                Increase in inventory                                                                     (226,000)       (680,000)
                Decrease in prepaid expenses and other current assets                                        2,000          83,000
                Decrease (increase) in other assets                                                          4,000          (7,000)
                Increase (decrease) in accounts payable                                                  1,261,000        (869,000)
                Increase (decrease) in accrued expenses and other current liabilities                      (65,000)        991,000
                Increase in other liabilities                                                                    -          37,000
                                                                                                      ------------    ------------

                Net cash used for operating activities                                                  (1,508,000)    (17,478,000)
                                                                                                      ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of short-term investments                                                                         -     (34,048,000)
     Maturities of short-term investments                                                                        -      33,989,000
     Purchases of equipment and furniture                                                                 (183,000)    (19,796,000)
     Payment of collocation fees                                                                          (475,000)    (12,111,000)
                                                                                                      ------------    ------------

                Net cash used for investing activities                                                    (658,000)    (31,966,000)
                                                                                                      ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from leasing company for equipment                                                                 -       1,755,000
     Repayments on long-term debt                                                                                -        (111,000)
     Payment of debt issue costs                                                                                 -      (1,169,000)
     Proceeds from issuance of Common Stock                                                                227,000       1,406,000
     Proceeds from issuance of Preferred Stock and Warrants                                             18,292,000      60,000,000
                                                                                                      ------------    ------------

                Net cash provided by financing activities                                               18,519,000      61,881,000
                                                                                                      ------------    ------------

Net increase in cash and cash equivalents                                                               16,353,000      12,437,000
Cash and cash equivalents at beginning of period                                                        10,166,000      21,315,000
                                                                                                      ------------    ------------

Cash and cash equivalents at end of period                                                            $ 26,519,000    $ 33,752,000
                                                                                                      ------------    ------------
                                                                                                      ------------    ------------

Supplemental schedule of cash flow information:
     Cash paid for interest                                                                           $      8,000    $     16,000
                                                                                                      ------------    ------------
                                                                                                      ------------    ------------

Supplemental schedule of non-cash financing activities:
     Equipment purchases payable, to be financed through operating leases                             $  1,576,000    $  9,541,000
                                                                                                      ------------    ------------
                                                                                                      ------------    ------------
     Equipment and furniture purchases payable                                                        $          -    $ 10,349,000
                                                                                                      ------------    ------------
                                                                                                      ------------    ------------
     Intangible business acquisition costs arising from issuance of preferred stock and warrants      $          -    $ 10,250,000
                                                                                                      ------------    ------------
                                                                                                      ------------    ------------
</TABLE>

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


                                      5

<PAGE>


                           RHYTHMS NETCONNECTIONS INC.
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                            Series A Convertible      Series B Convertible    Series C Convertible
                                               Preferred Stock           Preferred Stock         Preferred Stock    
                                              $0.001 par value          $0.001 par value        $0.001 par value    
                                            ----------------------    ---------------------    -------------------- 
                                            # Shares      Amount      # Shares     Amount      # SHARES    AMOUNT   
                                            -----------   --------    ----------   --------    ----------  -------- 
<S>                                         <C>           <C>         <C>          <C>         <C>         <C>      
Balance at December 31, 1998                 12,855,094    $13,000     4,044,943    $ 4,000             -   $     - 

Issuance of Common Stock upon
     exercise of options ($0.04 to $3.33
     per share exercise price) (unaudited)            -          -             -          -             -         - 
Issuance of Series C Preferred Stock
      and Warrants for cash ($8.04 per
     share) in March 1999 (unaudited)                 -          -             -          -     7,462,819     7,000 
Business relationship value arising
     from issuance of Series C Preferred
     Stock in March 1999 (unaudited)                  -          -             -          -             -         - 
Issuance of Warrants to leasing
     company in March 1999 (unaudited)                -          -             -          -             -         - 
Deferred compensation from grant of
     options to purchase Common Stock
     (unaudited)                                      -          -             -          -             -         - 
Amortization of deferred compensation
     (unaudited)                                      -          -             -          -             -         - 
Reversal of deferred compensation
     from cancellation of grants to
     purchase Common Stock
     (unaudited)                                      -          -             -          -             -         - 
Net loss through March 31, 1999
      (unaudited)                                     -          -             -          -             -         - 
                                            -----------   --------    ----------   --------    ----------  -------- 

Balance at March 31, 1999 (unaudited)        12,855,094    $13,000     4,044,943    $ 4,000     7,462,819   $ 7,000 
                                            -----------   --------    ----------   --------    ----------  -------- 
                                            -----------   --------    ----------   --------    ----------  -------- 


<CAPTION>



                                                Common Stock           Treasury Stock    
                                             $0.001 par value              at cost            Additional                     
                                            --------------------     --------------------      Paid-In                       
                                            # Shares     Amount      # Shares   Amount         Capital         Warrants      
                                            ----------   --------    --------  ----------   --------------    -----------    
<S>                                         <C>          <C>         <C>       <C>          <C>               <C>            
Balance at December 31, 1998                 8,042,530    $ 8,000     438,115  $ (18,000)     $ 37,212,000     $        -    

Issuance of Common Stock upon
     exercise of options ($0.04 to $3.33
     per share exercise price) (unaudited)   1,577,190      2,000           -          -         1,404,000              -    
Issuance of Series C Preferred Stock
      and Warrants for cash ($8.04 per
     share) in March 1999 (unaudited)                -          -           -          -        55,529,000      4,464,000    
Business relationship value arising
     from issuance of Series C Preferred
     Stock in March 1999 (unaudited)                 -          -           -          -        10,000,000              -    
Issuance of Warrants to leasing
     company in March 1999 (unaudited)               -          -           -          -                 -        250,000    
Deferred compensation from grant of
     options to purchase Common Stock
     (unaudited)                                     -          -           -          -         3,897,000              -    
Amortization of deferred compensation
     (unaudited)                                     -          -           -          -                 -              -    
Reversal of deferred compensation
     from cancellation of grants to
     purchase Common Stock
     (unaudited)                                     -          -           -          -          (499,000)             -    
Net loss through March 31, 1999
      (unaudited)                                    -          -           -          -                 -              -    
                                            ----------   --------    --------  ----------   --------------    -----------    

Balance at March 31, 1999 (unaudited)        9,619,720    $10,000     438,115  $ (18,000)    $ 107,543,000     $4,714,000    
                                            ----------   --------    --------  ----------   --------------    -----------    
                                            ----------   --------    --------  ----------   --------------    -----------    


<CAPTION>


                                                                                  Total
                                               Deferred       Accumulated      Stockholders'
                                             Compensation       Deficit          Equity
                                            -------------     -------------    ------------
<S>                                         <C>              <C>              <C> 
Balance at December 31, 1998                 $ (5,210,000)    $(38,756,000)   $ (6,747,000)

Issuance of Common Stock upon
     exercise of options ($0.04 to $3.33
     per share exercise price) (unaudited)              -                -       1,406,000
Issuance of Series C Preferred Stock
      and Warrants for cash ($8.04 per
     share) in March 1999 (unaudited)                   -                -      60,000,000
Business relationship value arising
     from issuance of Series C Preferred
     Stock in March 1999 (unaudited)                    -                -      10,000,000
Issuance of Warrants to leasing
     company in March 1999 (unaudited)                  -                -         250,000
Deferred compensation from grant of
     options to purchase Common Stock
     (unaudited)                               (3,897,000)               -               -
Amortization of deferred compensation
     (unaudited)                                  601,000                -         601,000
Reversal of deferred compensation
     from cancellation of grants to
     purchase Common Stock
     (unaudited)                                  499,000                -               -
Net loss through March 31, 1999
      (unaudited)                                       -      (23,899,000)    (23,899,000)
                                            -------------     -------------    ------------

Balance at March 31, 1999 (unaudited)        $ (8,007,000)    $(62,655,000)   $ 41,611,000
                                            -------------     -------------    ------------
                                            -------------     -------------    ------------

</TABLE>

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


                                      6

<PAGE>

                            RHYTHMS NETCONNECTIONS INC.
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                          
NOTE 1 - BASIS OF PRESENTATION:

THE COMPANY:  RHYTHMS NetConnections Inc. (the "Company"), a Delaware 
corporation, was organized under the name Accelerated Connections Inc. in 
February 1997. The Company's name was changed to RHYTHMS NetConnections Inc. 
in August 1997. The Company is in the business of providing high-speed data 
communications services on an end-to-end basis to business customers and end 
users. The Company began service trials in the San Diego, California, market 
in December 1997 and began commercial operations in San Diego effective April 
1, 1998.

The Company's ultimate success depends upon, among other factors, rapidly 
expanding the geographic coverage of its network services; entering into 
interconnection agreements with incumbent local exchange carriers, some of 
which are competitors or potential competitors of the Company; deploying 
network infrastructure; attracting and retaining customers; accurately 
assessing potential markets; continuing to develop and integrate its 
operational support system and other back office systems; obtaining any 
required governmental authorizations; responding to competitive developments; 
continuing to attract, retain, and motivate qualified personnel; and 
continuing to upgrade its technologies and commercialize its network services 
incorporating such technologies. 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. As the Company continues the 
development of its business, it will seek additional sources of financing to 
fund its development. If unsuccessful in obtaining such financing, the 
Company will continue expansion of its operations on a reduced scale based on 
its existing capital resources.
 
