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

                                    FORM 10-K

(MARK ONE)

/X/  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                       OR

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

FOR THE TRANSITION PERIOD FROM _____ TO _____

                             COMMISSION FILE NUMBER:
                                    333-39646

                                 VELOCITA CORP.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

          DELAWARE                                       52-2197932
(STATE OR OTHER JURISDICTION OF             (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

                       2941 FAIRVIEW PARK DRIVE, SUITE 200
                          FALLS CHURCH, VIRGINIA 22042
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

                                 (703) 564-7200
               (REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.

        SECURITIES REGISTERED PURSUANT TO SECTION 12(c) OF THE ACT: NONE.

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

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

The number of shares of the registrant's common stock outstanding as of March
31, 2002 was 80,000,000.

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     ALL REFERENCES IN THIS REPORT TO "WE", "US", "OUR" OR THE "COMPANY" ARE TO
VELOCITA CORP. AND ITS SUBSIDIARIES.

                       DOCUMENTS INCORPORATED BY REFERENCE

None.

                                     PART I

ITEM 1.   BUSINESS

     Please see the Glossary of Terms at the end of this Item 1 for definitions
of certain terms used in this Report.

RECENT CHANGES TO THE BUSINESS, CREDIT AGREEMENT DEFAULTS AND POSSIBLE
RESTRUCTURING

     As of March 31, 2002, we were not in compliance with certain financial
covenants under our credit agreement. On March 28, 2002, we obtained a waiver
from our banking group through April 15, 2002, and on April 15, 2002 this
waiver was extended through April 30, 2002 (the "Waiver"). Because of these
financial covenant breaches, significant financial pressures facing us and
the telecommunications industry, and the need for additional capital to
complete our network build, we are considering various financial and
strategic alternatives. These alternatives include restructuring our debt,
the sale to one or more strategic investors, the sale or other disposition of
substantially all of our business or assets, and filing for protection under
Chapter 11 of the United States Bankruptcy Code. Pending a final
determination regarding our financial and strategic alternatives, it is
likely that we will elect to cease paying interest on our outstanding senior
notes. Additionally, we have scaled back our business plan because of our
financial situation and industry conditions.

     The Waiver requires us to comply with other covenants in the credit
agreement and to forego further borrowing under the revolving credit portion
of our credit agreement. In addition, during the waiver period, PF.Net Corp.,
our wholly-owned subsidiary, is prohibited from making any restricted
payments (as defined under our credit agreement), other than restricted
payments to Velocita Corp. to be used to fund operating and administrative
expenses. This restriction, if it were to apply on an interest payment date
for purposes of our senior notes, would prohibit PF.Net Corp. from making
cash payments to Velocita Corp. necessary for us to pay interest on the
senior notes. During the waiver period, we are continuing discussions with
our bank lenders regarding modification of the terms of our credit agreement.
If we do not obtain an amendment, or an additional waiver, to our credit
agreement, we will be in default of our credit agreement and our lenders
could elect to accelerate and make all of the outstanding indebtedness under
the credit agreement due and payable immediately. As a result of these
defaults, all of the obligations under the credit agreement have been
reclassified as current liabilities. As of April 15, 2002, we had
approximately $380 million of indebtedness (including outstanding letters of
credit) outstanding under the credit agreement. In the event of an
acceleration, we would be unable to repay that indebtedness and, unless we
cure the defaults, the credit agreement lenders could seek a judgment and
attempt to seize our assets to satisfy the debt to them. Accordingly, we may
be required to file for protection under Chapter 11 of the United States
Bankruptcy Code. We are unable to predict if we will be able to obtain the
necessary modifications of our credit agreement from our banks.


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     In May 2001, in connection with the execution of a supply agreement with
Cisco Systems, Inc., we completed a $200 million senior preferred stock offering
to Cisco, and amended our credit agreement to provide for $285 million of vendor
financing from Cisco Systems Capital Corporation. During 2001 and early 2002, we
also pursued various merger and acquisition opportunities, including purchasing
troubled telecommunications companies and combining with other, larger
telecommunication companies, that could have provided additional customers and
increased our revenue base and minimized our capital expenditures. Other than
the Cisco transactions, we have not yet implemented such a strategic
transaction. In July 2001, we initiated various efforts to minimize our capital
and operating expenditures. These efforts included delaying certain planned
construction routes, eliminating or deferring planned fiber purchases and
reducing our staff.

     During 2001, we worked on a consulting basis with UBS Warburg LLC as part
of our effort to explore various merger and acquisition and fund-raising
opportunities. In February 2002, we finalized the terms of our arrangement
with UBS and we engaged Impala Partners, LLC to advise us regarding strategic
alternatives. At our request, UBS prepared solicitation materials and
contacted potential investors, both strategic and financial, as part of our
continuing effort to raise new capital and solicit strategic partners. We
continue to explore alternatives for funding from potential investors and
transactions with strategic partners, however, to date we have not obtained
any commitments.

     In February 2002, we announced layoffs to reduce our total staff to 55
employees, eliminated the majority of our sales and marketing staff and
curtailed efforts to establish new resale customers. These steps are part of
a scaled-back business plan pursuant to which we are focusing our efforts on
completing construction, dark fiber sales, merger and acquisition and
fund-raising activities, and scaled-back operations to support these
activities. We have chosen to initially light only 2,400 miles of our
network. After the initial lighting, we will implement a success-based
lighting plan, whereby we will only light segments of our network for which
we have enough capacity demand to generate sufficient revenue to recover our
costs and a targeted return on investment. In addition, our scaled-back
network will consist of approximately 14,050 route miles and 55 points of
presence, or POPs, rather than the roughly 20,000 route miles and 67 POPs
previously contemplated for our network. Because we are scaling back our
network and our business plan in the near term, we will be required to
restructure our relationships with suppliers and customers, and we cannot
assure you that we will be able to complete such restructuring on terms
satisfactory to us. If market conditions continue to deteriorate, we may
further reduce the scope of our network.

     As of March 31, 2002, we had approximately 5,100 route miles of conduit in
the ground and 4,000 route miles of fiber-optic cable installed, of which
approximately 2,400 route miles are lit. We are currently scheduled to complete
construction of the majority of the 6,400-mile constructed portion of our
network by late-2002.

     We currently estimate that we need a minimum of between $140 million and
$160 million to complete construction of our planned 14,050-mile network.
This does not include amounts that will be needed to fund operating losses
through the date of completion and beyond, amounts required to service our
existing debt and any amounts payable under our contractual purchase
obligations beyond our currently planned network. As of March 31, 2002, we
had $63 million of cash on hand. We do not expect that we will be able to
borrow additional funds under our credit agreement unless we are able to
amend that agreement. We expect to receive approximately $150 million through
the fourth quarter of 2003 from payment obligations from AT&T, Touch America,
and other dark fiber sales for which we have contractual obligations.
However, these are mostly "progress" payments that are required to be made as
we deliver, and are subject to completion of, sections of our network, and
therefore the payments corresponding to the completion of a

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particular section may not be relied upon as a source of funds for completion of
that section. In addition, we cannot assure you that these parties will make any
payments due prior to completion of our network in a timely fashion or at all.

     We will continue to focus efforts on dispositions of dark fiber and conduit
to help finance continued construction. However, we cannot adequately predict
the future volume, if any, of such dispositions and the sale prices of dark
fiber and conduit. On June 6, 2000, in connection with an amendment to our
supply agreement with Lucent Technologies, Lucent committed to purchase dark
fiber of up to $100 million to compensate us if we fell short of our
objective to sell a targeted amount of dark fiber by July 31, 2002. We
anticipate having a shortfall of more than $100 million on July 31, 2002 and
have notified Lucent that we intend to exercise our rights under this
agreement. We believe this commitment will be subject to dispute by Lucent.
We cannot predict the outcome if Lucent disputes this obligation.

     We have entered into various fixed-cost construction contracts with
third party construction companies to build our fiber optic network and
related facilities and these construction companies rely on numerous
subcontractors to fulfill their construction obligations. Although we have
made timely payments to our construction companies, during 2001 some of
our construction companies defaulted on their payment obligations to
subcontractors and/or did not pay subcontractors in a timely manner. This
resulted in some work slowdowns and work stoppage along selected routes. The
slowdowns and stoppage continued until the subcontractors were paid in full
for their work and received assurances they would be paid for future
services. We expect that additional work slow-downs and stoppage may occur
as a result of current economic conditions, continued weakness in the
telecommunications sector, and liquidity problems facing many of our
construction companies and their subcontractors.

     We anticipate that unless we are able to amend our credit agreement,
restructure our relationships with key suppliers and customers, and/or identify
a potential strategic or financial investor in the relatively near term, it may
be necessary for Velocita and some or all of its subsidiaries to file a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the
second quarter of 2002. If we commence a bankruptcy proceeding, it is likely
that our senior notes will suffer significant impairment.

     If we are unable to obtain sufficient funding and/or negotiate a successful
debt restructuring, whether or not we file a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code, we may have to sell strategic assets
or take other measures, which could include liquidation of our assets.
Additionally, we could experience adverse impacts to our business, including
but not limited to, loss of key construction vendors or suppliers, losses of
customer accounts (including dark fiber customers), and loss of key
management personnel. We may also lose government and regulatory support for
various initiatives, including rights to build on federally owned land, that
we believe are critical to our success.

     For further discussion of these matters, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7 of this
Report. See also "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Risk Factors" in Item 7 of this Report for a summary
of risks related to our business in general and to these matters in particular.

RECENT MANAGEMENT AND DIRECTOR CHANGES

     David L. Taylor, our Chief Financial Officer and Treasurer since October
1, 1999, resigned effective February 18, 2002. Donald W. Bolar, the President
of PF.Net Network Services, Inc. since April 12, 2000, was notified on
February 28, 2002, that his position was being eliminated effective April 29,
2002. Joseph W. Moeller, a Director of Velocita Corp. since October

                                        4
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1999, designated by Koch Telecom Ventures, resigned on March 27, 2002. Ammar
Hanafi and William Nuti, Directors of Velocita Corp. since May 2001, designated
by Cisco Systems, Inc., resigned on April 10, 2002.

OVERVIEW

     Velocita is currently developing a 14,050 route mile, nationwide
fiber-optic network which passes through over 160 cities and 35 of the top 50
Metropolitan Statistical Areas ("MSAs") in the United States. We plan to
finish construction of the network, if current and additional funding
permits. When the demand for such services improves, we plan to become a
facilities-based provider of fiber-optic network infrastructure, broadband
capacity and data communications services throughout the United States. We
are assembling our low-cost, upgradeable nationwide fiber-optic network
through joint construction arrangements, fiber and conduit swap, and sales
and purchases. We are constructing approximately 6,400 miles of our network
and acquiring 5,300 miles of our network through swap agreements. Previously
we had contemplated, and entered into agreements with customers and suppliers
with respect to, a 20,500-mile network. We will need to restructure certain
of these agreements in order to implement our currently planned 14,050-mile
network. The constructed portion of our network will include substantial
fiber and empty conduit. We may expand our network over time through swaps
and sales of fiber and conduit, fiber and conduit purchases and additional
joint construction arrangements.

     On October 29, 1999, we entered into an agreement with AT&T to build
approximately one-half of the outsourced portion of AT&T's state-of-the-art
fiber-optic network. The construction contemplated by the AT&T network
development agreement, as amended in May 2000, December 2000, July 2001, October
2001 and December 2001, will represent approximately 6,100 miles of the
6,400-mile constructed portion of our network, connecting important metropolitan
areas along AT&T's network. We believe that this agreement provides us with many
business, operational and marketing advantages. AT&T is reimbursing us for their
portion of construction costs, thus reducing our overall network construction
costs. In addition, we are designing and constructing this portion of the
network to AT&T's specifications, which will ensure network quality and
reliability and provide us with a key marketing advantage in offering our
services. AT&T has also agreed to provide its private rights of way for use on
the AT&T portion of our network. We have sold and leased and continue to sell or
lease excess dark fibers along all 6,400 miles of our constructed network, which
will further reduce our overall network construction costs.

     On February 25, 2000, we entered into a conduit and fiber swap agreement
with Touch America that will provide us with a combination of fiber and conduit
over an additional 4,500 route miles of our network and approximately $48.5
million in cash (subject to adjustment) in exchange for a combination of fiber
and conduit over approximately 5,900 route miles of our network. Touch America
is constructing most of these route miles pursuant to a joint construction
agreement with AT&T similar to our agreement with AT&T. We expected to complete
the swap transaction before December 31, 2001. Velocita Corp. and Touch America
experienced force majeure construction delays on certain routes to be swapped.
We have delayed completing the swap with Touch America pending completion of
construction by both parties, currently anticipated for the first quarter of
2003.

     On December 9, 2000, our wholly-owned subsidiary, PF.Net Corp., entered
into an agreement with AT&T Corp. (amended and restated in July 2001 and
amended in December 2001) to purchase fibers from AT&T (or rights to use such
fibers on certain routes) on approximately, 8,850 route-miles. Such agreement
also provides for colocation at AT&T points of presence and optical amplifier
huts along the routes, maintenance of the network and certain other services,
and an option for PF.Net to install, at our incremental cost of installation,
additional fibers to triple our fiber count along roughly 90% of the same
route-miles in the event AT&T chooses to install additional fibers on such
routes. The agreement provides that the total

                                        5
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cost for this acquisition will be approximately $106 million payable as we
acquire fiber along these routes. (See "Our Network-General-Dark Fiber
Acquisition" for link mileage and scheduled completion dates.) In 2001, PF.Net
Corp. made $21.2 million in payments related to this agreement.

     We will need to restructure this agreement to implement our new business
plan which assumes that we will only be purchasing approximately 2,400 of the
miles subject to this agreement. We cannot assure you that we will be able to
complete such restructuring on terms satisfactory to us. If market conditions
and our liquidity improve and we decide to expand our network, we would likely
seek to acquire some or all of the additional miles subject to this agreement.
However, if our scaled-back network has resulted in a restructuring or violation
of this agreement, we cannot assure you that these additional miles will still
be available to us.

     On April 12, 2001, PF.Net Corp., a wholly-owned subsidiary of Velocita
Corp. ("Velocita") entered into an agreement (the "Supply Agreement") with
Cisco Systems, Inc. ("Cisco") pursuant to which Cisco supplies optronics and
data internetworking equipment for Velocita's fiber-optic network. All of the
provisions of this agreement became effective on May 24, 2001. Under the
Supply Agreement, we also entered into a "take-or-pay" obligation with Cisco
through May 2003 with respect to $225 million of equipment and services. We
do not expect our scaled-back network to require $225.0 million of such
equipment and services. See "Description of Material Agreements--Cisco Supply
Agreement."

     We have executed fixed-price, performance-bonded construction contracts
with a number of third-party contractors for substantially the entire
constructed portion of our network. In January 2000, construction began on
segments of our network. As of March 31, 2002, we had approximately 5,100 route
miles of conduit in the ground and 4,000 route miles of fiber-optic cable
installed, of which approximately 2,400 route miles are lit. We are currently
scheduled to complete construction of the majority of the 6,400-mile constructed
portion of our network by late-2002. This 6,400-mile portion of our network will
generally consist of between 96 to 144 fibers and three empty conduits, some of
which we have committed to swap in the Touch America transaction and other sales
transactions.

     We have a limited operating history. The development, construction and
expansion of our network will require significant capital to be invested before
any material revenue is generated. We expect to continue to incur significant
and increasing operating losses and negative EBITDA while we construct our
network and develop a customer base. We expect to generate cash proceeds from
dispositions of dark fiber and conduit rights in order to finance a portion of
our network construction costs. However, we do not anticipate significant
recurring revenues from sales of broadband on-net services for the foreseeable
future. In order for us to meet our strategic objectives, we must complete the
6,400 constructed miles of our network according to our build schedule. In
addition, we will rely upon Touch America and other fiber swap partners for
timely completion of the segments of our network we will receive from them.

     We anticipate that unless we are able to amend our credit agreement,
restructure our relationships with key suppliers and customers, and/or identify
a potential strategic or financial investor in the relatively near term, it may
be necessary for Velocita and some or all of its subsidiaries to file a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the
second quarter of 2002. See "Recent Changes To The Business, Credit Agreement
Defaults and Possible Restructuring" within Item 1 of this Report and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Significant Developments in 2001" within Item 7 of this Report.

BUSINESS STRATEGY

     Key elements of our business strategy include:

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ESTABLISH A TECHNOLOGICALLY ADVANCED, UPGRADEABLE HIGH-CAPACITY NETWORK

     We have designed our network to be among the most advanced,
cost-competitive, high-capacity networks in the United States. The network
has been designed specifically to support high-speed data, video and
value-added applications. The lit portion of the network is powered with
Cisco optical equipment providing bandwidth speeds ranging from DS-1 to
OC-192, and the network is capable of operating at speeds of up to OC-768 as
that technology becomes available. Our network predominantly uses
state-of-the-art Lucent TrueWave -Registered Trademark- RS optical fiber
designed to accommodate the latest DWDM transmission technology. A
substantial portion of our network includes empty conduit and a significant
number of fibers. Lucent TrueWave -Registered Trademark- RS fiber allows for
the deployment of equipment that transmits signals on up to 160 or more
individual wavelengths of light, or "windows," per strand, thereby
significantly increasing capacity relative to older fiber products, which
generally transmit fewer wavelengths of light per strand. See "Recent Changes
To The Business, Credit Agreement Defaults and Possible Restructuring" within
Item 1 of this Report.

LEVERAGE OUR RELATIONSHIP WITH AT&T

     We plan to maximize the benefits of our relationship with AT&T by
continuing to capitalize on:

     -    the shared cost basis on which we and AT&T are constructing and
          maintaining network facilities, meaningfully reducing our construction
          costs for the 6,100 miles of our network covered by the AT&T network
          development agreement;

     -    AT&T's reputation for stringent quality control standards, which we
          believe will provide us with significant marketing benefits;

     -    AT&T's existing private rights of way along approximately 40% of the
          6,400-mile constructed portion of our network, which has allowed us
          to accelerate our construction schedule and reduce costs; and

     -    the proximity of our points of presence to AT&T's points of presence.

OFFER A FOCUSED RANGE OF PRODUCTS AND SERVICES

     We are following a focused product roll-out plan which is intended to limit
capital expenditures and operating expenses. Accordingly, for the remainder of
2002, we plan to offer dark fiber, conduit, colocation, maintenance services and
selected broadband products to existing and strategic customers on the lit
portion of the network. Beginning in 2003, we may begin to offer high-bandwidth
broadband service (OC-3, OC-12, OC-48, wavelength) and gigabit Ethernet
services, lighting segments of the network as demand is generated if market
conditions warrant such service offerings. However, we may offer these services
sooner if there is demand based on our success-based lighting strategy.

     -    DARK FIBER AND CONDUIT RIGHTS, AND BANDWIDTH IRUS. We market dark
          fiber strands, conduit and bandwidth IRUs to regional and nationwide
          communications companies, internet service providers, or ISPs,
          corporate and governmental entities and other buyers of network
          capacity, which may either purchase or lease them on a long-term basis
          to increase their data transmission capacity in areas where they
          experience capacity constraints, expand their business geographically,
          or satisfy a need for redundant capacity.

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     -    COLOCATION AND MAINTENANCE SERVICES. We offer space, technical support
          and 24-hour-a-day, seven-day-a-week maintenance services at some of
          our facilities to customers that need safe technical operating
          environments for their communications and networking equipment. In
          addition, we offer 24-hour-a-day, seven-day-a-week surveillance,
          troubleshooting, customer service and maintenance on our network.

     -    SELECT BROADBAND PRODUCTS. We are capable of offering optical wave and
          SONET services on the lit portion of our network, which currently
          spans 2,400 route miles. If additional segments are lit, we will be
          able to offer these services in additional markets. The DWDM
          technology installed on these portions of the network allow us to
          offer up to 10 Gbps optical wave services to customers. Optical wave
          services allow a customer to purchase lit capacity for a fixed period
          of time, while retaining similar control advantages of outright dark
          fiber ownership.

TAKE ADVANTAGE OF OUTSOURCING OPPORTUNITIES

     We are establishing a high quality fiber optic network through the use of
joint construction arrangements, our access to private rights of way,
fixed-cost construction contracts with third-party construction companies and
fiber and conduit sales and swaps. We have used rights of way contributed by
AT&T for approximately 40% of the 6,400-mile constructed portion of our
network, which will reduce our construction costs because substantially all
of AT&T's rights of way are already perfected for telecommunication use. In
addition, we have entered into fixed-cost construction contracts with
third-party construction companies for substantially all of the 6,400-mile
constructed portion of our network. These subcontractors are overseen by our
construction team that includes project managers with significant prior
experience in managing the construction of pipeline networks and managers who
participated in the construction of telecommunications networks for other
major telecommunications companies.

 EMPLOY RIGHTS OF WAY THAT PROVIDE ROUTE DIVERSITY

     Telecommunications carriers require redundant paths throughout their
networks to provide reliability in the event of an equipment failure, a break
in one of their fiber lines or other outage. In order to ensure the required
redundancy, telecommunications carriers typically build, swap or lease
capacity along fiber routes that do not share a common point of potential
failure. While many of our competitors' networks share common rights of way,
a substantial portion of our network is being built on diverse private rights
of way. These diverse private rights of way are more secure than public
rights of way, less vulnerable to third-party construction interruptions and
will enable us to provide true route diversity to our customers.

EXPAND OUR NETWORK OVER THE LONG TERM

     We will continue to evaluate swap opportunities and strategic transactions
that would expand our network to major metropolitan areas not covered by our
planned 14,050 miles that we otherwise would be required to purchase or
construct. We intend to use the substantial excess conduit and fiber capacity we
are installing along the 6,400 constructed miles of our network to facilitate
conduit and fiber swaps. We believe that these fiber strands and empty conduits
will provide us with sufficient excess capacity to expand our network beyond the
planned 14,050 miles if we decide at a later date that such expansion is
appropriate.

     See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" in Item 7 of this
Report.

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OUR NETWORK

GENERAL

     We are assembling a low-cost, upgradeable nationwide fiber-optic
network. We are constructing approximately 6,100 miles of the 6,400-mile
constructed portion of our network pursuant to the AT&T network development
agreement. The Touch America swap agreement will extend our network by
approximately 4,500 miles, other swap agreements will add 700 miles and we
plan to add an additional 2,400 miles subject to the AT&T fiber purchase
agreement.

     The following chart shows the major routes along the 6,400-mile
constructed portion of our network, the additional 4,500 miles that we will
receive from Touch America, the additional 700 miles from other swaps and the
2,400 miles of network that will be added pursuant to the AT&T fiber purchase
agreement, along with a breakdown of mileage and currently scheduled dates by
which these routes will be substantially complete. Through our own
constructed and partner provided POPs, our network will have access to over
160 metropolitan areas in the continental United States, including 35 of the
top 50 MSAs.

<Table>
<Caption>
ROUTE END POINTS                                          APPROXIMATE ROUTE     SCHEDULED SUBSTANTIALLY
                                                               MILEAGE               COMPLETE DATE
<S>                                                                  <C>        <C>
CONSTRUCTED PORTION
Houston--Jacksonville..............................                   1,017     Complete
Jacksonville--Orlando..............................                     174     Complete
Ellisville--Fort Pierce/Orlando....................                     394     Fourth Quarter, 2002 (1)
Los Angeles--Houston...............................                   2,208     Second Quarter, 2003 (1)
Jacksonville--Newark...............................                   1,753     Fourth Quarter, 2002 (1)
Dallas--St. Louis..................................                     816     Complete
In City Miles......................................                      19     Various
                                                                    -------
TOTAL MILEAGE OF THE CONSTRUCTED PORTION
OF OUR NETWORK.....................................                   6,381
                                                                    -------
TOUCH AMERICA PORTION
Chicago--Denver....................................                   1,107     (2)
Denver--Salt Lake City.............................                     656     (2)
Salt Lake City--Sacramento.........................                     803     (2)
Chicago--Minneapolis...............................                     514     (2)
Chicago--Detroit...................................                     382     (2)
Denver--Dallas.....................................                   1,075     (2)
                                                                    -------
TOTAL TOUCH AMERICA MILEAGE........................                   4,537
                                                                    -------
AT&T FIBER PURCHASE AGREEMENT
New York--Boston...................................                     289     Complete
New York--Newark...................................                      18     Complete
St. Louis--Chicago--Cleveland......................                     728     Complete
Orlando--Miami.....................................                     442     Second Quarter, 2003
Dallas--Ft. Worth..................................                      42     Complete
Seattle--Los Angeles...............................                     860     Fourth Quarter, 2002
                                                                    -------

AT&T FIBER ACQUISITION MILEAGE....................                    2,379(3)
                                                                    -------
TOTAL MILEAGE TO BE ACQUIRED PURSUANT TO OTHER SWAP
AGREEMENTS                                                              754     Various
                                                                    -------
</Table>

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<Table>
<S>                                                                  <C>
TOTAL ROUTE MILEAGE...............................                   14,051
                                                                    -------
</Table>

----------
(1) Separate links of each of our routes will be completed prior to the date
    scheduled for substantial completion of the entire route. As of March 31,
    2002, 559 route miles of the Ellisville-Ft. Pierce route, 1,680 route
    miles of the Los Angeles-Houston route and 1,495 route miles of the
    Jacksonville-Newark route have been completed.
(2) Under the Touch America agreement, all routes are required to be delivered
    concurrently when all construction is completed on both parties' routes.
    Both parties have experienced force majeure construction delays on certain
    routes to be swapped.
(3) Total mileage contemplated by this agreement is approximately 8,850 miles.
    See "Description of Material Agreements--AT&T Fiber Purchase Agreement"
    within Item 1 of this Report.

THE CONSTRUCTED PORTION OF OUR NETWORK

     We are building the 6,400-mile constructed portion of our network using
advanced fiber-optic telecommunications equipment and technology using Lucent
TrueWave -Registered Trademark- RS fiber. The 6,400-mile constructed portion of
our network is being built through simultaneous efforts in multiple locations,
with links to be completed on a staggered basis pursuant to our agreement with
AT&T. Construction commenced in January 2000. AT&T is providing approximately
40% of the rights of way required on the constructed portion of our network. We
believe that approximately 99% of the rights of way to be provided by AT&T have
already been perfected, and we are collaborating with AT&T to complete the
acquisition and perfection of the remaining public rights of way needed to
complete that portion of our network that we are building pursuant to the AT&T
network development agreement.

     Under this agreement with AT&T, AT&T is providing the standards and
specifications for the development of the route miles covered by that agreement
based on its extensive operational and technical expertise. We believe that our
commitment to AT&T's high quality standards will be a source of competitive
advantage.

     We expect the constructed portion of our network to have the following
characteristics:

     -    RIGHTS OF WAY AND ROUTING. We have received approximately 40% of the
          required rights of way to complete construction of the 6,400-mile
          constructed portion of our network from private sources, such as AT&T,
          affiliates of Koch Telecom Ventures and other third-party sources. The
          remaining 60% of rights of way needed to complete construction are
          being purchased or leased from a number of public sources. We are
          seeking to procure these rights from sources that maximize the
          security, diversity and quality of our network.

     -    CONDUITS. Each route in the 6,100 miles covered by the AT&T network
          development agreement will contain six conduits, with limited
          exceptions. Of those six conduits, AT&T will own three conduits,
          including one conduit containing, approximately, between 192 to 288
          fiber-optic strands, half of which are owned by us with the other half
          owned by AT&T. We will own the remaining three empty conduits, one of
          which we have agreed to swap to Touch America along approximately
          3,500 miles. The additional conduits will allow us to upgrade our
          network's capabilities in response to advances in technology or
          increases in demand for capacity. We are installing multiple conduits
          along the remaining 300 constructed route miles not covered by the
          AT&T network development agreement where we believe it is economically
          advisable to do so.

                                       10
<Page>

     -    FIBER-OPTIC CABLE. We are installing Lucent TrueWave -Registered
          Trademark- RS optical fiber along the 6,400-mile constructed portion
          of our network. On the 6,100 miles covered by the AT&T network
          development agreement, we are installing between 192 to 288 strands of
          fiber. Of those strands, one-half will be owned by us and one-half
          will be owned by AT&T. These fibers are designed to accommodate the
          latest DWDM transmission technology deployment of equipment that
          transmits signals on multiple wavelengths of light per strand, thereby
          significantly increasing the capacity of the network relative to older
          networks, which generally use optical fiber strands that transmit
          fewer wavelengths of light per strand. The Lucent TrueWave -Registered
          Trademark- RS fiber allows us to increase our network capacity over
          time as optical-electronic equipment technology improves.

     -    NETWORK ARCHITECTURE. Our network will initially be able to operate at
          a speed up to OC-192 and be capable of operating at speeds of up to
          OC-768 as that technology becomes available.

     -    OPTICAL ELECTRONIC AND DATA EQUIPMENT. We selected Cisco Systems, Inc.
          as our exclusive provider of optical electronic and data equipment. We
          have initially lit approximately 2,400 miles of our constructed
          network. The remainder of our network is expected to be lit under a
          success based lighting plan as we develop customers on unlit routes.

     -    POINTS OF PRESENCE AND RELATED EQUIPMENT. Our 14,050-mile network will
          reach 35 of the top 50 MSAs in the continental United States, which
          will permit us to interconnect with all major carriers with points of
          presence or central offices in those metropolitan areas. These points
          of presence will be secure, monitored and environmentally controlled
          locations that are designed to hold the equipment defined in our
          network architecture. Our points of presence are designed to provide
          colocation services for our customers and give them direct access to
          our network and service offerings. We have leased 45 of 55 initial
          points of presence on our current network.

     -    NETWORK OPERATIONS CENTER. We currently outsource our network
          operations center and customer care to Lucent. A network operations
          center provides network surveillance, troubleshooting and customer
          service on a 24-hour-a-day, seven-day-a-week basis. Lucent has
          substantial experience and expertise in operating network operations
          centers for a variety of telecommunications carriers. If customer
          demand warrants, we may develop and operate our own network operations
          and customer care center.

NETWORK CONSTRUCTION, DEVELOPMENT AND RIGHTS OF WAY

     We have assembled a construction team consisting of experienced
construction personnel and experienced telecommunications project managers.
Certain members of our construction team have managed major pipeline projects
along some of our planned routes and other of our managers have participated in
the construction of telecommunications networks for other major
telecommunications companies. These managers possess project management, systems
and construction experience, which are valuable in the construction of
telecommunications assets similar to our network.

     We executed contracts with third-party contractors for the installation of
substantially all of the constructed portion of our network, including design,
rights of way procurement, permitting and construction. Our construction team
oversees the third-party contractors and the construction process. In addition
to requiring the construction contractors to perform every phase of the network
construction process, these agreements substantially define our construction
costs. In January 2000, construction began on segments of our network, and we
are currently scheduled to complete the majority of the 6400-

                                       11
<Page>

mile constructed portion of our network by late 2002. A portion of our
constructed network, which consists of a 150-mile segment, will be completed
by early 2003.

     We currently expect that approximately 40% of the total rights of way
needed to construct the 6,400-mile constructed portion of our network will be
provided by AT&T pursuant to 40-year or perpetual licenses, without additional
payments to AT&T. We believe that at least 99% of the AT&T rights of way are
already perfected for our immediate use. We have experienced some permitting
delays on certain of these routes, which may materially affect our overall
network construction schedule and costs. We believe that AT&T's rights of way
have a variety of marketing advantages that include route diversity,
exclusivity, directness of routing, security and cost position. We believe that
these factors will provide us with significant competitive advantages. We have
acquired approximately 60% of the necessary rights of way from public and
private sources in order to complete the 6,400 constructed miles of our network.

     Pursuant to an agreement with an affiliate of Koch Telecom Ventures, that
Koch Telecom Ventures affiliate may provide a portion of the rights of way
needed for the 6,400 constructed miles of our network along its approximately
35,000 mile pipeline network. Our access to the rights of way owned by
affiliates of Koch Telecom Ventures provides us with certain advantages, such as
rights of way procurement, construction security, route diversity and
exclusivity. In order to acquire rights under this agreement, we must exercise
our option by October 29, 2002.

     We must obtain licenses and permits from third-party landowners and
governmental authorities to permit us to install conduit and fiber. Public and
third-party private rights of way are generally non-exclusive. Where possible,
we lease them under multi-year agreements with renewal options. We may lease
underground conduit and other rights of way from entities such as state and
local governments and transit authorities. Rights of way agreements and permits
provide us with a contractual interest and do not create an interest in land. In
the ordinary course of business, each build requires us to either obtain, lease,
cure (or condemn) rights of way or design re-routes on a daily basis.

THE ACQUIRED PORTION OF OUR NETWORK

     We may expand our network through conduit and fiber swaps and purchases
and other arrangements. We intend to use the substantial conduit and fiber
capacity we are installing along the 6,400 constructed miles of our network
to facilitate these conduit and fiber swaps.

     We have entered into a swap agreement with Touch America. The swap
transaction with Touch America will extend our network by approximately 4,500
miles to include Denver, Detroit, Minneapolis, Milwaukee, Salt Lake City and
Sacramento. We will receive one conduit and 12 fibers along the 3,000 miles
of their network being constructed pursuant to their agreement with AT&T, and
24 fibers along 380 miles and six fibers along 1,075 miles of that portion of
the network Touch America is constructing independently. Touch America will
also provide us with approximately $48.5 million (subject to adjustment based
on actual route mileage), payable in monthly installments. Touch America has
made $17.1 million of such payments through December 31, 2001, and we have
recorded a receivable in the amount of $11.8 million for payments due from
them as of March 31, 2002. We expected to complete the swap transaction
before December 31, 2001. However, Velocita and Touch America experienced
force majeure construction delays on certain routes to be swapped. We expect
to complete the swap with Touch America upon completion of construction by
both parties, currently anticipated for the first quarter of 2003. At the
conclusion of this transaction, there will be a one-time "true-up" payment as
compensation for any differences in the estimated actual miles swapped of
fiber and conduit.

     On December 9, 2000, our wholly-owned subsidiary, PF.Net Corp., entered
into an agreement with AT&T Corp. (amended through December 2001) to purchase
fibers from AT&T (or rights to use such fibers on certain routes) on
approximately, 8,850 route-miles. Such agreement also provides for

                                       12
<Page>

colocation at AT&T points of presence and optical amplifier huts along the
routes, maintenance of the network and certain other services, and an option for
PF.Net to install, at our incremental cost of installation, additional fibers to
triple our fiber count along roughly 90% of the same route-miles in the event
AT&T chooses to install additional fibers on such routes. The agreement provides
that the total cost for this acquisition will be approximately $106 million
payable as we acquire fiber along these routes. (See "Our Network-General-Dark
Fiber Acquisition" for link mileage and scheduled completion dates.) In 2001,
PF.Net Corp. made $21.2 million in payments related to this agreement. If AT&T
fails to complete any link within 90 days after the scheduled completion date,
it must pay PF.Net Corp. liquidated damages of $75,000 per month, subject to a
cap of 5% of the value of the link. If AT&T fails to perform its obligations
under the AT&T fiber-optic acquisition agreement after written notice and
applicable cure periods, PF.Net Corp. may terminate the AT&T fiber-optic
acquisition agreement. The agreement provides that if PF.Net Corp. fails to make
payments to AT&T within 30 days of the date due or experiences certain
insolvency events, AT&T may terminate the fiber-optic acquisition agreement.
AT&T may also terminate the agreement for PF.Net Corp.'s failure to perform its
other obligations under the agreement after written notice and the lapsing of
applicable cure periods.

     We will need to restructure this agreement to implement our new business
plan which assumes that we will only be purchasing approximately 2,400 of the
miles subject to this agreement. We cannot assure you that we will be able to
complete such restructuring on terms satisfactory to us. If market conditions
and our liquidity improve and we decide to expand our network, we would likely
seek to acquire some or all of the additional miles subject to this agreement.
However, if our scaled-back network has resulted in a restructuring or violation
of this agreement, we cannot assure you that these additional miles will still
be available to us.

     In addition to our swap of fiber assets with Touch America and our purchase
of dark fiber from AT&T, we may continue to evaluate opportunities to swap dark
fiber or conduit with other carriers for fiber assets along routes in which
excess capacity exists if we decide at a later date that such expansion is
appropriate.

POINTS OF PRESENCE

     We are in the process of installing both points of presence (POPs) and op
amp sites to house the optical equipment needed to light our network. As of
March 31, 2002, we had 45 of our planned 55 POP sites leased and 85 of the
currently planned 98 op amp sites leased. We are progressively completing both
POP and op amp sites on a route by route basis, timed with our planned
construction completion as well as availability of the AT&T and Touch America
portions of our network.

     We have lit approximately 2,400 miles of our constructed network using
Cisco-provided optical electronic and data equipment. The remaining portion of
our constructed network will be lit under a success-based plan as we establish
customers on specific routes. See "Recent Changes To The Business, Credit
Agreement Defaults and Possible Restructuring" within Item 1 of this Report.

OPERATIONS SUPPORT

     During 2001, we established network planning, optical and data engineering,
field service (maintenance, support and network operations center) as well as
customer service and support functions. As a result of our scaled-back
business plan, we eliminated most of the personnel associated with these
functions in early 2002. In addition, we began information systems
development and implementation and focused on back office support tools. See
"Recent Changes To The Business, Credit Agreement Defaults and Possible
Restructuring" in Item 1 of this Report.

                                       13
<Page>

PRODUCTS AND SERVICES

     We are following a focused product roll-out plan which is intended to
limit capital expenditures and operating expenses. Accordingly, for the
remainder of 2002, we plan to offer dark fiber, conduit, colocation,
maintenance services, and selected broadband products to existing and
strategic customers on the lit portion of the network. Based on market
conditions, beginning in 2003, we may offer high-bandwidth broadband services
(OC-3, OC-12, OC-48, wavelengths) and Gigabit Ethernet services, lighting
segments of the network as demand is generated. These products and services
are described below:

     -    DARK FIBER AND CONDUIT: The dark fiber product consists of dedicated,
          POP-to-POP fiber-optic cable that customers can use to build a
          wholly-owned, fiber-optic communications network. Customers are
          responsible for lighting the dark fiber segment by procuring optical
          amplifiers, regenerators and multiplexing equipment and placing that
          equipment at or near our POP and Op Amp locations. We sell rights to
          our dark fiber and conduit in the form of indefeasible rights of
          use, or IRUs. Typically, these transactions are not outright sales of
          ownership interests. Instead, the IRU leases are amortized into
          income over a 20-year life. Customers typically will also purchase
          fiber maintenance and colocation services (i.e. racks, power,
          support service, etc.) with the purchase of dark fiber. At our
          disposal are approximately 6,400 route miles of constructed fiber,
          with more than 800,000 fiber miles available for purchase. Each
          route in the 6,100-mile portion of our network constructed under the
          AT&T network development agreement also contains, with limited
          exceptions, three empty conduits that we own, which are available
          for purchase by customers that wish to purchase and install their
          own fiber-optic strands. Some of the dark fiber and conduit has
          already been sold to customers, including one entire conduit on the
          3,500 miles that has been swapped with Touch America.

     -    MAINTENANCE: Our maintenance service is comprised of: (i) preventative
          maintenance service; (ii) cable and conduit restoration service; and
          (iii) customer support service. Preventative maintenance activities
          include placement and maintenance of signposts along the route,
          subscription to one-call agencies, route maintenance and patrolling.
          Cable and conduit restoration services are called upon when one or
          more fibers are damaged or cut and restoration of the fiber(s) or
          conduit is required. Customer support service provides trained and
          qualified customer support and maintenance personnel to respond to
          dark fiber or conduit service issues twenty-four hours a day, seven
          days a week. We subcontract dark fiber and conduit maintenance
          services from AT&T.

     -    COLOCATION: We intend to offer space at our facilities to dark fiber
          customers who need safe technical operation environments for their
          communications and networking equipment. This includes power,
          environmental, fire protection and security services. We intend to
          offer colocation services at both our POP and Op Amp sites. POP sites
          accommodate equipment that allows traffic to be added and dropped,
          while Op Amp sites house transmission equipment that regenerates or
          amplifies optical signals. Because of this difference in
          functionality, POPs are located in major towns and cities along the
          route, while Op Amp sites are deployed every 50 miles between POPs.

     -    BROADBAND CAPACITY TRANSMISSION SERVICES: We are capable of offering
          optical wave and SONET services on the lit portion of our network,
          which currently spans 2,400 route miles. If additional segments are
          lit, we will be able to offer these services in additional markets.
          The DWDM technology being installed over the lit portion of our
          network allows us to offer 2.5 Gbps and 10 Gbps optical wave services
          to customers. Optical wave services allow a customer to purchase lit
          capacity for a fixed period of time, while retaining similar control
          advantages of

                                       14
<Page>

          outright dark fiber ownership. We also plan to offer optical capacity
          leases to customers in increments from OC-3 to OC-48.

     -    NETWORK CONSTRUCTION AND FIBER DEPLOYMENT SERVICES: We provide optical
          fiber infrastructure solutions and strategic network design services
          for organizations deploying networks throughout the United States. We
          have assembled a construction team consisting of experienced
          construction personnel and experienced telecommunications project
          managers. Also, we have developed an extensive network of suppliers to
          provide the highest quality construction and installation of
          fiber-optic telecommunication networks. Construction services include
          trenching or directional boring for placement of conduit along the
          planned network path. Manholes and handholes are placed along the
          network route for easy access and cable splicing. The highest quality
          AT&T fiber deployment standards are used to ensure slack points are
          placed for fast restoration of the network due to potential fiber
          cuts.

MARKETING AND SALES STRATEGY

     As part of our strategy, we have focused our initial sales efforts on
dispositions of dark fiber and conduit rights through sales, IRU grants,
leases and swaps. We will focus primarily on these infrastructure sales in
2002 and 2003. When it becomes economically compelling, according to our
success-based strategy, we will target regional and nationwide communications
companies, governmental entities, ISPs, Fortune 1000 companies and other
significant users of network capacity. We will position ourselves as the
provider of choice to customers due to our quality of service, the
reliability of our services, the quality and diversity of the ROWs used and
our position as a low-cost provider.

INTERCONNECTION

     As a result of the Telecommunications Act, telecommunications carriers may,
as a matter of law, interconnect with incumbent local exchange carriers on terms
designed to help ensure economic, technical and administrative equality between
the interconnected parties. We plan to interconnect our network to existing
carriers' networks by leasing capacity, swapping fiber or building fiber to
existing "carrier hotels", points of presence and other points of
interconnection. Interconnection is necessary for us to be able to transmit
traffic to other carriers, trade traffic with other carriers and terminate
traffic with other carriers.

FINANCIAL MARKET CONDITIONS

     Continuing deterioration in the telecommunications and overall capital
markets sector has caused several of our competitors to delay or cut back
capital expansion programs. Additionally, capital raising efforts for all
telecommunications companies are a significant challenge and debt and equity
sources of capital are generally unavailable. Many current and potential
customers have also announced bankruptcy filings, liquidation, workforce
reductions or reduced revenue and earnings projections. Telecommunication
industry and capital market conditions have had and could continue to have a
material adverse effect on our business.

COMPETITION

     The telecommunications industry is extremely competitive, particularly with
respect to price and service. We face competition from existing and planned
telecommunication systems with respect to each of our planned routes. Our
competitors include: wholesale providers, IXCs, ILECs and CLECs, which include
such companies as AT&T, WorldCom, Inc., Sprint Corp., Qwest, Touch America,
Inc., Level 3

                                       15
<Page>

Communications, Inc. and Williams Communications Group. Potential competitors
capable of offering similar services include communications service providers,
cable television companies, electric utilities, microwave carriers, satellite
carriers, wireless telephone operators and large end-users with private
networks. Other companies may choose to compete with us in our current or
planned markets, by selling or leasing fiber assets or bandwidth services to our
targeted customers.

     The increased number of competitors and resulting investment in
telecommunications networks has created a substantial oversupply of network
capacity in the industry. The oversupply has resulted in an intensely
competitive environment forcing numerous competitors to curtail their business
plans and, in a number of cases, to file for protection under bankruptcy or
protection from creditor statutes. These factors have resulted in downward
pricing pressure for our products.

     Some of our competitors have already made substantial long-term investments
in the construction of fiber-optic networks and the acquisition of bandwidth.
Some of these competitors have substantially greater resources, existing
customers and more experience than we and directly compete with us in the market
for fiber assets and bandwidth services.

     Significant new competitors could arise as a result of:

     -    increased consolidation and strategic alliances in the industry
          resulting from Congressional and FCC actions;

     -    allowing foreign carriers to compete in the U.S. market;

     -    further technological advances; and

     -    further deregulation and other regulatory initiatives.

     The introduction of new products or emergence of new technologies may
reduce the cost or increase the supply of certain services similar to those we
provide. We cannot predict which of many possible future product and service
offerings will be crucial to establish or maintain our competitive position or
what expenditures will be required to develop and profitably provide such
products and services. Additional competition could materially and adversely
affect our operations.

     The market for our high-capacity telecommunication services is highly
competitive and is likely to become more so as the BOCs are allowed into the
in-region long distance market. The market for these services has numerous
entities competing for the same customers, many of who enter into multi-year
service contracts. The presence of such contracts may make it more difficult for
us initially to attract customers.

     The Telecommunications Act permitted BOCs to provide long distance services
outside their local service regions immediately, and will permit them to provide
in-region, long distance service upon demonstrating to the FCC and state
regulatory agencies that they have adhered to the Telecommunications Act's
Section 271 14-point competitive checklist. Some BOCs have filed applications
with various state public utility commissions and the FCC seeking approval to
offer such "in-region, interLATA" service. For the first three years following
passage of the Telecommunications Act of 1996, the FCC consistently denied the
BOCs authority to provide these services, blocking BOC entry into these markets.
In December 1999, however, the FCC for the first time granted such authority to
Verizon authorizing it to provide in-region, interLATA service originating in
New York State. Since that time, Southwestern Bell has applied for, and been
granted, authority to provide interLATA long distance service in Arkansas,
Missouri, and Texas. The FCC also granted Southwestern Bell's application for
authority to provide interLATA long distance service in Kansas and Oklahoma, but
this decision was remanded back to the FCC on December 28, 2001 by the U.S.
Court of Appeals for the District of

                                       16
<Page>

Columbia Circuit. The D.C. Circuit determined that the FCC did not properly
consider certain arguments of opponents of the application and now must more
fully consider these arguments on remand. Similarly, in addition to New York,
Verizon has applied for, and been granted, long distance authority in
Connecticut, Massachusetts, Pennsylvania and Rhode Island. Several additional
applications are pending and we expect that additional BOCs will continue to
file similar applications. The entrance of these and other BOCs into the
in-region, interLATA market could significantly increase competition in our
service markets by permitting these established telecommunications companies,
which have greater financial, technical and other resources than we do, into the
market for some of the same services that we intend to provide.

SUPPLIERS

     The principal components of our network are fiber-optic cable and conduit,
optical-electronic, data communications and internetworking equipment, which are
purchased from third-party suppliers. Lucent is a major supplier of our
fiber-optic cable; however, there are a number of alternate suppliers. During
the second quarter of 2001, we selected Cisco as our equipment vendor to provide
optical-electronic, data communications and internetworking equipment. We
believe that both component supply and manufacturing capacity exists to support
our plan requirements; however, this situation could change given world market
conditions for selective components or products supplied.

                                   REGULATION

     THE FOLLOWING SUMMARY OF REGULATORY DEVELOPMENTS AND LEGISLATION IS NOT
COMPLETE. IT DOES NOT DESCRIBE ALL CURRENT AND PROPOSED FEDERAL, STATE AND LOCAL
REGULATION AND LEGISLATION AFFECTING THE TELECOMMUNICATIONS INDUSTRY. EXISTING
FEDERAL AND STATE REGULATIONS ARE CURRENTLY SUBJECT TO JUDICIAL PROCEEDINGS,
LEGISLATIVE HEARINGS AND ADMINISTRATIVE PROPOSALS THAT COULD CHANGE, IN VARYING
DEGREES, THE MANNER IN WHICH OUR INDUSTRY OPERATES. WE CANNOT PREDICT THE
OUTCOME OF THESE PROCEEDINGS OR THEIR IMPACT ON THE TELECOMMUNICATIONS INDUSTRY
OR US.

     We are part of an industry that is highly regulated by federal, state and
local governments whose actions are often subject to regulatory, judicial, or
legislative modification. To the extent that our offerings are treated as
telecommunications services, additional federal and state regulation would apply
to those offerings. Accordingly, there can be no assurance that regulations,
current or future, will not have a material adverse effect on us.

     To the extent we provide our services internationally, we will be subject
to certain FCC regulations applicable to international services. In addition, we
may be subject to the domestic telecommunications regulations of any foreign
countries in which we provide service.

