<PAGE>

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

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ---------------------
                                   FORM 10-K

<Table>
<C>          <S>
 (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
</Table>

                       COMMISSION FILE NUMBER 33339884-01
                             ---------------------
                           MPOWER HOLDING CORPORATION
             (Exact name of registrant as specified in its charter)

<Table>
<S>                                            <C>
                   DELAWARE                                      52-2232143
       (State or other jurisdiction of                        (I.R.S. Employer
        incorporation or organization)                      Identification No.)

 175 SULLY'S TRAIL, SUITE 300, PITTSFORD, NY                       14534
   (Address of principal executive offices)                      (Zip Code)
</Table>

                                 (716) 218-6550
               REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<Table>
<Caption>
                                                           NAME OF EACH EXCHANGE
             TITLE OF EACH CLASS                            ON WHICH REGISTERED
             -------------------                           ---------------------
<S>                                            <C>
                     NONE                                           NONE
</Table>

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                    COMMON STOCK, $0.001 PAR VALUE PER SHARE
             7.25% SERIES D CONVERTIBLE REDEEMABLE PREFERRED STOCK
                                (TITLE OF CLASS)

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

     As of March 22, 2002, the aggregate market value of Common Stock held by
non-affiliates of the Registrant, based on the closing sale price of such stock
in the NASDAQ Stock Market on March 22, 2002, was approximately $2.4 million. As
of March 22, 2002, the Registrant had 59,466,023 shares of Common Stock
outstanding.

     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. [ ]

                      DOCUMENTS INCORPORATED BY REFERENCE
                                 Not Applicable

                      Exhibit Index is located on page 52.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

                                  THE COMPANY

     We are a competitive local exchange carrier ("CLEC") offering local
dial-tone, long distance, high-speed Internet access via dedicated Symmetrical
Digital Subscriber Line ("SDSL") technology, voice over SDSL ("VoSDSL"), Trunk
Level 1 ("T1"), Integrated T1 and Data-only T1 as well as other voice and data
features. Our services are offered primarily to small and medium size business
customers through our wholly owned subsidiary, Mpower Communications Corp.
("Mpower Communications").

RECAPITALIZATION PLAN

     We announced on February 25, 2002 that we had reached agreement with an
informal committee representing approximately 66% of the outstanding principal
amount of our 13% Senior Notes due 2010 on a comprehensive recapitalization plan
that would eliminate a significant portion of our long-term debt and all of our
preferred stock. Under the proposed recapitalization plan, we would use $19.0
million of cash on hand and issue common stock to eliminate $583.4 million in
debt and preferred stock, as well as the associated $49.5 million of annual
interest expense related to our 2010 Senior Notes and $15.8 million of annual
dividend payments on our preferred stock.

     On March 22, 2002, we announced that we successfully completed our
bondholder solicitation which resulted in more than 99% of the holders of our
2010 Senior Notes entering into voting agreements with us in support of the
proposed recapitalization plan announced on February 25, 2002. On March 27,
2002, each bondholder who participated in the solicitation received a consent
fee equal to their pro-rata share of the $19.0 million.

     In addition, more than two-thirds of the holders of our issued and
outstanding shares of preferred stock have also entered into voting agreements
with us in support of the proposed recapitalization plan.

     With the necessary backing of these key constituencies, we plan to move
forward with our recapitalization plan, which would retire $583.4 million in
debt and preferred stock in exchange for a consent fee of $19.0 million in cash
and new equity in the reorganized company. We and our subsidiaries, Mpower
Communications and Mpower Lease Corporation, intend to implement the proposed
recapitalization plan by commencing a voluntary, pre-negotiated Chapter 11
proceeding no later than April 30, 2002. This Chapter 11 proceeding may also
include other subsidiaries. We will continue ongoing efforts to secure the
additional funding needed to complete the recapitalization plan. We cannot
assure you that we will be able to secure the necessary additional financing.

     Subject to the court's approval, our proposed recapitalization plan would
provide that our 2010 Senior Noteholders receive 85% of the common stock of our
recapitalized company's issued and outstanding stock on the effective date of
the plan, and be entitled to nominate four new members to our reorganized
company's seven member Board of Directors. Our preferred and common stockholders
would receive 13.5% and 1.5% respectively of the common stock of our
recapitalized company on the effective date of the plan, and the preferred
stockholders would be entitled to nominate one new director to our reorganized
company's Board of Directors.

     As part of the Chapter 11 proceeding, we will be required to file a plan of
reorganization with the Bankruptcy Court. In order for the plan to be confirmed
by the Court, among other things, the requisite votes under the Bankruptcy Code
must be received and the plan must satisfy the requirements set forth in Section
1129 of the Bankruptcy Code. Some of these requirements are beyond our control
and we cannot assure you that we will be able to successfully implement our
proposed recapitalization plan.

     During the Chapter 11 proceeding, we plan to continue to provide customers
with their complete range of services. We do not currently expect any
significant impact on our employees, customers or suppliers. Due to our
remaining available cash resources, we do not believe that we will require
debtor-in-possession financing.

                                        2
<PAGE>

     The proposed recapitalization plan also provides for an employee stock
option plan for up to 10% of the common stock of our recapitalized company's
issued and outstanding common stock on the effective date of the plan (including
existing options), which would dilute the ownership percentages referenced
above.

     On March 22, 2002, we also announced that we will voluntarily move from
NASDAQ National Market (the "NASDAQ") to the NASD Over the Counter Bulletin
Board ("OTC Bulletin Board"), a regulated quotation service that displays
real-time quotes, last-sale prices and volume information in over-the-counter
equity securities. We expect that our common and preferred stock will continue
to trade under the symbols MPWR and MPWRP, respectively. After we file Chapter
11, we expect our stock will continue to trade on the OTC Bulletin Board, but
the ticker symbols may change during the time we are in bankruptcy. As a
consequence of our move from the NASDAQ to the OTC Bulletin Board, it is
expected that our stockholders will find it more difficult to buy or sell shares
of, or obtain accurate quotations as to the market value of our common stock. In
addition, our common stock may be substantially less attractive as collateral
for margin borrowings and loan purposes, for investment by financial
institutions under their internal policies or state legal investment laws, or as
consideration in future capital raising transactions.

MPOWER OVERVIEW

     We offer voice and high-speed data services using both SDSL and T1
technology in all of our markets. At March 22, 2002, we provide services in 27
metropolitan areas in 8 states. Our network consists of 583 incumbent carrier
central office collocation sites providing us access to approximately 11.7
million addressable business lines. All of our 583 central office collocation
sites are SDSL capable and 374 are T1 capable. We have established working
relationships with BellSouth, Verizon, Sprint, and Southwestern Bell Corporation
(including its operating subsidiaries PacBell and Ameritech collectively
referred to as "SBC"). We have over 400,000 lines in service.

     We were one of the first competitive communications carriers to implement a
facilities-based network strategy. As a result, we own the network equipment
that controls how voice and data transmissions originate and terminate, which we
refer to as switches, and we lease the telephone lines over which the voice and
data traffic are transmitted, which we refer to as transport. We install our
network equipment at the site of the incumbent carrier from whom we rent
standard telephone lines. These sites are referred to as collocation sites
within the telecommunications industry. As we have already invested and built
our network, we believe our strategy has allowed us to serve a broad geographic
area at a comparatively low cost while maintaining control of the access to our
customers.

     Our business is to deliver packaged voice and broadband data solutions to
small and mid-sized businesses. Specifically, our business plan is based on
serving the small and medium enterprise customers that find business value in
high-speed broadband Internet access integrated with local dial-tone service. We
have more than 75,000 business customers, providing them broadband Internet via
SDSL and T1, integrated services over VoDSL, T1 and local voice telephone
service.

     In the fourth quarter of 2001, we began to upgrade our network with T1
technology to increase our revenue potential, gross margin and addressable
customer base. By leveraging our existing equipment, interconnection agreements
with incumbent carriers and network capabilities, we are able to offer fully
integrated and channelized voice and data products over a T1 connection,
overcoming the DSL loop length limitations. This platform utilizes central
office equipment provisioned with T1 line cards that leverage low-cost T1
unbundled network elements leased from incumbent carriers. Our collocation DSL
equipment then aggregates Internet traffic to the central office Internet
gateway. This delivery mechanism provides guaranteed bandwidth and a data
service that is positioned to be a superior offering when compared to the
incumbent carriers' DSL service offering.

     By using a T1 service delivery platform, we expect to increase the amount
of revenue per customer. In order to serve the largest portion of our target
audience, our combined voice and data network allows us to deliver services in
several combinations over the most favorable technology: basic phone service on
the traditional phone network, SDSL service, integrated T1 voice and data
service, or data-only T1 connectivity.

                                        3
<PAGE>

MARKET OPPORTUNITY

     We believe we have a significant market opportunity as a result of the
following factors:

 IMPACT OF THE TELECOMMUNICATIONS ACT OF 1996

     The Telecommunications Act of 1996 allows competitive carriers to use the
existing infrastructure established by incumbent carriers, as opposed to
building a competing infrastructure at significant cost. The Telecommunications
Act requires all incumbent carriers to allow competitive carriers to collocate
their equipment in the incumbent carrier's central offices. This enables
competitive carriers to access customers through existing telephone line
connections. The Telecommunications Act created an incentive for incumbent
carriers' that were formerly part of the Bell system to cooperate with
competitive carriers' by precluding each of these incumbent carriers' from
providing long distance service in its region until regulators determine there
is a significant level of competition in the incumbent carriers' local market.
See "Government Regulations."

 NEEDS OF SMALL AND MEDIUM SIZE BUSINESSES FOR INTEGRATED COMMUNICATIONS
 SOLUTIONS

     Small and medium sized businesses have few cost-effective alternatives for
traditional telecommunication services as well as for Internet access. These
businesses must often contend with productivity limitations associated with slow
transmission speeds from dial-up services. In addition, to meet their
communications needs, small and medium size businesses are subject to the cost
and complexity of using multiple service providers: local dial-tone providers,
long distance carriers, Internet service providers and equipment integrators. We
believe these businesses can benefit significantly from an integrated
cost-effective communications solution delivered by a single provider.

 GROWING MARKET DEMAND FOR HIGH-SPEED DATA SERVICES

     The rise of the Internet as a commercial medium as well as a necessary
business tool, has driven the demand for high-speed data services. Businesses
are increasingly establishing Web sites and corporate intranets and extranets to
expand their customer reach and improve their communications efficiency. To
remain competitive, small and medium size businesses increasingly need
high-speed data and Internet connections to access critical business information
and communicate more effectively with employees, customers, vendors and business
partners.

 SHRINKING COMPETITIVE LANDSCAPE

     The shake out of the telecommunications industry over the past year has
significantly reduced the number of competitive local exchange carriers and
other DSL providers in the marketplace. Many companies in the competitive
communications industry have succumbed to heavy debt loads and burdensome
interest payments without the revenue streams to compensate, and therefore have
not been able to sustain their business model. As a result, fewer competitors
are vying for the same customers.

THE MPOWER SOLUTION

     We believe that we offer an attractive communications solution to small and
medium size business customers. In developing our solution, we have attempted to
include elements intended to create customer loyalty. Key aspects of our
solution include:

     Integrated Communications Solutions.  We offer cost-effective,
comprehensive and flexible communications solutions, which include local voice
service, local calling features, long distance, high-speed Internet access
services, and Web hosting all on a single bill. Our customers have the
convenience of a single point of contact for a complete package of services,
eliminating the need to manage multiple vendors.

     Dedicated Support.  Our account managers personally call on the small and
mid-size businesses. This is different from many communications companies'
approach to this market segment, which telemarket to these businesses.

                                        4
<PAGE>

     Service Reliability.  Our network is designed to mirror the reliability of
the incumbent carriers. In addition, we believe we are able to offer our
customers a high degree of service reliability through efficient, timely
provisioning of lines due to our mature relationships with the incumbent
carriers in the markets we currently serve. We believe our rollout of T1
services will enable us to further improve our service reliability by
simplifying the provisioning process.

BUSINESS STRATEGY

     Optimize Current Network Infrastructure.  The footprint of our
facilities-based network is completely built out and operational. All of our
traffic and revenue is on-switch and on-collocation, allowing us better control
over our costs. During 2001, we retrenched our expansion plans and focused on
our most profitable markets. Our strategy going forward is to maximize the
investment in this infrastructure and increase market share in the areas we
serve. Our network is designed with technology flexibility that allows us to
deliver our product set in the most efficient manner regardless of the physical
plant quality of the incumbent carriers' networks.

     Increase Market Share and Profitable Revenue.  We plan to continue to
aggressively sell into our existing network footprint and target those customers
with the products which we believe will generate the highest margin revenue
streams and maximize network efficiencies. Focusing on providing integrated
solutions, feature rich lines, and a minimum size for voice only orders, should
further increase the quality of our revenue streams. We expect that the majority
of network expansion will be centered around augmentation and grooming of our
existing network to further enhance our product portfolio and service delivery
capabilities.

     Focused Sales and Marketing Effort.  We target small and medium size
business customers through our direct sales force, agent/vendor programs,
telemarketing for lead generation and a limited amount of targeted advertising.
Our account managers consult with businesses and seek to tailor a communications
solution to their needs, focusing on enhancing the productivity with a package
that provides both value and convenience. Our technical consultants and tiered
customer support provide superior technical assistance. As a result of these
factors, a growing percentage of our new customers come to us through referrals
from existing customers. Additionally, we intend to continue our relationships
with independent agents or vendors as a complement to our direct sales channels.

     Product Development.  Our product development efforts are focused on adding
services that will appeal to a larger size and billing base of business
customers. Services such as digital and analog trunking would allow us to
provide a solution for customers with 12 or more lines or 50 or more employees
and currently utilizing a PBX system. Building on this service, we expect to
also introduce Direct Inward Dialing capable trunks which provide flexibility
for the customer's internal extensions. These services will allow us to attract
new customers and grow along with our existing customers. In addition, an
increasing amount of our services will be provided under contract. We believe
that by providing term contracts on a majority of our products and services we
can provide price protection and service guarantees for our customers and
revenue protection for us.

     Targeting Small and Medium Size Businesses.  Based on telephone lines in
service, we believe the small and medium size business customer base is a large
and rapidly growing segment of the communications market in the United States.
We target suburban areas of large metropolitan markets because these areas have
high concentrations of small and medium size businesses. In addition to being
densely clustered in the urban areas we serve, business customers generate
approximately 60% of all local telephone service revenues. By providing a
package of voice and data services and focusing on small and medium size
business sales, we believe we will gain a competitive advantage over the
incumbent carrier, our primary competitor for these customers.

     Products and Services.  We focus on offering bundled communications
packages to our small and medium size business customers. These services include
local voice lines, high speed Internet access, calling cards, web hosting, long
distance, and customer calling features such as voice mail, call waiting, caller
ID and call forwarding. To capitalize on the higher end customer base, we
introduced a variety of T1 based solutions in the fall of 2001, including an
integrated voice and data package over our T1 platform, and a data only solution
over our T1 platform.

                                        5
<PAGE>

     Control Customer Relationship.  By connecting the standard telephone line
originating at our customer's site to our central office collocation, we
effectively place the customer on our network. This connection serves as the
platform for delivering our current and future communications services to our
customers. Any future changes our customers want to make to their services,
including purchasing more services from us, are under our direct control. The
one exception is for repairs, which are infrequent but may require the
participation of the incumbent carrier's network maintenance staff.

     Capital Efficient Network.  We were one of the first competitive local
exchange carriers to implement a facilities-based network strategy of purchasing
and installing switches, collocating in the central offices of the incumbent
carrier and leasing local telephone lines, referred to as a "smart build"
strategy. Now that this network footprint is complete and operational, we
believe this deployment strategy has the potential to provide an attractive
return on our invested capital. We have installed SDSL technology across our
existing network, and have T1 technology in the majority of our network
collocations.

     Operations Support System.  We have a comprehensive operations support
system to manage our business. Our system provides integrated features
addressing customer care, billing and collections, general ledger, payroll,
fixed asset tracking, and personnel management. During 2001, we augmented our
current back-office systems with some functional components such as network
monitoring and upgraded other components such as general ledger, purchasing and
accounts payable. We have found our systems have the ability to adapt to
multiple incumbent carrier provisioning systems, which can improve our operating
efficiencies and effectiveness.

     Timely and Accurate Provisioning for Customers.  We believe one of the keys
to our success is effectively managing the provisioning process for new
customers. We have implemented a standardized service delivery process and
consolidated our service delivery centers, which has significantly reduced our
provisioning intervals and improved our provisioning quality metrics. In
addition, through electronic order interfaces with all of the incumbent
carriers, we have been able to substantially reduce the time, number of steps
and duplication of work typically involved in the provisioning process.

     Quality Customer Service.  We believe providing quality customer service is
essential to offering a superior product to our customers and creating customer
loyalty. We operate one main call center that handles general billing, customer
care and related issues for all of our customers. Our call center is focused on
first call resolution, which involves an enhanced automated call distribution
system that directs callers into the customer service center based on the type
of question they have, and specially trained agents with the tools to more
quickly resolve customer issues. In addition, service delivery representatives
are in contact with our customers during the process of service conversion. Our
service representatives use our operations support system to gain immediate
access to our customers' data, enabling quick responses to customer requests and
needs at any time. This system allows us to present our customers with one fully
integrated monthly billing statement for all communication services.

MARKETS

     As of March 22, 2002, we operate in 27 markets in 8 states and have 583
incumbent carrier central office collocation sites providing access to an
estimated 11.7 million addressable business lines. Our collocation facilities
provide us with a service area that covers attractive business markets in 18 of
the top 50 metropolitan statistical areas. In addition, we have built our
network with expansive collocation footprints that average 20,000 addressable
lines per collocation.

                                        6
<PAGE>

     The table below shows the distribution of our central office collocation
sites within these states.

<Table>
<Caption>
                                                                                ADDRESSABLE
                                                    NUMBER OF    NUMBER OF     LINES WITHIN
STATE                                                MARKETS    COLLOCATIONS   TARGET MARKET
-----                                               ---------   ------------   -------------
<S>                                                 <C>         <C>            <C>
California........................................     11           218          4,360,000
Florida...........................................      5            81          1,620,000
Georgia...........................................      1            36            720,000
Illinois..........................................      1            69          1,380,000
Michigan..........................................      1            38            760,000
Nevada............................................      1            18            360,000
Ohio..............................................      2            45            900,000
Texas.............................................      5            78          1,560,000
                                                       --           ---         ----------
Totals............................................     27           583         11,660,000
                                                       ==           ===         ==========
</Table>

     During 2001 and the beginning of 2002, we scaled back from 40 markets to
what we believe to be our most promising 27 markets and from 761 to 583
collocations in incumbent carrier central offices. Our focus at the present time
will be concentrated on building market share within our existing service
territory, as opposed to building into new or additional markets. We believe
there is significant scaling potential within our existing market footprint,
given our past success in market penetration in our base of original markets. In
addition, our robust network backbone is scalable and can provide reliability
and service quality across our collocation footprint, while affording us the
benefit of spreading the fixed costs across our markets.

SALES AND MARKETING

     Our highly focused marketing efforts seek to generate well-managed,
profitable growth through increased market share with minimal customer turnover.
Our current sales programs include direct sales efforts, telemarketing and
programs with agents and vendors directed at the small and medium size business
customer. We have established sales training modules that allow a simplified
approach to new product deployment and promotional offerings. As of March 22,
2002, we employed 343 quota-carrying sales personnel and an additional 249 sales
support personnel.

     Our sales representatives are supported by customer account managers and
service delivery personnel. These support personnel function as the liaison
between the small business customer and our operational personnel to effect a
coordinated transfer of service from the incumbent carrier's network to our
network. Field technicians are responsible for the installation of customer
premise equipment, if required. Our national sales organization is divided by
geographic territories into four regions. Sales personnel report to city
managers and ultimately the vice presidents of their respective regions.

     To complement our sales force, we use established independent
telecommunication equipment and service providers to market our services in
conjunction with their own products to business customers.

NETWORK ARCHITECTURE AND TECHNOLOGY

     We have implemented a strategy enabling us to own the hardware that routes
voice calls and data traffic, which we refer to as "switches", while leasing the
telephone lines and cable over which the voice calls and data traffic are
actually transmitted, which we refer to as "transport". We use three basic types
of transport to transmit voice calls and data traffic. First, we lease the
standard telephone line from the incumbent carrier. This allows us to move voice
calls and data traffic from a customer's location to the nearest central office
owned by the incumbent carrier. Inside these central offices, we have equipment
that allows us to deliver the services we sell to our customers. Second, we
lease cable from other communications companies, which connects the equipment we
installed in the central office of the incumbent carrier to our switches. Third,
we lease additional cable from other communications companies, which connect our
switches to each other and allow us to complete our customers' long distance
calls to national and international destinations. We believe

                                        7
<PAGE>

this network strategy provides us an efficient capital deployment plan, which
allows us to achieve an attractive return on our invested capital.

     We believe that leasing the standard telephone line from the incumbent
carriers' central office to the end-user provides a cost-efficient solution for
gaining control of access to our customers. Leasing costs are not incurred until
we have acquired a customer and revenue can be generated. It is our experience
that the cable required to connect our collocation equipment located at an
incumbent carriers' central office to our switching hardware and the cable
required to connect our customers' voice calls and data traffic to the Internet
and other telephones is available at reasonable prices in all of our current
markets. Because the cable required to transport voice calls and data traffic
has become a readily available service from numerous other communications
companies, we focused our efforts on owning and installing the hardware that
determines where to route voice calls and data traffic and on selling and
delivering our services to our customers.

     We have 15 operational voice switches and 15 operational data pops (point
of presence). All of our current voice switches are DMS-500 switches
manufactured by Nortel Networks. These switches offer a flexible and cost
efficient way for us to provide local and long distance services to our
customers. Our data pops allow us to efficiently deliver data traffic across our
network.

     Once we install equipment in the collocation sites we rent from the
incumbent carrier, we initiate service to a customer by arranging for the
incumbent carrier to physically disconnect a standard telephone line from their
equipment and reconnect the same standard telephone line to our equipment. When
the standard telephone line has been connected to our equipment, we have direct
access to the customer and can deliver our current voice and data services. Any
future changes the customer wishes to make, such as purchasing more services
from us, are under our direct control. The few exceptions are infrequent
repairs, which may require the participation of the incumbent carrier's
maintenance staff.

     We have installed our equipment in 583 collocation sites as of March 22,
2002. We believe this network allows us to sell our services to an estimated
universe of 11.7 million small and medium size business customers. Our 15 host
switching sites are connected to each other by cable, which allows us to
transmit data traffic using asynchronous transfer mode technology. Asynchronous
transfer mode technology allows both voice calls and data traffic to be
transported in digital form over a single cable connection at high speeds and
reasonable costs. By deploying SDSL and T1 technology into our network, we are
now able to transport both voice calls and data traffic in digital form on a
single telephone line from a customer's location to one of our switches.

     Using SDSL technology, we can increase the amount of information we carry
on a standard telephone line, which we refer to as bandwidth, to as much as 1.5
million bits per second or "Mbps". This bandwidth is the equivalent of 24
regular voice telephone lines. Our SDSL equipment is programmed to allocate the
available bandwidth. For example, voice calls are carried at 64 thousand bits
per second or "Kbps"; if a customer has eight phone lines and all are in use at
the same time, then 512 Kbps (eight phone lines multiplied by 64 Kbps each) of
the total 1.5 Mbps are allocated for the voice calls. The remaining bandwidth,
988 Kbps, is available to carry the data traffic.

     We believe the SDSL technology significantly reduces our customers'
potential for service outages when the incumbent carrier moves the standard
telephone line from their equipment to ours. Additionally, we believe this
technology reduces our costs since we lease a reduced number of standard
telephone lines per customer from the incumbent carrier. For example, if a
customer today has eight voice lines, we must order from and provision through
the incumbent carrier eight individual standard telephone lines. If the same
customer were to buy our service offering and we deliver the service using SDSL
technology, we only order and provision one standard telephone line from the
incumbent carrier.

T1 TECHNOLOGY

     With 4-wire T1 technology we reduce the impact of distance limitations and
service quality common to SDSL. Also, a T1 will consistently offer 1.5 million
Mbps data speed. With this introduction, we now have an alternative to SDSL when
network restrictions will not facilitate SDSL usage. We have two product
offerings

                                        8
<PAGE>

at this time using T1 technology, integrated service and a data-only service.
Both use the same underlying transport and equipment technology.

     "Integrated" service refers to the combination of both traditional voice
services such as local and long distance service, and Internet connectivity. It
refers to a product that offers both elements, voice and data, across a single
cable. Hardware specifically designed to manage these various types of traffic
is needed at both the customer premise and within our network. This product will
allocate unused bandwidth from on-hook telephone lines to the usable data
bandwidth. For example: A customer purchases a package of 16 voice lines and 1
Mbps of data bandwidth. When the customer is not using any of his voice lines,
he will get the full 1.5 Mbps for data. However, if he is using all his voice
lines only 1 Mbps will be available for data.

     The "data-only" product provides a more robust and higher bandwidth data
offering that routes traffic directly to the Internet backbone. Here a customer
will not receive any voice lines, but likewise there will be no voice lines to
limit bandwidth. Even though no voice lines come with the package, the same
customer premise device is used in order to maintain a consistency of equipment
in our network.

CUSTOMER PREMISE EQUIPMENT (CPE)

     We use two basic types of equipment at the customer premise. One is called
a "modem" and the other an Integrated Access Device ("IAD"). A modem is used for
an SDSL data only connection. Here, no voice ports are needed and therefore the
modem is adequate to support the SDSL connection. The modem communicates with
our collocation via a DSL link and the customer's network via an Ethernet link.
The IAD is used for SDSL integrated access, T1 integrated access and T1 Data
Only. Within our network on the Wide Area Network (WAN), the IAD has a built-in
modem which communicates with the SDSL and/or T1 link. From the customers'
perspective, the IAD appears as regular phone service for the voice channels,
and an Ethernet port for data traffic. An IAD is also used for the Data-Only T1
product to reduce the number of devices used at the customer premise.

  INTERCONNECTION AGREEMENTS AND COMPETITIVE CARRIER CERTIFICATIONS

     We have interconnection agreements for all of the markets in which we
currently operate. These agreements are with Sprint in Nevada, BellSouth for
Georgia and Florida, Verizon for parts of California and Florida, and SBC
(through one of its operating subsidiaries) in California, Texas, Illinois,
Michigan and Ohio. We are currently in the process of negotiating more
beneficial agreements with Sprint, SBC and BellSouth and we expect to have these
new agreements in place during 2002. We are certified as a competitive carrier
in all of our existing markets.

SERVICE DEPLOYMENT AND OPERATIONS

     Customer Service.  We strive to provide high quality customer service
through:

     - Personnel.  Our customer service representatives and sales personnel are
       well trained and attentive to our customers' needs.

     - Call Center.  Our centralized customer service center provides
       comprehensive customer support. Calls from our customers are answered and
       responded to with minimal wait time.

     - Coordination of Service Provisioning.  We coordinate service installation
       with our customer and the incumbent carrier to ensure a smooth transition
       of services from the incumbent carrier to us.

     - Close Customer Contact.  We proactively monitor our network and keep our
       customers informed of installation or repair problems and allocate the
       necessary resources to resolve any problems.

     - Billing.  We provide our customers with accurate, timely and easily
       understood bills.

     - Process Automation.  We have a comprehensive operations support system to
       manage our business. Our system provides integrated features addressing
       customer care, billing and collections, general ledger, payroll, fixed
       asset tracking and personnel management. Our customer service
       representatives

                                        9
<PAGE>

       are able to handle all customer service inquiries, including billing
       questions and repair calls, with the information available from our
       integrated system.