INTERIM RESULTS (UNAUDITED):  The accompanying consolidated financial 
statements (unaudited), which include the transactions and balances of 
Rhythms NetConnections Inc. and its wholly owned subsidiaries ACI Corp and 
ACI Corp.-Virginia, have been prepared in accordance with generally accepted 
accounting principles for interim financial information and, therefore, do 
not include all the information and footnotes required by generally accepted 
accounting principles for complete financial statements. In the opinion of 
management, these statements have been prepared on the same basis as the 
audited financial statements and include all adjustments, consisting only of 
normal recurring accruals, that are necessary for the fair statement of 
results for the unaudited interim periods. The data disclosed in these notes 
to consolidated financial statements is also unaudited. 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 and the disclosure of 
contingent assets and liabilities at the financial statement date, as well as 
the reported amounts of revenues and expenses during the reporting period. 
Actual results could differ from those estimates. The operating results for 
the interim period are not necessarily indicative of the results to be 
expected for a full fiscal year or for any future periods. All material 
intercompany transactions and balances have been eliminated.

NOTE 2 - 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 
outstanding for the period in addition to the weighted average number of 
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 subject to repurchase by the Company totaling 61,281,828 and 
46,325,054 at March 31, 1999 and 1998, respectively, have been excluded from 
the computation since their effect would be antidilutive.

                                      7

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED):

NOTE 3 - STOCKHOLDERS' EQUITY:

During the first quarter of 1999, the Company granted options to employees to 
purchase a total 2,886,616 shares of Common Stock pursuant to its Stock 
Option/Stock Issuance Plan. During this same time, employees exercised 
previously granted options to purchase a total of 1,577,190 shares of Common 
Stock for total proceeds to the Company of $1,406,000.

Effective March 2, 1999, the Company amended its Certificate of Incorporation 
to increase the number of authorized Common shares to 84,527,584 and to 
authorize 3,731,410 shares of Series C Preferred Stock.

On March 4, 1999, the Company issued Series C Preferred Stock and Warrants to 
MCI WorldCom's investment fund for $30,000,000. A total of 3,731,410 shares 
of Series C Preferred Stock and Warrants to purchase 720,000 shares of Common 
Stock at a price of $6.70 per share were issued in this transaction. Of the 
proceeds received, the Company allocated $29,496,000 to the Preferred Stock 
and $504,000 to the Warrants. The terms of the transaction also provide for 
the Company and MCI WorldCom to enter into various business relationships, 
including MCI 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.

Effective March 15, 1999, the Company amended its Certificate of 
Incorporation to increase the number of authorized Common shares to 
74,171,062 and to authroize an additional 3,731,409 shares of Series C 
Preferred Stock. 

On March 16, 1999, the Company issued Series C Preferred Stock and Warrants 
to Microsoft Corporation for $30,000,000. A total of 3,731,409 shares of 
Series C Preferred Stock and Warrants to purchase 720,000 shares of Common 
Stock at a price of $6.70 per share were issued in this transaction. Of the 
proceeds received, the Company allocated $26,544,000 to the Preferred Stock 
and $3,456,000 to the Warrants. The terms of the transaction also provide for 
the Company and Microsoft to enter into various business relationships. In 
connection with these business relationships, the Company capitalized 
$10,000,000 in business acquisition costs that will be amortized to operating 
expense over a three-year period beginning March 1999.

On March 16, 1999 the Company's Board of Directors approved the 1999 Stock 
Incentive Plan and the 1999 Employee Stock Purchase Plan, each plan subject 
to shareholder approval. The 1999 Stock Incentive Plan serves as the 
successor equity incentive program to the 1997 Stock Option/Stock Issuance 
Plan and became effective April 6, 1999. An initial reserve of 8,161,944 
shares of Common Stock has been authorized for issuance under the 1999 Stock 
Incentive Plan. The 1999 Employee Stock Purchase Plan has an initial reserve 
of 1,200,000 shares of Common Stock and became effective April 6, 1999.

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 split.

On March 31, 1999, the Company entered into a 36-month lease line that 
provides for $24,000,000 in equipment on an operating lease basis. In 
connection with this lease agreement, the Company issued 45,498 Warrants to 
purchase Common Stock at a price of $10.55 per share, exercisable 
immediately. The value of these Warrants, estimated to be $250,000, is being 
amortized over the life of the lease.

NOTE 4 - SUBSEQUENT EVENTS:

Effective April 5, 1999, the Company restated its Certificate of Incorporation
to increase the number of authorized Common shares to 81,000,000, to authorize
an additional 932,836 shares of Series C Preferred Stock, to authorize 441,176
shares of Series D Preferred Stock, and to designate 1,000,000 shares as Series
1 Junior Participating Preferred Stock.

                                      8

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED):

NOTE 4 - SUBSEQUENT EVENTS (CONTINUED):

On April 6, 1999, the Company issued 932,836 shares of its Series C Preferred 
Stock at a price of $8.04 per share and 441,176 shares of its Series D 
Preferred Stock at a price of $17.00 per share to a wholly owned subsidiary 
of Qwest Communications Corporation for total proceeds of $15,000,000. In 
connections with this investment, Qwest also received warrants to purchase 
180,000 shares of Common Stock at a price of $6.70 per share and MCI WorldCom 
received an additional warrant to purchase 136,996 shares of Common Stock at 
a price of $21.00 per share. In accordance with provisions of the agreement 
underlying this investment, the Company and Qwest have entered into certain 
business relationships. Although a value has not been finalized for this 
business relationship, the Company estimates that approximately $10,500,000 
will be capitalized with respect to the relationship and that the amount 
capitalized with be amortized to operating expense over a five-year period.

On April 5, 1999, the Company entered into a 36-month lease line that 
provides for $20,000,000 in equipment on an operating lease basis. In 
connection with this lease agreement, the Company issued 75,000 warrants to 
purchase Common Stock at a price of $10.55 per share, exercisable immediately.

Effective April 12, the Company restated its Certificate of Incorporation to 
increase the number of authorized Common shares to 250,000,000 and to 
decrease the number of authorized Preferred Shares to 5,000,000.

Effective April 12, 1999, the Company completed an initial public offering of 
its Common Stock. A total of 10,781,250 shares were issued at $21.00 per 
share; net proceeds to the Company were approximately $211,407,000, after 
payment of underwriting fees but before payment of related issue expenses. 
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 and a resulting zero shares of Preferred Stock 
being issued and outstanding.

On April 23, 1999, the Company issued 12.75 percent Senior Notes due 2009 in 
the principal amount of $325,000,000, due at maturity. Cash proceeds from the 
issuance, after payment of underwriting fees but before payment of related 
issue expenses, were $315,250,000. Of these proceeds, approximately 
$113,675,000 was used to purchase a portfolio of U.S. government securities 
and will be used for the first three years' interest payments.

                                      9

<PAGE>

                            RHYTHMS NETCONNECTIONS INC.
                                          
                                       PART I
                         FINANCIAL INFORMATION (CONTINUED)
                                          
                                          
                                          
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis is based on the consolidated financial 
statements of Rhythms NetConnections Inc. (the "Company" or "Rhythms") and 
the notes thereto and should be read in conjunction with such consolidated 
financial statements and related notes thereto presented previously. Certain 
statements set forth below constitute "forward-looking statements." Such 
forward-looking statements involve known and unknown risks, uncertainties, 
and other factors that may cause the actual results, performance or 
achievements of the Company, or industry results to be materially different 
from any future results, performance, or achievements expressed or implied by 
such forward-looking statements. Given these uncertainties, investors and 
prospective investors are cautioned not to place undue reliance on such 
forward-looking statements. Factors that could cause or contribute to such 
differences include, but are not limited to, those discussed in the "Risks 
and Uncertainties" below. The Company disclaims any obligation to update 
information contained in any forward-looking statement.

RESULTS OF OPERATIONS:


During the first three months of fiscal year 1999, we continued the 
development of our business operations, entering one new market, adding 155 
central office locations, and adding service to approximately 735 DSL lines. 
In accordance with our plan to rapidly expand our infrastructure and network 
services, we intend to offer service in an additional 22 markets by the end 
of this year and a further 17 markets by the end of year 2000.

During the first quarter of 1999, we received $60.0 million from selling 
Series C Preferred Stock and Warrants. Also during the first quarter, we entered
into a 36-month lease line that provides for an additional $24.0 million in 
equipment leasing.

THREE MONTHS ENDED MARCH 31, 1999

During the first quarter of 1999, we continued the development of our 
business operations in our existing markets and additionally commenced 
service in Philadelphia. We recorded $660,000 in revenues during the quarter, 
compared to $10,000 in the same quarter of 1998, which comprise primarily DSL 
service and installation charges, net of discounts given to customers upon 
service establishment. Network service costs for the quarter also reflect the 
increases in commercial service and include customer installation costs, line 
and backbone expenses, the cost of customer premise equipment, equipment 
operating leases, and repair and support costs. Since we did not offer 
commercial services until April 1, 1998, revenues and network service costs 
for the first quarter of 1998 were minimal.

Our selling, general, and administrative expenses for the quarter were 
$13.8 million. These expenses reflect our continuing increase in staffing 
levels, increased marketing efforts coinciding with the launch of commercial 
services, and increased legal fees associated with development of additional 
markets.

We recorded depreciation and amortization of $782,000 during the quarter, a 
significant increase over the $16,000 recorded for the same period in 1998. 
This increase is primarily attributable depreciation on our operating 
equipment, which we began to use commercially on April 1, 1998.

During the first quarter of 1999, we recorded interest income of $1.7 million, 
which was generated from our invested cash balances. These investment 
balances include the proceeds from the issuance of the Series C Preferred 
Stock and Warrants during the quarter in the amount of $60.0 million. We 
recorded $5.5 million in amortized debt discount during the quarter, which 
arose from issuing our 13.5 percent Senior Discount Notes in May 1998.

                                     10

<PAGE>

RESULTS OF OPERATIONS (CONTINUED):

We continue to be in a net operating loss tax position through March 31, 
1999; consequently, we have not recorded a provision for income taxes through 
the first quarter.