PENDING LEGISLATION

     In February 2002, the U.S. House of Representatives approved The Internet
Freedom and Broadband Deployment Act of 2001 (H.R. 1542), also known as the
Tauzin-Dingell Bill. The legislation allows the Bell Operating Companies to
offer in-region long distance and data services without meeting the requirements
of Section 271 of the Telecommunications Act of 1996. In addition, the
legislation removes requirements that the BOCs sell certain network elements,
including line-sharing and fiber-fed local loops to competitive carriers. The
Telecommunications Act of 1996 (1996 Act) requires BOCs to open their networks
to competitors before the incumbent carriers may enter the long-distance voice
market and provide nondiscriminatory access to unbundled network elements. It is
unclear whether the legislation will be approved by the United States Senate. If
Tauzin-Dingell becomes law, it could

                                       17
<Page>

materially alter how the Company provides its services, to whom it sells its
services, how the Company prices those services and potential strategic
investors in the Company.

FEDERAL REGULATION

     U.S. Federal regulation has a significant impact on the telecommunications
industry. Federal regulations have undergone major changes in the last several
years as the result of the enactment of the Telecommunications Act on February
8, 1996. The Telecommunications Act is the most comprehensive reform of the U.S.
telecommunications law since the Communications Act was enacted in 1934. For
example, the Telecommunications Act imposes a number of interconnection and
access requirements on telecommunications carriers and on all local exchange
carriers, including ILECs and CLECs.

     The different ways we intend to offer fiber-optic supported services could
trigger three alternative types of regulatory requirements:

     (1)  non-communications services,

     (2)  private carrier services, and

     (3)  telecommunications services or common carriage.

     Certain regulations associated with each type of offering are described
below.

     Although the law establishing these alternative regulatory requirements is
often unclear, we expect that even our common carriage offerings will be subject
to a lower degree of federal regulation than those of dominant carriers. While
we consider ourselves an interexchange carrier, it is difficult to predict with
certainty how the FCC will classify some of our services.

NON-COMMUNICATIONS SERVICES

     The provision of dark fiber can be viewed as a non-communications service
in that it is not a service, but rather the provision of a physical facility
that is indistinguishable from other non-communications offerings such as
constructing an office building. Many providers of dark fiber are currently
operating on the assumption that they are providing unregulated facilities.
Although the FCC attempted to regulate ILEC provision of dark fiber as a common
carrier service, this position was vacated by the U.S. Court of Appeals for the
District of Columbia Circuit in 1994. The FCC has not addressed the issue since
that time and, thus, we believe that the sale or other disposition of dark fiber
is not regulated by the FCC as a common carrier service at this time. However,
there can be no assurance that the FCC, on remand, will not take the position
again that at least some dark fiber offerings are subject to common carrier
regulation. Moreover, the FCC has found that dark fiber is an unbundled network
element which must be made available by the ILECs to CLECs. If the FCC were to
determine that the sale of dark fiber constituted telecommunications, we would
be subject to additional regulation at the federal level in connection with
these offerings.

PRIVATE CARRIER SERVICES

     Even if some of our offerings are treated as communications services, they
could be viewed as private carrier offerings. Private carrier offerings
typically entail the offering of telecommunications, but are provided to a
limited class of users on the basis of individually negotiated terms and
conditions that do not meet the definition of a telecommunications service under
the Telecommunications Act. If our services are treated as private carriage,
they are generally unregulated by the FCC, but would be subject

                                       18
<Page>

to universal service payments based on the gross interstate and international
telecommunications revenues from end users. See "--Telecommunications
Services--Universal Service" below. Private carriers may also be subject to
access charges if interconnected to local exchange carriers.

TELECOMMUNICATIONS SERVICES

     Some of our services, such as the provision of bandwidth capacity, lit
fiber and the resale of telecommunications services from AT&T and other
providers, will be treated as telecommunications services by the FCC. A
significant number of federal regulatory requirements will be applicable to
those services.

     The law essentially defines telecommunications carriers to include entities
offering telecommunications services for a fee directly to the public or to
classes of users so as to be effectively available directly to the public,
regardless of the facilities used. "Telecommunications" is defined as the
transmission, between or among points specified by the user, of information of
the user's choosing, without change in the form or content of the information as
sent and received. The FCC has ruled that the term "telecommunications carrier"
is the same as the definition of common carrier. For the reasons stated above,
regarding our belief that we are not a common carrier, we also believe that we
are not a telecommunications carrier when we are providing our dark fiber
offerings. An FCC decision to the contrary was appealed to federal court, which
remanded to the FCC. A decision on remand could require that our services be
treated as common carriage. In addition, certain railroad, power and
telecommunications associations--none of which is affiliated with us--have
petitioned the FCC to clarify the status of fiber providers in this regard. If
the FCC decides that these companies are acting as telecommunications carriers
in providing dark fiber facilities, we, too, could become subject to certain
federal regulatory requirements that may impose substantial administrative and
other burdens on us.

     If the FCC finds some of our services to be telecommunications services, we
will be regulated as a nondominant common carrier and as such will not need
authorization to provide domestic services and can file tariffs on one day's
notice. The FCC imposes greater regulations on common carriers such as the BOCs
that have some degree of market power ("dominant carriers"). In addition, the
FCC requires common carriers to obtain an authorization to construct and operate
telecommunication facilities or to provide or resell telecommunications services
between the United States and international points.

     GENERAL OBLIGATIONS OF ALL TELECOMMUNICATIONS CARRIERS. To the extent that
any of our offerings are treated as telecommunications services, we would be
subject to a number of general regulations at the federal level that apply to
all telecommunications carriers, including the obligation not to charge unjust
or unreasonable rates or engage in unjust or unreasonable practices, the
obligation not to unreasonably discriminate in our service offerings and the
potential obligation to allow resale of our services in certain circumstances.
In addition, third parties may file complaints against us at the FCC for
violations of the Communications Act of 1934 (the "Communications Act") or the
FCC's regulations. Certain statistical reporting requirements and regulatory
fees may also apply. In addition, FCC rules require that telecommunications
carriers contribute to universal service support mechanisms, the
Telecommunications Relay Service fund, the number portability fund, and the
North American Number Plan Administrator fund.

     INTERCONNECTION OBLIGATIONS OF ALL TELECOMMUNICATIONS CARRIERS. All
telecommunications carriers have the basic duty to interconnect, either directly
or indirectly, with the facilities of other telecommunications carriers. This is
the minimum level of interconnection required and is generally considered to
impose only minimal requirements as compared with the interconnection
obligations imposed on ILECs described in the next section. All
telecommunications carriers must also ensure that they do not install network
features, functions or capabilities that do not comply with guidelines and

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standards established by the FCC to implement requirements to ensure
accessibility for individuals with disabilities and to regulations designed to
promote interconnectivity of networks. Although these requirements are not
burdensome now, the FCC could adopt new regulations that could impose burdensome
or expensive regulations that could adversely affect us.

     TARIFFS AND PRICING REQUIREMENTS. In October 1996, the FCC adopted an order
in which it eliminated the requirements that nondominant interstate
interexchange carriers maintain tariffs on file with the FCC for domestic
interstate services. The order does not apply to the switched and special access
services of the BOCs or other local exchange carriers. The FCC order was issued
pursuant to authority granted to the FCC in the Telecommunications Act to
"forbear" from regulating any telecommunications services provider under certain
circumstances. Several parties filed notices for reconsideration of the FCC
order and other parties have appealed the decision. After a lengthy appeal, on
April 28, 2000, the D.C. Circuit affirmed the FCC's decision to require
mandatory detariffing of domestic interstate services.

     Non-dominant interexchange telecommunications carriers can no longer file
tariffs with the FCC as a means of providing notice to customers of prices,
terms and conditions on which they offer their interstate services, and must
instead enter into individual contracts for these services. In addition, the FCC
has required that interexchange carriers instead post their rates, terms and
conditions for all their interstate, domestic services on their Internet web
sites if they have one. Detariffing may result in significant administrative
expenses for us. Tariffs allow a carrier to limit its liability to its
customers, including in connection with service interruptions. Accordingly, we
may be subject to liability risks that we would have been able to limit through
tariff filings, and there can be no assurance that the potential liabilities
will not have a material adverse effect on our results of operations and
financial condition and ability to meet our obligations under the notes. With or
without a tariff, the obligation to provide non-discriminatory, just and
reasonable prices remains unchanged under the Communications Act. Competitive
access providers do not have to file tariffs for their exchange access services,
but may if they choose to do so. On March 16, 2001, the FCC eliminated the
requirement that non-dominant carriers file tariffs for most international
interexchange services.

     To the extent we provide interexchange telecommunications service, we are
required to pay access charges to ILECs and CLECs when we use the facilities of
those companies to originate or terminate interexchange calls. The interstate
access charges of ILECs are subject to extensive regulation by the FCC, while
those of CLECs or non-CLECs are subject to a lesser degree of FCC oversight but
remain subject to the requirement that all charges be just, reasonable, and not
unreasonably discriminatory. In May 1997, the FCC made major changes in the
interstate access charge structure. The FCC increased price caps on the costs
that LECs recover through monthly, non-traffic sensitive access charges and
decreased reliance on traffic-sensitive charges. The FCC also announced its plan
to bring interstate access rate levels more in line with cost. On appeal, the
Eighth Circuit upheld the FCC's May 1997 order in a decision issued on August
19, 1998. With significant exceptions, the current policy of the FCC for most
interstate access services dictates that ILECs charge all customers the same
price for the same service. Thus, the ILECs generally cannot lower prices to
some customers without also lowering charges for the same service to all
similarly situated customers in the same geographic area, including those whose
telecommunications requirements would not justify the use of the lower prices.

     In August 1999, the FCC issued an order that provided substantial new
pricing flexibility to ILECs, primarily with respect to special access and
dedicated transport, and proposed further pricing flexibility for those services
and for switched access. In some cases, ILECs may offer deaveraged rates,
contract tariffs, and non-cost based volume discounts.

                                       20
<Page>

     In April 2001, the FCC issued an order that imposes limits on interstate
access charges that competitive local carriers may impose on interexchange
carriers by establishing a declining benchmark scheme for these charges. Access
charges set at or below benchmark levels are presumed reasonable by the FCC, and
the carrier may impose such charges by tariff. The FCC requires mandatory
detariffing, however, of access charges that exceed the benchmark, and carriers
must negotiate individually with each interexchange carrier any agreement to pay
rates that exceed this benchmark. In addition, the FCC requires competitive
local exchange carriers to charge the benchmark rate during the pendency of
negotiations to establish access charges or in the event that parties cannot
agree on rates. These limits could reduce our costs and benefit us to the extent
that we provide interexchange telecommunications service.

     The FCC has also adopted a joint proposal from Verizon, BellSouth, SBC
Communications, AT&T, and Sprint to lower significantly and deaverage interstate
access charges for certain participating local exchange carriers. These pricing
reforms were appealed to the D.C. Circuit, and were largely upheld by that
court. The result of these pricing reforms may be increased competition among
carriers offering local exchange and exchange access service in our operating
area, thus lowering prices for some of the services we offer.

     SECTION 214 REQUIREMENTS. Section 214 of the Communications Act governs the
extension of lines and discontinuance of common carriers services. Although the
FCC does not require a non-dominant carrier to obtain certification prior to
constructing facilities or offering domestic telecommunications service, the FCC
does require carriers to seek permission prior to the discontinuance, reduction
or impairment of service. Application must also be made for discontinuance,
reduction or impairment of services using dark fiber. The affected customers
also must be notified of the planned disconnection, reduction or impairment of
telecommunications services. As indicated above, Section 214 authorization is
required in connection with both the construction of facilities for
international telecommunications services and the provision of international
telecommunications services.

     ACCESS TO POLES, DUCTS, CONDUITS AND RIGHTS OF WAY. An area of the law that
remains in flux concerns the extent of a carrier's obligations to provide access
to poles, ducts, conduits and rights of way. We are obligated under Section 224
of the Communications Act to permit other carriers reasonable access to our
poles, ducts, conduits and rights of way, and the FCC has adopted comprehensive
rules governing how access is to be provided, and what rates can be charged. In
January 2002, the Supreme Court overturned a ruling by the Eleventh Circuit that
called into question certain aspects of the FCC's authority under Section 224.
The Supreme Court opinion clarified that the Section 224 empowers the FCC to
require us to grant nondiscriminatory access to carriers that use wireless
telecommunications technology as well as to cable operators seeking access in
order to provide Internet access. The FCC recently concluded that, pursuant to
the Section 224 obligation to provide other carriers access to rights of way,
utilities must provide access to property used in the manner of a right of way
as part of the transmission and distribution network. The FCC specifically held
that the roof of a utility's corporate office is not subject to access under
Section 224. There are petitions for reconsideration pending regarding access to
rights of way.

     REGULATORY FEES. Under Section 9(a) of the Act, the FCC is authorized to
assess and collect annual regulatory fees, as determined annually by Congress,
in order to recover costs incurred in carrying out its regulatory activities and
providing user information services.

     OTHER REGULATORY ISSUES:

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     Designation of Service Agent. The Communications Act requires us, as an
interstate common carrier, to designate an agent in the District of Columbia
upon whom service of all notices, process, orders, decisions, and requirements
of the Commission may be made.

     EEO Report. The FCC requires us to file an annual employment report to
comply with the FCC's Equal Employment Opportunity policies.

     Truth in Billing. The FCC has adopted new rules designed to make it easier
for customers to understand the bills of telecommunications carriers. These new
rules establish certain requirements regarding the formatting of bills and the
information that must be included in bills.

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

     CUSTOMER PROPRIETARY NETWORK INFORMATION

     In February 1998, the FCC adopted rules implementing Section 222 of the
Communications Act, which governs the use of customer proprietary network
information by telecommunications carriers. Customer proprietary network
information generally includes any information regarding a subscriber's use of a
telecommunications service, where it is obtained by a carrier solely by virtue
of the carrier-customer relationship. The FCC has clarified that customer
proprietary network information, which we refer to as CPNI, does not include a
subscriber's name, telephone number, and address, as this information is
generally not derived from the carrier's provision of a telecommunications
service to a customer. Under the FCC's rules, a carrier may only use a
customer's proprietary network information to market services that are
"necessary to, or used in," the provision of a service that the carrier already
provides to the customer, unless it receives the customer's prior oral or
written consent to use that information to market other services. In December
1999, the Court of Appeals for the Tenth Circuit vacated the FCC's original and
modified CPNI rules, on the grounds that they violate the First Amendment. In
September 2001, on remand from the Tenth Circuit, the FCC issued an order
clarifying that the remainder of its CPNI rules are still in effect and stating
that carriers may obtain consent using an opt-out mechanism (following proper
notification, the carrier may use customer CPNI for marketing purposes, unless
the customer indicates otherwise) or opt-in mechanism (carriers are not allowed
to use a customer's CPNI for marketing purposes without the customer's express
consent). The FCC is continuing to study additional options for implementing
Section 222 and we cannot predict at this time the outcome of the ongoing CPNI
proceeding or its impact upon the telecommunications industry or on us.
Uncertainty regarding restrictions on the use of CPNI may impede our ability
effectively to market integrated packages of services and to expand existing
customers' use of our services.

     UNIVERSAL SERVICE

     Pursuant to the Telecommunications Act of 1996, on May 8, 1997, the FCC
released an order establishing a significantly expanded federal universal
service subsidy regime. The universal service program provides support to
carriers serving low-income customers and customers who live in areas where the
cost of providing telecommunications services is high. In addition, the FCC
established new subsidies for telecommunications and certain information
services provided to qualifying schools and libraries and for services provided
to rural health care providers. Providers of interstate telecommunications
services, as well as certain other entities, such as private carriers offering
excess

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capacity to end user customers, must pay for these programs. Our contribution to
the federal support funds would be calculated based on a percentage of our gross
end-user interstate and international telecommunications revenues. The quarterly
assessment rate typically varies between 6 and 8 percent of interstate and
international end user telecommunications revenues. The amounts contributed may
be billed to customers. The FCC recently changed the methodology for calculating
assessments based on prior year's revenues. Now the FCC calculates assessments
based on revenues accrued in the prior two quarters. In addition, annual revenue
data for the prior year will be used to true-up quarterly revenue data submitted
during the prior calendar year. The FCC has recently adopted the cost model
which it will use to determine the support needed in many high-cost areas and
the inputs for the model. The new high-cost support mechanism, which went into
effect on January 1, 2000 for non-rural carriers, substantially increases the
amount of high-cost support provided to non-rural carriers. This and numerous
other FCC orders revising these funds are subject to petitions for
reconsideration and further petitions for appeals. The outcome of these
proceedings or their effect cannot be predicted.

     In addition to the universal service mechanisms described above, on May 31,
2000 the FCC adopted a joint proposal from Verizon, BellSouth, SBC
Communications, AT&T, and Sprint to create a $650 million fund to provide
universal service support for interstate access charges. On appeal, the Fifth
Circuit largely upheld the FCC's pricing rules, but determined that the FCC
acted arbitrarily in determining the size of this fund. The outcome of this
proceeding on remand is impossible to predict.

     CALEA. We might incur significant expenses to assure that our networks
comply with the requirements of the Communications Assistance for Law
Enforcement Act ("CALEA"). Under CALEA, telecommunications carriers are required
to: (1) provide law enforcement officials with call content and call identifying
information pursuant to a valid electronic surveillance warrant ("assistance
capability requirements"), and (2) reserve a sufficient number of circuits for
use by law enforcement officials in executing court authorized electronic
surveillance ("capability requirements"). To the extent that we provide
facilities-based telecommunications services, we may incur costs in meeting both
of these requirements. In particular, regarding the assistance capability
requirements, except in very limited circumstances the government is only
required to compensate carriers for the costs of making equipment installed or
deployed before January 1, 1995 CALEA compliant. While the telecommunications
industry is attempting to negotiate legislative and administrative changes to
this reimbursement cut-off date, as it stands today, we will be financially
responsible for ensuring that our post-1995 equipment is in compliance.
Regarding the capacity requirements, the government will finance any necessary
increases in capacity for equipment that we have specifically identified as
installed or deployed prior to September 8, 1998, and we are responsible for
paying for any necessary increases in capacity for equipment installed or
deployed after that date. On August 15, 2000, the United States Court of Appeals
for the District of Columbia Circuit vacated certain surveillance capability
requirements set forth in the CALEA regulations and remanded the matter to the
FCC for further proceeding. With the exception of the vacated capability
requirements, carriers have been required to have upgraded their equipment to
institute the required surveillance capabilities by June 30, 2000. However,
numerous carriers have petitioned the FCC and the FCC has granted extensions of
the deadline for complying with the capabilities requirements as they relate to
both circuit switched and packet-mode communications. The FCC issued a public
notice on October 17, 2000, seeking comments on the scope of carriers' CALEA
obligations in light of the D.C. Circuit's opinion, and will likely issue an
order clarifying this obligation in the spring of 2002. We cannot predict our
costs associated with compliance with these CALEA requirements.

LOCAL EXCHANGE CARRIER REGULATION

     A local exchange carrier is defined as a provider of telephone exchange
service, which is an interconnected service of the character ordinarily
furnished in a single exchange, covered by the local exchange charge, or
comparable service provided through a system of switches, transmission
equipment,

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or other facilities, or combination thereof, by which a subscriber can originate
and terminate a telecommunications service. We have obtained certification in
some states and are contemplating becoming certificated as a CLEC in additional
states in order to provide such services and take advantage of certain
beneficial pricing arrangements. Where we obtain authorization to operate as a
CLEC, the obligations described below that are applicable to CLECs would apply.

     INTERCONNECTION. The Telecommunications Act greatly expands ILEC
interconnection obligations. The Telecommunications Act subjects the ILECs to
the following requirements:

     -    PHYSICAL COLOCATION. Requires ILECs to provide physical colocation of
          facilities and equipment necessary for interconnection or access to
          unbundled network elements (UNEs), which allows companies such as us
          and other competitive local exchange carriers to install and maintain
          our own network termination equipment in incumbent local exchange
          carrier central offices or, if requested or if physical colocation is
          demonstrated to be technically infeasible, virtual colocation. See
          "--Colocation and Line Sharing" below;

     -    UNBUNDLED ACCESS. Requires all ILECs to provide nondiscriminatory
          access to unbundled network elements (including certain network
          facilities, features, functions, and capabilities) at any technically
          feasible point within their networks, on nondiscriminatory terms, at
          prices based on cost (which may include a reasonable profit). The
          Supreme Court's decision in AT&T V. IOWA UTILITIES BOARD required the
          FCC to reconsider which elements should be unbundled. On November 5,
          1999, the FCC released an order largely retaining its list of
          unbundled network elements, but eliminating the requirement that ILECs
          provide unbundled access to local switching for customers with four or
          more lines in the densest parts of the top 50 Metropolitan Statistical
          Areas in most circumstances, and the requirement to provide operator
          services and directory assistance. The FCC also noted that ILECs
          remain obligated under the non-discrimination requirements of the
          Communications Act to comply with the reasonable request of a carrier
          that purchases these services from the ILECs to rebrand or unbrand
          those services, and to provide directory assistance listings and
          updates in daily electronic batch files. The FCC also required ILECs
          to offer dark fiber as an unbundled network element on both a local
          loop and interoffice transport basis. It is possible that the
          availability of dark fiber from ILECs as an unbundled network element
          could affect the demand for our services. This availability of dark
          fiber from ILECs as an unbundled network element could be in addition
          to other sources of dark fiber already available in the market and
          ILEC current offerings of dark fiber.

          Petitions for reconsideration and appeals of these new FCC rules have
          been filed. Further, pursuant to a December 12, 2001 notice of
          proposed rulemaking, the FCC opened a proceeding to examine the
          framework under which incumbent local exchange carriers must make UNEs
          available to competing carriers. This latest notice of proposed
          rulemaking consolidated into one proceeding many ongoing issues
          relating to access to local switching. Thus, while the Supreme Court
          resolved many issues, including the FCC's jurisdictional authority,
          other issues remain subject to further consideration by the courts and
          the FCC. We cannot predict the ultimate disposition of those matters;

     -    RESALE. Requires ILECs to establish "wholesale" rates for their
          services to promote resale by competitive local exchange carriers. In
          addition, ILECs are required to offer all retail telecommunications
          services to other carriers for resale at discounted rates, based on
          the costs avoided by the ILEC in the offering.

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<Page>

     ILECs are required to negotiate in good faith with carriers requesting any
or all of the above arrangements. If the negotiating carriers cannot reach
agreement within a prescribed time, either carrier may request binding
arbitration of the disputed issues by the state regulatory commission. Where an
agreement has not been reached, ILECs remain subject to interconnection
obligations established by the FCC and state telecommunication regulatory
commissions.

     In addition, all local exchange carriers, including CLECs, are subject to
the following requirements:

     -    INTERCONNECTION. Requires all ILECs and CLECs to permit their
          competitors to interconnect with their facilities either directly or
          indirectly. Requires all ILECs to permit interconnection at any
          technically feasible point within their networks, on nondiscriminatory
          terms, at prices based on cost (which may include a reasonable
          profit);

     -    NUMBER PORTABILITY. Requires all ILECs and CLECs to establish number
          portability, which will allow a customer to retain its existing phone
          number if it switches from the local exchange carrier to a competitive
          local service provider;

     -    RECIPROCAL COMPENSATION. All ILECs and CLECs must complete local calls
          originated by other LECs under reciprocal compensation arrangements.
          That is, the LEC terminating a local call is entitled to payment from
          the LEC originating a call. Charges assessed by the ILECs for
          terminating calls originated on a CLEC's network must be based on a
          reasonable approximation of additional cost or through mutual exchange
          of traffic without explicit payment. Regulation of reciprocal
          compensation, and inter-carrier compensation generally, is in a state
          of considerable flux. A number of proceedings are, or soon could be,
          pending before the FCC. In particular, on April 27, 2001, the FCC
          initiated a rulemaking to consider moving to a unified pricing regime
          for all intercarrier payments. As a result of this proceeding, the FCC
          could reduce, or even eliminate, inter-carrier payments for the
          exchange of local traffic. Also on April 27, 2001, the FCC revised the
          compensation structure for ISP-bound traffic by establishing a
          declining interim cap on intercarrier compensation rates for ISP-bound
          traffic and imposing a cap on total ISP-bound minutes for which a
          local exchange carrier may receive such compensation. Failing adoption
          of any alternative intercarrier compensation rules, after 3 years,
          carriers will cease paying any compensation for termination of
          ISP-bound traffic on another carrier's network. The interim
          compensation structure applies as carriers renegotiate expiring
          interconnection agreements and does not alter existing contractual
          obligations, except to the extent that the contract includes a
          change-of-law provision. Further, the rate cap compensation structure
          applies only if the incumbent local exchange carrier offers to
          exchange all traffic subject to reciprocal compensation at the same
          rate. If the incumbent carrier chooses not to offer to exchange all
          such traffic at the same capped rates as the ISP-bound traffic, then
          the incumbent carrier must exchange ISP-bound traffic at the
          state-approved or state-arbitrated reciprocal compensation rates in
          their contracts. This order has been appealed to the D.C. Circuit;

     -    DIALING PARITY. Requires all ILECs and CLECs to provide
          nondiscriminatory access to telephone numbers, operator services,
          directory assistance, and directory listing with no unreasonable
          dialing delays. They must also provide dialing parity for interLATA
          services and for intraLATA toll services; and

     -    ACCESS TO RIGHTS OF WAY. Requires all ILECs and CLECs to permit
          competing carriers access to poles, ducts, conduits and rights of way
          at reasonable and nondiscriminatory rates, terms and conditions. In a
          decision issued January 2002, the U.S. Supreme Court

                                       25
<Page>

          confirmed that the FCC's authority to regulate access, including the
          rates that may be charged, to local exchange carrier facilities
          extends to dual-use cable television and Internet attachments by a
          cable provider as well as to equipment attached by wireless
          telecommunications providers.

OTHER FEDERAL COMMUNICATIONS REQUIREMENTS

     UNBUNDLED NETWORK ELEMENT PRICING. The FCC is charged with establishing
national guidelines to implement certain portions of the Telecommunications Act.
Among other rules, the FCC has established a list of network elements,
comprising most of the significant facilities, features, functionalities or
capabilities of the network that the incumbent local exchange carriers must
unbundle. It is possible for competitors to provide competitive local exchange
service using only these unbundled network elements. In addition, the FCC
mandated a particular forward-looking pricing methodology for these network
elements that produces relatively low element prices that are favorable to
competitors.

     On July 18, 1997, however, the United States Court of Appeals for the
Eighth Circuit issued a decision vacating the FCC's pricing rules, as well as
certain other portions of the FCC's rules implementing the Telecommunications
Act, on the grounds that the FCC had improperly intruded into matters reserved
for state jurisdiction. On January 25, 1999, the Supreme Court largely reversed
the Eighth Circuit's order, holding that the FCC has general jurisdiction to
implement the local competition provisions of the Telecommunications Act. In so
doing, the Supreme Court stated that the FCC has authority to set pricing
guidelines for unbundled network elements, to prevent incumbent local exchange
carriers from disaggregating existing combinations of network elements, and to
establish "pick and choose" rules regarding interconnection agreements. "Pick
and choose" rules would permit a carrier seeking interconnection to pick and
choose among the terms of service from other interconnection agreements between
the ILEC and various CLECs. This action reestablishes the validity of many of
the FCC rules vacated by the Eighth Circuit.

     Although the Supreme Court affirmed the FCC's authority to develop pricing
guidelines, the Supreme Court did not evaluate the specific forward-looking
pricing methodology mandated by the FCC and remanded the case to the Eighth
Circuit for further consideration. Some incumbent local exchange carriers argued
that this pricing methodology does not allow adequate compensation for the
provision of unbundled network elements. The Eighth Circuit found aspects of the
FCC's pricing methodology invalid. The Supreme Court granted certiorari to hear
this pricing issue, including arguments on the merits of the FCC's
forward-looking pricing methodology. If the Supreme Court fails to affirm the
FCC's pricing methodology, which is favorable to competitors such as us because
it is based on forward-looking costs, then unbundled network element prices,
including prices for unbundled network element combinations, may rise. Such
increases could have a materially adverse effect on our business.

     FILING REQUIREMENTS. CLECs are also subject to other FCC filing
requirements. Compliance with these obligations, individually and in the
aggregate, may cause us to incur substantial expenses. There can be no assurance
that these expenses will not have a material adverse effect upon our results of
operations and financial condition and our ability to meet our obligations under
the notes.

     COLOCATION AND LINE SHARING. The FCC has adopted new rules designed to make
it easier and less expensive for CLECs to obtain colocation at incumbent local
exchange carrier central offices by, among other things, restricting the ILECs'
ability to prevent certain types of equipment from being colocated and requiring
ILECs to offer alternative colocation arrangements to CLECs. On March 17, 2000,
the D.C. Circuit vacated those portions of the FCC's expanded colocation rules
that permitted CLECs to colocate equipment that contained functions in addition
to those necessary for interconnection or access to unbundled network elements.
The Court, while upholding the FCC's authority to require cageless

                                       26
<Page>

colocation, also rejected the FCC's effort to leave the choice of space within
the central office to the CLEC. The Court vacated the FCC's rules in part and
remanded to the FCC the issue of what equipment is necessary for interconnection
or access to unbundled elements. In response, the FCC issued an Order and Notice
of Proposed Rulemaking on August 10, 2000. The FCC strengthened the colocation
rules by requiring ILECs to provide physical colocation space within ninety
calendar days of any CLEC colocation request, including requests for cageless
colocation, and to allow CLECs to construct "adjacent structures" on land owned
or controlled by an ILEC if central office space is exhausted. The FCC also
requested comments on colocation requirements at ILEC remote terminals and on
the need to revise the local competition rules in light of the deployment of new
network architecture by ILECs. In August 2001, the FCC issued an additional
order in accordance with the D.C. Circuit's interpretation of when colocation is
required and clarified that competing carriers must be able to obtain access
that is non-discriminatory and interconnection "equal in quality" to what the
incumbent local exchange carrier provides itself and others. The FCC also
limited the requirement on incumbent carriers to allow colocation of
multi-functional equipment to include only such equipment for which the primary
purpose is to obtain non-discriminatory access to network or interconnection
equal in quality to what the incumbent carrier provides itself or others.
Further, the FCC determined that incumbent local exchange carriers must allow
other carriers to collocate certain equipment having switching and routing
capability.

     On November 18, 1999, the FCC also adopted a new order requiring ILECs to
provide line sharing, which will allow CLECs to offer data services over the
same line that a consumer uses for voice services without the CLECs having to
provide the voice service. On January 19, 2001, the FCC concluded that an ILEC
must permit competing carriers providing voice service using the UNE platform to
either self-provision necessary equipment or partner with a competitive data
carrier to provide xDSL service on the same line. While we expect that the FCC's
new rules will be beneficial to CLECs, we cannot be certain that these new rules
will be implemented by the ILEC in a favorable manner. Under the FCC line
sharing order, state commissions will establish the rates for line-sharing,
using the FCC's pricing guidelines. ILECs and other parties have asked the FCC
to reconsider some or all of the line sharing rules, and have appealed the rules
in federal court. We cannot predict the outcome of these actions or the effect
they may have on our business.

     JURISDICTIONAL NATURE OF INTERNET TRAFFIC. The FCC has determined that both
continuous access and dial-up calls from a customer to an Internet service
provider are jurisdictionally interstate, not local, calls, and, therefore, are
subject to the FCC's jurisdiction. The FCC has initiated a proceeding to
determine the effect that this regulatory classification will have on the
obligation of local exchange carriers to pay reciprocal compensation for dial-up
calls to Internet service providers that originate on one local exchange carrier
network and terminate on another local exchange carrier network. The vast
majority of states to consider this issue have held that local exchange carriers
need to pay reciprocal compensation for calls terminating at Internet service
providers. On April 27, 2001, the FCC concluded that ISP-bound traffic is not
subject to reciprocal compensation under Section 251(b)(5) of the Communications
Act of 1934, as amended, because it constitutes interstate information access,
which is subject to the pre-Act equal access requirements, a decision currently
being reviewed by the D.C. Circuit. See "--Local Exchange Carrier
Regulation--Interconnection--Reciprocal Compensation" above. We cannot predict
the eventual outcome of this proceeding or its effect on our business.

REGULATION OF INTERNET ACCESS

     The FCC has recently begun a series of proceedings that explore the
regulatory status of high-speed access to the Internet. Currently, the FCC's
regulation of Internet access differs depending on what type of provider, such
as a LEC or cable, satellite, wireless or other provider, offers the service. If
these regulatory regimes are harmonized, as the FCC has proposed to do, we could
be subject to additional regulation, or regulation of our ILEC competitors could
be reduced.

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<Page>

STATE REGULATION

     State regulatory commissions generally have authority to regulate the
provision of telecommunications services within their state borders. The
Telecommunications Act prohibits state and local governments from enforcing any
law, rule or legal requirement that prohibits or has the effect of prohibiting
any entity from providing any interstate or intrastate telecommunications
service.

     Despite these prohibitions and limitations, telecommunications services are
subject to various state regulations. Among other things, the states may:

     -    require the certification of telecommunications service providers;

     -    regulate the rates of intrastate offerings and the terms and
          conditions of both intrastate and certain interstate service offerings
          including dark fiber in some cases; and

     -    adopt regulations necessary to preserve universal service, ensure the
          continued quality of communications services, safeguard the rights of
          consumers, and protect public safety and welfare. Accordingly, state
          involvement in telecommunications services may be substantial.

     State law may not recognize "private carriage" and, therefore, even if
certain of our offerings are treated as "private carriage" at the federal level,
they may be regulated as telecommunications or common carrier services at the
state level. In addition, should we decide to offer local exchange service
obtained from ILECs or CLECs or provide such services ourselves, we will be
required to apply for authorization on a state-by-state basis. Moreover, in some
states the construction and ownership of telecommunications facilities may
require state certifications or other authorizations. The state regulatory
environment varies substantially from state to state. For example, our pricing
flexibility for products or services which are intrastate in nature may be
limited by regulation in some jurisdictions. There can be no assurance that
these requirements, and the associated pricing methodologies, where applicable,
will not reduce the demand for our offerings.

     States also often require prior approvals or notifications for certain
transfers of assets, customers or ownership of a certificated carrier and for
issuances by certified carriers of equity securities, notes or indebtedness.
States generally retain the right to sanction a carrier and to revoke
certifications if a carrier violates relevant laws and/or regulations. Delays in
receiving required regulatory approvals could also have a material adverse
effect on us. We cannot confirm that regulators or third parties will not raise
material issues with regard to our compliance or non-compliance with applicable
laws or regulations.

     As indicated above, states also have significant responsibilities in the
implementation of the Telecommunications Act. States arbitrate interconnection
disputes if ILECs and CLECs cannot successfully negotiate the terms of an
interconnection agreement. The states also approve both arbitrated and
negotiated interconnection agreements and establish rates for unbundled network
elements, subject to the guidelines established in FCC regulations.

LOCAL REGULATION

     In addition to federal and state laws, local governments exercise legal
authority that may affect our business. For example, some local governments
retain the ability to license public ROW, subject, however, to the federal
limitation that local authorities may not prohibit entities from entering the
telecommunications market. Compliance with local requirements may delay and
increase the costs of our use of public rights of way. Accordingly, these
requirements could impose substantial burdens on us.

                                       28
<Page>

Our communications and information services business will be subject to varying
degrees of federal, state, local and international regulation.

ENVIRONMENTAL MATTERS

     We are subject to federal, state and local laws and regulations relating
to the environmental aspects of our business. Our management believes that
our operations are in substantial compliance with existing environmental
legal requirements. We have been required to hire additional environmental
inspectors to assist us in constructing our network across federally owned
land. The additional inspectors and cost will help us ensure we do not
disturb or damage environmental elements on such lands. However, we do
anticipate the additional inspectors for federally owned land to increase the
costs of our planned construction. Our management expects that compliance
with such existing environmental legal requirements will not have a material
adverse effect on our financial and competitive position.

EMPLOYEES

     As of December 31, 2001, we had 240 full-time employees. On February 28,
2002 we announced a reduction in workforce of 181 employees, representing
approximately 75% of our nationwide employees. After the reduction, and after
the employees complete their employment through various WARN notice and other
transition periods, we will have 55 employees. See "Recent Changes To The
Business, Credit Agreement Defaults and Possible Restructuring" within Item 1 of
this Report and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Reorganization" within Item 7 of this Report.

     None of our employees are represented by a collective bargaining agreement.
We believe that our relations with our employees are good. See "Management --
Employment and Similar Agreements" in Item 11 of this Report.

                                       29
<Page>

                       DESCRIPTION OF MATERIAL AGREEMENTS

AT&T NETWORK DEVELOPMENT AGREEMENT

GENERAL

     On October 29, 1999, our wholly-owned subsidiary, PF.Net Corp., entered
into the original AT&T network development agreement for the construction of
approximately 4,900 miles of fiber-optic network that would be financed jointly
by us and AT&T. On May 5, 2000, December 9, 2000, July 27, 2001, October 22,
2001, and December 5, 2001 PF.Net Corp. and AT&T amended the network development
agreement to increase the fiber-optic network by 2,200 miles to 6,100 miles and
modify the completion date on certain links. The AT&T network will, with limited
exceptions, include six separate fiber conduits, of which we will own three and
AT&T will own three. We currently expect to place between 192 to 288 fibers in
one of AT&T's conduits. Of those fibers, one-half will be owned by AT&T and
one-half will be owned by us. Based on our current estimates of actual route
mileage, we expect the AT&T routes to comprise approximately 6,100 of the
6,400-mile constructed portion of our network.

THE AT&T ROUTES

     The AT&T routes will be constructed in 22 separate "links" described below:

<Table>
<Caption>
                                                          PRIMARY CITIES
                                     --------------------------------------------------------
         LINK          MILEAGE       TERMINATION A                   TERMINATION B
<S>                      <C>         <C>                             <C>
1..................        517       Arlington, VA                   Greensboro, NC
1A.................         27       Pine Springs, VA (Reroute)      Calverton VA (Reroute)
2..................        390       Atlanta, GA                     Jacksonville, FL
3..................        172       Jacksonville, FL                Orlando, FL
4A.................        115       Windermere, FL                  Fort Pierce, FL
4B(2)..............        136       Fort Pierce, FL                 Miami, FL
6(2)...............        163       Ellisville, FL                  Orlando, FL
7..................        563       Ellisville, FL                  New Orleans, LA
7A.................         75       Ellisville, FL                  Jacksonville, FL
8..................        415       New Orleans, LA                 Houston, TX
9..................        240       Houston, TX                     San Antonio, TX
10.................        105       San Antonio, TX                 Austin, TX
11.................        230       Austin, TX                      Ft. Worth, TX
12.................      1,129       Ft. Worth, TX                   Phoenix, AZ
13.................        208       Phoenix, AZ                     Blythe, CA
13A................        250       Blythe, CA                      San Diego, CA
14.................        147       San Diego, CA                   Los Angeles, CA
19.................        265       Tulsa, OK                       Kansas City, MO
20.................        283       Kansas City, MO                 St. Louis, MO
37(2)..............        492       Greensboro, NC                  Atlanta, GA
38.................        200       Arlington, VA                   Philadelphia, PA
39.................        138       Philadelphia, PA                Newark, NJ
                         -----

Total..............      6,260(1)
                         -----
</Table>

(1) For purposes of our plan, we have determined the route miles to total
    approximately 6,100, given slight changes of mileage forecasted on a
    route-by-route basis. As the contract has a plus/minus 3% variance tolerance
    built into it, this adjustment falls within the agreed-upon tolerance limit.
    These route miles may be adjusted slightly on an ongoing basis.

                                       30
<Page>

(2) On 293 route miles of these links, we are installing fiber through an
    existing AT&T conduit. Therefore, on these route miles we will not own three
    empty conduits.

ACQUISITION AND USE OF RIGHTS OF WAY

     To construct the network, we will use, at our discretion, rights of way
across property from four different sources:

     -    AT&T rights of way (rights of way that AT&T provides);

     -    rights of way that we procure on behalf of AT&T from nonpublic third
          parties;

     -    rights of way that we obtain from our affiliates, including pursuant
          to the Koch agreement; and

     -    rights of way that we obtain from federal, state and local
          governmental agencies, through permit easement or otherwise.

     AT&T rights of way will at all times be owned by AT&T. AT&T will make AT&T
rights of way available to us at no cost through a nonexclusive license. We
believe that approximately 40% of the 6,400-mile constructed portion of our
network will be built on AT&T rights of way.

     Public rights of way will be obtained by us in the form required by the
relevant public agency. In most cases, we will obtain public rights of way in
the names of both us and AT&T. We will pay all costs incurred in connection with
the acquisition of public rights of way. We believe that approximately 60% of
the 6,400-mile constructed portion of our network will be built on public rights
of way.

     Each party supplying rights of way is required to obtain such rights of way
in perpetuity, except that if a party cannot obtain rights of way in perpetuity,
then the rights of way must have a term of, or be renewable for, a minimum of 40
years.

CONSTRUCTING AND FINANCING THE NETWORK

     The AT&T network development agreement provides that we (together with our
construction subcontractors) will construct the 6,100 miles covered by the
agreement, for which AT&T will pay us a fixed fee of approximately $285 million.
The only construction activity that AT&T will perform will be splicing the
fibers along the network. With respect to each link, AT&T will pay us 80% during
the construction period on a monthly basis, based on the number of route miles
on which we have completed construction, and the remainder after certain testing
procedures have been completed and time periods have elapsed.

     We will be responsible for all construction costs in excess of the fixed
fee that we will charge AT&T. Until each link is completed and accepted by AT&T,
we bear the risk of loss and damage to any materials provided in constructing
that link.

CONSTRUCTION TIMETABLE

     We are required to substantially complete each link (i.e., place all
conduit, fiber, transmission sites, manholes and handholes) within the time
periods set forth in the AT&T network development agreement. Each of the
delivery dates is subject to a grace period varying from 30 days to 90 days.

                                       31
<Page>

     If we do not substantially complete a link within the specified time period
as it may be extended by any applicable grace period, then we will be required
to pay liquidated damages to AT&T for up to 90 additional days, subject to
certain agreed upon caps.

     If we do not substantially complete a link within the specified time period
as it may be extended by any applicable grace period and the liquidated damages
period, then AT&T will be permitted to declare a default under the AT&T network
development agreement, and may under certain circumstances terminate the
agreement. See "--Events of Default" and "--Term and Termination" below.

COVENANTS

     Our subsidiary, PF.Net Corp., is required to comply with certain covenants
during the construction of the AT&T network. In particular:

     -    PF.Net Corp. must deliver periodic financial reports to AT&T ;

     -    PF.Net Corp. may not undertake a new line of business outside that
          outlined in our current business plan;

     -    PF.Net Corp. may not sell material assets unless the proceeds are
          reinvested in our business or used to repay indebtedness;

     -    PF.Net Corp. may not undertake any guarantees, backstops or loans to
          affiliates or third parties, other than to wholly-owned affiliates so
          long as reasonably related to our business plan;

     -    PF Telecom and Koch Telecom Ventures are restricted in their ability
          to transfer shares of Velocita Corp. common stock; and

     PF.Net Corp. is also subject to the following financial covenants:

     -    a cross-acceleration provision with respect to the covenant in the
          credit agreement relating to minimum amounts of proceeds from sales,
          lease or other dispositions of dark fiber strands or unused conduit
          sales, and fiber swaps;

     -    PF.Net Corp. must complete construction of a minimum of 60% in any
          single fiscal quarter, or 80% in any two consecutive fiscal quarters,
          of the number of route miles projected; and

     -    PF.Net Corp. must certify every six months that it has enough cash on
          hand, cash available under credit lines and projected cash flow from
          operations to fund principal and interest payments, capital lease
          payments, capital expenditures, operating losses and periodic cash
          taxes over the following six-month period.

     We were in breach of the covenant in the credit agreement relating to
minimum amounts of dark fiber and conduit proceeds. Should our lenders under the
credit agreement accelerate indebtedness based on such breach, we would be in
breach of the AT&T network development agreement. In addition, we likely will
not be able to deliver the certification regarding liquidity described above on
the July 1, 2002 due date unless we obtain an amendment to our credit agreement
and/or access substantial additional funds. See "-Events of Default" and "-Term
and Termination" for a description of the possible effects of such events.

                                       32
<Page>

FORCE MAJEURE

     The deadlines for completing construction of the links in the AT&T network
and performing the covenants described above may be extended if a delay is the
result of any of the following conditions and we so notify AT&T:

     -    acts of God including fire, flood, earthquakes and hurricanes;

     -    shortage of materials, unless the shortage is the result of our
          failure to place an order on time or take other necessary actions;

     -    government regulations which prevent performance, including inability
          to obtain a permit, unless the delay results from our failure to pay
          sufficient funds, or otherwise could have been avoided by rerouting
          the system if such rerouting was commercially reasonable; or

     -    war or civil disorder.

     In addition, we will not be in default or subject to liquidated damages for
delays or failures in our performance of the AT&T network development agreement
if the delays or failures are attributable solely to the failure of AT&T to
perform its obligations under the agreement.

EVENTS OF DEFAULT

     PF.Net Corp. may be in default under the AT&T network development agreement
if:

     -    PF.Net Corp. fails to complete a link on time, after giving effect to
          the applicable cure period and liquidated damages period as described
          above;

     -    PF.Net Corp. breaches any financial covenant as described above or any
          other obligation under the AT&T network development agreement; or

     -    certain insolvency events occur.

     PF.Net Corp. will not be in default under the AT&T network development
agreement for any of the foregoing reasons (other than an insolvency event)
unless AT&T notifies us of the breach and PF.Net Corp. fails to cure it within
30 days. If the breach cannot reasonably be cured within 30 days and PF.Net
Corp. is diligently attempting to cure it, then PF.Net Corp. will have up to 120
days to cure it before PF.Net Corp. will be deemed to be in default under the
AT&T network development agreement. If an insolvency event occurs, AT&T may
terminate the agreement on ten days' notice.

     If PF.Net Corp. is in default under the AT&T network development agreement,
AT&T may also exercise any remedies it may have under law or equity.

TERM AND TERMINATION

     Except as follows, the AT&T network development agreement will terminate on
the expiration of the useful life of the last link, which will not be less than
40 years. Either party may terminate the AT&T network development agreement in
whole or with respect to any affected link in the event of a material default by
the other that is not cured within the time periods described above under
"--Events of Default." If either party so terminates the AT&T network
development agreement, AT&T is required (subject to any right of setoff it may
have) to pay for work performed, plus costs up to three percent of the contract
price of any terminated link. Notwithstanding the termination of the AT&T
network development agreement or any link:

                                       33
<Page>

     -    if AT&T terminates after a PF.Net Corp. default, and PF.Net Corp. has
          completed a minimum of 10% of the conduit construction between two
          adjacent AT&T POPs, then AT&T has the option to work with us to
          complete that route section;

     -    no termination will affect the rights of each party to rights of way
          with respect to any completed portion of a link;

     -    the non-defaulting party will continue to have the right to use rights
          of way provided by the defaulting party to complete and operate its
          fiber-optic system; and

     -    if PF.Net Corp. has completed 80% of the conduit construction on any
          link, regardless of whether we are the defaulting party, we will
          continue to have the right to use all rights of way as provided under
          the AT&T network development agreement to complete the link.

     In addition, in the event that we fall behind in our construction plan with
respect to any link by a period of time that exceeds the sum of the applicable
cure period plus the liquidated damages period, and it is probable that we will
not substantially complete the link by the applicable Builder Substantially
Complete Date (as set forth in the table above) as extended by the applicable
grace period and the liquidated damages period, then AT&T may either:

     -    deliver a notice of default with respect to the affected link, which
          would allow AT&T to terminate the AT&T network development agreement
          with respect to the affected link;

     -    grant us an extension; or

     -    assume authority over the construction of the affected link.

MAINTENANCE

     AT&T will provide us with all maintenance services with respect to all of
the 6,100 miles of our network that we are building jointly with AT&T. AT&T will
charge us an annual fee of $500 per route-mile for routine maintenance, plus
actual costs up to $1,000 per hour for any emergency maintenance. Each party is
required to enter into a maintenance agreement with any fiber or conduit
purchaser. Half of the maintenance proceeds from these third-party maintenance
agreements, regardless of whether the agreement is with AT&T or us, will be used
to offset our maintenance fees to AT&T. Maintenance fees are subject to
adjustment every two years, based on adjustments to the consumer price index for
the previous two years.

AT&T RESALE AGREEMENT

     On December 21, 1999 (as amended in February 2002), PF.Net Network Services
Corp. ("Network Services"), our indirect, wholly-owned subsidiary, entered into
an agreement with AT&T Corp., in which Network Services agreed to buy private
line, echo cancellation, local channel, satellite and frame relay services from
AT&T for resale to Network Services' customers for a term of 72 months. The
agreement includes various charges, including termination charges for some
services of up to $40,000 or more and guaranteed minimum revenue to AT&T for
services of $500,000 per month after the first year for private line and
satellite services and by specified formulas for other services and $26.0
million in total during the six year term of the agreement. AT&T has the right
to increase the rates. Network Services is responsible for paying all local,
state and federal taxes and for communicating with its end users and ensuring
that any intermediate resellers comply with this agreement and all federal and
state regulations. In addition, AT&T may discontinue services pursuant to this
agreement without further liability should Network Services engage in certain
prohibited activities or other misconduct or negligence related to the service
or network.