GOVERNMENT REGULATIONS

 OVERVIEW

     Our services are regulated at the federal, state and local levels. The FCC
exercises jurisdiction over all facilities of, and services offered by,
communications common carriers like us, when those facilities are used in
connection with interstate or international communications. State regulatory
commissions have some jurisdiction over most of the same facilities and services
when they are used in connection with communications within the state. In recent
years, there has been a dramatic change in the regulation of telephone services
at both federal and state levels as both legislative and regulatory bodies seek
to enhance competition in both the local exchange and interexchange service
markets. These efforts are ongoing and many of the legislative measures and
regulations adopted are subject to judicial review. We cannot predict the impact
on us of the results of these ongoing legislative and regulatory efforts or the
outcome of any judicial review.

 FEDERAL REGULATION

     The FCC regulates interstate and international communications services,
including access to local telephone facilities to place and receive interstate
and international calls. We provide these services as a common carrier. The FCC
imposes more regulation on common carriers that have some degree of market
power, such as incumbent local exchange carriers. The FCC imposes less
regulation on common carriers without market power, including competitive
carriers like us. The FCC grants automatic authority to carriers to provide
interstate long distance service, but requires common carriers to receive an
authorization to construct and operate communications facilities, and to provide
or resell communications services, between the United States and international
points.

     The FCC has required competitive carriers like us to cancel their tariffs
for domestic interstate and international long distance services, which were
schedules listing the rates, terms and conditions of all these services offered.
Even without tariff filing, however, carriers offering interstate and
international services must charge just and reasonable rates and must not
discriminate among customers for like services. The FCC may adjudicate
complaints against carriers alleging violations of these requirements.

     Our charges for interstate access services, which includes the use of our
local facilities by other carriers to originate and terminate interstate calls,
remain governed by tariffs. In April 2001, the FCC adopted new rules that limit
our rates for these services. Under these rules, which took effect on June 20,
2001, competitive carriers are required to reduce their switched access charges
to rates no higher than 2.5 cents per minute. After one year, the rate ceiling
will be reduced to 1.8 cents and after two years to 1.2 cents per minute. After
three years, all competitive carriers will be required to charge rates no higher
than the incumbent telephone company. These new FCC rules are currently subject
to petitions for re-considerations and/or judicial review. We cannot predict the
ultimate outcome of these proceedings.

     The FCC imposes numerous other regulations on carriers subject to its
jurisdiction, some of the most important of which are discussed below. The FCC
also hears complaints against carriers filed by customers or other carriers and
levies various charges and fees.

     Except for certain restrictions placed on the Bell operating companies, the
Telecommunications Act permits virtually any entity, including cable television
companies and electric and gas utilities, to enter any communications market.
The Telecommunications Act takes precedence over inconsistent state regulation.
However, entities that enter communications markets must follow state
regulations relating to safety, quality, consumer protection and other matters.
Implementation of the Telecommunications Act continues to be affected by
numerous federal and state policy rulemaking proceedings and review by courts.
We are uncertain as to how our business may be affected by these proceedings.

                                        10
<PAGE>

     The Telecommunications Act is intended to promote competition. The
Telecommunications Act opens the local services market to competition by
requiring incumbent carriers to permit interconnection to their networks and by
establishing incumbent carrier and competitive carrier obligations with respect
to:

          Reciprocal Compensation.  All incumbent carriers and competitive
     carriers are currently required to complete local calls originated by each
     other under reciprocal arrangements at prices based on tariffs or
     negotiated prices.

          Resale.  All incumbent carriers and competitive carriers are required
     to permit resale of their communications services without unreasonable
     restrictions or conditions. In addition, incumbent carriers are required to
     offer wholesale versions of all retail services to other common carriers
     for resale at discounted rates, based on the costs avoided by the incumbent
     carrier by offering these services on a wholesale basis.

          Interconnection.  All incumbent carriers and competitive carriers are
     required to permit their competitors to interconnect with their facilities.
     All incumbent carriers are required to permit interconnection at any
     feasible point within their networks, on nondiscriminatory terms, at prices
     based on cost, which may include a reasonable profit. At the option of the
     carrier requesting interconnection, collocation of the requesting carrier's
     equipment in the incumbent carriers' premises must be offered.

          Unbundled Access.  All incumbent carriers are required to provide
     access to specified individual components of their networks, which are
     sometimes referred to as unbundled network elements or UNE's, on
     nondiscriminatory terms and at prices based on cost, which may include a
     reasonable profit.

          Number Portability.  All incumbent carriers and competitive carriers
     are required to permit users of communications services to retain their
     existing telephone numbers without impairing quality, reliability or
     convenience when switching from one common carrier to another.

          Dialing Parity.  All incumbent carriers and competitive carriers are
     required to provide "1+" equal access dialing to competing providers of
     long distance service, and to provide nondiscriminatory access to telephone
     numbers, operator services, directory assistance and directory listing,
     with no unreasonable dialing delays.

          Access to Rights-of-Way.  All incumbent carriers and competitive
     carriers are required to permit competing carriers access to their poles,
     ducts, conduits and rights-of-way at regulated prices.

     Incumbent carriers 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 predetermined amount of time, either carrier may
request arbitration of the disputed issues by the state regulatory commission.

     Our business relies to a considerable degree on the use of incumbent
carrier network elements, which we access through collocation arrangements in
incumbent carrier offices. The terms and conditions, including prices, of these
network elements and collocation elements are largely dictated by regulatory
decisions, and changes in the availability or pricing of these facilities can
have significant effects on our business plan and operating results.

     The requirement that incumbent carriers unbundle their network elements has
been implemented through rules adopted by the FCC. In January 1999, the United
States Supreme Court confirmed the FCC's broad authority to issue these rules,
but vacated a particular rule that defined the network elements the incumbent
carriers must offer. In a November 1999 order, the FCC reaffirmed that incumbent
carriers must provide unbundled access to a minimum of six network elements
including local loop and transport facilities (the elements in primary use by
us). In December 2001, the FCC initiated a review of the network elements
unbundling rules, and requested comments on whether to expand, reduce or change
the list of required elements. We anticipate that the proceeding will be
concluded during 2002, but we cannot predict what, if any, change the FCC will
make in the unbundling requirements. Also, in February 2002, the FCC requested
comments on a number of issues relating to regulation of broadband Internet
access services offered over telephone company facilities, including whether the
incumbent carriers should continue to be required to offer the elements of these
services on an unbundled basis. Any change in the existing rules that would
reduce the

                                        11
<PAGE>

obligation of incumbent carriers to offer network elements to us on an unbundled
basis could adversely affect our business plan.

     The prices that incumbent carriers may charge for access to these network
elements will shortly be resolved, as the Supreme Court is considering whether
incumbent carriers should be required to price these network elements based on
the efficient replacement cost of existing technology, as the FCC methodology
now requires, or whether the price of these elements should be based on their
historical costs. The Court also will consider whether the FCC may require
incumbent carriers to combine certain previously uncombined elements at the
request of a competitive carrier. We cannot predict the outcome of this case. If
the Court requires changes in the existing pricing methodology, these changes
likely would be implemented over a period of a year or longer.

     On November 8, 2001, the FCC initiated two rulemaking proceedings to
establish a core set of national performance measurements and standards for
evaluating an incumbent carrier's performance in provisioning wholesale
facilities and services to competitors. It seeks comment on a set of specific
performance measurements and on related issues of implementation, reporting
requirements, and enforcement mechanisms. We cannot predict the ultimate outcome
of these proceedings.

     On August 8, 2001, in response to previous court decisions requiring
further consideration of some portions of its existing rules, the FCC adopted
new rules strengthening and clarifying the requirements for collocation of
competitive carriers' equipment in incumbent local carriers' central offices.
The new rules allow competitive carriers to collocate multifunction equipment,
including equipment with switching and routing capabilities, and require
incumbent carriers to provision cross-connects between carriers collocating in
their central offices. The FCC also established several principles to govern
incumbent carriers' space allocation practices, and required that space
allocation practices be reasonable and nondiscriminatory.

     The Telecommunications Act also contains special provisions that replace
prior antitrust restrictions that prohibited the regional Bell operating
companies from providing long distance services and engaging in communications
equipment manufacturing. Before the passage of the Telecommunications Act, the
regional Bell operating companies were restricted to providing services within a
distinct geographical area known as a local access and transport area (LATA).
The Telecommunications Act permits the regional Bell operating companies to
provide interLATA long distance service immediately in areas outside of their
market regions and within their market regions once they have satisfied several
procedural and substantive requirements, including:

     - a showing that the regional Bell operating company is subject to
       meaningful local competition in the area in which it seeks to offer long
       distance service; and

     - a determination by the FCC that the regional Bell operating company's
       entry into long distance markets is in the public interest.

     Only two regional Bell operating companies have received approval from the
FCC to provide interLATA long distance services to date. The FCC has authorized
SBC to provide long distance services in Texas (granted June 6, 2000); Kansas
(granted January 22, 2001); Oklahoma (granted January 22, 2001); Arkansas
(granted November 16, 2001); and Missouri (granted November 16, 2001). It has
also approved Verizon's application in New York (granted December 22, 1999);
Massachusetts (granted April 16, 2001); Connecticut (granted July 20, 2001);
Pennsylvania (granted September 19, 2001); and Rhode Island (granted February
24, 2002). Several additional applications are pending before the FCC, and more
are expected to be filed in the near future.

     In addition, legislation has been proposed in Congress that would eliminate
FCC review of Bell company applications for entry into the in-region interLATA
long distance market and compliance with the Telecommunications Act's
competitive checklist. If such legislation is enacted, it would significantly
erode the incentives of incumbent carriers to cooperate with competitors, and it
would have a very adverse impact on our ability to compete in the local market.
That bill, known as the Broadband Regulatory Relief Plan, would permit the Bell
operating companies to build data networks across LATA boundaries without having
to satisfy

                                        12
<PAGE>

the local market-opening requirements of the Telecommunications Act. The bill
was passed by the House in late February 2002, but no action has yet been
scheduled in the Senate.

     On December 12, 2001, the FCC initiated a review of the current regulatory
requirements for incumbent carriers' broadband telecommunications services.
Incumbent carriers are generally treated as dominant carriers, and hence are
subject to certain regulatory requirements, such as tariff filings and pricing
requirements. In this proceeding, the FCC seeks to determine what regulatory
safeguards and carrier obligations, if any, should apply when a carrier that is
dominant in the provision of traditional local exchange and exchange access
services provides broadband service. A decision by the FCC to exempt the
incumbent carriers' broadband services from traditional regulation could have a
significant adverse competitive impact. We cannot reasonably predict the
ultimate outcome of this proceeding.

     In several orders adopted in recent years, the FCC has made major changes
in the structure of the access charges incumbent carriers impose for the use of
their facilities to originate or complete interstate and international calls.
Under the FCC's plan, per-minute access charges have been significantly reduced,
and replaced in part with higher monthly fees to end-users and in part with a
new interstate universal service support system. Under this plan, the largest
incumbent carriers are required to reduce their average access charge to $0.0055
per minute over a period of time, and some of these carriers have already
reduced the target level.

     In August 1999, the FCC adopted an order providing additional pricing
flexibility to incumbent carriers subject to price cap regulation in their
provision of interstate access services, particularly special access and
dedicated transport. The FCC eliminated rate scrutiny for "new services" and
permitted incumbent carriers to establish additional geographic zones within a
market that would have separate rates. Additional and more substantial pricing
flexibility will be given to incumbent carriers as specified levels of
competition in a market are reached through the collocation of competitive
carriers and their use of competitive transport. This flexibility includes,
among other items, customer specific pricing, volume and term discounts for some
services and streamlined tariffing. As part of the same August 1999 order, the
FCC initiated another proceeding to consider additional pricing flexibility
proposals for incumbent carriers. We cannot predict the outcome of this
proceeding, which may have an unfavorable effect on our business.

     Under the Telecommunications Act, competitive local exchange carriers are
entitled to receive reciprocal compensation from other telephone companies for
delivering traffic to their customers. A dispute has existed for several years
on whether this compensation applies to calls bound for Internet service
provider clients of the competitive local exchange carriers. Most states have
required telephone companies to pay this compensation to competitive local
exchange carriers. In April 2001, however, the FCC adopted new rules limiting
the right of competitive local exchange carriers to collect compensation on
calls that terminate to Internet service providers, and preempting inconsistent
state rules. Under the new rules, which took effect on June 14, 2001, the amount
of compensation payable on calls to Internet service providers was limited to
$0.0015 per minute for the first six months after the rules took effect, $0.0010
per minute for the next eighteen months, and $0.0007 per minute thereafter. In
addition, the overall amount of compensation payable in each state is limited by
a provider based upon the number of minutes of Internet traffic terminated in
the first quarter of 2001. The FCC rules permit carriers to continue collecting
the existing higher rates on calls that terminate to customers who are not
Internet service providers. Any traffic exchanged between carriers that exceeds
a three to one ratio of terminating to originating minutes is presumed to be
Internet calls, although either carrier may attempt to rebut this presumption
and claim a different level of Internet traffic.

     Internet service providers may be among our potential customers and these
new reciprocal compensation rules could limit our ability to service this group
of customers profitably. While some competitive carriers target Internet service
providers in order to generate additional revenues from reciprocal compensation
charges, at the present time we do not focus our marketing efforts on Internet
service providers. Therefore, these rules will have a minimal impact on us.

     On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy program. This order established new
subsidies for telecommunications and information services provided to qualifying
schools, libraries and rural health providers. The FCC also expanded federal
subsidies

                                        13
<PAGE>

for local dial-tone services provided to low-income consumers. Providers of
interstate telecommunications service, including us, must contribute to these
subsidies. In later years, the FCC created additional subsidies that primarily
benefit incumbent telephone companies. On a quarterly basis, the FCC announces
the contribution factor proposed for the next quarter. For the first quarter of
the year 2002, the contribution factor is $0.068086 of a provider's interstate
and international revenue for the third quarter of 2001. We intend to recover
our share of these costs through charges assessed directly to our customers and
participation in federally subsidized programs. The FCC is considering proposals
to change the way contributions are assessed, but we cannot predict when or
whether the FCC will act on these proposals.

     In 1994, Congress passed the Communications Assistance for Law Enforcement
Act ("CALEA") to ensure that law enforcement agencies would be able to conduct
properly authorized electronic surveillance of digital and wireless
telecommunications services CALEA requires telecommunications carriers to modify
their equipment, facilities and services to ensure that they are able to comply
with authorized electronic surveillance requests. For circuit-switched
facilities, carriers such as us were required to comply with CALEA by November
19, 2001. As a result of litigation, the FCC extended the deadline for carriers
to implement the Department of Justice/Federal Bureau of Investigation "punch
list" capabilities until June 30, 2002. The FCC is expected to begin a
proceeding in the next few months to determine which of the six "punch-list"
capabilities carriers must implement.

  STATE REGULATION

     The implementation of the Telecommunications Act is subject to numerous
state rulemaking proceedings. As a result, it is currently difficult to predict
how quickly full competition for local services, including local dial-tone, will
be introduced.

     To provide services within a state, we generally must obtain a certificate
of public convenience and necessity from the state regulatory agency and comply
with state requirements for telecommunications utilities, including state
tariffing requirements. To date, we have satisfied state requirements to provide
local and intrastate long distance services in the 8 states in which we
currently operate.

     State regulatory agencies have jurisdiction over our intrastate services,
including our rates. State agencies require us to file periodic reports, pay
various fees and assessments and comply with rules governing quality of service,
consumer protection and similar issues. These agencies may also have to approve
the transfer of assets or customers located in the state, a change of control of
our company or our issuance of securities or assumption of debt. The specific
requirements vary from state to state. State regulatory agencies also must
approve our interconnection agreements with incumbent carriers. Price cap or
rate of return regulation for competitive carriers does not apply in any of our
current markets. However, we cannot assure you that the imposition of new
regulatory burdens in a particular state will not affect the profitability of
our services in that state.

  LOCAL REGULATION

     Our networks must comply with numerous local regulations such as building
codes, municipal franchise requirements and licensing. These regulations vary on
a city by city and county by county basis. In some of the areas where we provide
service, we may have to comply with municipal franchise requirements and may be
required to pay license or franchise fees based on a percentage of gross revenue
or other factors. Municipalities that do not currently impose fees may seek to
impose fees in the future. We cannot assure you that fees will remain at their
current levels following the expiration of existing franchises.

COMPETITION

     The communications industry is highly competitive. We believe the principal
competitive factors affecting our business will be:

     - pricing levels and policies,

     - transmission speed,

                                        14
<PAGE>

     - customer service,

     - breadth of service availability,

     - network security,

     - ease of access and use,

     - bundled service offerings,

     - brand recognition,

     - operating experience,

     - capital availability,

     - exclusive contracts,

     - accurate billing, and

     - variety of services.

     To maintain our competitive posture, we believe we must be in a position to
reduce our prices to meet any reductions in rates by our competitors. Any
reductions could adversely affect us. Many of our current and potential
competitors have financial, personnel and other resources, including brand name
recognition, substantially greater than ours, as well as other competitive
advantages over us. In addition, competitive alternatives may result in
substantial customer turnover in the future. Many providers of communications
and networking services experience high rates of customer turnover.

     A continuing trend toward consolidation of communications companies and the
formation of strategic alliances within the communications industry, as well as
the development of new technologies, could give rise to significant new
competitors. For example, WorldCom merged with MCI Communications and AT&T has
acquired Teleport Communications Group Inc., a competitive carrier, and
Tele-Communications, Inc., a cable, communications and high-speed Internet
services provider, and has merged with another cable television company,
MediaOne. Ameritech Corporation has merged with SBC, Bell Atlantic has merged
with GTE Corporation (to form Verizon Communications) and Qwest has merged with
US West. Following this wave of consolidation, there are now only four remaining
regional Bell operating companies. Time Warner and AOL also have merged. These
types of consolidations and other strategic alliances could put us at a
competitive disadvantage.

  LOCAL DIAL-TONE SERVICES

  Incumbent Carriers

     In each of the markets we target, we will compete principally with the
incumbent carrier serving that area. We have not achieved and do not expect to
achieve a significant market share for any of our services. The incumbent
carriers have long-standing relationships with their customers, have financial,
technical and marketing resources substantially greater than ours and have the
potential to subsidize competitive services with revenues from a variety of
businesses. While recent regulatory initiatives which allow competitive carriers
to interconnect with incumbent carrier facilities provide increased business
opportunities for us, interconnection opportunities have been and likely will
continue to be accompanied by increased pricing flexibility for, and relaxation
of regulatory oversight of, the incumbent carriers.

     Incumbent carriers have long-standing relationships with regulatory
authorities at the federal and state levels. The FCC recently proposed a rule
that would provide for increased pricing flexibility for incumbent carriers and
deregulation for competitive access services, either automatically or after
competitive levels are reached. If the incumbent carriers are allowed by
regulators to offer discounts to large customers through contract tariffs,
engage in aggressive volume and term discount pricing practices for their
customers, and/or seek to charge competitors excessive fees for interconnection
to their networks, our operating margins could be

                                        15
<PAGE>

materially adversely affected. Future regulatory decisions which give the
incumbent carriers increased pricing flexibility or other regulatory relief
could also have a material adverse effect on us.

  Competitive Carriers/Long Distance Carriers/Other Market Entrants

     We face, and expect to continue to face, competition from long distance
carriers, including AT&T, MCI WorldCom, and Sprint, seeking to enter, reenter or
expand entry into the local exchange market. We also compete with other
competitive carriers, resellers of local dial-tone services, cable television
companies, electric utilities, microwave carriers and wireless telephone system
operators.

     The Telecommunications Act includes provisions which impose regulatory
requirements on all incumbent carriers and competitive carriers but grants the
FCC expanded authority to reduce the level of regulation applicable to these
common carriers. The manner in which these provisions of the Telecommunications
Act are implemented and enforced could have a material adverse effect on our
ability to successfully compete against incumbent carriers and other
communications service providers.

     The Telecommunications Act radically altered the market opportunity for
competitive carriers. Many existing competitive carriers which entered the
market before 1996 had to build a fiber infrastructure before offering services.
With the Telecommunications Act requiring unbundling of the incumbent carrier
networks, competitive carriers are now able to more rapidly enter the market by
installing switches and leasing standard telephone lines and cable.

     A number of competitive carriers have entered or announced their intention
to enter one or more of our markets. We believe that not all competitive
carriers, however, are pursuing the same target customers we pursue. We intend
to keep our prices at levels below those of the incumbent carriers while
providing, in our opinion, a higher level of service and responsiveness to our
customers. Innovative packaging and pricing of basic telephone services are
expected to provide competitive differentiation for us in each of our markets.

  LONG DISTANCE SERVICES

     The long distance services industry is very competitive and many long
distance providers experience a high average turnover rate as customers
frequently change long distance providers in response to offerings of lower
rates or promotional incentives by competitors. Prices in the long distance
market have declined significantly in recent years and are expected to continue
to decline. We expect to face increasing competition from companies offering
long distance data and voice services over the Internet. Companies offering
these services over the Internet could enjoy a significant cost advantage
because they do not currently pay common carrier access charges or universal
service fees.

  DATA AND INTERNET SERVICES

     We expect the level of competition with respect to data and Internet
services to intensify in the future. We expect significant competition from:

     - Incumbent Carriers.  Most incumbent carriers have announced deployment of
       commercial DSL services. Some incumbent carriers have announced they
       intend to aggressively market these services to their residential
       customers at attractive prices. In addition, most incumbent carriers are
       combining their DSL service with their own Internet service provider
       businesses. We believe incumbent carriers have the potential to quickly
       overcome many of the issues that have delayed widespread deployment of
       DSL services in the past. The incumbent carriers have an established
       brand name in their service areas, possess sufficient capital to deploy
       DSL services rapidly and are in a position to offer service from central
       offices where we may be unable to secure collocation space. When the
       regional Bell operating companies begin providing long distance service,
       they may be able to offer "one stop shopping" that would be competitive
       with our offerings.

     - Traditional Long Distance Carriers.  Many of the leading traditional long
       distance carriers, including AT&T, MCI WorldCom and Sprint, are expanding
       their capabilities to support high-speed, end-to-end networking services.
       We expect them to offer combined data, voice and video services over
       their

                                        16
<PAGE>

       networks. These carriers have extensive fiber networks in many
       metropolitan areas that primarily provide high-speed data and voice
       services to large companies. They could deploy DSL services in
       combination with their current fiber networks. They also have
       interconnection agreements with many incumbent carriers and have secured
       collocation space from which they could begin to offer competitive DSL
       services.

     - Newer Long Distance Carriers.  The newer long distance carriers,
       including Williams Communications, Qwest Communications International and
       Level 3 Communications, are building and managing high-speed networks
       nationwide. They are also building direct sales forces and partnering
       with Internet service providers to offer services directly to business
       customers. They could extend their existing networks and offer high-speed
       services using DSL, either alone or in partnership with others.

     - Cable Modem Service Providers.  Cable modem service providers are
       offering, or are preparing to offer, high-speed Internet access over
       cable networks to consumers and businesses. These networks provide
       high-speed data services similar to our services, and in some cases at
       higher speeds. These companies use a variety of new and emerging
       technologies, including point-to-point and point-to-multipoint wireless
       services, satellite-based networking and high-speed wireless digital
       communications.

     - Internet Service Providers.  Internet service providers, including Yahoo,
       Earthlink, Concentric and Verio, offer Internet portal services which
       compete with our service. We offer basic web hosting and e-mail services
       and anticipate offering an enhanced set of Internet products in the
       future. The competitive Internet service providers generally provide more
       features and functions than our current Internet portal.

     - Wholesale DSL Carriers.  DSL carriers, including Covad Communications
       Group, Inc., offer DSL services and have significant strategic equity
       investors, marketing alliances and product development partners.

     Many of these competitors are offering, or may soon offer, DSL technologies
and services that will directly compete with us.

PERSONNEL

     As of March 22, 2002, we had approximately 1,800 employees, a 10% decrease
over the approximate 2,000 employees at December 31, 2000.

     We have non-disclosure and non-compete agreements with our executive
employees. None of our employees are represented by a collective bargaining
agreement.

                                  RISK FACTORS

     Investors should carefully consider the following risk factors before
making investment decisions regarding our stock.

WE MAY NEED SIGNIFICANT ADDITIONAL FUNDS THAT WE MAY NOT BE ABLE TO OBTAIN

     We will require significant amounts of capital to fund the development of
our business and services as well as our operating costs and debt service. If we
cannot generate or otherwise obtain sufficient funds, this may have a negative
impact on our growth and our ability to compete in the communications industry.
We expect to fund our capital requirements through existing resources,
internally generated funds and debt or equity financing. We cannot assure you we
will be successful in raising sufficient debt or equity financing on acceptable
terms or at all.

     On February 7, 2002, we announced that we could no longer confirm our prior
guidance of having sufficient cash to fund our operations into the first quarter
of 2003. On February 25, 2002, we announced that we had reached an agreement
with an informal committee representing approximately 66% of the outstanding

                                        17
<PAGE>

principal amount of our 13% Senior Notes due 2010 on a comprehensive
recapitalization plan that would eliminate a significant portion of our
long-term debt and all of our preferred stock. On March 22, 2002, we announced
that we had successfully completed our consent solicitation and that 99% of the
holders of our 13% Senior Notes due 2010 had signed voting agreements supporting
the comprehensive recapitalization plan that would eliminate a significant
portion of our long-term debt and all of our preferred stock. On March 22, 2002,
we also announced that more than two-thirds of the preferred shareholders had
signed voting agreements supporting the plan. We also announced that we were
voluntarily de-listing from NASDAQ and moving to the OTC Bulletin Board Service.
Finally, all our outside directors have resigned. The current board members,
Rolla P. Huff, Joseph M. Wetzel and S. Gregory Clevenger, are all officers of
the company.

     We plan to implement our proposed recapitalization plan by commencing a
voluntary pre-negotiated Chapter 11 proceeding with respect to us and our
subsidiaries, Mpower Communications Corp. and Mpower Lease Corporation. This
Chapter 11 proceeding may also include other Mpower subsidiaries. Our
reorganized company is expected to have substantial capital needs, and based on
the current business plan, would only have sufficient cash to operate through
the end of 2002. Although we continue to have discussions with current and
potential new equity investors, as well as potential lenders, we cannot assure
you that any additional capital will be available to operate our business beyond
the end of 2002.

THERE IS A POSSIBILITY THAT THE PREVIOUSLY ANNOUNCED CHAPTER 11 BANKRUPTCY
FILING MAY NOT PROCEED AS ANTICIPATED

     There are significant risks associated with our proposed Chapter 11
reorganization plan proceeding as planned.

     - The proposed reorganization plan could evolve into a lengthy and
       contested Chapter 11 bankruptcy case that could ultimately become a
       Chapter 7 liquidation proceeding. The Bankruptcy Court could delay
       confirming or fail to confirm our plan if it were to find that it was
       reasonably unlikely that the reorganized company could obtain additional
       financing necessary to fund our ongoing operations.

     - We may require additional debt or equity to emerge from bankruptcy. We
       cannot assure you that we will be successful in obtaining sufficient debt
       or equity financing on acceptable terms or at all.

     - The plan may not be confirmed by the Bankruptcy Court for a number of
       reasons. For example, a non-accepting creditor of ours might challenge
       the terms of the plan as not being in compliance with the Bankruptcy Code
       and the Bankruptcy Court might rule in favor of the non-accepting
       creditor's objections.

     - The Bankruptcy Court may find that our solicitation of acceptances for
       the plan does not comply with the requirements of the Bankruptcy Code. In
       such an event, we may seek to re-solicit acceptances. Nonetheless,
       confirmation of the plan would be delayed and possibly jeopardized.

     - We cannot assure you that the plan will not require significant
       modifications for confirmation, or that such modifications would not
       require a re-solicitation of acceptances.

     - Our filing of a bankruptcy petition and the publicity attendant thereto
       may adversely affect our business. We believe that any such adverse
       effects may worsen during the pendency of a protracted bankruptcy case if
       the plan is not confirmed as planned.