CHANGES IN FINANCIAL POSITION:

We had $136.8 million in cash and investments at the beginning of our first 
quarter 1999. During the quarter, we received $60.0 million from selling 
Series C Preferred Stock and Warrants and we received $3.2 million from the 
sale of Common Stock and the sale/leaseback of operating equipment. Of our 
available cash and investments, we used approximately $50.7 million for 
operations and capital purchases during the quarter, leaving $149.3 million 
in cash and investments at the end of the quarter. Also during the first 
quarter, we entered into a 36-month lease line that provides for an 
additional $24.0 million in equipment leasing, which we will begin utilizing 
during the second quarter.

As discussed above in "Results of Operations," the Company continued its 
market build-out and development efforts. The result on financial condition 
was increased operating losses, increased accounts payable and accrued 
expenses, increased collocation expenditures, and smaller increases in 
accounts receivable, inventory, and other assets.

LIQUIDITY AND CAPITAL RESOURCES:

The development and expansion of our business requires significant capital 
expenditures. These capital expenditures primarily include build-out costs 
such as the procurement, design, and construction of our connections points 
and one or two metro service center locations in each market, as well as 
other costs that support our network design.

The number of targeted central offices in each market varies, as does the 
average capital cost to build our connection points in the given market. 
Capital expenditures, including payments for collocation fees, were $42.3 
million during the first quarter of 1999. We expect our capital expenditures 
to be substantially higher in future periods, arising primarily from payments 
of collocation fees and the purchase of infrastructure equipment necessary 
for the development and expansion of our network.

Our capital requirements may vary based upon the timing and success of our 
rollout and as a result of regulatory, technological, and competitive 
developments or if

       -  demand for our services or our anticipated cash flow from operations
          is less or more than expected;

       -  our development plans or projections change or prove to be inaccurate;

       -  we engage in any acquisitions; or

       -  we accelerate deployment of our network services or otherwise alter 
          the schedule or targets of our rollout plan.

Since our primary activities since inception have focused on building our 
network and building a customer base, we have operated at a loss since 
inception. We intend to continue to expand our operations at a rapid pace and 
expect to continue to operate at a loss for the foreseeable future. The 
nature of expenses contributing to our future losses will include network and 
service costs in existing and new markets; legal, marketing, and selling 
expenses as we enter each new market; payroll-related expenses as we continue 
to add employees; general overhead to support the operational increases; and 
interest expense arising from financing our expenditures.

We have not paid any dividends to our shareholders and will not pay dividends 
for the foreseeable future. Our senior discount notes contain covenants that 
restrict our ability to make certain payments, including dividend payments.

Through March 31, 1999, we have financed our operations and market build-outs 
primarily through the issuance of senior discount notes in May 1998 for 
$144.0 million in net proceeds and the private placements of equity totaling 
$90.8 million, of which we received $60.0 million during the first quarter of 
1999. We have also utilized operating leases totaling $26.5 million for the 
acquisition of a large portion of our operating equipment. As of March 31, 
1999, we had $149.3 million in cash and investments and we had an accumulated 
deficit of $62.7 million.

Subsequent to the end of the first quarter we completed several significant 
financings. On  April 6, 1999, we received $15.0 million from the private 
placement of preferred stock and warrants. On April 12, 1999, we completed 
our initial public offering of common stock, from which we received $211.4 
million in net proceeds. Effective April 23, 1999, we issued senior notes and 
received $315.2 million in net proceeds, of which $113.7 million is 
restricted and may be used to pay interest on the notes only. We additionally 
entered into a 36-month lease line that provides for $20.0 million in 
equipment on an operating lease basis.

We believe that our existing cash and investment balances as of March 31, 
1999, together with the net proceeds from the April 1999 financing activities 
and the anticipated future revenue generated from operations, will be 

                                     11

<PAGE>

sufficient to fund our operating losses, capital expenditures, lease 
payments, and interest payments through approximately June 2001. We expect 
our operating losses and capital expenditures to increase substantially in 
the near-term, primarily due to our network expansion. We expect that 
additional financing will be required in the future. We may attempt to raise 
financing through some combination of commercial bank borrowings, leasing, 
vendor financings, or the private or public sale of equity or debt 
securities. Future equity or debt financings may not be available to us at 
all, or, if available, may not be on favorable terms. If we are unable to 
obtain financing in the future, we will continue the expansion of our 
operations on a reduced scale based on our existing capital resources.

IMPACT OF THE YEAR 2000 ISSUE:

Many computer programs have been written using two digits rather than four to 
define the applicable year. This poses a problem at the end of the century 
because these computer programs may recognize a date using "00" as the year 
1900 rather than the year 2000. This, in turn, could result in major system 
failures or miscalculations, and is generally referred to as the "Year 2000 
issue." We have formulated and, to a large extent, effected a plan to 
address our Year 2000 issues. Our Year 2000 plan applies to two areas: 
internal business systems and compliance by external customers and providers. 
We have completed our Year 2000 compliance testing for all of our internal 
systems and believe that they are Year 2000 compliant. Because we are a young 
company, we believe we have been able to build our business systems with the 
Year 2000 issue in mind in a more effective manner than many older companies. 
Therefore, there have been few Year 2000 changes required to our existing 
systems and applications. We have substantially completed a compliance check 
of our external customers and providers, except for the incumbent carriers. 
Based on responses from these third parties, other than the incumbent 
carriers, we believe that they will not experience Year 2000 problems that 
would materially and adversely affect our business. We have not been able to 
conduct a compliance check of incumbent carriers nor assess the incumbent 
carriers' Year 2000 compliance. To the extent that one or more incumbent 
carriers or other third parties experience Year 2000 problems, our network 
and services could be adversely affected. Furthermore, the purchasing 
patterns of our customers may be affected by Year 2000 issues as companies 
expend significant resources to correct their current systems for Year 2000 
compliance. These expenditures may result in reduced funds available for our 
services. Any of these developments could have a material and adverse effect 
on our business, prospects, operating results and ability to repay our debt, 
including the notes. We have not fully determined the risks associated with 
the reasonably worst-case scenario and have not formulated a contingency plan 
to address Year 2000 issues. We do not expect to have a specific contingency 
plan in place in the future.

RISKS AND UNCERTAINTIES 

       IN ADDITION TO THE OTHER INFORMATION CONTAINED HEREIN, YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN EVALUATING OUR COMPANY.

       WE CANNOT PREDICT OUR SUCCESS BECAUSE WE HAVE A SHORT OPERATING HISTORY

       We formed our company in February 1997, and we have a short operating 
history for you to review in evaluating our business.  We have limited 
historical financial and operating data upon which you can evaluate our 
business and prospects.  We entered into our first interconnection agreement 
with an incumbent carrier in July 1997 and began to offer commercial services 
in San Diego in April 1998.  We have limited commercial operations and have 
recognized limited revenues since our inception.  In addition, our senior 
management team and our other employees have worked together at our company 
for only a short period of time.  

       BECAUSE OUR MARKET IS NEW AND EVOLVING, WE CANNOT PREDICT ITS FUTURE
GROWTH OR ULTIMATE SIZE, AND WE MAY BE UNABLE TO COMPETE EFFECTIVELY

       The market for packet-based high-speed digital communication services 
using telephone lines is in the early stages of development.  Since this 
market is new and evolving and because our current and future competitors are 
likely to introduce competing services, we cannot accurately predict the rate 
at which this market will grow, if at all, or whether new or increased 
competition will result in market saturation.  Various providers of 
high-speed digital communication services are testing products from various 
suppliers for various applications, and suppliers have not broadly adopted an 
industry standard. Certain critical issues concerning commercial use of DSL 
for Internet and local area network access, including security, reliability, 
ease and cost of access and quality of service, remain unresolved and may 
impact the growth of these services.  If the markets for our services fail to 
develop, grow more slowly than anticipated or become saturated with 
competitors, these events could materially and adversely affect our business, 
prospects, operating results and financial condition.  

       Our success will depend on the development of this new and rapidly 
evolving market and our ability to compete effectively in this market.  To 
address these risks, we must, among other things:

   -   rapidly expand the geographic coverage of our network services; 
       
   -   raise additional capital; 
       
   -   enter into interconnection agreements and working arrangements with
       additional incumbent carriers, substantially all of which we expect to
       be our competitors;  
       
   -   deploy an effective network infrastructure; 
       
   -   attract and retain customers; 
       
   -   successfully develop relationships and activities with our partners and
       distributors, including MCI WorldCom, Microsoft, Qwest and Cisco;  
       
   -   continue to attract, retain and motivate qualified personnel; 
       
   -   accurately assess potential markets and effectively respond to
       competitive developments;  
       
   -   continue to develop and integrate our operational support system and
       other back office systems;  
       
   -   obtain any required governmental authorizations; 
       
   -   comply with evolving governmental regulatory requirements; 
       
   -   increase awareness of our services; 

                                     12

<PAGE>
       
   -   continue to upgrade our technologies; and  
       
   -   effectively manage our expanding operations. 
       
       We may not be successful in addressing these and other risks, and our
failure to address risks would materially and adversely affect our business,
prospects, operating results and financial condition. 

       WE CANNOT PREDICT OUR SUCCESS BECAUSE OUR BUSINESS MODEL IS UNPROVEN

       We have not validated our business model and strategy in the market.  
We believe that the combination of our unproven business model and the highly 
competitive and fast changing market in which we compete makes it impossible 
to predict the extent to which our network service will achieve market 
acceptance and our overall success.  To be successful, we must develop and 
market network services that are widely accepted by businesses at profitable 
prices.  We may never be able to deploy our network as planned, achieve 
significant market acceptance, favorable operating results or profitability 
or generate sufficient cash flow to repay our debt.  Of the 9,800 lines that 
we have committed to deliver to date, we committed approximately 8,700 to 
only two customers.  None of our enterprise customers has rolled out our 
services broadly to its employees, and we cannot be certain when or if these 
rollouts will occur.  We will not receive significant revenue from our large 
customers unless these rollouts occur.  Any continued or ongoing failure for 
any reason of enterprise customers to roll out our services, failure to 
validate our business model in the market, including failure to build out our 
network, achieve widespread market acceptance or sustain desired pricing 
would materially and adversely affect our business, prospects, operating 
results and financial condition. 