                                       34
<Page>

     If either party breaches any material term of this agreement and that
breach is not cured within 60 days, the other party may terminate the agreement.
If Network Services breaches its payment obligations and fails to make payment
within five days after written notice of default, AT&T may terminate the
agreement. Either party may terminate the agreement immediately by written
notice if the other party suffers certain insolvency events. We may, in the near
future, exit the customer resale business, particularly if we file for
protection under Chapter 11 of the U.S. bankruptcy code. If we exit this
customer resale business we will need to restructure the terms of this
agreement.

TOUCH AMERICA RECIPROCAL IRU LEASE AND EXCHANGE OPTION AGREEMENT

     On February 25, 2000, our indirect wholly-owned subsidiary, PF.Net
Construction Corp., entered into an agreement with Touch America, Inc.,
providing for the reciprocal leasing of IRUs of conduit and fiber along both
parties' fiber-optic cable network systems with a mutually exercisable option to
extend the term of the leases. The agreement describes each party as the
constructing party with respect to its own system and the non-constructing party
with respect to the other party's system. The initial term of the leases will
run for 20 years from the date that both parties have completed their
constructed networks and accepted each other's leased fiber and conduit, except
that on the Touch America Dallas-to-Denver and Chicago-to-Detroit links that
term will be 18 years. We and Touch America may extend the term of the initial
IRU leases to 38 years by exercising an exchange option. This option is
exercisable for a 120-day period starting 20 months after the completion of the
swap.

     The agreement contemplates that there will be a difference in the total
number of fiber miles and conduit miles contributed by each party; therefore,
Touch America will also provide us with approximately $48.5 million (subject to
adjustment), payable in monthly installments. Touch America has made $17.1
million of such payments through December 31, 2001, and we have recorded a
receivable in the amount of $11.8 million for payments due from them as of March
31, 2002. We expected to complete the swap transaction before December 31, 2001.
However, Velocita and Touch America experienced force majeure construction
delays on certain routes to be swapped. We expect to complete the swap with
Touch America upon completion of construction by both parties, currently
anticipated for the first quarter of 2003. The agreement provides for interim
lease arrangements with Touch America for completed routes prior to both party
construction completion. At the conclusion of this transaction, there will be a
one-time "true-up" payment as compensation for any differences in the estimated
actual miles swapped of fiber and conduit.

     Touch America will provide us with fiber and, in some cases, a conduit,
along the segments set forth in the following table. We will receive a total of
approximately 51,000 fiber miles, generally consisting of 12 fibers on each
segment, and approximately 3,000 miles of one empty conduit.

<Table>
<Caption>
          ROUTE                                                 ROUTE MILES
          -----                                                 -----------
          <S>                                                         <C>
          Chicago - Denver....................................        1,050
          Denver  - Salt Lake City............................          621
          Salt Lake City - Sacramento.........................          795
          Chicago - Minneapolis...............................          495
          Chicago - Detroit...................................          380
          Denver - Dallas.....................................        1,075
                                                                      -----
          Total Miles.........................................        4,416(1)
                                                                      -----
</Table>

          ----------
          (1) For purposes of our plan, we have determined the route miles to
              total approximately 4,500, given slight changes of mileage
              forecasted on a route by route basis. These route miles may be
              adjusted slightly on an ongoing basis.

                                       35
<Page>

     We will provide fiber and, in some cases, a conduit, to Touch America along
the segments set forth in the following table. We will provide a total of
approximately 71,000 fiber miles, generally consisting of 12 fibers on each
segment, and approximately 3,500 miles of one empty conduit.

<Table>
<Caption>
          ROUTE                                                 ROUTE MILES
          -----                                                 -----------
          <S>                                                         <C>
          Los Angeles - San Diego.............................          147
          San Diego - Phoenix.................................          458
          Phoenix - Fort Worth................................        1,129
          Fort Worth - Austin.................................          232
          Austin - San Antonio................................          105
          San Antonio -Houston................................          240
          Houston - New Orleans...............................          415
          New Orleans - Jacksonville..........................          638
          Jacksonville - Orlando..............................          172
          Jacksonville - Atlanta..............................          390
          Atlanta - Greensboro................................          372
          Greensboro - Arlington..............................          517
          Arlington - New York................................          249
          Fort Worth - Tulsa..................................          287
          Tulsa - Kansas City.................................          265
          Kansas City - St. Louis.............................          283
                                                                      -----
          Total Miles.........................................        5,899(1)
                                                                      -----
</Table>

          ----------
          (1) For purposes of our plan, we have determined the route miles to
              total approximately 5,900, given slight changes of mileage
              forecasted on a route by route basis. These route miles may be
              adjusted slightly on an ongoing basis.

     Under the Touch America agreement, all routes are required to be delivered
concurrently when all construction is completed on both parties' routes. Both
parties have experienced force majeure construction delays on certain routes to
be swapped.

RIGHTS IN IRUS

     Each constructing party will obtain all rights of way and other rights
necessary for the use of its conduit, fiber and other physical facilities and
will exercise its best efforts to renew or replace existing rights of way, IRUs
or other underlying rights to continue to maintain its network. If, despite its
best efforts, the constructing party determines that it cannot renew or replace
any of these rights, it will cooperate with the non-constructing party and allow
the non-constructing party to attempt to renew or replace these rights at the
non-constructing party's sole expense. The ability of the non-constructing party
to renew or replace these rights will not cause any adjustment in the true-up
payment, or payments for colocation, interconnection, or operation, maintenance
or repair of the network. Any failure of the constructing party's rights will
entitle the non-constructing party to enforce specific performance from the
constructing party and any other available remedies at law or in equity as long
as the failure is not due to force majeure or the fault of the non-constructing
party.

                                       36
<Page>

CONSTRUCTION

     The agreement provides that each party's network will be completed and
tested by December 31, 2001. Both parties agreed to use commercially reasonable
efforts to complete all construction and testing by this date. If a constructing
party fails to complete construction and testing by December 31, 2001, unless
otherwise excused by the agreement, it will pay a penalty of $75,000 per month
for each link that is late until construction and fiber testing is completed.
This will be the exclusive remedy of the non-constructing party until June 30,
2002. After that date, the non-constructing party may assume the uncompleted
construction. In such a case, the constructing party must cooperate fully with
the non-constructing party to transfer to the non-constructing party that part
of construction being undertaken. Both parties experienced construction delays,
and each has claimed such delays are the result of force majeure, which allows
each to avoid a default for such delays under the agreement.

TESTING AND ACCEPTANCE

     Each constructing party will test the fibers in the other party's IRU
fibers and conduit to verify that those fibers and conduit are operating
according to specifications set forth in this agreement. This testing will take
place along the routes and links as cable splicing is completed. If the test
results are within the parameters set forth in the agreement, the
non-constructing party will give the constructing party written notice of
acceptance. Each constructing party will provide the non-constructing party
as-built drawings and technical specifications for the fiber, splices,
regenerators and other equipment placed in each link.

EXCHANGE OPTION

     We and Touch America may extend the term of the initial IRU leases to 38
years from the completion date of construction, testing and acceptance of both
parties systems' by exercising the exchange option. Such option is exercisable
by Touch America or us by written notice given within a period of 120 days
before the second anniversary of the completion date of construction, testing
and acceptance.

COLOCATION, INTERCONNECTION AND MAINTENANCE

     The constructing party will provide the non-constructing party colocation
space in secure shelters with power, backup power and alarms, at all optical
amplifier, regenerator, junction and point of presence sites. The
non-constructing party will pay the constructing party an agreed-upon fee set
forth in the agreement for rack space and power.

     The non-constructing party will pay a proportional amount of any repairs
needed due to a specific accident or disaster or fiber deterioration that is not
due to the constructing party's negligence or willful misconduct, to the extent
that the non-constructing party's proportional share based on the number of its
fibers relative to the total fibers in the system, is greater than $10,000. The
non-constructing party will also pay the other party agreed-upon fees set forth
in the agreement for maintenance of the fiber and conduit.

                                       37
<Page>

DEFAULT AND TERMINATION

     Neither Touch America nor we will be in default until the other party gives
written notice of the default and the defaulting party fails to cure the default
within 30 days if the default is capable of being cured within 30 days. If it is
not capable of curing within 30 days, the defaulting party will have an extended
period of time to cure the default. Events of default include certain insolvency
events. Any event of default may be waived by the other party. Upon the failure
of the defaulting party to timely cure a default, the other party may correct
the default and pursue any legal or equitable remedies for the breach.

OTHER CONDITIONS

     Touch America and we have agreed to indemnify each other for claims and
losses due to each party's respective misconduct. A party will not be in default
if a delay in performance occurs without its fault and due to certain conditions
outside its control. Neither party may assign the agreement without the consent
of the other party, which consent may not be unreasonably withheld. Upon
termination of the agreement at the end of the term, each party, at its sole
cost, will remove its electronics and equipment from the other party's
facilities.

AT&T FIBER PURCHASE AGREEMENT

     On December 9, 2000, our wholly-owned subsidiary, PF.Net Corp., entered
into an agreement with AT&T Corp. (amended and restated in July 2001 and
amended in December 2001) to purchase fibers from AT&T (or rights to use such
fibers on certain routes) on approximately 8,850 route-miles. Such agreement
also provides for colocation at AT&T points of presence and optical amplifier
huts along the routes, maintenance of the network and certain other services,
and an option for PF.Net to install, at our incremental cost of installation,
additional fibers to triple our fiber count along roughly 90% of the same
route-miles in the event AT&T chooses to install additional fibers on such
routes. The agreement provides that the total cost for this acquisition will
be approximately $106 million payable as we acquire fiber along these routes.
(See "Our Network-General-Dark Fiber Acquisition" for link mileage and
scheduled completion dates.) In 2001, PF.Net Corp. made $21.2 million in
payments related to this agreement. If AT&T fails to complete any link within
90 days after the scheduled completion date, it must pay PF.Net Corp.
liquidated damages of $75,000 per month, subject to a cap of 5% of the value
of the link. If AT&T fails to perform its obligations under the AT&T
fiber-optic acquisition agreement after written notice and applicable cure
periods, PF.Net Corp. may terminate the AT&T fiber-optic acquisition
agreement. The agreement provides that if PF.Net Corp. fails to make payments
to AT&T within 30 days of the date due or experiences certain insolvency
events, AT&T may terminate the fiber-optic acquisition agreement. AT&T may
also terminate the agreement for PF.Net Corp.'s failure to perform its other
obligations under the agreement after written notice and the lapsing of
applicable cure periods.

     We will need to restructure this agreement to implement our new business
plan which assumes that we will only be purchasing approximately 2,400 of the
miles subject to this agreement. We cannot assure you that we will be able to
complete such restructuring on terms satisfactory to us. If market conditions
and our liquidity improve and we decide to expand our network, we would likely
seek to acquire some or all of the additional miles subject to this agreement.
However, if our scaled-back network has resulted in a restructuring or violation
of this agreement, we cannot assure you that these additional miles will still
be available to us.

CISCO SUPPLY AGREEMENT

                                       38
<Page>

     On April 12, 2001, PF.Net Corp., a wholly-owned subsidiary of Velocita
Corp., entered into the Supply Agreement with Cisco, pursuant to which Cisco
will supply optronics and data internetworking equipment for our network. All
of the provisions of this agreement became effective on May 24, 2001. Under
the Supply Agreement, we also entered into a "take-or-pay" obligation with Cisco
through May 2003 with respect to $225 million of equipment and services. We
do not expect our scaled-back network to require $225.0 million of such
equipment and services. See "Description of Material Agreements--Cisco Supply
Agreement."

     In early 2002, we initiated a success-based lighting plan and we have lit
2,400 miles of our network. We do not expect to light any more miles unless
marketing opportunities arise on specific routes. As of March 31, 2002, we have
purchased from Cisco approximately $63.0 million in equipment and services. It
is currently unclear if and when we will purchase additional equipment and
services from Cisco under the Supply Agreement. Pursuant to the terms of the
Supply Agreement, if we do not purchase $225.0 million of equipment and services
from Cisco by May 2003, Cisco has the right invoice us for payment in an amount
equal to the difference between $225.0 million and the amount of equipment and
services we purchased or ordered from Cisco.

STOCKHOLDERS AGREEMENT

     Each holder of our outstanding shares of common stock and senior preferred
stock, as well as certain holders of warrants to purchase shares of common
stock, are parties to a stockholders agreement by among these stockholders and
us. This stockholders agreement was amended and restated as of May 24, 2001, in
connection with the consummation of the Cisco financing transactions.

     The stockholders agreement contains transfer restrictions that limit the
ability of our stockholders to transfer our securities. Until the earlier of (a)
October 29, 2001 and (b) the date on which our equity is actively publicly
traded, or 180 days after that date in the case of First Union, no stockholder
shall transfer any interests in our securities, subject to certain exceptions.
All transferees of our securities will be required to acknowledge in writing
that their securities are subject to the provisions of the stockholders
agreement.

     The stockholders agreement requires that each of the parties thereto vote
all of its securities to cause to be elected to our board of directors (1) up to
two designees of Odyssey Investment Partners; (2) up to three designees of PF
Telecom Holdings LLC; (3) up to three designees of Koch Telecom Ventures; (4) up
to two designees of Cisco Systems; (5) up to one designee of UBS Capital II LLC
and (6) our chief executive officer. Messrs. Mirza and Kwait are the Odyssey
designees. Messrs. Aziz, Warta and Irwin are the PF Telecom designees. Messrs.
Cesarek and Pittenger are the Koch Telecom designees. Mr. Moore is the designee
of UBS Capital. Although Cisco continues to have the right to designate up to
two individuals to our board of directors, currently there are no Cisco
designees on our board of directors.

     The right of each of Odyssey, PF Telecom and Koch Telecom Ventures to
designate members of our board of directors will be reduced by one, if any of
them and their respective affiliates own less than 50% of their initial holdings
(as determined therein) of our securities and the right will terminate if any
them and their respective affiliates own less than 25% of their initial
holdings. UBS Capital's right to designate one member of our board of directors
will terminate if UBS Capital and its affiliates own less than 50% of its
initial holdings of our securities. Upon termination of UBS Capital's right to
designate a board member, each of PF Telecom and Koch Telecom Ventures will have
the number of directors they have a right to designate reduced by one. The
number of directors Cisco has a right to designate will be reduced by one if
Cisco's holdings together with the holdings of its permitted transferees fall
below $100.0 million of initial liquidation preference in series B preferred
stock. If Cisco's holdings fall below $40.0 million of initial liquidation
preference in series B preferred stock, or if it transfers its holdings to more
than five non-affiliated transferees, Cisco will not be entitled to designate
any individual to the Board of Directors.

                                       39
<Page>

     The stockholders agreement contains protection provisions, whereby we will
be required to obtain the consent of three of the four groups of directors
designated by Odyssey, PF Telecom, Cisco and Koch Telecom Ventures,
respectively, to consummate the following transactions:

     -    any increase or decrease in the number of shares of our capital stock
          or the capital stock of our subsidiaries issued or authorized;

     -    the creation (by reclassification or otherwise) of any new class or
          series of capital stock by us or any of our subsidiaries;

     -    any amendment or waiver of our or any of our subsidiaries'
          certificates of incorporation or bylaws;

     -    any sale, merger, acquisition or consolidation (other than pursuant to
          the company sale right described therein) involving us or any of our
          subsidiaries in excess of $10.0 million in value;

     -    any financing arrangement in excess of $10.0 million;

     -    the approval of each business plan and annual budget of ours or any of
          our subsidiaries;

     -    the approval of changes to the business plan or any amendments to our
          annual budget or the annual budget of any of our subsidiaries, in
          either case, that involve increases in expenditures in excess of $10.0
          million in the aggregate;

     -    the entering into or amendment of any partnership or joint venture
          arrangement or making any other debt or equity investment in any other
          entity or forming any new subsidiary or affiliate involving an
          investment;

     -    performance of services or delivery of goods or materials of an amount
          or value in excess of $10.0 million;

     -    any other contract or any amendment to existing contracts (other than
          any agreement with Koch Telecom Ventures and its affiliates),
          including any contract involving performance of services or delivery
          of goods or materials by us or any of our subsidiaries of an amount or
          value in excess of $10.0 million or having an effect in excess of
          $10.0 million on our value or the value of any of our subsidiaries;

     -    any sale of assets for a price in excess of $10.0 million;

     -    any redemption, purchase or other acquisition of our capital stock;

     -    the adoption or amendment of any management incentive plan, including
          the granting of awards pursuant to such plan and the terms and
          conditions of such awards (including, without limitation, vesting and
          expiration provisions);

     -    entry into any new line or type of business;

     -    the resolution or settlement of any third-party claim in excess of
          $10.0 million; or

     -    the election of each of the members of the board of directors of each
          of our subsidiaries.

                                       40
<Page>

     Due to the fact that currently there are no Cisco designees on our board of
directors, we will only be required to obtain the consent of two of the three
groups of directors designated by Odyssey, PF Telecom and Koch Telecom Ventures
to consummate any of the transactions set forth above.

     In addition to other approvals we will be required to receive in certain
situations, we will also be required to obtain the consent of the majority of
our board of directors, to consummate the following transactions:

     -    any sale, merger, acquisition or consolidation (other than pursuant to
          the company sale right described therein) involving us or any of our
          subsidiaries that is in excess of $5.0 million and less than or equal
          to $10.0 million in value;

     -    any financing arrangement in excess of $5.0 million and less than or
          equal to $10.0 million;

     -    the approval of changes to the business plan or any amendments to our
          annual budget or the annual budget of any of our subsidiaries, in
          either case, that involve increases in expenditures that are in excess
          of $5.0 million in the aggregate and less than or equal to $10.0
          million in the aggregate;

     -    entry into or amendment of any partnership or joint venture
          arrangement or the making of any other debt or equity investment in
          any other entity or forming any new subsidiary or affiliate involving
          an investment, performance of services or delivery of goods or
          materials of an amount or value in excess of $5.0 million and less
          than or equal to $10.0 million;

     -    any other contract or any amendment to existing contracts (other than
          any agreement with Koch Telecom Ventures and its affiliates),
          including any contract involving performance of services or delivery
          of goods or materials by us or any of our subsidiaries of an amount or
          value in excess of $5.0 million and less than or equal to $10.0
          million or having an effect on our value or the value of any of our
          subsidiaries in excess of $5.0 million and less than or equal to $10.0
          million;

     -    any sale of assets for a price in excess of $5.0 million and less than
          or equal to $10.0 million; or

     -    the resolution or settlement of any third-party claim in excess of
          $5.0 million and less than or equal to $10.0 million.

     In addition, the stockholders agreement grants:

     -    a right of first offer to Odyssey, PF Telecom, Koch Telecom Ventures,
          UBS Capital and any other Odyssey and Cisco co-investors and each of
          their respective affiliates on certain proposed transfers of our
          securities by any stockholder (other than Cisco);

     -    tag-along rights to each stockholder (other than Cisco) on certain
          transfers of our securities by any stockholder, other than First Union
          and Cisco;

     -    Odyssey, Koch Telecom Ventures, Cisco, PF Telecom and the Company the
          right to drag-along all of our stockholders if there is a sale of our
          company;

     -    each of Odyssey, PF Telecom, Cisco and Koch Telecom Ventures, the
          right, after 180 days from the effective date of our initial public
          offering, to make two demands to us to register their securities, or
          one demand in the case of UBS Capital;

     -    certain stockholders piggy-back registration rights after our initial
          public offering;

                                       41
<Page>

     -    preemptive rights to Odyssey, PF Telecom, Koch Telecom Ventures, UBS
          Capital, Cisco and any other Odyssey and Cisco co-investors and each
          of their respective affiliates on any proposed issuances by us of
          capital stock to our affiliates; and

     -    either (1) Odyssey the right, at any time after October 29, 2004 or
          (2) any two of the following stockholders, Koch Telecom Ventures, PF
          Telecom and Cisco, the right, at any time after October 29, 2005, and
          in each case, prior to the date that our equity is actively publicly
          traded, to initiate a sale of our company, provided that the
          stockholders initiating the sale give notice of it to Odyssey, Koch
          Telecom Ventures, Cisco and PF Telecom, as applicable, of it and allow
          them to make an offer to purchase our company, subject to the terms
          and conditions listed in the stockholders agreement.

FIRST UNION CREDIT AGREEMENT

     On May 24, 2001, our wholly-owned subsidiary, PF.Net Corp., amended its
credit agreement with First Union National Bank, as administrative agent, to
provide for an additional $297.4 million in vendor financing to be provided by
Cisco Systems Capital Corporation in the amount of $285.0 million and by Koch
Telecom Ventures, Inc. in the amount of $12.4 million. Concurrently, Koch
Telecom Ventures received $12.4 million under the terms of the subordinated note
dated October 29, 1999. See "Certain Relationships and Related Transactions --
Other Related Party Transactions" in Item 13 of this Report. The amendment to
the credit agreement resulted in total borrowing capacity of $647.4 million.
Borrowings from Cisco Capital under the First Union credit agreement will be
used primarily to purchase equipment and services under the supply agreement we
have entered into with Cisco described above.

     As amended, the First Union credit agreement provides for term loans under
a Tranche A facility and a revolving facility. The Tranche A facility provides
for borrowings of up to approximately $497.4 million, and the revolving facility
provides for borrowings of up to $150 million. The Tranche A facility is
comprised of three subfacilities (i) $160 million available for the purchase of
vendor products and services used in the construction of the network, (ii) $40
million available to finance general capital expenditures and operating expenses
associated with development of our network, as defined, and (iii) approximately
$297 million available for the purchase of vendor products and services used in
the construction of the network, $225 million of which are initially available
for the purchase of Cisco equipment and services. The revolving facility
provides for borrowings for general capital expenditures and operating expenses
associated with the development of the network and working capital needs.

     Borrowings under the credit agreement bear interest, at PF.Net Corp.'s
option, at the following rates per annum: (i) LIBOR (1.98% annual rate as of
December 31, 2001) plus an applicable margin ranging between 3.50% to 4.75% per
annum based on PF.Net Corp.'s consolidated leverage ratio or (ii) a base rate,
which is equal to the greater of (a) the current prime rate of First Union, or
(b) the current U.S. federal funds rate plus 0.5% per annum, plus an applicable
margin, ranging from 2.25% to 3.50% per annum based on the status of PF.Net
Corp.'s consolidated leverage ratio. Indebtedness under the First Union credit
agreement matures on December 31, 2006.

     The First Union credit agreement is subject to certain restrictive
covenants including minimum route-mile completion in accordance with PF.Net
Corp.'s network development agreement with AT&T, minimum operating results
before interest, taxes, depreciation and amortization and certain debt to equity
ratios. The credit agreement is secured by substantially all of the assets of
PF.Net Corp. and its subsidiaries.

     As of December 31, 2001, we had a total of approximately $277.0 million
(net of $3.8 million of outstanding letters of credit) available under the
credit agreement, assuming we meet certain spending requirements with respect to
our network and the equipment purchased from Cisco for use on our

                                       42
<Page>

network. However, we do not expect that we will be able to borrow additional
funds under our credit agreement unless we are able to amend that agreement. See
"Recent Changes To The Business, Credit Agreement Defaults and Possible
Restructuring" within Item 1 of this Report.

     As of March 31, 2002, we were not in compliance with certain financial
covenants under our credit agreement. On March 28, 2002, we obtained the Waiver
from our banking group through April 15, 2002, and on April 15, 2002 this
Waiver was extended through April 30, 2002. Because of these financial covenant
breaches, significant financial pressures facing us and the telecommunications
industry, and the need for additional capital to complete our network build, we
are considering various financial and strategic alternatives. These alternatives
include restructuring our debt, the sale to one or more strategic investors, the
sale or other disposition of substantially all of our business or assets, and
filing for protection under Chapter 11 of the United States Bankruptcy Code.
Pending a final determination regarding our financial and strategic
alternatives, it is likely that we will elect to cease paying interest on our
outstanding senior notes. Additionally, we have scaled back our business plan
because of our financial situation and industry conditions.

     The Waiver requires us to comply with other covenants in the credit
agreement and to forego further borrowing under the revolving credit portion
of our credit agreement. In addition, during the waiver period, PF.Net Corp.,
our wholly-owned subsidiary, is prohibited from making any restricted
payments (as defined under our credit agreement), other than restricted
payments to Velocita Corp. to be used to fund operating and administrative
expenses. This restriction, if it were to apply on an interest payment date
for purposes of our senior notes, would prohibit PF.Net Corp. from making
cash payments to Velocita Corp. necessary for us to pay interest on the
senior notes. During the waiver period, we are continuing discussions with
our bank lenders regarding modification of the terms of our credit agreement.
If we do not obtain an amendment, or an additional waiver, to our credit
agreement, we will be in default of our credit agreement and our lenders
could elect to accelerate and make all of the outstanding indebtedness under
the credit agreement due and payable immediately. As a result of these
defaults, all of the obligations under the credit agreement have been
reclassified as current liabilities. As of April 15, 2002, we had
approximately $380 million of indebtedness (including outstanding letters of
credit) outstanding under the credit agreement. In the event of an
acceleration, we would be unable to repay that indebtedness and, unless we
cure the defaults, the credit agreement lenders could seek a judgment and
attempt to seize our assets to satisfy the debt to them. Accordingly, we may
be required to file for protection under Chapter 11 of the United States
Bankruptcy Code. We are unable to predict if we will be able to obtain the
necessary modifications of our credit agreement from our banks.

                                       43
<Page>

                                GLOSSARY OF TERMS

<Table>
<S>                               <C>
access.........................   Telecommunications service that permits long distance
                                  carriers to use local exchange facilities to originate
                                  and/or terminate long distance service.

access charges.................   The fees paid by long distance carriers to LECs for
                                  originating and terminating long distance calls on the LEC's
                                  local networks.

Asynchronous Transfer Mode
     (ATM).....................   A cell-based connection-oriented technology that provides a
                                  protocol for transmitting multiple traffic types over
                                  high-speed networks.

backbone ......................   A centralized high-speed network that interconnects smaller,
                                  independent networks.  It is the through-portion of a
                                  transmission network, as opposed to spurs that branch off
                                  the through-portions.

band ..........................   A range of frequencies between two defined limits.

bandwidth .....................   The relative range of analog frequencies or digital signals
                                  that can be passed through a transmission medium, such as
                                  glass fibers, without distortion.  The greater the
                                  bandwidth, the greater the information carrying capacity.
                                  Bandwidth is measured in hertz (analog) or bits per second
                                  (digital).

bit  ..........................   A binary unit of information that can have either of two
                                  values, 0 or 1.

BGP Communities................   Border Gateway Protocol Communities.  A defined subset of
                                  the global Internet routing table, e.g., Internet routes
                                  from France.

BOC  ..........................   Under the terms of the 1982 consent decree resulting in the
                                  break-up of the old AT&T "Bell System," the local exchange
                                  activities of AT&T were divested into seven new, regional
                                  holding companies ("RHCs"), and several dozen "Bell"
                                  operating companies within the RHCs.  The Bell operating
                                  companies are referred to herein as the "BOCs."  Today, due
                                  to merger activity, there are four RHCs remaining, and the
                                  BOCs are listed by name in the Communications Act.  The Act
                                  imposes certain restrictions on the BOCs and their
                                  affiliates, including restrictions on the provision of
                                  service between their LATAs and other areas.  The
                                  "interLATA" restrictions and other aspects of BOC regulation
                                  are described in the "Regulation" section of this Report.
</Table>

                                       44
<Page>

<Table>
<S>                               <C>
broadband......................   An information (voice, data, etc.) transmission facility
                                  providing bandwidth capability, usually greater than 45 Mbps
                                  (T-3).  A broadband transmission facility is generally a
                                  fiber-optic network which, with appropriate optical, data
                                  communications and internetworking equipment, can provide
                                  DWDM, SONET and IP data as well as advanced application
                                  services.

broadband carrier..............   Service provider offering broadband services to both carrier
                                  and enterprise customers.

CAP  ..........................   Competitive Access Provider.  A company that provides its
                                  customers with an alternative to the local exchange company
                                  for local transport of private line and specific access
                                  telecommunications services.

capacity.......................   The information carrying ability of a telecommunications
                                    facility.

carrier ........................  A provider of communications transmission services by fiber,
                                  wire or radio.

carrier's carrier .............   A provider of communications transmission services that
                                  specializes in thewholesale provision of telecommunications
                                  bandwidth and services to other carriers and service providers.

CCITT..........................   Consultative Committee on International Telegraphy and
                                   Telephony.

cell ..........................   For ATM, an information packet consisting of 53 bytes, or
                                  octets, of data.  Of these, the first 5 constitute the
                                  header: 48 carry the payload.

central office.................   Telephone company facility where subscribers' lines are
                                  joined to switching equipment for connecting other
                                  subscribers to each other, locally and long distance.

CLEC ..........................   Competitive local exchange carrier.  A company that competes
                                  with LECs in the local services market.

colocation.....................   Refers to carriers or customers placing equipment in an
                                  incumbent's POP, op amp or regeneration site.  Generally,
                                  service fees for use of the real estate as well as related
                                  services (power, HVAC, etc.) are shared or paid for to allow
                                  the customer to operate its own equipment on these sites.
                                  Colocation sites can be owned by the incumbent or be leased
                                  from other carriers or real estate companies.
</Table>

                                       45
<Page>

<Table>
<S>                               <C>
common carrier.................   A government-defined group of private companies offering
                                  telecommunications services or facilities to the general
                                  public on a non-discriminatory basis.

conduit........................   A pipe, usually made of metal, ceramic or plastic, that
                                  protects buried cables.

CWDM ..........................   Coarse Wave Division Multiplexing.  Similar to DWDM but uses a
                                  much broader spectrum with significantly lower cost lasers.
                                  The number of wavelengths per fiber ranges from four to eight.

dark fiber ....................   Fiber that lacks the requisite optical transmission
                                  equipment necessary to use the fiber for transmission.

dedicated lines................   Telecommunications lines reserved for use by particular
                                   customers.

dialing parity.................   The ability of a competing local or toll service provider to
                                  provide telecommunications services in such a manner that
                                  customers have the ability to route automatically, without
                                  the use of any access code, their telecommunications to the
                                  service provider of the customers' designation.

DS-3 ..........................   A data communications circuit capable of transmitting data at
                                    45 Mbps.

digital .......................   Describes a method of storing, processing and transmitting
                                  information through the use of distinct electronic or
                                  optical pulses that represent the binary digits 0 and 1.
                                  Digital transmission/ switching technologies employ a
                                  sequence of discrete, distinct pulses to represent
                                  information, as opposed to the continuously variable analog
                                  signal.  This gives operators significant capacity increases
                                  over analog.

DSL  ..........................   A term referring to a variety of new Digital Subscriber Line
                                  technologies.  Some of these varieties are asymmetric with
                                  different data rates in the downstream and upstream
                                  directions.  Others are symmetric.  Downstream speeds range
                                  from 384 kbps, or SDSL, to 1.5-8 Mbps, or ADSL.

DWDM ..........................   Dense Wavelength Division Multiplexing.  High speed version
                                  of WDM, which is a means of increasing the capacity of SONET
                                  fiber-optic transmission systems through the multiplexing of
                                  multiple wavelengths of light.  A technique for transmitting
                                  more than one light wave frequency on a single fiber to
                                  increase the information carrying capacity.
</Table>

                                       46
<Page>

<Table>
<S>                               <C>
enterprise.....................   Usually refers to businesses both public and private, but
                                  can also refer to select government or other institutions.

equal access...................   The basis upon which customers of interexchange carriers are
                                  able to obtain access to their Primary Interexchange
                                  Carriers' (PIC) long distance telephone network by dialing
                                  "1", thus eliminating the need to dial additional digits and
                                  an authorization code to obtain such access.

facilities based carriers......   Carriers that own and operate their own network and
                                   equipment.

fiber miles ...................   The number of route miles installed along a
                                  telecommunications path multiplied by the number of fibers
                                  along the path.  See the definition of "route miles" below.

fiber-optics ..................   Fiber-optic technology involves sending laser light pulses
                                  across glass strands in order to transmit digital
                                  information.  Fiber-optic cable is the medium of choice for
                                  the telecommunications and cable industries.

frame relay ...................   A high-speed, data-packet switching service used to transmit
                                  data between computers.  Frame Relay supports data units of
                                  variable lengths at access speeds ranging from 56 kilobits
                                  per second to 1.5 megabits per seconds.  This service is
                                  well-suited for connecting local area networks, but is not
                                  presently well suited for voice and video applications due
                                  to the variable delays which can occur.  Frame Relay was
                                  designed to operate at high speeds on modern fiber-optic
                                  networks.

Gbps ..........................   Gigabits per second.  A transmission rate.  One gigabit equals
                                  1.024 billion bits of information.

ILEC ..........................   Incumbent local exchange carrier.  A company historically
                                  providing local telephone service.  Often refers to one of
                                  the Bell Operating Companies (BOCs).  Often referred to as
                                  "LEC" (Local Exchange Carriers).

interconnection................   Interconnection of facilities between or among local
                                  exchange carriers, including potential physical colocation
                                  of one carrier's equipment in the other carrier's premises
                                  to facilitate such interconnection.

interLATA......................   Telecommunications services originating in a LATA and
                                  terminating outside of that LATA.

internet.......................   A global collection of interconnecting computer networks
                                  which use a specific communications protocol.
</Table>

                                       47
<Page>

<Table>
<S>                               <C>
IntraLATA......................   Telecommunications services originating and terminating in
                                  the same LATA.

IP   ..........................   Internet Protocol.  A network protocol that allows computers
                                  with different architectures and operating system software
                                  to communicate with other computers on the Internet.

IRU  ..........................   Indefeasible right of use.  A long-term lease of approximately
                                  10 or 20 years with option periods thereafter to renew at
                                  lower rates, at the option of the lessee.

ISDN ..........................   Integrated Services Digital Network.  A standardized
                                  all-digital network that integrates voice and data
                                  communications through existing copper wiring.

ISP  ..........................   Internet service provider.  A company that provides businesses
                                  and consumers with access to the Internet.

IXC  ..........................   Interexchange carrier.  In the United States, a company
                                  providing interLATA or long distance services between LATAs
                                  on an intrastate or interstate basis.

Kbps ..........................   Kilobits per second.  A transmission rate.  One kilobit equals
                                  1,024 bits of information.

LAN  ..........................   Local area network.  A short distance data communications
                                  network (typically within a building or campus) used to link
                                  together computers and peripheral devices (such as printers)
                                  under some form of standard control.

LATA ..........................   The approximately 200 geographic areas defined pursuant to
                                  the Consent Decree between which the BOCs are prohibited
                                  from providing long distance service until they demonstrate
                                  to the FCC and state regulatory agencies that they have
                                  adhered to the Telecommunications Act's Section 271 14-point
                                  competitive checklist.

leased line....................   Telecommunications line dedicated to a particular customer
                                  along predetermined routes.

LEC  ..........................   Local Exchange Carrier.  A telecommunications company that
                                  provides telecommunications services in a geographic area in
                                  which calls generally are transmitted without toll charges.
                                  LECs include both ILECs and CLECs.
</Table>

                                       48
<Page>

<Table>
<S>                               <C>
lit fiber .....................   Fiber activated or equipped with the requisite optical
                                  transmission equipment necessary to use the fiber for
                                  transmission.

local exchange.................   A geographic area determined by the appropriate state
                                  regulatory authority in which calls generally are
                                  transmitted without toll charges to the calling or
                                  called party.

local loop.....................   A circuit that connects an end user to the LEC central
                                  office within a LATA.

Mbps ..........................   Megabits per second.  A transmission rate.  One megabit equals
                                  1.024 million bits of information.

MPLS ..........................   Multi-Protocol Label Switching.  A switching standard for the
                                  transmission of data at increased speeds.  The concept is
                                  based on having routers at the edge of a communications
                                  network and switches at the core of the network for the
                                  faster transmission of data communications.

MSA  ..........................   Metropolitan Statistical Area.  Refers to a county or group of
                                  adjoining counties that contain at least one urbanized area
                                  of 50,000 inhabitants or more.

multiplexing ..................   An electronic or optical process that combines a large
                                  number of lower speed transmission lines into one high speed
                                  line by splitting the total available bandwidth into
                                  narrower bands (frequency division), or by allotting a
                                  common channel to several different transmitting devices,
                                  one at a time in sequence (time division).

OC   ..........................   OC is a measure of SONET (Synchronous Optical Network)
                                  transmission optical carrier level, which is equal to the
                                  corresponding number of DS-3s (e.g., OC-3 is equal to 3
                                  DS-3s (DS-3 service has a bit rate of 45 megabits per second
                                  and typically transmits 672 simultaneous voice
                                  conversations) and OC-48 is equal to 48 DS-3s).

Op amp/regeneration site.......   Optical amplification equipment placed at specified
                                  intervals along a fiber-optic network to transmit optical
                                  signals using lasers.  Intervals can range, depending on the
                                  equipment manufacturer, from 45 to 65 miles.  Regeneration
                                  sites include additional optical internetworking equipment
                                  required to improve signal transmission quality as a result
                                  of signal dispersion in the optical fiber over long
                                  distances.
</Table>

                                       49
<Page>

<Table>
<S>                               <C>
Optical Carrier (OCx) .........   Fundamental unit of measurement used in SONET hierarchy.  OC
                                  indicates an optical carrier signal and x represents
                                  increments of 51.84 Mbps.  OC-1, OC-3, and OC-12 represent
                                  optical transmission rates of 51, 155, 622 Mb/s.

optical wave services .........   Services that allow a customer exclusive long-term use of a
                                  portion of the transmission capacity of a fiber-optic strand.

packet-switched ...............   A packet is a group of fixed-length binary digits, including
                                  the data, call control signals and error control
                                  information.  In a packet-switched network, a transmission
                                  channel is occupied only for the duration of the
                                  transmission of the packet.

peering .......................   The commercial practice under which ISPs exchange each
                                  other's traffic without the payment of settlement charges.
                                  Peering occurs in both public and private exchange points.

POP  ..........................   Point-of-presence.  Locations where a carrier has installed
                                  transmission equipment in a service area that serves as, or
                                  relays calls to, a network switching center of the carrier,
                                  or locations in customer buildings where a carrier has
                                  installed electronics and/or facilities.

private line...................   A dedicated telecommunications connection between end user
                                   locations.

protocol ......................   A formal description of a set of rules and conventions that
                                  govern how devices on a network exchange information.  These
                                  rules consist of syntax (header structure), semantics
                                  (actions and reactions that are supposed to occur), and
                                  timing (relative ordering and direction of states and
                                  events).

PSTN ..........................   Public Switched Telephone Network.  That portion of a local
                                  exchange company's network available to all users generally
                                  on a shared basis (i.e., not dedicated to a particular
                                  user).  Traffic along the public switched network is
                                  generally switched at the local exchange company's central
                                  offices.

reciprocal compensation........   The compensation of the CLEC for termination of a local call
                                  by the ILEC on the CLEC's network, which is the same as the
                                  compensation that the CLEC pays the ILEC for termination of
                                  local calls on the ILEC's network.
</Table>

                                       50
<Page>

<Table>
<S>                               <C>
reseller ......................   A carrier that does not own transmission facilities, but
                                  obtains communications services from another carrier on a
                                  wholesale basis for resale to the public.

route miles ...................   The number of miles of the telecommunications path in which
                                  fiber-optic cables are installed.

router.........................   Equipment placed between networks that relays data to those
                                  networks based upon a destination address contained in the
                                  data packets being routed.

ROW............................   Rights of way, licenses and permits (creating a contractual
                                  interest and not an interest in land) from third-party landowners
                                  and governmental authorities that permit the holder to install
                                  conduit and fiber.

SONET..........................   Synchronous Optical Network.  An electronic and network
                                  architecture for variable bandwidth products which enables
                                  transmission of voice, data and video (multimedia) at very
                                  high speeds.  SONET ring architecture provides for virtually
                                  instantaneous restoration of service in the event of a fiber
                                  cut by automatically rerouting traffic in the opposite
                                  direction around the ring.

SONET ring ....................   Synchronous Optical Network Technology Ring.  An electronics
                                  and network architecture for variable-bandwidth products
                                  which enables transmission of voice, data and video
                                  (multimedia) at very high speeds in the event of a fiber cut
                                  by automatically rerouting traffic in the opposite direction
                                  around the ring.

Substantially complete date....   Date on which the digging, laying of conduit and pulling of
                                  fiber through the conduit have been achieved, in addition to
                                  any necessary remediation of terrain disturbed during
                                  construction.

switch ........................   A sophisticated computer that accepts instructions from a
                                  caller in the form of a telephone number.  Like an address
                                  on an envelope, the numbers tell the switch where to route
                                  the call.  The switch opens or closes circuits or selects
                                  the paths or circuits to be used for transmission of
                                  information.  Switching is a process of interconnecting
                                  circuits to form a transmission path between users.

Synchronous Optical Network
(SONET) .......................   A CCITT standard for synchronous transmission up to
                                  multi-gigabit speeds.
</Table>

                                       51
<Page>

<Table>
<S>                               <C>
T-1  ..........................   A data communications circuit capable of transmitting data
                                 at 1.544 Mbps.

Tbps ..........................   Terabits per second.  A transmission rate.  One terabit equals
                                  1.024 trillion bits of information.

Telecommunications Act ........   Telecommunications Act of 1996, as amended from time to time.

unbundled......................   Services, programs, software and training sold separately
                                  from the hardware.

unbundled access...............   Access to unbundled elements of a telecommunications
                                  services provider's network including network facilities,
                                  equipment, features, functions and capabilities, at any
                                  technically feasible point within such network.

VPN  ..........................   Virtual private network.  Committed (can be dedicated) circuits
                                  or capacities made available on segments of or across an entire
                                  network for a particular customer's use. This can be made
                                  available on a bulk capacity basis or on an as needed basis.

wavelength.....................   Usually refers to (today) a single OC-192 capacity on a
                                  single fiber, which is usually denoted by a separate color
                                  to allow simultaneous transmission of multiple wavelengths
                                  on the same fiber at the same time.  The number of
                                  wavelengths and the capacity throughput (OC-192 and above)
                                  will vary over time, depending on the technologies.

web-site.......................   A server connected to the Internet from which Internet users
                                  can obtain information.

wireless.......................   A communications system that operates without wires.
                                  Cellular service is an example.

world wide web or web..........   A collection of computer systems supporting a communications
                                  protocol that permits multimedia presentation of information
                                  over the Internet.

xDSL ..........................   A term referring to a variety of new Digital Subscriber Line
                                  technologies.  Some of these new varieties are asymmetric
                                  with different data rates in the downstream and upstream
                                  directions.  Others are symmetric.  Downstream speeds range
                                  from 384 Kbps (or "SDSL") to 1.5 to 8 Mbps ("ADSL").
</Table>

Item 2.   Properties

     Our executive and administrative offices are located in Falls Church,
Virginia, where we lease approximately 75,000 square feet under an agreement
that expires in August 2011. We also lease

                                       52
<Page>

approximately 5,000 square feet in Houston, Texas for our construction team
under an agreement that expires on December 31, 2002. In addition we maintain an
office in Washougal, Washington, where we lease an aggregate of approximately
4,000 square feet under an agreement that expires in June 2004. We also lease
approximately 10,000 square feet in Short Hills, New Jersey under an agreement
that expires in January 2006. In the ordinary course of our business, we also
lease building or warehouse space or, to the extent necessary, have acquired
easements to accommodate our regeneration sites and POPs or for storage
purposes. Based upon our current operations, we believe that our properties are
adequate and suitable for our intended purposes. As a result of our planned
reorganization, we will actively pursue sub-leasing opportunities for some of
our leased space. See "Recent Changes To The Business, Credit Agreement Defaults
and Possible Restructuring" within Item 1 of this Report.

ITEM 3.   LEGAL PROCEEDINGS

     We are a party to various claims involving employee matters. Management
believes that the claims are without merit and we intend to vigorously defend
against them. Resolution of these matters is not expected to have a material
adverse effect on us. From time to time, we may be party to various other legal
proceedings arising in the ordinary course of business, including issues related
to obtaining rights of way, franchise fees, bankruptcy filings by customers and
vendors, default provisions under construction contracts, and mechanics liens
against our assets. Management does not believe these legal proceedings,
individually or in the aggregate, will have a material adverse effect on us.

     On March 31, 2001, we entered into an agreement with Winstar Wireless, Inc.
whereby the Company purchased IRUs in certain wavelengths from Winstar (the
"Wavelength IRU"), and certain tenant improvement and space build out of
colocation facilities under a Professional Services Agreement ("PSA"). Under the
Agreement, we were obligated to pay Winstar a total purchase price of $50
million for the Wavelength IRU and use of the colocation facilities, of which
$25 million was due and payable on March 31, 2001. The remaining balance due
under the Agreement was due and payable on May 29, 2001. On April 18, 2001,
Winstar filed for protection under Chapter 11 of the U.S. Bankruptcy Code. As a
result, our payment was not made on May 29, 2001. On July 23, 2001, Winstar
filed an Adversary Proceeding seeking turnover of $25 million they believed we
owed them under the Wavelength IRU and the PSA. We have moved to dismiss the
action for failure to state a claim. In December 2001, Winstar sold
substantially all of its assets to a third party and it converted its Chapter 11
case to a Chapter 7 bankruptcy filing. The Adversary Proceeding against us was
not sold to the third party and remains with the Winstar estate. The court has
not yet ruled on the Adversary claim or our motion to dismiss the action.
Management does not believe we are obligated to pay additional amounts and
intends to vigorously defend against the claim. In March 2001, we sold Winstar
conduits under a 20-year IRU for $25 million in cash and an additional $25
million to be paid in May 2001. On July 25, 2001, Winstar filed a motion in the
Bankruptcy court to reject the conduit purchase contract. The court did not rule
on the motion and because the buyer of Winstar's assets has a period of time to
define assets that it actually purchased from Winstar, it is currently unclear
whether the Winstar estate or the third party buyer own the conduit contract.
The outcome of this matter is currently uncertain with the bankruptcy court and
it is undetermined whether we will complete the sale transaction.

     On January 28, 2002, Global Crossing filed for protection under Chapter
11 of the U.S. Bankruptcy Code. In June 2001, we purchased $33.6 million in
prepaid services from Global Crossing, of which we currently have
approximately $32.7 million in remaining services to utilize. Additionally,
we sold fiber and related colocation and maintenance services to Global
Crossing, and we received a $33.6 million prepayment for the fiber and
services. We had not yet delivered the fiber or services to Global Crossing
at the time of their bankruptcy filing. We cannot determine what impact, if
any, the bankruptcy

                                       53
<Page>

filing will have on Global Crossing's ability to continue to provide services
under the capacity agreement or to accept fiber under the fiber sale agreement.

     At the direction of the California Department of Transportation, we entered
into a joint build agreement with Level 3 Communications (Level 3) on
November 26, 2000 for conduit in Southern California. Under the Agreement, we
agreed to pay Level 3 a fixed amount for construction, plus a management fee,
and up to 10% in costs overruns without prior notification and consent of
such overruns. Based on contractual terms, the maximum amount owed to Level
3, including the 10% overrun, is $4,596,180. In December 2001, Level 3
presented us with an invoice for payment of $21,044,114, which included
significant cost overruns. We believe that Level 3 did not provide proper
notification of potential cost overruns as required in the Agreement and that
we did not consent to pay for overruns. We offered to pay Level 3 $4,596,180
as payment in full for the construction and Level 3 rejected payment claiming
we owe $21,044,114. To date, Level 3 has not pursued any legal action. We
will vigorously defend against Level 3's claim, and we are evaluating our
legal rights under the contract. Delivery of the conduit is dependent on
resolution and payment of the contractual amount. As of December 31, 2001, we
had recorded a liability of $4,596,180 related to this matter.

     Any adverse outcomes from the bankruptcy courts, or rejection of contracts,
related to the Winstar or Global Crossing bankruptcy proceedings, or an adverse
outcome in the Level 3 matter, could have a material adverse effect on us.

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

     No matters were submitted during the fourth quarter of the fiscal year
covered by this Report to a vote of the security holders, through the
solicitation of proxies or otherwise.

                                       54
<Page>

                                     PART II

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

     As of the date of this filing, there is no established public trading
market for our common stock.

     Our certificate of incorporation authorizes 400,000,000 shares of common
stock, par value $0.01 per share, 1,250,000 shares of Series A senior preferred
stock, par value $0.01 per share, and 2,000,000 shares of Series B senior
preferred stock, par value $0.01 per share.

     As of March 31, 2002, there were issued and outstanding 80,000,000 shares
of common stock, 1,250,000 shares of Series A senior preferred stock and
2,000,000 shares of Series B senior preferred stock. We have not issued any
other shares of our capital stock.