     - The commencement of our Chapter 11 bankruptcy filing may cause trade
       suppliers and vendors to cease providing goods and services to us and our
       subsidiaries.

     - Because of the traditional stigma associated with any bankruptcy, our
       commencement of a Chapter 11 bankruptcy case may adversely affect our
       ability to retain and attract customers and/or highly-skilled personnel,
       which could harm our business.

     - In light of the difficult financial environment, and in particular the
       lack of ready sources of either debt or equity financing for telecom
       companies, we may not obtain adequate capital to exit the Chapter 11.

                                        18
<PAGE>

THE VALUE OF THE EQUITY SECURITIES TO BE ISSUED UNDER THE PROPOSED PLAN OF
REORGANIZATION MAY BE NEGATIVELY AFFECTED BY ADDITIONAL ISSUANCES OF EQUITY
SECURITIES BY THE REORGANIZED COMPANY AND GENERAL MARKET FACTORS

     Issues or sales of equity securities by our reorganized company will likely
be heavily dilutive. Assuming the plan is approved and adopted, there will be no
restriction on our ability to issue additional equity securities, which may
include, but not be limited to, common stock, preferred stock and securities
exercisable or convertible into our common stock (including employee stock
options). There can be no certainty as to the effect, if any, that future
issuances or sales of such securities by our reorganized company, or the
availability of such equity securities for future issue or sale, would have on
the price of our common stock prevailing from time to time. Sales of substantial
amounts of equity securities of ours in the public or private market, a
perception in the market that such sales could occur, or the issuance of
securities exercisable or convertible into our stock could adversely affect the
prevailing price of our stock.

LACK OF TRADING MARKET FOR OUR SECURITIES

     On March 22, 2002 we announced that we will voluntarily remove our common
stock and our Series D convertible preferred stock from their respective
listings on the NASDAQ. This voluntary removal may adversely affect the ability
of holders of our Series D preferred stock and common stock to sell their shares
because there will be no securities exchange or national automated quotation
system on which to trade our securities.

     As a consequence of our move from the NASDAQ to the NASD OTC Bulletin
Board, it is expected that our stockholders will find it more difficult to buy
or sell shares of, or obtain accurate quotations as to the market value of our
common stock. In addition, our common stock may be substantially less attractive
as collateral for margin borrowings and loan purposes, for investment by
financial institutions under their internal policies or state legal investment
laws, or as consideration in future capital raising transactions.

THE MARKET FOR SECURITIES OF TELECOMMUNICATIONS COMPANIES HAS HISTORICALLY BEEN
VOLATILE

     The prices for securities of emerging companies in the telecommunications
industry have been highly volatile. In addition, the stock market has
experienced volatility that has affected the market prices of equity securities
of many companies and that often has been unrelated to the operating performance
of such companies. These broad market fluctuations may adversely affect the
prevailing price of our securities.

WE EXPECT OUR LOSSES TO CONTINUE AND WE MAY NOT BE ABLE TO GENERATE SUFFICIENT
CASH FLOW TO MEET OUR DEBT SERVICE REQUIREMENTS

     We recorded net losses before extraordinary items of $500.1 million in
2001, $224.6 million in 2000 and $69.8 million in 1999. In addition, we had
negative cash flow from operations of $219.2 million in 2001, $141.5 million in
2000 and $45.9 million in 1999. We do not generate enough cash flow to cover our
operating and investing expenses. Our historical earnings were insufficient to
cover combined fixed charges and dividends on preferred stock by $526.7 million
for the year ended December 31, 2001. Combined fixed charges and dividends
include interest and dividends, whether paid or accrued. We expect to record
significant net losses and generate negative cash flow from operations for the
foreseeable future. We cannot assure you that we will achieve or sustain
profitability or generate sufficient positive cash flow from operations to meet
our planned capital expenditures, working capital and debt service requirements.

OUR SUBSTANTIAL DEBT CREATES FINANCIAL AND OPERATING RISK

     We have a substantial amount of debt. As of December 31, 2001, we had
approximately $430.7 million of total debt outstanding. The terms of our
outstanding debt limit, but do not prohibit, us from incurring additional debt.
For example, the indentures for our outstanding debt allow us to incur an
unlimited amount of debt to finance the cost of acquiring equipment used in our
business. While we have initiated a recapitalization plan to reduce our debt,
this plan may not be successful. Our existing level of debt could have important
consequences to you, including the following:

                                        19
<PAGE>

     - It could limit our ability to obtain additional financing for working
       capital, capital expenditures, and general corporate purposes;

     - It could require us to dedicate a substantial portion of our cash flow
       from operations to payments of principal and interest on our debt,
       thereby reducing the funds available to us for other purposes, including
       working capital, capital expenditures, and general corporate purposes;

     - It could make us more vulnerable to changes in general economic
       conditions or increases in prevailing interest rates; limiting our
       ability to withstand competitive pressures and reducing our flexibility
       in responding to changing business and economic conditions;

     - It could limit our flexibility in planning for, or reacting to, changes
       in our business and the industry in which we operate;

     - It could place us at a competitive disadvantage compared to our
       competitors that have less debt; and

     - Our failure to comply with the restrictions contained in any of our
       financing agreements could lead to a default which could result in our
       being required to repay all of our outstanding debt.

OUR CASH FLOW MAY NOT BE SUFFICIENT TO PERMIT REPAYMENT OF OUR INDEBTEDNESS WHEN
DUE

     Our ability to make payments on and to refinance our indebtedness will
depend on our ability to generate cash flow in the future. We cannot assure you
that our business will generate sufficient cash flow from operations to meet our
debt service requirements. Our cash flow from operations may be insufficient to
repay our indebtedness at scheduled maturity and some or all of such
indebtedness may have to be refinanced. If we are unable to refinance our debt
or if additional financing is not available on acceptable terms, or at all, we
could be forced to dispose of assets under certain circumstances that might not
be favorable to realizing the highest price for the assets or to default on our
obligations with respect to our indebtedness.

OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE AND WILL BE DIFFICULT TO PREDICT

     Our annual and quarterly operating results are likely to fluctuate
significantly as a result of numerous factors, many of which are outside of our
control. These factors include:

     - our limited operating history, which makes predicting future results
       difficult;

     - the timing and willingness of traditional telephone companies to provide
       us with central office space and the prices, terms and conditions on
       which they make the space available to us;

     - the amount and timing of capital expenditures and other costs relating to
       the development of our networks and the marketing of our services;

     - delays in the generation of revenue because certain network elements have
       lead times that are controlled by incumbent carriers and other third
       parties;

     - the ability to develop and commercialize new services by us or our
       competitors;

     - the ability to deploy on a timely basis our services to adequately
       satisfy customer demand;

     - our ability to successfully operate our networks;

     - the rate at which customers subscribe to our services;

     - decreases in the prices for our services due to competition, volume-based
       pricing and other factors;

     - the development and operation of our billing and collection systems and
       other operational systems and processes;

     - the rendering of accurate and verifiable bills from the incumbent
       carriers from whom we lease transport and resolution of billing disputes;

                                        20
<PAGE>

     - the incorporation of enhancements, upgrades and new software and hardware
       products into our network and operational processes that may cause
       unanticipated disruptions; and

     - the interpretation and enforcement of regulatory developments and court
       rulings concerning the 1996 Telecommunications Act, interconnection
       agreements and the antitrust laws.

THE TERMS OF OUR DEBT COVENANTS AND PREFERRED STOCK COULD LIMIT HOW WE CONDUCT
OUR BUSINESS AND OUR ABILITY TO RAISE ADDITIONAL FUNDS

     The agreements which govern the terms of our debt contain covenants that
may restrict our ability to:

     - incur additional debt;

     - pay dividends and make other distributions;

     - prepay subordinated debt;

     - make investments and other restricted payments;

     - create liens;

     - sell assets; and

     - engage in transactions with affiliates.

     In addition, the terms of our outstanding preferred stock require us to
obtain the approval of the holders before we take specified actions.

     Our future financing arrangements will likely contain similar or more
restrictive covenants. As a result of these restrictions, we may be:

     - limited in how we conduct our business;

     - unable to raise additional debt or equity financing to operate during
       general economic or business downturns; and

     - unable to compete effectively or to take advantage of new business
       opportunities.

     These restrictions may affect our ability to grow in accordance with our
plans.

OUR SUCCESS DEPENDS ON THE EFFECTIVENESS AND RETENTION OF OUR MANAGEMENT TEAM

     Our business is managed by a small number of key management personnel, the
loss of some of whom could impair our ability to carry out our business plan. We
believe our future success will depend in large part on our ability to attract
and retain highly skilled and qualified personnel. We cannot assure you that our
senior management team will remain with us through the bankruptcy and
recapitalization processes. Under our circumstances, it may be difficult to find
suitable replacements for any departing management personnel. We do not maintain
key man insurance on our officers.

IF OUR EQUIPMENT DOES NOT PERFORM AS WE EXPECT, IT COULD DELAY OUR INTRODUCTION
OF NEW SERVICES

     In implementing our strategy, we may use new or existing technologies to
offer additional services. We also plan to use equipment manufactured by
multiple vendors to offer our current services and future services in each of
our markets. If we cannot successfully install and integrate the technology and
equipment necessary to deliver our current services and any future services
within the time frame and with the cost effectiveness we currently contemplate,
we could be forced to delay or abandon the introduction of new services. This
could also affect our ability to attract and retain customers.

                                        21
<PAGE>

THE FAILURE OF OUR OPERATIONS SUPPORT SYSTEM TO PERFORM AS WE EXPECT COULD
IMPAIR OUR ABILITY TO RETAIN CUSTOMERS AND OBTAIN NEW CUSTOMERS OR RESULT IN
INCREASED CAPITAL EXPENDITURES

     Our operations support system is expected to be an important factor in our
success. If the operations support system fails or is unable to perform as
expected, we could suffer customer dissatisfaction, loss of business or the
inability to add customers on a timely basis, any of which would adversely
affect our revenues. Furthermore, problems may arise with higher processing
volumes or with additional automation features, which could potentially result
in system breakdowns and delays and additional, unanticipated expense to remedy
the defect or to replace the defective system with an alternative system. Our
current system may not be adequate to scale our business.

OUR FAILURE TO MANAGE GROWTH COULD RESULT IN INCREASED COSTS

     We may be unable to manage our growth effectively. This could result in
increased costs and delay our introduction of additional services. The
development of our business will depend on, among other things, our ability to
achieve the following goals in a timely manner, at reasonable costs and on
satisfactory terms and conditions:

     - purchase, install and operate equipment, including DSL and T1 equipment;

     - negotiate suitable interconnection agreements with, and arrangements for
       installing our equipment at the central offices of, incumbent carriers on
       satisfactory terms and conditions;

     - hire and retain qualified personnel;

     - lease suitable access to transport networks; and

     - obtain required government authorizations.

     We have experienced rapid growth since our inception, and we believe
sustained growth will place a strain on our operational, human and financial
resources. Our growth will also increase our operating complexity as well as the
level of responsibility for both existing and new management personnel. Our
ability to manage our growth effectively will depend on the continued
development of plans, systems and controls for our operational, financial and
management needs and on our ability to expand, train and manage our employee
base.

OUR SERVICES MAY NOT ACHIEVE SUFFICIENT MARKET ACCEPTANCE TO BECOME PROFITABLE

     To be successful, we must develop and market services that are widely
accepted by businesses at profitable prices. Our success will depend upon the
willingness of our target customers to accept us as an alternative provider of
local, long distance, high-speed data and Internet services. Although we are in
the process of rolling out additional products and services, we might not be
able to provide the range of communication services our target business
customers need or desire.

OUR FAILURE TO ACHIEVE OR SUSTAIN MARKET ACCEPTANCE AT DESIRED PRICING LEVELS
COULD IMPAIR OUR ABILITY TO ACHIEVE PROFITABILITY OR POSITIVE CASH FLOW

     Prices for data communication services have fallen historically, a trend we
expect will continue. Accordingly, we cannot predict to what extent we may need
to reduce our prices to remain competitive or whether we will be able to sustain
future pricing levels as our competitors introduce competing services or similar
services at lower prices. Our ability to meet price competition may depend on
our ability to operate at costs equal to or lower than our competitors or
potential competitors. There is a risk that competitors, perceiving us to lack
capital resources, may undercut our rates or increase their services or take
other actions in an effort to force us out of business. Our failure to achieve
or sustain market acceptance at desired pricing levels could impair our ability
to achieve profitability or positive cash flow.

                                        22
<PAGE>

OUR FAILURE TO SUCCESSFULLY TERMINATE OR SUBLEASE OUR SURPLUS SWITCH SITES,
OTHER FACILITIES AND COLLOCATIONS IN LINE WITH OUR ESTIMATES COULD ADVERSELY
AFFECT OUR FINANCIAL CONDITION

     We have estimated the charges to be incurred in connection with our plans
to cancel: (1) our surplus collocation sites; (2) our entry into twelve markets
in the Northeast and Northwest and (3) our ongoing operations in several
markets. Our failure to successfully re-deploy or sell equipment no longer
required for these switch sites and collocations and our inability to terminate
or sublease the switch sites and collocations in line with our estimates could
adversely affect our financial condition.

IF WE ARE UNABLE TO NEGOTIATE AND ENFORCE FAVORABLE INTERCONNECTION AGREEMENTS
AND ARRANGEMENTS FOR INSTALLING OUR EQUIPMENT, WE COULD HAVE DIFFICULTY
OPERATING PROFITABLY IN OUR EXISTING MARKETS

     We must negotiate and renew favorable interconnection agreements and
arrangements for installing our equipment with other companies, including
incumbent carriers, in markets we have entered. The rates charged to us under
the interconnection agreements might not continue to be low enough for us to
attract a sufficient number of customers and to operate the business on a
profitable basis. In addition, our interconnection agreements provide for our
connection and maintenance orders to receive attention on the same basis as the
incumbent carrier's customers and for the incumbent carriers to provide adequate
capacity to keep blockage within industry standards. However, from time to time,
we have experienced excessive blockage in the delivery of calls to and from the
incumbent carriers due to an insufficient number of phone lines installed by the
incumbent carriers between their switches and our switches. Blocked calls result
in customer dissatisfaction, which may result in the loss of business.

DELAYS BY THE INCUMBENT CARRIERS IN CONNECTING OUR CUSTOMERS TO OUR NETWORK
COULD RESULT IN CUSTOMER DISSATISFACTION AND LOSS OF BUSINESS

     We rely on the timeliness of incumbent carriers and competitive carriers in
processing our orders for customers switching to our service and in maintaining
the customer's standard telephone lines to assure uninterrupted service. The
incumbent carriers are our competitors and have had little experience leasing
standard telephone lines to other companies. Therefore, the incumbent carriers
might not be able to continue to provide and maintain leased standard telephone
lines in a prompt and efficient manner as the number of standard telephone lines
requested by competitive carriers increases.

WE MAY NOT BE ABLE TO SERVICE OUR CUSTOMERS IF WE CANNOT SECURE SUFFICIENT
TELEPHONE LINES AND CABLE TO MEET OUR FUTURE NEEDS

     We may not be able to renew our lease arrangements or obtain comparable
arrangements from other carriers in our existing markets. Because we lease
rather than construct telephone lines and cable in each of our markets, we would
be unable to service our customers if we are not able to obtain sufficient
telephone lines and cable. Our inability to lease sufficient telephone lines and
cable could result in the loss of customers and the inability to add new
customers.

OUR RELIANCE ON A LIMITED NUMBER OF EQUIPMENT SUPPLIERS COULD RESULT IN
ADDITIONAL EXPENSES

     We currently rely and expect to continue to rely on a limited number of
third party suppliers to manufacture the equipment we require to implement our
DSL and T1 technologies. If our suppliers enter into competition with us, or if
our competitors enter into exclusive or restrictive arrangements with our
supplies it may materially and adversely affect the availability and pricing of
the equipment we purchase. Our reliance on third-party vendors involves a number
of additional risks, including the absence of guaranteed supply and reduced
control over delivery schedules, quality assurance, production yields and costs.

     We cannot assure you that our vendors will be able to meet our needs in a
satisfactory and timely manner in the future or that we will be able to obtain
alternative vendors when and if needed. It could take a significant period of
time to establish relationships with alternative suppliers for critical
technologies and to introduce substitute technologies into our network. In
addition, if we change vendors, we may need to replace all or a

                                        23
<PAGE>

portion of the equipment deployed within our network at significant expense in
terms of equipment costs and loss of revenues in the interim.

THE TELECOMMUNICATIONS INDUSTRY IS HIGHLY COMPETITIVE WITH PARTICIPANTS THAT
HAVE GREATER RESOURCES THAN WE DO, AND WE MAY NOT BE ABLE TO COMPETE
SUCCESSFULLY

     Our success depends upon our ability to compete with other
telecommunications providers in each of our markets, many of which have
substantially greater financial, marketing and other resources than we have. In
addition, competitive alternatives may result in substantial customer turnover
in the future. A growing trend towards consolidation of communications companies
and the formation of strategic alliances within the communications industry, as
well as the development of new technologies, could give rise to significant new
competitors. We cannot assure you that we will be able to compete successfully.
For more information regarding the competitive environment in which we operate,
please see "Competition."

IF WE ARE NOT ABLE TO OBTAIN OR IMPLEMENT NEW TECHNOLOGIES, WE MAY LOSE BUSINESS
AND LIMIT OUR ABILITY TO ATTRACT NEW CUSTOMERS

     We may be unable to obtain access to new technology on acceptable terms or
at all. We may be unable to adapt to new technologies and offer services in a
competitive manner. If these events occur, we may lose customers to competitors
offering more advanced services and our ability to attract new customers would
be hindered. Rapid and significant changes in technology are expected in the
communications industry. We cannot predict the effect of technological changes
on our business. Our future success will depend, in part, on our ability to
anticipate and adapt to technological changes, evolving industry standards and
changing needs of our current and prospective customers.

A SYSTEM FAILURE OR BREACH OF NETWORK SECURITY COULD CAUSE DELAYS OR
INTERRUPTIONS OF SERVICE TO OUR CUSTOMERS AND RESULT IN CUSTOMER DISSATISFACTION

     Interruptions in service, capacity limitations or security breaches could
have a negative effect on customer acceptance and, therefore, on our revenues
and ability to attract new customers. Our networks may be affected by physical
damage, power loss, capacity limitations, software defects, breaches of security
by computer viruses, break-ins or otherwise and other factors which may cause
interruptions in service or reduced capacity for our customers.

IF WE ARE UNABLE TO EFFECTIVELY DELIVER DSL AND T1 SERVICES TO A SUBSTANTIAL
NUMBER OF CUSTOMERS, WE MAY NOT ACHIEVE OUR REVENUE GOALS

     We cannot guarantee our network will be able to connect and manage a
substantial number of customers at high transmission speeds. If we cannot
achieve and maintain digital transmission speeds that are otherwise available in
the market, we may lose customers to competitors with higher transmission speeds
and we may not be able to attract new customers. While digital transmission
speeds of up to 1.5 Mbps are possible on portions of our network, that speed may
not be available over a majority of our network. Actual transmission speeds on
our network will depend on a variety of factors many of which are beyond our
control, including the distance an end user is located from a central office,
the quality of the telephone lines, the presence of interfering transmissions on
nearby lines and other factors.

WE MAY LOSE CUSTOMERS OR POTENTIAL CUSTOMERS BECAUSE THE TELEPHONE LINES WE
REQUIRE MAY BE UNAVAILABLE OR IN POOR CONDITION

     Our ability to provide DSL services to potential customers depends on the
quality, physical condition, availability and maintenance of telephone lines
within the control of the incumbent carriers. If the telephone lines are not
adequate, we may not be able to provide DSL services to many of our target
customers and our expected revenues will be diminished. We believe the current
condition of telephone lines in many cases may be inadequate to permit us to
fully implement our DSL services. In addition, the incumbent carriers may not
maintain the telephone lines in a condition that will allow us to implement our
DSL services effectively or may

                                        24
<PAGE>

claim they are not of sufficient quality to allow us to fully implement or
operate our DSL services. Further, some customers use technologies other than
copper lines to provide telephone services, and as a result, DSL services might
not be available to these customers.

INTERFERENCE OR CLAIMS OF INTERFERENCE COULD RESULT IN CUSTOMER DISSATISFACTION

     Interference, or claims of interference by the incumbent carriers, if
widespread, could adversely affect our speed of deployment, reputation, brand
image, service quality and customer satisfaction and retention. Technologies
deployed on copper telephone lines, such as DSL, have the potential to interfere
with other technologies on the copper telephone lines. Interference could
degrade the performance of our services or make us unable to provide service on
selected lines and the customers served by those lines. Although we believe our
DSL technologies, like other technologies, do not interfere with existing voice
services, incumbent carriers may claim the potential for interference permits
them to restrict or delay our deployment of DSL services. The procedures to
resolve interference issues between competitive carriers and incumbent carriers
are still being developed. We may be unable to successfully resolve interference
issues with incumbent carriers.

OUR SUCCESS WILL DEPEND ON GROWTH IN THE DEMAND FOR INTERNET ACCESS AND
HIGH-SPEED DATA SERVICES

     If the markets for the services we offer, including Internet access and
high-speed data services, fail to develop, grow more slowly than anticipated or
become saturated with competitors, we may not be able to achieve our projected
revenues. The markets for business Internet and high-speed data services are in
the early stages of development. Demand for Internet services is highly
uncertain and depends on a number of factors, including the growth in consumer
and business use of new interactive technologies, the development of
technologies that facilitate interactive communication between organizations and
targeted audiences, security concerns and increases in data transport capacity.

     In addition, the market for high-speed data transmission via DSL technology
is relatively new and evolving. Various providers of high-speed digital services
are testing products from various suppliers for various applications, and no
industry standard has been broadly adopted. Critical issues concerning
commercial use of DSL for Internet and high-speed data access, including
security, reliability, ease of use and cost and quality of service, remain
unresolved and may impact the growth of these services.

THE DESIRABILITY AND MARKETABILITY OF OUR INTERNET SERVICE MAY BE ADVERSELY
AFFECTED IF WE ARE NOT ABLE TO MAINTAIN RECIPROCAL RELATIONSHIPS WITH OTHER
INTERNET SERVICE PROVIDERS

     The Internet is comprised of many Internet service providers and underlying
transport providers who operate their own networks and interconnect with other
Internet service providers at various points. As we continue the operation of
Internet services, connections to the Internet will be provided through
wholesale carriers. We anticipate as our volume increases, we will enter into
reciprocal agreements with other Internet service providers. We cannot assure
you other national Internet service providers will maintain reciprocal
relationships with us. If we are unable to maintain these relationships, our
Internet services may not be attractive to our target customers, which would
impair our ability to retain and attract customers. In addition, the
requirements associated with maintaining relationships with the major national
Internet service providers may change. We cannot assure you that we will be able
to expand or adapt our network infrastructure to meet any new requirements on a
timely basis, at a reasonable cost, or at all.

WE MAY INCUR LIABILITIES AS A RESULT OF OUR INTERNET SERVICE OFFERINGS

     United States law relating to the liability of on-line service providers
and Internet service providers for information carried on, disseminated through,
or hosted on their systems is currently unsettled. If liability is imposed on
Internet service providers, we would likely implement measures to minimize our
liability exposure. These measures could require us to expend substantial
resources or discontinue some of our product or service offerings. In addition,
increased attention to liability issues, as a result of litigation, legislation
or legislative proposals could adversely affect the growth and use of Internet
services.

                                        25
<PAGE>

CHANGES IN LAWS OR REGULATIONS COULD RESTRICT THE WAY WE OPERATE OUR BUSINESS
AND NEGATIVELY AFFECT OUR COSTS AND COMPETITIVE POSITION

     A significant number of the services we offer are regulated at the federal,
state and/or local levels. If these laws and regulations change or if the
administrative implementation of laws develops in an adverse manner, there could
be an adverse impact on our costs and competitive position. In addition, we may
expend significant financial and managerial resources to participate in
administrative proceedings at either the federal or state level, without
achieving a favorable result. We believe incumbent carriers and others may work
aggressively to modify or restrict the operation of many provisions of the
Telecommunications Act. We expect incumbent carriers and others to continue to
pursue litigation in courts, institute administrative proceedings with the FCC
and other regulatory agencies and lobby the United States Congress, all in an
effort to affect laws and regulations in a manner favorable to them and against
the interest of competitive carriers. We believe that the recent changes in the
make-up of the FCC and leadership changes in the Congress may create an
atmosphere that is more favorable to the incumbent carriers. For more details
about our regulatory situation, please see "Government Regulations".

WE MAY FACE CHALLENGES TO THE USE OF THE MPOWER TRADEMARK

     Other companies utilizing trademarks that are similar to our trademark may
at some time challenge our use of the Mpower mark. A challenge to the mark could
result in litigation to defend our mark and could ultimately require us to adopt
a new trademark for our services and products.

AN ADVERSE DECISION IN AN APPEAL TO OUR CLASS ACTION LAWSUIT COMMENCED AGAINST
US COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION

     On September 20, 2000, a class action lawsuit was commenced against us,
alleging violations of the Securities Exchange Act of 1934 and rule 10(b)-5
thereunder (the "Exchange Act") and Section 11 of the Securities Act of 1933.
While we have denied any wrongdoing and will vigorously contest the class action
lawsuit, any judgment that is significantly greater than our available insurance
coverage could have a material adverse effect on our results of operations
and/or financial condition. On February 11, 2002, the United States District
Court for the Western District of New York entered its Decision and Order
dismissing the class action lawsuit. That Decision and Order has been appealed
to the United States Court of Appeals for the Second Circuit. We cannot predict
the outcome of that appeal.

THE PRICES WE CHARGE FOR OUR SERVICES AND PAY FOR THE USE OF SERVICES OF
INCUMBENT CARRIERS AND OTHER COMPETITIVE CARRIERS MAY BE NEGATIVELY AFFECTED IN
REGULATORY PROCEEDINGS, WHICH COULD RESULT IN DECREASED REVENUES, INCREASED
COSTS AND LOSS OF BUSINESS

     If we were required to decrease the prices we charge for our services or to
pay higher prices for services we purchase from incumbent carriers and other
competitive carriers, it would have an adverse effect on our ability to achieve
profitability and offer competitively priced services. We must file tariffs with
state and federal regulators which indicate the prices we charge for our
services. In addition, we purchase some tariffed services from incumbent
carriers and/or competitive carriers. The rates we pay for other services we
purchase from incumbent carriers and other competitive carriers are set by
negotiations between the parties. All of the tariffed prices may be challenged
in regulatory proceedings by customers, including incumbent carriers,
competitive carriers and long distance carriers who purchase these services.
These negotiated rates are also subject to regulatory review. On April 27, 2001,
the FCC released an order establishing benchmark rates for competitive local
carrier switched access charges. Under the order, competitive local carrier
access rates that are at or below the benchmark rates will be presumed to be
just and reasonable, and carriers like us may impose them by tariff. Above the
benchmark, these carriers' access service will be mandatorily detariffed, so the
competitive local carriers must negotiate higher rates with long distance
carriers. During the pendency of the negotiations, or if the parties cannot
agree, the local carrier must charge the long distance carrier the appropriate
benchmark rate. The FCC's order has been appealed by several parties, including
us, and is currently pending before the U.S. Court of Appeals for the D.C.
Circuit. While the outcome of the appeal cannot be predicted, with reasonable
certainty, if the court were to affirm the FCC's rules requiring us to

                                        26
<PAGE>

decrease our access charges, or if our costs were increased because we had to
negotiate access charges with all long distance providers, it could have an
adverse impact on our expected revenues and operating results. The prices
charged by incumbent carriers for unbundled network elements, collocations and
other services upon which we rely are determined by FCC rules that are currently
being received by the Supreme Court. Change in these prices resulting from a
court decision may adversely affect our business. For more details about our
regulatory situation, please see "Government Regulations".