       WE EXPECT OUR LOSSES TO CONTINUE

       We have incurred losses and experienced negative operating cash flow 
for each month since our formation.  As of March 31, 1999, we had an 
accumulated deficit of approximately $62.7 million.  We intend to rapidly and 
substantially increase our expenditures and operating expenses in an effort 
to expand our network services.  We expect to have annual interest and 
amortization expense relating to our senior discount notes issued in May 1998 
and our senior notes issued in April 1999 of approximately $52.2 million in 
1999 and increasing to $80.6 million in 2003.  In addition, we may incur more 
debt in the future. Furthermore, as a result of recent preferred stock 
issuances and stock option grants, we anticipate that there will be 
significant charges to earnings in future periods.  As a result of these 
factors, we expect to incur substantial operating and net losses and negative 
operating cash flow for the foreseeable future.  We will need to obtain 
additional financing to pay our expenses and to make payments on our debt.  
We cannot give you any assurance about whether or when we will have 
sufficient revenues to satisfy our funding requirements or pay our debt 
service obligations.  

       OUR OPERATING RESULTS IN ONE OR MORE FUTURE PERIODS ARE LIKELY TO 
FLUCTUATE SIGNIFICANTLY AND MAY FAIL TO MEET OR EXCEED THE EXPECTATIONS OF 
SECURITIES ANALYSTS OR INVESTORS

       Our annual and quarterly operating results are likely to fluctuate 
significantly in the future due to numerous factors, many of which are 
outside of our control.  These factors include:  

   -   the rate of customer acquisition and turnover; 
       
   -   the prices our customers are willing to pay; 
       
   -   the amount and timing of expenditures relating to the expansion of our
       services and infrastructure;  
       
   -   the timing and availability of incumbent carrier central office
       collocation facilities and transport facilities;  
       
   -   the success of our relationships with our partners and distributors,
       including MCI WorldCom, Microsoft, Qwest and Cisco;  
       
   -   our ability to deploy our network on a timely basis; 
       
   -   introduction of new services or technologies by our competitors; 

                                     13

<PAGE>
       
   -   price competition; 
       
   -   the ability of our equipment and service suppliers to meet our needs; 
       
   -   regulatory developments, including interpretations of the 1996
       Telecommunications Act;  
       
   -   technical difficulties or network downtime; 
       
   -   the success of our strategic alliances; and 
       
   -   the condition of the telecommunication and network service industries
       and general economic conditions.  
       
       Because of these factors, our operating results in one or more future 
periods could fail to meet or exceed the expectations of securities analysts 
or investors.  

       IF SALES FORECASTED FOR A PARTICULAR PERIOD ARE NOT REALIZED IN THAT 
PERIOD DUE TO THE LENGTHY SALES CYCLE OF OUR SERVICES, OUR OPERATING RESULTS 
FOR THAT PERIOD WILL BE HARMED

       The sales cycle of our network services can be very lengthy, 
particularly for large businesses.  The sales cycle for large businesses 
typically involves:  

   -   a significant technical evaluation;
       
   -   an initial trial rollout to a relatively small number of end users; 
       
   -   a commitment of capital and other resources by the customer; 
       
   -   delays associated with the customer's internal procedures to approve
       large capital expenditures;  
       
   -   time required to engineer the deployment of our services; 
       
   -   coordination of the activation of multiple access lines with incumbent
       carriers; and  
       
   -   testing and acceptance of our services. 
       
       For these and other reasons, our sales cycle for enterprise customers
lasts at least six months.  During this lengthy sales cycle, we will incur 
significant expenses in advance of the receipt of revenues.  If sales that we 
forecast for a particular period do not occur because of our lengthy sales 
cycle, this event could materially and adversely affect our business, 
prospects, operating results and financial condition.  

       WE DEPEND ON INCUMBENT CARRIERS FOR COLLOCATION AND TRANSMISSION
FACILITIES

       We must use copper telephone lines controlled by the incumbent 
carriers to provide DSL connections to customers.  We also depend on the 
incumbent carriers for collocation and for a substantial portion of the 
transmission facilities we use to connect our equipment in incumbent carrier 
central offices to our Metro Service Centers.  In addition, we depend on the 
incumbent carriers to test and maintain the quality of the copper lines that 
we use.  We have not established a history of obtaining access to collocation 
and transmission facilities from  incumbent carriers in large volumes.  In 
many cases, we may be unable to obtain access to collocation and transmission 
facilities from the incumbent carriers, or to gain access at acceptable 
rates, terms and conditions, including timeliness.  We have experienced, and 
expect to experience in the future, lengthy periods between our request for 
and the actual provision of the collocation space and telephone lines.  An 
inability to obtain adequate and timely access to collocation space or 
transmission facilities on acceptable terms and conditions from incumbent 
carriers could have a material and adverse effect on our business, prospects, 
operating results and financial condition.  

                                     14

<PAGE>

       Because we compete with incumbent carriers in our markets, they may be
reluctant to cooperate with us.  The incumbent carriers may experience, or claim
to experience, a shortage of collocation space or transmission capacity.  If
this occurs, we may not have alternate means of connecting our DSL equipment
with the copper lines or connecting our equipment in central offices to Metro
Service Centers.  We have experienced rejections of some of our collocation
applications on the grounds that no space is available.  We may receive
additional rejections in the future.  The number of other competitive local
exchange carriers that request collocation space will also affect the
availability of collocation space and transmission capacity.  If we are unable
to obtain physical collocation space or transmission capacity from our targeted
incumbent carriers, we may face delays, additional costs or an inability to
provide services in certain locations.  In many cases where our application for
physical collocation is rejected, we expect to have the option of adjacent
location--where we install our equipment in a building that is very close to the
incumbent carrier central office--or virtual collocation--where the incumbent
carrier manages and operates our equipment.  While we have used adjacent and
virtual collocation in our network, those alternatives reduce our control over
our equipment, and therefore may reduce the level of quality and service we
provide to our customers.  We are currently in an arbitration proceeding with
SBC Communications Inc. concerning the availability of DSL-enabled copper lines,
as well as other operational issues.  Delays in obtaining access to collocation
space and telephone lines or the rejection of our applications for collocation
could result in delays in, and increased expenses associated with, the rollout
of our services, which in turn could have a material and adverse effect on our
business, prospects, operating results and financial condition.  

       WE ARE UNABLE TO CONTROL THE TERMS AND CONDITIONS UNDER WHICH WE GAIN 
ACCESS TO INCUMBENT CARRIER COLLOCATION AND TRANSMISSION FACILITIES

       We cannot control the terms under which we collocate our equipment, 
connect to copper lines or gain the use of an incumbent carrier's 
transmission facilities.  State tariffs, state public utility commissions and 
interconnection agreements with the incumbent carriers determine the price, 
terms and conditions under which collocation space is made available, and 
they make these administrative determinations in ongoing hearings.  
Interconnection agreements and state public utility commissions also 
determine the terms and conditions of access to copper lines and other 
components of an incumbent carrier's network. We may be unable to negotiate 
or enter into interconnection agreements on acceptable terms or at all.  In 
addition, we cannot be sure that incumbent carriers will abide by their 
obligations under those agreements.  Delays in obtaining interconnection 
agreements would delay our entry into certain markets. In addition, disputes 
may arise between us and the incumbent carriers with respect to 
interconnection agreements, and we may be unable to resolve disputes in our 
favor.  If we are unable to enter into, or experience a delay in obtaining, 
interconnection agreements, this inability or delay could adversely affect 
our business, prospects, operating results and financial condition. Further, 
the interconnection agreements are generally short term, and we may be unable 
to renew the interconnection agreements on acceptable terms or at all. The 
state commissions, the Federal Communications Commission and the courts 
oversee, in varying degrees, interconnection arrangements as well as the 
terms and conditions under which we gain access to incumbent carrier copper 
lines and transmission facilities.  These government entities may modify the 
terms or prices of our interconnection agreements and our access to incumbent 
carrier copper lines and transmission facilities in ways that would be 
adverse to our business.  State regulatory commissions establish the price 
rates for DSL-capable copper lines as well as other rates, terms and 
conditions of our dealings with the incumbent carriers in ongoing public 
hearings.  Participation in these hearings will involve significant 
management time and expense. Incumbent carriers may from time to time propose 
new rates, and the outcomes of hearings and rulings could have a material and 
adverse effect on our business, prospects, operating results and financial 
condition.  

       WE DEPEND ON THIRD PARTIES, PARTICULARLY MCI WORLDCOM, MICROSOFT, 
QWEST AND CISCO, FOR THE MARKETING AND SALES OF OUR NETWORK SERVICES 

       We will rely significantly on indirect sales channels for the 
marketing and sales of our network services.  We will seek to establish 
relationships with numerous service providers, including Internet Service 
Providers, interexchange carriers, other competitive carriers and value-added 
resellers, to gain access to customers.  Our agreements to date with service 
providers are non-exclusive, and we anticipate that future agreements will 
also be on a non-exclusive basis, allowing service providers to resell 
services offered by our competitors.  These agreements are generally short 
term, and can be cancelled by the service provider without significant 
financial consequence.  We cannot control how these service providers perform 
and cannot be certain that their performance will be satisfactory to us or 
our customers.  Many of these companies also compete with us.  If the number 
of customers we obtain through indirect sales channels is significantly lower 
than our forecast for any reason, or if the service providers with 

                                     15

<PAGE>
which we have contracted are unsuccessful in competing in their own intensely 
competitive markets, these events would have a material and adverse effect on 
our business, prospects, operating results and financial condition.  