     Each holder of our outstanding shares of common stock and senior preferred
stock, as well as certain holders of warrants to purchase shares of common
stock, are parties to a stockholders agreement, amended and restated as of May
24, 2001, by and among these stockholders and us. See "Description of Material
Agreements--Stockholders Agreement" in Item 1 of this Report.

     We have not declared or paid any cash dividends and we presently intend to
retain future earnings, if any, to finance the growth and operations of our
business. In addition, certain outstanding indebtedness restricts our ability to
pay cash dividends. Therefore, the payment of any cash dividends on our common
stock is unlikely in the foreseeable future.

COMMON STOCK

     All shares of our common stock now outstanding are fully paid and
non-assessable. The holders of common stock:

     -    are subject to preferences that may be applicable to the preferred
          stock, have equal and ratable rights to dividends from funds legally
          available for distribution, when, as and if declared by our board of
          directors;

     -    are entitled to share ratably in all of the assets of our company
          available for distribution to holders of common stock upon
          liquidation, dissolution or winding up of the affairs of our company;

     -    do not have subscription or conversion rights (there are no redemption
          or sinking fund provisions applicable to the common stock); and

     -    are entitled to one vote for each share of common stock held on all
          matters as to which holders of common stock shall be entitled to vote.

     The rights and preferences of holders of common stock are subject to the
rights of the preferred stock currently issued and outstanding or issued and
outstanding in the future.

SENIOR CONVERTIBLE PREFERRED STOCK

     Our senior preferred stock consists of two series of preferred stock, our
series A preferred stock and series B preferred stock. The senior preferred
stock has certain dividend, liquidation, redemption, change of control and
voting rights. The senior preferred stock has an initial liquidation preference
of $100 per share or $125.0 million in the aggregate of series A preferred stock
and $200.0 million in the

                                       55
<Page>

aggregate of series B preferred stock. The holders of senior preferred stock are
entitled to receive dividends at the rate of 10% per annum compounded quarterly,
payable in increases in the liquidation preference of the senior preferred
stock. Each share of senior preferred stock is convertible into shares of our
common stock at the option of the holder thereof by dividing the sum of the
liquidation preference plus accrued dividends by the conversion price then in
effect. The initial conversion price of the series A preferred stock was $5.6250
per share and was adjusted to $2.8125 per share as a result of our two-for-one
stock split which occurred on April 3, 2000. The initial conversion price of the
series B preferred stock was $8.50 per share.

     Each share of senior preferred stock is mandatorily redeemable by us on
August 15, 2010, at a price equal to the liquidation preference per share of
senior preferred stock plus accrued dividends. Holders of the shares of senior
preferred stock are entitled to the number of votes equal to the number of full
shares of common stock into which such shares of senior preferred stock are then
convertible. The senior preferred stock has the right to vote on all matters
voted on by holders of common stock, voting together with the common stock as a
single class. The number of shares issued upon exercise of the senior preferred
stock and the conversion price are subject to anti-dilution adjustments in some
circumstances.

     Upon the occurrence of a change of control, other than a change of control
that has been unanimously approved by the board members nominated by the holders
of series A preferred stock and the holders of shares of series B preferred
stock pursuant to the stockholders agreement, the holders of shares of series A
preferred stock or the holders of shares of series B preferred stock, as
applicable, will be entitled to require us to repurchase all or any part of such
holder's shares at a purchase price in cash equal to 101% of the aggregate
liquidation preference plus accrued dividends. A default in the performance of
this covenant will entitle a majority of the shares of senior preferred stock,
voting as a single class, to elect a majority of our board of directors.

     In addition, the holders of the senior preferred stock can require
repurchase at 101% of the aggregate liquidation preference plus accrued
dividends in connection with a sale of the Company in certain circumstances.

     In addition, we may not, without the affirmative vote of the holders of a
majority of the shares of each series of senior preferred stock:

     (1) alter or amend our amended and restated certificate of incorporation
(including the certificates of designations of the senior preferred stock) or
bylaws which adversely affects the rights of the holders of the senior preferred
stock,

     (2) effect any authorization, issuance or creation of, or increase in the
amount of certain securities that are junior to the senior preferred stock
(other than our common stock),

     (3) with respect to the series A preferred stock only, effect any
authorization, issuance or creation of, or increase in the amount of securities
that are on parity with the series A preferred stock,

     (4) effect any authorization, issuance or creation of, or increase in the
amount of securities that rank senior to the senior preferred stock or

     (5) effect any amendment to the terms of the warrants granted to AT&T,
First Union, Odyssey and its co-investors, Koch Telecom Ventures, Cisco, PF
Telecom, the holders of the high-yield Warrants or Heidrick & Struggles that
adversely affects the holders of the senior preferred stock.

                                       56
<Page>

     We may not, without the consent of each affected holder of senior preferred
stock, effect an amendment or waiver that:

     (1) alters the voting rights of the senior preferred stock or reduces the
number of shares of senior preferred stock whose holders must consent to an
amendment, supplement or waiver,

     (2)  reduces the liquidation preference of any share of senior preferred
stock,

     (3)  reduces the conversion rate or the rate of or change of time for
payment of dividends on any share of senior preferred stock,

     (4) alters the senior preferred stock's mandatory redemption provisions or
redeems, purchases or otherwise acquires for value (or pay into or set aside a
sinking fund for such purposes) any share of senior preferred stock other than
in accordance with the certificate of designations, or

     (5)  makes any change in the foregoing amendment and waiver provisions.

REGISTRATION RIGHTS AND PREEMPTIVE RIGHTS

     We have granted registration rights and preemptive rights to certain
stockholders pursuant to the stockholders agreement. See "Description of
Material Agreements--Stockholders Agreement" in Item 1 of this Report. In
addition we have granted:

     (1) registration rights and preemptive rights to AT&T Corp. in connection
with the issuance of warrants to AT&T Corp., and

     (2) registration rights to the purchasers of units in connection with the
private placement of units that was consummated on May 10, 2000.

SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW

     We are a Delaware corporation and subject to Section 203 of the Delaware
General Corporation Law. Section 203 prevents an "interested stockholder"
(defined generally as a person owning 15% or more of a corporation's outstanding
voting stock) from engaging in a "business combination" (as defined) with a
Delaware corporation for three years following the date such person became an
interested stockholder, subject to certain exceptions such as transactions done
with the approval of the board of directors and of the holders of at least
two-thirds of the outstanding shares of voting stock not owned by the interested
stockholder. The existence of this provision would be expected to have an
anti-takeover effect, including possibly discouraging takeover attempts that
might result in a premium over the market price for the shares of our common
stock.

                                       57
<Page>

ITEM 6.   SELECTED FINANCIAL DATA

     The following financial data as of December 31, 2001, 2000, 1999 and 1998
and for the years ended December 31, 2001, 2000, 1999 and the period from
November 30, 1998 (date of inception) through December 31, 1998 are an integral
part of, and should be read in conjunction with, the consolidated financial
statements and notes thereto. All other amounts have been prepared from our
financial records. Information concerning significant trends in the financial
condition and results of operations is contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Item 7 of
this Report. Amounts are presented in thousands of dollars, except per share
amounts.

<Table>
<Caption>
                                                                                                Period from
                                                                                                November 30,
                                                                                                1998 through
                                                          Fiscal Year Ended December 31,         December 31,

                                                            2001           2000         1999             1998
                                                            ----           ----         ----             ----
<S>                                                  <C>            <C>           <C>               <C>
INCOME STATEMENT DATA
    Revenues                                         $    18,293    $       250   $       80        $       -
    Loss from operations(5)                             (644,798)       (30,972)      (6,161)            (121)
    Net loss                                            (602,127)       (86,811)      (8,031)            (121)
    Basic and diluted loss per share
     Loss from operations                                  (8.06)         (0.39)       (0.15)           (0.02)
     Net loss                                              (7.87)         (1.28)       (0.22)           (0.02)
Common dividends per share                                     -              -            -                -

BALANCE SHEET DATA
    Total assets                                         491,397        476,741      173,317              414
    Cash                                                 144,916         76,325      107,598                -
    Current Liabilities (4)                              495,663        117,232       29,197                -
    Long-term debt (1)                                   180,603        187,041       72,155                -
    Redeemable convertible senior preferred
    stock (2)                                            358,958        132,288       36,542                -
    Put warrants (3)                                           -         71,300       25,764                -
    Stockholders' (deficit) equity (5)                  (668,562)       (40,078)       9,729              414

OTHER FINANCIAL DATA
    Capital expenditures                                 558,242        312,906        3,037                -
</Table>

(1) See notes 6, and 7 and 11 to the consolidated financial statements for a
    discussion of our long-term debt and subordinated note payable to Koch
    Telecom Ventures, Inc.
(2) See note 8 to the consolidated financial statements for a discussion of our
    preferred stock offerings.
(3) See note 8 to the consolidated financial statements for a discussion of the
    Put Warrants granted in 1999.
(4) Includes $362.0 million due under our credit agreement and classified as
    current. See notes 2 and 6 to the consolidated financial statements.
(5) 2001 results include an impairment charge of $605.0 million. See note 15
    to the consolidated financial statements.

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

         This report contains forward-looking statements and information that
are based on the beliefs of management as well as assumptions made by and
information currently available to us. Forward-looking statements can be
identified by such words as "anticipates," "believes," "plans," "estimates,"
"scheduled" and "expects" or similar expressions. Such statements reflect our
current views with respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks

                                       58
<Page>

or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described in this document. See
"Cautionary Factors That May Affect Future Results" below in this Item 7.

RECENT MANAGEMENT AND DIRECTOR CHANGES

     David L. Taylor, our Chief Financial Officer and Treasurer since
October 1, 1999, resigned effective February 18, 2002. Donald W. Bolar, the
President of PF.Net Network Services, Inc. since April 12, 2000, was notified on
February 28, 2002, that his position was being eliminated effective April 29,
2002. Joseph W. Moeller, a Director of Velocita Corp. since October 1999,
designated by Koch Telecom Ventures, resigned on March 27, 2002. Ammar Hanafi
and William Nuti, Directors of Velocita Corp. since May 2001, designated by
Cisco Systems, Inc., resigned on April 10, 2002.

OVERVIEW

     Velocita is currently developing a 14,050 route mile, nationwide
fiber-optic network which passes through over 160 cities and 35 of the top 50
MSAs in the United States. We plan to finish construction of the network, if
current and additional funding permits. When the demand for such services
improves, we plan to become a facilities-based provider of fiber-optic
network infrastructure, broadband capacity and data communications services
throughout the United States. We are assembling our low-cost, upgradeable
nationwide fiber-optic network through joint construction arrangements, fiber
and conduit swap, and sales and purchases. We are constructing approximately
6,400 miles of our network and acquiring 5,300 miles of our network through
swap agreements. Previously we had contemplated, and entered into agreements
with customers and suppliers with respect to, a 20,500-mile network. We will
need to restructure certain of these agreements in order to implement our
currently planned 14,050-mile network. The constructed portion of our network
will include substantial fiber and empty conduit. We may expand our network
over time through swaps and sales of fiber and conduit, fiber and conduit
purchases and additional joint construction arrangements.

     On October 29, 1999, we entered into an agreement with AT&T to build
approximately one-half of the outsourced portion of AT&T's state-of-the-art
fiber-optic network. The construction contemplated by the AT&T network
development agreement, as amended in May 2000, December 2000, July 2001, October
2001 and December 2001, will represent approximately 6,100 miles of the
6,400-mile constructed portion of our network, connecting important metropolitan
areas along AT&T's network. We believe that this agreement provides us with many
business, operational and marketing advantages. AT&T is reimbursing us for their
portion of construction costs, thus reducing our overall network construction
costs. In addition, we are designing and constructing this portion of the
network to AT&T's specifications, which will ensure network quality and
reliability and provide us with a key marketing advantage in offering our
services. AT&T has also agreed to provide its private rights of way for use on
the AT&T portion of our network. We have sold and leased and continue to sell or
lease excess dark fibers along all 6,400 miles of our constructed network, which
will further reduce our overall network construction costs.

     On February 25, 2000, we entered into a conduit and fiber swap agreement
with Touch America that will provide us with a combination of fiber and conduit
over an additional 4,500 route miles of our network and approximately $48.5
million in cash (subject to adjustment) in exchange for a combination of fiber
and conduit over approximately 5,900 route miles of our network. Touch America
is constructing most of these route miles pursuant to a joint construction
agreement with AT&T similar to our agreement with AT&T. We expected to complete
the swap transaction before December 31, 2001. Velocita Corp.

                                       59
<Page>

and Touch America experienced force majeure construction delays on certain
routes to be swapped. We have delayed completing the swap with Touch America
upon completion of construction by both parties, currently anticipated for the
first quarter of 2003.

     On December 9, 2000, our wholly-owned subsidiary, PF.Net Corp., entered
into an agreement with AT&T Corp. (amended and restated in July 2001 and
amended in December 2001) to purchase fibers from AT&T (or rights to use such
fibers on certain routes) on approximately, 8,850 route-miles. Such agreement
also provides for colocation at AT&T points of presence and optical amplifier
huts along the routes, maintenance of the network and certain other services,
and an option for PF.Net to install, at our incremental cost of installation,
additional fibers to triple our fiber count along roughly 90% of the same
route-miles in the event AT&T chooses to install additional fibers on such
routes. The agreement provides that the total cost for this acquisition will
be approximately $106 million payable as we acquire fiber along these routes.
(See "Our Network-General-Dark Fiber Acquisition" for link mileage and
scheduled completion dates.) In 2001, PF.Net Corp. made $21.2 million in
payments related to this agreement.

     We will need to restructure this agreement to implement our new business
plan which assumes that we will only be purchasing approximately 2,400 of the
miles subject to this agreement. We cannot assure you that we will be able to
complete such restructuring on terms satisfactory to us. If market conditions
and our liquidity improve and we decide to expand our network, we would likely
seek to acquire some or all of the additional miles subject to this agreement.
However, if our scaled-back network has resulted in a restructuring or violation
of this agreement, we cannot assure you that these additional miles will still
be available to us.

     On April 12, 2001, PF.Net Corp., a wholly-owned subsidiary of Velocita
Corp., entered into the Supply Agreement with Cisco, pursuant to which Cisco
supplies optronics and data internetworking equipment for Velocita's fiber-optic
network. All of the provisions of this agreement became effective on May 24,
2001. Under the Supply Agreement, we also entered into a "take-or-pay"
obligation with Cisco through May 2003 with respect to $225 million of equipment
and services. We do not expect our scaled-back network to require $225.0
million of such equipment and services. See "Description of Material
Agreements--Cisco Supply Agreement."

     We have executed fixed-price, performance-bonded construction contracts
with a number of third-party contractors for substantially the entire
constructed portion of our network. In January 2000, construction began on
segments of our network. As of March 31, 2002, we had approximately 5,100 route
miles of conduit in the ground and 4,000 route miles of fiber-optic cable
installed, of which approximately 2,400 route miles are lit. We are currently
scheduled to complete construction of the majority of the 6,400-mile constructed
portion of our network by late-2002. This 6,400-mile portion of our network will
generally consist of between 96 to 144 fibers and three empty conduits, some of
which we have committed to swap in the Touch America transaction and other sales
transactions.

     We have a limited operating history. The development, construction and
expansion of our network will require significant capital to be invested before
any material revenue is generated. We expect to continue to incur significant
and increasing operating losses and negative EBITDA while we construct our
network and develop a customer base. We expect to generate cash proceeds from
dispositions of dark fiber and conduit rights in order to finance a portion of
our network construction costs. However, we do not anticipate significant
recurring revenues from sales of broadband on-net services for the foreseeable
future. In order for us to meet our strategic objectives, we must complete the
6,400 constructed miles of our network according to our build schedule. In
addition, we will rely upon Touch America and other fiber swap partners for
timely completion of the segments of our network we will receive from them.

                                       60
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     We anticipate that unless we are able to amend our credit agreement,
restructure our relationships with key suppliers and customers, and/or identify
a potential strategic or financial investor in the relatively near term, it may
be necessary for Velocita and some or all of its subsidiaries to file a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the
second quarter of 2002. See "Recent Changes To The Business, Credit Agreement
Defaults and Possible Restructuring" within Item 1 of this Report and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Significant Developments in 2001" within Item 7 of this Report.

ASSET IMPAIRMENT

     In connection with our audit for the year ended December 31, 2001, we
reviewed our long-term assets for impairment. The overall deterioration in
economic conditions within the telecommunications industry, continued
overcapacity in certain areas of the industry, the oversupply of dark fiber
and conduit, lack of customers and distressed prices for assets from
bankruptcies within the telecommunications sector led us to believe that the
market value of our network assets had decreased significantly. Based on our
evaluation, we determined that the market value of our network assets was
less than the carrying value. Accordingly, we recorded a non-cash impairment
charge of $605.0 million against the carrying value of our property,
equipment and prepaid network services, and our adjusted carrying value of
our property and equipment was approximately $250.0 million. We estimated the
fair value of our network assets using valuation models and assumptions
representative of current and volatile market conditions. Valuation models
require the use of subjective assumptions that can materially affect the
estimated fair value. Amounts realized from an arm's length third party
transaction, particularly during different market conditions, could be
significantly different from our estimate. We cannot assure you that we will
not be required to further write down our assets in the future.

SIGNIFICANT DEVELOPMENTS IN 2001

SUPPLY AGREEMENT

     On April 12, 2001, PF.Net Corp., a wholly-owned subsidiary of Velocita
Corp., entered into the Supply Agreement with Cisco, pursuant to which Cisco
will supply optronics and data internetworking equipment for our network. All
of the provisions of this agreement became effective on May 24, 2001. Under
the Supply Agreement, we also entered into a "take-or-pay" obligation with Cisco
through May 2003 with respect to $225.0 million of equipment and services. We
do not expect our scaled-back network to require $225.0 million of such
equipment and services. See "Description of Material Agreements--Cisco Supply
Agreement."

     In early 2002, we initiated a success-based lighting plan and we expect to
initially light only 2,400 miles of our network. We do not expect to light any
more miles unless marketing opportunities arise on specific routes. As of March
31, 2002, we have purchased from Cisco approximately $63.0 million in equipment
and services. It is currently unclear if and when we will purchase additional
equipment and services from Cisco under the Supply Agreement. Pursuant to the
terms of the Supply Agreement, if we do not purchase $225.0 million of equipment
and services from Cisco by May 2003, Cisco has the right to invoice us for
payment in an amount equal to the difference between $225.0 million and the
amount of equipment and services we purchased or ordered from Cisco.

ISSUANCE OF SERIES B SENIOR CUMULATIVE CONVERTIBLE PREFERRED STOCK

     On May 24, 2001, we issued 2,000,000 shares of our Series B Senior
Cumulative Convertible Preferred Stock (the "Series B Preferred Stock") for
gross proceeds of $200 million. The Series B Preferred Stock has an initial
liquidation preference of $100 per share. Dividends on the Series B Preferred
Stock are cumulative from the date of issuance at an annual rate equal to the
liquidation preference multiplied by 10% compounded quarterly, payable in
increases in the liquidation preference of the Series B Preferred Stock. Holders
of the Series B Preferred Stock may convert their shares, in whole or in part,
into common stock by dividing the sum of the liquidation preference plus accrued
dividends by the conversion price of $8.50 per share. The Series B Preferred
Stock will automatically convert to common stock upon the consummation of
certain transactions. The Series B Preferred Stock provides for mandatory
redemption on August 15, 2010 at a price in cash equal to the liquidation
preference amount plus accumulated and unpaid dividends through the date of
redemption.

     The holder of the Series B Preferred Stock is entitled to vote on all
matters submitted to a vote of the holders of our capital stock as if all shares
of Series B Preferred Stock were converted into common shares. The Preferred
Stock is senior to our common stock with respect to dividend distributions and
distributions on liquidation.

     In connection with the issuance of the Series B Preferred Stock, we granted
to the holder of the Series B Preferred Stock contingent anti-dilution warrants
to purchase shares of common stock at a price of $0.01 per share. The
anti-dilution warrants vest and become exercisable from time to time in
connection with the vesting of other contingent warrants previously issued by us
(the "Prior Contingent Warrants") for a number of shares of common stock that

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will cause the percentage of the common stock held by such holder after
giving effect to the exercise of the anti-dilution warrants and the Prior
Contingent Warrants to equal the percentage of the common stock held by such
holder immediately prior to such exercise. We will record the fair value of
the anti-dilution warrants, if any, when the issuance of the anti-dilution
warrants is probable and the number of shares is reasonably determinable.

     In connection with the issuance of the Series B Preferred Stock, we issued
contingent Performance Warrants to the holder of the Series B Preferred Stock to
purchase 5,000,000 shares of our common stock at an exercise price of $0.01 per
share. The Performance Warrants will vest and become exercisable on (a) the date
of any equity issuance at a price per share that is less than the holder's
effective cost per share, except for certain exempt issuances as defined in the
warrant agreement or (b) June 30, 2003, in the event of a failure to reach
certain revenue and earnings before interest, income taxes, depreciation and
amortization (EBITDA) targets, as defined in the agreement, or to complete a
sale of the company or public offering at specified valuations. We did not meet
a revenue target as of December 31, 2001 and we expect to issue these
Performance Warrants to Cisco in 2003. We will record the fair value of the
Performance Warrants, if any, when the issuance of the Performance Warrants is
probable and the number of shares to be issued is reasonably determinable.

     The issuance of the Series B Preferred Stock relieved us of our contingent
obligation to issue additional warrants under the terms of our high yield debt
offering in 2000.

AMENDMENT OF CREDIT AGREEMENT

     On May 24, 2001, our wholly-owned subsidiary, PF.Net Corp., amended its
credit agreement with First Union National Bank, as administrative agent, to
provide for an additional $297.4 million in vendor financing to be provided by
Cisco Systems Capital Corporation in the amount of $285.0 million and by Koch
Telecom Ventures, Inc. in the amount of $12.4 million. Concurrently, Koch
Telecom Ventures received $12.4 million under the terms of the subordinated note
dated October 29, 1999. See "Certain Relationships and Related Transactions --
Other Related Party Transactions" in Item 13 of this Report. The amendment to
the credit agreement resulted in total borrowing capacity of $647.4 million.
Borrowings from Cisco Capital under the First Union credit agreement will be
used primarily to purchase equipment and services under the supply agreement we
have entered into with Cisco described above. However, we do not expect that we
will be able to borrow additional funds under our credit agreement unless we are
able to amend that agreement. See "Recent Changes To The Business, Credit
Agreement Defaults and Possible Restructuring" within Item 1 of this Report.

     The amended credit agreement provides for term notes under Tranche A and a
revolving facility. The Tranche A facility provides for borrowings of up to
approximately $497.4 million, and the revolving facility provides for borrowings
of up to $150 million. The Tranche A facility is comprised of three
subfacilities (i) $160 million available for the purchase of vendor products and
services used in the construction of the network, (ii) $40 million available to
finance general capital expenditures and operating expenses associated with
development of our network, as defined, and (iii) $297.4 million available for
the purchase of specified vendor products and services used in the construction
of the network. The revolving facility provides for borrowings for general
capital expenditures and operating expenses associated with the development of
the network and working capital needs.

     As of March 31, 2002, we were not in compliance with certain financial
covenants under our credit agreement. On March 28, 2002, we obtained a Waiver
from our banking group through April 15, 2002, and on April 15, 2002 this
Waiver was extended through April 30, 2002. Because of these

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financial covenant breaches, significant financial pressures facing us and the
telecommunications industry, and the need for additional capital to complete our
network build, we are considering various financial and strategic alternatives.
These alternatives include restructuring our debt, the sale to one or more
strategic investors, the sale or other disposition of substantially all of our
business or assets, and filing for protection under Chapter 11 of the United
States Bankruptcy Code. Pending a final determination regarding our financial
and strategic alternatives, it is likely that we will elect to cease paying
interest on our outstanding senior notes. Additionally, we have scaled back our
business plan because of our financial situation and industry conditions. See
"Recent Changes To The Business, Credit Agreement Defaults and Possible
Restructuring" within Item 1 of this Report.

     The Waiver requires us to comply with other covenants in the credit
agreement and to forego further borrowing under the revolving credit portion
of our credit agreement. In addition, during the waiver period, PF.Net Corp.,
our wholly-owned subsidiary, is prohibited from making any restricted
payments (as defined under our credit agreement), other than restricted
payments to Velocita Corp. to be used to fund operating and administrative
expenses. This restriction, if it were to apply on an interest payment date
for purposes of our senior notes, would prohibit PF.Net Corp. from making
cash payments to Velocita Corp. necessary for us to pay interest on the
senior notes. During the waiver period, we are continuing discussions with
our bank lenders regarding modification of the terms of our credit agreement.
If we do not obtain an amendment, or an additional waiver, to our credit
agreement, we will be in default of our credit agreement and our lenders
could elect to accelerate and make all of the outstanding indebtedness under
the credit agreement due and payable immediately. As a result of these
defaults, all of the obligations under the credit agreement have been
reclassified as current liabilities. As of April 15, 2002, we had
approximately $380 million of indebtedness (including outstanding letters of
credit) outstanding under the credit agreement. In the event of an
acceleration, we would be unable to repay that indebtedness and, unless we
cure the defaults, the credit agreement lenders could seek a judgment and
attempt to seize our assets to satisfy the debt to them. Accordingly, we may
be required to file for protection under Chapter 11 of the United States
Bankruptcy Code. We are unable to predict if we will be able to obtain the
necessary modifications of our credit agreement from our banks.

AMENDMENTS TO AT&T NETWORK DEVELOPMENT AGREEMENT AND FIBER PURCHASE AGREEMENT

     On July 2001, October 2001 and December 2001, we and AT&T amended the
original network development agreement initially entered into during October
1999 and amended in May 2000 and December 2000, related to the construction
of our network. We also amended the dark fiber purchase agreement entered
into during December 2000 related to the purchase of fiber from AT&T. During
2001 we paid AT&T approximately $21.2 million in connection with this fiber
purchase agreement and have accepted fiber on routes from Boston to New York,
New York to Newark, and St. Louis to Cleveland. As a result of the amendment,
we have deferred payments through 2005, and we expect to pay $10.9 million in
2002 under the terms of the agreement.

     We will need to restructure the dark fiber purchase agreement to implement
our new business plan which assumes that we will only be purchasing
approximately 2,400 of the miles subject to this agreement. We cannot assure you
that we will be able to complete such restructuring on terms satisfactory to us.
If market conditions and our liquidity improve and we decide to expand our
network, we would likely seek to acquire some or all of the additional miles
subject to this agreement. However, if our scaled-back network has resulted in a
restructuring or violation of this agreement, we cannot assure you that these
additional miles will still be available to us.


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CRITICAL ACCOUNTING POLICIES

     We consider the following accounting policies to be the most important to
our financial position and results of operations or policies, which require the
exercise of significant judgment and/or estimates.

GOING CONCERN

     A fundamental principle of the preparation of financial statements in
accordance with accounting principles generally accepted in the United States is
the assumption that an entity will continue in existence as a going concern,
which contemplates continuity of operations and the realization of assets and
settlement of liabilities occurring in the ordinary course of business. This
principle is applicable to all entities except for entities in liquidation or
entities for which liquidation appears imminent. In accordance with this
requirement, our policy is to prepare our consolidated financial statements on a
going concern basis.

     As shown in our consolidated financial statements, we have defaulted on
our senior debt obligations and have incurred recurring operating losses and
negative cash flows from operating activities, which raises substantial doubt
about our ability to continue as a going concern. There can be no assurance
that we will be able to successfully reorganize or that our liquidity and
capital resources will be sufficient to maintain our normal operations. While
we have prepared our financial statements on a going concern basis, if we are
unable to successfully restructure our debt, obtain additional waivers or
amendments to our credit agreement, and we do not receive additional funding,
our ability to continue as a going concern will be impacted. Therefore, we
may not be able to realize our assets and settle our liabilities in the
ordinary course of business. While we have written down the carrying values
of our long-lived assets in accordance with SFAS No. 121, our consolidated
financial statements included in this Report or Form 10-K do not reflect any
adjustments that might specifically result from the outcome of this
uncertainty or our debt restructuring activities.

LONG-LIVED ASSETS

     Property and equipment is stated at historical cost net of accumulated
depreciation. Costs associated directly with the uncompleted network and related
support systems, including employee related costs and interest expense incurred
during the construction period are capitalized. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets. The estimated
useful lives of network assets and infrastructure is 5 to 25 years and 3 to 10
years for furniture fixtures, equipment,

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leasehold improvements and other assets. These useful lives are determined based
on historical usage with consideration given to technological changes, trends in
the industry that could impact the network architecture, and asset utilization.

     These long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount should be addressed
pursuant to Statement of Financial Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
Pursuant to SFAS No. 121, impairment is determined by comparing the carrying
value of these long-lived assets to management's best estimate of the future
undiscounted cash flows expected to result from the use of the assets and their
eventual disposition. In the event an impairment exists, a loss is recognized
based on the amount by which the carrying value exceeds the fair value of the
asset, which is generally determined by using quoted market prices or valuation
techniques such as the discounted present value of expected future cash flows,
appraisals, or other pricing models as appropriate.

     We believe that impairment existed in accordance with SFAS No. 121 as of
December 31, 2001 and we recorded an impairment charge of approximately $605.0
million. See note 15 to the consolidated financial statements contained in Item
14 of this Report.

REVENUE RECOGNITION

     Revenue for communications services, including private line, wavelengths,
colocation, and maintenance is recognized monthly as the services are provided.
Fees billed in connection with customer installations and other upfront charges
are deferred and recognized ratably over the estimated customer life.

     Revenue attributable to the sale or lease of dark fiber or conduit pursuant
to indefeasible rights-of-use agreements ("IRUs") is recognized ratably over the
contract term. The contract term commences when we deliver fiber or conduit to
the customer and the customer provides formal acceptance notice.

     We have received up-front cash payments for fiber or conduit to be
delivered at a future date. In such cases, the cash payment is recoded as
deferred revenue until the contract terms commences.

NEW ACCOUNTING PRONOUNCEMENTS

     In June 1998, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 133, ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES. This
statement, as amended by SFAS Nos. 137 and 138, establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. We were required to adopt SFAS No. 133 on January 1, 2001 and its
adoption did not have a significant impact on our financial position or results
of operations. We will record gains and losses on derivatives related to cash
flow hedges of interest rate payments on variable rate debt through interest
expense upon expiration of the underlying interest rate cap agreements. We
entered into two interest rate cap agreements during September 2001 and a third
agreement in November 2001. The notional principal amounts of interest rate cap
agreements outstanding were $125 million at December 31, 2001.

     The cash requirements of our financial instruments approximate their fair
value. Cash flows associated with these financial instruments will be classified
consistent with the cash flows of the transactions being hedged. Derivative
financial instruments involve, to a varying degree, elements of market and
credit risk not recognized in the consolidated financial statements. The market
risk associated

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with these instruments resulting from interest rate fluctuations is expected to
offset the market risk of the underlying transactions, assets and liabilities
being hedged.

     The counterparties to the agreements relating to our interest rate
instruments are major international financial institutions with high credit
ratings. We do not believe that there is significant risk of nonperformance by
these counterparties because we limit the amount of financial exposure and the
amount of agreements entered into with any one financial institution. While the
contract or notional amounts of derivative financial instruments provide one
measure of the volume of these transactions, they do not represent the amount of
our exposure to credit risk. The amounts potentially subject to credit risk
(arising from the inability of the counterparties to meet the terms of their
contracts) are generally limited to the amounts, if any, by which the
counterparty's obligations under the contracts exceed our obligations to the
counterparties.

     On March 31, 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AN INTERPRETATION OF
ACCOUNTING PRINCIPLES BOARD OPINION NO. 25. This interpretation modifies the
current practice of accounting for certain stock award agreements and is
generally effective beginning July 1, 2000. The initial impact of this
interpretation on our results of operations and financial position was not
material, but its application may have a material impact on future accounting
for stock based compensation transactions.

     Effective June 30, 2001, the FASB issued SFAS No. 141, BUSINESS
COMBINATIONS. This statement requires that all business combinations initiated
after June 30, 2001, be accounted for using the purchase method. The FASB also
issued SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Under SFAS No. 142,
goodwill is no longer subject to amortization over its estimated useful life.
Rather, goodwill will be subject to at least an annual assessment for impairment
by applying a fair-value based test. We are required to adopt the provisions of
these statements for our fiscal year beginning January 1, 2002. We do not
currently have goodwill or acquired intangible assets; therefore, management
does not believe the adoption of the new statements will have a material impact
on our financial condition or results of operations.

     During June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS. This statement establishes the accounting for legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. This statement is
effective for fiscal periods beginning after June 30, 2002. We do not believe
the adoption of this statement will have a material impact on our financial
condition or results of operations.

     In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 supersedes SFAS No. 121, but
retains its requirements to (a) recognize an impairment loss only if the
carrying amount of a long-lived asset is not recoverable from its undiscounted
cash flows and (b) measure an impairment loss as the difference between the
carrying amount and the estimated fair value of the asset. It removes goodwill
from its scope and, therefore, eliminates the requirement to allocate goodwill
to long-lived assets to be tested for impairment. It also describes a
probability-weighted cash flow estimation approach to deal with situations in
which alternative courses of action to recover the carrying amount of a
long-lived asset are under consideration or a range is estimated for possible
future cash flows. Management does not expect implementation of this standard
will have a material effect on its financial condition.

     It requires that a long-lived asset to be abandoned, exchanged for a
similar productive asset, or distributed to owners in a spin-off be considered
held and used until it is disposed of. In these situations,

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SFAS No. 144 requires that an impairment loss be recognized at the date a
long-lived asset is exchanged for a similar productive asset or distributed to
owners in a spin-off if the carrying amount of the asset exceeds its fair value.

FACTORS AFFECTING FUTURE OPERATIONS

     The following is a discussion of the primary factors that we believe will
affect our future operations.

REVENUES

     We expect to generate cash proceeds from sales, long-term leases and
IRUs of dark fiber and conduit. Historically these arrangements typically
required customers to pay a down payment upon execution of the agreement with
the balance payable upon delivery of the fiber or conduit and acceptance by
the customer. Due to industry conditions, we expect that fiber sale
arrangements will be structured to provide us a down payment upon execution
of the agreement with the remaining balances to paid through periodic
installments over periods of time through the term of the agreement. These
arrangements may also include arrangements where we provide maintenance on
the fiber over the term of the related fiber agreements and colocation space
to fiber customers over periods that may range up to the term of the related
fiber agreement. We expect to establish maintenance and collocation fees
based on market rates and conditions at inception of the respective
agreements. We generally expect to bill customers monthly for maintenance and
collocation, however, in some cases, customers may prepay maintenance and
collocation upon the execution of the agreements. Revenue attributable to the
sale or lease of dark fiber or conduit pursuant to IRUs is recognized ratably
over the contract term. The contract term commences when we deliver fiber or
conduit to the customer and the customer provides formal acceptance notice.

     During 2001, we had revenue from the resale of lit services and
construction services. Although we expect some of these revenues to continue in
early 2002, as a result of our scaled down business plan, we do not expect
resale and construction services revenue to be significant during 2002 or
beyond, unless market conditions improve and we establish lit services on our
network.

EXPENSES

     During the construction phase of our network build-out, our major
expenditures consist of:

     -    network build costs (including conduit and fiber installation,
          engineering and construction);

     -    site preparation costs (including permitting and rights of way
          acquisition and perfection for telecommunication use);

     -    operating costs (such as rent and utilities) incurred during the
          construction phase;

     -    fiber and conduit costs; and

     -    costs of optical-electronic equipment.

     These costs will be capitalized as incurred until the respective fiber
routes or operating locations are placed into service. During November 2001, we
placed our first network routes into service and began depreciation of the
network facilities that were placed in service. Additional operating costs
related to the network routes and facilities are expensed as incurred once the
routes and facilities are placed into service. Our principal operating expenses
consist of network operating costs, selling, general and administrative
expenses, depreciation, amortization and interest expense.

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     During 2001, our business plan included establishing lit broadband and
data services, building a nationwide sales force, establishing local access
connections, and building a data network. As a result, we incurred
significant costs, and entered into fixed long-term obligations to establish
lit services, local access and to build a customer base. See note 11 to our
consolidated financial statements for discussion on our fixed long-term
obligations. Additionally, we incurred significant human resource costs to
hire and train system designers, network engineers, sales personnel and
related support functions and to establish IT systems to support our planned
business. Because of our scaled down business plan, and planned restructuring
of certain contracts, we anticipate that many of the operating costs incurred
during 2001 will be eliminated during 2002 and on a go-forward basis. See
"Recent Changes To The Business, Credit Agreement Defaults and Possible
Restructuring" within Item 1 of this Report for more information.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

     Revenue increased from $250,000 in 2000 to $18.3 million during 2001 due
primarily to increases in the number of resale customers and additional revenue
associated with construction service agreements with other telecommunications
providers. Revenue from the resale of communications services increased from
$250,000 to $6.0 million as our customer base increased from eight to
approximately 45 as of December 31, 2001. Construction services revenue during
2001 consists primarily of optical amplifier construction for a third party
telecommunications provider that began in August 2001. Total revenue recorded
related to the construction of these telecommunication facilities and other
conduit construction agreements totaled approximately $12.1 million. We expect
to complete this contract during the second quarter of 2002. Revenue related to
IRUs of fiber and wavelengths, colocation, maintenance and installation on our
network totaled approximately $236,000. Although we received cash down payments
at inception of IRU and wavelength agreements, we began recognizing revenue upon
delivery and acceptance of the fiber or wavelength by the customer. Because of
our scaled-back plan, we do not expect to generate significant revenues, whether
from construction services, the resale of communication services or otherwise,
in the foreseeable future.

     Access and network operations costs increased from $2.1 million in 2000 to
$23.4 million for the year ended December 31, 2001 due primarily to (i) an
increase of $7.8 million related to costs for circuits that are resold, (ii)
costs associated with the conduit construction contracts and optical amplifier
sites of $5.8 million that were not incurred in 2000, (iii) costs for local
access in various cities, colocation and redundant circuits totaling $4.9
million, (iv) an increase in payroll and related costs of $11.1 million due to
significantly higher headcount for the majority of 2001 compared to 2000 and (v)
an increase in the amount of contract labor costs, consulting fees, travel and
computer costs totaling $5.3 million, due primarily to the increased headcount
and continued build out of our network. These increases were offset by an
increase in the amount of costs capitalized of $13.6 million.

     Selling, general and administrative costs increased from $28.5 million for
the year ended December 31, 2000 to $30.3 million for the year ended December
31, 2001. Of this increase, $800,000 was attributable to salary related costs,
commissions and bonuses, offset by signing bonuses and other recruiting costs
incurred in 2000. Facilities and telecommunications costs increased $3.4 million
due to the addition of rent associated with our corporate headquarters facility
and the significantly higher headcount present during the majority of 2001.
Professional service costs decreased $1 million as we used fewer contract labor
personnel and we were able to substantially reduce our legal and consulting fees
compared to 2000 as a result of our capital conservation program. Travel, taxes
and other costs increased

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$400,000 due to the higher headcount in 2001 and the property taxes paid on
corporate assets that were not present in 2000.

     Depreciation and amortization increased from $569,000 to $4.3 million
due primarily to the commencement of depreciation on our Houston to
Jacksonville route and the depreciation of the network assets and equipment
on that route during the fourth quarter of 2001. Additionally, we added
significant leasehold improvements at our corporate headquarters building and
a new billing system during the second quarter of 2001, both of which began
depreciating during 2001.

     Impairment charges were $605.0 million in 2001. This consisted of
approximately $580.0 million related to our network assets and $25 million
related to purchased capacity from another telecommunications provider that
filed for bankruptcy and could not provide services. See note 15 to the
consolidated financial statements contained in Item 14 of this Report.

     During the year ended December 31, 2001, we recorded a non-cash gain of
$71.3 million related to the decrease in the value of the put warrants granted
in 1999. The downturn in the telecommunications industry and the current
economic environment led to a significant decrease in the value of our stock
during 2001, resulting in a write down of these warrants to $0 as of December
31, 2001.

     Interest income decreased from $10.8 million during the year ended December
31, 2000 to $4.9 million for the year ended December 31, 2001. This decrease was
caused by a general decrease in interest rates during 2001 and the lower average
cash balances maintained during the year as we continued the construction of our
network.

     Interest expense increased from $21.1 million for the year ended December
31, 2000 to $33.5 million for the year ended December 31, 2001, net of $27.2
million and $24.6 million capitalized to network construction costs, for the
years ended December 31, 2001 and 2000, respectively. The increase was caused by
(i) $11.5 million related to the Senior Notes that were outstanding for the
entire year, (ii) the incremental amortization of the high yield debt discount
of $1.9 million and (iii) $14.9 million additional interest expense related to
the credit agreement. These increases were offset by decreases related to (i)
$4.2 million for the bridge loan that was repaid in 2000, (ii) a decrease in
commitment fee of $593,000 due to additional borrowings under the credit
agreement, (iii) a decrease of $872,000 in the interest related to the
subordinated note payable to Koch Telecom Ventures as the note was repaid in
accordance with its terms in May 2001, (iv) a decrease of $7.7 million related
to the amortization of deferred financing costs as we wrote off costs in 2000 of
approximately $9 million related to the interim credit facility and (v) the
higher amount of capitalized interest during 2001.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

     Communications revenue related to private line resale increased 213% from
$79,900 during 1999 to $249,900 during 2000. The increase in revenue was
attributable to a higher number of customers and an increase in circuits to
existing customers as a result of increased sales efforts during the year.

     Access and network operations costs increased from $56,300 during the year
ended December 31, 1999 to $2.1 million during the year ended December 31, 2000.
The increase was primarily due to higher salary and recruiting costs as we
increased the number of network operations personnel. Non-cash stock
compensation expense contributed $488,200 of the increase and $175,100 of the
increase was attributable to the higher number of resale customers and the
access costs associated with the additional revenue.

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     Selling, general and administrative costs increased 394% from $5.8 million
for the year ended December 31, 1999 to $28.5 million for the year ended
December 31, 2000. Of this increase, $8.0 million was attributable to the growth
in headcount during the year from 16 employees as of December 31, 1999 to 89
employees as of December 31, 2000. In addition, hiring costs of approximately
$5.4 million were incurred in connection with the hiring of select senior
executives. We also incurred higher expenses in connection with our system
implementations, employee related, legal and other costs of $9.3 million, which
were not incurred during 1999. Of the above amounts, non-cash charges were
incurred related to employee stock compensation and warrants issued to a
recruiting firm for selling, general and administrative employees totaling $2.6
million and $1.1 million, respectively, during 2000 compared to a total of
$446,200 incurred during 1999.

     Depreciation and amortization increased 37% from $415,700 during the year
ended December 31, 1999 to $569,300 during the year ended December 31, 2000.
This increase was caused largely by additional purchases of computers and
equipment as we increased our employee headcount during 2000.

     During the year ended December 31, 2000, we recorded a charge of $45.5
million related to the change in the fair market value of the put warrants
granted to AT&T, in accordance with Emerging Issues Task Force ("EITF") No.
96-13, ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND
POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK. Future changes in the fair value
of the put warrants will be recognized in earnings during the period in which
they occur.

     Interest income increased from $988,400 during the year ended December 31,
1999 to $10.8 million for the year ended December 31, 2000. This increase was
caused by an increase in the average balance of cash and cash equivalents
following (i) the private placement of our preferred stock in the first and
second quarters of 2000, resulting in net proceeds to us of approximately $80.3
million, (ii) the high yield debt offering of $225 million completed during May
2000 and (iii) higher interest rates on investments in 2000 compared to 1999.

     Interest expense increased from $2.9 million for the year ended December
31, 1999 to $21.1 million, net of $24.6 million capitalized to network
construction costs, for the year ended December 31, 2000. The increase was
caused by (i) $19.8 million related to the Senior Notes, (ii) the incremental
amortization of deferred financing costs, debt discounts and warrants during
2000 of $7.2 million, (iii) $1.1 million additional interest expense on the
interim credit facility that was outstanding for over four months in 2000 and
only two months during 1999, (iv) the write-off of $9.0 million of financing
costs related to the interim credit facility, (v) increase in commitment fees
of $4.4 million under the credit agreement, and (vi) incremental interest on
the subordinated note payable to Koch Telecom Ventures of $1.3 million, which
is a non-cash expense added to the principal of the note payable.

     Our net losses continue to reflect our development stage status and future
recovery of tax losses remains uncertain. If we are able to carry these losses
forward, future tax amounts owed will be lower due to these loss carryforwards.

FINANCIAL CONDITION AS OF DECEMBER 31, 2001 AND CASH FLOWS DURING THE YEAR THEN
ENDED

     Our working capital deficit of approximately $317.1 million as of
December 31, 2001 represented the reclassification of our obligations under
our credit agreement as current liabilities.  See "Recent Changes to the
Business Credit Agreement Defaults and Possible Restructuring" included in
Item 1 of this report for more information.


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     Cash used in operations for the year ended December 31, 2001 was
approximately $8.5 million compared to a source of $3.4 million during 2000. The
increase in cash used in operations was a result of significantly higher
headcount during a majority of 2001 compared to 2002 and significantly higher
interest costs incurred during 2001. These cash uses were significantly offset
by sales of fiber and conduit IRUs during the year, for which we received the
cash in advance for services being provided to the customer.

     Investing activities include the use of proceeds from our borrowings under
the credit agreement as well as from the issuance of our Series B Senior
Preferred Stock to construct our network, acquire fiber from other
telecommunications providers to expand our network and obtain redundancy on our
routes, and develop business support systems. Capital expenditures during 2001
were $558.2 million and we expect this amount to decrease during 2002 as we
implement a success-based lighting plan and reduce the overall amount of fiber
miles that we will construct or purchase from AT&T.

     Cash provided by financing activities of $635.4 million during the year
ended December 31, 2001 consisted of net proceeds from borrowings under our
credit agreement of $362.4 million, net proceeds from the issuance of our
Series B Senior Preferred Stock of $198.9 million and the proceeds received
pursuant to our network development agreement with AT&T of $96.3 million.
Partially offsetting these financing sources were payment of deferred
financing costs of $9.8 million and a repayment of our subordinated note
payable to Koch Telecom Ventures, Inc. of $12.4 million under the terms of
that subordinated note. We expect cash provided by financing activities will
decrease significantly during 2002 as we will significantly decrease our
borrowings under the credit agreement and implement our new business plan.

LIQUIDITY AND CAPITAL RESOURCES

     As of December 31, 2001, we had outstanding senior notes of $180.6
million (net of a debt discount of $44.4 million), approximately $136.5
million in other payment obligations, and two series of redeemable preferred
stock with an aggregate liquidation preference of $367.2 million. In addition
as of December 31, 2001, we have $362.4 million of outstanding indebtedness
under our credit agreement. This outstanding indebtedness under the credit
agreement has been classified as current on our balance sheet because of our
breach of certain of the financial covenants contained in our credit
agreement making our debt subject to acceleration. Based on our capital
structure at December 31, 2001 and the existing interest rates for
obligations with variable interest rates, we estimate that our debt service
commitments for 2002, if we were to pay them, would be approximately $71.5
million. We have to date made all scheduled debt service payments on our
senior notes, however, it is unlikely we will make interest payments on our
senior notes that are required to be made on May 15, 2002. In fact, during
the period set forth in our waiver agreement with our secured lenders, PF.Net
Corp. is prohibited from making any restricted payments (as defined under our
credit agreement), other than restricted payments to Velocita Corp. to be
used to fund operating and administrative expenses.

     Unless a debt restructuring is completed, we will require additional
financing by the middle of 2002, much of which could be in the form of
additional indebtedness, which would further increase the risk of additional
defaults unless we can establish an adequate revenue base and generate
sufficient cash flow to repay our indebtedness. Our scaled-back business plan
does not contemplate activities that are likely to generate significant
revenues, and we may never establish an adequate revenue base to produce an
operating profit or generate adequate positive cash flow to provide future
capital expenditures and repayment of debt.

     As of March 31, 2002, we were not in compliance with certain financial
covenants under our credit agreement. On March 28, 2002, we obtained a Waiver
from our banking group through April 15, 2002, and on April 15, 2002 this
Waiver was extended through April 30, 2002. Because of these financial covenant
breaches, significant financial pressures facing us and the telecommunications
industry, and the need for additional capital to complete our network build, we
are considering various financial and strategic alternatives. These alternatives
include restructuring our debt, the sale to one or more strategic investors, the
sale or other disposition of substantially all of our business or assets, and
filing for protection under Chapter 11 of the United States Bankruptcy Code.
Pending a final determination regarding our financial and strategic
alternatives, it is likely that we will elect to cease paying interest on our
outstanding senior notes. Additionally, we have scaled back our business plan
because of our financial situation and industry conditions.