OUR FORWARD-LOOKING STATEMENTS MAY MATERIALLY DIFFER FROM ACTUAL EVENTS OR
RESULTS

     This Report contains "forward-looking statements," which you can generally
identify by our use of forward-looking words including "believe," "expect,"
"intend," "may," "will," "should," "could," "anticipate" or "plan" or the
negative or other variations of these terms or comparable terminology, or by
discussion of strategies that involve risks and uncertainties. We often use
these types of statements when discussing:

     - our plans and strategies;

     - our anticipation of profitability or cash flow from operations;

     - the development of our business;

     - the expected market for our services and products;

     - our anticipated capital expenditures;

     - changes in regulatory requirements; and

     - other statements contained in this Report regarding matters that are not
       historical facts.

     We caution you these forward-looking statements are only predictions and
estimates regarding future events and circumstances. We cannot assure you we
will achieve the future results reflected in these statements.

ITEM 2.  PROPERTY

     We have leased office space in the Rochester, New York area, where we
maintain our corporate headquarters. The leased office space is 26,000 square
feet and expires during March 2005.

     We also lease space in Las Vegas for our national customer service
operations, national network operating center and local sales personnel. This
lease expires in 2004. This facility is owned by a limited liability company,
which is principally owned by two of our former directors, Maurice J. Gallagher,
Jr. and Timothy P. Flynn.

     We own property housing our switches in California, Illinois and Florida.
We also lease switch sites in Texas, Ohio, Michigan, Georgia, Florida, Nevada
and California expiring between 2005 and 2010. We have leased facilities to
house our local sales and administration staff in each market in which we
operate.

     During 2001, we cancelled our plans to expand into twelve Northeast and
Northwest markets and closed down operations in twelve of the markets we had
recently opened, resulting in the elimination of more than 500 collocations. We
plan to reduce the future commitments associated with switch site and sales
office leases in turned down markets through negotiated settlements.

ITEM 3.  LEGAL PROCEEDINGS

     We are party to numerous state and federal administrative proceedings. In
these proceedings, we are seeking to define and/or enforce incumbent carrier
performance requirements related to:

     - the cost and provisioning of those network elements we lease;

     - the establishment of customer care and provisioning;

     - the allocation of subsidies; and

                                        27
<PAGE>

     - collocation costs and procedures.

     The outcome of these proceedings will establish the rates and procedures by
which we obtain and provide leased network elements and could have a material
effect on our operating costs.

     We have intervened on behalf of the FCC in an appeal filed by AT&T seeking
to overturn the FCC's declaratory ruling in CCB/CPD No. 01-02, in which the FCC
concluded that a long distance carrier may not refuse a call from/to an access
line served by a competitive local carrier with presumptively reasonable access
rates. We have appealed the FCC's order in CC Docket No. 96-262, in which the
FCC, among other things, established benchmark rates for competitive local
carrier switched access charges. We cannot predict the outcome of these appeals.

     On September 20, 2000, a class action lawsuit was commenced against us and
our chief executive officer, Rolla P. Huff, in federal court for the Western
District of New York. On March 6, 2001, an amended consolidated class action
complaint was served in that action, seeking to recover damages for alleged
violations by us of the Securities Exchange Act of 1934 and rule 10(b)-5
thereunder (the "Exchange Act") and section 11 of the Securities Act of 1933.
The amended consolidated complaint also seeks to recover damages against several
of our officers and members of our board of directors in addition to Mr. Huff.
The amended consolidated complaint also names various underwriters as defendants
in the action. On February 11, 2002, the Court issued its Decision and Order
dismissing the class action lawsuit. The decision of the Court has been appealed
to the Court of Appeals for the Second Circuit and the final outcome of this
lawsuit is uncertain.

     On August 1, 2001, we were named in a judicial complaint seeking
declaratory relief for certain obligations to Fir Tree Partners, a bondholder of
ours. On November 8, 2001, the New York State Supreme Court granted our motion
to dismiss the complaint. No appeal was taken by Fir Tree Partners from the
dismissal.

     From time to time, we engage in other litigation and governmental
proceedings in the ordinary course of our business. We do not believe any other
pending litigation or governmental proceeding will have a material adverse
effect on our results of operations or financial condition.

ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

     None.

                                        28
<PAGE>

                                    PART II

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

MARKET INFORMATION

     Our common stock, $0.001 par value, traded on the NASDAQ National Market
(the "NASDAQ") under the symbol "MGCX" from May 11, 1998 (the date of our
initial public offering) until February 18, 2000. On February 18, 2000, our
common stock began trading under the symbol "MPWR." As of March 22, 2002, there
were approximately 265 holders of record of our common stock. The following sets
forth the reported high and low sale prices for the common stock for each
quarterly period in fiscal 2000 and 2001, as adjusted for the three-for-two
stock split paid in the form of a 50% stock dividend on August 28, 2000.

<Table>
<Caption>
                                                               HIGH     LOW
                                                              ------   ------
<S>                                                           <C>      <C>
Quarter Ending March 31, 2000...............................  $52.00   $28.33
Quarter Ending June 30, 2000................................  $45.83   $24.04
Quarter Ending September 30, 2000...........................  $40.08   $ 4.88
Quarter Ending December 31, 2000............................  $ 9.19   $ 2.50
Quarter Ending March 31, 2001...............................  $ 9.94   $ 2.38
Quarter Ending June 30, 2001................................  $ 3.01   $ 0.90
Quarter Ending September 30, 2001...........................  $ 1.05   $ 0.18
Quarter Ending December 31, 2001............................  $ 1.15   $ 0.09
</Table>

     As of March 22, 2002, the closing price of our common stock was $0.04. On
March 22, 2002 we announced that we will voluntarily move from the NASDAQ to the
NASD Over the Counter Bulleting Board, a regulated quotation service that
displays real-time quotes, last-sale prices and volume information in
over-the-counter ("OTC") equity securities. We expect that our common stock will
continue to trade under the symbol MPWR. After we file Chapter 11, we expect our
stock will continue to trade on the OTC Bulletin Board, but the ticker symbol
may change.

DIVIDENDS

     No cash dividends have ever been declared by us on our common stock. We
intend to retain earnings to finance the development and growth of our business.
We do not anticipate that any dividends will be declared on our common stock for
the foreseeable future. Future payments of cash dividends, if any, will depend
on our financial condition, results of operations, business conditions, capital
requirements, restrictions contained in agreements, future prospects and other
factors deemed relevant by our board of directors. Our ability to declare and
pay dividends on our common stock is restricted by certain covenants in our debt
indentures and by the terms of our outstanding preferred stock.

                                        29
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

     The information required by this Item is as follows:

<Table>
<Caption>
                                            2001        2000       1999       1998       1997
                                          --------   ----------   -------   --------   --------
                                                  (IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                                       <C>        <C>          <C>       <C>        <C>
Operating revenues......................  $195,695   $  146,862   $55,066   $ 18,249   $  3,791
Net loss................................  (467,740)    (244,714)  (69,769)   (32,065)   (10,836)
Basic and diluted loss per share of
  common stock*.........................     (8.26)       (5.20)    (5.09)     (1.51)     (0.86)
Total assets............................   613,647    1,172,460   402,429    252,119    191,977
Long-term debt and capital lease
  obligations including current
  maturities............................   430,686      485,081   161,935    157,295    156,637
Series A Convertible Redeemable
  Preferred Stock.......................        --           --        --         --     16,665
Series B Convertible Redeemable
  Preferred Stock.......................        --           --    55,363         --         --
Series C Convertible Redeemable
  Preferred Stock.......................    46,610       42,760    29,610         --         --
Series D Convertible Redeemable
  Preferred Stock.......................   156,220      202,126        --         --         --
</Table>

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

* See Note 7 of Notes to Financial Statements

                                        30
<PAGE>

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

RECENT EVENTS

     We announced on February 25, 2002 that we had reached agreement with an
informal committee representing approximately 66% of the outstanding principal
amount of our 13% Senior Notes due 2010 on a comprehensive recapitalization plan
that would eliminate a significant portion of our long-term debt and all of our
preferred stock. Under the proposed recapitalization plan, we would use $19.0
million of cash on hand and issue common stock to eliminate $583.4 million in
debt and preferred stock, as well as the associated $49.5 million of annual
interest expense related to our 2010 Senior Notes and $15.8 million of annual
dividend payments on our preferred stock.

     On March 22, 2002, we announced that we successfully completed our
bondholder solicitation which resulted in more than 99% of the holders of our
2010 Senior Notes entering into voting agreements with us in support of the
proposed recapitalization plan announced on February 25, 2002. On March 27,
2002, each bondholder who participated in the solicitation received a consent
fee equal to their pro-rata share of the $19.0 million.

     In addition, more than two-thirds of the holders of our issued and
outstanding shares of preferred stock have also entered into voting agreements
with us in support of the proposed recapitalization plan.

     With the necessary backing of these key constituencies, we plan to move
forward with our recapitalization plan, which would retire $583.4 million in
debt and preferred stock in exchange for a consent fee of $19.0 million in cash
and new equity in the reorganized company. We and our subsidiaries, Mpower
Communications and Mpower Lease Corporation, intend to implement the proposed
recapitalization plan by commencing a voluntary, pre-negotiated Chapter 11
proceeding no later than April 30, 2002. This Chapter 11 proceeding may also
include other subsidiaries. We will continue ongoing efforts to secure the
additional funding needed to complete the recapitalization plan. We cannot
assure you that we will be able to secure the necessary additional financing.

     Subject to the court's approval, our proposed recapitalization plan would
provide that our 2010 Senior Noteholders receive 85% of the common stock of our
recapitalized company's issued and outstanding stock on the effective date of
the plan, and be entitled to nominate four new members to our reorganized
company's seven member Board of Directors. Our preferred and common stockholders
would receive 13.5% and 1.5% respectively of the common stock of our
re-capitalized company on the effective date of the plan, and the preferred
stockholders would be entitled to nominate one new director to our reorganized
company's Board of Directors.

     As part of the Chapter 11 proceeding, we will be required to file a plan of
reorganization with the Bankruptcy Court. In order for the plan to be confirmed
by the Court, among other things, the requisite votes under the Bankruptcy Code
must be received and the plan must satisfy the requirements set forth in Section
1129 of the Bankruptcy Code. Some of these requirements are beyond our control
and we cannot assure you that we will be able to successfully implement our
proposed recapitalization plan.

     During the Chapter 11 proceeding, we plan to continue to provide customers
with their complete range of services. We do not currently expect any
significant impact on our employees, customers or suppliers. Due to our
remaining available cash resources, we do not believe that we will require
debtor-in-possession financing.

     The proposed recapitalization plan also provides for an employee stock
option plan for up to 10% of the common stock of our re-capitalized companys'
issued and outstanding common stock on the effective date of the plan (including
existing options), which would dilute the ownership percentages referenced
above.

     On March 22, 2002 we also announced that we will voluntarily move from
NASDAQ National Market (the "NASDAQ") to the NASD Over the Counter Bulletin
Board ("OTC Bulletin Board"), a regulated quotation service that displays
real-time quotes, last-sale prices and volume information in over-the-counter
equity securities. We expect that our common and preferred stock will continue
to trade under the symbols MPWR and MPWRP, respectively. After we file Chapter
11, we expect our stock will continue to trade on the OTC Bulletin Board, but
the stock ticker symbol may change during the time that we are in bankruptcy. As
a

                                        31
<PAGE>

consequence of our move from the NASDAQ to the OTC Bulletin Board, it is
expected that our stockholders will find it more difficult to buy or sell shares
of, or obtain accurate quotations as to the market value of our common stock. In
addition, our common stock may be substantially less attractive as collateral
for margin borrowings and loan purposes, for investment by financial
institutions under their internal policies or state legal investment laws, or as
consideration in future capital raising transactions.

     We have incurred losses applicable to common stockholders of $489.5
million, $268.4 million and $151.0 million in 2001, 2000 and 1999, respectively.
We continue to generate negative cash flows from operating and investing
activities and estimate that we have the resources to fund our current
operations through the end of 2002, but that additional resources could be
required thereafter. In addition, we intend to implement our recapitalization
plan by commencing a voluntary Chapter 11 proceeding, most likely in the second
quarter of 2002. We will likely require debt or equity financing to successfully
emerge out of the bankruptcy process. These factors, among others, may indicate
that we may be unable to continue as a going concern.

     Our operations require substantial capital investment for the purchase of
equipment and the development and maintenance of our network. Management expects
to continue to require substantial amounts of capital to acquire customers, fund
operating losses, augment the network in existing markets and develop new
products and services.

     We have completed, and are pursuing, several initiatives intended to
increase liquidity and better position ourselves to compete under current
conditions and anticipate changes in the telecommunications sector. These
include:

     - Implementing the recapitalization of our balance sheet as soon as
       possible

     - Retaining financial advisors to assist in obtaining additional equity or
       debt financing

     - Aggressively seeking possible funding sources

     - Continuing to update our prospective business plans and forecasts to
       assist in monitoring current and future liquidity

     - Closing unprofitable or under-performing markets

     - Reducing general and administrative expenses through various cost cutting
       measures

     - Introducing new products and services with greater profit margins

     - Analyzing the pricing of our current products and services to ensure they
       are competitive and meet our objectives

     - Re-deploying our assets held for future use to reduce the requirement for
       capital expenditures

     Our continuation as a going concern is dependent on our ability to meet the
above initiatives, among others. However, there can be no assurance that we will
be successful in obtaining additional debt or equity financing, or in obtaining
a bank facility on terms acceptable to us, or at all, or that management's
estimate of additional funds required is accurate.

COMPANY OVERVIEW

     We are a competitive local exchange carrier ("CLEC") offering local
dial-tone, long distance, high-speed Internet access via dedicated Symmetrical
Digital Subscriber Line ("SDSL") technology, voice over SDSL ("VoSDSL"), Trunk
Level 1 ("T1"), Integrated T1 and Data-only T1 as well as other voice and data
features. Our services are offered primarily to small and medium size business
customers through our wholly owned subsidiary, Mpower Communications Corp.
("Mpower Communications").

     We offer voice and high-speed data services using both SDSL and T1
technology in all of our markets. At March 22, 2002, we provide services in 27
metropolitan areas in 8 states. Our network consists of 583 incumbent carrier
central office collocation sites providing us access to approximately 11.7
million addressable

                                        32
<PAGE>

business lines. All of our 583 central office collocation sites are SDSL capable
and 374 are T1 capable. We have established working relationships with
BellSouth, Verizon, Sprint, and Southwestern Bell Corporation (including its
operating subsidiaries PacBell and Ameritech collectively referred to as "SBC").
We have over 400,000 lines in service.

     We were one of the first competitive communications carriers to implement a
facilities-based network strategy. As a result, we own the network equipment
that controls how voice and data transmissions originate and terminate, which we
refer to as switches, and we lease the telephone lines over which the voice and
data traffic are transmitted, which we refer to as transport. We install our
network equipment at the site of the incumbent carrier from whom we rent
standard telephone lines. These sites are referred to as collocation sites
within the telecommunications industry. As we have already invested and built
our network, we believe our strategy has allowed us to serve a broad geographic
area at a comparatively low cost while maintaining control of the access to our
customers.

     Our business is to deliver packaged voice and broadband data solutions to
small and mid-sized businesses. Specifically, our business plan is based on
serving the small and medium enterprise customers that find business value in
high-speed broadband Internet access integrated with local dial-tone service. We
have more than 75,000 business customers, providing them broadband Internet via
SDSL and T1, integrated services over VoDSL, T1 and local voice telephone
service.

     In the fourth quarter of 2001, we began to upgrade our network with T1
technology to increase our revenue potential, gross margin and addressable
customer base. By leveraging our existing equipment, interconnection agreements
with incumbent carriers and network capabilities, we are able to offer fully
integrated and channelized voice and data products over a T1 connection,
overcoming the DSL loop length limitations. This platform utilizes central
office equipment provisioned with T1 line cards that leverage low-cost T1
unbundled network elements leased from incumbent carriers. Our collocation DSL
equipment then aggregates Internet traffic to the central office Internet
gateway. This delivery mechanism provides guaranteed bandwidth and a data
service that is positioned to be a superior offering when compared to the
incumbent carriers' DSL service offering.

     By using a T1 service delivery platform, we expect to increase the amount
of revenue per customer. In order to serve the largest portion of our target
audience, our combined voice and data network allows us to deliver services in
several combinations over the most favorable technology: basic phone service on
the traditional phone network, SDSL service, integrated T1 voice and data
service, or data-only T1 connectivity.

CRITICAL ACCOUNTING POLICIES

     Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to
uncollectible receivables, taxes, network optimization accruals and
contingencies. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions. We believe the following critical accounting policies
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements.

     Allowance For Doubtful Accounts:  We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
pay for our services. In order to estimate the appropriate level of this
allowance, we analyze historical bad debts, current economic trends and changes
in our customer payment patterns. If the financial condition of our customers
were to deteriorate and impact their ability to make payments, additional
allowances may be required.

                                        33
<PAGE>

     Taxes:  Management judgement is required to estimate the probable outcomes
associated with normal and customary audits of our various tax liabilities
including property taxes, franchise taxes and commodity taxes in the
jurisdictions in which we operate.

     Network Optimization Accruals:  In establishing the accrual for the network
optimization costs we made certain assumptions related to the wind down and
closure of certain markets and related future severance costs and other exit
costs. While we feel the assumptions were appropriate, there can be no assurance
that actual costs will not differ from estimates used to establish the
restructuring accrual. If actual results differ significantly from the
estimates, we may need to adjust our restructuring accrual in the future.

     Disputes With Carriers:  Various long distance carriers and incumbent
carriers lease loop, transport and network facilities to us. The pricing of such
facilities are governed by either a tarriff or an interconnection agreement.
These carriers bill us for our use of such facilities. From time to time, the
carriers present inaccurate bills to us, which we dispute. As a result of such
billing inaccuracies, we record an estimate of our liability based on our
measurement of services received.

RESULTS OF OPERATIONS

     Our revenues are generated from sales of communications services consisting
primarily of local phone services, data services, long-distance services,
switched access billings and non-recurring charges, principally installation
charges. Local, long distance and data services are generally provided and
billed as a bundled offering under which customers pay a fixed amount for a
package of combined local, long distance and data services. As a result, the
portion of our revenues attributable to each kind of service is not identifiable
and, therefore, we do not record or report these amounts separately. Our
revenues consist of:

     - the monthly recurring charge for basic local voice and data services;

     - usage-based charges for local and toll calls in certain markets;

     - charges for services such as call waiting and call forwarding;

     - certain non-recurring charges, such as set-up charges for additional
       lines for existing customers; and

     - interconnection revenues from switched access charges to long distance
       carriers.

     Our switched access revenues historically have been subject to
uncertainties such as various federal and state regulations and disputes with
our long distance carriers. As of December 31, 2000, we reached agreements with
those carriers providing over 65% of our switched access traffic. In addition,
the FCC in April 2001 adopted new rules that limit the rates we can charge
carriers for use of our facilities. Under these rules, which took effect on June
20, 2001, competitive carriers are required to reduce their tariffed interstate
access charges to agreed upon contract rates or rates no higher than 2.5 cents
per minute. After one year, the rate ceiling will be reduced to 1.8 cents and
after two years to 1.2 cents per minute. After three years, all competitive
carriers will be required to charge rates no higher than the incumbent telephone
company. As a result of our agreements and the reductions in rates dictated by
the FCC, we anticipate a continued decrease of switched access revenues as a
percent of total revenue. Switched access revenue as a percent of total revenue
was 29% in 2001, 39% in 2000 and 35% in 1999.

     Our principal operating expenses consist of cost of operating revenues,
selling expenses, general and administrative expenses, and depreciation and
amortization expense. Cost of operating revenues consists primarily of access
charges, line installation expenses, transport expenses, long distance expenses
and lease expenses for our switch sites and our collocation sites.

     Selling expenses consist primarily of salaries, commissions and related
personnel costs, marketing costs and facilities costs. General and
administrative expenses consist primarily of salaries and related personnel
costs, the cost of maintaining the hardware in our network and back office
systems, provision for bad debts, professional fees and facilities expenses.

                                        34
<PAGE>

     Depreciation and amortization expense includes depreciation of switching
and collocation equipment, business application software as well as general
property and equipment and the amortization of goodwill and other intangibles.

     Gross interest expense is primarily attributable to the 13% Senior Notes
due 2010 we issued in March 2000 and the 13% Senior Notes due 2004 issued in
September 1997.

     Interest income results from the investment of cash and cash equivalents,
United States Treasury and other agency securities.

     We have experienced operating losses and generated negative cash flow from
operations since inception and expect to continue to generate negative cash flow
from operations for the foreseeable future while we continue to grow our
existing network and develop our product offerings and customer base. During
this period, we expect to incur significant operating losses as many of the
fixed costs of providing service in newer markets are incurred before
significant revenue can be generated from those markets. In addition, we expect
to incur significant costs to build our base of customers in our newer markets.
We cannot assure investors that our revenue or customer base will grow or that
we will be able to achieve or sustain positive cash flow from operations.

 YEAR ENDED DECEMBER 31, 2001 VS. 2000

     Total operating revenues increased to $195.7 million for the year ended
December 31, 2001 as compared to $146.9 million for the year ended December 31,
2000. The 33% increase in revenue was primarily the result of the increase in
the lines in service. Total lines in service increased 37% from 285,130 at
December 31, 2000 to 391,373 at December 31, 2001. Our number of switched access
revenues decreased $1.3 million or 2% from the year ended December 31, 2000.
This decrease in switched access revenues was primarily a result of the
reduction in rates we negotiated with our major carriers. We expect switched
access revenue to continue to decline as a percentage of total revenue.

     Cost of operating revenues for the year ended December 31, 2001 was $158.7
million as compared to $119.8 million for the year ended December 31, 2000. The
32% increase is due to the increased number of lines in service, the cost to
install the increased number of lines and operational expenses associated with
the backbone of our network.

     For the year ended December 31, 2001, selling expenses totaled $62.4
million, a 4% increase over the $59.8 million for the year ended December 31,
2000. The increase is primarily a result of increased costs attributable to an
increased sales force and related sales support personnel. Direct sales
personnel increased from 279 as of December 31, 2000 to 458 as of December 31,
2001.

     For the year ended December 31, 2001, general and administrative expenses
totaled $129.9 million, a 7% increase from $121.2 million for the year ended
December 31, 2000. The increase is primarily a result of costs attributable to
administrative personnel and facilities expenses necessary to support our
expanded network operations and customer base, offset in part by recent market
reductions and cost savings initiatives.

     For the year ended December 31, 2001, we recorded $3.1 million in
stock-based compensation compared to $3.3 million recorded in 2000. This expense
relates to in-the-money stock options granted in 1999, 2000, and 2001. Due to
the September 2000 and September 2001 re-pricing of stock options, we are now
subject to variable plan accounting. We recognized $0.1 million in stock-based
compensation expense for the options exchanged in September 2001 as the market
price of our common stock at December 31, 2001 was above the current exercise
prices. We have not recognized compensation expense for the options re-priced in
September 2000 as the market price of the common stock at December 31, 2001 was
below the exercise prices. However, we are unable to predict the expense that
may be recognized in future periods as this amount is subject to fluctuations of
the market price of our stock.

     During third quarter 2000, we announced a plan to eliminate 339
collocations and delay our expansion into 12 Northeast and Northwest markets. We
recorded a network optimization charge of $12.0 million that

                                        35
<PAGE>

represents estimated amounts paid or to be paid to incumbent local exchange
carriers for collocation sites for which we have decided to discontinue
entrance.

     During February 2001, we announced the cancellation of our plans to enter
those markets and the related elimination of an additional 351 collocations. We
recorded a network optimization charge of $24.0 million in the first quarter of
2001 associated with the investment we made in switch sites and collocations for
these markets.

     During May 2001, we announced plans to close down operations in twelve of
the markets we had recently opened, representing more than 180 collocations. We
exited those markets over the period from June to September 2001 and recognized
a network optimization charge of $209.1 million in the second quarter of 2001.
Included in the charge is $126.8 million for the goodwill and customer base
associated with the Primary Network business, which was eliminated as a result
of the market closings, $65.1 million for property including collocations and
switch sites, and $17.2 million for other costs associated with exiting these
markets. This charge is reflected as a network optimization cost in the
Consolidated Financial Statements.

     With respect to the network optimization charges, the total actual charges
will be based on ultimate settlements with the incumbent local exchange
carriers, recovery of costs from any subsequent subleases, our ability to sell
or re-deploy network equipment for growth in our existing network and other
factors.

     For the year ended December 31, 2001, depreciation and amortization was
$76.1 million as compared to $51.0 million for the year ended December 31, 2000.
This increase is a result of placing additional assets in service in accordance
with the planned build-out of our network.

     Gross interest expense for fiscal 2001 totaled $63.8 million, as compared
to $56.6 million for fiscal 2000. Interest capitalized for the year ended
December 31, 2001 decreased to $4.9 million as compared to $10.7 million for the
year ended December 31, 2000. The decrease in interest capitalized is due to the
decrease in switching equipment under construction as our network expansion has
slowed. Gross interest expense is primarily attributable to the 13% Senior Notes
due 2010 we issued in March 2000 and the 13% Senior Notes due 2004 issued in
September 1997.

     Interest income was $20.8 million during the year ended December 31, 2001
compared to $41.5 million for the year ended December 31, 2000. The 50% decrease
is a result of decreases in cash and investments during 2001. Cash and
investments have been used to purchase switching equipment, pay interest on the
senior secured notes and fund operating losses.

     We incurred net losses before extraordinary items of $500.1 million and
$224.6 million for the years ended December 31, 2001 and 2000, respectively.

     For the year ended December 31, 2001, we incurred an extraordinary gain on
the early retirement of debt of $32.3 million. This was attributable to a series
of exchanges of our long-term debt as further described in Note 4 of the
accompanying consolidated financial statements.

     For the year ended December 31, 2001, we recognized preferred stock
dividends of $21.8 million paid in shares of our common stock to holders of our
Series D convertible preferred stock, which included $6.6 million related to the
inducement feature included in the conversion of preferred stock to common
stock.

     Effective June 30, 2000, we acquired Primary Network, a provider of
data-centric communications services to business and residential customers in
the Midwest. From July 1, 2000, the results of Primary Network's operations are
included in our consolidated financial statements. However, as of December 31,
2001, we had effectively eliminated all operations related to the Primary
Network acquisition.

  YEAR ENDED DECEMBER 31, 2000 VS.  1999

     Total operating revenues increased to $146.9 million for the year ended
December 31, 2000 as compared to $55.1 million for the year ended December 31,
1999. The 167% increase was primarily the result of the increase in the number
of lines in service. Total lines in service increased 100% from 142,664 at
December 31, 1999 to 285,130 at December 31, 2000. Our switched access revenues,
which represented 39% of our total

                                        36
<PAGE>

operating revenues for the year ended December 31, 2000, increased $38.1 million
or 194% from the year ended December 31, 1999.

     Cost of operating revenues for the year ended December 31, 2000 was $119.8
million as compared to $42.1 million for the year ended December 31, 1999. The
185% increase is due to the increased number of lines in service and
installation and operational expenses associated with the expansion of our
network.

     For the year ended December 31, 2000, selling expenses totaled $59.8
million, a 441% increase over the $11.1 million for the year ended December 31,
1999. The increase is primarily a result of increased costs attributable to our
expanded geographic footprint and increased sales force and related sales
support personnel.

     For the year ended December 31, 2000, general and administrative expenses
totaled $121.2 million, a 191% increase over the $41.7 million for the year
ended December 31, 1999. The increase is primarily a result of costs
attributable to administrative personnel and facilities expenses necessary to
support our continued network expansion.

     For the year ended December 31, 2000, we recorded $3.3 million in
stock-based compensation compared to $0.7 million recorded in 1999. This expense
relates to in-the-money stock options granted in 1999 and 2000. Due to the
September 2000 re-pricing of stock options discussed in Note 6 of the
accompanying consolidated financial statements, we are now subject to variable
plan accounting which did not result in any expense recognition in 2000 due to
our stock price at year end. However, we are unable to predict the expense that
may be recognized in future periods as this amount is subject to fluctuations of
the market price of our stock.