       We expect to rely particularly on the sales and marketing efforts of 
our strategic partners, including MCI WorldCom, Microsoft, Cisco and Qwest.  
While our agreement with MCI WorldCom calls for it to sell 100,000 DSL lines, 
the agreement also enables MCI WorldCom to terminate the agreement under 
certain circumstances and to receive offsets and credits under other 
circumstances. Therefore, MCI WorldCom might sell significantly fewer than 
100,000 DSL lines, or we might receive significantly lower revenues than we 
otherwise would.  

       THE MARKET IN WHICH WE OPERATE IS HIGHLY COMPETITIVE, AND WE MAY NOT 
BE ABLE TO COMPETE EFFECTIVELY, ESPECIALLY AGAINST ESTABLISHED INDUSTRY 
COMPETITORS WITH SIGNIFICANTLY GREATER FINANCIAL RESOURCES

       We will face competition from many competitors with significantly 
greater financial resources, well-established brand names and large, existing 
installed customer bases.  We expect the level of competition to intensify in 
the future.  We expect significant competition from incumbent carriers, 
traditional and new long distance carriers, cable modem service providers, 
Internet Service Providers, wireless and satellite data service providers and 
other competitive carriers.  Incumbent carriers have existing metropolitan 
area networks and circuit-switched local access networks.  In addition, most 
incumbent carriers are establishing their own Internet Service Provider 
businesses and are in some stage of market trials and retail sales of 
DSL-based access services.  Some incumbent carriers have announced that they 
intend to aggressively market these services to their residential customers 
at attractive prices.  We believe that incumbent carriers have the potential 
to quickly overcome many of the issues that have delayed widespread 
deployment of DSL services in the past.  In addition, we may experience 
substantial customer turnover in the future.  Many providers of 
telecommunications and networking services experience high rates of customer 
turnover.  

       Many of the leading traditional long distance carriers, including AT&T 
Corporation, MCI WorldCom and Sprint, are expanding their capabilities to 
support high-speed, end-to-end networking services.  The newer long distance 
carriers, including Williams Companies Inc., Qwest Communications 
International, Inc. and Level 3 Communications, Inc., are building and 
managing high bandwidth, nationwide packet networks and partnering with 
Internet Service Providers to offer services directly to the public.  Cable 
modem service providers, like @Home Networks, are offering or preparing to 
offer high-speed Internet access over hybrid fiber networks to consumers, and 
@Work positioned itself to do the same for businesses.  Several new companies 
are emerging as wireless, including satellite-based, data service providers.  
Internet Service Providers, including some with significant and even 
nationwide presences, provide Internet access to residential and business 
customers, generally over the incumbent carriers' circuit switched networks, 
although some have begun offering DSL-based access. Certain competitive 
carriers, including Covad Communications Group, Inc. and NorthPoint 
Communications, Inc., have begun offering DSL-based access services, and, 
like us, have attracted strategic equity investors, marketing allies and 
product development partners.  Others are likely to do the same in the 
future. 

       Many of these competitors are offering, or may soon offer, 
technologies and services that will directly compete with some or all of our 
service offerings.  Some of the technologies used by these competitors for 
local access connections include integrated services digital network (ISDN), 
DSL, wireless data and cable modems.  Some of the competitive factors in our 
markets include transmission speed, reliability of service, breadth of 
service availability, price performance, network security, ease of access and 
use, content bundling, customer support, brand recognition, operating 
experience, capital availability and exclusive contracts.  We believe that we 
compare unfavorably with many of our competitors with regard to, among other 
things, brand recognition, existing relationships with end users, available 
pricing discounts, central office access, capital availability and exclusive 
contracts.  Substantially all of our competitors and potential competitors 
have substantially greater resources than us.  We may not be able to compete 
effectively in our target markets.  Our failure to compete effectively would 
have a material and adverse effect on our business, prospects, operating 
results and financial condition.  Please see "Management's Discussion and 
Analysis of Financial Condition and Results of Options--Liquidity and Capital 
Resources."

                                     16

<PAGE>

       OUR NETWORK SERVICES MAY NOT ACHIEVE SIGNIFICANT MARKET ACCEPTANCE 
BECAUSE OUR PRICES ARE OFTEN HIGHER THAN THOSE CHARGED FOR COMPETING SERVICES

       Our prices are in some cases higher than those that our competitors 
charge for some of their services.  Prices for digital communications 
services have fallen historically, and we expect prices in the industry in 
general, and for the services we offer now and plan to offer in the future, 
to continue to fall.  We may be required to reduce prices periodically to 
respond to competition and to generate increased sales volume.  Our prices 
may not permit our network services to gain a desirable level of commercial 
acceptance, and we may be unable to sustain any current or future pricing 
levels.  Due to these factors, we cannot accurately forecast our revenues or 
the rate at which we will add new customers.  

       WE WILL NEED SIGNIFICANT ADDITIONAL FUNDS, WHICH WE MAY NOT BE ABLE TO 
OBTAIN

       The expansion and development of our business will require significant 
additional capital.  We intend to seek substantial additional financing in 
the future to fund the growth of our operations, including funding the 
significant capital expenditures and working capital requirements necessary 
for us to provide service in our targeted markets.  We believe that our 
current capital resources will be sufficient to fund our aggregate capital 
expenditures and working capital requirements, including operating losses, 
approximately until June 2001.  We will not have completed our network 
rollout by this date and will need additional capital, whether or not our 
estimate on how long current capital resources will last is accurate.  In 
addition, our actual funding requirements may differ materially if our 
assumptions underlying this estimate turn out to be incorrect.  Therefore, 
you should consider our estimate in light of the following facts:  

   -   we have no meaningful history of operations or revenues; 
       
   -   our estimated funding requirements do not reflect any contingency
       amounts and may increase, perhaps substantially, if we are unable to
       generate revenues in the amount and within the time frame we expect or
       if we have unexpected cost increases; and  
       
   -   we face many challenges and risks, including those discussed elsewhere
       in "Risks and Uncertainties."  
       
       We may be unable to obtain any future equity or debt financing on 
acceptable terms or at all.  Recently the financial markets have experienced 
extreme price fluctuations.  A market downturn or general market uncertainty 
may adversely affect our ability to secure additional financing.  The 
indentures that govern our senior discount notes issued in May 1998 and our 
senior notes issued in April 1999 restrict our ability to obtain additional 
debt financing. Any future borrowing instruments, such as credit facilities 
and lease agreements, are likely to contain similar or more restrictive 
covenants and could require us to pledge assets as security for the 
borrowings.  If we are unable to obtain additional capital or are required to 
obtain it on terms less satisfactory than what we desire, we will need to 
delay deployment of our network services or take other actions that could 
adversely affect our business, prospects, operating results and financial 
condition.  If we are unable to generate sufficient cash flow or obtain funds 
necessary to meet required payments of our debt, then we will be in default 
on our debt instruments.  To date, our cash flow from operations has been 
insufficient to cover our expenses and capital needs.  Please see 
"Management's Discussion and Analysis of Financial Condition and Results of 
Operations--Liquidity and Capital Resources." 

       OUR SERVICES ARE SUBJECT TO GOVERNMENT REGULATION, AND CHANGES IN 
CURRENT OR FUTURE LAWS OR REGULATIONS COULD RESTRICT THE WAY WE OPERATE OUR 
BUSINESS

       A significant portion of the services that we offer through our 
subsidiaries is subject to regulation at the federal, state and/or local 
levels. Future federal or state regulations and legislation may be less 
favorable to us than current regulation and legislation and therefore have an 
adverse impact on our business, prospects, operating results and financial 
condition.  In addition, we may expend significant financial and managerial 
resources to participate in rule-setting proceedings at either the federal or 
state level, without achieving a favorable result.  The Federal 
Communications Commission prescribes rules applicable to interstate 
communications, including rules implementing the 1996 Telecommunications Act, 
a responsibility it shares with the state regulatory commissions.  In 
particular, we believe that incumbent carriers will work aggressively to 
modify or restrict the operation of many provisions of the 1996 
Telecommunications Act.  We expect incumbent carriers will pursue litigation 
in courts, institute administrative proceedings with the Federal 
Communications Commission and other regulatory agencies 

                                     17

<PAGE>

and lobby the United States Congress, all in an effort to affect laws and 
regulations in a manner favorable to the incumbent carriers and against the 
interest of competitive carriers such as us.  If the incumbent carriers 
succeed in any of their efforts, if these laws and regulations change or if 
the administrative implementation of laws develops in an adverse manner, 
these events could have a material and adverse effect on our business, 
prospects, operating results and financial condition.  

       OUR FAILURE TO MANAGE GROWTH COULD ADVERSELY AFFECT US

       We have rapidly and significantly expanded our operations.  We 
anticipate further significant expansion of our operations in an effort to 
achieve our network rollout and deployment objectives.  Our expansion to date 
has strained our management, financial controls, operations systems, 
personnel and other resources.  Any future rapid expansion would increase 
these strains. If our marketing strategy is successful, we may experience 
difficulties responding to customer demand for services and technical support 
in a timely manner and in accordance with their expectations.  As a result, 
rapid growth of our business would make it difficult to implement 
successfully our strategy to provide superior customer service.  To manage 
any growth of our operations, we must:  

   -   improve existing and implement new operational, financial and management
       information controls, reporting systems and procedures;  
       
   -   hire, train and manage additional qualified personnel; 
       
   -   expand and upgrade our core technologies; and 
       
   -   effectively manage multiple relationships with our customers, suppliers
       and other third parties.  
       
       We may not be able to install management information and control 
systems in an efficient and timely manner, and our current or planned 
personnel, systems, procedures and controls may not be adequate to support 
our future operations.  Failure to manage our future growth effectively could 
adversely affect the expansion of our customer base and service offerings.  
Any failure to successfully address these issues could materially and 
adversely affect our business, prospects, operating results and financial 
condition.  