     The Waiver requires us to comply with other covenants in the credit
agreement and to forego further borrowing under the revolving credit portion of

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our credit agreement. In addition, during the waiver period, PF.Net Corp., our
wholly-owned subsidiary, is prohibited from making any restricted payments (as
defined under our credit agreement), other than restricted payments to
Velocita Corp. to be used to fund operating and administrative expenses. This
restriction, if it were to apply on an interest payment date for purposes of
our senior notes, would prohibit PF.Net Corp. from making cash payments to
Velocita Corp. necessary for us to pay interest on the senior notes. During
the waiver period, we are continuing discussions with our bank lenders
regarding modification of the terms of our credit agreement. If we do not
obtain an amendment, or an additional waiver, to our credit agreement, we
will be in default of our credit agreement and our lenders could elect to
accelerate and make all of the outstanding indebtedness under the credit
agreement due and payable immediately. As a result of these defaults, all of
the obligations under the credit agreement have been reclassified as current
liabilities. As of April 15, 2002, we had approximately $380 million of
indebtedness (including outstanding letters of credit) outstanding under the
credit agreement. In the event of an acceleration, we would be unable to
repay that indebtedness and, unless we cure the defaults, the credit
agreement lenders could seek a judgment and attempt to seize our assets to
satisfy the debt to them. Accordingly, we may be required to file for
protection under Chapter 11 of the United States Bankruptcy Code. We are
unable to predict if we will be able to obtain the necessary modifications of
our credit agreement from our banks.

     In May 2001, in connection with the execution of a supply agreement with
Cisco Systems, Inc., we completed a $200 million senior preferred stock offering
to Cisco, and amended our credit agreement to provide for $285 million of vendor
financing from Cisco Systems Capital Corporation. During 2001 and early 2002, we
also pursued various merger and acquisition opportunities, including purchasing
troubled telecommunications companies and combining with other, larger
telecommunication companies, that could have provided additional customers and
increased our revenue base and minimized our capital expenditures. Other than
the Cisco transactions, we have not yet implemented such a strategic
transaction. In July 2001, we initiated various efforts to minimize our capital
and operating expenditures. These efforts included delaying certain planned
construction routes, eliminating or deferring planned fiber purchases and
reducing our staff.

     During 2001, we worked on a consulting basis with UBS Warburg LLC as
part of our effort to explore various merger and acquisition and fund-raising
opportunities. In February 2002, we finalized the terms of our arrangement
with UBS and we engaged Impala Partners, LLC to advise us regarding strategic
alternatives. At our request, UBS prepared solicitation materials and
contacted potential investors, both strategic and financial, as part of our
continuing effort to raise new capital and solicit strategic partners. We
continue to explore alternatives for funding from potential investors and
transactions with strategic partners, however, to date we have not obtained
any commitments.

     In February 2002, we announced layoffs to reduce our total staff to 55
employees, eliminated the majority of our sales and marketing staff and
curtailed efforts to establish new resale customers. These steps are part of
a scaled-back business plan pursuant to which we are focusing our efforts on
completing construction, dark fiber sales, merger and acquisition and
fund-raising activites, and scaled-back operations to support these
activities. We have chosen to initially light only 2,400 miles of our
network. After the initial lighting, we will implement a success-based
lighting plan, whereby we will only light segments of our network for which
we have enough capacity demand to generate sufficient revenue to recover our
costs and a targeted return on investment. In addition, our scaled-back
network will consist of approximately 14,050 route miles and 55 POPs, rather
than the roughly 20,000 route miles and 67 POPs previously contemplated for
our network. Because we are scaling back our network and our business plan in
the near term, we will be required to restructure our relationships with
suppliers and customers, and we cannot assure you that we


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will be able to complete such restructuring on terms satisfactory to us. If
market conditions continue to deteriorate, we may further reduce the scope of
our network.

     As of March 31, 2002, we had approximately 5,100 route miles of conduit in
the ground and 4,000 route miles of fiber-optic cable installed, of which
approximately 2,400 route miles are lit. We are currently scheduled to complete
construction of the majority of the 6,400-mile constructed portion of our
network by late-2002.

     We currently estimate that we need a minimum of between $140 million and
$160 million to complete construction of our planned 14,050-mile network.
This does not include amounts that will be needed to fund operating losses
through the date of completion and beyond, amounts required to service our
existing debt and any amounts payable under our contractual purchase
obligations beyond our currently planned network. As of March 31, 2002, we
had $63 million of cash on hand. We do not expect that we will be able to
borrow additional funds under our credit agreement unless we are able to
amend that agreement. We expect to receive approximately $150 million through
the fourth quarter of 2003 from payment obligations from AT&T, Touch America,
and other dark fiber sales for which we have contractual obligations.
However, these are mostly "progress" payments that are required to be made as
we deliver, and are subject to completion of, sections of our network, and
therefore the payments corresponding to the completion of a particular
section may not be relied upon as a source of funds for completion of that
section. In addition, we cannot assure you that these parties will make any
payments due prior to completion of our network in a timely fashion or at all.

     We expect our current cash sources will fund our operations through July
2002. We will continue to focus efforts on dispositions of dark fiber and
conduit to help finance continued construction. However, we cannot adequately
predict the future volume, if any, of such dispositions and the sale prices
of dark fiber and conduit. On June 6, 2000, in connection with an amendment
to our supply agreement with Lucent Technologies, Lucent committed to
purchase dark fiber of up to $100 million to compensate us if we fell short
of our objective to sell a targeted amount of dark fiber by July 31, 2002. We
anticipate having a shortfall of more than $100 million on July 31, 2002 and
have notified Lucent that we intend to exercise our rights under this
agreement. We believe this commitment will be subject to dispute by Lucent.
We cannot predict the outcome if Lucent disputes this obligation.

     We anticipate that unless we are able to amend our credit agreement,
restructure our relationships with key suppliers and customers, and/or identify
a potential strategic or financial investor in the relatively near term, it may
be necessary for Velocita and some or all of its subsidiaries to file a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the
second quarter of 2002. If we commence a bankruptcy proceeding, it is likely
that our senior notes will suffer significant impairment.

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     If we are unable to obtain sufficient funding and/or negotiate a successful
debt restructuring, whether or not we file a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code, we may have to sell strategic assets or
take other measures, which could include liquidation of our assets.
Additionally, we could experience adverse impacts to our business, including but
not limited to, loss of key construction vendors or suppliers, losses of
customer accounts (including dark fiber customers), and loss of key management
personnel. We may also lose government and regulatory support for various
initiatives, including rights to build on federally owned land, that we believe
are critical to our success. See also "Risk Factors" below for a summary of
risks related to our business in general and to these matters in particular.

     We are also dependent on the continued liquidity of our existing
construction partners and their ability to complete portions of our planned
network and to meet their obligations to us. We cannot assure you that our
construction partners will have continued liquidity and meet their payment or
performance obligations to us in a timely manner.

     Our amended credit agreement in May 2001 resulted in higher interest
expense and revisions to our debt covenants. Continued increases in interest
rates could have a material impact on our ability to pay interest on variable
rate debt that we may obtain under our credit facilities. In addition, our
ability to expand our business and enter into new customer relationships will
depend on our ability to obtain additional financing for these projects.
Continued weakness in the capital markets for telecommunications companies,
including the increasing bankruptcy filings among competitors and potential
customers, could also materially affect our ability to obtain additional
financing or sell dark fibers or conduits.

INFLATION

     Inflation has not significantly affected our operations since our
inception.

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                                  RISK FACTORS

     This report contains forward-looking statements and information that are
based on the beliefs of our management as well as assumptions made by and
information currently available to us. Forward-looking statements can be
identified by such words as "anticipates", "believes", "plans", "estimates",
"scheduled" and "expects" or similar expressions. Such statements reflect our
current views with respect to future events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described in this document. We
make these forward-looking statements in reliance on the safe-harbor protections
provided under the Private Securities Litigation Reform Act of 1995.

     These forward-looking statements include, among others, statements
concerning:

     -    Anticipated growth and recovery of the telecommunications industry

     -    Plans to devote significant management time and capital resources to
          our business

     -    Expectations as to our future revenues, margins, expenses and capital
          requirements

     -    Anticipated dates on which we will begin providing certain services or
          specific milestones in the business plan

     -    Expected completion dates of our network build routes

     -    Expected timing and outcome of a reorganization plan or Chapter 11
          Bankruptcy filing

     -    Other statements of expectations, beliefs, future plans and
          strategies, anticipated developments and other matters that are not
          historical facts

     These forward-looking statements are subject to risks and uncertainties,
including financial, regulatory, environmental, industry growth and trend
projections, that could cause actual events or results to differ materially from
those expressed or implied by the statements. Factors that could prevent us from
achieving our stated goals include, but are not limited to, our failure to:

     -    Maintain liquidity

     -    Achieve and sustain profitability based on the creation and
          implementation of our advanced facilities-based communications network
          based on Internet protocol technology

     -    Overcome significant early operating losses

     -    Produce or obtain sufficient capital to fund our business and future
          operating losses

     -    Develop financial, management and operating controls to manage costs

     -    Attract and retain qualified management and other personnel

     -    Install on a timely basis the switches/routers, fiber-optic cable and
          associated electronics required for successful implementation of the
          business plan

     We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.

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RISKS RELATED TO LIQUIDITY AND FINANCIAL RESOURCES

WE ARE IN DEFAULT UNDER OUR CREDIT AGREEMENT AND ARE REVIEWING ALTERNATIVES TO
RESTRUCTURE OUR OBLIGATIONS UNDER THAT AGREEMENT.

     As of March 31, 2002, we were not in compliance with certain financial
covenants under our credit agreement. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations-- Liquidity and Capital
Resources" within Item 7 of this Report and "Recent Changes To The Business,
Credit Agreement Defaults and Possible Restructuring" within Item 1 of this
Report for more information.

IF WE ARE NOT SUCCESSFUL IN RAISING ADDITIONAL CAPITAL, NEGOTIATING A SUCCESSFUL
DEBT RESTRUCTURING OR SELLING OUR COMPANY IN THE VERY NEAR TERM, WE WILL HAVE TO
DRASTICALLY ALTER OUR BUSINESS PLAN OR LIQUIDATE

     Although our network build is approximately 81% complete, our business plan
contemplates substantial additional capital spending. We will need to raise
additional capital because our anticipated future funding requirements for
operating expenses, capital expenditures and debt service exceed the $63.0
million in cash we had on hand as of March 31, 2002 and any cash we expect to
receive from our agreements with AT&T, Touch America and other swap parties.

     If a debt restructuring is not implemented or, as a result of these
existing market conditions or other factors, we fail or are unable to raise
sufficient capital when needed, we may have to drastically alter our business
plan so as to conserve cash, or sell all or a portion of our assets, possibly
pursuant to a liquidation proceeding in bankruptcy court, or both. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" within Item 7 of this Report and
"Recent Changes To The Business, Credit Agreement Defaults and Possible
Restructuring" within Item 1 of this Report for more information.

WE HAVE A HISTORY OF INCREASING NET LOSSES AND NEGATIVE CASH FLOW FROM
OPERATIONS AND WE MAY NEVER BE ABLE TO SATISFY OUR CASH NEEDS FROM OPERATIONS.

     For each period since inception, we have incurred substantial and
increasing net losses and negative cash flow from operations. For 2001, we
posted a net loss of approximately $630.0 million and showed negative cash flows
from operations of approximately $8.5 million. Our accumulated deficit was
approximately $697.0 million at December 31, 2001. We expect that losses and
negative cash flow from operations will continue over the next several years.

     Our existing operations do not currently, and are not expected in the near
future to, generate cash flows from which we can make interest payments on our
currently outstanding indebtedness and unsecured notes or fund continuing
operations and planned capital expenditures. We cannot know when, if ever, net
cash generated by our operations will support our growth and continued
operations.

     Our existing operations are not expected to generate cash flows sufficient
to pay our expected operating expenses, fund our capital expenditure
requirements and make interest payments on indebtedness expected to be
outstanding after completion of the reorganization for a few years.

WE HAVE SUBSTANTIAL EXISTING DEBT AND PREFERRED STOCK AND WE MAY INCUR
SUBSTANTIAL ADDITIONAL OBLIGATIONS THAT WILL INCREASE THE RISK OF A DEFAULT

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     As of December 31, 2001, we had outstanding senior notes of $180.6
million (net of a debt discount of $44.4 million), approximately $136.5
million in other payment obligations and two series of redeemable preferred
stock with an aggregate liquidation preference of $367.2 million. In addition
as of December 31, 2001, we have $362.4 million of outstanding indebtedness
under our credit agreement. This outstanding indebtedness under the credit
agreement has been classified as current on our balance sheet because of our
breach of certain of the financial covenants contained in our credit
agreement making our debt subject to acceleration. Based on our capital
structure at December 31, 2001 and the existing interest rates for
obligations with variable interest rates, we estimate that our debt service
commitments for 2002, if we were to pay them, would be approximately $71.5
million, assuming that obligations under our indebtedness are not
accelerated. We have to date made all scheduled debt service payments on our
senior notes, however, it is unlikely we will make interest payments on our
senior notes that are required to be made on May 15, 2002. In fact, during
the period set forth in our waiver agreement with our secured lenders, PF.Net
Corp. is prohibited from making any restricted payments (as defined under our
credit agreement), other than restricted payments to Velocita Corp. to be
used to fund operating and administrative expenses.

     Unless a debt restructuring is completed, we will require additional
financing by the middle of 2002, much of which could be in the form of
additional indebtedness, which would further increase the risk of additional
defaults unless we can establish an adequate revenue base and generate
sufficient cash flow to repay our indebtedness. Our scaled-back business plan
does not contemplate activities that are likely to generate significant
revenues, and we may never establish an adequate revenue base to produce an
operating profit or generate adequate positive cash flow to provide future
capital expenditures and repayment of debt.

THE COVENANTS IN OUR INDENTURE AND SENIOR SECURED CREDIT AGREEMENT RESTRICT OUR
FINANCIAL AND OPERATIONAL FLEXIBILITY, WHICH COULD HAVE AN ADVERSE AFFECT ON OUR
RESULTS OF OPERATIONS.

     The indenture under which our senior notes have been issued and our senior
secured credit agreement contain covenants that restrict, among other things,
our ability to borrow money, grant additional liens on our assets, make
particular types of investments or other restricted payments, sell assets or
merge or consolidate. Our senior secured credit agreement also requires us to
maintain specified financial ratios.

     Our existing debt obligations and outstanding redeemable preferred stock
also could affect our financial and operational flexibility, as follows:

 - they may impair our ability to obtain additional financing in the future;

 - they will require that a substantial portion of our cash flow from operations
and financing activities be dedicated to the payment of interest on debt and
dividends on preferred stock, which will reduce the funds available for other
purposes;

 - they may limit our flexibility in planning for or reacting to changes in
market conditions; and

 - they may cause us to be more vulnerable in the event of a downturn in our
business.

     We are subject to covenants that restrict our operational flexibility and
require us to maintain certain financial ratios, and the lenders under the
credit agreement have a security interest in substantially all of the assets of
PF.Net Corp. and its subsidiaries.

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     If any of our lenders accelerates our indebtedness to them, as a result of
cross-default provisions we would be in default with respect to certain of our
contracts, including our AT&T network development agreement.

     Unless we are able to amend our credit agreement, restructure our
relationships with key suppliers and customers, and/or identify a potential
strategic or financial investor in the relatively near term, it may be necessary
for Velocita and some or all of its subsidiaries to file a voluntary petition
for relief under Chapter 11 of the Bankruptcy Code in the second quarter of
2002. If we commence a bankruptcy proceeding, it is likely that our senior notes
will suffer significant impairment.

     If we are unable to obtain sufficient funding and/or negotiate a successful
debt restructuring, whether or not we filed a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code, we may have to sell strategic assets or
take other measures, which could include liquidation of our assets.
Additionally, we could experience adverse impacts to our business, including but
not limited to, loss of key construction vendors or suppliers, losses of
customer accounts (including dark fiber customers), and loss of key management
personnel. We may also lose government and regulatory support for various
initiatives, including rights to build on federally owned land, that we believe
are critical to our success.

SUBORDINATION -- WE ARE A HOLDING COMPANY AND OUR SENIOR NOTES ARE UNSECURED,
AND THEREFORE THE SENIOR NOTES ARE EFFECTIVELY SUBORDINATED TO ALL OBLIGATIONS
OF OUR SUBSIDIARIES AND TO OUR SECURED INDEBTEDNESS.

     We are a holding company and have few assets other than the capital stock
of our subsidiaries. Although the senior notes are referred to as "senior
notes," they are unsecured and will be effectively subordinated to all existing
and future secured indebtedness of Velocita Corp. and to all existing and future
indebtedness and other liabilities (including trade payable) of our
subsidiaries. In the event of a bankruptcy, liquidation or similar proceeding
involving our company or any of our subsidiaries, any assets that serve as
collateral will be available to satisfy the obligations under any secured
indebtedness before any payments are made on the senior notes and creditors will
generally be entitled to payment of their claims from the assets of those
subsidiaries before any assets are made available for distribution to us, except
to the extent that we may also have a claim as a creditor.

ORIGINAL ISSUE DISCOUNT -- BECAUSE THE INITIAL OFFERING PRICE OF OUR UNITS IS
ALLOCABLE TO THE WARRANTS AND SENIOR NOTES, OUR SENIOR NOTES ARE CONSIDERED TO
BE ISSUED WITH ORIGINAL ISSUE DISCOUNT WHICH MAY CONSTITUTE "UNMATURED INTEREST"
FOR PURPOSES OF THE BANKRUPTCY CODE.

     If a bankruptcy case is commenced by or against us under the United States
Bankruptcy Code, the claim of a holder of any of our senior notes with respect
to the principal amount thereof may be limited to an amount equal to the sum of:

  -  the initial offering price allocable to the senior notes, and

  -  that portion of the original issue discount which is not deemed to
     constitute "unmatured interest" for purposes of the Bankruptcy Code.

     Any original issue discount that was not amortized as of any such
bankruptcy filing would constitute "unmatured interest."

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RISKS RELATED TO NETWORK DEVELOPMENT

OUR RIGHTS TO THE USE OF THE DARK FIBER THAT MAKE UP OUR NETWORK MAY BE AFFECTED
BY THE FINANCIAL HEALTH OF OUR FIBER PROVIDERS

     We hold some of the unlit fiber and purchased network capacity that makes
up a portion of our network, particularly in our Touch America Swap routes,
through long-term leases or indefeasible right of use agreements. A bankruptcy
or financial collapse of one of these fiber providers could result in a loss of
our rights under such leases and agreements with the provider, which in turn
could have a negative impact on the integrity of our network and ultimately on
our results of operations. There has been increasing financial pressure on some
of our fiber providers as part of the overall weakening of the
telecommunications market over the past twelve to eighteen months. Consequently,
in the case of a bankruptcy or financial collapse by one of our fiber providers,
our rights under our dark fiber agreements remain unclear. In particular, to our
knowledge, the rights of the holder of such rights in strands of unlit fiber
have never been addressed by the judiciary at the state or federal level in
bankruptcy.

WE DEPEND ON OUR KEY PERSONNEL AND QUALIFIED STAFF AND, IF WE LOSE THEIR
SERVICES, OUR ABILITY TO MANAGE THE DAY-TO-DAY ASPECTS OF OUR BUSINESS WILL BE
WEAKENED. WE MAY NOT BE ABLE TO HIRE AND RETAIN QUALIFIED PERSONNEL, WHICH COULD
ADVERSELY AFFECT OUR OPERATING RESULTS.

     We are highly dependent on the services of our management and other key
personnel. The loss of the services of our senior executive management team or
other key personnel could cause us to make less successful strategic decisions,
which could hinder the introduction of new services or the entry into new
markets. We may not be able to attract, develop, motivate and retain experienced
and innovative personnel to complete our construction build and successful
restructure our debt.

THE REQUIREMENT THAT WE OBTAIN PERMITS AND RIGHTS OF WAY TO DEVELOP OUR NETWORK
INCREASES OUR COST OF DOING BUSINESS AND COULD ADVERSELY AFFECT OUR PERFORMANCE
AND RESULTS.

     In order for us to acquire and develop our fiber networks, we must obtain
local franchises and other permits, as well as rights of way and fiber capacity
from entities such as incumbent carriers and other utilities, railroads, long
distance companies, state highway authorities, local governments and transit
authorities. The process of obtaining these permits and rights of way is
time-consuming and burdensome and increases our cost of doing business.

     We may not be able to maintain our existing franchises, permits and rights
of way that we need to implement our business. We may also be unable to obtain
and maintain the other franchises, permits and rights that we require. A
sustained and material failure to obtain or maintain these rights could
materially adversely affect our performance and operating results in the
affected metropolitan area.

COMPETITION

     The telecommunications industry is extremely competitive, particularly with
respect to price and service. We face competition from existing and planned
telecommunication systems with respect to each of our planned routes. Our
competitors include: wholesale providers, IXCs, ILECs and CLECs, which include
such companies as AT&T, WorldCom, Inc., Sprint Corp., Qwest, Touch America,
Inc., Level 3 Communications, Inc. and Williams Communications Group. Potential
competitors capable of offering similar services include communications service
providers, cable television companies, electric utilities, microwave carriers,
satellite carriers, wireless telephone operators and large end-users with
private

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<Page>

networks. Other companies may choose to compete with us in our current or
planned markets, by selling or leasing fiber assets or bandwidth services to our
targeted customers.

     The increased number of competitors and resulting investment in
telecommunications networks has created a substantial oversupply of network
capacity in the industry. While the Company believes that this oversupply
condition is temporary, the oversupply has resulted in an intensely competitive
environment forcing numerous competitors to curtail their business plans and, in
a number of cases, to file for protection under bankruptcy or protection from
creditor statutes. These factors have resulted in downward pricing pressure for
our products.

     Some of our competitors have already made substantial long-term investments
in the construction of fiber-optic networks and the acquisition of bandwidth.
Some of these competitors have substantially greater resources, existing
customers and more experience than we and directly compete with us in the market
for fiber assets and bandwidth services.

     Significant new competitors could arise as a result of:

     -    increased consolidation and strategic alliances in the industry
          resulting from Congressional and FCC actions;

     -    allowing foreign carriers to compete in the U.S. market;

     -    further technological advances; and

     -    further deregulation and other regulatory initiatives.

     The introduction of new products or emergence of new technologies may
reduce the cost or increase the supply of certain services similar to those we
provide. We cannot predict which of many possible future product and service
offerings will be crucial to establish or maintain our competitive position or
what expenditures will be required to develop and profitably provide such
products and services. Additional competition could materially and adversely
affect our operations.

     The market for our high-capacity telecommunication services is highly
competitive and is likely to become more so as the BOCs are allowed into the
in-region long distance market. The market for these services has numerous
entities competing for the same customers, many of who enter into multi-year
service contracts. The presence of such contracts may make it more difficult for
us initially to attract customers.

     The Telecommunications Act permitted BOCs to provide long distance services
outside their local service regions immediately, and will permit them to provide
in-region, long distance service upon demonstrating to the FCC and state
regulatory agencies that they have adhered to the Telecommunications Act's
Section 271 14-point competitive checklist. Some BOCs have filed applications
with various state public utility commissions and the FCC seeking approval to
offer such "in-region, interLATA" service. For the first three years following
passage of the Telecommunications Act of 1996, the FCC consistently denied the
BOCs authority to provide these services, blocking BOC entry into these markets.
In December 1999, however, the FCC for the first time granted such authority to
Verizon authorizing it to provide in-region, interLATA service originating in
New York State. Since that time, Southwestern Bell has applied for, and been
granted, authority to provide interLATA long distance service in Arkansas,
Missouri, and Texas. The FCC also granted Southwestern Bell's application for
authority to provide interLATA long distance service in Kansas and Oklahoma, but
this decision was remanded back to the FCC on December 28, 2001 by the U.S.
Court of Appeals for the District of Columbia Circuit. The D.C. Circuit
determined that the FCC did not properly consider certain arguments

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<Page>

of opponents of the application and now must more fully consider these arguments
on remand. Similarly, in addition to New York, Verizon has applied for, and been
granted, long distance authority in Connecticut, Massachusetts, Pennsylvania and
Rhode Island. Several additional applications are pending and we expect that
additional BOCs will continue to file similar applications. The entrance of
these and other BOCs into the in-region, interLATA market could significantly
increase competition in our service markets by permitting these established
telecommunications companies, which have greater financial, technical and other
resources than we do, into the market for some of the same services that we
intend to provide.

OTHER NETWORK DEVELOPMENT RISKS

     We have a number of other risks with respect to the development of our
network, including the following:

     -    Erosion of Capital Markets--Given the recent erosion in capital
          markets, many companies are facing constraints in their cash flows and
          capital raising ability, which may affect their ability to buy both
          dark fiber and lit fiber capacity. This adverse market condition may
          continue to affect all fiber-optic companies, including ours.

     -    Changes in General Economic Conditions--Changes in general economic
          conditions in the United States and changes in federal or state laws
          and regulations to which we are subject, including, but not limited
          to, tax, environmental and employment laws and regulations.

     -    Dependence on Dark Fiber and Conduit Sales--Our current financing plan
          depends on our ability to generate cash proceeds from dispositions of
          dark fiber and conduit rights. A covenant in our credit agreement
          requires us to generate proceeds from dark fiber and conduit
          dispositions in the amounts and prior to the dates specified in the
          credit agreement. As of March 31, 2002, we were in breach of that
          covenant. Our inability to sell dark fiber in the amounts included in
          our current projections or as specified in the credit agreement has
          had and may continue to have a material adverse affect on our
          liquidity.

     -    Construction Delay--If we are unable to complete the construction of
          the 6,400-mile constructed portion of our network on time and in a
          cost-effective manner, we may not be able to generate revenues at the
          margins we currently expect. If the delays in our construction are
          significant enough, AT&T has the right to terminate our network
          development agreement, which in turn would have a material adverse
          effect on our business, operations, financial condition and liquidity.

     -    Importance of Certain Agreements--We depend on our agreements with,
          and payments from, AT&T for the completion of our entire network. We
          also intend to use dispositions of fiber and conduit constructed in
          connection with the AT&T network development agreement as a financing
          source. We will also depend on the AT&T fiber purchase agreement for
          approximately 2,400 miles of, and on the Touch America agreement for
          4,500 miles of, our planned 14,050-mile network. Our inability, or the
          inability of each of AT&T or Touch America to perform its obligations
          under these agreements, respectively, could have a material adverse
          affect on our financial condition.

     -    Risk of Network Failure--Network disruptions could adversely affect
          our operating results.

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<Page>

     -    Pricing Pressures-- Numerous other telecommunications companies are
          facing financial difficulties, have declared bankruptcy, and are
          selling telecommunications assets at distressed prices. We anticipate
          that prices for fiber assets will decline. If pricing pressure is
          greater than we anticipate, it could continue to have a material
          adverse affect on our liquidity.

     -    Dependence on Subcontractors--We have entered into various fixed-cost
          construction contracts with third party construction companies to
          build our fiber optic network and related facilities and these
          construction companies rely on numerous subcontractors to fulfill
          their construction obligations. Although we have made timely
          payments to our construction companies, during 2001 some of our
          construction companies defaulted on their payment obligations to
          subcontractors and/or did not pay subcontractors in a timely
          manner. This resulted in some work slowdowns and work stoppage
          along selected routes. The slowdowns and stoppage continued until
          the subcontractors were paid in full for their work and received
          assurances they would be paid for future services. We expect that
          additional work slow-downs and stoppage may occur as a result of
          current economic conditions, continued weakness in the
          telecommunications sector, and liquidity problems facing many of
          our construction companies and their subcontractors.

     -    Risks of Technological Change--New technologies could reduce the
          demand for fiber-optic systems.

     -    Risks Associated with Growth--Our inability to implement our business
          strategy and manage our growth could cause significant delays in the
          completion of our network.

     -    Dependence on Suppliers--The loss or unreliability of key sources of
          supply and related support services could adversely affect us.

     -    Extensive Regulation--Regulatory matters could impact our ability to
          conduct our business. Please refer to "Regulation" included in Item 1
          of this Report for more information.

     -    Market Downturn --Deterioration in the capital markets sector,
          including the telecommunications industry, has had and may continue to
          have an adverse effect on our business.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

     We have interest rate exposure related to the credit agreement. Borrowings
under the credit agreement bear interest at rates that fluctuate with changes in
short-term interest rates. The weighted average interest rate based on
outstanding amounts under the variable rate debt of approximately $362.4 million
was approximately 6.8% as of December 31, 2001. A hypothetical increase of 1% in
the variable portion of the weighted average rate (i.e. a weighted average rate
of 7.8%) would increase annual interest expense of the Company by approximately
$3.6 million. The credit agreement requires us to hedge the risks related to
interest rate movements through the use of interest rate protection agreements
or other derivative instruments and as necessary to ensure that at least 50% of
our consolidated indebtedness either bears interest at a fixed rate or is
protected against interest rate fluctuations by a hedging agreement that fixes
or limits our interest cost. As a result of this requirement and our additional
borrowings under the credit agreement during the third and fourth quarters of
2001, we entered into three interest rate cap agreements to fix the rate of
interest on $125 million of the outstanding variable rate debt. The terms of the
agreements provide that the net interest expense related to $125 million of the
borrowings under the credit agreement will not exceed 12%. The agreements
therefore cap the LIBOR portion of the interest rate at 7.25%. At December 31,
2001, we had $350 million of fixed rate debt bearing interest ranging from
6.6875% to 13.75%; however, the debt currently bearing interest at 6.6875% could
potentially increase to the cap amount of 12% in the future. To maintain an
effective balance of fixed and variable obligations, we may elect to enter into
specific interest rate swaps or other derivative instruments, as we

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deem necessary. The change in interest rates is based on hypothetical movements
and is not necessarily indicative of the actual results that may occur. Future
earnings and losses will be affected by actual fluctuations in interest rates.

MARKET RISK

     We have market risk exposure related to put warrants. We issued warrants to
purchase 14,141,414 shares (subject to adjustment upon the occurrence of certain
events) of the Company's common stock at $2.8125 per share. In the event that
the Company does not complete an initial public offering by October 29, 2004,
the holder of the warrants shall have the right to require us to repurchase the
unexercised shares at the difference between the warrant exercise price and the
fair market price of our common stock on the date of repurchase. If the Company
is unable to pay cash or if debt terms prohibit payment of cash for the
repurchase, the Company will use commercially reasonable efforts to provide
substitute consideration, including subordinated indebtedness or preferred
equity. We recognize changes to the fair market value of the put warrants in
earnings. Changes in the fair value of our common stock affect the fair value of
the put warrants. Such changes could have a material effect on our financial
position and results of operations. At December 31, 2001, the fair value of the
put warrants was zero, determined using the Black-Scholes option-pricing model.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated financial statements for Velocita Corp. and Subsidiaries
appear in Item 14 of this Report.

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

     None.

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                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth certain information with respect to our
executive officers and directors and the key employees of PF.Net Corp., our
wholly owned subsidiary. Our directors, with the exception of Robert Annunziata
and Kirby Pickle, are also directors of PF.Net Corp. In addition, Messrs. Irwin,
Kwait and McCaleb are directors of all our other subsidiaries.

<Table>
<Caption>
            NAME                 AGE                            POSITION
-----------------------------  -------   ------------------------------------------------------------
<S>                              <C>     <C>
Kirby G. Pickle, Jr.             45      Director and Chief Executive Officer and Acting Chief
                                         Financial Officer of Velocita Corp.
W. Terrell Wingfield, Jr.        49      Senior Vice President, General Counsel and Secretary of
                                         Velocita Corp.
Robert D. Collet                 45      Chief Technology Officer
Thomas R. McCaleb                56      Vice President, Operations of PF.Net Corp.
Robert Annunziata                53      Chairman of the Board of Directors
Sharyar Aziz(1)                  49      Director
Tim Cesarek(2)                   38      Director
Stephen Irwin(3)                 60      Director
Brian Kwait(1)(3)                40      Director
Muzzafar Mirza                   44      Director
Charles W. Moore                 35      Director
John C. Pittenger(1)(3)          45      Director
John Warta                       54      Director
</Table>

----------
(1) Member of the Audit/Finance Committee of the Board of Directors.
(2) Mr. Cesarek replaced David Duncan as a Koch Telecom Ventures appointed
    Director effective September 7, 2001.
(3) Member of the Compensation Committee of the Board of Directors.

     KIRBY G. PICKLE, JR. has been Chief Executive Officer and a Director of
Velocita Corp. since September 2000 and Acting Chief Financial Officer of
Velocita Corp. since February 2002. He was President and Chief Operating Officer
of Teligent, Inc. since January 1997. Prior to joining Teligent, Inc., he served
as President and Chief Operating Officer of UUNet Technologies, Inc., from
January 1996 to January 1997. Prior to that he was Executive Vice President of
MFS Communications Company, Inc. and President and Chief Operating Officer of
the MFS Intelenet Companies from August 1995 to January 1996. On May 21, 2001,
Teligent, Inc. filed for voluntary bankruptcy protection under Chapter 11 of the
United States Bankruptcy Code.

     ROBERT ANNUNZIATA has been Chairman of the Board of Directors of Velocita
Corp. since May 2000. Mr. Annunziata was a Director and Chief Executive Officer
of Global Crossing Ltd. from February 1999 through March 2000. From September
1998 to February 1999, Mr. Annunziata was President of AT&T's business services
group, responsible for the AT&T global network. Prior thereto, Mr. Annunziata
was Chairman and Chief Executive Officer of the Teleport Communications Group, a
competitive local exchange carrier, from 1983 to 1998. Mr. Annunziata is a
Director of ADC Telecommunications Inc. and ThruPoint, Inc. Mr. Annunziata
serves on various other telecommunication boards as well. He is also Chairman
of the Board of the YMCA of Greater New York. On January 28, 2002, Global
Crossing Ltd. filed for voluntary bankruptcy protection under Chapter 11 of
the United States Bankruptcy Code.

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     W. TERRELL WINGFIELD, JR. has been Senior Vice President and General
Counsel of Velocita Corp. since October 2000 and was elected Secretary in August
2001. He was Executive Vice President for Sales and Marketing for ICG
Communications, Inc. from August 2000 to October 2000 and Executive Vice
President for Corporate Development for ICG Communications, Inc. from March 2000
to August 2000. Prior to that he was Senior Vice President of Telephony Ventures
for AT&T Broadband and Internet Services from June 1999 to March 2000. From
August 1998 to March 2000, he was the Legal and Government Affairs Vice
President for AT&T's Local Services Division. Prior thereto, Mr. Wingfield was
Vice President and General Counsel of the Teleport Communications Group from
March 1996 until it was merged into AT&T in August 1999. On November 14, 2000,
ICG Communications, Inc. filed for voluntary bankruptcy protection under Chapter
11 of the United States Bankruptcy Code.

     ROBERT D. COLLET is the Chief Technology Officer of Velocita Corp. From
January 2001 through February 2001, Mr. Collet served as President of Velocita
Corp. From September 2000 through December 2000 he was President, Internet and
Advanced Data Services for Velocita Corp. From February 1996 to August 2000 he
was Vice President and General Manager of Internet and Data Services at
Teleglobe Communications Corp. Prior to that he was Director, Sales Engineering,
Sprint Government Systems Division from August 1995 to February 1996 and he was
Director, Engineering and Operations for Internet and Managed Network Services,
Sprint Business Services Group from April 1992 to August 1995.

     THOMAS R. MCCALEB has been Vice President, Operations of PF.Net Corp. since
November 1999. Prior to that he held numerous executive and management positions
with Koch Industries, Inc., most recently serving as Vice President, Network
Construction of Koch Telecom Ventures from October 1999 to November 1999, and as
Vice President of Koch Midstream Gasmark Company from December 1998 to April
1999. Mr. McCaleb was Executive Vice President of Koch Pipeline Company, L.P.
from December 1997 to October 1998 and President from January 1996 to December
1997. He served as Vice President of Chase Pipeline Company from April 1994 to
October 1998.

     SHARYAR AZIZ has been a Director of Velocita Corp. since October 1999. Mr.
Aziz has been a Managing Director of UBS Warburg LLC since March 1994. Prior to
that, Mr. Aziz was an Executive Vice President and Managing Director of the
investment bank Smith Barney, Harris Upham & Co. Inc. Mr. Aziz is a member of
the Yale Development Board.

     TIM CESAREK has been a Director of Velocita Corp. since September 2001 as a
Koch Telecom Ventures appointed Director. Mr. Cesarek is the managing director
of corporate finance and structuring for Koch Industries, Inc., where he is
responsible for leading a team that focuses on transaction support. Such support
includes the analysis, due diligence and negotiation, as well as post
transaction integration and monitoring for investments, acquisitions,
restructurings, joint ventures and divestitures contemplated by Koch Industries
and its portfolio companies. Prior to joining Koch Industries in May 2001, Mr.
Cesarek was a director of transaction services for KPMG, LLP.

     STEPHEN IRWIN has been a Director of Velocita Corp. since October 1999. Mr.
Irwin was an Executive Vice President and Vice Chairman of the Board of our
predecessors from April 1999 to October 1999. Mr. Irwin was Vice Chairman of the
Board of Directors of GST Telecommunications, Inc. ("GST") from 1994 through
February 1999. He has been of counsel at the law firm of Olshan Grundman Frome
Rosenzweig & Wolosky LLP since 1991.

     BRIAN KWAIT has been a Director of Velocita Corp. since October 1999. Mr.
Kwait has been a Managing Principal of Odyssey Investment Partners, LLC since
1997. Prior to that, Mr. Kwait was a

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Principal in the private equity-investing group of Odyssey Partners, LP from
1989 to 1996. Mr. Kwait is a director of Williams Scotsman Holdings Inc.

     MUZZAFAR MIRZA has been a Director of Velocita Corp. since October 1999 and
was Chairman of the Board of Directors of Velocita Corp. from November 1999 to
May 2000. Mr. Mirza has been a Managing Principal of Odyssey Investment
Partners, LLC since 1997. Prior to that, Mr. Mirza was a Principal in the
private equity-investing group of Odyssey Partners, LP from 1993 to 1996. From
1988 to 1993, Mr. Mirza was employed by the merchant banking group of GE Capital
Corp. Mr. Mirza is a director of TransDigm Inc. and Dresser, Inc.

     CHARLES W. MOORE has been a Director of Velocita Corp. since October 1999.
Since January 2000, Mr. Moore has been a Partner of UBS Capital Americas,
LLC. Prior to that, Mr. Moore has been a principal of UBS Capital LLC since
March 1997. Mr. Moore is currently a Director of IFX Corp., Worknet
Communications, Netstream Communications, Sonexis, Inc., Dynamicsoft, Inc.
and Tutopia.com. From November 1994 until March 1997, Mr. Moore was an
associate of Greenwich Street Capital Partners LLC.

     JOHN C. PITTENGER has been a Director of Velocita Corp. since October 1999.
Mr. Pittenger has been President of Koch Telecom Ventures, Inc. since 1999 and a
Senior Vice President of Koch Industries, Inc. since 2000. He also served as
President of Koch Realty, Inc. from December 1993 to May 1998, Managing Director
of Koch Equities, Inc. from January 1994 to January 1995, Vice President of Koch
Properties, Inc. from December 1995 to May 1998 and Vice President, Capital
Services, of Koch Industries, Inc. from March 1996 to March 1998.

     JOHN WARTA has been a Director of Velocita Corp. since October 2001 and
was a Director of Velocita from October 1999 until January 2001. Until
October 1999, Mr. Warta, the founder of our company's predecessor, was
President and CEO of the predecessor companies of Velocita Corp. Mr. Warta
is Chairman and CEO of Pacific Lightnet, Inc., a competitive telecom company
operating principally in Hawaii. Mr. Warta is the Managing Director, of
NextNet Investments, which has a variety of investments in telecom ventures.
Mr. Warta is also Chairman of Chandalar Communications Corporation. Mr. Warta
was the chairman of the board at GST from March 1997 to August 1998. He was
the chief executive officer of GST from March 1995 to August 1998. From June
1994 to April 1995, he was the President and Chief Executive Officer of GST
Telecom, Inc. Mr. Warta co-founded Electric Lightwave, Inc. (ELI) in 1988,
which operates fiber optic competitive access networks. He served as its
president and chief executive officer from June 1989 to June 1993.

STOCKHOLDERS AGREEMENT

     We entered into a stockholders agreement, amended and restated as of
May 24, 2001, with certain of our stockholders. The stockholders agreement
requires that each of the parties thereto vote all of its securities to cause to
be elected to our board of directors (1) up to two designees of Odyssey
Investment Partners; (2) up to three designees of PF Telecom Holdings LLC; (3)
up to three designees of Koch Telecom Ventures; (4) up to two designees of Cisco
Systems; (5) up to one designee of UBS Capital II LLC and (6) our chief
executive officer. Messrs. Mirza and Kwait are the Odyssey designees. Messrs.
Aziz, Warta and Irwin are the PF Telecom designees. Messrs. Cesarek and
Pittenger are the Koch Telecom designees. Mr. Moore is the designee of UBS
Capital. Currently there are no Cisco designees on our board of directors. See
"Description of Material Agreements--Stockholders Agreement" in Item 1 of this
Report.

COMPENSATION OF DIRECTORS

     Except as set forth below, no director of our company or of our
subsidiaries will receive any compensation for serving as a director. Messrs.
Pickle, Annunziata, Warta and Irwin are receiving compensation as described
under "--Employment and Similar Agreements" in Item 11 of this Report. At this
time, non-employee directors have not been granted stock, options or warrants in
such capacity.

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<Page>

COMMITTEES OF THE BOARD OF DIRECTORS

     Our bylaws provide that our board of directors may designate one or more
board committees. Our board of directors has established an audit committee, a
finance committee and compensation committee.

     The audit committee is responsible for monitoring corporate financial
reporting and our internal and external audits and overseeing the engagement of
our independent auditors.

     The finance committee is responsible for establishing and monitoring our
financial policies and procedures, maintaining our capital structure and
directing capital-raising efforts to support our ongoing operations.

     The compensation committee establishes salaries, incentives and other forms
of compensation for our executive officers and administers incentive
compensation and benefit plans for our employees.

     Currently, the members of the audit and finance committees are the same.

                           SUMMARY COMPENSATION TABLE

     The following table summarizes the compensation paid to our chief executive
officer and the other four most highly paid executive officers whose total
salary and bonus exceed $100,000 for the year ended December 31, 2001. We refer
to all of these executive officers as our Named Executive Officers.

<Table>
<Caption>
                                                     ANNUAL COMPENSATION                  SECURITIES
                                                                           OTHER ANNUAL   UNDERLYING       ALL OTHER
NAME AND PRINCIPAL POSITION               YEAR     SALARY     BONUS (1)    COMPENSATION     OPTIONS     COMPENSATION(2)
<S>                                       <C>    <C>         <C>                <C>       <C>                  <C>
Kirby G. Pickle, Jr. (3) (4)........      2001   $ 500,000   $       --         --               --            $ 18,287
    Chief Executive Officer and Acting    2000     193,269    3,700,000         --        4,000,000            $  4,000
    Chief Financial Officer

Donald W. Bolar (3) (5) ............      2001     400,000   $       --         --               --              13,000
    President, PF.Net Network Services    2000     276,359      356,600         --        2,800,000               7,000
    Corp.
                                          2001     364,500   $                  --               --              13,000
Robert D. Collet (3) (6) ...........      2000     100,000           --         --        1,000,000               4,000
    Chief Technology Officer                                    274,200

David L. Taylor (7) ................      2001     250,000   $                  --               --             205,967
    Chief Financial Officer               2000     250,000           --         --        1,600,000              12,000
                                          1999     125,000      250,000         --               --                  --
                                                                     --
W. Terrell Wingfield, Jr. (3) (8)...      2001     300,000   $       --         --               --              76,694
    Senior Vice President, General        2000      58,077      356,600         --        1,000,000                  --
    Counsel and Secretary
</Table>

----------
(1) Amounts indicated reflect signing and performance bonuses earned or paid
    during the year 2000. No bonuses were paid for the year ended December 31,
    2001. The compensation committee awarded performance-based bonuses in
    accordance with our employment agreements, see "--Employment and Similar
    Agreements" in Item 11 of this Report.
(2) For 2001, includes for Mr. Pickle: $14,000 for the auto allowance and $4,287
    for contributions made by us on behalf of Mr. Pickle under our 401(k) plan;
    for Mr. Bolar $13,000 for the auto allowance; for Mr. Collet $13,000 for the
    auto allowance; for Mr. Taylor $14,000 for the auto allowance, $191,967 for
    reimbursement of relocation expenses; for Mr. Wingfield $72,944 for
    reimbursement of relocation expenses and $3,750 for contributions made by us
    under the 401(k) plan on behalf of Mr. Wingfield.
(3) Salary amount listed for the year ended December 31, 2000 is not per annum,
    but for part-year employment during 2000. For per annum salaries of these
    officers, see "--Employment and Similar Agreements" in Item 11 of this
    Report.

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<Page>

(4) Mr. Pickle was retained as Chief Executive Officer effective September 7,
    2000.
(5) Mr. Bolar was retained as our President, PF.Net Network Services effective
    April 24, 2000. Mr. Bolar received notice on February 28, 2002 that his
    position, President of PF.Net Network Services, Inc., was being eliminated,
    effective April 29, 2002.
(6) Mr. Collet was retained as President, Internet and Advanced Data Services
    effective September 1, 2000 and more recently has assumed the role of Chief
    Technology Officer in 2001.
(7) Mr. Taylor resigned from the position of Chief Financial Officer and
    Treasurer effective February 18, 2002.
(8) Mr. Wingfield was retained as our Senior Vice President and General Counsel
    effective October 23, 2000.

                        OPTION GRANTS IN LAST FISCAL YEAR

     We did not grant any stock options or stock appreciation rights to the
Named Executive Officers during the year ended December 31, 2001.

       AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
                                  OPTION VALUES

     The following table sets forth information concerning unexercised stock
options held by the Named Executive Officers as of December 31, 2001.

<Table>
<Caption>
                                                             NUMBER OF SECURITIES
                                SHARES                      UNDERLYING UNEXERCISED           VALUE OF UNEXERCISED
                              ACQUIRED ON      VALUE        OPTIONS AT DECEMBER 31,         IN-THE-MONEY OPTIONS AT
                              EXERCISE(#)    REALIZED($)             2001                    DECEMBER 31, 2001(1)

NAME                                                      EXERCISABLE   UNEXERCISABLE    EXERCISABLE    UNEXERCISABLE
<S>                                                         <C>             <C>             <C>             <C>
Kirby G. Pickle, Jr..........     --            --          1,000,000       3,000,000       $  --           $  --

Donald W. Bolar(3)...........     --            --            700,000       2,100,000          --              --

Robert D. Collet ............     --            --            250,000         750,000          --              --

David L. Taylor (2) .........     --            --          1,244,444         355,556          --              --

W. Terrell Wingfield, Jr. ...     --            --            250,000         750,000          --              --
</Table>

----------
(1) None of the options held by the Named Executive Officers are in-the-money.

(2) Mr. Taylor resigned as our Chief Financial Officer and Treasurer effective
    February 18, 2002. On that date, all of his unvested options were canceled.
    In addition, Mr. Taylor forfeited 50% of his vested options. Mr. Taylor may
    exercise his remaining vested options through October 1, 2004 and, if not
    exercised, the options will be canceled in October 2004.

(3) Mr. Bolar was notified on February 28, 2002 that his employment will be
    terminated on April 29, 2002. Based on the terms of his employment
    agreement, Mr. Bolar will receive accelerated vesting of options to purchase
    700,000 shares of our common stock, and he will hold on his termination
    date, vested options to purchase a total of 2,100,000 shares of our common
    stock. Mr. Bolar has 180 days to exercise his vested options and, if not
    exercised, those options will be canceled. On his termination date, his
    unvested options to purchase 700,000 shares of our common stock will be
    canceled.

                                       88
<Page>

ITEM 11. EMPLOYMENT AND SIMILAR AGREEMENTS

KIRBY G. PICKLE, JR.

     Mr. Pickle is currently employed as Chief Executive Officer by Velocita
Corp. pursuant to an agreement (represented by a summary term sheet) dated as
of September 7, 2000. The agreement provides for an initial term ending
August 31, 2004, automatically renewable for three additional one-year terms
unless either Mr. Pickle or we give a timely written notice of nonrenewal.
Mr. Pickle is entitled to receive an annual salary of $500,000. Our board of
directors will annually review his salary and may increase but not decrease
his annual salary in our sole discretion based on Mr. Pickle's performance
during the preceding year. Mr. Pickle is eligible to receive an annual bonus
in an amount of up to 100% of his base compensation or as otherwise
determined by the Board of Directors, except that the bonus for the year 2000
was prorated for the portion of the year worked by Mr. Pickle. The bonus
amount, if any, will be determined by our board of directors based on
performance criteria. Pursuant to this employment agreement, Mr. Pickle was
paid a signing bonus of $3,500,000 and we have granted Mr. Pickle options to
purchase 4,000,000 shares of our common stock exercisable at $6.40 per share
that vest over a four-year period. Certain change of control events and the
successful completion of an Initial Public Offering will cause one hundred
percent of Mr. Pickle's options and stock awards to be vested. Mr. Pickle has
agreed to maintain the confidentiality of our information and not to compete
with us for the period from the date of the agreement until the second
anniversary of his termination date or, in the event he terminates his
employment "for good reason," as defined in the agreement, or we terminate
his employment "without cause," as defined in the agreement, until the date
he ceases to receive payments from the company. Upon termination, Mr. Pickle
will receive his base compensation and any other payments due him under our
policies, through the effective date of termination. Mr. Pickle can be
terminated "for cause" as defined in the agreement or due to a disability or
other cause preventing him from performing a substantial portion of his
duties. If he is terminated "without cause," or if he terminates his
employment "for good reason," we will pay him an amount equal to his base
compensation for the remainder of the term of the agreement, but for no
greater than two years and no less than one year.