     During third quarter 2000, we announced a plan to eliminate 339
collocations and delay our expansion into 12 Northeast and Northwest markets. We
recorded a network optimization charge of $12.0 million that represents
estimated amounts paid or to be paid to incumbent local exchange carriers for
collocation sites for which we have decided to discontinue entrance.

     With respect to the network optimization charge, the total actual charge
will be based on ultimate settlements with the incumbent local exchange
carriers, recovery of costs from any subsequent subleases, our ability to sell
or re-deploy network equipment for growth in our existing network and other
factors.

     For the year ended December 31, 2000, depreciation and amortization was
$51.0 million as compared to $18.9 million for the year ended December 31, 1999.
This increase is a result of placing additional assets in service in accordance
with the planned build-out of our network.

     Gross interest expense for fiscal 2000 totaled $56.6 million, as compared
to $22.3 million for fiscal 1999. Interest capitalized for the year ended
December 31, 2000 increased to $10.7 million as compared to $4.0 million for the
year ended December 31, 1999. The increase in interest capitalized is due to the
increase in switching equipment under construction. Gross interest expense is
primarily attributable to the 13% Senior Notes due 2010 we issued in March 2000
and the 13% Senior Notes due 2004 issued in September 1997.

     Interest income was $41.5 million during the year ended December 31, 2000
compared to $7.7 million for the year ended December 31, 1999. The 438% increase
is a result of increases in cash and investments during certain periods of 2000.
Cash and investments have been used to purchase switching equipment, pay
interest on the senior secured notes and fund operating losses.

     We incurred net losses before extraordinary items of $224.6 million and
$69.8 million for the years ended December 31, 2000 and 1999, respectively.

     For the year ended December 31, 2000, we incurred an extraordinary loss on
the early retirement of debt of $20.1 million. This was attributable to a series
of exchanges of our long-term debt as further described in Note 4 of the
accompanying consolidated financial statements.

     For the year ended December 31, 2000, we recognized preferred stock
dividends of $16.9 million paid in shares of our common stock to holders of our
Series D convertible preferred stock. We also recognized $6.8 million of
accretion to redemption value related to the Series B and Series C convertible
preferred stock.

                                        37
<PAGE>

     Effective June 30, 2000, we acquired Primary Network, a provider of
data-centric communications services to business and residential customers in
the Midwest. From July 1, 2000, the results of Primary Network's operations are
included in our consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

     Assuming that we are successful in our recapitalization plan, we expect
that our available cash will be adequate to fund our operating losses and
planned capital expenditures, as currently projected, through the end of 2002.
We currently project we will require additional financing at that time. As of
December 31, 2001, we had $170.3 million in cash and investments available for
sale and this will be our near-term source of liquidity. We have been generating
from revenues only a portion of the cash necessary to fund our operations. We
have incurred a loss in each year since inception, and we expect to incur
substantial losses for the near future. We have taken the first steps in our
financial restructuring.

     We and our subsidiaries, Mpower Communications Corp. and Mpower Lease
Corporation, intend to implement our proposed recapitalization plan by
commencing a voluntary, pre-negotiated Chapter 11 proceeding no later than April
30, 2002. This Chapter 11 proceeding may also include other subsidiaries. We
cannot predict whether or not we will be able to emerge from our Chapter 11
proceeding.

     We are actively working with our financial advisor Rothschild Inc. to
explore a number of alternatives to improve our funding position, including one
or a combination of the following: bank financing, vendor financing, private
equity investments and cost management initiatives. Without additional capital
we anticipate major changes to our 27 market plan. We cannot assure investors
that we will be successful in obtaining additional debt or equity financing or
in obtaining a bank facility on terms acceptable to us, or at all, or that our
estimate of additional funds required is accurate.

     Our operations require substantial capital investment for the purchase of
equipment and the development and maintenance of our network. Cash outlays for
capital expenditures were $86.4 million, $286.9 million and $83.2 million for
the years ended December 31, 2001, 2000 and 1999, respectively. We expect we
will continue to require substantial amounts of capital to acquire customers,
fund our operating losses, augment our network in our existing markets and
develop new products and services.

     Developing and maintaining our network and business has required and will
continue to require us to incur capital expenditures primarily consisting of the
costs of purchasing switching and associated equipment. As part of our network
growth strategy, we purchased and installed host switches to support each of our
markets while leasing the means of transporting voice and data traffic from
these switches to our customers' telephones or other equipment.

     The substantial capital investment required to initiate services and fund
our operations has exceeded our operating cash flow. This negative cash flow
from operations results from the need to establish our network and sales and
support functions in anticipation of connecting revenue-generating customers. We
expect to continue recording negative cash flow from operations until we
generate adequate revenue to cover the fixed cost of the network. We cannot
assure you we will attain break-even cash flow from operations in subsequent
periods, nor that we have the funding to scale the business to operating cash
flow positive.

     We continually evaluate our capital requirements plan in light of
developments in the telecommunications industry and market acceptance of our
service offerings. The actual amount and timing of future capital requirements
may differ materially from our estimates as a result of, among other things:

     - the cost of the development and support of our networks in each of our
       markets

     - the extent of price and service competition for telecommunication
       services in our markets

     - the demand for our services

     - regulatory and technological developments

     - our ability to develop, acquire and integrate necessary operating support
       systems

                                        38
<PAGE>

     - our ability to re-deploy assets held for future use

     As such, actual costs and revenues may vary from expected amounts, possibly
to a material degree, and such variations are likely to affect our future
capital requirements.

     Beginning in January 2001, we entered into privately negotiated conversions
of our Series D Preferred Stock into shares of our common stock. As of December
2001, we had converted 1,126,612 Series D preferred shares into 2,199,831 common
shares, primarily resulting from these agreements.

     During June 2001, we repurchased $48.9 million in face value of our 2010
Senior Notes for $15.5 million, which was inclusive of $1.4 million of interest
payments, in the open market. We recognized a gain of $32.3 million as a result
of this repurchase, which has been reflected as an extraordinary item in the
Consolidated Statement of Operations.

     In July 2001, pursuant to the terms of the 13% Senior Notes due 2010, as a
result of becoming the publicly held parent holding company of Communications
and after satisfying other preconditions set forth in the indenture governing
the notes, Communications was released from its obligations on the 13% Senior
Notes due 2010. As a result, we became the sole obligor on the 13% Senior Notes
due 2010. In addition, pursuant to a supplemental indenture, we became a
co-obligor, along with Communications, on Communications' 13% Senior Notes due
2004.

CASH FLOW DISCUSSION

     In summary our cash flows were:

<Table>
<Caption>
                                                                 2001
                                                               ---------
<S>                                                            <C>
(IN THOUSANDS)
Net Cash Used in Operating Activities.......................   $(219,205)
Net Cash Provided by Investing Activities...................     240,520
Net Cash Used in Financing Activities.......................     (22,616)
</Table>

     Cash, Cash Equivalents And Investments Available For Sale:  We invest
excess cash predominantly in debt instruments that are highly liquid, of
high-quality investment grade, and predominantly have maturities of less than
two years with the intent to make such funds readily available for operating
purposes. At December 31, 2001, cash, cash equivalents and investments
available-for-sale were $170.3 million. Restricted cash amounted to $12.6
million as of December 31, 2001. The restricted cash balance as of December 31,
2001 primarily represents a commitment we made in September 2001, to pay up to
$4.5 million during the period through December 31, 2002 for employee retention
and incentive compensation bonuses, subject to the terms of the agreements. In
addition, we committed to pay up to $7.5 million in severance payments to
certain employees in the event they are terminated involuntarily, without cause
or voluntarily, with good cause. As of November 2001, we established a trust,
which was funded at a level sufficient to cover the maximum commitment for
retention, incentive compensation and severance payments.

     Operating Activities:  We used $219.2 million in cash for operations for
the year ended December 31, 2001. The use of cash in 2001 was primarily the
result of operating expenses due to salary and related employee expenses, and
costs of information technology, facilities, marketing and professional services
related to the on-going operation of our business. These operating expenses and
associated use of cash were partially offset by revenue and gross profits, which
generated cash.

     Investing Activities:  For the year ended December 31, 2001, we were
provided with $240.5 million in cash from investing activities. The cash
provided in 2001 primarily represents sale of investments available-for-sale to
fund our operating losses and capital requirements.

     Financing Activities:  For the year ended December 31, 2001, we used $22.6
million of cash for financing activities. The cash used in 2001 represents
primarily the repurchase of Senior Notes and continued payments on capital lease
obligations.

                                        39
<PAGE>

     We anticipate a significant reduction in capital expenditures for 2002 as
we have completed the footprint build-out of our network in the markets in which
we operate. To conserve cash we have also decided to delay any further upgrade
and augmentation of our operational support systems. Once we have attracted new
capital into the business, we will revisit this decision. We will continue to
rely on our existing operational support systems. We cannot assure the investor
that these systems will be adequate to support the continued scaling of our
business.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS No. 141).
The standard is effective for acquisitions initiated after June 30, 2001. This
standard eliminates the pooling-of-interests method of accounting for business
combinations and requires the purchase method of accounting for business
combinations. The adoption of SFAS No. 141 has not had a material effect on our
financial results.

     In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS No. 142). We will adopt this standard on January 1, 2002. Upon adoption of
SFAS No. 142, goodwill and other acquired intangible assets with indefinite
lives will no longer be amortized, but will be subject to at least an annual
assessment for impairment through the application of a fair-value-based test. We
do not expect the adoption of SFAS No. 142 to have a material effect on our
financial results.

     In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143). We will adopt this standard on January 1, 2003.
Upon adoption of SFAS No. 143, the fair value of a liability for an asset
retirement obligation will be recognized in the period in which it is incurred.
The associated retirement costs will be capitalized as part of the carrying
amount of the long-lived asset and subsequently allocated to expense over the
asset's useful life. We do not expect the adoption of SFAS No. 143 to have a
material effect on our financial results.

     In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144). We will adopt this standard on
January 1, 2002. This standard addresses financial accounting and reporting for
the impairment and disposal of long-lived assets. We do not expect the adoption
of SFAS No. 144 to have a material effect on our financial results.

TRENDS/UNCERTAINTIES THAT MAY AFFECT THE BUSINESS

     The sector in which our business operates has had many changes over the
past 18 months. As a result of the downturn of the economy and the dramatic
shrinking of the technology sector many of our competitors have discontinued
doing business or have restructured in order to be able to continue to operate.
As a result of the downturn, competitive carriers may face over-expansion, large
amounts of debt and uncertain economic and regulatory conditions.

     On September 26, 2001 we announced that due to revenue trends resulting
from the further deterioration in the overall U.S. economy and continuing
weakness in the telecom market, we were no longer able to affirm that our
business plan was fully funded. In spite of these conditions, there exists
continued growing demand for competitive telecommunications services as well as
high-speed data services. We expect that with the reduction in the number of
competitors our position in the marketplace will improve.

     We scaled back the markets we serve from early to mid 2001, to focus our
resources on the markets we expect to be the most profitable. Most recently, on
February 25, 2002, we announced we were ceasing operations in Charlotte, North
Carolina, where we were serving approximately 500 customers. We do not currently
have any plans to close any additional markets. No assurance can be given that
future operating results will improve after these closings, or that these
closings will not negatively affect our operations. Further, there can be no
assurance that additional market closings will not be required in the future.

                                        40
<PAGE>

     Various long distance carriers and incumbent carriers lease loop, transport
and network facilities to us. The pricing of such facilities are governed by
either a tarriff or an interconnection agreement. These carriers bill us for our
use of such facilities. From time to time, the carriers present inaccurate bills
to us, which we dispute. As a result of such billing inaccurracies, we record an
estimate of our liability based on our measurement of services received. We
cannot assure you that our estimates will be upheld as any disputes are
resolved.

     On confirmation of a plan of reorganization, we may be required to
implement fresh start accounting in accordance with Statement of Position (SOP)
90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code." Our plan of reorganization along with fresh start accounting could
materially change the amounts currently recorded in the consolidated financial
statements. Fresh start accounting creates a new reporting entity and the
recorded amounts of assets and liabilities are adjusted to reflect their
estimated fair values. If fresh start accounting is required, a revaluation of
our assets to reflect current values would be made. The accompanying
consolidated financial statements do not give effect to any adjustment to the
carrying value of assets or amounts and classifications of liabilities that
might be necessary as a result of resolving the bankruptcy.

     Several key legal, regulatory and economic factors may affect our business
over the next 12-15 months.

     On December 12, 2001, the FCC initiated a review of the current regulatory
requirements for incumbent carriers' broadband telecommunications services.
Incumbent carriers are generally treated as dominant carriers, and hence are
subject to certain regulatory requirements, such as tariff filings and pricing
requirements. In this proceeding, the FCC seeks to determine what regulatory
safeguards and carrier obligations, if any, should apply when a carrier that is
dominant in the provision of traditional local exchange and exchange access
services provides broadband service. A decision by the FCC to exempt the
incumbent carriers' broadband services from traditional regulation could have a
significant adverse competitive impact. We cannot reasonably predict the
ultimate outcome of this proceeding.

     In several orders adopted in recent years, the FCC has made major changes
in the structure of the access charges incumbent carriers impose for the use of
their facilities to originate or complete interstate and international calls.
Under the FCC's plan, per-minute access charges have been significantly reduced,
and replaced in part with higher monthly fees to end-users and in part with a
new interstate universal service support system. Under this plan, the largest
incumbent carriers are required to reduce their average access charge to $.0055
per minute over a period of time, and some of these carriers have already
reduced the target level.

     In August 1999, the FCC adopted an order providing additional pricing
flexibility to incumbent carriers subject to price cap regulation in their
provision of interstate access services, particularly special access and
dedicated transport. The FCC eliminated rate scrutiny for "new services" and
permitted incumbent carriers to establish additional geographic zones within a
market that would have separate rates. Additional and more substantial pricing
flexibility will be given to incumbent carriers as specified levels of
competition in a market are reached through the collocation of competitive
carriers and their use of competitive transport. This flexibility includes,
among other items, customer specific pricing, volume and term discounts for some
services and streamlined tariffing. As part of the same August 1999 order, the
FCC initiated another proceeding to consider additional pricing flexibility
proposals for incumbent carriers. We cannot predict the outcome of this
proceeding, which may have an unfavorable effect on our business.

     Under the Telecommunications Act, competitive local exchange carriers are
entitled to receive reciprocal compensation from other telephone companies for
delivering traffic to their customers. A dispute has existed for several years
on whether this compensation applies to calls bound for Internet service
provider clients of the competitive local exchange carriers. Most states have
required telephone companies to pay this compensation to competitive local
exchange carriers. In April 2001, however, the FCC adopted new rules limiting
the right of competitive local exchange carriers to collect compensation on
calls that terminate to Internet service providers, and preempting inconsistent
state rules. Under the new rules, which took effect on June 14, 2001, the amount
of compensation payable on calls to Internet service providers was limited to
$.0015 per minute for the first six months after the rules took effect, $.0010
per minute for the next eighteen months,

                                        41
<PAGE>

and $.0007 per minute thereafter. In addition, the overall amount of
compensation payable in each state is limited based upon the number of minutes
of Internet traffic terminated in the first quarter of 2001. The FCC rules
permit carriers to continue collecting the existing higher rates on calls that
terminate to customers who are not Internet service providers. Any traffic
exchanged between carriers that exceeds a three to one ratio of terminating to
originating minutes is presumed to be Internet calls, although either carrier
may attempt to rebut this presumption and claim a different level of Internet
traffic.

     Internet service providers may be among our potential customers and these
new reciprocal compensation rules could limit our ability to service this group
of customers profitably. While some competitive carriers target Internet service
providers in order to generate additional revenues from reciprocal compensation
charges, at the present time we do not focus our marketing efforts on Internet
service providers. Therefore, these rules will have a minimal impact on us.

     On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy program. This order established new
subsidies for telecommunications and information services provided to qualifying
schools, libraries and rural health providers. The FCC also expanded federal
subsidies for local dial-tone services provided to low-income consumers.
Providers of interstate telecommunications service, including us, must
contribute to these subsidies. In later years, the FCC created additional
subsidies that primarily benefit incumbent telephone companies. On a quarterly
basis, the FCC announces the contribution factor proposed for the next quarter.
For the first quarter of the year 2002, the contribution factor is 0.068086 of a
provider's interstate and international revenue for the third quarter of 2001.
We intend to recover our share of these costs through charges assessed directly
to our customers and participation in federally subsidized programs. The FCC is
considering proposals to change the way contributions are assessed, but we
cannot predict when or whether the FCC will act on these proposals.

     In 1994, Congress passed the Communications Assistance for Law Enforcement
Act ("CALEA") to ensure that law enforcement agencies would be able to conduct
properly authorized electronic surveillance of digital and wireless
telecommunications services CALEA requires telecommunications carriers to modify
their equipment, facilities and services to ensure that they are able to comply
with authorized electronic surveillance requests. For circuit-switched
facilities, carriers such as us were required to comply with CALEA by November
19, 2001. As a result of litigation, the FCC extended the deadline for carriers
to implement the Department of Justice / Federal Bureau of Investigation "punch
list" capabilities until June 30, 2002. The FCC is expected to begin a
proceeding in the next few months to determine which of the six "punch-list"
capabilities carriers must implement.

TABLE OF FUTURE COMMITMENTS

<Table>
<Caption>
                                                                               2005 AND
CONTRACTUAL OBLIGATIONS:                          2002      2003      2004      BEYOND
------------------------                         -------   -------   -------   --------
                                                             (IN THOUSANDS)
<S>                                              <C>       <C>       <C>       <C>
Capital lease obligations......................  $ 7,211   $ 1,783   $   371   $    --
Operating lease obligations....................   13,779    13,001    12,804    36,369
Circuit lease obligations......................    8,900     4,610     2,700       440
                                                 -------   -------   -------   -------
Total..........................................  $29,890   $19,394   $15,875   $36,809
                                                 =======   =======   =======   =======
</Table>

     Approximately $4.6 million of the operating lease payments and circuit
lease payments due were accrued as part of our network optimizaton charges
recorded September 2000, March 2001 and June 2001. We believe that we possess
sufficient liquidity and capital resources to fund these obligations through the
end of 2002. We will require additional funds to continue to pay these
obligations beyond the end of 2002. There can be no assurances that additional
funding will be available at all, or that if available, such financing will be
obtainable on terms favorable to us. We are currently working with our landlords
and vendors to reduce these future commitments through negotiated settlements.

                                        42
<PAGE>

FORWARD LOOKING STATEMENTS

     Under the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, we caution investors that certain statements contained in
this Report regarding our and/or management's intentions, hopes, beliefs,
expectations or predictions of the future are forward-looking statements. We
wish to caution the reader these forward-looking statements are not historical
facts and are only estimates or predictions. Actual results may differ
materially from those projected as a result of risks and uncertainties
including, but not limited to, our ability to implement our recapitalization
plan, projections of future sales, market acceptance of our product offerings,
our ability to secure adequate financing or equity capital to fund our
operations and network expansion, our ability to manage rapid growth and
maintain a high level of customer service, the performance of our network and
equipment, the cooperation of incumbent local exchange carriers in provisioning
lines and interconnecting our equipment, regulatory approval processes, changes
in technology, price competition and other market conditions.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our Senior Notes bear fixed interest rates. However, the fair market value
of this debt is sensitive to changes in prevailing interest rates. We run the
risk that market rates will decline and the required payments will exceed those
based on the current market rate. We do not use interest rate derivative
instruments to manage our exposure to interest rate changes. Based upon quoted
market prices, the fair value of our Senior Notes outstanding is approximately
$73.5 million at December 31, 2001 as compared to a carrying value of $420.8
million. A hypothetical 1% decrease in interest rates would increase the fair
value of our long-term debt by $1.0 million.

     The remainder of our long-term debt consists primarily of variable rate
debt with carrying amounts that approximate their fair values.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The response to this item is submitted as a separate section of this
Report.

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

     None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Our executive officers and directors, and their respective ages as of March
22, 2002, are as follows:

<Table>
<Caption>
NAME                                   AGE                       POSITION
----                                   ---                       --------
<S>                                    <C>    <C>
Rolla P. Huff........................  45     Chief Executive Officer and Chairman of the
                                              Board
S. Gregory Clevenger.................  38     Executive Vice President -- Chief Strategic
                                              and Planning Officer and Director
Michael R. Daley.....................  40     Executive Vice President and Chief Financial
                                              Officer
Michael J. Tschiderer................  42     Vice President of Finance and Controller
Joseph M. Wetzel.....................  46     President, Chief Operating Officer and
                                              Director
Russell I. Zuckerman.................  54     Senior Vice President, General Counsel and
                                              Secretary
</Table>

     Rolla P. Huff currently serves as our chief executive officer and chairman
of our board of directors. Mr. Huff was elected as our chief executive officer
and president and as a member of our board of directors and served in that role
from November 1999 through July 2001. From March 1999 to September 1999, Mr.
Huff served as president and chief operating officer of Frontier Corporation and
served as executive vice

                                        43
<PAGE>

president and chief financial officer of that corporation from May 1998 to March
1999. From July 1997 to May 1998, Mr. Huff was president of AT&T Wireless for
the Central U.S. region and Mr. Huff served as senior vice president and chief
financial officer of that company from March 1995 to July 1997. From July 1994
to March 1995, Mr. Huff was financial vice president of mergers and acquisitions
for AT&T.

     S. Gregory Clevenger joined our company as senior vice president --
corporate development in January 2000 and has since September 2000 served as our
executive vice president -- chief strategic and planning officer. He was elected
to our board of directors on March 22, 2002. From March 1997 to December 1999,
Mr. Clevenger was vice president of investment banking at Goldman, Sachs & Co.
in the communications, media and entertainment group in Singapore and New York.
From September 1992 to March 1997, Mr. Clevenger was an associate and vice
president in the investment banking division of Morgan Stanley & Co.
Incorporated in New York, Hong Kong and Singapore in a variety of groups
including the global telecommunications group and the global project finance and
leasing group.

     Michael R. Daley has served as our executive vice president and chief
financial officer since November 1999. From November 1998 to November 1999, Mr.
Daley served as executive vice president and chief financial officer of
Concentrix Corporation. From 1984 through ACC Corp.'s merger with Teleport
Communications Group, Inc. in 1998, Mr. Daley served in various capacities at
ACC Corp., including as executive vice president and chief financial officer
from March 1994 to October 1998 with responsibilities including operations
support, investor relations, human resources, legal, mergers and acquisitions
and business development.

     Michael J. Tschiderer joined our company in May, 2000 and has served as our
vice president and controller since March, 2001. He served as vice president,
finance and administration from May 2000 to March 2001. Before joining us, Mr.
Tschiderer had been a partner in the accounting firm of Bonadio & Co. in
Rochester, New York from September 1995 to April 2000. Mr. Tschiderer was
responsible for the management consulting division at Bonadio & Co. From 1989 to
1995, Mr. Tschiderer owned various small businesses in the Rochester, NY area.
He is certified public accountant in New York.

     Joseph M. Wetzel currently serves as our president and chief operating
officer. Mr. Wetzel joined our company as president of operations in August
2000, and served that role from August 2000 through July 2001. He was elected to
our board of directors on March 1, 2002. From 1997 to 2000, Mr. Wetzel was vice
president of technology with MediaOne Group and from 1993 to 1997 was vice
president of technology with MediaOne's multimedia group. From 1986 to 1993, Mr.
Wetzel served in numerous positions with US West Advanced Technologies including
senior director, technical management and program management.

     Russell I. Zuckerman joined our company in January 2000 as Director of
National Legal Affairs and has served as our Secretary since April 2000. Since
December 2000, he has served as senior vice president, General Counsel and
Secretary. Before joining us, he had been in private practice since 1973 with
Underberg & Kessler, LLP, a Rochester, New York firm. Mr. Zuckerman had served
as managing partner and chairman of the litigation department at Underberg &
Kessler, and specialized in all aspects of litigation, including commercial,
banking and employment.

     A number of our directors (Maurice J. Gallagher, Jr., Timothy P. Flynn,
David Kronfeld, Mark Masiello, Richard Miller, Thomas Neustaetter and Mark
Pelson) have resigned during the period from June 13, 2001 until March 22, 2002.
Messrs. Clevenger and Wetzel were recently elected as directors to fill two of
the vacancies created by these resignations. The holders of our Series C
Preferred Stock have the right to designate up to two members of our board of
directors, but are not represented on our board at this time.

ITEM 11.  EXECUTIVE COMPENSATION

SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION

     The following table shows, for the fiscal years ended December 31, 2001,
2000 and 1999, the cash compensation paid by us, as well as certain other
compensation paid or accrued for such year, for our chief executive officer and
the four most highly compensated executive officers other than the chief
executive officer employed by us as of December 31, 2001, and one other former
officer who was among the four most highly

                                        44
<PAGE>

compensated officers for 2001. This table also indicates the principal
capacities in which they served during 2001.

                           SUMMARY COMPENSATION TABLE

<Table>
<Caption>
                                                ANNUAL COMPENSATION               LONG TERM
                                      ---------------------------------------   COMPENSATION     ALL OTHER
                                                               OTHER ANNUAL        AWARDS       COMPENSATION
NAME AND PRINCIPAL POSITION    YEAR   SALARY($)   BONUS($)    COMPENSATION($)   OPTIONS(#)(1)       ($)
---------------------------    ----   ---------   ---------   ---------------   -------------   ------------
<S>                            <C>    <C>         <C>         <C>               <C>             <C>
Rolla P. Huff................  2001    500,000      136,300       50,771           956,250(8)          --
  Chief executive              2000    500,000           --       67,150           675,000(5)          --
  officer and director(2)      1999     77,923    1,000,000           --           600,000(5)          --
Joseph M. Wetzel.............  2001    250,000      125,000       38,716           206,250(8)          --
  President and
  Chief-Operating              2000     77,884      300,000           --           275,000(5)          --
  Officer(3)
Michael R. Daley.............  2001    225,000       61,013        2,843           281,250(8)          --
  Executive vice president
  and                          2000    225,000           --           --            75,000(5)          --
  chief financial officer(4)   1999     17,308           --           --           300,000(5)          --
S. Gregory Clevenger.........  2001    200,000       60,077           --           178,125(8)          --
  Executive vice president --  2000    182,692      105,000           --            50,000(5)      66,092
  Chief Strategic and
  planning
  officer(6)                   1999         --           --           --           187,500(5)          --
Russell I. Zuckerman.........  2001    178,942       15,000           --            75,000(8)          --
  Senior vice president --     2000     97,528       15,000           --            52,000(5)          --
  General counsel and
  Secretary..................  1999         --           --           --            48,000(5)          --
Paul D. Celuch...............  2001    188,925       30,000           --                --             --
  President -- sales(7)......  2000    108,654           --           --           112,500             --
</Table>

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

(1) All stock options have been adjusted to reflect the 3-for-2 stock split on
    August 28, 2000.

(2) Mr. Huff commenced employment with us in November 1999, and therefore, the
    salary shown for him for 1999 is for the period from November 1999 through
    December 1999. Mr. Huff received a signing bonus in 1999 in the amount
    indicated in the above table upon his employment with us. Mr. Huff's other
    annual compensation includes various perquisites received by him.

(3) Mr. Wetzel commenced employment with us in August 2000, and therefore, the
    salary shown for him for 2000 is for the period from August 2000 through
    December 2000. Mr. Wetzel's other annual compensation includes various
    perquisites received by him.

(4) Mr. Daley commenced employment with us in November 1999, and therefore, the
    salary shown for him for 1999 is for the period from November 1999 through
    December 1999. Mr. Daley's other annual compensation includes various
    perquisites received by him.

(5) These options were repriced in September 2001.

(6) The other compensation received by Mr. Clevenger represents moving expense
    reimbursements.