       OUR SUBSTANTIAL DEBT CREATES FINANCIAL AND OPERATING RISK

       We are highly leveraged, and we intend to seek additional debt funding 
in the future.  As of March 31, 1999, we had approximately $163.7 million of 
outstanding debt, and our debt made up 77.3% of our capitalization.  During 
April 1999, we issued an additional $325 million in debt. We are not 
generating any meaningful revenue to fund our operations or to repay our 
debt. Our substantial leverage poses the risks that:  

   -   we may be unable to repay our debt due to one or more events discussed
       in "Risks and Uncertainties;"  
       
   -   we may be unable to obtain additional financing; 
       
   -   we must dedicate a substantial portion of our cash flow from operations
       to servicing our debt once our debt requires us to make cash interest
       payments, and any remaining cash flow may not be adequate to fund our
       planned operations; and  
       
   -   we may be more vulnerable during economic downturns, less able to
       withstand competitive pressures and less flexible in responding to
       changing business and economic conditions.  
       
       THE TELECOMMUNICATIONS INDUSTRY IS UNDERGOING RAPID TECHNOLOGICAL
CHANGE, AND NEW TECHNOLOGIES MAY BE SUPERIOR TO THE TECHNOLOGY WE USE

       The telecommunications industry is subject to rapid and significant 
technological changes, such as continuing developments in DSL technology and 
alternative technologies for providing high-speed data communications.  We 
cannot predict the effect of technological changes on our business.  We will 
rely in part on third parties, including certain of our competitors and 
potential competitors, for the development of and access to communications 
and networking technology.  We expect that new products and technologies 
applicable to our 

                                     18

<PAGE>

market will emerge.  New products and technologies may be superior and/or 
render obsolete the products and technologies that we currently use.  Our 
future success will depend, in part, on our ability to anticipate and adapt 
to technological changes and evolving industry standards.  We may be unable 
to obtain access to new technology on acceptable terms or at all, and we may 
be unable to adapt to new technologies and offer services in a competitive 
manner. Our joint development projects with Cisco and MCI WorldCom and our 
strategic arrangement with Microsoft may not produce useful technologies or 
services for us.  Further, new technologies and products may not be 
compatible with our technologies and business plan.  We believe that the 
telecommunications industry must set standards to allow for the compatibility 
of various products and technologies.  However, the industry may not set 
standards on a timely basis or at all.  In addition, many of the products and 
technologies that we intend to use in our network services are relatively new 
and unproven and may be unreliable.  

       WE MAY BE UNABLE TO EFFECTIVELY EXPAND OUR NETWORK SERVICES AND 
PROVIDE HIGH PERFORMANCE TO A SUBSTANTIAL NUMBER OF END USERS

       Due to the limited deployment of our network services, we cannot 
guarantee that our network will be able to connect and manage a substantial 
number of end users at high transmission speeds.  We may be unable to scale 
our network to service a substantial number of end users while achieving high 
performance.  Further, our network may be unable to achieve and maintain 
competitive digital transmission speeds.  While digital transmission speeds 
of up to 7.1 Mbps are possible on certain portions of our network, that speed 
is not available over a majority of our network.  Actual transmission speeds 
on our network will depend on a variety of factors and many of these factors 
are beyond our control, including the type of DSL technology deployed, the 
distance an end user is located from a central office, the quality of the 
telephone lines, the presence of interfering transmissions on nearby lines 
and other factors.  As a result, we may not be able to achieve and maintain 
digital transmission speeds that are attractive in the market.

       OUR SERVICES MAY SUFFER BECAUSE THE TELEPHONE LINES WE REQUIRE MAY BE 
UNAVAILABLE OR IN POOR CONDITION

       Our ability to provide DSL-based services to potential customers 
depends on the quality, physical condition, availability and maintenance of 
telephone lines within the control of the incumbent carriers.  We believe 
that the current condition of telephone lines in many cases will be 
inadequate to permit us to fully implement our network services.  In 
addition, the incumbent carriers may not maintain the telephone lines in a 
condition that will allow us to implement our network effectively.  The 
telephone lines may not be of sufficient quality or the incumbent carriers 
may claim they are not of sufficient quality to allow us to fully implement 
or operate our network services.  Further, some customers use technologies 
other than copper lines to provide telephone services, and DSL might not be 
available to these customers.  

       OUR SUCCESS DEPENDS ON OUR RETENTION OF CERTAIN KEY PERSONNEL AND ON 
THE PERFORMANCE OF THOSE PERSONNEL

       Our success depends on the performance of our officers and key 
employees, especially our Chief Executive Officer.  Members of our senior 
management team have worked together for only a short period of time.  We do 
not have "key person" life insurance policies on any of our employees nor do 
we have employment agreements for fixed terms with any of our employees.  Any 
of our employees, including any member of our senior management team, may 
terminate his or her employment with us at any time.  Given our early stage 
of development, we depend on our ability to retain and motivate high quality 
personnel, especially our management.  Our future success also depends on our 
continuing ability to identify, hire, train and retain highly qualified 
technical, sales, marketing and customer service personnel.  Moreover, the 
industry in which we compete has a high level of employee mobility and 
aggressive recruiting of skilled personnel.  We may be unable to continue to 
employ our key personnel or to attract and retain qualified personnel in the 
future.  We face intense competition for qualified personnel, particularly in 
software development, network engineering and product management. 

       WE DEPEND ON THIRD PARTIES FOR EQUIPMENT, INSTALLATION AND PROVISION 
OF FIELD SERVICE

       We currently plan to purchase all of our equipment from many vendors 
and outsource the majority of the installation and field service of our 
networks to third parties.  Our reliance on third party vendors involves a 
number of risks, including the absence of guaranteed capacity and reduced 
control over delivery schedules, quality assurance, production yields and 
costs.  If any of our suppliers reduces or interrupts its supply, or if any 
significant installer or field service provider interrupts its service to us, 
this reduction or interruption could disrupt our business.  

                                     19

<PAGE>

Although multiple manufacturers currently produce or are developing equipment 
that will meet our current and anticipated requirements, our suppliers may be 
unable to manufacture and deliver the amount of equipment we order, or the 
available supply may be insufficient to meet our demand.  Currently, almost 
all of the DSL modem and DSL multiplexing equipment we use for a single 
connection over a copper line must come from the same vendor since there are 
no existing interoperability standards for the equipment used in our higher 
speed services.  If our suppliers or licensors enter into competition with 
us, or if our competitors enter into exclusive or restrictive arrangements 
with the suppliers or licensors, then these events may materially and 
adversely affect the availability and pricing of the equipment we purchase 
and the technology we license.  

       A SYSTEM FAILURE OR BREACH OF NETWORK SECURITY COULD CAUSE DELAYS OR 
INTERRUPTIONS OF SERVICE TO OUR CUSTOMERS

       Our operations depend on our ability to avoid damages from fires, 
earthquakes, floods, power losses, excessive sustained or peak user demand, 
telecommunications failures, network software flaws, transmission cable cuts 
and similar events.  A natural disaster or other unanticipated problem at our 
owned or leased facilities could interrupt our services.  Additionally, if an 
incumbent carrier, competitive carrier or other service provider fails to 
provide the communications capacity we require, as a result of a natural 
disaster, operational disruption or any other reason, then this failure could 
interrupt our services.  

       Despite the implementation of security measures, our network may be 
vulnerable to unauthorized access, computer viruses and other disruptive 
problems.  Corporate networks and Internet Service Providers have in the past 
experienced, and may in the future experience, interruptions in service as a 
result of accidental or intentional actions of Internet users, current and 
former employees and others.  Unauthorized access could also potentially 
jeopardize the security of confidential information stored in the computer 
systems of our customers, which might cause us to be liable to our customers, 
and also might deter potential customers.  Eliminating computer viruses and 
alleviating other security problems may require interruptions, delays or 
cessation of service to our customers and our customers' end users.  

       INTERFERENCE OR CLAIMS OF INTERFERENCE COULD DELAY OUR ROLLOUT OR HARM 
OUR SERVICES

       All transport technologies deployed on copper telephone lines have the 
potential to interfere with, or to be interfered with by, other transport 
technologies on the copper telephone lines.  We believe that our DSL 
technologies, like other transport technologies, do not interfere with 
existing voice services.  We believe that a workable plan that takes into 
account all technologies could be implemented in a scalable way across all 
incumbent carriers using existing plant engineering principles.  There are 
several initiatives underway to establish national standards and principles 
for the deployment of DSL technologies.  We believe that our technologies can 
be deployed consistently with these evolving standards.  Nevertheless, 
incumbent carriers may claim that the potential for interference permits them 
to restrict or delay our deployment of DSL services.  Interference could 
degrade the performance of our services or make us unable to provide service 
on selected lines.  The procedures to resolve interference issues between 
competitive carriers and incumbent carriers are still being developed, and 
these procedures may not be effective.  We may be unable to successfully 
negotiate interference resolution procedures with incumbent carriers.  
Moreover, incumbent carriers may make claims regarding interference or 
unilaterally take action to resolve interference issues to the detriment of 
our services.  State or federal regulators could also institute responsive 
actions.  Interference, or claims of interference, if widespread, would 
adversely affect our speed of deployment, reputation, brand image, service 
quality and customer satisfaction and retention.  