ROBERT ANNUNZIATA

     Mr. Annunziata is currently the Executive Chairman of the Board of
Directors of Velocita Corp. pursuant to an agreement dated October 1, 2001. The
agreement provides that Mr. Annunziata's term will extend through December 31,
2002, unless it is mutually agreed to extend the term. The agreement entitles
Mr. Annunziata to annual compensation consisting of a base compensation of
$500,000 and a minimum bonus of $500,000 during 2002 if bonuses are paid to
executive management. He also received a signing bonus of $2.5 million paid in
equal installments during October 2001 and January 2002. The agreement entitles
Mr. Annunziata to bonuses in connection with certain transactions, as defined in
the agreement, which may be entered into by the Company during the term of the
agreement. As a result of the agreement, on October 1, 2001, Mr. Annunziata
forfeited all of his options to purchase a total of 4.2 million shares of our
common stock. Upon termination during the term of the agreement, Mr. Annunziata
will receive his base compensation and any other payments due him under our
policies, through the effective date of termination. If Mr. Annunziata is
terminated by us without "Cause" or he terminates the agreement with "Good
Reason", both as defined in the agreement, he will receive his base compensation
through December 31, 2002, or twelve months, if greater and the annual bonus for
the year of termination.

     Also as of October 1, 2001, Mr. Annunziata entered into an agreement with
our current shareholders pursuant to which he will be eligible to receive 5% of
the "Profit" of each shareholder upon

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the completion of a transaction or series of related transactions, as defined in
the agreement. Mr. Annunziata will only receive the payment if he fulfills his
obligations under the agreement described above and he is serving as our
Executive Chairman at the time of execution of the transaction, subject to
certain termination provisions contained in the agreement. The amount of payment
received by Mr. Annunziata under this agreement is subject to adjustment based
on conditions as specified in the agreement.

STEPHEN IRWIN

     Mr. Irwin was retained by PF.Net Corp. pursuant to an agreement dated
November 1, 1999. He was employed by us until December 31, 2000 at which time he
became a consultant to us under the terms of his agreement. Under the agreement,
we will retain Mr. Irwin as a consultant for a term of five years beginning on
January 1, 2001 for a monthly fee of $10,000 plus $2,500 for his general office
expenses. In addition, we will provide for the cost of healthcare insurance for
Mr. Irwin and his spouse, as well as life insurance for Mr. Irwin in a face
amount of $1.0 million during the term of his consulting agreement. Mr. Irwin
has agreed to maintain the confidentiality of our information and not to compete
with us for the period from the date of the agreement until the last day of his
consulting term, but in no event beyond December 31, 2005.

JOHN WARTA

     Mr. Warta was retained by PF.Net Corp. pursuant to an agreement dated
November 1, 1999. He was employed by us until December 31, 2000 at which time he
became a consultant to us under the terms of his agreement. Under the agreement,
we will retain Mr. Warta as a consultant for a term of five years beginning on
his termination date for a monthly fee of $10,000 plus $2,500 for his general
office expenses. In addition, we will provide for the cost of healthcare
insurance for Mr. Warta and his spouse, as well as life insurance for Mr. Warta
in a face amount of $1.0 million during the term of his consulting agreement.
Mr. Warta has agreed to maintain the confidentiality of our information and not
to compete with us for the period from the date of the agreement until the last
day of his consulting term, but in no event beyond December 31, 2005.

DONALD W. BOLAR

     Mr. Bolar is currently employed as President of PF.Net Network Services,
Inc. pursuant to an employment agreement dated as of April 12, 2000. The
agreement provides for an initial term commencing on April 24, 2000 and ending
on April 11, 2004, automatically renewable for three additional one-year terms
unless Mr. Bolar was given timely written notice of nonrenewal, which notice we
gave on February 28, 2002, as further described below. Mr. Bolar was entitled to
receive an annual salary of $400,000. Pursuant to this employment agreement, we
agreed to grant Mr. Bolar ten-year options that vest over a four-year period, to
purchase 2,800,000 shares of our common stock, 800,000 of which are exercisable
at $2.8125 per share and 2,000,000 of which are exercisable at $6.40 per share.
Mr. Bolar agreed to maintain the confidentiality of our information and not to
compete with us during the period of his employment until the first anniversary
of his termination date. On February 28, 2002, Mr. Bolar was notified his
position was being eliminated effective April 29, 2002. In a separation and
release agreement dated March 8, 2002, Mr. Bolar agreed to accept a lump sum
payment of $250,000 plus payment of COBRA benefits, in lieu of amounts due to
him under his employment agreement.

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<Page>

ROBERT D. COLLET

     Mr. Collet is currently employed as Chief Technology Officer by Velocita
Corp. pursuant to an agreement (represented by a summary term sheet) dated as of
September 1, 2000. The agreement provides for an initial term ending August 31,
2004, automatically renewable for three additional one-year terms unless either
Mr. Collet or we give a timely written notice of nonrenewal. Mr. Collet is
entitled to receive an annual salary of $300,000. Our board of directors will
annually review his salary and may increase but not decrease his annual salary
in our sole discretion based on Mr. Collet's performance during the preceding
year. Mr. Collet will be eligible to receive an annual bonus in an amount of up
to 100% of his base compensation, except that the bonus for the year 2000 will
be prorated for the portion of the year worked by Mr. Collet. The bonus amount,
if any, will be determined by our board of directors based on performance
criteria. Pursuant to this employment agreement, Mr. Collet was paid a signing
bonus of $175,000 and we have granted Mr. Collet options to purchase 1,000,000
shares of our common stock exercisable at $6.40 per share that vest over a
four-year period. Mr. Collet has agreed to maintain the confidentiality of our
information and not to compete with us for the period from the date of the
agreement until the second anniversary of his termination date or, in the event
he terminates his employment "for good reason," as defined in the agreement, or
we terminate his employment "without cause," as defined in the agreement, until
the date he ceases to receive payments from the company. Upon termination, Mr.
Collet will receive his base compensation and any other payments due him under
our policies, through the effective date of termination. Mr. Collet can be
terminated "for cause" as defined in the agreement or due to a disability or
other cause preventing him from performing a substantial portion of his duties.
If he is terminated "without cause," or if he terminates his employment "for
good reason," we will pay him an amount equal to his base compensation for the
remainder of the term of the agreement, but for no greater than two years and no
less than one year.

ANTHONY D. MARTIN

     Mr. Martin was employed as President and Chief Operating Officer of
Velocita Corp. pursuant to an employment agreement dated as of March 31, 2000.
Pursuant to this employment agreement, Mr. Martin was granted seven-year options
to purchase 2,800,000 options that vest over a four-year period, 800,000 of
which are exercisable at $2.8125 per share and 2,000,000 of which are
exercisable at $6.40 per share. Effective December 31, 2000, Mr. Martin resigned
his employment with us pursuant to an agreement whereby he received a pro-rated
bonus related to 2000 of $300,000, a monthly consulting fee of $5,000 payable
through December 31, 2001, and a total amount of $800,000 which will be paid on
a monthly basis through December 31, 2002. Upon his resignation, 75 percent of
Mr. Martin's stock options were canceled, 25 percent were immediately vested,
and the exercise period for the vested options was reduced to extend through
June 30, 2002.

DAVID L. TAYLOR

     Mr. Taylor was employed as Chief Financial Officer by Velocita Corp.
pursuant to an agreement dated as of October 1, 1999. Pursuant to this
employment agreement, Mr. Taylor was granted five-year options to purchase
1,600,000 shares of our common stock exercisable at $1.97 per share that vest
over a three-year period. Mr. Taylor agreed to maintain the confidentiality of
our information and not to compete with us for the period from the date of the
agreement until the first anniversary of his termination date. Upon termination,
Mr. Taylor is entitled to receive his base compensation and any other payments
due him under our policies, through the effective date of termination. Effective
February 18, 2002, Mr. Taylor resigned from the Company. Upon his resignation,
Mr. Taylor forfeited all of his unvested options and 50% of his vested options.

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<Page>

W. TERRELL WINGFIELD, JR.

     Mr. Wingfield is currently employed as Senior Vice President and General
Counsel of Velocita Corp. pursuant to an offer letter effective October 23,
2000. Mr. Wingfield is entitled to receive an annual salary of $300,000. Our
Board of Directors will annually review his salary and may increase but not
decrease his annual salary in their sole discretion based on Mr. Wingfield's
performance during the preceding year. Pursuant to the offer letter,
Mr. Wingfield was paid a signing bonus of $300,000 and we have granted Mr.
Wingfield options to purchase 1,000,000 shares of our common stock exercisable
at $6.40 per share that vest over a four-year period. Mr. Wingfield is also
entitled to an automobile lease for a three-year period.

EQUITY INCENTIVE PLAN

     Our Board of Directors has adopted and our stockholders have approved the
Velocita Corp. 1999 Equity Incentive Plan (Amended and Restated effective as of
July 12, 2000), which we also refer to as the Equity Plan. The principal purpose
of the Equity Plan is to attract, retain and motivate selected officers,
employees, consultants and directors through the granting of stock-based
compensation awards. The Equity Plan provides for the award of non-qualified
stock options, incentive stock options (within the meaning of Section 422 of the
Internal Revenue Code) and shares of restricted stock. A total of 25,000,000
shares of common stock are reserved for issuance under the Equity Plan, of which
13,349,126 were subject to outstanding awards as of February 28, 2002. A total
of 4,369,162 options will be canceled upon termination of employees who fall
under the WARN Act. Upon the occurrence of certain events following an initial
public offering of our common stock, the maximum number of shares that may be
subject to awards granted under the Equity Plan to any individual in any
calendar year cannot exceed 7,500,000.

     Prior to the initial public offering of our common stock, our Board of
Directors or a committee designated by our Board will administer the Equity Plan
with respect to all awards. Following such registration, a committee of
independent directors (each of whom is a "non-employee director" for purposes of
Rule 16b-3 under the Exchange Act and an "outside director" under Section 162(m)
of the Internal Revenue Code) will administer grants to employees, consultants
and directors.

     The Equity Plan provides that the committee (or the Board) has the
authority to select the employees, consultants and directors to whom awards are
to be made, to determine the number of shares to be subject thereto and the
terms and conditions thereof, and to make all other determinations and to take
all other actions necessary or advisable for the administration of the Equity
Plan with respect to employees, consultants and directors. The committee (and
the Board) is authorized to adopt, amend and rescind rules relating to the
administration of the Equity Plan, and to amend, suspend and terminate the
Equity Plan.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth as of March 31, 2002, certain information
regarding the beneficial ownership of our senior preferred stock and common
stock with respect to:

     -    each beneficial owner of more than 5.0% of our outstanding Series A
          and Series B Senior Preferred Stock and common stock,

     -    beneficial ownership of our Series A and Series B Senior Preferred
          Stock and common stock by each of our directors and our Named
          Executive Officers, and

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<Page>

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

         Except as otherwise indicated below, each of the following persons can
be reached care of Velocita Corp. at 2941 Fairview Park Drive, Suite 200, Falls
Church, VA 22042.

<Table>
<Caption>
                                          SERIES A SENIOR PREFERRED         SERIES B SENIOR              COMMON STOCK
                                                     STOCK                  PREFERRED STOCK          BENEFICIALLY OWNED(1)
                                         ----------------------------    ----------------------      ----------------------
                                                         PERCENTAGE                  PERCENTAGE                   PERCENTAGE
NAME OF BENEFICIAL OWNER                    SHARES        OF CLASS       SHARES       OF CLASS       SHARES        OF CLASS
------------------------                    ------        --------       ------       --------       ------        --------
EXECUTIVE OFFICERS AND DIRECTORS
<S>                                        <C>                 <C>      <C>              <C>         <C>             <C>
   Robert Annunziata (A) (2)...........           --            0.0%           --          0.0%              --        0.0%
   Kirby G. Pickle, Jr. (A) (B) (3)....           --            0.0%           --          0.0%       1,000,000        1.2%
   Donald W. Bolar (B) (4).............           --            0.0%           --          0.0%       2,100,000        2.6%
   Robert D. Collet (B) (5)............           --            0.0%           --          0.0%         250,000        *
   David L. Taylor (B) (6).............           --            0.0%           --          0.0%         622,222        *
   W. Terrell Wingfield, Jr. (B) (7)...           --            0.0%           --          0.0%         250,000        *
   Sharyar Aziz (A) (8)................      305,000           24.4%           --          0.0%      13,773,429       14.7%
   Tim Cesarek (A) (9).................           --            0.0%           --          0.0%      40,000,000       50.0%
   Ammar Hanafi (A) (10) ..............           --            0.0%    2,000,000        100.0%      25,599,673       24.2%
   Stephen Irwin (A) (11)..............           --            0.0%           --          0.0%              --        0.0%
   Brian Kwait (A) (12)................      840,000           67.2%           --          0.0%      37,933,377       32.2%
   Muzzafar Mirza (A) (13).............      840,000           67.2%           --          0.0%      37,933,377       32.2%
   Charles W. Moore (A) (14)...........      300,000           24.0%           --          0.0%      13,547,635       14.5%
   William Nuti (A) (15) ..............           --            0.0%    2,000,000         100.0%     25,599,673       24.2%
   John Pittenger (A) (16).............           --            0.0%           --          0.0%      40,000,000       50.0%
   John Warta (A) (17).................           --            0.0%           --          0.0%      40,000,000       50.0%
   All executive officers and
     directors as a group  (18) .......    1,144,000           91.2 %    2,000,00         100.0%    121,528,701      100.0%

OTHER 5% STOCKHOLDERS
   AT&T Corp. (19) ....................           --            0.0%           --          0.0%      14,141,414       15.0%
   First Union Corporation (20)........      110,000            8.8%           --          0.0%       7,795,748        8.9%
   Koch Telecom Ventures, Inc. (21)....           --            0.0%           --          0.0%      40,000,000       50.0%
   Odyssey (22)........................      840,000           67.2%           --          0.0%      37,933,377       32.2%
   PF Telecom Holdings LLC (23)........           --            0.0%           --          0.0%      40,000,000       50.0%
   UBS Capital II LLC (24).............      300,000           24.0%           --          0.0%      13,547,635       14.5%
   Cisco Systems, Inc. (25) ...........           --            0.0%    2,000,000        100.0%      25,599,673       24.2%
</Table>

----------
* Less than one percent of the outstanding Common Stock.
(A) Director
(B) Executive Officer

(1)  Beneficial ownership as reported in the table above has been determined in
     accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
     amended. The percentages of our common stock outstanding are based upon
     80,000,000 shares outstanding as of March 31, 2002, except for certain
     parties who hold options, warrants or convertible securities that are
     exercisable or convertible into shares of common stock within 60 days of
     March 31, 2002. The percentages for those parties who hold options,
     warrants or convertible securities that are exercisable or convertible
     within 60 days of March 31, 2002 are based on the sum of 80,000,000 shares
     outstanding plus the number of shares of common stock subject to options,
     warrants or convertible securities that are exercisable or convertible
     within 60 days of March 31, 2002 held by them and no other person, as
     indicated in the following notes. The numbers of shares of common stock
     beneficially owned has been determined for purposes of these two columns
     assuming the conversion of 1,250,000 shares of our series A senior
     preferred stock, the conversion of 2,000,000 shares of our series B senior
     preferred stock and the exercise of options and warrants exercisable into
     shares of common stock within 60 days of March 31, 2002. These numbers of
     shares of common stock do not include (a) warrants and options

                                       93
<Page>

     that are exercisable into shares of common stock after 60 days from March
     31, 2002, (b) warrants to purchase shares of common stock issued to Odyssey
     (as defined in footnote (22) below) and its co-investors, (c) warrants to
     purchase shares of common stock issued to PF Telecom Holdings LLC and Koch
     Telecom Ventures, Inc., (d) warrants to purchase shares of common stock
     issued to Cisco Systems, Inc. and (e) warrants to purchase shares of common
     stock issued to purchasers of our senior notes. See "Certain Relationships
     and Related Party Transactions" in Item 13 of this Report.

(2)  Mr. Annunziata forfeited all of his options in connection with the
     agreement entered into as of October 1, 2001. See "-Employment and Similar
     Agreements" within Item 10 of this Report.

(3)  Consists of 1,000,000 shares of common stock issuable upon exercise of
     options exercisable within 60 days of March 31, 2002.

(4)  Consists of 2,100,000 shares of common stock issuable upon exercise of
     options exercisable within 60 days of March 31, 2002.

(5)  Consists of 250,000 shares of common stock issuable upon exercise of
     options exercisable within 60 days of March 31, 2002.

(6)  Consists of 622,222 shares of common stock issuable upon exercise of
     options exercisable within 60 days of March 31, 2002.

(7)  Consists of 250,000 shares of common stock issuable upon exercise of
     options exercisable within 60 days of March 31, 2002.

(8)  Consists of (a) 300,000 shares of series A senior preferred stock and
     13,547,635 shares of common stock issuable upon conversion of the series A
     senior preferred stock, as of March 31, 2002 deemed to be beneficially
     owned by UBS Capital II LLC and (b) 5,000 shares of series A senior
     preferred stock and 225,794 shares of common stock issuable upon conversion
     of the senior preferred stock, as of March 31, 2002, indirectly held by Mr.
     Aziz through PF Coinvestment II, LLC, an entity controlled by Odyssey
     Investment Partners, LLC (see footnote (22) below). Mr. Aziz is a managing
     director of UBS Warburg LLC, which may be considered to be an affiliate of
     UBS Capital II LLC. As a result, Mr. Aziz may be deemed to share voting and
     investment power with respect to the shares referred to in clause (a) of
     the first sentence of this footnote. Mr. Aziz disclaims beneficial
     ownership of all of the shares referred to in clauses (a) and (b) above.

(9)  Consists of 40,000,000 shares of common stock beneficially owned by Koch
     Telecom Ventures, Inc. Mr. Cesarek is the managing director of corporate
     finance and structuring for Koch Industries, Inc., the indirect parent
     company of Koch Telecom Ventures, Inc. As a result, Mr. Cesarek may be
     deemed to share voting and investment power with respect to the shares
     deemed to be owned by Koch Telecom Ventures, Inc. Mr. Cesarek disclaims
     beneficial ownership of these shares.

(10) Consists of 2,000,000 shares of series B senior preferred stock and
     25,599,673 shares of common stock issuable upon conversion of the series B
     senior preferred stock, as of March 31, 2002, deemed to be beneficially
     owned by Cisco Systems, Inc. Mr. Hanafi is vice president of corporate
     business development at Cisco Systems, Inc. As a result, Mr. Hanafi may be
     deemed to share voting and investment power with respect to these shares.
     Mr. Hanafi disclaims beneficial ownership of these shares. Mr. Hanafi
     resigned from our board of directors on April 10, 2002.

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<Page>

(11) Does not include the 40,000,000 shares of common stock beneficially owned
     by PF Telecom Holdings LLC. See footnote (23) below.

(12) Consists of 840,000 shares of series A senior preferred stock and
     37,933,377 shares of common stock issuable upon conversion of the series A
     senior preferred stock, as of March 31, 2002, deemed to be beneficially
     owned by Odyssey (as defined in footnote (22) below). Mr. Kwait is a
     managing member of Odyssey Capital Partners, LLC and Odyssey Investment
     Partners, LLC. As a result, Mr. Kwait may be deemed to share voting and
     investment power with respect to these shares. Mr. Kwait disclaims
     beneficial ownership of these shares.

(13) Consists of 840,000 shares of series A senior preferred stock and
     37,933,337 shares of common stock issuable upon conversion of the series A
     senior preferred stock, as of March 31, 2002, deemed to be beneficially
     owned by Odyssey (as defined in the footnote (22) below). Mr. Mirza is a
     managing member of Odyssey Capital Partners, LLC and Odyssey Investment
     Partners, LLC. As a result, Mr. Mirza may be deemed to share voting and
     investment power with respect to these shares. Mr. Mirza disclaims
     beneficial ownership of these shares.

(14) Consists of 300,000 shares of series A senior preferred stock and
     13,547,635 shares of common stock issuable upon conversion of the series A
     senior preferred stock, as of March 31, 2002, deemed to be beneficially
     owned by UBS Capital II LLC. Mr. Moore is a Partner of UBS Capital Americas
     LLC, which is an affiliate of UBS Capital II LLC. As a result, Mr. Moore
     may be deemed to share voting and investment power with respect to these
     shares. Mr. Moore disclaims beneficial ownership of these shares.

(15) Consists of 2,000,000 shares of series B senior preferred stock and
     25,599,673 shares of common stock issuable upon conversion of the series B
     senior preferred stock, as of March 31, 2002, deemed to be beneficially
     owned by Cisco Systems, Inc. Mr. Nuti is senior vice president of worldwide
     service provider operations for Cisco Systems, Inc. As a result, Mr. Nuti
     may be deemed to share voting and investment power with respect to these
     shares. Mr. Nuti disclaims beneficial ownership of these shares. Mr. Nuti
     resigned from our board of directors on April 10, 2002.

(16) Consists of 40,000,000 shares of common stock beneficially owned by Koch
     Telecom Ventures, Inc. Mr. Pittenger is President of Koch Telecom Ventures,
     Inc. and a Senior Vice President of Koch Industries, Inc., the indirect
     parent company of Koch Telecom Ventures, Inc. As a result, Mr. Pittenger
     may be deemed to share voting and investment power with respect to the
     shares deemed to be owned by Koch Telecom Ventures, Inc. Mr. Pittenger
     disclaims beneficial ownership of these shares.

(17) Consists of 40,000,000 shares of common stock beneficially owned by PF
     Telecom Holdings, LLC. John Warta and Georgiana Warta, his spouse, directly
     and indirectly own approximately 58% of the outstanding membership
     interests of PF Telecom Holdings, LLC.

(18) As described (a) in footnotes (12), (13) and (22), Messrs. Kwait and Mirza
     may each be deemed to share investment and voting power with respect to
     840,000 shares of series A senior preferred stock and 37,933,377 shares of
     common stock issuable upon conversion of the series A senior preferred
     stock, as of March 31, 2002, deemed to be beneficially owned by Odyssey (as
     defined in footnote (22) below), (b) in footnotes (8), (14) and (24),
     Messrs. Aziz and Moore may be deemed to share investment and voting power
     with respect to 300,000 shares of series A senior preferred stock and
     13,547,635 shares of common stock issuable upon conversion of the series A
     senior preferred stock,

                                       95
<Page>

     as of March 31, 2002 deemed to be beneficially owned by UBS Capital II LLC,
     (c) in footnote (8), Mr. Aziz may be deemed to beneficially own 5,000
     shares of series A senior preferred stock and 220,287 shares of common
     stock held by PF Coinvestment II, LLC, an entity controlled by Odyssey, (d)
     in footnotes (9) and (16), Messrs. Cesarek and Pittenger may be deemed to
     share voting and investment power with respect to 40,000,000 shares of
     common stock beneficially owned by Koch Telecom Ventures, Inc., and (e) in
     footnotes (10) and (15), Messrs. Hanafi and Nuti may be deemed to share
     voting and investment power with respect to 2,000,000 shares of series B
     senior preferred stock and 25,599,673 shares of common stock issuable upon
     conversion of the series B senior preferred stock, as of March 31, 2002
     deemed to be beneficially owned by Cisco Systems, Inc. Each of Messrs.
     Kwait, Mirza, Aziz, Moore, Cesarek, Pittenger, Hanafi and Nuti disclaims
     ownership of these shares. Excluding such shares, all officers and
     directors as a group beneficially own no shares of senior preferred stock
     and 44,222,222 shares of common stock or 55.3%.

(19) Consists of 14,141,414 shares (subject to increase due to the occurrence of
     certain events as defined in the warrant agreement) of common stock
     issuable upon exercise of warrants exercisable within 60 days of March 31,
     2002. The address of AT&T Corp. is 295 North Maple Avenue, Basking Ridge,
     New Jersey 07920.

(20) Consists of (a) 110,000 shares of series A senior preferred stock and
     4,967,466 shares of common stock issuable upon conversion of the senior
     preferred stock, as of March 31, 2002 held by First Union Capital Partners,
     LLC and (b) 2,828,282 shares of common stock issuable upon exercise of
     warrants exercisable within 60 days of March 31, 2002 held by First Union
     Investors, Inc. First Union Capital Partners, LLC and First Union
     Investors, Inc. are wholly-owned subsidiaries of First Union Corporation.
     The address of First Union Corporation is 301 South College St., Charlotte,
     North Carolina 28288.

(21) The address of Koch Telecom Ventures, Inc. is 4111 East 37th Street North,
     Wichita, Kansas 67220.

(22) Consists of 840,000 shares of series A senior preferred stock and
     37,933,377 shares of common stock issuable upon conversion of the series A
     senior preferred stock, as of March 31, 2002, owned in the aggregate by
     Odyssey Investment Partners Fund, LP (the "Fund"), Odyssey Coinvestors, LLC
     ("Coinvestors"), PF Coinvestment, LLC ("PF I") and PF Coinvestment II, LLC
     ("PF II" and, together with the Fund, Coinvestors and PF I, "Odyssey").
     Odyssey Capital Partners, LLC is the general partner of the Fund. Odyssey
     Investment Partners, LLC is the manager of the Fund and the managing member
     of each of Coinvestors, PF I and PF II. The principal business address for
     Odyssey is 280 Park Avenue, West Tower, 38th Floor, New York, New York
     10017. Brian Kwait and Muzzafar Mirza are managing members of Odyssey
     Capital Partners, LLC and Odyssey Investment Partners, LLC and, therefore,
     may each be deemed to share voting and investment power with respect to the
     shares deemed to be owned by Odyssey. Each of them disclaims beneficial
     ownership of these shares.

(23) The address of PF Telecom Holdings LLC is 1701 Broadway Street, Suite 358,
     Vancouver, Washington 98663. Stephen Irwin's children and spouse, Karen
     Irwin, indirectly own approximately 20% of the outstanding membership
     interests of PF Telecom Holdings LLC.

(24) Consists of 300,000 shares of series A senior preferred stock and
     13,547,635 shares of common stock issuable upon conversion of the series A
     senior preferred stock, as of March 31, 2002. UBS Capital II LLC may be
     considered to be an affiliate of UBS Warburg LLC. The address of UBS
     Capital II LLC is 299 Park Avenue, New York, New York 10171.

                                       96
<Page>

(25) Consists of 2,000,000 shares of series B senior preferred stock and
     25,599,673 shares of common stock issuable upon conversion of the series B
     senior preferred stock, as of March 31, 2002. The address of Cisco Systems,
     Inc. is 170 W. Tasman Dr., San Jose, California 95134.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ODYSSEY INVESTMENT AND RELATED TRANSACTIONS

     On October 29, 1999, we entered into a subscription agreement with Odyssey
Investment Partners Fund, LP, Odyssey Coinvestors, LLC and UBS Capital II LLC.
Pursuant to this agreement, the Odyssey entities and UBS Capital committed to
purchase up to an aggregate of $125.0 million or 1,250,000 shares of our Series
A senior cumulative convertible preferred stock and warrants to purchase shares
of our common stock. The subscription agreement contained customary provisions,
including representations and warranties with respect to the condition and
operation of our business. On October 29, 1999, the Odyssey entities invested
$34.0 million of their $95.0 million commitment and UBS Capital invested over
$10.0 million of its $30.0 million commitment. The remainder of the outstanding
commitments under the subscription agreement was funded on May 10, 2000.

     In connection with the Odyssey equity investment, UBS Warburg LLC, an
affiliate of UBS Capital II LLC, performed certain financial advisory services
for us and received customary compensation. In addition, as part of the Odyssey
equity investment, we paid to Odyssey Investment Partners Fund, LP a fee of $2.5
million in cash. Two of our directors, Muzzafar Mirza and Brian Kwait, are
managing members of Odyssey Capital Partners, LLC and Odyssey Investment
Partners, LLC. Odyssey Capital Partners, LLC is the general partner of Odyssey
Investment Partners Fund, LP. Odyssey Investment Partners, LLC is the manager of
Odyssey Investment Partners Fund, LP.

     In connection with the Odyssey equity investment, we entered into a
stockholders agreement with each holder of our outstanding shares of common
stock and senior preferred stock and certain holders of warrants to purchase
shares of common stock. This agreement was amended and restated as of May 24,
2001, in connection with the consummation of the Cisco financing transaction.
See "Description of Material Agreements--Stockholders Agreement" in Item 1 of
this Report.

     As part of the consideration of the subscription agreement, we issued to
Odyssey and the other purchasers named therein warrants to purchase up to 14% of
our common stock calculated on a fully diluted basis at an exercise price of
$0.01 per share. These warrants vest and become exercisable if, prior to July
31, 2002, we do not meet a targeted level of sales, leases, IRUs and swaps of
dark fiber and conduit. If we do not meet this target level, these dark fiber
warrants will vest and become automatically exercisable into a number of shares
of common stock up to a maximum of 14% of the fully diluted common stock,
depending upon how far our actual sales, leases and swaps of dark fiber and
conduit have deviated from the target level. We do not currently expect to meet
this targeted level of sales, leases, IRUs and swaps of dark fiber and conduit
by July 31, 2002. In addition, if within five years of the initial issuance
of the dark fiber warrants the holder of any dark fiber warrant achieves cash
proceeds from the sales of senior preferred stock and common stock equal to a
five times return of their investment, the unexercised portion of the dark
fiber warrant shall automatically terminate. These dark fiber warrants expire
on May 15, 2010.

     As part of the Odyssey equity investment, we issued to PF Telecom and Koch
Telecom Ventures, warrants to purchase up to an aggregate of 20,202,024 shares
of our common stock at an exercise price of $2.8125 per share. These warrants
will vest and become exercisable if Odyssey and the other purchasers of senior
preferred stock achieve certain realization events that exceed specified hurdle
rates. Warrants exercisable for a total of 5,381,820 shares of common stock
would vest if the return to Odyssey and the

                                       97
<Page>

other investors exceeds four times their original investment and another
5,381,820 shares of common stock would vest if the return exceeds five times
their original investment. Warrants exercisable for a total of 5,397,980 shares
and 4,040,404 shares of common stock would vest if the return to Odyssey and the
other investors exceeds six times and seven times their original investment,
respectively. These warrants expire on December 28, 2005.

CISCO SYSTEMS EQUITY INVESTMENT AND RELATED TRANSACTIONS

     On May 24, 2001, we issued 2,000,000 shares of our series B preferred stock
to Cisco Systems, Inc. for gross proceeds of $200 million. The series B
preferred stock has an initial liquidation preference of $100 per share.
Dividends on the series B preferred stock are cumulative from the date of
issuance at an annual rate equal to the liquidation preference multiplied by
10% compounded quarterly, payable in increases in the liquidation preference
of the series B preferred stock. Holders of the series B preferred stock may
convert their shares, in whole or in part, into common stock by dividing the
sum of the liquidation preference plus accrued dividends by the conversion
price of $8.50 per share. In connection with the issuance of the series B
preferred stock, we entered into a subscription agreement with Cisco Systems,
Inc. The subscription agreement contained customary provisions, including
representations and warranties with respect to the condition and operation of
our business. William Nuti, a director of ours from May 2001 to April 10,
2002, is senior vice president of worldwide service provider operations for
Cisco Systems and Ammar Hanafi, a director of ours from May 2001 to April 10,
2002, is vice president of corporate business development at Cisco Systems.

     In connection with the issuance of the series B preferred stock, we granted
to Cisco contingent anti-dilution warrants to purchase shares of common stock at
a price of $0.01 per share. The anti-dilution warrants vest and become
exercisable from time to time in connection with the vesting of other contingent
warrants previously issued by us for a number of shares of common stock that
will cause the percentage of the common stock held by Cisco after giving effect
to the exercise of the anti-dilution warrants and the other previously issued
contingent warrants to equal the percentage of the common stock held by Cisco
immediately prior to such exercise.

     In connection with the issuance of the series B preferred stock, we issued
contingent warrants to Cisco to purchase 5,000,000 shares of the Company's
common stock at an exercise price of $0.01 per share. These performance warrants
will vest and become exercisable on (a) the date of any equity issuance at a
price per share that is less than Cisco's effective cost per share, except for
certain exempt issuances, as defined in the warrant agreement or (b) June 30,
2003, in the event of a failure to reach certain revenue and EBITDA targets, as
defined in the warrant agreement, or a failure to complete a sale of our company
or public offering at specified valuations. We did not meet a revenue target as
of March 31, 2002 and we expect to issue the performance warrants to Cisco in
2003. The number of shares of common stock issuable upon conversion of the
performance warrants is subject to adjustment if shares of our common stock are
granted or sold at a price per share that is less than the fair value of each
share of common stock on the date of grant or sale.

     In connection with the Cisco financing transactions, we amended and
restated our existing stockholders agreement. Cisco is a party to this
agreement. See "Description of Material Agreements--Stockholders Agreement" in
Item 1 of this Report.

     On April 12, 2001, PF.Net Corp., a wholly-owned subsidiary of Velocita
Corp. entered into the Supply Agreement with Cisco pursuant to which Cisco
supplies optronics and data internetworking equipment for Velocita's fiber-optic
network. All of the provisions of this agreement became effective on May 24,
2001. Under the Supply Agreement, we also entered into a "take-or-pay"
obligation with Cisco

                                       98
<Page>

through May 2003 with respect to $225 million of equipment and services. During
fiscal year 2001, we have purchased $51.0 million of equipment and services from
Cisco.

DEBT FINANCINGS

     On March 31, 2000, we entered into a $350.0 million senior secured credit
agreement with First Union National Bank to replace a credit agreement with
Lucent through an assignment of the Lucent credit agreement, as amended, to
First Union.

     On May 10, 2000, we completed a units offering of senior notes and
warrants, using approximately $66.7 million of the net proceeds to repay the
outstanding borrowings under our interim credit facility. UBS Warburg LLC was an
initial purchaser in the units offering and received customary fees and
reimbursement of expenses in connection with the offering. Sharyar Aziz, one of
our directors, is a Managing Director of UBS Warburg LLC, one of the initial
purchasers of the units offering and a joint lead arranger under our interim
credit facility. Charles W. Moore, one of our directors, is a Partner of UBS
Capital Americas LLC, which may be considered to be an affiliate of UBS Warburg
LLC. UBS Warburg LLC performed certain financial advisory services for us in
connection with the interim credit facility and received customary compensation.

     On May 24, 2001, our wholly-owned subsidiary, PF.Net Corp., amended its
credit agreement with First Union National Bank, as administrative agent, to
provide for an additional $297.4 million in vendor financing to be provided
by Cisco Systems Capital Corporation, a subsidiary of Cisco Systems, Inc., in
the amount of $285.0 million and by Koch Telecom Ventures, Inc. in the amount
of approximately $12.4 million. Concurrently, Koch Telecom Ventures received
$12.4 million under the terms of the subordinated note dated October 29,
1999. The subordinated note had been issued in exchange for the right to use
rights of way and other assets held by an affiliate of Koch Telecom Ventures
in the construction of our network. See "--Other Related Party Transactions" in
Item 13 of this Report. First Union Capital Partners, LLC holds 110,00 shares
of our series A preferred stock and First Union Investors, Inc. holds
warrants to purchase 2,828,282 shares of our common stock. First Union
Capital Partners, LLC and First Union Investors, Inc. are affiliates of First
Union National Bank. First Union National Bank received customary
compensation and reimbursement of expenses in connection with the amendment
to the credit agreement. Koch Telecom Ventures is an indirect subsidiary of
Koch Industries, Inc. Joseph W. Moeller, one of our directors in 2001, is
President and Chief Operating Officer of Koch Industries, Inc. John C.
Pittenger, one of our directors, is President of Koch Telecom Ventures, Inc.
and a Senior Vice President of Koch Industries, Inc. Tim Cesarek, one of our
directors, is a Managing Director of Koch Industries, Inc.

TAX ALLOCATION AGREEMENT

     On October 29, 1999, we entered into a tax allocation agreement with our
wholly-owned subsidiary PF.Net Corp. Pursuant to the tax allocation agreement,
PF.Net Corp. is obligated to make payments to us in an amount equal to the
amount of income taxes that PF.Net Corp. would have owed on behalf of PF.Net
Corp. and its subsidiaries in respect of federal and state income taxes if
PF.Net Corp. and its subsidiaries were, for tax purposes, a separate
consolidated group. In addition, we are obligated to make payments to PF.Net
Corp. in an amount equal to the amount by which the income tax liability that we
would have had if PF.Net Corp. and its subsidiaries were not part of our
consolidated group exceeds the consolidated federal income tax liability of our
consolidated group, including PF.Net Corp. and its subsidiaries.

                                       99
<Page>

OTHER RELATED PARTY TRANSACTIONS

     Our wholly owned subsidiary entered into the Amended and Restated Fiber
Networks Development Agreement with Sea Breeze Communication Company, an
affiliate of Koch Telecom Ventures, in October 1999. Koch Telecom Ventures is a
significant stockholder of ours. As part of that agreement, we have agreed to
pay Sea Breeze Communication Company annual payments of $375,000 plus
out-of-pocket expenses for consulting services. In connection with the October
1999 Koch agreement, we issued an unsecured subordinated note for $10.0 million
to Koch Telecom Ventures. In accordance with its terms, the subordinated note
was repaid in full, together with accrued interest, totaling $12.4 million.
Concurrently, Koch Telecom Ventures loaned $12.4 million to PF.Net Corp. on
terms identical to those applicable to loans from Cisco Capital and/or any other
lenders in the Cisco Capital tranche under the First Union credit agreement. In
connection with the funding of the loan, PF.Net Corp. paid Koch Telecom
Ventures, Inc. a fee in the amount of approximately $248,000 under the same
terms applicable to the lenders of the tranche A-3 facility under the First
Union credit agreement.

     Odyssey Investment Partners, LLC provided support to us in relation to our
financing and merger and acquisition activities during 2001. We reimbursed
Odyssey approximately $558,000 during 2001 for time and services rendered and
approximately $215,000 was payable to Odyssey as of December 31, 2001. During
2000, we paid a financing fee of $750,000 to Odyssey Investment Partners, LLC
in connection with our units offering of senior notes and warrants. Odyssey
Investment Partners Fund, LP is a significant stockholder of ours. Two of our
directors, Muzzafar Mirza and Brian Kwait, are managing members of Odyssey
Capital Partners, LLC and Odyssey Investment Partners, LLC. Odyssey Capital
Partners, LLC is the general partner of Odyssey Investment Partners Fund, LP.
Odyssey Investment Partners, LLC is the manager of Odyssey Investment Partners
Fund, LP.

     On June 15, 1999, PF.Net, LLC, predecessor in interest to PF.Net Corp.,
entered into a Lease Agreement with Green Arbor Development, Inc. to lease
office space for our Washougal, Washington offices. The landlord, Green Arbor
Development, Inc., is owned by Georgiana Warta, the wife of John Warta, one of
our directors. The term of the Lease Agreement is for five years, terminating on
June 15, 2004 at a monthly base rent amount of $4,000.

     Beginning in June 2001, we consulted with, and in February 2002 we entered
into a financial advisory agreement with, UBS Warburg LLC, which may be
considered an affiliate of UBS Capital II LLC. UBS Capital is a significant
stockholder of ours. The advisory agreement includes a $500,000 sign up fee
and a monthly retainer of $75,000, plus out-of-pocket expenses. During 2001,
we paid UBS Warburg approximately $798,000 for services under this agreement
and other investment banking services. Approximately $700,000 was payable to
UBS Warburg as of December 31, 2001, which was paid in March 2002. UBS
Warburg is entitled to success fees of 3.5% of the aggregate consideration
for a strategic investment transaction or 1% of the aggregate consideration
for the sale of the business, assets, or acquisition of a target entity.
Sharyar Aziz, one of our directors, is a Managing Director of UBS Warburg
LLC. Charles W. Moore, one of our directors, is a Partner of UBS Capital
Americas LLC, which may be considered to be an affiliate of UBS Warburg LLC.

                                       100
<Page>

                                     PART IV

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

     (a)  1.  CONSOLIDATED FINANCIAL STATEMENTS

          THE FINANCIAL STATEMENTS LISTED IN THE ACCOMPANYING INDEX TO FINANCIAL
STATEMENTS ARE FILED AS PART OF THIS ANNUAL REPORT.

          2. FINANCIAL STATEMENT SCHEDULES

          NONE.

          3. EXHIBITS

          THOSE EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF REGULATION S-K ARE
LISTED ON THE ACCOMPANYING EXHIBIT INDEX IMMEDIATELY FOLLOWING THE SIGNATURE
PAGE AND ARE FILED AS PART OF THIS REPORT.

     (b)  REPORTS ON FORM 8-K.

          NONE.

          WE ARE FILING THIS REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 AND HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12
OF THE SECURITIES EXCHANGE ACT OF 1934. WE HAVE NOT SENT ANY ANNUAL REPORTS OR
PROXY MATERIALS TO OUR SECURITY HOLDERS.

                                       101
<Page>

                         VELOCITA CORP. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<Table>
<Caption>
                                                                                       PAGE
                                                                                       ----
<S>                                                                                     <C>
Report of Deloitte & Touche LLP, Independent Auditors................................   F-2
Consolidated Statements of Operations for the years ended December 31, 2001,
   2000 and 1999,....................................................................   F-3
Consolidated Balance Sheets as of December 31, 2001 and 2000                            F-4
Consolidated Statements of Stockholders' Equity for the years ended December
   31, 2001, 2000 and 1999...........................................................   F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2001,
   2000, and 1999,...................................................................   F-6
Notes to Consolidated Financial Statements...........................................   F-8
</Table>

<Page>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders of
  Velocita Corp. and Subsidiaries

      We have audited the accompanying consolidated balance sheets of Velocita
Corp. and Subsidiaries (the "Company") as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

      We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

      In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Velocita Corp. and Subsidiaries
as of December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America.

      The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the financial statements, the Company's recurring losses from operations,
limited cash resources and difficulties in maintaining compliance with bank
covenants raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

March 1, 2002 (April 15, 2002
  as to Notes 2 and 15)




                                      F-2
<Page>

<Table>
<Caption>
VELOCITA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
-----------------------------------------------------------------------------------------------------
                                                                                2001           2000
<S>                                                                          <C>            <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                                  $ 144,916      $  76,325
  Accounts receivable, net of allowance of $275 and $0                          24,856         31,888
  Prepaid expenses                                                               1,513            760
  Other current assets                                                           7,265          4,388
                                                                             ---------      ---------
    Total current assets                                                       178,550        113,361
PROPERTY AND EQUIPMENT, net                                                    249,912        343,078
NETWORK CAPACITY AND SERVICES                                                   33,617             --
DEFERRED FINANCING COSTS, net                                                   25,435         19,940
OTHER ASSETS                                                                     3,883            362
                                                                             ---------      ---------
                                                                             $ 491,397      $ 476,741
                                                                             =========      =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
  Accounts payable                                                           $  18,363      $  37,065
  Accrued liabilities                                                           85,956         36,612
  Accrued interest payable                                                       7,568          5,209
  Fiber-optic network obligation                                                    --          7,279
  Deferred revenue                                                               8,424         14,221
  Contract liability                                                                --         11,153
  Borrowings under credit facility (Note 6)                                    362,444             --
  Current portion of construction retainage                                     12,908          5,693
                                                                             ---------      ---------
    Total current liabilities                                                  495,663        117,232
LONG-TERM DEBT, net of debt discount of $44,397 and $49,707                    180,603        175,293
DEFERRED REVENUE                                                               113,039             --
NOTE PAYABLE TO SHAREHOLDER                                                         --         11,749
CONSTRUCTION RETAINAGE AND OTHER LIABILITIES                                    11,696          8,957
COMMITMENTS AND CONTINGENCIES                                                       --             --
SERIES A REDEEMABLE CONVERTIBLE SENIOR PREFERRED STOCK;
  1,250,000 shares authorized; 10% cumulative convertible; stated
  value $100 per share; 1,250,000 shares issued and outstanding;
  stated at liquidation preference of $154,889 and $140,320, net of
  financing costs of $7,171 and $8,032                                         147,718        132,288
SERIES B REDEEMABLE CONVERTIBLE SENIOR PREFERRED STOCK;
  2,000,000 shares authorized, 10% cumulative convertible; stated
  value $100 per share 2,000,000 shares issued and outstanding; stated
  at liquidation preference of $212,290 net of financing costs of $1,050       211,240             --
PUT WARRANTS                                                                        --         71,300
STOCKHOLDERS' DEFICIT
Common stock, $.01 par value; authorized 400,000,000 shares;
    80,000,000 shares issued and outstanding                                       800            800
Additional paid-in capital                                                      29,618         57,077
Unearned compensation                                                           (1,976)        (2,992)
Accumulated other comprehensive income                                              86             --
Accumulated deficit                                                           (697,090)       (94,963)
                                                                             ---------      ---------
    Total stockholders' deficit                                               (668,562)       (40,078)
                                                                             ---------      ---------
                                                                             $ 491,397      $ 476,741
                                                                             =========      =========
</Table>

See accompanying notes to consolidated financial statements.

                                      F-3
<Page>

<Table>
<Caption>

VELOCITA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
----------------------------------------------------------------------------------------------

                                                          2001           2000          1999

<S>                                                   <C>            <C>            <C>
REVENUE                                               $  18,293      $     250      $      80

OPERATING EXPENSES:
  Access and network operations                          23,426          2,144             56
  Selling, general, and administrative expenses          30,342         28,509          5,769
  Asset impairment charge                               605,000             --             --
  Depreciation and amortization                           4,323            569            416
                                                      ---------      ---------      ---------

    Total operating expenses                            663,091         31,222          6,241
                                                      ---------      ---------      ---------

LOSS FROM OPERATIONS                                   (644,798)       (30,972)        (6,161)

DECREASE (INCREASE) IN FAIR VALUE OF PUT WARRANTS        71,300        (45,536)            --

INTEREST INCOME                                           4,899         10,818            988

INTEREST EXPENSE                                        (33,513)       (21,111)        (2,856)
                                                      ---------      ---------      ---------

LOSS BEFORE INCOME TAXES                               (602,112)       (86,801)        (8,029)

PROVISION FOR INCOME TAXES                                  (15)           (10)            (2)
                                                      ---------      ---------      ---------

NET LOSS                                               (602,127)       (86,811)        (8,031)

ACCRETION OF PREFERRED STOCK
  DIVIDENDS AND OFFERING COSTS                          (27,795)       (15,483)          (897)
                                                      ---------      ---------      ---------

NET LOSS APPLICABLE TO COMMON STOCK                   $(629,922)     $(102,294)     $  (8,928)
                                                      =========      =========      =========

BASIC AND DILUTED LOSS PER SHARE                      $   (7.87)     $   (1.28)     $   (0.22)
                                                      =========      =========      =========

BASIC AND DILUTED WEIGHTED
AVERAGE SHARES OUTSTANDING                               80,000         80,000         41,060
                                                      =========      =========      =========
</Table>

See accompanying notes to consolidated financial statements.


                                      F-4
<Page>

<Table>
<Caption>

VELOCITA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(AMOUNTS IN THOUSANDS)
---------------------------------------------------------------------------------------------------------------------------------

                                                                                            ACCUMULATED OTHER
                                                    COMMON STOCK       ADDITIONAL               COMPRE-
                                               ----------------------   PAID-IN    UNEARNED     HENSIVE   ACCUMULATED
                                                  SHARES     AMOUNT     CAPITAL  COMPENSATION   INCOME      DEFICIT       TOTAL

<S>                                              <C>      <C>        <C>         <C>         <C>         <C>         <C>
BALANCE, January 1, 1999                          4,966   $      50  $     485   $      --   $      --   $    (121)  $     414

  Accretion of preferred stock dividend and
    offering costs                                                        (897)                                           (897)
  Contribution of capital                        75,034         750      7,334                                           8,084
  Issuance of warrants                                                   9,713                                           9,713
  Compensatory stock option grants                                       1,351        (905)                                446
  Net loss                                                                                                  (8,031)     (8,031)
                                              ---------   ---------  ---------   ---------   ---------   ---------   ---------

BALANCE, December 31, 1999                       80,000         800     17,986        (905)         --      (8,152)      9,729

  Compensatory stock option grants                                       5,175      (2,087)                              3,088
  Issuance of warrants                                                  54,256                                          54,256
  Cancellation of warrants                                              (4,857)                                         (4,857)
  Accretion of preferred stock dividend and
    offering costs                                                     (15,483)                                        (15,483)
  Net loss                                                                                                 (86,811)    (86,811)
                                              ---------   ---------  ---------   ---------   ---------   ---------   ---------

BALANCE, December 31, 2000                       80,000         800     57,077      (2,992)         --     (94,963)    (40,078)

  Compensatory stock option grants                                         336       1,016                               1,352
  Accretion of preferred stock dividends and
    offering costs                                                     (27,795)                                        (27,795)
  Increase in fair value of derivative asset                                                        86                      86
  Net loss                                                                                                (602,127)   (602,127)
                                              ---------   ---------  ---------   ---------   ---------   ---------   ---------

BALANCE, December 31, 2001                       80,000   $     800  $  29,618   $  (1,976)  $      86   $(697,090)  $(668,562)
                                              =========   =========  =========   =========   =========   =========   =========
</Table>

See accompanying notes to consolidated financial statements.