(7) As of July 2001, Mr. Celuch was no longer employed by us. As of December 31,
    2001 all options have been cancelled/forfeited.

(8) The options granted in 2001 replace all previously granted options and are
    the only remaining options outstanding as of December 31, 2001.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     Since May 12, 2000, the compensation committee has consisted of Timothy P.
Flynn, David Kronfeld and Mark Pelson. On December 1, 2001, Mr. Pelson resigned
from our Board of Directors. On December 31, 2001, Mr. Flynn resigned from our
Board of Directors. On March 22, 2002, Mr. Kronfeld resigned from our

                                        45
<PAGE>

Board of Directors. To date, none of these individuals have been replaced on the
compensation committee. None of the members of the compensation committee had
been officers or employees of our company.

EMPLOYMENT AGREEMENTS

     Rolla P. Huff.  Our employment agreement with Mr. Huff provides for a base
salary of $500,000 per year and an annual bonus of up to 100% of his base salary
based on our achievement of certain annual targets to be established by the
board of directors in conjunction with our annual operating budget or in the
discretion of the board of directors. Mr. Huff is required to devote his full
time and efforts to the business of our company during the term of his
employment agreement which expires in October 2002. Mr. Huff's employment may be
terminated by either us or Mr. Huff at any time. Mr. Huff has agreed not to
participate in a competitive business during the term of his employment and for
a period of twelve months following termination. In the event Mr. Huff's
employment shall cease within one year after a change of control or he is
terminated without cause or resigns for good reason, Mr. Huff will be entitled
to severance pay equal to two times the salary and bonus paid to him during the
previous 12 months with payments to be made over the 24 month period following
his termination of employment.

     In connection with Mr. Huff's employment with us, we sold to Mr. Huff
225,000 shares of common stock at its value at that time ($19.21 per share,
adjusted for the stock split on August 28, 2000). The purchase price was payable
by a non-recourse promissory note secured by the shares purchased. In August
2001, Mr. Huff's employment agreement was amended. The amended agreement
rescinded the sale of 225,000 shares to Mr. Huff. Pursuant to the amended
agreement, Mr. Huff has returned the note shares to us for cancellation. We have
delivered the note to Mr. Huff for cancellation. The cancellation of the note
and accrued interest has been recognized in the Consolidated Balance Sheet as a
reduction to additional paid-in capital and notes receivable from stockholders
for issuance of common stock.

     The terms of the employment agreement also provided a $1.0 million signing
bonus to Mr. Huff, which was subject to repayment if Mr. Huff's employment was
terminated before three years of employment under certain circumstances.
Pursuant to the terms of the amended employment agreement, we agreed that the
signing bonus shall become immediately fully vested such that Mr. Huff would not
be required to repay the bonus or any portion thereof. Upon acceptance of the
amended employment agreement, we recognized the remaining unamortized portion of
the signing bonus as a component of general and administrative expenses within
the Consolidated Statement of Operations.

     Michael R. Daley.  Our employment agreement with Mr. Daley provides for a
base salary of $225,000 per year and an annual bonus of up to 75% of his base
salary based on our achievement of certain annual targets to be established by
the Board of Directors in conjunction with our annual operating budget. Mr.
Daley's employment may be terminated by either us or Mr. Daley at any time. Mr.
Daley has agreed not to participate in a competitive business during the term of
his employment and for a period of twelve months following termination. In the
event Mr. Daley's employment shall cease within one (1) year after a change of
control or he is terminated without casue or he resigns for good reason, Mr.
Daley will be entitled to severance pay equal to two times the salary and bonus
paid to him during the previous 12 months with payments to be made over the 24
month period following his termination of employment.

     Joseph M. Wetzel.  Our employment agreement with Mr. Wetzel provides for a
base salary of $250,000 per year and an annual bonus of up to 75% of his base
salary based upon achieving established corporate, functional and individual
goals. For the year 2000, Mr. Wetzel was guaranteed a bonus of $100,000, which
was paid in 2001. Mr. Wetzel also received a $300,000 signing bonus at the time
he began employment. The signing bonus vests equally over three years. If Mr.
Wetzel voluntarily terminates his employment or we terminate him for cause prior
to full vesting, he will be required to repay the unvested amount. Mr. Wetzel's
employment may be terminated by either us or Mr. Wetzel at any time. If Mr.
Wetzel's employment is terminated by us without cause or due to a change of
control or there is a material change in Mr. Wetzel's responsibilities after a
change in control, Mr. Wetzel will receive severance pay of 24 months base
salary.

     S. Gregory Clevenger.  Our employment agreement with Mr. Clevenger provides
for: (1) a retention bonus equal to 50% of base salary as of October 1, 2001,
 1/3 to be paid on June 30, 2002 and 2/3 to be paid on

                                        46
<PAGE>

December 31, 2002; (2) a guaranteed annual incentive bonus equal to 50% of his
2001 targeted annual incentive bonus under our 2001 Management Incentive
Program, which was paid in January 2002; and (3) a severance benefit of one
times base salary as of October 1, 2001, to be paid over 12 months if terminated
by us without cause or voluntarily for good reason. Mr. Clevenger has agreed not
to participate in a competitive business during the period in which he receives
the severance benefit.

     Russell I. Zuckerman.  Our employment agreement with Mr. Zuckerman provides
for: (1) a retention bonus equal to 50% of base salary as of October 1, 2001,
 1/3 to be paid on June 30, 2002 and 2/3 to be paid on December 31, 2002; (2) a
guaranteed annual incentive bonus equal to 50% of his 2001 targeted annual
incentive bonus under our 2001 Management Incentive Program, which was paid in
January 2002; and (3) a severance benefit of one times base salary as of October
1, 2001, to be paid over 12 months if terminated by us without cause or
voluntarily for good reason. Mr. Zuckerman has agreed not to participate in a
competitive business during the period in which he receives the severance
benefit.

     Michael J. Tschiderer.  Our employment agreement with Mr. Tschiderer
provides for: (1) a retention bonus equal to 30% of base salary as of October 1,
2001, 1/3 to be paid on June 30, 2002 and 2/3 to be paid on December 31, 2002;
(2) a guaranteed annual incentive bonus equal to 50% of his 2001 targeted annual
incentive bonus under our 2001 Management Incentive Program, which was paid in
January 2002; and (3) a severance benefit of one times base salary as of October
1, 2001, to be paid over 12 months if terminated by us without cause or
voluntarily for good reason. Mr. Tschiderer has agreed not to participate in a
competitive business during the period in which he receives the severance
benefit.

OPTION GRANTS IN LAST FISCAL YEAR

     The table below sets forth information regarding all stock options granted
in the 2001 fiscal year under our Stock Option Plan to those executive officers
named in the Compensation Table above.

<Table>
<Caption>
                                                                                                           POTENTIAL REALIZED
                                                        % OF TOTAL                                              VALUE AT
                                           NUMBER OF     OPTIONS                  MARKET                  ASSUMED ANNUAL RATES
                                           SECURITIES   GRANTED TO               PRICE OR                    OF STOCK PRICE
                                           UNDERLYING   EMPLOYEES               FAIR VALUE                   APPRECIATION(1)
                                            OPTIONS     IN FISCAL    EXERCISE   ON DATE OF   EXPIRATION   ---------------------
                                            GRANTED        YEAR       PRICE       GRANT         DATE         5%          10%
                                           ----------   ----------   --------   ----------   ----------   ---------   ---------
<S>                                        <C>          <C>          <C>        <C>          <C>          <C>         <C>
Rolla P. Huff............................   956,250        16.5%      $0.22       $0.22       09/27/11    $132,304    $335,284
Joseph M. Wetzel.........................   206,250         3.6%      $0.22       $0.22       09/27/11    $ 28,536    $ 72,316
Michael R. Daley.........................   281,250         4.8%      $0.22       $0.22       09/27/11    $ 38,913    $ 98,613
S. Gregory Clevenger.....................   178,125         3.1%      $0.22       $0.22       09/27/11    $ 24,645    $ 62,455
Russell I. Zuckerman.....................    75,000         1.3%      $0.22       $0.22       09/27/11    $ 10,377    $ 26,297
Paul D. Celuch...........................        --         0.0%      $  --       $  --             --    $     --    $     --
</Table>

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

(1) The dollar amounts under these columns are the result of calculations at the
    5% and 10% rates set by the Securities and Exchange Commission and therefore
    are not intended to forecast possible future appreciation, if any, of the
    price of our common stock.

                                        47
<PAGE>

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES

     The following table shows aggregate exercises of options during 2001 and
the values of options held as of December 31, 2001 by those executive officers
named in the Compensation Table above.

<Table>
<Caption>
                                                                                     VALUE OF UNEXERCISED
                                                                    NUMBER OF            IN-THE-MONEY
                                       NUMBER OF               UNEXERCISED OPTIONS         OPTIONS
                                        SHARES                  DECEMBER 31, 2001    DECEMBER 31, 2001(1)
                                      ACQUIRED ON    VALUE       EXERCISABLE(E)/       EXERCISABLE(E)/
                                       EXERCISE     REALIZED    UNEXERCISABLE(U)       UNEXERCISABLE(U)
                                      -----------   --------   -------------------   --------------------
<S>                                   <C>           <C>        <C>                   <C>
Rolla P. Huff.......................       --            --         956,250U              $219,938U
Joseph M. Wetzel....................       --            --         206,250U              $ 47,438U
Michael R. Daley....................       --            --         281,250U              $ 64,688U
S. Gregory Clevenger................       --            --         178,125U              $ 40,969U
Russell I. Zuckerman................       --            --          75,000U              $ 17,250U
Paul D. Celuch(2)...................       --            --             None                   None
</Table>

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

(1) Amounts shown are based upon the closing sale price for our common stock on
    December 31, 2001, which was $0.45 per share.

(2) As of July 2001, Mr. Celuch is no longer employed by us.

TEN-YEAR OPTION REPRICINGS

     In September 2001, following a continued drop in the price of our common
stock, our compensation committee became concerned with the effect of the price
drop on employees holding stock options with higher, and in several cases,
significantly higher exercise prices. After carefully reviewing the matter, the
compensation committee recommended to the Board of Directors that we offer to
all of our active employees the opportunity to have all their existing options
cancelled and new options granted with an exercise price equal to the fair
market value of the shares on September 27, 2001. All of the terms of the new
options are identical to the cancelled options, except that the number of
options granted in each case was reduced by 25% and the vesting periods provide
for annual vesting over three years beginning on September 27, 2001.

     In September 2000, following a sharp, sudden drop in the price of our
common stock, our compensation committee became concerned with the effect of the
price drop on employees holding stock options with higher, and in many cases,
significantly higher exercise prices. After carefully reviewing the matter, the
compensation committee recommended to the Board of Directors that we offer to
all of our active employees, except our chief executive officer, Rolla P. Huff,
the opportunity to have all their existing options cancelled and new options
granted with an exercise price equal to the fair market value of the shares on
September 14, 2000. All of the options granted in September 2000 were exchanged
for the options granted in September 2001. The following table shows information
regarding option re-pricings for all of our executive officers.

                                        48
<PAGE>

<Table>
<Caption>
                                                                                                                       LENGTH OF
                                                                                                                       ORIGINAL
                                                                   NUMBER OF      MARKET      EXERCISE                OPTION TERM
                                                                   SECURITIES    PRICE OF     PRICE OF                 REMAINING
                                                                   UNDERLYING    STOCK AT     STOCK AT      NEW       AT DATE OF
                                                                    OPTIONS      TIME OF      TIME OF     EXERCISE    RE-PRICING
NAME                            PRINCIPLE POSITION        DATE     RE-PRICED    RE-PRICING   RE-PRICING    PRICE       (MONTHS)
----                         -------------------------   -------   ----------   ----------   ----------   --------   -------------
<S>                          <C>                         <C>       <C>          <C>          <C>          <C>        <C>
Rolla P. Huff..............  Chief Executive Officer     9/27/01     450,000      $0.22        $13.33      $0.22           97
                             and Director
Rolla P. Huff..............                              9/27/01     225,000      $0.22        $46.67      $0.22          102
Rolla P. Huff..............                              9/27/01     281,250      $0.22        $36.33      $0.22          102
Joseph M. Wetzel...........  President and Chief         9/27/01     150,000      $0.22        $ 8.88      $0.22          108
                             Operating Officer
Joseph M. Wetzel...........                              9/27/01      56,250      $0.22        $ 2.53      $0.22          110
Joseph M. Wetzel...........                              9/14/00     200,000(1)   $8.70        $ 8.88      $8.70          119
Michael R. Daley...........  Executive Vice President    9/27/01     225,000      $0.22        $16.67      $0.22           98
                             and Chief Financial
                             Officer
Michael R. Daley...........                              9/27/01      56,250      $0.22        $20.00      $0.22          110
Michael R. Daley...........                              9/14/00     300,000(1)   $8.70        $16.67      $8.70          110
S. Gregory Clevenger.......  Executive Vice President    9/27/01     140,625      $0.22        $23.58      $0.22           99
                             Chief Strategic and
                             Planning Officer
S. Gregory Clevenger.......                              9/27/01      37,500      $0.22        $ 2.53      $0.22          110
S. Gregory Clevenger.......                              9/14/00     187,500(1)   $8.70        $23.58      $8.70          111
Russell I. Zuckerman.......  Senior Vice President       9/27/01      36,000      $0.22        $25.67      $0.22           99
                             General Counsel and
                             Secretary
Russell I. Zuckerman.......                              9/27/01       6,000      $0.22        $ 5.50      $0.22          109
Russell I. Zuckerman.......                              9/27/01      33,000      $0.22        $ 2.94      $0.22          111
Russell I. Zuckerman.......                              9/14/00      48,000(1)   $8.70        $25.67      $8.70          112
Paul D. Celuch.............  Former -- President --      9/14/00     112,500      $8.70        $32.67      $8.70          116
                             Sales
Michael J. Tschiderer......  Vice President of Finance   9/27/01      33,750      $0.22        $33.87      $0.22          100
                             and Controller
Michael J. Tschiderer......                              9/27/01       5,624      $0.22        $ 2.53      $0.22          110
Michael J. Tschiderer......                              9/27/01       3,750      $0.22        $ 2.53      $0.22          114
Michael J. Tschiderer......                              9/14/00      45,000(1)   $8.70        $33.87      $8.70          112
Sean T. Higman.............  Former -- Vice President    9/27/01      33,750      $0.22        $32.67      $0.22          105
                             and Treasurer
Sean T. Higman.............                              9/27/01       3,749      $0.22        $ 2.53      $0.22          114
Sean T. Higman.............                              9/14/00      45,000(1)   $8.70        $32.67      $8.70          117
Kent F. Heyman.............  Former -- Senior Vice       9/14/00     112,500      $8.70        $18.33      $8.70          110
                             President and General
                             Counsel
Roger J. Pachuta...........  Senior Vice President --    9/14/00     150,000      $8.70        $33.87      $8.70          113
                             Network Services
</Table>

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

(1) All of these options were exchanged for a reduced number of options in
    September 2001.

DIRECTOR COMPENSATION

     Our outside directors had received meeting fees of $500 to $1,000 per
meeting of the board of directors or committee attended in person in addition to
reimbursement of their expenses in attending meetings of the board of directors.
Currently, due to director resignations, we do not have any outside directors.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table shows information known to us with respect to
beneficial ownership of common stock as of March 22, 2002, by (A) each director,
(B) each of the executive officers named in the Summary Compensation Table
beginning on page 36, (C) all executive officers and directors as a group and
(D) each person known by us to be a beneficial owner of more than 5% of our
outstanding common stock.

                                        49
<PAGE>

<Table>
<Caption>
                                                          NUMBER OF SHARES      PERCENTAGE OF
NAME OF BENEFICIAL OWNER                                BENEFICIALLY OWNED(1)   OWNERSHIP(2)
------------------------                                ---------------------   -------------
<S>                                                     <C>                     <C>
Providence Equity Partners III LLC(3).................        7,847,231             13.2%
Maurice J. Gallagher, Jr.(4)..........................        4,957,412              8.3%
David Kronfeld(5).....................................        3,137,723              5.3%
Rolla P. Huff, chief executive officer and chairman of
  the board(6)........................................            9,000                *
Michael R. Daley, executive vice president and chief
  financial officer...................................           35,000                *
S. Gregory Clevenger, executive vice president and
  director............................................           15,000                *
Russell I. Zuckerman, senior vice president...........            2,050                *
Joseph M. Wetzel, president, chief operating officer
  and director........................................                0                *
All executive officers and directors as a group (6
  Persons)(6).........................................           61,050                *
</Table>

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

* Less than 1% of total.

(1) In accordance with the Securities and Exchange Commission's rules, each
    beneficial owner's holdings have been calculated assuming the full exercise
    of options and the conversion of all shares of convertible preferred stock
    held by the holder which are currently exercisable or convertible or which
    will become exercisable or convertible within 60 days after the date
    indicated and no exercise of options or conversion of preferred stock held
    by any other person.

(2) Percentage of ownership is based on 59,466,023 outstanding as of March 22,
    2002.

(3) Includes 892,857 shares of Series C convertible preferred stock, each share
    of which are convertible into 1.5 shares of common stock. Such shares
    represent 71.4% of the outstanding shares of the Series C convertible
    preferred stock. The address of this beneficial owner is 901 Fleet Center,
    50 Kennedy Plaza, Providence, Rhode Island 02903.

(4) Includes options to purchase 26,000 shares of common stock which are
    presently exercisable or will become exercisable within 60 days after the
    date indicated above and 4,715,667 shares of common stock owned by the
    various partnerships, trusts or corporations with respect to which Mr.
    Gallagher is a general partner, beneficiary and/or controlling stockholder.
    Also includes 67,095 shares owned by a trust for the benefit of Mr.
    Gallagher's minor children with respect to which Mr. Gallagher disclaims any
    beneficial ownership interest. Mr. Gallagher's address is 3291 N. Buffalo
    Drive, Las Vegas, Nevada 89129.

(5) Includes 2,588,809 shares of common stock and 357,143 shares of Series C
    convertible preferred stock, all of which are owned by partnerships in which
    Mr. Kronfeld is a general partner or manager of a general partner. Each
    share of Series C convertible preferred stock is convertible into 1.5 shares
    of common stock. Such shares represent 28.6% of the outstanding shares of
    the Series C convertible preferred stock. Mr. Kronfeld's address is JK&B
    Management, L.L.C., 180 North Stetson Avenue, Suite 4500, Chicago, Illinois
    60601.

(6) Includes 1,500 shares owned by Mr. Huff's wife, of which shares Mr. Huff
    disclaims beneficial ownership.

     To our knowledge, our directors and executive officers do not own any
shares of our Series D convertible preferred stock. We are not aware that any
person owns at least 5% of the outstanding shares of our Series D convertible
preferred stock.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Exchange Act requires our directors and executive
officers and persons who own more than 10% of our equity securities to file
initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission. Such persons are required by the Exchange
Act to furnish us with copies of all Section 16(a) forms they file.

                                        50
<PAGE>

     Based solely on our review of the copies of such forms received by us with
respect to transactions during 2001, or written representations from certain
reporting persons, we believe that all filing requirements applicable to our
directors, executive officers and persons who own more than 10% of our equity
securities have been complied with except that the initial report required for
our newly elected officer, Michael Tschiderer, was filed late by 66 days.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     We have entered into an agreement to lease approximately 76,000 square feet
of office space from a limited liability company which is principally owned by
two of our former directors, Maurice J. Gallagher, Jr. and Timothy P. Flynn. The
average rental rate is $1.70 per square foot per month, which includes common
area maintenance charges. Our management believes that the terms and conditions
of this lease arrangement are at least as favorable to us as those which we
could have received from an unaffiliated third party. During 2001, we paid
approximately $1.6 million in lease payments and leasehold improvements under
this arrangement.

     On October 13, 1999, we sold 225,000 shares of our common stock at a price
of $19.21 per share to our chief executive officer, Rolla P. Huff. The purchase
price was payable by a non-recourse promissory note secured by the shares
purchased. In August 2001, Mr. Huff's employment/stock repurchase agreement
dated October 13, 1999 was amended. The amended agreement rescinded the sale of
225,000 shares to Mr. Huff. Pursuant to the amended agreement, Mr. Huff has
returned the note shares to us for cancellation. We have delivered the note to
Mr. Huff for cancellation.

     During January 2002, we entered into certain agreements with former
employees, whereby in consideration for the payment of $0.1 million and return
of 81,000 shares of our common stock, the former employees were released from
$0.4 million of obligations related to the notes receivable from stockholders
for issuance of common stock.

                                        51
<PAGE>

                                    PART IV

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

     (a)

     1. The response to this portion of Item 14 is submitted as a separate
        section of this report.

     2. The response to this portion of Item 14 is submitted as a separate
        section of this report.

     3. Filing of Exhibits:

<Table>
<S>           <C>  <C>
Exhibit 4.2   --   Voting Agreements and Term Sheet for Exchange of (I) Cash
                   and Newco Common Stock for 13% Senior Notes due 2010 Issued
                   by Mpower Holding Corporation and (II) Newco Common Stock
                   for Series C and Series D Preferred Stock Issued by the
                   Company.
Exhibit 10.8  --   Employment/Stock Repurchase Agreement dated October 13,
                   1999, between Mpower Communications Corp. and Rolla P. Huff.
Exhibit 21    --   Subsidiaries of the Registrant.
Exhibit 23    --   Consent of Arthur Andersen LLP.
Exhibit 99.1  --   Letter to the Commission regarding audit by Arthur Andersen
                   LLP.
</Table>

     (b) The Registrant filed the following reports on Form 8-K during the
         quarter ended December 31, 2001:

          (1) On October 17, 2001 the registrant filed Form 8-K to report an
              amendment to the Rights Agreement and Certification of Compliance
              with Section 26 dated as of August 28, 2001 between Mpower Holding
              Corporation and Continental Stock Transfer & Trust Company.

     (c) The following exhibits are filed herewith or incorporated by reference
         as indicated. Exhibit numbers refer to Item 60l of Regulation S-K.

<Table>
    <S>     <C>
     2.1    Amended and Restated Agreement and Plan of Merger among
            Mpower Communications Corp., Mpower Holding Corporation and
            Mpower Merger Company, Inc., dated as of April 12, 2001.(1)
     3.1    Amended and Restated Certificate of Incorporation of Mpower
            Holding Corporation filed on June 27, 2001 with the
            Secretary of State of Delaware.(2)
     3.2    Amended and Restated By-laws of Mpower Holding Corporation
            adopted on June 27, 2001.(2)
     3.3    Articles of Merger Merging Mpower Merger Company, Inc. with
            and into Mpower Communications Corp. filed with the
            Secretary of State of Nevada effective June 28, 2001.(2)
     3.4    Certificate of Restated Articles of Incorporation of Mpower
            Communications Corp. filed on June 28, 2001 with the
            Secretary of State of Nevada.(2)
     3.5    Amended and Restated By-laws of Mpower Communications Corp.
            adopted on June 28, 2001.(2)
     3.6    Certificate of Merger Merging Mpower Merger Company, Inc.
            with and into Mpower Communications Corp. filed with the
            Secretary of State of Delaware effective June 28, 2001.(2)
     3.7    Certificate of Change in Authorized Capital.(3)
     3.8    Certificate of Change of Resident Agent and Registered
            Office of Mpower Holding Corporation filed with the
            Secretary of State of Nevada on October 24, 2000.(3)
     4.1    See the Articles of Incorporation and amendments filed as
            Exhibits 3.1, 3.3, 3.4 and 3.6 and the By-laws filed as
            Exhibits 3.2 and 3.5.
     4.2    Voting Agreements and Term Sheet for Exchange of (I) Cash
            and Newco Common Stock for 13% Senior Notes due 2010 Issued
            by Mpower Holding Corporation and (II) Newco Common Stock
            for Series C and Series D Preferred Stock Issued by the
            Company.
</Table>

                                        52
<PAGE>
<Table>
    <S>     <C>
     4.3    Certificate of Designation of Mpower Holding Corporation's
            10% Series C convertible preferred stock filed on June 27,
            2001 with the Secretary of State of Delaware.(2)
     4.4    Certificate of Designation of Mpower Holding Corporation's
            7.25% Series D convertible preferred stock filed on June 27,
            2001 with the Secretary of State of Delaware.(2)
     4.5    Indenture dated as of September 29, 1997, between Mpower
            Communications Corp. and Marine Midland Bank, as Trustee.(5)
     4.6    Form of Note for Mpower Communications Corp.'s registered
            13% Senior Secured Notes due 2004.(5)
     4.7    Stockholders Agreement dated as of November 26, 1997, among
            Mpower Communications Corp., Maurice J. Gallagher, Jr. and
            certain investors identified therein.(5)
     4.8    Warrant Registration Rights Agreement dated as of September
            29, 1997, among Mpower Communications Corp., Bear, Stearns &
            Co. Inc. and Furman Selz LLC.(5)
     4.9    Amended and Restated Registration Rights Agreement dated
            December 29, 1999, among Mpower Communications Corp. and the
            purchasers of Series B convertible preferred stock and
            Series C convertible preferred stock.(6)
     4.10   Amended and Restated Securityholders' Agreement dated
            December 29, 1999, among Mpower Communications Corp. and the
            purchasers of Series B convertible preferred stock and
            Series C convertible preferred stock.(6)
     4.11   Certificate of Designation of Series E Preferred Stock.(3)
     4.12   Indenture dated as of March 24, 2000 between Mpower
            Communications Corp., Mpower Holding Corporation and HSBC
            Bank USA, as Trustee.(7)
     4.13   First Supplemental Indenture dated as of May 31, 2000
            between Mpower Communications Corp. and HSBC Bank USA
            (successor to Marine Midland Bank), as Trustee.(8)
     4.14   Registration Rights Agreement dated March 24, 2000 by and
            between Mpower Holding Corp., Mpower Communications Corp.,
            Bear Stearns, Salomon Smith Barney, Goldman Sachs, Merrill
            Lynch and Warburg Dillon.(9)
     4.15   Form of Exchange Note for Mpower Communications Corp.'s 13%
            Senior Notes due 2010.(7)
     4.16   Agreement and Plan of Merger dated as of April 17, 2000,
            among Primary Network Holdings, Inc., Mpower Communications
            Corp. and Mpower Merger Sub, Inc.(7)
     4.17   Shareholders Agreement among Mpower Holding Corporation,
            Brian Matthews, Carol Matthews, Charles Wiegert, Welton
            Brison, Tom Hesterman, Richard Phillips, John Alden, EC
            Primary LLC, Quantum Emerging Growth Partners, C.V., and TGV
            Partners, dated as of April 17, 2000.(7)
     4.18   Letter Agreement among Mpower Holding Corporation and EC
            Primary, L.P., Quantum Emerging Growth Partners C.V., Ravich
            Revocable Trust of 1989, The Ravich Children Permanent
            Trust, U.S. Bancorp Libra, and TGV/Primary Investors LLC,
            dated as of April 17, 2000.(7)
     4.19   Rights Agreement dated as of December 11, 2000 between
            Mpower Communications Corp. and Continental Stock Transfer
            and Trust Company.(3)
     4.20   Second Supplemental Indenture dated as of July 12, 2001,
            between Mpower Communications Corp., Mpower Holding
            Corporation and HSC Bank USA (formerly known as Marine
            Midland Bank), as trustee.(10)
    10.1    Mpower Holding Corporation's Amended and Restated Stock
            Option Plan.(11)
    10.2    Primary Network Holdings, Inc. Stock Option Plan.(11)
    10.3    Amendment No. 1 to Primary Network Holdings, Inc. Stock
            Option Plan.(11)
    10.4    Warrant Agreement dated September 29, 1997, between Mpower
            Communications Corp. and Marine Midland Bank.(5)
    10.5    Standard Office Lease Agreement dated July 1, 1997, between
            Mpower Communications Corp. and Cheyenne Investments
            L.L.C.(5)
    10.6    First Amendment to Lease dated May 1, 1998 between Cheyenne
            Investments, LLC and Mpower Communications Corp.(12)
</Table>

                                        53
<PAGE>
<Table>
    <S>     <C>
    10.7    Second Amendment to Lease dated December 29, 1998 between
            Cheyenne Investments, LLC and Mpower Communications
            Corp.(12)
    10.8    Employment/Stock Repurchase Agreement dated October 13,
            1999, between Mpower Communications Corp. and Rolla P.
            Huff.(4)
    10.9    Standard Office Lease Agreement dated March 5, 1999, between
            Cheyenne Investments, LLC and Mpower Communications
            Corp.(13)
    10.10   Employment Letter dated August 8, 2000 between Mpower
            Communications Corp. and Joseph M. Wetzel.(3)
    10.11   Retirement and Employment Agreement dated as of December 7,
            2000 between Mpower Communications Corp. and Kent F.
            Heyman.(3)
    10.12   Amendment To Employment/Stock Repurchase Agreement dated
            August 1, 2001, between Mpower Holding Corporation and Rolla
            P. Huff.(10)(4)
    21      Subsidiaries of the Registrant.
    23.1    Consent of Arthur Andersen LLP.
    99.1    Letter to the Commission regarding audit by Arthur Andersen
            LLP.
</Table>

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

(1)  Incorporated by reference to Mpower Holding Corporation's Registration
     Statement on Form S-4 (File No. 333-56746) filed with the Commission on
     April 13, 2001.