       WE DEPEND ON THIRD PARTIES FOR FIBER OPTIC TRANSPORT FACILITIES

       We depend on the availability of fiber optic transmission facilities 
from third parties to connect our equipment within and between metropolitan 
areas.  These third party fiber optic carriers include long distance 
carriers, incumbent carriers and other competitive carriers.  Many of these 
entities are, or may become, our competitors.  This approach includes a 
number of risks.  For instance, we may be unable to negotiate and renew 
favorable supply agreements. Further, we depend on the timeliness of these 
companies to process our orders for customers who seek to use our services.  
We have in the past experienced supply problems with certain of our fiber 
optic suppliers, and they may not be able to meet our needs on a timely basis 
in the future.  Moreover, the fiber optic transport providers whose networks 
we lease may be unable to obtain or maintain permits and rights-of-way 
necessary to develop and operate existing and future networks.  

                                     20

<PAGE>

       UNCERTAIN FEDERAL AND STATE TAX AND OTHER SURCHARGES ON OUR SERVICES 
MAY INCREASE OUR PAYMENT OBLIGATIONS

       Telecommunications providers pay a variety of surcharges and fees on 
their gross revenues from interstate and intrastate services.  The division 
of our services between interstate and intrastate services is a matter of 
interpretation, and in the future the Federal Communications Commission or 
relevant state commission authorities may contest this division.  A change in 
the characterization of the jurisdiction of our services could cause our 
payment obligations to increase.  In addition, pursuant to periodic revisions 
by state and federal regulators of the applicable surcharges, we may be 
subject to increases in the surcharges and fees currently paid.  

       OUR INTELLECTUAL PROPERTY PROTECTION MAY BE INADEQUATE TO PROTECT OUR
PROPRIETARY RIGHTS, AND WE MAY BE SUBJECT TO INFRINGEMENT CLAIMS

       We rely on a combination of licenses, confidentiality agreements and 
other contracts to establish and protect our technology and other 
intellectual property rights.  We have applied for trademarks and 
servicemarks on certain terms and symbols that we believe are important for 
our business.  We currently have no patents or patent applications pending.  
The steps we have taken may be inadequate to protect our technology or other 
intellectual property.  Moreover, our competitors may independently develop 
technologies that are substantially equivalent or superior to ours.  Third 
parties may assert infringement claims against us and, in the event of an 
unfavorable ruling on any claim, we may be unable to obtain a license or 
similar agreement to use technology we rely upon to conduct our business.  We 
also rely on unpatented trade secrets and know-how to maintain our 
competitive positions, which we seek to protect, in part, by confidentiality 
agreements with employees, consultants and others.  However, these agreements 
may be breached or terminated, and we may not have adequate remedies for any 
breach.  In addition, our competitors may otherwise learn or discover our 
trade secrets.  Our management personnel were previously employees of other 
telecommunications companies.  In many cases, these individuals are 
conducting activities for us in areas similar to those in which they were 
involved prior to joining us.  As a result, we or our employees could be 
subject to allegations of violation of trade secrets and other similar 
claims.  

       RISKS ASSOCIATED WITH POTENTIAL GENERAL ECONOMIC DOWNTURN

       In the last few years the general health of the economy, particularly 
the economy of California where we have conducted a significant portion of 
our operations to date, has been relatively strong and growing, a consequence 
of which has been increasing capital spending by individuals and growing 
companies to keep pace with rapid technological advances.  To the extent the 
general economic health of the United States or of California declines from 
recent historically high levels, or to the extent individuals or companies 
fear a decline is imminent, these individuals and companies may reduce 
expenditures such as those for our services.  Any decline or concern about an 
imminent decline could delay decisions among certain of our customers to roll 
out our services or could delay decisions by prospective customers to make 
initial evaluations of our services.  Any delays would have a material and 
adverse effect on our business, prospects, operating results and financial 
condition.  

       WE MAY BE UNABLE TO SATISFY, OR MAY BE ADVERSELY CONSTRAINED BY, THE 
COVENANTS IN OUR EXISTING DEBT SECURITIES

       The indentures for our senior discount notes issued in May 1998 and 
our senior notes issued in April 1999 impose significant restrictions on how 
we can conduct our business.  For example, the restrictions prohibit or limit 
our ability to incur additional debt, make dividend payments and engage in 
certain business activities.  The restrictions may materially and adversely 
affect our ability to finance future operations or capital needs or conduct 
additional business activities.  Any future senior debt that we may incur 
will likely impose additional restrictions on us.  If we fail to comply with 
any existing or future restrictions, we could default under the terms of the 
applicable debt and be unable to meet our debt obligations.  If we default, 
the holders of the applicable debt could demand that we pay the debt, 
including interest, immediately.  We may be unable to make the required 
payments or raise sufficient funds from alternative sources to make the 
payments.  Even if additional financing is available in the event that we 
default, it may not be on acceptable terms.  

                                     21

<PAGE>

       OUR PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWN A SIGNIFICANT PERCENTAGE 
OF OUR COMPANY, AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR 
COMPANY

       Our executive officers and directors and principal stockholders 
together beneficially own over 81% of the total voting power of our company.  
Accordingly, these stockholders will be able to determine the composition of 
our Board of Directors, will retain the voting power to approve all matters 
requiring stockholder approval and will continue to have significant 
influence over our affairs.  This concentration of ownership could have the 
effect of delaying or preventing a change in our control or otherwise 
discouraging a potential acquirer from attempting to obtain control of us, 
which in turn could have a material and adverse effect on the market price of 
the common stock or prevent our stockholders from realizing a premium over 
the market prices for their shares of common stock.  

       OUR FAILURE AND THE FAILURE OF THIRD PARTIES TO BE YEAR 2000 COMPLIANT 
COULD NEGATIVELY IMPACT OUR BUSINESS

       Many computer programs have been written using two digits rather than 
four to define the applicable year.  This poses a problem at the end of the 
century because these computer programs may recognize a date using "00" as 
the year 1900 rather than the year 2000.  This, in turn, could result in 
major system failures or miscalculations, and is generally referred to as the 
"Year 2000 issue."  We have formulated and, to a large extent, effected a 
plan to address our Year 2000 issues.  

       Our Year 2000 plan applies to two areas: internal business systems and 
compliance by external customers and providers.  We have completed our Year 
2000 compliance testing for all of our internal systems and believe that they 
are Year 2000 compliant.  Because we are a young company, we believe we have 
been able to build our business systems with the Year 2000 issue in mind in a 
more effective manner than many older companies.  Therefore, there have been 
few Year 2000 changes required to our existing systems and applications.  We 
have substantially completed a compliance check of our external customers and 
providers, except for the incumbent carriers.  Based on responses from these 
third parties, other than the incumbent carriers, we believe that they will 
not experience Year 2000 problems that would materially and adversely affect 
our business.  We have not been able to conduct a compliance check of 
incumbent carriers nor assess the incumbent carriers' Year 2000 compliance.  
To the extent that one or more incumbent carriers or other third parties 
experience Year 2000 problems, our network and services could be adversely 
affected.  Furthermore, the purchasing patterns of our customers may be 
affected by Year 2000 issues as companies expend significant resources to 
correct their current systems for Year 2000 compliance.  These expenditures 
may result in reduced funds available for our services.  Any of these 
developments could have a material and adverse effect on our business, 
prospects, operating results and financial condition. We have not fully 
determined the risks associated with the reasonably worst-case scenario and 
have not formulated a contingency plan to address Year 2000 issues. We do not 
expect to have a specific contingency plan in place in the future.  

       IF WE ARE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY, WE WOULD 
BECOME SUBJECT TO SUBSTANTIAL REGULATION WHICH WOULD INTERFERE WITH OUR 
ABILITY TO CONDUCT OUR BUSINESS ACCORDING TO OUR BUSINESS PLAN

       As a result of our previous financings, we have substantial cash, cash 
equivalents and short-term investments.  We plan to continue investing the 
excess proceeds of these financings in short-term instruments consistent with 
prudent cash management and not primarily for the purpose of achieving 
investment returns.  Investment in securities primarily for the purpose of 
achieving investment returns could result in our being treated as an 
"investment company" under the Investment Company Act of 1940.  The 
Investment Company Act requires the registration of companies that are 
primarily in the business of investing, reinvesting or trading securities or 
that fail to meet certain statistical tests regarding their composition of 
assets and sources of income even though they consider themselves not to be 
primarily engaged in investing, reinvesting or trading securities.  

       We believe that we are primarily engaged in a business other than 
investing in or trading securities and, therefore, are not an investment 
company within the meaning of the Investment Company Act.  If the Investment 
Company Act required us to register as an investment company, we would become 
subject to substantial regulation with respect to our capital structure, 
management, operations, transactions with affiliated persons and other 
matters.  Application of the provisions of the Investment Company Act to us 
would materially and adversely affect our business, prospects, operating 
results and financial condition.  

                                     22

<PAGE>

       WE HAVE NOT PAID AND DO NOT INTEND TO PAY DIVIDENDS

       We have not paid any dividends, and we do not intend to pay cash 
dividends in the foreseeable future.  Our current financing documents contain 
provisions which restrict our ability to pay dividends.  

       THE TERMS OF OUR EXISTING DEBT MAY LIMIT OUR ABILITY TO ENTER INTO A 
CHANGE OF CONTROL TRANSACTION

       The indentures governing our senior discount notes issued in May 1998 
and our senior notes issued in April 1999 require us to offer to repurchase 
all such notes for 101% of their principal amount or accreted value, plus any 
accrued interest due, within 30 days after a change of control.  We might not 
have sufficient funds available at the time of any change of control to make 
any required payment, as well as any payment that may be required pursuant to 
any other outstanding indebtedness at the time, including our indebtedness to 
equipment financing lenders.  These covenants may also deter third parties 
from entering into a change of control transaction with us.  Furthermore, 
following the occurrence of certain change-of-control events, we must offer 
to repurchase for cash all of the outstanding warrants issued in connection 
with our senior discount notes issued in May 1998.

                                     23

<PAGE>

                             RHYTHMS NETCONNECTIONS INC.