                                      F-5
<Page>

<Table>
<Caption>

VELOCITA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(AMOUNTS IN THOUSANDS)
------------------------------------------------------------------------------------------------------------

                                                                      2001           2000            1999
<S>                                                                <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                         $(602,127)     $ (86,811)     $  (8,031)
  Adjustments to reconcile net loss to net
    cash (used in) provided by operating activities:
    Asset Impairment charge                                          605,000             --             --
    Stock-based compensation expense                                   1,352          3,088            446
    Issuance of warrants to executive search firm                         --          1,156             --
    Cancellation of warrants                                              --            (81)            --
    Increase in redemption value of put warrants                     (71,300)        45,536             --
    Bad debt expense                                                     468             --             --
    Amortization of debt discount and deferred financing fees          9,162          5,947             81
    Write-off deferred finance charges for bridge loan                    --          9,021             --
    Accrued interest on note payable to shareholder                      645          1,517            231
    Services paid for by affiliates                                       --             --          1,900
    Depreciation and amortization                                      4,323            569            416
    Net change in operating assets and liabilities                    43,933         23,440          4,684
                                                                   ---------      ---------      ---------

     Net cash (used in) provided by operating activities              (8,544)         3,382           (273)

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                (558,242)      (312,906)        (3,037)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Cash paid for financing fees                                        (9,842)        (8,905)       (15,680)
  Contribution of capital                                                 --             --          1,490
  Proceeds from bridge loan obligation and warrants                       --             --         66,700
  Payments on bridge loan obligation                                      --        (66,700)            --
  Proceeds from issuance of high yield debt and units offering            --        225,000             --
  Proceeds from the issuance of preferred stock, net                 198,875         80,263         35,645
  Borrowings under credit facility                                   412,444             --             --
  Proceeds received under network obligation                          96,294         48,593         22,753
  Repayment of borrowings under credit facility                      (50,000)            --             --
  Repayment of note payable to shareholder                           (12,394)            --             --
                                                                   ---------      ---------      ---------

        Net cash provided by financing activities                    635,377        278,251        110,908
                                                                   ---------      ---------      ---------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                      68,591        (31,273)       107,598

CASH AND CASH EQUIVALENTS, beginning of year                          76,325        107,598             --
                                                                   ---------      ---------      ---------

CASH AND CASH EQUIVALENTS, end of year                             $ 144,916      $  76,325      $ 107,598
                                                                   =========      =========      =========
</Table>

See accompanying notes to consolidated financial statements.


                                      F-6
<Page>

<Table>
<Caption>

VELOCITA CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
(AMOUNTS IN THOUSANDS)
-----------------------------------------------------------------------------------------------------------------

                                                                               2001           2000          1999
<S>                                                                         <C>            <C>            <C>
SUPPLEMENTAL DISCLOSURES OF
  CASH FLOW INFORMATION - Cash paid  for interest                           $   48,500     $   25,858     $   746
                                                                            ==========     ==========     =======

SCHEDULE OF NONCASH INVESTING AND FINANCING TRANSACTIONS
Contractual obligations incurred for the acquisition of equipment           $      298     $       --     $    22
                                                                            ==========     ==========     =======
Increase in network construction-in-progress
  paid for by affiliates                                                    $       --     $       --     $ 4,695
                                                                            ==========     ==========     =======
Issuance of warrants in connection with debt financing                      $       --     $   53,100     $ 9,713
                                                                            ==========     ==========     =======
Issuance of warrants in connection with construction of network             $       --     $       --     $25,764
                                                                            ==========     ==========     =======
Contractual obligation incurred for network construction-in-progress        $       --     $       --     $10,000
                                                                            ==========     ==========     =======
Increase in accounts receivable and fiber network obligation                $       --     $    7,279     $    --
                                                                            ==========     ==========     =======
Net increase in accounts receivable and reduction in
  property and equipment                                                    $   80,184     $   23,815     $    --
                                                                            ==========     ==========     =======
Reduction in property and equipment, and fiber-optic network obligation     $    7,279     $   22,753     $    --
                                                                            ==========     ==========     =======
Net increase in property and equipment, accounts
  payable, accrued expenses and construction retainage                      $   27,704     $   73,704     $ 1,784
                                                                            ==========     ==========     =======
Increase in other current assets and reduction in
  property and equipment                                                    $    3,349     $    3,105     $    --
                                                                            ==========     ==========     =======
Decrease in accrued expenses and deferred financing costs                   $    1,120     $    1,200     $    --
                                                                            ==========     ==========     =======
</Table>

See accompanying notes to consolidated financial statements.


                                      F-7
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

1.    ORGANIZATION, BASIS OF PRESENTATION, AND INDUSTRY CONDITIONS

      ORGANIZATION - On November 30, 1998, Koch Ventures, Inc. and PF Telecom
      Holdings, LLC (PF Telecom) formed PF.Net LLC, a Delaware limited liability
      company (PF.Net). Koch Ventures, Inc. subsequently assigned its ownership
      interest to Koch Telecom Ventures, Inc. (Koch). In October 1999, the
      equity members reincorporated PF.Net in Delaware as a C Corporation and
      formed PF.Net Holdings, Limited, a Delaware corporation (PF.Net Holdings).
      Concurrently, PF.Net was merged with and into PF.Net Holdings. Subsequent
      to December 31, 1999, PF.Net Holdings changed its name to PF.Net
      Communications, Inc. Subsequent to December 31, 2000, PF.Net
      Communications, Inc. changed its name to Velocita Corp. (the "Company").

      The Company is building, designing and anticipates operating a nationwide
      fiber-optic network to provide broadband capacity and related network
      services ("the network"). Through joint construction arrangements and
      fiber and conduit swaps, sales and purchases, the Company intends to
      assemble a low-cost, upgradeable nationwide fiber-optic network consisting
      of approximately 14,050 miles, reaching 160 cities and 35 of the top 50
      metropolitan areas in the continental United States. The Company is
      currently constructing approximately 6,400 miles of our network, acquiring
      4,500 miles of our network through a swap agreement (Note 11), purchasing
      2,400 miles of our network from AT&T (Note 11) and over 750 miles from
      other swap agreements. The Company may purchase another 6,450 miles of
      dark fiber from AT&T, for a total potential network of approximately
      20,500 miles. In addition to providing a broadband backbone, the Company
      intends to provide co-location services, private line, wavelength and
      other data and information services. Customers include wholesale
      communications carriers, Internet Service Providers, corporations and
      governmental entities with enterprise network needs.

      The fiber-optic network is being built in conjunction with the Company's
      joint build construction contract with AT&T for the AT&T Next Generation
      Network. Under the contract, as amended in December 2000, July 2001 and
      December 2001, AT&T will pay the Company approximately $285 million and
      provide rights-of-way for the joint construction routes (Note 11). As of
      December 31, 2001, the Company had lit approximately 1,600 miles of its
      network and it planned to light an additional 800 miles for an initial lit
      network of 2,400 miles. After the initial lighting, the Company will
      implement a success-based lighting plan, whereby the Company will only
      light segments of the network for which it has enough capacity demand to
      generate sufficient revenue to recover its costs and a targeted return on
      investment.

      A large portion of the network will include three empty conduits that can
      be used to continuously upgrade and expand the network. Additionally, the
      Company plans to continue selling portions of its empty conduit and fiber
      to other communication-intensive companies or services providers. The
      Company currently expects to complete construction of the majority of its
      U.S. network backbone by early 2003. Prior to completing its network, the
      Company has re-sold network capacity obtained under agreements with other
      network providers.

      During 2001 and early 2002, the Company undertook a capital conservation
      plan, including delaying certain planned construction routes, eliminating
      or deferring planned fiber purchases, scaling-back its network lighting
      plan from a nationwide lighting plan to a success-based lighting plan, and
      reducing its staff. In February 2002, the company reduced its total staff
      to 55 employees, eliminated the majority of its sales and marketing staff,
      curtailed efforts to establish new resale customers, and focused its
      efforts on construction completion. The Company will continue to focus
      efforts on dispositions of dark fiber and conduit to help finance
      continued construction. The Company is evaluating the costs and benefits
      of reselling capacity to its customers, and in the near term, it does not
      anticipate providing resell services to new customers.


                                      F-8
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

      BASIS OF PRESENTATION - The accompanying consolidated financial statements
      have been prepared in accordance with accounting principles generally
      accepted in the United States of America and reflect the reorganization
      described above, which has been accounted for on a basis similar to a
      pooling of interests. During 2001, the Company placed certain routes into
      service and commenced selected operations. Accordingly, the Company is no
      longer in the development stage.

      INDUSTRY CONDITIONS - The telecommunications industry is highly
      competitive and is currently operating in a difficult economic
      environment. The industry has experienced significant financial pressures,
      including bankruptcy filings or threatened bankruptcies, of major
      telecommunications and broadband providers, including some of the
      Company's customers and vendors. Additionally, these conditions have
      caused telecommunications construction contractors, including some of the
      Company's contractors, to file for bankruptcy protection or to liquidate.
      These industry and general economic conditions have made capital markets
      for new sources of funding extremely tight, have made vendor credit
      availability tight, and have created a challenging business environment
      for broadband network providers. Payment and performance defaults by
      industry players have increased the costs of franchise fees and
      performance bonds for companies building network infrastructure.
      Additionally, market conditions, perceived bandwidth over-capacity and
      distressed prices for assets sold by troubled telecommunications companies
      have caused continued declines in bandwidth and network infrastructure
      pricing.

      Many of the Company's existing and potential competitors have financial,
      personnel, marketing and other resources significantly greater than the
      Company, as well as other competitive advantages including larger customer
      bases. Increased consolidation and strategic alliances in the industry
      resulting from the Telecommunications Act of 1996 and further deregulation
      could give rise to significant new competitors to the Company.

2.    GOING CONCERN

      The accompanying financial statements have been prepared on a going
      concern basis, which contemplates the realization of assets and
      satisfaction of liabilities in the normal course of business. The Company
      breached certain financial covenants under its credit agreement as of
      March 31, 2002. On March 28, 2002, the Company entered into a waiver
      agreement with its banking group for a waiver of certain financial
      covenants through April 15, 2002, and on April 15, 2002, this waiver was
      extended through April 30, 2002. The waiver requires the Company to comply
      with other covenants in the credit agreement, to forgo further borrowing
      under the credit agreement, and limits certain restricted payments to
      affiliates. During the waiver period, the Company expects to continue
      discussions with its bank lenders and bondholders regarding modification
      of the terms of its credit agreement. If the Company does not obtain an
      amendment, or an additional waiver, to its credit agreement, the Company
      will be in default of its credit agreement, and the lenders could take
      action to require repayment of outstanding balances. The Company is unable
      to predict when or if it will be able to obtain the necessary
      modifications of its credit agreement from its banks.

      The Company has retained financial and legal advisors to assist in
      reviewing alternatives available to the Company, including restructuring
      its debt, the sale of the Company's securities to one or more strategic
      investors or the sale or other disposition of substantially all of the
      Company's business or assets. The Company is continuing these efforts
      during the waiver period; however, the Company is unable to predict the
      outcome of these efforts. Based on its current operating plan, the Company
      anticipates that its current cash sources will fund the Company through
      July 2002. The Company is continuing to evaluate its operating plan to
      further conserve cash. Our cash resources are dependent on continued
      receipt of amounts due under contractual agreements from AT&T, Touch
      America and other fiber customers for construction completion. Should
      efforts to amend the credit agreement, bring in new sources of capital, or


                                      F-9
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

      to sell the Company be unsuccessful, the Company may be required to file
      for protection under Chapter 11 of the United States Bankruptcy Code.

      The Company's continuation as a going concern is dependent on its ability
      to obtain additional financing, restructure its debt, comply with the
      terms and covenants of its financing agreements and to successfully
      operate in the existing difficult telecommunications environment.
      Therefore, the Company may not be able to continue as a going concern for
      a reasonable period of time. The financial statements do not include any
      adjustments relating to the recoverability and classification of recorded
      asset amounts or the amounts and classification of liabilities that might
      be necessary should the Company be unable to continue as a going concern.

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
      statements include the accounts of Velocita Corp. and its wholly owned
      subsidiaries (collectively, the Company). All significant intercompany
      balances have been eliminated.

      CASH AND CASH EQUIVALENTS - The Company classifies cash on hand, deposits
      in banks, commercial paper, money market accounts, and other highly liquid
      investments with an original maturity of three months or less as cash and
      cash equivalents.

      PROPERTY AND EQUIPMENT is stated at cost. Depreciation of equipment is
      computed on a straight-line basis over the estimated useful lives of these
      assets ranging from three to 25 years, with the exception of leasehold
      improvements and capital leases which are depreciated over the lesser of
      the estimated useful lives of the assets or the terms of the agreement.
      (See Note 15.)

      NETWORK CONSTRUCTION COSTS - Network construction costs are recorded as
      property and equipment, and include all direct material and labor costs
      and those indirect costs related to network development. Cash received
      from AT&T for their share of network construction costs is recorded as a
      reduction to network construction in progress (Note 4). General and
      administrative costs are charged to expense as incurred.

      ACQUIRED NETWORK ASSETS - The Company records acquisitions of dark fiber,
      conduit and wavelength indefeasible rights of use ("IRUs") as acquired
      network assets within property and equipment. The Company will record
      depreciation expense on a straight-line basis over the shorter of the IRU
      term or the asset's useful life, beginning when the asset is placed in
      service.

      NETWORK CAPACITY AND SERVICES - The Company records the cost of broadband
      capacity and related services, where applicable, as network capacity and
      services. The Company will recognize network capacity expense over the
      term of the service agreement or as the capacity is utilized.

      DEFERRED FINANCING COSTS - The Company amortizes deferred financing costs
      to interest expense over the life of the respective financing agreement
      utilizing the effective interest method.

      IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews its long-lived
      assets for impairment when events or changes in circumstances indicate, in
      management's judgment, that the carrying value of such assets may not be
      recoverable. This review consists of a comparison of the carrying value of
      the assets to the assets' expected future undiscounted cash flows. If
      impairment has occurred, the amount of the impairment recognized is
      determined by estimating the fair value for the assets and recording a
      provision for loss if the carrying value is greater than fair value. (Note
      15)

      SERVICES REVENUE - The Company's revenue to date relates to the resale of
      private line communications services and construction services. The
      Company records revenue from communications services as the


                                      F-10
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

      services are provided. Amounts billed in advance of the service period,
      including relevant setup fees, are included in deferred revenue in the
      accompanying consolidated balance sheet. Revenue from construction service
      contracts to develop fiber-optic systems or related equipment for others
      is determined on the percentage-of-completion basis over the period of
      construction. Revenue recognized in excess of billings is recorded as
      unbilled revenue. Billings are generally rendered on the achievement of
      certain construction milestones. Provisions are made for all potential
      losses as soon as they become evident.

      DARK FIBER SALES/IRU REVENUE - The Company currently records revenue for
      dark fiber sales, leases and IRUs over the term of the respective
      agreement, which the Company believes is in accordance with Financial
      Accounting Standards Board ("FASB") Interpretation No. 43 (FIN 43), REAL
      ESTATE SALES, AN INTERPRETATION OF FASB STATEMENT NO. 66. FIN 43 requires
      that sales of integral equipment, including fiber and conduit, should be
      treated the same as sales of real estate. In July 2001, the Emerging
      Issues Task Force ("EITF") reached a consensus that integral equipment
      subject to a lease should be evaluated as real estate. Further, a
      consensus was reached that for integral equipment or property improvements
      for which no statutory title registration system exists, the lessor must
      execute and deliver such documents that transfer ownership by the end of
      the lease term for the transaction to accounted for as a sales-type lease.
      The effect of EITF 00-11 was to allow qualifying IRU transactions to be
      accounted for as sales-type leases. The Company does not believe the
      issuance of EITF 00-11 will have a significant effect on its future
      operating results or financial condition.

      MAINTENANCE REVENUE - The Company provides maintenance services under dark
      fiber IRU's and other capacity agreements. Customers are obligated to pay
      fixed maintenance costs and their allocable share of major repair costs.
      The Company recognizes revenue monthly as services are provided. Amounts
      billed in advance of a service period, including prepaid maintenance over
      an IRU term, are included in deferred revenue on the accompanying
      consolidated balance sheet.

      COLOCATION REVENUE - The Company provides colocation services in
      connection with dark fiber IRU's and other capacity agreements. The
      Company recognizes revenue monthly as services are provided. Amounts
      billed in advance of a service period, including prepaid collocation over
      an IRU term, are included in deferred revenue on the accompanying
      consolidated balance sheet.

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

      FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting
      Standards ("SFAS") No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
      INSTRUMENTS, requires management to disclose the estimated fair value of
      certain assets and liabilities defined by SFAS No. 107 as financial
      instruments. Financial Instruments are generally defined by SFAS No. 107
      as cash, evidence of ownership interest in equity, or a contractual
      obligation that both conveys to one entity a right to receive cash or
      other financial instruments from another entity and imposes on the other
      entity the obligation to deliver cash or other financial instruments to
      the first entity. Management believes that the carrying amount of cash and
      cash equivalents, accounts receivable, accounts payable, and accrued
      liabilities approximate fair value because of the short maturity of these
      financial instruments.

      The Company's financial instruments that are exposed to concentration of
      credit risk consist primarily of cash and cash equivalents, principally
      through one financial institution, that are uninsured or are in excess of
      the federally insured limits.


                                      F-11
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

      COMPREHENSIVE LOSS - In 1997, the Financial Accounting Standards Board
      ("FASB") issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME, which
      established standards for the reporting and displaying of comprehensive
      income and its components. The comprehensive loss for 2001 consisted of
      the Company's net loss including the mark to market adjustment related to
      the derivative instruments entered into by the Company during the third
      and fourth quarters of 2001.

      SEGMENT REPORTING - The Company has adopted SFAS No. 131, DISCLOSURES
      ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which defines how
      operating segments are determined and requires disclosures about products,
      services, major customers and geographic areas. The Company currently
      intends to be a facilities-based provider of fiber-optic network
      infrastructure that the Company believes to be one business segment with
      an anticipated group of similar products.

      INCOME TAXES - The Company accounts for income taxes in accordance with
      SFAS No. 109, ACCOUNTING FOR INCOME TAXES. This statement requires the
      recognition of deferred tax assets and liabilities to reflect the future
      tax consequences of events that have been recognized in the Company's
      financial statements or tax returns. In the event the future consequences
      of differences between financial reporting basis and tax basis of the
      Company's assets and liabilities result in a deferred tax asset, SFAS No.
      109 requires an evaluation of the probability of being able to realize the
      future benefits indicated by such asset. A valuation allowance related to
      a deferred tax asset is recorded when it is more likely than not that some
      portion or all of the deferred tax asset will not be realized.

      NET LOSS PER COMMON SHARE - The Company calculates net loss per common
      share pursuant to SFAS No. 128, EARNINGS PER SHARE (EPS). SFAS No. 128
      requires the Company to report basic EPS, as defined therein, which
      excludes the effect of potentially dilutive securities, and diluted EPS,
      as defined therein, which includes potentially dilutive securities. The
      Company had 98.0 million and 79.8 million potentially dilutive securities
      outstanding that were not included in the computation of diluted loss per
      share because to do so would have been anti-dilutive as of December 31,
      2001 and 2000, respectively.

      STOCK-BASED COMPENSATION - As permitted by SFAS No. 123, ACCOUNTING FOR
      STOCK-BASED COMPENSATION, the Company uses the intrinsic method under
      Accounting Principles Board ("APB") Opinion No. 25 for measurement and
      recognition of employee stock-based transactions.

      NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the FASB issued Statement of
      Financial Accounting Standard ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVES
      AND HEDGING ACTIVITIES. This statement, as amended by SFAS Nos. 137 and
      138, establishes accounting and reporting standards for derivative
      instruments and for hedging activities. It requires that an entity
      recognize all derivatives as either assets or liabilities in the statement
      of financial position and measure those instruments at fair value. We were
      required to adopt SFAS No. 133 on January 1, 2001 and its adoption did not
      have a significant impact on our financial position or results of
      operations. The Company will record gains and losses on derivatives
      related to cash flow hedges of interest rate payments on variable rate
      debt through interest expense upon expiration of the underlying interest
      rate cap agreements. As discussed in Note 6, the Company entered into
      three interest rate cap agreements during 2001. The notional principal
      amounts of interest rate cap agreements outstanding were $125 million at
      December 31, 2001.

      The cash requirements of the Company's financial instruments approximate
      their fair value. Cash flows associated with these financial instruments
      will be classified consistent with the cash flows of the transactions
      being hedged. Derivative financial instruments involve, to a varying
      degree, elements of market and credit risk not recognized in the
      consolidated financial statements. The market risk associated with these
      instruments resulting from interest rate fluctuations is expected to
      offset the market risk of the underlying transactions, assets and
      liabilities being hedged.


                                      F-12
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

      The counterparties to the agreements relating to the Company's interest
      rate instruments are major international financial institutions with high
      credit ratings. The Company does not believe that there is significant
      risk of nonperformance by these counterparties because the Company limits
      the amount of financial exposure and the amount of agreements entered into
      with any one financial institution. While the contract or notional amounts
      of derivative financial instruments provide one measure of the volume of
      these transactions, they do not represent the amount of the Company's
      exposure to credit risk. The amounts potentially subject to credit risk
      (arising from the inability of the counterparties to meet the terms of
      their contracts) are generally limited to the amounts, if any, by which
      the counterparty's obligations under the contracts exceed the obligations
      of the Company to the counterparties.

      In December 1999, the Securities and Exchange Commission issued Staff
      Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
      ("SAB 101"). SAB 101 provides interpretive guidance on the recognition,
      presentation and disclosures of revenue in the financial statements. SAB
      101 was adopted during December 2000 and its application was retroactive
      to January 1, 2000. Adoption of SAB 101 did not have a material effect on
      our financial position or results of operations.

      The FASB issued Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS
      INVOLVING STOCK COMPENSATION. This interpretation modifies the current
      practice of accounting for certain stock award agreements and is effective
      beginning July 1, 2000. The Company has adopted the accounting treatment
      prescribed by this interpretation, which did not materially impact the
      Company's financial statements.

      Effective June 30, 2001, the FASB issued SFAS No. 141, BUSINESS
      COMBINATIONS. This statement requires that all business combinations
      initiated after June 30, 2001, be accounted for using the purchase method.
      The FASB also issued SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
      Under SFAS No. 142, goodwill is no longer subject to amortization over its
      estimated useful life. Rather, goodwill will be subject to at least an
      annual assessment for impairment by applying a fair-value based test. The
      provisions of these statements are required to be adopted by the Company
      for its fiscal year beginning January 1, 2002. The Company does not
      currently have goodwill or acquired intangible assets; therefore,
      management does not believe the adoption of the new statements will have a
      material impact on the Company's financial condition or results of
      operations.

      During June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
      RETIREMENT OBLIGATIONS. This statement establishes the accounting for
      legal obligations associated with the retirement of long-lived assets that
      result from the acquisition, construction, development and/or the normal
      operation of a long-lived asset, except for certain obligations of
      lessees. This statement is effective for fiscal periods beginning after
      June 30, 2002. The Company does not believe the adoption of this statement
      will have a material impact on the Company's financial condition or
      results of operations.

      Effective August 31, 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR
      THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. This statement superceded
      SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
      LONG-LIVED ASSETS TO BE DISPOSED OF and established a single accounting
      framework for the disposal of a segment of a business or other long-lived
      asset to be disposed of through a sale. Initial adoption of this statement
      is not expected to have a material impact on the Company's financial
      position or results of operations.

      STOCK SPLIT - Effective April 3, 2000, the Company effected a 2-for-1
      stock split of its common stock. All share and per share amounts included
      in the accompanying consolidated financial statements and footnotes have
      been restated to reflect the stock split.

      RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
      conform to the current year presentation.


                                      F-13
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

4.    PROPERTY AND EQUIPMENT

      The Company is currently constructing its communications network. Costs
      directly associated with the uncompleted network and interest expense
      incurred during construction are capitalized based on the average
      accumulated construction expenditures during the period and the interest
      rates related to borrowings associated with the construction. During the
      years ended December 31, 2001 and 2000, the Company capitalized interest
      expense of approximately $27.2 million and $24.6 million, respectively. No
      interest was capitalized during the year ended December 31, 1999. As
      segments of the network are completed and placed in service, they will be
      depreciated over their estimated useful lives up to 25 years. Capitalized
      business support systems and network construction costs that have not been
      placed in service have been classified as construction in progress within
      property and equipment below. During the fourth quarter of 2001, the
      Company completed its fiber optic route from Houston to Jacksonville and
      began depreciating assets related to this route totaling approximately
      $132 million.

      Property and equipment consists of the following at December 31, (in
      thousands):

<Table>
<Caption>

                                      DEPRECIABLE
                                      LIVES (YEARS)          2001               2000

<S>                                        <C>            <C>                 <C>
      Land                                    --          $   6,695           $   2,108
      Office equipment                         7             18,734               3,971
      Acquired network assets                 20             45,105              11,153
      Network infrastructure                10-25           109,950                  --
      Optronics equipment                      7              7,830                  --
      Data equipment                           5                854                  --
      Leasehold Improvements                 5-10             7,341                  67
      Other Network equipment                5-20             5,327                  --
      Construction-in-progress                --            632,965             326,346
                                                          ---------           ---------

                                              --            834,801             343,645
      Less accumulated depreciation           --             (4,889)               (567)
      Asset impairment write-down (Note 15)   --           (580,000)                 --
                                                          ---------           ---------
                                              --          $ 249,912           $ 343,078
                                                          =========           =========
      </Table>

      Property under capital lease, primarily network servers and test equipment
      included above, amounted to $298,000 at December 31, 2001. Approximately
      $25,000 related to this property under capital lease is included in the
      accumulated depreciation amount above. Depreciation expense was
      approximately $4.3 million, $539,000, and $37,000 in 2001, 2000, and 1999,
      respectively.

5.    ACCRUED LIABILITIES

      Accrued liabilities consist of the following at December 31, (in
      thousands):


                                      F-14
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

<Table>
<Caption>

                                           2001             2000

<S>                                       <C>              <C>
      Construction costs                  $59,511          $22,791
      Employee and payroll costs            3,243            7,486
      Fiber acquisitions                    5,776               --
      Sales and use tax                     3,856               --
      Professional fees                     3,070            2,596
      Network access fees                   2,223               --
      Personal property tax                 5,252               --
      Other accrued liabilities             3,025            3,739
                                          -------          -------

                                          $85,956          $36,612
                                          =======          =======
</Table>

6.    CREDIT FACILITY

      On May 24, 2001, the Company's credit facility with First Union National
      Bank was amended (the "Credit Facility") to provide for an additional
      $297.4 million in vendor financing to be provided by Cisco Systems Capital
      Corporation in the amount of $285 million and by Koch Telecom Ventures,
      Inc. in the amount of $12.4 million. The amendment to the Credit Facility
      results in total borrowing capacity of $647.4 million.

      The amended Credit Facility provides for term notes under Tranche A and a
      revolving facility. The Tranche A facility provides for borrowings of up
      to approximately $497.4 million, and the revolving facility provides for
      borrowings of up to $150 million. The Tranche A facility is comprised of
      three subfacilities (i) $160 million available for the purchase of vendor
      products and services used in the construction of the network, (ii) $40
      million available to finance general capital expenditures and operating
      expenses associated with development of our network, as defined, and (iii)
      $297.4 million available for the purchase of specified vendor products and
      services used in the construction of the network (Note 17). The revolving
      facility provides for borrowings for general capital expenditures and
      operating expenses associated with the development of the network and
      working capital needs.

      Borrowings under the Credit Facility bear interest, at the Company's
      option, at the following rates per annum: (i) LIBOR (1.98% annual rate as
      of December 31, 2001) plus an applicable margin ranging between 3.50% to
      4.75% per annum based on the Company's consolidated leverage ratio or (ii)
      a base rate, which is equal to the greater of (a) the current prime rate
      of certain banks, or (b) the current U.S. federal funds rate plus 0.5% per
      annum, plus an applicable margin, ranging from 2.25% to 3.50% per annum
      based on the status of certain financial leverage ratios. The Credit
      Facility matures on December 31, 2006.

      The Credit Facility requires the Company to hedge the risks related to
      interest rate movements through the use of interest rate protection
      agreements or other derivative instruments and as necessary to ensure that
      at least 50% of the Company's consolidated indebtedness either bears
      interest at a fixed rate or is protected against interest rate
      fluctuations by a hedging agreement that fixes or limits the Company's
      interest cost. As a result of this requirement and our additional
      borrowings under the Credit Facility during the third and fourth quarters
      of 2001, the Company entered into two interest rate cap agreements to cap
      the rate of interest on $125 million of the outstanding variable rate
      debt. The terms of the agreements provide that the net interest expense
      related to $125 million of the borrowings under the Credit Facility will
      not exceed 12%. The agreements therefore cap the LIBOR portion of the
      interest rate at 7.25%. At December 31, 2001, the Company had $350 million
      of fixed rate debt bearing interest ranging from 6.6875% to 13.75%;
      however, the debt currently bearing interest at 6.6875% could potentially
      increase to


                                      F-15
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

      the cap amount of 12% in the future. As of December 31, 2001, the fair
      value of the interest rate caps had increased $86,000, resulting in an
      increase in the derivative asset on the balance sheet and a corresponding
      increase in accumulated other comprehensive income.

      As of December 31, 2001, the Company had borrowed $362.4 million under the
      credit facility at interest rates ranging from 6.6875% to 7.3125%. The
      Credit Facility is subject to certain restrictive covenants including
      minimum route mile completion in accordance with the AT&T Agreement (Note
      11), minimum revenue amounts, minimum operating results before interest,
      taxes, depreciation and amortization and certain debt to equity ratios.
      The Company was in compliance with these covenants as of December 31,
      2001. All amounts borrowed under the Credit Facility have been classified
      as current due to financial covenant defaults that occurred on March 31,
      2002 (Notes 2 and 15). The Credit Facility is secured by substantially all
      of the assets of the Company. As of December 31, 2001, the Company had
      letters of credit of approximately $3.9 million outstanding against the
      Credit Facility.

      Upon the assignment of the credit agreement to First Union National Bank,
      Lucent also transferred warrants to First Union to purchase 2,828,282
      shares of the Company's common stock at $3.51 per share. The warrants
      expire on December 31, 2006. The Company has recorded the fair value of
      these warrants, $4,856,000, as a deferred financing cost, which are being
      amortized over the term of the Credit Facility.

7.    LONG-TERM DEBT

      On October 29, 1999, the Company entered into a Bridge Loan with various
      lenders (collectively, the Lenders). The Bridge Loan provided for
      borrowings not to exceed $225 million and was a predecessor facility to a
      permanent financing obtained during fiscal 2000. The Bridge Loan
      terminated on May 10, 2000 in connection with the private placement
      described below and the principal and accrued interest thereon was repaid.
      In connection with the Bridge Loan, the Company entered into a warrant
      agreement providing the lenders the right to purchase shares of the
      Company's common stock at $0.01 per share. The warrants granted were
      terminated on May 10, 2000 concurrent with the private placement and
      deferred financing costs of approximately $9 million were charged to
      expense.

      On May 10, 2000, the Company completed the private placement of 225,000
      units consisting of 13.75% senior notes payable (the "Senior Notes"), with
      a stated principal amount of $225 million and warrants to purchase
      8,296,296 shares of the Company's common stock for $0.01 per share. The
      estimated value of the warrants, $53.1 million, has been reflected as a
      debt discount with a corresponding increase to warrants. The debt discount
      and associated debt issuance costs are being charged to interest expense
      over the ten-year term of the notes. Interest on the notes will be payable
      semiannually in arrears and payments commenced on November 15, 2000. The
      Company used the net proceeds from the Senior Notes offering to repay in
      full and retire the outstanding indebtedness under the Bridge Loan. The
      Company also used the proceeds to finance the construction of its Network.
      On July 18, 2000, the Company commenced an exchange offer of publicly
      tradable notes (the "Exchange Notes") for $190 million of its outstanding
      Senior Notes pursuant to a registration statement on Form S-4 declared
      effective by the Securities and Exchange Commission on July 18, 2000. The
      Company was required to file a registration statement before January 5,
      2001, for certain holders of the Senior Notes who could not participate in
      the exchange offer. Since the Company has not completed such registration
      statement, it is required to pay an additional 0.5 % interest to such
      holders.

      The Exchange Notes are subject to redemption at the option of the Company,
      in whole or in part, at any time or from time to time on or after May 15,
      2005, plus accrued and unpaid interest thereon to the redemption date, if
      redeemed during the twelve months beginning May 15, of the years indicated
      below:


                                      F-16
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

<Table>
<Caption>

           Year                                           Redemption Price
-------------------------------------------------------------------------------
<S>                                                           <C>
           2005                                               106.875%
           2006                                               104.583%
           2007                                               102.291%
     2008 and thereafter                                      100.000%
</Table>


      In addition, at any time prior to May 15, 2003, the Company may redeem up
      to 35% of the aggregate principal amount of the Exchange Notes at a
      redemption price equal to 113.75% of the principal amount of the Exchange
      Notes redeemed, plus accrued and unpaid interest thereon to the redemption
      date. The Exchange Notes are senior, unsecured obligations of the Company,
      ranking equally in right of payment with all existing and future senior
      unsecured obligations and will rank senior to all of its existing and
      future subordinated indebtedness (Note 2).

      The issuance of the Series B Preferred Stock (see note 6) relieved the
      Company of its contingent obligation to issue additional warrants under
      the terms of May 2000 offering.

8.    REDEEMABLE SECURITIES

      SENIOR CONVERTIBLE PREFERRED STOCK

      Our senior preferred stock consists of two series of preferred stock, our
      series A preferred stock and series B preferred stock. The senior
      preferred stock has certain dividend, liquidation, redemption, change of
      control and voting rights. The senior preferred stock has an initial
      liquidation preference of $100 per share or $125.0 million in the
      aggregate of series A preferred stock and $200.0 million in the aggregate
      of series B preferred stock. The holders of senior preferred stock are
      entitled to receive dividends at the rate of 10% per annum compounded
      quarterly, payable in increases in the liquidation preference of the
      senior preferred stock. Each share of senior preferred stock is
      convertible into shares of our common stock at the option of the holder
      thereof by dividing the sum of the liquidation preference plus accrued
      dividends by the conversion price then in effect. The initial conversion
      price of the series A preferred stock was $5.6250 per share and was
      adjusted to $2.8125 per share as a result of our two-for-one stock split
      which occurred on April 3, 2000. The initial conversion price of the
      series B preferred stock was $8.50 per share.

      Each share of senior preferred stock is mandatorily redeemable by us on
      August 15, 2010, at a price equal to the liquidation preference per share
      of senior preferred stock plus accrued dividends. Holders of the shares of
      senior preferred stock are entitled to the number of votes equal to the
      number of full shares of common stock into which such shares of senior
      preferred stock are then convertible. The senior preferred stock has the
      right to vote on all matters voted on by holders of common stock, voting
      together with the common stock as a single class. The number of shares
      issued upon exercise of the senior preferred stock and the conversion
      price are subject to anti-dilution adjustments in some circumstances.

      In connection with the issuance of Series A Preferred Stock, the Company
      granted to the initial holders of Series A Preferred Stock a warrant to
      purchase shares of the Company's common stock at $0.01 per share. The
      number of shares to be issued under the warrant, if any, is dependent on
      the Company meeting certain sales criteria through April 30, 2002, as
      defined. To the extent that the Company meets the sales criteria, the
      warrants will become null and void. The Company will record the fair value
      of these warrants, if any, when the issuance of the warrant is probable
      and the number of shares becomes reasonably determinable. As of March 28,
      2002, it is probable the company will not meet the established


                                      F-17
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

      sales criteria. The number of additional warrants to be provided will be
      determined as of April 30, 2002. In connection with the issuance of the
      Series A Preferred Stock, the Company issued warrants to PF Telecom and
      Koch Telecom Ventures, Inc. to purchase up to 20,202,024 shares of the
      Company's common stock at $2.8125 per share, the estimated fair value of
      the common stock on the date of grant. The number of shares that will
      become exercisable under the warrant, if any, is dependent on the Company
      completing certain equity transactions, as defined. The warrants expire on
      December 28, 2005. The Company will record the fair value of these
      warrants, as equity issuance costs, when the issuance of the warrant is
      probable and the number of shares becomes reasonably determinable.

      In connection with the issuance of the Series B Preferred Stock, the
      Company granted to the holder of the Series B Preferred Stock contingent
      anti-dilution warrants to purchase shares of common stock at a price of
      $0.01 per share. The anti-dilution warrants vest and become exercisable
      from time to time in connection with the vesting of other contingent
      warrants previously issued by the Company (the "Prior Contingent
      Warrants") for a number of shares of common stock that will cause the
      percentage of the common stock held by such holder after giving effect to
      the exercise of the anti-dilution warrants and the Prior Contingent
      Warrants to equal the percentage of the common stock held by such holder
      immediately prior to such exercise. The Company will record the fair value
      of the anti-dilution warrants, if any, when the issuance of the
      anti-dilution warrants is probable and the number of shares is reasonably
      determinable.

      In connection with the issuance of the Series B Preferred Stock, the
      Company issued contingent Performance Warrants to the holder of the Series
      B Preferred Stock to purchase 5,000,000 shares of the Company's common
      stock at an exercise price of $0.01 per share. The Performance Warrants
      will vest and become exercisable on (a) the date of any equity issuance at
      a price per share that is less than the holder's effective cost per share,
      except for certain exempt issuances as defined in the warrant agreement or
      (b) June 30, 2003, in the event of a failure to reach certain revenue and
      earnings before interest, income taxes, depreciation and amortization
      (EBITDA) targets, as defined in the agreement, or to complete a sale of
      the Company or public offering at specified valuations. The Company will
      record the fair value of the Performance Warrants, if any, when the
      issuance of the Performance Warrants is probable and the number of shares
      to be issued is reasonably determinable. As of December 31, 2001, the
      Company did not meet defined revenue targets under the warrant agreement.
      Unless the Company completes the equity issuance defined above prior to
      June 30, 2003, the Company will be required to issue additional warrants
      as defined above to the holder of the Series B Preferred Stock.

      The issuance of the Series B Preferred Stock relieved the Company of its
      contingent obligation to issue additional warrants under the terms of its
      high yield debt offering in 2000. Additionally, according to the terms of
      the Company's note payable to Koch Telecom Ventures, Inc., approximately
      $12.4 million in principal and interest was repaid (Note 11).

      PUT WARRANTS - In connection with a network construction agreement with
      AT&T (Note 11), the Company issued a warrant to AT&T (the Put Warrants) to
      purchase 14,141,414 shares of the Company's common stock at $2.8125 per
      share, the estimated fair value of the Company's common stock at the date
      of grant. In the event that the Company does not complete an initial
      public offering by October 29, 2004, the holder of the warrants shall have
      the right to require the Company to repurchase the unexercised shares at
      the difference between the warrant exercise price and the fair market
      price of the Company's common stock on the date of repurchase. The Put
      Warrants expire October 29, 2004 or, in the event the Company has not
      completed an initial public offering by October 29, 2004, they will expire
      on October 29, 2006. The Company recorded the initial fair value of these
      warrants upon issuance, $25.8 million, as network construction-in-process
      and a corresponding liability. The Company recognizes changes to the fair
      market value of the Put Warrants in earnings. At December 31, 2001, as a
      result of the economic downturn and, more specifically, the
      telecommunications industry, the Put Warrants were deemed to have


                                      F-18
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

      no value, resulting in a non-cash gain of $71.3 million for the year ended
      December 31, 2001. For the year ended December 31, 2000, the Company
      recorded a non-cash charge of approximately $45.5 million to reflect the
      increase in the fair value of the Put Warrants occurring during 2000.

9.    STOCKHOLDERS' DEFICIT

      COMMON STOCK - During the year ended December 31, 1999, the equity members
      of the Company's predecessor contributed $8,084,343 to the Company, of
      which $7,129,391 was in the form of salary and services paid for at cost
      by the individual affiliated companies for the development of the network.

      STOCK PURCHASE WARRANTS - In connection with retaining the Company's Chief
      Executive Officer, the Company granted a warrant to an executive search
      firm to purchase 333,333 shares of the Company's common stock for $6.40
      for a period of four years. As the warrant was granted to a third party
      recruiting firm, the Company recorded expense equal to the fair value of
      the warrant totaling approximately $1.2 million.

      STOCK OPTIONS - The Company has an Equity Incentive Plan (the "Plan") as
      amended and restated effective September 14, 2001, under which officers,
      employees, non-employee directors and consultants may be granted options
      to purchase shares of the Company's authorized but unissued common stock.
      The maximum number of shares of the Company's common stock available for
      issuance under the Plan is 25.0 million shares. As of December 31, 2001,
      the maximum number of shares available for future grant under the Plan is
      7.1 million shares. The Plan allows for the issuance of incentive stock
      options to employees ("ISO") and nonqualified stock options ("NQSO"). As
      of December 31, 2001, no ISOs have been granted under the Plan. Options
      granted under the plan generally have an exercise price of fair market
      value, a term of seven years and vest over four years. The Plan contains
      provisions that allow for the acceleration of the vesting period of
      outstanding option awards under certain conditions upon a change in
      control of the Company, as defined.

      Additional information with respect to the Plan's stock option and warrant
      grants is as follows:




                                      F-19
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

<Table>
<Caption>
                                                      STOCK OPTIONS                   WARRANTS
                                              --------------------------    --------------------------
                                                               WEIGHTED                       WEIGHTED
                                                               AVERAGE                        AVERAGE
                                               NUMBER OF       EXERCISE      NUMBER OF        EXERCISE
                                                SHARES          PRICE          SHARES          PRICE
                                              -----------      --------     -----------      --------
<S>                                             <C>                <C>       <C>                 <C>
Outstanding at January 1, 1999                         --      $     --              --      $     --
  Granted                                       3,672,000          2.45      16,969,696          2.93
                                              -----------      --------     -----------      --------
Outstanding at December 31, 1999                3,672,000          2.45      16,969,696          2.93
  Granted                                      19,120,100          6.10      10,358,025          0.22
  Forfeited                                    (2,148,400)         5.32              --            --
  Canceled                                             --            --      (1,728,396)         0.01
                                              -----------      --------     -----------      --------
Outstanding at December 31, 2000               20,643,700      $   5.53      25,599,325      $   2.03
  Granted                                       3,270,500          6.86
  Forfeited                                    (6,003,724)         6.39
  Canceled                                             --            --              --            --
                                              -----------      --------     -----------      --------
Outstanding at December 31, 2001               17,910,476      $   5.49      25,599,325      $   2.03

Weighted-average grant-date fair value of
options/warrants granted in:

  1999
    Market price = exercise price                              $   1.69                      $   1.69
    Market price > exercise price                              $   1.90                      $     --
    Market price < exercise price                              $     --                      $   1.55

  2000
    Market price = exercise price                              $   4.57                      $   3.48
    Market price > exercise price                              $   5.27                      $   6.39

  2001
    Market price = exercise price                              $   6.86                      $     --
</Table>


                                      F-20
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

      The following tables summarize information about stock options and
      warrants outstanding and exercisable at December 31, 2001:

<Table>
<Caption>

                           STOCK OPTIONS OUTSTANDING                              WARRANTS OUTSTANDING
                ----------------------------------------------------  --------------------------------------------------
                                      WEIGHTED                                           WEIGHTED
                                       AVERAGE        WEIGHTED                            AVERAGE          WEIGHTED
   RANGE OF                           REMAINING        AVERAGE                           REMAINING         AVERAGE
   EXERCISE         NUMBER OF        CONTRACTUAL      EXERCISE          NUMBER OF       CONTRACTUAL LIFE   EXERCISE
    PRICES            SHARES        LIFE (IN YEARS)     PRICE            SHARES          (IN YEARS)         PRICE
--------------- ------------------- ---------------- --------------  ------------------  --------------  --------------
<S>                    <C>                    <C>        <C>                 <C>                 <C>        <C>
    $0.01                        -               -       $         -          8,296,296           8.4       $ 0.01
    $1.97                1,600,000             2.8              1.97                  -             -            -
 $2.8125-3.51            2,936,901             5.4            2.8125         16,969,696           4.8         2.93
    $6.40               12,776,775             6.0              6.40            333,333           2.7         6.40
    $8.50                  596,800             6.5              8.50                  -             -            -
                       -----------            ----       -----------       ------------         -----            -
                        17,910,476             5.6            $ 5.49         25,599,325           5.9       $ 2.03
                       ===========            ====       ===========       ============         =====       =======
</Table>

<Table>
<Caption>

                                    STOCK OPTIONS EXERCISABLE                     WARRANTS EXERCISABLE
                            -----------------------------------------   ---------------------------------------
    RANGE OF                       NUMBER OF        WEIGHTED AVERAGE          NUMBER OF       WEIGHTED AVERAGE
 EXERCISE PRICES                    SHARES           EXERCISE PRICE             SHARES         EXERCISE PRICE
------------------          -------------------  --------------------   -------------------- ------------------
<S>                                  <C>            <C>                        <C>              <C>
      $1.97                          1,244,444      $     1.97                           -      $      -
  $2.8125-3.51                       1,653,306          2.8125                  16,969,696          2.93
      $6.40                          3,178,672            6.40                     333,333          6.40
                                    ----------      ----------            ----------------      ---------

                                     6,076,422      $     4.52                  17,303,029      $   2.99
                                    ==========      ==========            ================      ========
</Table>

     The total compensation cost related to employee stock options for the years
     ended December 31, 2001, 2000 and 1999 was $1.4 million, $3.1 million and
     $446,160, respectively.

     The Company has elected to follow APB Opinion No. 25, ACCOUNTING FOR STOCK
     ISSUED TO EMPLOYEES in accounting for its stock options. If the Company
     used FASB No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to determine
     compensation costs based on the fair value at the grant date for stock
     options issued, net earnings and earnings per share would have been the
     following pro forma amounts, (in thousands, except per share amounts):

<Table>
<Caption>

                                                     2001                 2000                1999
<S>                                              <C>                  <C>                  <C>
Net loss applicable to common stock:
  As reported                                    $ (629,922)          $ (102,294)          $  (8,928)
  Pro forma                                      $ (629,922)            (109,829)            (10,051)

Basic and diluted loss per share:
  As reported                                    $    (7.87)          $    (1.28)          $   (0.22)
  Pro forma                                      $    (7.87)               (1.37)              (0.24)
</Table>


                                      F-21
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

      These amounts were determined using the Black-Scholes option-pricing
      model, which values options based on the stock price at the grant date,
      expected life of the option, estimated volatility of the stock (based on
      market volatility of established competitors), expected dividend payments,
      and the risk-free interest rate over the expected life of the option. The
      assumptions used in the Black-Scholes model were as follows for stock
      options and warrants granted during the years ended December 31, 2001,
      2000 and 1999:

<Table>
<Caption>

                                              2001     2000     1999

<S>                                           <C>      <C>      <C>
      Risk free interest rate                 3.25%    5.0%     6.0%
      Expected volatility of common stock     131%      88%      65%
      Dividend yield                            0%       0%       0%
      Expected life of options (in years)       5        5        5
</Table>

      The Black-Scholes option valuation model was developed for estimating the
      fair value of traded options that have no vesting restrictions and are
      fully transferable. Option valuation models require the use of subjective
      assumptions and changes in these assumptions can materially affect the
      fair value of the options. The Company's options do not have the
      characteristics of traded options; therefore, the option valuation models
      do not necessarily provide a reliable measure of the fair value of its
      options.