(2)  Incorporated by reference to Mpower Holding Corporation's Report on Form
     8-K (File No. 333-39884-01) filed with the Commission on June 28, 2001.

(3)  Incorporated by reference to Mpower Communication Corp.'s Registration
     Statement on Form S-3 (File No. 333-79963) filed with the Commission on
     June 3, 1999.

(4)  Management contract or compensation plan or agreement required to be filed
     as an Exhibit to this Report on Form 10-K pursuant to Item 14(C) of Form
     10-K.

(5)  Incorporated by reference to Mpower Communication Corp.'s Registration
     Statement on Form S-4 (File No. 333-38875) filed with the Commission on
     October 28, 1997, and amendments thereto.

(6)  Incorporated by reference to Mpower Communication Corp.'s Registration
     Statement on Form S-3 (File No. 333-91353) filed with the Commission on
     November 19, 1999, and amendments thereto.

(7)  Incorporated by reference to Mpower Communication Corp.'s Registration
     Statement on Form S-4 (File No. 333-36672) filed with the Commission on May
     10, 2000, and amendments thereto.

(8)  Incorporated by reference to Mpower Communication Corp.'s Report on Form
     8-K (File No. 0-24059) filed with the Commission on June 2, 2000.

(9)  Incorporated by reference to Mpower Communication Corp.'s Registration
     Statement on Form S-4 (File No. 333-39884) filed with the Commission on
     June 22, 2000, and amendments thereto.

(10) Incorporated by reference to Mpower Holding Corporation's quarterly report
     on Form 10-Q (File No. 0-24059) for the quarter ended September 30, 2001.

(11) Incorporated by reference to the Company's registration statement on Form
     S-8 (File No. 333-64592) filed with the Commission on July 3, 2001.

(12) Incorporated by reference to Mpower Communication Corp.'s annual report on
     Form 10-K (File No. 0-24059) for the year ended December 31, 1998.

(13) Incorporated by reference to Mpower Communication Corp.'s annual report on
     Form 10-K (File No. 0-24059) for the year ended December 31, 1999.

     All schedules have been omitted as they are not required under the related
instructions, are inapplicable, or because the information required is included
in the consolidated financial statements or related notes thereto.

                                        54
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          MPOWER HOLDING CORPORATION

                                          By:       /s/ ROLLA P. HUFF
                                            ------------------------------------
                                                       Rolla P. Huff
                                                  Chief Executive Officer

Date: March 22, 2002

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

<Table>
<S>     <C>                                          <C>                                  <C>

                /s/ ROLLA P. HUFF                       Chief Executive Officer and       March 22, 2002
 ------------------------------------------------          Chairman of the Board
                  Rolla P. Huff


               /s/ MICHAEL R. DALEY                   Executive Vice President (Chief     March 22, 2002
 ------------------------------------------------     Financial Officer and Principal
                 Michael R. Daley                           Accounting Officer)


               /s/ JOSEPH M. WETZEL                      President (Chief Operating       March 22, 2002
 ------------------------------------------------          Officer) and Director
                 Joseph M. Wetzel


             /s/ S. GREGORY CLEVENGER                 Executive Vice President (Chief     March 22, 2002
 ------------------------------------------------    Strategy and Planning Officer) and
               S. Gregory Clevenger                               Director
</Table>

                                        55
<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                           MPOWER HOLDING CORPORATION

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Public Accountants....................   F-2
Consolidated Balance Sheets as of December 31, 2001 and
  2000......................................................   F-3
Consolidated Statements of Operations for the years ended
  December 31, 2001, 2000 and 1999..........................   F-4
Consolidated Statements of Redeemable Preferred Stock and
  Stockholders' (Deficit) 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-7
Schedule II -- Valuation and Qualifying Accounts and
  Reserves for the years ended December 31, 2001, 2000 and
  1999......................................................  F-35
</Table>

                                       F-1
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Mpower Holding Corporation:

     We have audited the accompanying consolidated balance sheets of Mpower
Holding Corporation (a Delaware corporation) and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of operations, redeemable
preferred stock and stockholders' (deficit) equity 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. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mpower Holding Corporation
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.

     The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 17 to the
financial statements, the Company has suffered recurring losses from operations
and has a net stockholders' deficit that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 17. The financial statements do not include
any adjustments relating to the recoverabability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.

     Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

                                          /s/ ARTHUR ANDERSEN LLP
Rochester, New York
February 6, 2002 (except with respect to the matters discussed in
              Note 14, as to which the date is March 27, 2002)

                                       F-2
<PAGE>

                           MPOWER HOLDING CORPORATION

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                      DECEMBER 31,
                                                              ----------------------------
                                                                  2001           2000
                                                              ------------   -------------
                                                              (IN THOUSANDS, EXCEPT SHARE
                                                                 AND PER SHARE AMOUNTS)
<S>                                                           <C>            <C>
                           ASSETS
Current assets:
  Cash and cash equivalents.................................   $   9,136      $   10,437
  Investments available-for-sale............................     161,144         492,804
  Restricted investments....................................      12,640           1,065
  Accounts receivable, less allowance for doubtful accounts
    of $4,330 and $5,271 at December 31, 2001 and 2000,
    respectively............................................      24,825          28,117
  Prepaid expenses and other current assets.................       5,587           2,826
                                                               ---------      ----------
         Total current assets...............................     213,332         535,249
Property and equipment, net.................................     385,872         482,265
Deferred financing costs, net of accumulated amortization of
  $2,095 and $895 at December 31, 2001 and 2000,
  respectively..............................................       8,400          10,794
Goodwill and other intangibles, net of accumulated
  amortization of $8,147 at December 31, 2000...............          --         137,469
Other assets................................................       6,043           6,683
                                                               ---------      ----------
         Total assets.......................................   $ 613,647      $1,172,460
                                                               =========      ==========
 LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
                       (DEFICIT) EQUITY
Current liabilities:
  Current maturities of long-term debt and capital lease
    obligations.............................................   $   7,729      $    8,422
  Accounts payable:
    Trade...................................................      24,336          36,584
    Property and equipment..................................       4,493          39,263
  Accrued interest..........................................      14,023          15,613
  Accrued sales taxes payable...............................       7,077           9,091
  Accrued network optimization costs........................      13,593           5,030
  Accrued other expenses....................................      24,087          20,045
                                                               ---------      ----------
         Total current liabilities..........................      95,338         134,048
Senior notes, net of unamortized discount of $10,686 and
  $13,564 at December 31, 2001 and 2000, respectively.......     420,803         466,845
Other long-term debt and capital lease obligations..........       2,154           9,814
                                                               ---------      ----------
      Total liabilities.....................................     518,295         610,707
                                                               ---------      ----------
Commitments and contingencies
Redeemable preferred stock:
  10% Series C convertible preferred stock, 1,250,000 shares
    authorized, issued and outstanding at December 31, 2001
    and 2000................................................      46,610          42,760
  7.25% Series D convertible preferred stock, 3,013,388 and
    4,140,000 shares authorized, issued and outstanding at
    December 31, 2001 and 2000, respectively................     156,220         202,126
Stockholders' (deficit) equity:
Preferred stock, 45,636,612 and 44,510,000 shares authorized
  but unissued at December 31, 2001 and 2000,
  respectively..............................................          --              --
Series E preferred stock, 100,000 shares authorized but
  unissued..................................................          --              --
Common stock, $0.001 par value, 300,000,000 shares
  authorized, 59,488,843 and 56,875,870 shares issued and
  outstanding at December 31, 2001 and 2000, respectively...          59              57
Additional paid-in capital..................................     712,334         672,031
Accumulated deficit.........................................    (826,615)       (358,875)
Less: treasury stock, 13,710 shares, at cost................         (76)            (76)
Notes receivable from stockholders for issuance of common
  stock.....................................................        (973)         (5,294)
Accumulated other comprehensive income......................       7,793           9,024
                                                               ---------      ----------
         Total stockholders' (deficit) equity...............    (107,478)        316,867
                                                               ---------      ----------
         Total liabilities, redeemable preferred stock and
           stockholders' (deficit) equity...................   $ 613,647      $1,172,460
                                                               =========      ==========
</Table>

          See accompanying notes to consolidated financial statements.

                                       F-3
<PAGE>

                           MPOWER HOLDING CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                        ------------------------------------------
                                                            2001           2000           1999
                                                        ------------   ------------   ------------
                                                        (IN THOUSANDS, EXCEPT SHARE AND PER SHARE
                                                                         AMOUNTS)
<S>                                                     <C>            <C>            <C>
Operating revenues:
  Telecommunication services..........................  $   195,695    $   146,862    $    55,066
Operating expenses:
  Cost of operating revenues (excluding
     depreciation)....................................      158,709        119,767         42,078
  Selling.............................................       62,352         59,840         11,065
  General and administrative..........................      129,949        121,218         41,705
  Stock-based compensation expense....................        3,081          3,345            714
  Network optimization cost...........................      233,083         12,000             --
  Depreciation and amortization.......................       76,118         50,975         18,921
                                                        -----------    -----------    -----------
                                                            663,292        367,145        114,483
                                                        -----------    -----------    -----------
     Loss from operations.............................     (467,597)      (220,283)       (59,417)
Other income (expense):
  Gain on sale of assets, net.........................        5,596            102            224
  Interest income.....................................       20,812         41,466          7,702
  Interest expense (net of amount capitalized)........      (58,873)       (45,934)       (18,278)
                                                        -----------    -----------    -----------
     Net loss before extraordinary item...............     (500,062)      (224,649)       (69,769)
Extraordinary item:
  Gain (loss) on early retirement of debt.............       32,322        (20,065)            --
                                                        -----------    -----------    -----------
     Net loss.........................................     (467,740)      (244,714)       (69,769)
Value of preferred stock beneficial conversion
  feature.............................................           --             --        (72,500)
Accretion of preferred stock to redemption value......           --         (6,765)        (6,133)
Accrued preferred stock dividend......................      (21,782)       (16,889)        (2,577)
                                                        -----------    -----------    -----------
Net loss applicable to common stockholders............  $  (489,522)   $  (268,368)   $  (150,979)
                                                        ===========    ===========    ===========
Basic and diluted loss per share of common stock......  $     (8.26)   $     (5.20)   $     (5.09)
                                                        ===========    ===========    ===========
Gain (loss) per share applicable to extraordinary
  item................................................  $      0.55    $     (0.39)   $        --
                                                        ===========    ===========    ===========
Basic and diluted weighted average shares
  outstanding.........................................   59,245,239     51,630,640     29,663,115
                                                        ===========    ===========    ===========
</Table>

          See accompanying notes to consolidated financial statements.

                                       F-4
<PAGE>

                           MPOWER HOLDING CORPORATION

           CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND
                         STOCKHOLDERS' (DEFICIT) EQUITY
<Table>
<Caption>

                                                                                    REDEEMABLE
                                                                                 PREFERRED STOCK          COMMON STOCK
                                                              COMPREHENSIVE   ----------------------   -------------------
                                                                  LOSS          SHARES       AMOUNT      SHARES     AMOUNT
                                                              -------------   -----------   --------   ----------   ------
                                                                          (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S>                                                           <C>             <C>           <C>        <C>          <C>
BALANCE AT DECEMBER 31, 1998................................                           --   $     --   25,785,642    $26
Unrealized loss on investments available-for-sale...........    $  (1,903)             --         --           --     --
Common stock issued.........................................           --              --         --    7,540,502      8
Warrants and options exercised for common stock.............           --              --         --    1,329,058      1
Common stock issued for notes receivable....................           --              --         --      225,000     --
Payment on stockholders' notes..............................           --              --         --           --     --
Repurchase of common stock..................................           --              --         --      (13,710)    --
10% Series B convertible preferred stock issued for cash....           --       5,277,779     46,663           --     --
10% Series C convertible preferred stock issued for cash....           --       1,250,000     34,500           --     --
Preferred stock issued for note receivable..................           --              --     (4,900)          --     --
Stock-based compensation....................................           --              --         --           --     --
Accrued preferred stock dividend............................           --              --      2,577           --     --
Value of preferred stock beneficial conversion features.....           --              --         --           --     --
Value of preferred stock beneficial conversion features.....           --              --         --           --     --
Accretion of preferred stock to redemption value............           --              --      6,133           --     --
Net loss....................................................      (69,769)             --         --           --     --
                                                                ---------     -----------   --------   ----------    ---
COMPREHENSIVE LOSS..........................................      (71,672)
                                                                ---------
BALANCE AT DECEMBER 31, 1999................................                    6,527,779     84,973   34,866,492     35
Unrealized gain on investments available-for-sale...........       10,110              --         --           --     --
Common stock issued for cash................................           --              --         --    9,245,564      9
Warrants and options exercised for common stock.............           --              --         --    1,298,728      1
Payment on stockholders' notes..............................           --              --      4,900           --     --
10% Series B convertible preferred stock converted to common
  stock for cash............................................           --      (5,277,779)   (55,153)   7,916,668      8
7.25% Series D convertible preferred stock issued for
  cash......................................................           --       4,140,000    200,575           --     --
Stock-based compensation....................................           --              --         --           --     --
Accrued preferred stock dividend............................           --              --     16,889           --     --
Preferred dividends paid in common stock....................           --              --    (14,063)   1,448,661      2
Accretion of preferred stock to redemption value............           --              --      6,765           --     --
Shares issued for acquisition of Primary Network............           --              --         --    2,024,757      2
Options and warrants issued for acquisition of Primary
  Network...................................................           --              --         --           --     --
Shares issued in exchange of Primary Network Senior Notes...           --              --         --       75,000     --
Net loss....................................................     (244,714)             --         --           --     --
                                                                ---------     -----------   --------   ----------    ---
COMPREHENSIVE LOSS..........................................     (234,604)
                                                                ---------
BALANCE AT DECEMBER 31, 2000................................                    5,390,000    244,886   56,875,870     57
Unrealized loss on investments available-for-sale...........       (1,231)             --         --           --     --
Warrants and options exercised for common stock.............           --              --         --      211,072     --
Cancellation of stockholder's note for common stock.........           --              --         --     (225,000)    --
Stock-based compensation....................................           --              --         --           --     --
Accrued preferred stock dividend............................           --              --     15,157           --     --
Preferred dividends paid in common stock....................           --              --     (2,995)     427,070     --
7.25% Series D convertible preferred stock converted to
  common stock..............................................           --      (1,126,612)   (54,218)   2,199,831      2
Net loss....................................................     (467,740)             --         --           --     --
                                                                ---------     -----------   --------   ----------    ---
COMPREHENSIVE LOSS..........................................    $(468,971)
                                                                ---------
BALANCE AT DECEMBER 31, 2001................................                    4,263,388   $202,830   59,488,843    $59
                                                                              ===========   ========   ==========    ===

<Caption>
                                                                                                                NOTES
                                                                                                           RECEIVABLE FROM
                                                              ADDITIONAL                 TREASURY STOCK    STOCKHOLDERS FOR
                                                               PAID-IN     ACCUMULATED   ---------------     ISSUANCE OF
                                                               CAPITAL       DEFICIT     SHARES   AMOUNT     COMMON STOCK
                                                              ----------   -----------   ------   ------   ----------------
                                                                          (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S>                                                           <C>          <C>           <C>      <C>      <C>
BALANCE AT DECEMBER 31, 1998................................   $108,982     $ (44,392)       --    $ --        $(2,173)
Unrealized loss on investments available-for-sale...........         --            --        --      --             --
Common stock issued.........................................    118,302            --        --      --             --
Warrants and options exercised for common stock.............      1,678            --        --      --             --
Common stock issued for notes receivable....................      4,322            --        --      --         (4,322)
Payment on stockholders' notes..............................         --            --        --      --            200
Repurchase of common stock..................................         --            --    13,710     (76)            76
10% Series B convertible preferred stock issued for cash....         --            --        --      --             --
10% Series C convertible preferred stock issued for cash....         --            --        --      --             --
Preferred stock issued for note receivable..................         --            --        --      --             --
Stock-based compensation....................................        714            --        --      --             --
Accrued preferred stock dividend............................     (2,577)           --        --      --             --
Value of preferred stock beneficial conversion features.....    (72,500)           --        --      --             --
Value of preferred stock beneficial conversion features.....     72,500            --        --      --             --
Accretion of preferred stock to redemption value............     (6,133)           --        --      --             --
Net loss....................................................         --       (69,769)       --      --             --
                                                               --------     ---------    ------    ----        -------
COMPREHENSIVE LOSS..........................................
BALANCE AT DECEMBER 31, 1999................................    225,288      (114,161)   13,710     (76)        (6,219)
Unrealized gain on investments available-for-sale...........         --            --        --      --             --
Common stock issued for cash................................    316,724            --        --      --             --
Warrants and options exercised for common stock.............      2,944            --        --      --             --
Payment on stockholders' notes..............................         --            --        --      --            925
10% Series B convertible preferred stock converted to common
  stock for cash............................................     55,145            --        --      --             --
7.25% Series D convertible preferred stock issued for
  cash......................................................         --            --        --      --             --
Stock-based compensation....................................      3,345            --        --      --             --
Accrued preferred stock dividend............................    (16,889)           --        --      --             --
Preferred dividends paid in common stock....................     14,061            --        --      --             --
Accretion of preferred stock to redemption value............     (6,765)           --        --      --             --
Shares issued for acquisition of Primary Network............     70,382            --        --      --             --
Options and warrants issued for acquisition of Primary
  Network...................................................      5,171            --        --      --             --
Shares issued in exchange of Primary Network Senior Notes...      2,625            --        --      --             --
Net loss....................................................         --      (244,714)       --      --             --
                                                               --------     ---------    ------    ----        -------
COMPREHENSIVE LOSS..........................................
BALANCE AT DECEMBER 31, 2000................................    672,031      (358,875)   13,710     (76)        (5,294)
Unrealized loss on investments available-for-sale...........         --            --        --      --             --
Warrants and options exercised for common stock.............         72            --        --      --             --
Cancellation of stockholder's note for common stock.........     (4,904)           --        --      --          4,321
Stock-based compensation....................................      3,081            --        --      --             --
Accrued preferred stock dividend............................    (15,157)           --        --      --             --
Preferred dividends paid in common stock....................      2,995            --        --      --             --
7.25% Series D convertible preferred stock converted to
  common stock..............................................     54,216            --        --      --             --
Net loss....................................................         --      (467,740)       --      --             --
                                                               --------     ---------    ------    ----        -------
COMPREHENSIVE LOSS..........................................
BALANCE AT DECEMBER 31, 2001................................   $712,334     $(826,615)   13,710    $(76)       $  (973)
                                                               ========     =========    ======    ====        =======

<Caption>
                                                               ACCUMULATED
                                                                  OTHER           TOTAL
                                                              COMPREHENSIVE   STOCKHOLDERS'
                                                                 INCOME         (DEFICIT)
                                                                 (LOSS)          EQUITY
                                                              -------------   -------------
                                                              (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S>                                                           <C>             <C>
BALANCE AT DECEMBER 31, 1998................................     $   817        $  63,260
Unrealized loss on investments available-for-sale...........      (1,903)          (1,903)
Common stock issued.........................................          --          118,310
Warrants and options exercised for common stock.............          --            1,679
Common stock issued for notes receivable....................          --               --
Payment on stockholders' notes..............................          --              200
Repurchase of common stock..................................          --               --
10% Series B convertible preferred stock issued for cash....          --               --
10% Series C convertible preferred stock issued for cash....          --               --
Preferred stock issued for note receivable..................          --               --
Stock-based compensation....................................          --              714
Accrued preferred stock dividend............................          --           (2,577)
Value of preferred stock beneficial conversion features.....          --          (72,500)
Value of preferred stock beneficial conversion features.....          --           72,500
Accretion of preferred stock to redemption value............          --           (6,133)
Net loss....................................................          --          (69,769)
                                                                 -------        ---------
COMPREHENSIVE LOSS..........................................
BALANCE AT DECEMBER 31, 1999................................      (1,086)         103,781
Unrealized gain on investments available-for-sale...........      10,110           10,110
Common stock issued for cash................................          --          316,733
Warrants and options exercised for common stock.............          --            2,945
Payment on stockholders' notes..............................                          925
10% Series B convertible preferred stock converted to common
  stock for cash............................................          --           55,153
7.25% Series D convertible preferred stock issued for
  cash......................................................          --               --
Stock-based compensation....................................          --            3,345
Accrued preferred stock dividend............................          --          (16,889)
Preferred dividends paid in common stock....................          --           14,063
Accretion of preferred stock to redemption value............          --           (6,765)
Shares issued for acquisition of Primary Network............          --           70,384
Options and warrants issued for acquisition of Primary
  Network...................................................          --            5,171
Shares issued in exchange of Primary Network Senior Notes...          --            2,625
Net loss....................................................          --         (244,714)
                                                                 -------        ---------
COMPREHENSIVE LOSS..........................................
BALANCE AT DECEMBER 31, 2000................................       9,024          316,867
Unrealized loss on investments available-for-sale...........      (1,231)          (1,231)
Warrants and options exercised for common stock.............          --               72
Cancellation of stockholder's note for common stock.........          --             (583)
Stock-based compensation....................................          --            3,081
Accrued preferred stock dividend............................          --          (15,157)
Preferred dividends paid in common stock....................          --            2,995
7.25% Series D convertible preferred stock converted to
  common stock..............................................          --           54,218
Net loss....................................................          --         (467,740)
                                                                 -------        ---------
COMPREHENSIVE LOSS..........................................
BALANCE AT DECEMBER 31, 2001................................     $ 7,793        $(107,478)
                                                                 =======        =========
</Table>

          See accompanying notes to consolidated financial statements.

                                       F-5
<PAGE>

                           MPOWER HOLDING CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                  YEAR ENDED DECEMBER 31,
                                                              --------------------------------
                                                                2001        2000        1999
                                                              ---------   ---------   --------
                                                                       (IN THOUSANDS)
<S>                                                           <C>         <C>         <C>
Cash flows from operating activities:
Net loss....................................................  $(467,740)  $(244,714)  $(69,769)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation and amortization.............................     76,118      50,975     18,921
  Bad debt expense..........................................      7,057       5,469      1,750
  Gain (loss) on early retirement of debt...................    (32,322)     20,065         --
  Network optimization cost.................................    233,083      12,000         --
  Gain on sale of assets, net...............................     (5,596)        (34)      (224)
  Amortization of debt discount.............................      1,479       1,330        575
  Amortization of deferred debt financing costs.............      1,329       1,233        794
  Stock-based compensation expense..........................      3,081       3,345        714
Changes in assets and liabilities:
  Increase in accounts receivable...........................     (3,344)    (15,569)   (10,689)
  (Increase) decrease in prepaid expenses and other
    assets..................................................     (2,761)      1,820     (1,319)
  Decrease (increase) in other assets.......................        655      (5,427)      (464)
  (Decrease) increase in accounts payable -- trade..........    (12,248)      9,220      6,474
  (Decrease) increase in sales taxes payable................     (2,014)      4,746      2,945
  Decrease in accrued network optimization costs............    (14,901)       (970)        --
  (Decrease) increase in accrued interest and other
    expenses................................................     (1,081)     14,962      4,379
                                                              ---------   ---------   --------
Net cash used in operating activities.......................   (219,205)   (141,549)   (45,913)
                                                              ---------   ---------   --------
Cash flows from investing activities:
  Purchase of property and equipment, net of payables.......    (86,402)   (286,910)   (83,200)
  Net cash paid for acquisition of business.................         --     (13,475)        --
  Proceeds from sale of customer base.......................      1,601          --         --
  Sale (purchase) of investments available-for-sale, net....    336,911    (356,603)   (54,707)
  (Purchase) sale of restricted investments, net............    (11,590)     21,191     19,123
                                                              ---------   ---------   --------
Net cash provided by (used in) investing activities.........    240,520    (635,797)  (118,784)
                                                              ---------   ---------   --------
Cash flows from financing activities:
  Proceeds from issuance of Senior Notes, net of discount...         --     243,220         --
  Costs associated with issuance of Senior Notes and
    warrants................................................         --     (10,482)        --
  Proceeds from issuance of Convertible Preferred Stock, net
    of issuance costs.......................................         --     200,575     76,263
  Repurchase of Senior Notes................................    (14,134)     (9,647)        --
  Payments on other long term debt and capital lease
    obligations.............................................     (8,554)     (4,365)      (439)
  Payments received on stockholders' notes..................         --       5,825         --
  Proceeds from issuance of common stock....................         72     319,678    119,966
                                                              ---------   ---------   --------
Net cash (used in) provided by financing activities.........    (22,616)    744,804    195,790
                                                              ---------   ---------   --------
Net (decrease) increase in cash.............................     (1,301)    (32,542)    31,093
Cash and cash equivalents at beginning of year..............     10,437      42,979     11,886
                                                              ---------   ---------   --------
Cash and cash equivalents at the end of year................  $   9,136   $  10,437   $ 42,979
                                                              =========   =========   ========
Supplemental schedule of non-cash investing and financing
  activities:
  Treasury stock acquired in partial settlement of a note...  $      --   $      --   $     76
                                                              =========   =========   ========
  Stock issued for acquisition of subsidiary................  $      --   $  70,384   $    223
                                                              =========   =========   ========
  Options and warrants issued for acquisition of
    subsidiary..............................................  $      --   $   5,171   $     --
                                                              =========   =========   ========
  Preferred stock converted to common stock.................  $  54,218   $  55,153   $     --
                                                              =========   =========   ========
  Preferred stock dividends declared........................  $  15,157   $  16,889   $  2,577
                                                              =========   =========   ========
  Accretion of preferred stock to redemption value..........  $      --   $   6,765   $  6,133
                                                              =========   =========   ========
  Common stock issued for notes receivable..................  $      --   $      --   $  4,322
                                                              =========   =========   ========
  Preferred stock issued for note receivable................  $      --   $      --   $  4,900
                                                              =========   =========   ========
Other disclosures:
  Cash paid for interest net of amounts capitalized.........  $  55,750   $  32,276   $ 16,915
                                                              =========   =========   ========
</Table>

          See accompanying notes to consolidated financial statements.
                                       F-6
<PAGE>

                           MPOWER HOLDING CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               DECEMBER 31, 2001

(1) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

  DESCRIPTION OF BUSINESS

     The accompanying consolidated financial statements of Mpower Holding
Corporation (the "Company"), a Delaware corporation, include the accounts of the
Company and its wholly-owned subsidiaries, Mpower Communications Corp.
("Communications") and others. All significant inter-company balances and
transactions have been eliminated.