                                       PART II
                                  OTHER INFORMATION



ITEM 1.  LEGAL PROCEEDINGS

We are currently a party to an arbitration proceeding between us and SBC 
Communications regarding the terms of interconnection with Southwestern Bell 
in Texas. This arbitration, instituted December 11, 1998, is pending before 
the Public Utility Commission of Texas. The dispute involves the terms and 
conditions of issues related to DSL-based services and loops in connection 
with our interconnection agreement with Southwestern Bell. We are seeking to 
compel Southwestern Bell to include in our interconnection agreement language 
comparable to that in our other interconnection agreements, which gives us 
the ability to obtain copper telephone lines on which we provide our chosen 
variety of DSL technologies. 

In addition, on March 12, 1999, our subsidiary ACI Corp. filed a complaint 
with the Oregon Public Utilities Commission (the "Oregon PUC") against U S 
West Communications regarding collocation matters. ACI has requested the 
Oregon PUC to intervene in an on-going dispute between ACI and U S West 
Communications regarding ACI's ability to collocate in three central offices 
located in Portland, Oregon pursuant to Section 251(c)(6) of the 1996 
Telecommunications Act. ACI has requested that the Oregon PUC make a 
determination that U S West Communications can, in fact, accommodate ACI's 
requests for collocation and, if such a determination is made, that the 
Oregon PUC immediately order U S West Communications to make space available 
to ACI on the terms and conditions set forth in the existing interconnection 
agreement between the companies. ACI has also sought monetary damages in an 
amount to be proven at a hearing to compensate for ACI's economic losses. No 
hearing date or schedule has yet been set for this proceeding. 

On February 18, 1999, we filed a complaint for declaratory relief in San 
Diego County Superior Court (North County) against Thomas R. Lafleur. Mr. 
Lafleur was a former employee who resigned and/or was terminated in 1998. 
After he left, we sent him a check for the repurchase or buy-back of his 
unvested shares; Mr. Lafleur refused to cash this check. The declaratory 
relief action is to determine that his shares were unvested and thus properly 
repurchased. On or about March 26, 1999, Mr. Lafleur filed an answer to the 
complaint and also filed a cross-complaint against us for fraud, breach of 
the covenant of good faith and fair dealing, conspiracy to inflict emotional 
distress, intentional infliction of emotional distress, conversion and 
declaratory relief. The cross-complaint seeks compensatory and punitive 
damages according to proof, and 438,115 shares of common stock. Mr. Lafleur 
alleges in his cross-complaint that since we failed to purchase his shares 
within 60 days following his termination, the terms of his stock purchase 
agreement prevent us from repurchasing his shares. We intend to vigorously 
defend against such cross-claims, and have filed a demurrer to the 
cross-complaint. We are currently accounting for these 438,115 shares as 
treasury stock. 

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

       (c)     The Registrant issued the following unregistered securities
       during the quarter ended March 31, 1999:

               (1)    In March 1999 the Registrant issued to MCI WorldCom
       Venture Fund, Inc. and to Microsoft Corporation 3,731,410 and
       3,731,409 shares of Series C preferred stock, respectively, and issued
       to each of them a warrant to purchase 720,000 shares of common stock for
       an aggregate purchase price of $60.0 million. 

                                     24

<PAGE>
               (2)    In March 1999 the Registrant issued to GATX Capital
       Corporation, warrants to purchase an aggregate of 45,498 shares of
       common stock with an exercise price per share of $10.55 in connection
       with an equipment lease financing. 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

No defaults upon senior securities occurred during the quarter ended March 31,
1999.

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

The following matters were submitted to a vote of security holders during the 
quarter ended March 31, 1999.  All share numbers are on an as-converted to 
common stock basis and give effect to the 6-for-5 forward stock split 
effected in March 1999.

       (1)     Effective February 26, 1999, the stockholders approved by written
       consent an amendment to the Registrant's certificate of incorporation
       to, among other things, (i) set the conversion price of the Series A and
       Series B Preferred Stock at their respective purchase prices as of the
       date of an amendment to the Restated Certificate of Incorporation and
       (ii) exclude from the definition of "Additional Stock" (with respect to
       antidilution adjustments) the shares of securities issued or issuable
       upon exercise of warrants issued in connection with a contemplated and
       any future private placements pursuant to Rule 144A of the Securities
       Act of 1933, as amended.  A total of 39,328,313 shares were voted in
       favor of this written consent.  Votes were not received with respect to
       the remaining 9,780,826 shares then outstanding.

       (2)     In connection with the sale of Series C preferred stock and a
       warrant to purchase shares of common stock to MCI WorldCom, the
       stockholders approved by written consent, effective March 1, 1999, a
       restatement of the Registrant's certificate of incorporation to, among
       other things, (i) authorize additional shares of preferred stock, (ii)
       designate shares of Series C preferred stock and (iii) provide for the
       rights, preferences and privileges of the Series C preferred stock.  A
       total of 37,849,193 shares were voted in favor of this written consent. 
       Votes were not received with respect to the remaining 11,259,946 shares 
       then outstanding.
       
       (3)     In connection with the sale of Series C preferred stock and a
       warrant to purchase shares of common stock to Microsoft Corporation, the
       stockholders approved by written consent, effective March 12, 1999, a
       restatement of the Registrant's certificate of incorporation to, among
       other things, (i) authorize additional shares of preferred stock and
       (ii) designate shares of Series C preferred stock.  A total of
       42,326,885 shares were voted in favor of this written consent.  Votes
       were not received with respect to the remaining 11,259,946 shares then
       outstanding.
       
       (4)     Effective March 16, 1999, the stockholders approved by written
       consent the adoption of the Registrant's 1999 Stock Incentive Plan and
       the reservation of 7,440,000 shares of common stock for issuance under
       such plan.  The stockholders also approved an automatic annual increase
       in the number of shares reserved under such plan in an amount equal to
       two percent (2%) of the total number of shares of common stock
       outstanding on the last trading day in December of the immediately
       preceding year, provided that no such annual increase shall exceed
       1,440,000 shares.  The stockholders also approved the adoption of the
       Registrant's 1999 Employee Stock Purchase Plan and the reservation of
       1,200,000 shares of common stock for issuance under such plan, with an
       automatic annual increase in such number of reserved shares in an amount
       equal to one percent (1%) of the total number of shares of common stock
       outstanding on the last trading day in December of the immediately
       preceding year, provided that no such annual increase shall exceed
       780,000 shares.  A total of 42,566,885 shares were voted in favor of 
       this written consent.  Votes were not received with respect to the 
       remaining 16,124,727 shares then outstanding.
       
       (5)     Effective March 17, 1999, the stockholders approved by written
       consent an amendment to the Registrant's certificate of incorporation to
       effect a 6-for-5 forward stock split.  A total of 42,566,885 shares 

                                     25

<PAGE>

       were voted in favor of this written consent.  Votes were not received
       with respect to the remaining 16,124,727 shares then outstanding.
       
       (6)     Effective March 25, 1999, the stockholders approved by written
       consent an amendment to the Registrant's bylaws to (i) implement a
       staggered system of electing directors, pursuant to which the directors
       were classified into three classes, with terms of offices of the first,
       second and third classes of directors to expire in 2000, 2001 and 2002,
       respectively, and with directors elected to each respective class
       thereafter to serve three-year terms and (ii) to amend the provision
       relating to the determination of the size of the board of directors such
       that, within the range proscribed (between 7 and 10 directors and
       initially set at 8), the size of the board can be fixed by resolution of
       66-2/3% of the directors then in office or by the vote of 66-2/3% of the
       stockholders at the annual meeting of stockholders.  A total of
       48,196,579 shares were voted in favor of this written consent.  Votes
       were not received with respect to the remaining 10,495,033 shares then
       outstanding.
       
       (7)     Effective March 26, 1999, the stockholders approved by written
       consent the form of Restated Certificate of Incorporation and form of
       Restated Bylaws to become effective immediately prior to the closing of
       the Registrant's initial public offering (which was consummated on April
       12, 1999).  A total of 48,196,576 shares were voted in favor of this
       written consent.  Votes were not received with respect to the remaining
       10,932,616 shares then outstanding.
       
       (8)     Effective March 27, 1999, the stockholders approved by written
       consent an amendment to the Registrant's 1997 Stock Option/Stock
       Issuance Plan to increase the authorized number of shares for issuance
       under such plan by 500,000.  The stockholders also approved an increase
       in the number of shares of common stock to be available for issuance
       under the Restated Certificate of Incorporation to become effective
       immediately prior to the closing of the Registrant's initial public
       offering (which was consummated on April 12, 1999).  A total of
       47,044,576 shares were voted in favor of this written consent.  Votes
       were not received with respect to the remaining 12,084,616 shares then
       outstanding.
       
       (9)     In connection with the sale of Series C preferred stock, Series D
       preferred stock and a warrant to purchase shares of common stock to
       Qwest Communications Corporation, the stockholders approved by written
       consent, effective March 31, 1999, a restatement of the Registrant's
       certificate of incorporation to, among other things, (i) authorize
       additional shares of preferred stock, (ii) authorize additional shares
       of Series C preferred stock (iii) designate shares of Series D preferred
       stock and (iv) provide for the rights, preferences and privileges of the
       Series D preferred stock.  A total of 47,044,576 shares were voted in
       favor of this written consent.  Votes were not received with respect to
       the remaining 12,090,616 shares then outstanding.


ITEM 5.  OTHER INFORMATION

Not applicable.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

       (a)     Exhibits:

               27.1   Financial Data Schedule
               

       (b)     Reports on Form 8-K: 

               There have been no reports on Form 8-K filed during the quarter
               ended March 31, 1999.

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<PAGE>

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



  /s/  SCOTT C. CHANDLER                     
----------------------------------------------------
Scott C. Chandler
Chief Financial Officer and Executive Vice President
(Principal Financial and Accounting Officer)

May 17, 1999

                                     27