10.   INCOME TAXES

      Prior to October 1999, the Company was taxed as a limited liability
      company under the provisions of the federal and state tax codes. Under
      federal laws, taxes based on income of a limited liability company are
      payable by the members of the Company individually. In October 1999, the
      Company converted to a C corporation and became subject to regular federal
      and state income taxes on an ongoing basis. The provision for income taxes
      consists of the following for the years ended December 31, 2001, 2000 and
      1999:

<Table>
<Caption>

                               2001        2000        1999
<S>                           <C>         <C>         <C>
      Current:
        Federal               $    --     $    --     $    --
        State                  15,000      10,000       2,000
                              -------     -------     -------

          Total provision     $15,000     $10,000     $ 2,000
                              =======     =======     =======
</Table>


                                      F-22
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

      Deferred tax assets and liabilities at December 31, 2001 and 2000, are as
      follows, in thousands:

<Table>
<Caption>

                                                                      2001          2000
<S>                                                                <C>           <C>
      Deferred income tax asset attributable to:
        Net operating loss carryforward                            $ 43,407      $ 12,093
        Amortization of stock purchase warrants                       2,970        19,865
        Accrued compensation                                          2,096         2,435
        Commitment fees, net                                          3,250            --
        Start-up costs                                                1,421           643
        Asset impairment and other reserves                         230,132            --
        Other                                                           533           649
                                                                   --------      --------

        Total deferred income tax asset                             283,809        35,685

      Deferred income tax liabilities attributable to:

        Warrants marked to market                                   (10,190)           --
        Accumulated depreciation                                       (272)         (120)
        Other                                                          (130)          (77)
                                                                   --------      --------

      Total deferred income tax liabilities                         (10,592)         (197)

      Net deferred income tax asset before valuation allowance      273,217        35,488
      Valuation allowance                                          (273,217)      (35,488)
                                                                   --------      --------

      Net deferred income tax asset                                $     --      $     --
                                                                   ========      ========
      </Table>


      Presented below is a reconciliation of the income tax provision computed
      at the U.S. federal statutory rate to the provision for income taxes for
      the years ended December 31, 2001, 2000 and 1999.

<Table>
<Caption>

                                                                     2001       2000       1999

<S>                                                                 <C>        <C>        <C>
      Tax benefit at U.S. statutory rate                            (35.0)%    (35.0)%    (35.0)%
      State income taxes, net of federal tax benefit                 (4.5)      (4.5)      (8.6)
      Benefit of lower tax brackets                                    --         --        1.0
      Recording of deferred income tax assets in
        connection with conversion to C corporation                    --         --       (0.6)
      Operating losses for which no tax benefit was recognized        8.4        0.5         --
      Change in valuation allowance                                  31.1       39.0       43.2
                                                                   ------     ------      -----

      Provision for income tax                                        0.0%       0.0%       0.0%
                                                                   ======     ======      =====
</Table>

      At December 31, 2001, the Company had federal and state tax loss
      carryforwards of approximately $110 million, which will expire in varying
      amounts beginning in 2019. The tax loss carryforwards will likely be lost,
      or severely limited, should the Company file for protection under Chapter
      11 of the United States Bankruptcy Code (note 2).


                                      F-23
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

11.   COMMITMENTS AND CONTINGENCIES

      EMPLOYMENT AGREEMENTS - The Company has entered into employment agreements
      with certain officers and employees of the Company, committing the Company
      to an aggregate annual compensation of approximately $2.4 million, $1.4
      million and $667,000 for the years ended December 31, 2002, 2003 and 2004,
      respectively. These amounts include amounts to be paid to a former officer
      of the Company under a separation agreement.

      As of October 1, 2001, the Company entered into an agreement with its
      Executive Chairman of the Board of Directors, Mr. Robert Annunziata. The
      agreement provides that Mr. Annunziata's term will extend through December
      31, 2002, unless it is mutually agreed to extend the term. The agreement
      entitles Mr. Annunziata to annual compensation consisting of base
      compensation of $500,000 and a minimum bonus of $500,000 during 2002 if
      bonuses are paid to executive management. He also received a signing bonus
      of $2.5 million, which was expensed during 2001 and paid in equal
      installments during October 2001 and January 2002. The agreement entitles
      Mr. Annunziata to bonuses in connection with certain transactions, as
      defined in the agreement, which may be entered into by the Company during
      the term of the agreement. As a result of the agreement, on October 1,
      2001, Mr. Annunziata forfeited all previously granted stock options to
      purchase the Company's common stock. Upon termination during the term of
      the agreement, Mr. Annunziata will receive his base compensation and any
      other payments due him under the Company's policies, through the effective
      date of termination. If Mr. Annunziata is terminated by the Company
      without "Cause" or he terminates the agreement with "Good Reason", both as
      defined in the agreement, he will receive his base compensation through
      December 31, 2002, or twelve months, if greater and the annual bonus for
      the year of termination.

      Also as of October 1, 2001, Mr. Annunziata entered into an agreement with
      the Company's current shareholders pursuant to which he will be eligible
      to receive 5% of the "Profit" of each shareholder upon the completion of a
      transaction or series of related transactions, as defined in the
      agreement. Mr. Annunziata will only receive the payment if he fulfills his
      obligations under the agreement described above and he is serving as the
      Executive Chairman of the Company at the time of execution of the
      transaction, subject to certain termination provisions contained in the
      agreement. The amount of payment received by Mr. Annunziata under this
      agreement is subject to adjustment based on conditions as specified in the
      agreement.

      LEASES - From 1999 through 2001, the Company has leased a building under
      an operating lease from a member of the Board of Directors for a monthly
      fee of $4,000. The Company leases approximately 75,000 square feet of
      space in Falls Church, Virginia and approximately 10,000 square feet of
      space in Short Hills, New Jersey under leases expiring in August 2011, and
      January 2006, respectively. The Company also leases construction offices,
      point of presence (POP) operating facilities, and selected regeneration
      facilities throughout its nationwide network. During the construction
      phase, rent and operating costs have been capitalized.

      The Company is leasing rights of way, communications capacity, and
      premises under various operating leases, which, in addition to rental
      payments, require payments for insurance, maintenance, property taxes, and
      other executory costs related to the lease. Certain leases provide for
      adjustments in lease cost based upon adjustments in the consumer price
      index and increases in the landlord's management costs. These lease
      agreements have various expiration dates through December 2016.

      The Company also leases various office equipment and vehicles under
      operating leases. Rent expense was approximately $2.9 million, $413,000
      and $75,000 for the years ended December 31, 2001, 2000 and 1999,
      respectively.


                                      F-24
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

      A summary of operating lease commitments as of December 31, 2001, is as
      follows, (in thousands):

<Table>
<Caption>

Year ending December 31:
<S>                                                             <C>
  2002                                                          $   9,932
  2003                                                             10,149
  2004                                                             10,207
  2005                                                             10,350
  2006                                                             10,197
Thereafter                                                         56,120
                                                                   ------

Total future minimum lease payments                             $ 106,955
                                                                =========
</Table>


      AT&T - On October 29, 1999, the Company entered into an agreement with
      AT&T (the "AT&T Agreement") providing for the construction of a
      fiber-optic network. The AT&T Agreement, as amended in December 2000, July
      2001 and December 2001, provides that AT&T will share in the cost of the
      Company's construction of approximately 6,100 miles on a per mile basis,
      which is estimated to be $285 million in total. This amount will be
      received in monthly payments through early 2003. The timing of future
      payments may be delayed if construction delays are encountered or if the
      Company and AT&T mutually agree to defer construction on selected routes.
      At December 31, 2001, the Company had recorded approximately $7.4 million
      due from AT&T under the AT&T Agreement and construction services contract
      as accounts receivable.

      The AT&T Agreement contains certain restrictive covenants including the
      requirement to complete the development of certain routes within a
      specified period of time. If the Company violates any of the restrictive
      covenants without proper cure within a specific period of time, AT&T may
      terminate the AT&T Agreement.

      On December 9, 2000, the Company entered into an agreement with AT&T to
      purchase approximately 7,200 miles of dark fiber within a network
      currently being constructed by AT&T. The original agreement committed the
      company to purchase approximately $112 million of fiber by December 2002.
      The Agreement was amended in July 2001 and December 2001 to reduce the
      amount of the commitment to $106 million, to defer the estimated fiber
      delivery dates and payments for selected routes through November 2005,
      reduce the number of fibers purchased on each route, and increase the
      fiber route miles to 8,800 miles. Additionally, the Company has the option
      to cancel selected routes, to lease rather than purchase fiber on certain
      routes, and to purchase additional fiber on selected routes. In connection
      with the amended agreement, the Company paid $21.2 million during 2001
      that has been recorded as acquired network assets. As of December 31,
      2001, AT&T had delivered 307 route miles, or $4.1 million of fiber against
      the down payments, and $17.1 million remained available for delivery
      before the Company is required to pay additional amounts to AT&T.
      Currently the Company is contractually obligated to pay approximately
      $10.9 million, $16 million, $31.4 million and $26.7 million in 2002, 2003,
      2004 and 2005, respectively. The payment schedule is subject to change
      based on actual fiber delivery dates from AT&T and the cancellation
      options that may be exercised by the Company. The Company is also required
      to pay annual maintenance fees of $300 per mile to AT&T for purchased
      fiber. The agreement is subject to various covenants and cancellation
      provisions as defined in the agreement.

      During 2001 (and subsequently amended in February 2002), the Company
      amended its 1999 Master Carrier Agreement with AT&T under which is
      purchases capacity for resell to third parties. Under the amended
      agreement, the Company committed to purchase a minimum of $26 million in
      private line and


                                      F-25
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

      local access services from AT&T during a 6 year term ending in December
      2005. Through December 31, 2001, the Company has met $2 million of its
      total obligation and the Company is required to purchase a minimum of $6
      million in services annually during 2002 to 2005.

      SEA BREEZE COMMUNICATIONS COMPANY - Pursuant to an amended and restated
      Fiber-Optic Networks Development Agreement (the "SBCC Agreement") dated
      October 29, 1999, and subject to certain limitations therein, Sea Breeze
      Communications Company ("SBCC"), an affiliate of Koch, granted the Company
      a three-year exclusive option to designate and develop fiber-optic
      networks along SBCC's pipeline rights-of-way ("SBCC Assets"). Certain
      provisions in the SBCC Agreement apply the Company's rights to pipeline
      rights-of-way subsequently acquired by Koch or affiliates of Koch.
      Further, the Company shall have the ability to acquire available pipeline,
      as defined, for use along its network.

      Upon designation of its intent to construct the fiber network along routes
      utilizing SBCC Assets, the Company shall acquire an indefeasible right of
      use in the SBCC Assets subject to terms and conditions included in the
      SBCC Agreement. Further, the Company shall be required to complete its
      development of any such routes within a specified period of time. The SBCC
      Agreement expires in April 2003.

      In exchange and in full payment for the rights associated with the SBCC
      Agreement, the Company issued to Koch Telecom Ventures, Inc. a note in the
      amount of $10 million. Borrowings provide for interest at 13.75% per annum
      payable semi-annually in arrears on February 1 and November 1 of each
      year, commencing on February 1, 2000. Interest compounded quarterly and
      was to be paid at maturity, which was the earlier of a qualified equity
      offering as defined in the agreement or ten years from the issuance of the
      note. This note payable plus accrued interest was classified as a note
      payable to affiliate on the balance sheet as of December 31, 2000. In May
      2001, in connection with the amendment to the Credit Facility, the entire
      note payable and accrued interest aggregating $12.4 million were repaid.
      The Company currently pays Koch Telecom Ventures, Inc. or an affiliate an
      annual fee of $375,000 for certain consultation services provided pursuant
      to the SBCC Agreement.

      TOUCH AMERICA - On February 25, 2000, the Company entered into a conduit
      and fiber-optic swap agreement with Touch America (the "Agreement").
      Pursuant to the Agreement, the Company will swap a portion of its conduit
      and fiber, for 18 years, with an option to extend for an additional 20
      years, in return for a cash payment of approximately $48.5 million,
      subject to adjustment upon the occurrence of certain events, and a portion
      of conduit and fiber from the Touch America fiber network. At December 31,
      2001, the Company had recorded approximately $7.5 million due under the
      Agreement as accounts receivable. This amount and all amounts previously
      paid have been recorded as deferred revenue as of December 31, 2001. Once
      the Company and Touch America complete the construction of their networks
      under the Agreement, the swap transaction will occur. The parties were
      obligated to complete their respective construction and execute the swap
      prior to December 31, 2001. However, both Touch America and the Company
      have experienced construction delays and the swap has not yet been
      completed. Both parties are subject to liquidated damage provisions for
      incomplete routes of $75,000 per month for up to six months, however,
      valid force majuere notifications could limit liquidated damages. Under
      the Agreement, the Company may enter into interim lease arrangements with
      Touch America prior to completion of the swap. It is currently uncertain
      when both parties will complete their respective construction and fully
      execute the swap, or if interim lease arrangements will be completed.

      LITIGATION - The Company is a party to various claims involving employee
      matters. Management believes that the claims are without merit and the
      Company intends to vigorously defend against them. Resolution of these
      matters is not expected to have a material adverse effect on the Company.
      From time to time, the Company may be party to various other legal
      proceedings arising in the ordinary course of business, including issues
      related to obtaining rights-of-way, franchise fees, bankruptcy filings by
      customers and vendors, default provisions under construction contracts,
      and mechanics liens against the Company's


                                      F-26
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

      assets. Management of the Company does not believe these legal
      proceedings, individually or in the aggregate, will have a material
      adverse effect on the Company.

      On March 31, 2001, The Company entered into an agreement with Winstar
      Wireless, Inc. whereby the Company purchased IRUs in certain wavelengths
      from Winstar (the "Wavelength IRU"), and certain tenant improvement and
      space build out of colocation facilities under a Professional Services
      Agreement ("PSA"). Under the Agreement, the Company was obligated to pay
      Winstar a total purchase price of $50 million for the Wavelength IRU and
      use of the colocation facilities, of which $25 million was due and payable
      on March 31, 2001. The remaining balance due under the Agreement was due
      and payable on May 29, 2001. On April 18, 2001, Winstar filed for
      protection under Chapter 11 of the US Bankruptcy Code. As a result, the
      payment from the Company was not made on May 29, 2001. On July 23, 2001,
      Winstar filed an Adversary Proceeding seeking turnover of $25 million they
      believed was owed by the Company under the Wavelength IRU and the PSA. The
      Company has moved to dismiss the action for failure to state a claim. In
      December 2001, Winstar sold substantially all of its assets to a third
      party and it converted to a Chapter 7 bankruptcy filing. The Adversary
      Proceeding against the Company was not sold to the third party and remains
      with the Winstar estate. The court has not yet ruled on the Adversary
      claim or the Company's motion to dismiss the action. Management does not
      believe the Company is obligated to pay additional amounts and intends to
      vigorously defend itself against the claim. In March 2001, the Company
      sold Winstar conduits under a 20-year IRU for $25 million in cash
      (recorded as deferred revenue) and an additional $25 million to be paid in
      May 2001. On July 25, 2001, Winstar filed a motion in the Bankruptcy court
      to reject the conduit purchase contract. The court did not rule on the
      motion and because the buyer of Winstar's assets has a period of time to
      define assets that it actually purchased from Winstar, it is currently
      unclear whether the Winstar estate or the third party buyer own the
      conduit contract. The outcome of this matter is currently uncertain with
      the bankruptcy court and it is undetermined whether the Company will
      complete the sale transaction.

      On January 28, 2002, Global Crossing filed for protection under Chapter 11
      of the US Bankruptcy Code. In June 2001, the Company purchased $33.6
      million in prepaid services from Global Crossing, of which the Company
      currently has approximately $33.2 million in remaining services to
      utilize. Additionally, the Company sold fiber and related collocation and
      maintenance services to Global Crossing, and the Company received a
      $33.6 million prepayment for the fiber and services. The Company had
      not yet delivered the fiber or services to Global Crossing at the time
      of their bankruptcy filing. The Company cannot determine, what impact,
      if any, the bankruptcy filing will have on Global Crossing's ability to
      continue to provide services under the capacity agreement or to accept
      fiber under the fiber sale agreement.

      At the direction of the California Department of Transportation, the
      Company entered into a joint build agreement with Level 3 Communications
      (Level 3) for conduit in Southern California. Under the Agreement, the
      Company agreed to pay Level 3 a fixed amount for construction, plus a
      management fee, and up to 10% in cost overruns without prior notification
      and consent of such overruns. Based on contractual terms, the maximum
      amount owed to Level 3, including the 10% overrun, is $4,596,180. In
      December 2001, Level 3 presented the Company an invoice for payment of
      $21,044,114, which included significant cost overruns. The Company does
      not believe that Level 3 provided proper notification of potential cost
      overruns as required in the Agreement or the Company consented to pay for
      overruns. The Company offered to pay Level 3 $4,596,180 as payment in full
      for the construction and Level 3 rejected payment claiming the Company
      owes $21,044,114. The Company will vigorously defend against Level 3's
      claim, and it is evaluating its legal rights under the contract. Delivery
      of the conduit is dependent on resolution and payment of the contractual
      amount. As of December 31, 2001, the Company had recorded a liability of
      $4,596,180 related to this matter.


                                      F-27
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

      Any adverse outcomes from the bankruptcy courts, or rejection of
      contracts, related to the Winstar or Global Crossing bankruptcy
      proceedings, or an adverse outcome in the Level 3 matter, could have a
      material adverse effect on the company.

      CONSTRUCTION CONTRACTS - The Company has various contracts with
      construction contractors to build its fiber optic network and related
      facilities. These contracts are generally turnkey agreements and at a
      fixed price per mile of construction. The contracted prices are subject to
      change if the Company requests change orders or additional work outside
      the scope of the original agreement. The Company has generally contracted
      with several large contractors to build major links in different parts of
      the country, and these contractors have hired subcontractors to complete
      the construction build. The Company originally entered into contracts
      approximating $575 million with its major contractors. At December 31,
      2001, the Company has approximately $135 million in remaining amounts to
      pay under the contracts, including approximately $20 million in retainage
      to be paid upon successful construction completion within contract terms.

      During 2001, certain contractors did not pay their subcontractors in a
      timely manner and various mechanic liens were filed against the network
      assets. The Company paid some of the contractors and subcontractors using
      two-party check arrangements to remove the liens and in other cases, the
      Company filed claims with the contractor's bonding company. As a result of
      the current economic environment and the continued failure by some
      contractors to pay their subcontractors in a timely manner, the Company
      expects additional mechanic liens will be filed against the Company's
      assets. The Company generally will not pay contractors until lien waivers
      are obtained. Additionally, the Company has hired multiple smaller local
      contractors to complete construction in cases where the original major
      contractor defaulted. The Company could incur additional costs in
      attempting to remove liens, if bonding companies are unable to pay claims,
      or if new contractors must be hired to complete construction under
      defaulted contracts.

      EQUIPMENT SUPPLY AGREEMENT - On April 12, 2001, PF.Net Corp., a wholly
      owned subsidiary of the Company entered into an agreement (the "Supply
      Agreement") with Cisco Systems, Inc. ("Cisco") pursuant to which Cisco
      will supply optronics equipment, data internetworking equipment and other
      specified services for the Company's network. Under the Supply Agreement,
      the Company has committed to purchase at least $225 million of equipment
      and services through May 24, 2003. Through December 31, 2001, the Company
      has purchased approximately $51 million in product and services under the
      supply agreement.

      OTHER AGREEMENTS - During 2001, the Company entered into agreements for
      the acquisition of telecommunications capacity, local interconnection,
      private line, data backbone circuits and other services from a variety of
      telecommunications providers. Under these agreements, the Company
      purchased circuits or local loops under agreements with terms ranging from
      one to five years and most individual circuit agreements include
      termination penalties for early disconnections. At December 31, 2001, the
      Company committed to pay approximately $10.6 million for services during
      2002 (of which approximately $5 million related to data backbone circuits
      with one year terms expiring in 2002), and approximately $30.2 million in
      total over the five years ending December 31, 2006.

      In June 2001, the Company purchased $33.6 million in network capacity from
      Global Crossing. Under the agreement, the Company prepaid for services
      that may be utilized over the 20-year term of the agreement. The Company
      amortizes the prepaid amount based on actual monthly usage and through
      December 2001, the Company had consumed approximately $185,000 in
      services. Continued utilization of the capacity is dependent on the
      Company's continued provision of lit services and upon Global Crossing's
      ability to provide reliable services during and after its chapter 11
      bankruptcy proceeding (see litigation section above).


                                      F-28
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

      FRANCHISE FEES - The Company is required to pay franchise fees to various
      cities, states and other jurisdictions where the Company has network
      assets. Some jurisdictions require one time payments, while others require
      annual recurring payments over periods ranging up to 10 years. As of
      December 31, 2001, the Company had annual recurring franchise fees to pay
      of approximately $4.2 million. The Company will incur additional franchise
      fees as it expands its network and it may be required to pay its prorated
      share of franchise fees associated with certain purchased assets.
      Completion of selected routes is dependent on successfully negotiating
      reasonable franchise fees in certain jurisdictions.

      PERFORMANCE BONDS - The Company is required to purchase performance bonds
      for either the Company or its contractors to perform work in certain
      jurisdictions. The Company has historically maintained bonds where
      required, however, based on the current telecommunications environment
      and general economic conditions, the performance bond market for
      telecommunications companies has become much tighter, more expensive, and
      in some cases, insurers are no longer issuing bonds to telecommunications
      companies. We cannot make any assurance that we will be able to
      renew performance bonds upon expiration of their current terms or to
      obtain new performance bonds where required at reasonable prices. We may
      be required to provide performance deposits or to fully fund performance
      bonds with insurance companies to complete construction.

      Our construction contractors have performance bonds in place, however,
      based on the current economic conditions, it is uncertain whether the
      bonding companies will pay for nonperformance or damages caused by our
      contractors. If the bonding companies do not or are unable to pay claims,
      we may be required to incur additional costs to complete network
      construction.

      FIBER SALE AND SWAP AGREEMENTS - The Company has sold fiber and conduit to
      a variety of third parties under various fiber sale, IRU and swap
      agreements. Completion of the transactions and receipt of additional sales
      proceeds is dependent on successful construction completion and timely
      delivery by the Company to the third parties. Delayed or late deliveries
      may result in liquidated damage penalties, cancellation of agreements, or
      return of amounts already paid by the buyer. Additionally, completion of
      certain of these transactions is dependent on third parties successfully
      completing construction and timely delivery of completed routes to the
      Company. The Company cannot make any assurances that it will successfully
      deliver and complete such transaction in consideration of its existing
      financial condition (note 2). The Company has committed to pay annual
      maintenance costs and its prorated share of emergency maintenance costs on
      fiber and conduit purchased from other telecommunications providers.

12.   MAJOR CUSTOMERS

      The Company earned revenue from two customers amounting to 55% and 19%,
      respectively for the year ended December 31, 2001.

13.   RELATED PARTY TRANSACTIONS

      Effective June 2001, the Company entered into a financial advisory
      agreement with UBS Warburg. Affiliates of UBS Warburg own the Company's
      Series A Senior Convertible Preferred Stock and two members of the
      Company's Board of Directors are employed by UBS Warburg. The advisory
      agreement includes a $500,000 sign up fee and a monthly retainer of
      $75,000, plus out-of-pocket expenses. During 2001, the Company paid UBS
      Warburg approximately $798,000 for services under this agreement and
      other investment banking services. Approximately $700,000 was payable
      to UBS Warburg as of December 31, 2001, which was paid in March 2002.
      UBS Warburg is entitled to success fees of 3.5% of the aggregate
      consideration for a strategic investment transaction or 1% of the
      aggregate consideration for the sale of the business, assets, or
      acquisition of a target entity.

                                      F-29
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

      During the year ended December 31, 2000, the Company utilized leased
      employees under secondment agreements from both PF Telecom Holdings, Inc.
      ("PF Telecom") and Koch Ventures, Inc. The aggregate payments made to PF
      Telecom and Koch personnel for payroll, travel and entertainment expenses
      were approximately $1.8 million and $538,000, respectively. The Koch
      secondment agreement terminated on February 29, 2000 and the PF Telecom
      secondment agreement terminated on December 31, 2000. During 2001, the
      Company paid Koch Telecom Ventures, Inc. approximately $248,000 in
      connection with the amended Credit Facility. During 2000, the Company paid
      a financing fee of $300,000 to Koch Industries, the parent of Koch
      Ventures, Inc., in connection with the Company's high yield debt offering.
      (See Note 11.)

      Effective January 1, 2001, the Company has consulting agreements with two
      current board members and former executive officers to pay each $12,500
      per month, which consists of $10,000 for consulting fees and an office
      allowance of $2,500. Additionally, the company provides certain insurance
      benefits to the individuals. The agreements each have 5 year terms and are
      part of employment agreements each had with the Company during their
      respective employment terms.

      The Company paid Odyssey Investment Partners, LLC, a preferred stock and
      debt holder, approximately $78,000 during 2000 and $558,000 during 2001
      for time and services rendered in relation to financing and merger and
      acquisition activities. Approximately $215,000 was payable to Odyssey for
      such services as of December 31, 2001. During 2000, the Company paid a
      financing fee of $750,000 to Odyssey Investment Partners, LLC in
      connection with the Company's high yield debt offering.

14.   SUPPLEMENTARY CASH FLOW STATEMENT DATA

      A summary of the cash flow statement effects of the increase (decrease) in
      operating assets and liabilities is presented below for the years ended
      December 31, 2001, 2000 and 1999, (in thousands):

<Table>
<Caption>

                                                  2001           2000            1999

<S>                                           <C>            <C>            <C>
      Accounts receivable                     $  (9,546)     $    (115)     $      (9)
      Prepaid expenses                             (753)          (605)          (155)
      Other current assets                          473         (1,283)            --
      Network capacity and other assets         (62,052)          (368)           (26)
      Accounts payable                            1,514            281          2,277
      Accrued liabilities                           405          8,571            795
      Accrued interest payable                    2,359          3,412          1,797
      Current portion of deferred revenue        (6,016)            --             --
      Deferred revenue                          116,258         13,547              5
      Other liabilities                           1,291             --             --
                                              ---------      ---------      ---------
                                              $  43,933      $  23,440      $   4,684
                                              =========      =========      =========
</Table>


15.   ASSET IMPAIRMENT CHARGES

      Pursuant to SFAS No. 121, the Company identified certain long-lived assets
      for which there were indications of impairment. The overall deterioration
      in economic conditions within the telecommunications industry, continued
      over-capacity in certain areas of the industry, the oversupply of dark
      fiber and conduit, lack of customers, and distressed prices for such
      assets from bankruptcies within the telecommunication sector led the
      Company to believe the market value of its network assets had decreased
      significantly.


                                      F-30
<Page>

VELOCITA CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
--------------------------------------------------------------------------------

      Based on the Company's evaluation, it was determined that the estimated
      future cash flows from its network assets were less than the carrying
      value. Accordingly, during the fourth quarter, the Company adjusted the
      carrying value of its property and equipment to $250 million. The Company
      estimated the fair value of its network assets using valuation models and
      assumptions representative of current and volatile market conditions.
      Valuation models require the use of subjective assumptions that can
      materially affect the estimated fair value. Amounts realized from an
      arm's length third party transaction, particularly during different market
      conditions, could be significantly different from our estimate.

      Additionally, the Company wrote-off $25 million in prepaid capacity
      services purchased in March 2001 from Winstar (see note 11). The Company
      determined that neither Winstar, which filed for Chapter 7 bankruptcy
      during December 2001, nor the purchaser of Winstar's assets, could provide
      services to the Company.

      These adjustments resulted in a non-cash asset impairment charge of $605
      million.

16.   401(K) PLAN

      Effective July 1, 2001, the Company established a defined contribution
      retirement plan qualifying under the provisions of Section 401(K) of the
      Internal Revenue Code. Plan participants are eligible to contribute up to
      $10,500, on a tax deferred basis, to the Plan. The Company matched 50% of
      employee contributions up to 6% of pay and Company contributions would
      vest to participants over 5 years. The Company recognized total
      compensation expense of approximately $196,000 during 2001 related to the
      plan.

      Subsequent to year-end, there was a partial plan termination as a result
      of the employee workforce reduction (see note 17). The Company elected to
      discontinue company matching contributions and to provide immediate
      vesting in company matching contributions to date.

17.   SUBSEQUENT EVENTS

      Effective February 28, 2002, the Company reduced its workforce by 181
      employees, or 75% of its nationwide employees. The staff reductions
      occurred in sales, marketing and general and administrative departments.
      These headcount reductions are expected to significantly reduce overall
      operating expenses, primarily salary and benefit related expenses,
      resulting in annual savings of approximately $20 million.

      Effective March 28, 2002, the Company entered into a waiver agreement with
      its secured lenders to waive certain events of default, including March
      31, 2002 financial performance covenants, through April 15, 2002.
      On April 15, 2002, this waiver was extended through April 30, 2002.
      Additionally, the Company agreed to not draw approximately $36 million of
      the remaining available balance under its revolving credit agreement (note
      2).

                                   * * * * * *





                                      F-31

<Page>

                                   SIGNATURES
     Pursuant to the requirements of Sections 13 or 15(d) of the Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

                                       VELOCITA CORP.
                                       Registrant

                               April 15, 2002 By:

                                              /s/ KIRBY G. PICKLE, JR.
                                              ----------------------------------
                                              Name: Kirby G. Pickle, Jr.
                                              Title: Chief Executive Officer,
                                              Acting Chief Financial Officer and
                                              Director

<Page>

                                POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

     That the undersigned officers and directors of Velocita Corp. do hereby
constitute and appoint Kirby G. Pickle, Jr. or W. Terrell Wingfield, Jr. and
each of them, the lawful attorney and agent or attorneys and agents with power
and authority to do any and all acts and things and to execute any and all
instruments which said attorneys and agents, or either of them, determine may be
necessary or advisable or required to enable to comply with the Securities
Exchange Act of 1934, as amended, and any rules or regulations or requirements
of the Securities and Exchange Commission in connection with this Annual Report
on Form 10-K. Without limiting the generality of the foregoing power and
authority, the powers granted include the power and authority to sign the names
of the undersigned officers and directors in the capacities indicated below to
this Annual Report on Form 10-K or amendment or supplements thereto, and each of
the undersigned hereby ratifies and confirms all that said attorneys and agents,
or either of them, shall do or cause to be done by virtue hereof. This Power of
Attorney may be signed in several counterparts.

     IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his or her name.

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

<Table>
<Caption>
                  SIGNATURE                              TITLE                        DATE
                  ---------                              -----                        ----

<S>                                           <C>                               <C>
      /s/ KIRBY PICKLE, JR.                   Chief Executive Officer,
 ---------------------------------------      Director and Acting Chief
          Kirby Pickle, Jr.                   Financial Officer                 April 15, 2002

      /s/ ROBERT ANNUNZIATA
 ---------------------------------------
          Robert Annunziata                   Chairman                          April 15, 2002

       /s/ MUZZAFAR MIRZA
 ---------------------------------------
           Muzzafar Mirza                     Director                          April 15, 2002

        /s/ SHARYAR AZIZ
 ---------------------------------------
            Sharyar Aziz                      Director                          April 15, 2002

        /s/ STEPHEN IRWIN
 ---------------------------------------
            Stephen Irwin                     Director                          April 15, 2002
</Table>

                                       105
<Page>

                SIGNATURE                      TITLE                 DATE
                ---------                      -----                 ----

           /s/ BRIAN KWAIT
 ---------------------------------------
               Brian Kwait                    Director          April 15, 2002

          /s/ CHARLES MOORE
 ---------------------------------------
              Charles Moore                   Director          April 15, 2002

          /s/ JOHN PITTENGER
 ---------------------------------------
              John Pittenger                  Director          April 15, 2002

           /s/ TIM CESAREK
 ---------------------------------------
               Tim Cesarek                    Director          April 15, 2002


                                       106
<Page>

                                INDEX TO EXHIBITS

EXHIBIT NO.                          DESCRIPTION OF EXHIBIT

     3.1       Amended and Restated Certificate of Incorporation, filed on May
               24, 2001, of Velocita Corp. (formerly PF.Net Communications,
               Inc.) (formerly PF.Net Holdings, Limited) (incorporated herein by
               reference to Exhibit 3.1 of Velocita Corp.'s Quarterly Report for
               the period ended June 30, 2001 on Form 10-Q filed on August 14,
               2001 (File No. 333-39646)).

     3.2       Certificate of Designations, filed on May 24, 2001 of Series A
               Senior Cumulative Convertible Preferred Stock of Velocita Corp.
               (formerly PF.Net Communications, Inc.) (formerly PF.Net Holdings,
               Limited) (incorporated herein by reference to Exhibit 3.2 of
               Velocita Corp.'s Quarterly Report for the period ended June 30,
               2001 on Form 10-Q filed on August 14, 2001 (File No. 333-39646)).

     3.3       Certificate of Designations, filed on May 24, 2001 of Series B
               Senior Cumulative Convertible Preferred Stock of Velocita Corp.
               (formerly PF.Net Communications, Inc.) (formerly PF.Net Holdings,
               Limited) (incorporated herein by reference to Exhibit 3.3 of
               Velocita Corp.'s Quarterly Report for the period ended June 30,
               2001 on Form 10-Q filed on August 14, 2001 (File No. 333-39646)).

     3.4       By-Laws of Velocita Corp. (incorporated herein by reference to
               Exhibit 3.4 of Velocita Corp.'s Registration Statement on Form
               S-4 filed on June 19, 2000 (File No. 333-39646))

     4.1       The indenture, dated May 10, 2000 among Velocita Corp. and United
               States Trust Company of New York, as trustee, relating to the
               $225,000,000 in aggregate principal amount of 13 3/4% Senior
               Notes due 2010 and the registered 13 3/4% Senior Notes due 2010
               (incorporated herein by reference to Exhibit 4.1 of Velocita
               Corp.'s Registration Statement on Form S-4 filed on June 19, 2000
               (File No. 333-39646)).

     4.2       Specimen Certificate of 13 3/4% Senior Notes due 2010 (included
               in Exhibit 4.1 hereto).

     4.3       Specimen Certificate of the registered 13 3/4% Senior Notes due
               2010 (included in Exhibit 4.1 hereto).

     4.4       Registration Rights Agreement, dated May 10, 2000 among Velocita
               Corp., UBS Warburg LLC and Credit Suisse First Boston Corporation
               (incorporated herein by reference to Exhibit 4.4 of Velocita
               Corp.'s Registration Statement on Form S-4 filed on June 19, 2000
               (File No. 333-39646)).

     10.1      Fiber-Optic System Agreement, dated as of October 29, 1999,
               between PF.Net Corp. and AT&T Corp. (incorporated herein by
               reference to Exhibit 10.1 of Velocita Corp.'s Amendment No. 1 to
               Registration Statement on Form S-4 filed on July 17, 2000 (File
               No. 333-39646)).

     10.2      Amendment No. 1 to the Fiber-Optic System Agreement, dated as of
               May 5, 2000, between PF.Net Corp. and AT&T Corp. (incorporated
               herein by reference to Exhibit 10.2 of Velocita Corp.'s Amendment
               No. 1 to Registration Statement on Form S-4 filed on July 17,
               2000 (File No. 333-39646)).

                                        i
<Page>

EXHIBIT NO.                          DESCRIPTION OF EXHIBIT

     10.3      Amendment No. 2 to the Fiber-Optic System Agreement, dated as of
               December 6, 2000, between PF.Net Corp. and AT&T Corp.
               (incorporated herein by reference to Exhibit 10.3 of Velocita
               Corp.'s Annual Report on Form 10-K filed on March 30, 2001 (File
               No. 333-39646)).

     10.4      Amendment No. 3 to the Fiber-Optic System Agreement, dated as of
               July 27, 2001, between PF.Net Corp. and AT&T Corp., portions of
               which have been deleted therein and replaced with the symbol "**"
               pursuant to a request by Velocita Corp. to the Securities and
               Exchange Commission for confidential treatment of these portions.
               (incorporated herein by reference to Exhibit 10.5 of Velocita
               Corp.'s Quarterly Report for the period ended June 30, 2001 on
               Form 10-Q filed on August 14, 2001 (File No. 333-39646)).

     10.5      Amendment No. 4 to the Fiber-Optic System Agreement, dated as of
               October 1, 2001, between PF.Net Corp. and AT&T Corp.

     10.6      Amendment No. 5 to the Fiber-Optic System Agreement, dated as of
               December 5, 2001 between PF.Net Corp. and AT&T Corp.

     10.7      Amended and Restated Fiber Sale Agreement, dated as of July 27,
               2001, between PF.Net Corp. and AT&T Corp. (incorporated herein by
               reference to Exhibit 10.5 of Velocita Corp.'s Quarterly Report
               for the period ended June 30, 2001 on Form 10-Q filed on August
               14, 2001 (File No. 333-39646))

     10.8      Amendment No. 1 to the Amended and Restated Fiber Sale Agreement,
               dated as of December 7, 2001, between PF.Net Corp. and AT&T Corp.

     10.9      Amended and Restated Fiber Networks Development Agreement, dated
               as of October 29, 1999, between PF.Net Corp. and Sea Breeze
               Communication Company (incorporated herein by reference to
               Exhibit 10.3 of Velocita Corp.'s Registration Statement on Form
               S-4 filed on June 19, 2000 (File No. 333-39646)).

     10.10     Amendment No. 1 to the Amended and Restated Fiber Networks
               Development Agreement, dated as of March 17, 2000, between Sea
               Breeze Communication Company, PF.Net Corp. and PF.Net Network
               Services Corp. (incorporated herein by reference to Exhibit 10.4
               of Velocita Corp.'s Registration Statement on Form S-4 filed on
               June 19, 2000 (File No. 333-39646)).

     10.11     Credit Agreement, dated October 29, 1999, as amended on May 24,
               2001, between PF.Net Corp., the Lenders and First Union National
               Bank, as administrative agent, portions of which have been
               deleted therein and replaced with the symbol "**" pursuant to a
               request by the Securities and Exchange Commission for
               confidential treatment of these portions (incorporated herein by
               reference to Exhibit 10.1 of Velocita Corp.'s amended Quarterly
               Report for the period ended June 30, 2001 on Form 10-Q/A filed on
               March 5, 2002 (File No. 333-39646)).

     10.12     First Amendment to Loan Documents, dated as of March 31, 2000,
               among Velocita Corp., PF.Net Corp., and each of the subsidiaries
               of PF.Net Corp., First Union National Bank, as administrative
               agent, the lenders, State Street Bank and Trust Company, as
               corporate trustee and Patrick Thebado, as individual trustee
               (incorporated herein by reference to Exhibit 10.6 of Velocita
               Corp.'s Registration Statement on Form S-4 filed on June 19, 2000
               (File No. 333-39646)).

                                       ii
<Page>

EXHIBIT NO.                          DESCRIPTION OF EXHIBIT

     10.13     Second Amendment to Loan Documents, dated as of May 24, 2001,
               among PF.Net Corp., Velocita Corp., each of the subsidiaries of
               PF.Net Corp. as guarantors, First Union National Bank, as
               administrative agent, the Lenders, State Street Bank and Trust
               Company, as corporate trustee for the secured parties, amending
               the various loan documents entered into under the Credit
               Agreement, portions of which have deleted therein and replaced
               with the symbol "**" pursuant to a request by the Company to the
               SEC for confidential treatment of these portions (incorporated
               herein by reference to Exhibit 10.2 of Velocita Corp.'s Quarterly
               Report for the period ended June 30, 2001 filed on August 14,
               2001) (File No. 333-39646)).

     10.14     Series B Senior Cumulative Convertible Preferred Stock Purchase
               Agreement dated April 12, 2001 between Cisco Systems, Inc. and
               Velocita Corp. (incorporated herein by reference to Exhibit 10.2
               of Velocita Corp.'s amended Quarterly Report for the period ended
               March 31, 2001 on Form 10-QA filed on March 5, 2002)). (File No.
               333-39646)).

     10.15     Service Provider Agreement dated April 6, 2001 between PF.Net
               Corp. and Cisco Systems, Inc., portions of which have deleted
               therein and replaced with the symbol "**" pursuant to a request
               by the Company to the SEC for confidential treatment of these
               portions (incorporated herein by reference to Exhibit 10.1 of
               Velocita Corp.'s amended Quarterly Report for the period ended
               March 31, 2001 on Form 10-Q/A filed on March 5, 2002. (File No.
               333-39646)).

     10.16     Trust Agreement, dated as of October 29, 1999, among PF.Net
               Corp., State Street Bank and Trust Company, as Corporate Trustee
               and Patrick Thebado, as individual trustee (incorporated herein
               by reference to Exhibit 10.7 of Velocita Corp.'s Registration
               Statement on Form S-4 filed on June 19, 2000 (File No.
               333-39646)).

     10.17     Amended and Restated Stockholders Agreement, dated as of May 24,
               2001, by and among Velocita Corp., PF.Net Corp., PF.Net Property
               Corp., PF.Net Supply Corp., PF.Net Construction Corp., PF.Net
               Network Services Corp., PF.Net Virginia Corp., PF.Net Virginia,
               LLC, John Warta, Karen Irwin, Treg Ventures LLC, Gregory M. Irwin
               Trust, Tracie H. Irwin-Waldman Trust, Odyssey Investment Partners
               Fund, LP, Odyssey Coinvestors, LLC, PF Coinvestment, LLC, PF
               Coinvestment II, LLC, PF Telecom Holdings, LLC, Koch Telecom
               Ventures, Inc., UBS Capital II LLC, GLW Ventures LLC, Georgiana
               Warta, First Union Investors, Inc., First Union Capital Partners,
               LLC and Cisco Systems, Inc. (incorporated herein by reference to
               Exhibit 10.3 of Velocita Corp.'s Quarterly Report for the period
               ended June 30, 2001 on Form 10-Q filed on August 14, 2001 (File
               No. 333-39646)).

     10.18     Promissory Note, dated as of October 29, 1999, issued by Velocita
               Corp., Inc. to Koch Telecom Ventures, Inc. in principal amount of
               $10.0 million (incorporated herein by reference to Exhibit 10.11
               of Velocita Corp.'s Registration Statement on Form S-4 filed on
               June 19, 2000 (File No. 333-39646)).

     10.19     Master Secondment Agreement, dated as of November 1, 1999,
               between PF.Net Corp. and PF Telecom, LLC (incorporated herein by
               reference to Exhibit 10.12 of Velocita Corp.'s Registration
               Statement on Form S-4 filed on June 19, 2000 (File No.
               333-39646)).

                                       iii
<Page>

EXHIBIT NO.                          DESCRIPTION OF EXHIBIT

     10.20     10.15 Amendment Number One to the Master Secondment Agreement
               dated as of November 1, 1999 between PF.Net Corp. and PF Telecom
               LLC (incorporated herein by reference to Exhibit 10.13 of
               Velocita Corp.'s Registration Statement on Form S-4 filed on June
               19, 2000 (File No. 333-39646)).

     10.21     Master Supply, Services and System Agreement, dated as of August
               6, 1999, between PF.Net Network Services Corp. (formerly PF.Net,
               LLC) and Lucent Technologies Inc. (incorporated herein by
               reference to Exhibit 10.14 of Velocita Corp.'s Registration
               Statement on Form S-4 filed on June 19, 2000 (File No.
               333-39646)).

     10.22     Assignment and Assumption of Master Supply, Services and System
               Agreement, dated October 29, 1999, from PF.Net Network Services,
               Inc. to PF.Net Supply Corp. (incorporated herein by reference to
               Exhibit 10.15 of Velocita Corp.'s Registration Statement on Form
               S-4 filed on June 19, 2000 (File No. 333-39646)).

     10.23     Amendment Number One to the Master Supply, Services, and System
               Agreement, dated March 29, 2000, between PF.Net Supply Corp. and
               Lucent Technologies, Inc. (incorporated herein by reference to
               Exhibit 10.16 of Velocita Corp.'s Registration Statement on Form
               S-4 filed on June 19, 2000 (File No. 333-39646)).

     10.24     Reciprocal IRU Lease and Exchange Option Agreement, dated as of
               February 25, 2000, between PF.Net Construction Corp. and Touch
               America, Inc. (incorporated herein by reference to Exhibit 10.17
               of Velocita Corp.'s Registration Statement on Form S-4 filed on
               June 19, 2000 (File No. 333-39646)).

     10.25     Master Carrier Agreement, dated as of December 21, 1999, between
               PF.Net Network Services Corp. and AT&T Corp. (incorporated herein
               by reference to Exhibit 10.18 of Velocita Corp.'s Amendment No. 1
               to Registration Statement on Form S-4 filed on July 17, 2000
               (File No. 333-39646))

     10.26     Employment Agreement, dated as of November 1, 1999, between
               PF.Net Corp. and John Warta (incorporated herein by reference to
               Exhibit 10.20 of Velocita Corp.'s Registration Statement on Form
               S-4 filed on June 19, 2000 (File No. 333-39646)).

     10.27     Employment Agreement, dated as of November 1, 1999, between
               PF.Net Corp. and Stephen Irwin (incorporated herein by reference
               to Exhibit 10.21 of Velocita Corp.'s Registration Statement on
               Form S-4 filed on June 19, 2000 (File No. 333-39646)).

     10.28     Employment Agreement, dated as of October 1, 1999, between
               Velocita Corp. and David L. Taylor (incorporated herein by
               reference to Exhibit 10.22 of Velocita Corp.'s Registration
               Statement on Form S-4 filed on June 19, 2000 (File No.
               333-39646)).

     10.29     Employment Agreement, dated as of December 15, 1999, between
               PF.Net Construction Corp. and Thomas McCaleb, guaranteed by
               PF.Net Corp. (incorporated by reference to Exhibit 10.23 of
               Velocita Corp.'s Registration Statement on Form S-4 filed on June
               19, 2000 (File No. 333-39646)).

                                       iv
<Page>

EXHIBIT NO.                          DESCRIPTION OF EXHIBIT

     10.30     Employment Agreement, dated as of April 12, 2000, between
               Velocita Corp. and Donald Bolar (incorporated herein by reference
               to Exhibit 10.24 of Velocita Corp.'s Registration Statement on
               Forms-4 filed on June 19, 2000 (File No. 333-39646)).

     10.31     Employment Agreement, dated as of March 31, 2000, between
               Velocita Corp. and Anthony Martin (incorporated herein by
               reference to Exhibit 10.25 of Velocita Corp.'s Registration
               Statement on Form S-4 filed on June 19, 2000 (File No.
               333-39646)).

     10.32     Income Tax Sharing Agreement, dated October 29, 1999, among
               PF.Net Communications, Inc. and PF.Net Corp. (incorporated herein
               by reference to Exhibit 10.26 of Velocita Corp.'s Registration
               Statement on Form S-4 filed on June 19, 2000 (File No.
               333-39646)).

     10.33     Letter Agreement, dated as of May 10, 2000, among PF Telecom
               Holdings LLC, Koch Telecom Ventures, Inc., Odyssey Investment
               Partners Fund, LP, John Warta, Stephen Irwin and UBS Capital II
               LLC (incorporated herein by reference to Exhibit 10.27 of
               Velocita Corp.'s Registration Statement on Form S-4 filed on June
               19, 2000 (File No. 333-39646)).

     10.34     1999 Equity Incentive Plan of Velocita Corp. as Amended and
               Restated as of July 12, 2000 (incorporated herein by reference to
               Exhibit 10.28 of Velocita Corp.'s Amendment No. 1 to Registration
               Statement on Form S-4 filed on July 17, 2000 (File No.
               333-39646)).

     10.35     Employment Agreement, dated October 1, 2001, between Velocita
               Corp. and Mr. Robert Annunziata (incorporated herein by reference
               to Exhibit 10.1 of Velocita Corp.'s Quarterly Report for the
               period ended September 30, 2001 filed on November 14, 2001 (File
               No. 333-39646)).

     10.36     Letter Agreement, dated October 1, 2001, between Odyssey
               Investment Partners Fund, LP, Odyssey Coinvestors, LLC, PF
               Telecom Holdings, LLC, Koch Telecom Ventures, Inc., Cisco
               Systems, Inc., First Union Capital Partners, LLC, UBS Capital II,
               LLC and Mr. Robert Annunziata (incorporated herein by reference
               to Exhibit 10.2 of Velocita Corp.'s Quarterly Report for the
               period ended September 30, 2001 filed on November 14, 2001 (File
               No. 333-39636)).

     10.37     Waiver Agreement, dated as of March 20, 2002, to the credit
               agreement dated as of October 29, 1999 (as amended on May 24,
               2001), among PF.Net Corp., the Lenders from time to time party
               thereto and First Union National Bank in its capacity as
               Administrative Agent for the Lenders. (See Exhibit 10.11 for the
               credit agreement.)

     10.38     Second Waiver Agreement, dated as of April 15, 2002, to the
               credit agreement dated as of October 29, 1999 (as amended on May
               24, 2001), among PF.Net Corp., the lenders and financial
               institutions from time to time party thereto, and Wachovia Bank,
               National Association (formerly known as First Union National
               Bank), in its capacity as the administrative agent for the
               Lenders. (See Exhibit 10.11 for the credit agreement and Exhibit
               10.37 for the first Waiver Agreement.)

     10.39     Separation and Release Agreement, dated as of March 8, 2002,
               between Velocita Corp. and Donald W. Bolar.

     12.1      Statement of Computation of Ratio of Earnings to Fixed Charges.

     21.1      Subsidiaries of Velocita Corp.

                                        v