     On June 28, 2001, the Company became the publicly held parent holding
company of Communications pursuant to a merger agreement approved by
Communications' stockholders. All of the outstanding shares of Communications'
common stock, 10% Series C Convertible Preferred Stock and 7.25% Series D
Convertible Preferred Stock were automatically converted into an equal number of
shares of the Company's common stock, 10% Series C Convertible Preferred Stock
and 7.25% Series D Convertible Preferred Stock, respectively. During 2001, the
common stock and 7.25% Series D Convertible Preferred Stock of the Company were
listed on the NASDAQ national market system under the same symbols as the common
stock and 7.25% Series D Convertible Preferred Stock of Communications prior to
the merger.

     The Company offers local dial-tone, long distance, Internet access via
dedicated Symmetrical Digital Subscriber Line ("SDSL") technology, Trunk Level 1
("T1"), voice over SDSL ("VoSDSL"), and other voice and data services primarily
to small to medium size business customers through the utilization of
Company-owned switches and network architecture leased from incumbent local
exchange carriers ("ILEC's"). As of December 31, 2001, the Company delivered
services in 28 metropolitan areas in 9 states.

  REVENUE RECOGNITION

     Revenues for voice, data and other services to end-users are recognized in
the month in which the service is provided. Revenues for carrier interconnection
and access are recognized in the month in which the service is provided. Amounts
for services billed in advance of the service period and cash received in
advance of revenues earned are recorded as unearned revenues and recognized as
revenue over the expected service period.

     The Company accounts for certain activation and reactivation fees charged
to customers pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 101 ("SAB No. 101"). The Company defers these fees and records the
related revenue and cost of operating revenue over the estimated customer
service period rather than recording the revenues and charges when received or
paid.

     During 1999, the Company had recognized switched access revenues based on
management's best estimate of the probable collections from such revenue billed
to carriers. As of December 31, 2000, the Company had reached agreements with
those carriers providing over 65% of the traffic and began to recognize the
related revenues as billed to the extent the collectibility was reasonably
assured. During 2000, the Company recorded a one-time amount of $5.0 million in
revenue on those settlements for which the ultimate settlement exceeded
management's previously recorded best estimates. As a result of the carrier
agreements, the rates charged to these carriers declined in 2001 from 2000. For
the years ended December 31, 2001, 2000 and 1999, the Company has recognized in
operating revenues switched access revenues of approximately $56.4 million,
$57.7 million and $19.5 million, respectively. Included in accounts receivable
in the accompanying consolidated balance sheets as of December 31, 2001 and 2000
are net accounts receivable related to switched access of approximately $11.0
million and $16.7 million, respectively.

                                       F-7
<PAGE>

  COST OF OPERATING REVENUES

     Cost of operating revenues include the cost of leasing copper loops from
the ILECs, the cost to change over new customers onto our network, the cost of
transporting voice and data traffic over the Company's network, long distance
charges from service providers related to the traffic generated by our
customers, the cost of leasing collocation space from the ILECs and the related
utilities to operate the Company's equipment at those sites, the leased space
related to the Company's switch sites and the related utilities needed to
operate our switches and other related services.

  COMPREHENSIVE INCOME

     The Company reports comprehensive income (loss) in accordance with
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes rules for the reporting of
comprehensive income (loss) and its components. Comprehensive income (loss)
consists of unrealized gains (losses) on investments in available-for-sale
securities, as well as net losses, and is presented in the consolidated
statements of redeemable preferred stock and stockholders' (deficit) equity.

  CONCENTRATION OF CREDIT RISK

     The Company conducts business with a large base of customers.
Concentrations of credit risk with respect to accounts receivable are limited
due to the large number of customers comprising the Company's customer base. The
Company performs ongoing credit evaluations of our customers' financial
condition. Additionally, a significant portion of the Company's accounts
receivable related to switched access is concentrated in a limited number of
carriers. The Company has reached access rate agreements with its three largest
carriers. Allowances are maintained for potential credit issues and such losses
to date have been within management's expectations.

  CASH AND CASH EQUIVALENTS

     The Company considers short-term investments with a maturity of three
months or less at the date of purchase to be cash equivalents. The fair value of
the Company's cash and cash equivalents approximates carrying amounts due to the
relatively short maturities and variable interest rates of the instruments,
which approximate current market rates.

  INVESTMENTS

     The Company classifies its investments as available-for-sale in accordance
with the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." As of December 31, 2001, available-for-sale securities
represent investments principally in United States Treasury and other agency
securities which mature periodically through May 2003. Available-for-sale
securities are recorded at fair value with net unrealized holding gains and
losses reported in accumulated other comprehensive income. The Company recorded
gross unrealized gains of $7.8 million and $9.1 million, respectively, as part
of accumulated other comprehensive income for the years ended December 31, 2001
and 2000.

     The specific identification method is used to determine a cost basis for
computing realized gains and losses. During 2001, 2000 and 1999, proceeds from
the sale of available-for-sale investments were $336.9 million, $112.8 million
and $43.6 million, respectively. Gross realized gains were $7.4 million in 2001
and were not material in 2000 and 1999, respectively.

  RESTRICTED INVESTMENTS

     In September 2001, the Company committed to pay up to $4.5 million during
the period through December 31, 2002 for employee retention and incentive
compensation bonuses, subject to the terms of the agreements. In addition, the
Company committed to pay up to $7.5 million in severance payments to certain
employees in the event they are terminated involuntarily, without cause or
voluntarily, with good cause. As of

                                       F-8
<PAGE>

November 2001, the Company has established a trust, which is funded at a level
sufficient to cover the maximum commitment for retention, incentive compensation
and severance payments.

     Restricted investments also includes $0.6 million and $1.0 million, at
December 31, 2001 and 2000, respectively, of escrow funds related to the
acquisition of Q-Net by Primary Networks prior to the Company's acquisition of
Primary Networks. These funds will be released upon final settlement with Q-Net.

  ADVERTISING COSTS

     The Company expenses advertising costs in the period incurred. As of
December 31, 2001, 2000 and 1999, the Company had expensed advertising costs of
$0.1 million, $7.3 million and $1.3 million, respectively.

  PREPAID EXPENSES AND OTHER CURRENT ASSETS

     Prepaid and other current assets consist of prepaid rent, prepaid
insurance, prepaid maintenance agreements and deferred installation costs.
Prepaid expenses are expensed on a straight-line basis over the corresponding
life of the underlying agreements. Deferred installation costs are expensed on a
straight-line basis over the estimated customer service period.

  PROPERTY AND EQUIPMENT

     Property and equipment are carried at cost, less accumulated depreciation
and amortization. Direct and indirect costs of construction are capitalized, and
include $4.9 million, $10.7 million and $4.1 million of interest costs related
to construction during 2001, 2000 and 1999, respectively. Depreciation is
computed using the straight-line method over estimated useful lives beginning in
the month an asset is placed into service.

     Estimated useful lives of property and equipment are as follows:

<Table>
<S>                                                         <C>
Buildings................................................   39 years
Telecommunications and switching equipment...............   3-10 years
Computer hardware and software...........................   3-5 years
Office equipment and other...............................   3-10 years
Leasehold improvements...................................   the lesser of the estimated
                                                            useful lives or term of lease
</Table>

     The Company capitalizes costs associated with the design, deployment and
expansion of the Company's network including internally and externally developed
software. Capitalized external software costs include the actual costs to
purchase software from vendors. Capitalized internal software costs generally
include personnel and related costs incurred in the enhancement and
implementation of purchased software packages. Capitalized internal labor costs
for the years ended December 31, 2001, 2000 and 1999 were $8.7 million, $9.9
million and $1.8 million, respectively. Repair and maintenance costs are
expensed as incurred.

  DEFERRED FINANCING COSTS

     Deferred financing costs are amortized to interest expense over the life of
the related financing using the effective interest method.

  GOODWILL AND OTHER INTANGIBLES

     Goodwill and other intangibles were primarily attributable to the
acquisition of Primary Network in June 2000. This transaction was accounted for
as a purchase and was stated at fair value as of the acquisition date, less
accumulated amortization. The excess of the purchase price over the fair value
of the net assets acquired ("goodwill") was amortized using the straight-line
method over 10 years. The purchase price of customer bases acquired was
amortized using the straight-line method over 5 years. Amortization expense was
$7.6, $8.1 million and $0.1 million for the years ending December 31, 2001, 2000
and 1999, respectively. As of December 31, 2001, the Company had effectively
eliminated all operations related to the Primary Network

                                       F-9
<PAGE>

acquisition. As a result of this, goodwill and other intangibles associated with
Primary Network have been written off in 2001 in the Network optimization cost
included in the consolidated statements of operations.

  INCOME TAXES

     The Company has applied the provisions of SFAS No. 109, "Accounting for
Income Taxes," which requires the recognition of deferred tax assets and
liabilities for the consequences of temporary differences between amounts
reported for financial reporting and income tax purposes. SFAS No. 109 requires
recognition of a future tax benefit of net operating loss carryforwards and
certain other temporary differences to the extent that realization of such
benefit is more likely than not; otherwise, a valuation allowance is applied.

  FAIR VALUE OF FINANCIAL INSTRUMENTS

     SFAS No. 107, "Disclosure About Fair Value of Financial Instruments,"
requires all entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized on the balance sheet, for
which it is practicable to estimate fair value. SFAS No. 107 defines fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. At December 31, 2001
and 2000, the carrying value of certain financial instruments (accounts
receivable, accounts payable) approximates fair value due to the short term
nature of the instruments or interest rates, which are comparable with current
rates.

     Based upon quoted market prices, the fair value of the Company's Senior
Notes outstanding is approximately $73.5 million and $223.2 million, at December
31, 2001 and 2000, respectively, as compared to carrying values at December 31,
2001 and 2000 of $420.8 million and $466.8 million, respectively. The remainder
of the Company's long-term debt consists primarily of variable rate debt with
carrying values that approximate their fair values.

 LONG-LIVED ASSETS

     Management periodically evaluates the carrying value of its long-lived
assets, including property, equipment and goodwill and other intangible assets,
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. If the estimated future cash inflows attributable to the
asset, less estimated future cash outflows, is less than the carrying amount, an
impairment loss is recognized by writing down the asset's carrying value to its
fair value based on the present value of the discounted cash flows of the asset
or other relevant measures. Management believes no material impairment in the
value of long-lived assets exists at December 31, 2001.

 CONCENTRATION OF SUPPLIERS

     The Company currently leases its transport capacity from a limited number
of suppliers and is dependent upon the availability of collocation space and
transmission facilities owned by the suppliers. The Company is vulnerable to the
risk of renewing favorable supplier contracts, timeliness of the supplier in
processing the Company's orders for customers and is at risk related to
regulatory agreements that govern the rates to be charged to the Company.

 USE OF ESTIMATES

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

                                       F-10
<PAGE>

 RECLASSIFICATION

     Certain reclassifications, which have no effect on net income or loss, have
been made in the prior period financial statements to conform to the current
presentation.

(2) PROPERTY AND EQUIPMENT

     Property and equipment consist of the following:

<Table>
<Caption>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                2001        2000
                                                              ---------   ---------
                                                                 (IN THOUSANDS)
<S>                                                           <C>         <C>
Buildings and property......................................  $   5,715   $   5,640
Telecommunication and switching equipment...................    335,475     378,156
Leasehold improvements......................................     41,213       6,346
Computer hardware and software..............................     28,436      17,800
Office equipment and other..................................     26,494      25,603
                                                              ---------   ---------
                                                                437,333     433,545
Less accumulated depreciation and amortization..............   (123,687)    (70,342)
                                                              ---------   ---------
                                                                313,646     363,203
Assets held for future use..................................     42,134          --
Construction in progress....................................     30,092     119,062
                                                              ---------   ---------
Net property and equipment..................................  $ 385,872   $ 482,265
                                                              =========   =========
</Table>

     Depreciation expense was $68.5 million, $42.9 million and $18.9 million for
the years ending December 31, 2001, 2000 and 1999, respectively.

     As further discussed in Note 9 "Network Optimization Cost", the assets held
for future use are directly related to the recovery of switch and collocation
equipment from markets cancelled or exited during 2001 which will be re-deployed
throughout the Company's remaining operating markets.

(3) DIVESTITURE

     Beginning in February 2001, the Company entered into a series of agreements
to sell its dial-up ISP customer base. The Company acquired this customer base
through its acquisition of Primary Network in June of 2000. The Company received
proceeds from these sales of approximately $1.6 million.

(4) DEBT

     Long-term borrowings at December 31, 2001 and 2000 consist of the
following:

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                2001       2000
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
13% Senior Notes, due 2010, net of unamortized discount of
  $10,177 and $12,870.......................................  $370,366   $416,593
13% Senior Notes, due October 1, 2004, net of unamortized
  discount of $509 and $694.................................    50,437     50,252
Other long-term debt and capital lease obligations..........     9,883     18,236
                                                              --------   --------
                                                               430,686    485,081
Less current portion........................................    (7,729)    (8,422)
                                                              --------   --------
                                                              $422,957   $476,659
                                                              ========   ========
</Table>

                                       F-11
<PAGE>

     Maturities of long-term debt and capital lease obligations for each of the
next five years and thereafter ending December 31, consist of the following:

<Table>
<Caption>
                                                              (IN THOUSANDS)
                                                              --------------
<S>                                                           <C>
2002........................................................     $  7,729
2003........................................................        1,783
2004........................................................       51,317
2005........................................................            0
2006........................................................            0
Thereafter..................................................      380,543
                                                                 --------
                                                                 $441,372
                                                                 ========
</Table>

     In September 1997, Communications issued an aggregate of $160.0 million of
13% Senior Notes due in 2004 (the "2004 Notes") along with warrants to purchase
1,162,080 shares of common stock. The 2004 Notes bear a fixed annual rate of 13%
per annum, payable semi-annually in arrears on April 1 and October 1. As set
forth in the Indenture pursuant to which the 2004 Notes were issued,
Communications was required to hold in a trust account sufficient funds to
provide for payment in full of interest on the 2004 Notes through October 1,
2000. During 2000, Communications fulfilled the restricted interest payment
requirements under this Indenture. The 2004 Notes are secured by a security
interest in specific telecommunications equipment owned by Communications.

     The initial Indenture governing the 2004 Notes contained certain
restrictive covenants. As a result of the private exchange offer and consent
solicitation, as described herein, substantially all of the restrictive
covenants were eliminated. As of December 31, 2001, Communications is in
compliance with all debt covenants.

     The 2004 Notes may be redeemed at the option of Communications, in whole or
in part, on or after October 1, 2001, at a premium declining to par in 2003,
plus accrued and unpaid interest and liquidated damages, if any, through the
redemption date as follows:

<Table>
<Caption>
YEAR                                                          PERCENTAGE
----                                                          ----------
<S>                                                           <C>
2001........................................................    106.50
2002........................................................    103.25
2003 and thereafter.........................................    100.00
</Table>

     On March 24, 2000, the Company received approximately $236.1 million in net
proceeds from the issuance of $250.0 million of 13% Senior Notes due April 1,
2010 (the "2010 Notes"). The 2010 Notes bear a fixed annual interest rate of 13%
which will be paid in cash every six months on April 1 and October 1, commencing
October 1, 2000. The 2010 Notes are unsecured obligations and rank equally with
all of the Company's existing and future senior debt and are senior to all of
the Company's existing and future subordinated debt. The 2010 Notes contain
certain repurchase requirements if certain assets are sold and the proceeds are
not used as specified in the Indenture.

     The Indenture governing the 2010 Notes contains certain restrictive
covenants that, among other things, limit the ability of the Company and its
restricted subsidiaries to incur additional indebtedness, issue preferred stock,
pay dividends or make other distributions, repurchase equity interests or
subordinated indebtedness, engage in sale and lease back transactions, create
certain liens, enter into certain transactions with affiliates, sell assets of
the Company or its restricted subsidiaries, conduct certain lines of business,
issue or sell equity interests of the Company's restricted subsidiaries or enter
into certain mergers and consolidations. As of December 31, 2001, management
believes it is in compliance with all debt covenants governing these Notes.

                                       F-12
<PAGE>

     At any time prior to April 1, 2003, the Company may redeem up to 35% of the
principal amount of the 2010 Notes from the net cash proceeds of an underwritten
public offering of the Company's capital stock at a redemption price equal to
113.0% of the principal amount of the notes plus any unpaid or accrued interest.

     At any time after April 1, 2005, the Company may, at its option, redeem the
2010 Notes in whole or in part, at a premium declining to par in 2008, plus
accrued and unpaid interest and liquidated damages, if any, through the
redemption date as follows:

<Table>
<Caption>
YEAR                                                          PERCENTAGE
----                                                          ----------
<S>                                                           <C>
2005........................................................   106.500
2006........................................................   104.330
2007........................................................   102.166
2008 and thereafter.........................................   100.000
</Table>

     In June 2000, the Company consummated a private exchange offer and consent
solicitation issuing $117.1 million aggregate principal amount of the Company's
2010 Notes in exchange for $103.9 million aggregate principal of the Company's
2004 Notes. In addition, as a result of consummating the exchange offer and
having received the requisite consents from the holders of more than a majority
of the outstanding principal amount of the 2004 Notes, a supplemental Indenture
which eliminates substantially all of the restrictive covenants in the Indenture
governing the 2004 Notes became operative.

     In June 2000, the Company issued an additional $62.4 million aggregate
principal amount of its 2010 Notes in exchange for $55.6 million of the 12%
Senior Subordinated Discount Notes due 2006 of Primary Network (the "Primary
Notes"), originally assumed by the Company in connection with the acquisition of
Primary Network.

     In July 2000, the Company filed a registration statement offering to
exchange the unregistered 13% Senior Notes due 2010 for registered 13% Senior
Notes due 2010 under the Securities Act of 1933, as amended. Terms of the
registered 13% Senior Notes due 2010 are substantially the same as the
unregistered 13% Notes due 2010. The exchange was consummated in August 2000.

     In August, 2000, the Company consummated an offer to purchase for cash $5.2
million in aggregate principal amount of 2004 Notes owned by the holders who
were not "qualified institutional buyers" for a cash payment of $5.7 million.

     In August, 2000, as required by the terms of the Primary Notes in the event
of a change of control, the Company paid $4.4 million to purchase for cash the
remaining outstanding Primary Notes, at a purchase price of 101% of their
accreted value as of August 16, 2000.

     In connection with the issuances in June 2000 of the 2010 Notes discussed
above, the related early extinguishment of the debt replaced by the 2010 Notes,
and the cash tender offer in August 2000, the Company incurred a loss on early
retirement of debt of $20.1 million which has been reflected as a loss from
extraordinary item in these consolidated financial statements.

     In June 2001, the Company repurchased $48.9 million in face value of its
2010 Notes for $15.5 million in cash, which was inclusive of $1.4 million of
interest payments, in a series of transactions in the open market. The Company
recognized an extraordinary gain of $32.3 million on these transactions.

     In July 2001, pursuant to the terms of the 2010 Notes, as a result of the
Company becoming the publicly held parent holding company of Communications and
after satisfying other preconditions set forth in the indenture governing the
notes, Communications was released from its obligations on its 2010 Notes. As a
result, the Company is now the sole obligor on the 2010 Notes. In addition,
pursuant to a supplemental indenture, the Company became a co-obligor, along
with Communications, on Communications' 2004 Notes.

                                       F-13
<PAGE>

(5) REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY

  COMMON STOCK

     In July 1999, the Company issued 7,540,502 shares of common stock at $16.67
per share and received proceeds, after expenses, of $118.3 million. In this
offering, existing shareholders sold additional 881,543 shares of common stock
for which the Company did not receive any proceeds.

     In September 1999, the Company reacquired 13,710 shares of its common stock
at an aggregate purchase price of $0.1 million in partial cancellation of a note
receivable from a stockholder for issuance of common stock and is classified as
treasury stock in the accompanying consolidated financial statements.

     In October 1999, the Company approved an agreement (the "Employment
Agreement") with the Chief Executive Officer ("CEO") under which he purchased a
total of 225,000 shares of common stock at $19.21 per share. The Company
retained the right to repurchase these shares at their cost in the event of
termination of employment for any reason and agreed to finance the purchase
price of the shares purchased. The agreement provided for the forgiveness of the
note at the end of a three-year term of employment. Through July 2001, the $4.3
million owed to the Company was classified in the accompanying statements of
redeemable preferred stock and stockholders' equity as notes receivable from
stockholders for issuance of common stock. In August 2001, the Company amended
the Employment Agreement. The amended Employment Agreement rescinded Item 9 of
the Employment Agreement, under which 225,000 shares of the Company's common
stock were issued (the "Note Shares") to the CEO for a non-recourse promissory
note in the amount of $4.3 million (the "Note"). Pursuant to the amended
Employment Agreement, the CEO has returned the Note Shares to the Company for
cancellation. The Company has delivered the note to the CEO for cancellation.
The cancellation of the Note and accrued interest has been recognized in the
Consolidated Balance Sheet as a reduction to additional paid-in capital and
notes receivable from stockholders for issuance of common stock.

     In February 2000, the Company issued 9,245,564 shares of common stock at
$36.00 per share and received proceeds, after expenses, of $316.7 million. In
this offering, existing shareholders sold an additional 43,562 shares of common
stock for which the Company did not receive any proceeds.

     During 2000, the Company issued 209,699 shares of common stock pursuant to
the exercise of warrants acquired in a private placement. As the warrants were
exercised on a cashless basis, the Company did not receive any proceeds from the
issuance.

     In June 2000, the Company issued 2,024,757 shares of common stock at $35.00
per share for a total value of $70.9 million in connection with the stock
acquisition of Primary Network. The Company received no proceeds from this
issuance of common stock.

     In June 2000, the Board of Directors authorized an increase in the number
of shares of common stock of the Company from 90,000,000 shares to 300,000,000
shares of common stock.

     In August, 2000, the Company effected a three-for-two split on its common
stock to shareholders of record on July 31, 2000. As a result of the stock
split, the accompanying consolidated financial statements reflect an increase in
the number of outstanding shares of common stock and the transfer of the par
value of these additional shares from additional paid-in capital. All references
to the number of common shares and per share amounts have been restated to
reflect the stock split for all periods presented.

     During 2001, the Company issued 96,752 shares of common stock pursuant to
the exercise of warrants acquired in a private placement. As the warrants were
exercised on a cashless basis, the Company did not receive any proceeds from the
issuance.

  PREFERRED STOCK

     In connection with the December 11, 2000 adoption of a Stockholder Rights
Plan, the Company's Board of Directors authorized the creation of 100,000 shares
of Series E Preferred Stock. Pursuant to the plan, preferred stock purchase
rights will be distributed as a dividend at the rate of one right for each share
of

                                       F-14
<PAGE>

common stock held. The rights are designed to guard against partial tender
offers and other abusive tactics that might be used in an attempt to gain
control of the Company without paying all stockholders a fair price for their
shares. Each right will entitle stockholders to buy one one-thousandth of a
share of Series E Preferred Stock of the Company at an exercise price of $36.50.

     The rights will be exercisable only if a person or group acquires
beneficial ownership of 15% or more of the Company's outstanding common stock or
commences a tender or exchange offer upon consummation of which a person or
group would beneficially own 15% or more of the Company's outstanding common
stock. The Company will generally be entitled to redeem the Rights at $0.0001
per Right at any time until the 10th business day following public announcement
that a person or group has acquired 15% or more of the Company's common stock.

     Quarterly dividends shall be paid to each holder of 1/1000th of a share of
Series E preferred stock, such fraction of a share is referred to as a unit, in
an amount equal to the greater of (1) $.01, or (2) the amount of any dividends
paid during the previous quarter on any shares of the Company's common stock.
Dividends shall begin to accrue from the date of issuance of each unit of Series
E Preferred Stock. Accrued but unpaid dividends will not bear interest.

The holders of each unit of Series E Preferred Stock shall have the following
voting rights:

     (1) The holders of each unit of Series E Preferred Stock shall be entitled
to one vote on all matters submitted to a vote of the stockholders of the
Company. The holders of units and the holders of shares of our common stock
shall vote together as a class on all matters submitted to a vote of the
stockholders;

     (2) If quarterly dividends are in arrears and unpaid for six or more
quarters then the holders of the units, voting separately as a class, shall have
the right to elect two of the Company's directors. If such an event occurs, then
the number of members of the board of directors will be immediately and
automatically increased by the number of directors elected by the holders of
units of Series E preferred stock. The voting rights of the Series E Preferred
Stock discussed in this subparagraph will be continued until all accrued and
unpaid quarterly dividends have been paid, at which time, the term of any
directors elected pursuant to the provisions of this subparagraph will terminate
and the number of directors constituting our board of directors will be
immediately and automatically decreased by that number.

     Upon the Company's liquidation, the holders of units of Series E Preferred
Stock shall be entitled to receive their liquidation amounts plus accumulated
and unpaid dividends, if any, on a pro rata basis with the holders of any series
of preferred stock that ranks equally with the Series E Preferred Stock and
before any amounts may be paid to holders of our common stock or other junior
securities. The liquidation amount is the greater of (1) $.01 per unit of Series
E Preferred Stock, or (2) an amount equal to the aggregate amount distributed to
holders of our common stock.

     The units of Series E Preferred Stock are not redeemable.

     The units of Series E Preferred Stock shall rank junior to all other series
of preferred stock of the Company as to the payment of dividends and the
distribution of assets unless the certificate of designation of any such series
shall provide otherwise.

     The terms of the Series E Preferred Stock shall not be amended in any
manner that would alter or change the powers, preferences and special rights of
the Series E Preferred Stock without the affirmative vote of the holders of a
majority or more of the outstanding units of Series E Preferred Stock, voting
separately as a class.

  REDEEMABLE PREFERRED STOCK

     The Company has authorized the issuance of up to 50,000,000 shares of
preferred stock.

     In May 1999, the Company entered into an agreement with Providence Equity
Partners III L.P. ("Providence"), JK&B Capital III L.P. ("JK&B III") and Wind
Point Partners III L.P. ("Wind Point") under which Providence, JK&B III and Wind
Point and their affiliates agreed to purchase 5,277,779 shares of

                                       F-15
<PAGE>

newly issued Series B Convertible Preferred Stock ("Series B Preferred Stock")
at $9.00 per share for net proceeds of approximately $46.7 million.

     Dividends accrued on the Series B Preferred Stock at the rate of 10% per
annum from the issue date until November 21, 1999 and are payable in preference
to any dividends that may be paid with respect to the Company's common stock.
Effective November 22, 1999, the Company elected to terminate the accrual of
dividends since the Company's stock price exceeded $18.00 per share for 20
consecutive trading days (the "Market Threshold").

     The Series B Preferred Stock was convertible into Common Stock at any time
at the option of the holder. Initially, the conversion price was $9.00 per share
and each share of Series B Preferred Stock was convertible into one share of
common stock. The conversion price was subject to adjustment as a result of
stock splits, stock dividends and certain other issuances of additional stock.

     The Series B Preferred Stock was issued in May 1999 with a beneficial
conversion feature totaling $47.5 million measured as the difference between the
conversion price of $9.00 per share and the fair value of the underlying common
stock at the time of issuance, limited by the total amount of the proceeds of
the preferred stock issued. The beneficial conversion feature has been
recognized as an increase in additional paid-in capital, with an offsetting
decrease in additional paid-in capital.

     During the years ended December 31, 2000 and 1999, the Company recorded a
pro rata accretion of the Series B Preferred Stock to its anticipated redemption
value. Such accretion was based on the market value of the common stock at the
balance sheet date, not to exceed $18.00 per share based on the Market
Threshold. For the years ended December 31, 2000 and 1999, the Company recorded
accretion of $2.5 million and $6.1 million, respectively, related to the Series
B Preferred Stock which has been recorded as an increase in redeemable preferred
stock with a corresponding decrease in additional paid-in capital.

     In March 2000, the holders of the Series B Preferred Stock elected to
convert their 5,277,779 shares, along with $2.6 million in dividends, into
8,354,796 shares of common stock.

     In November 1999, the Company entered into an agreement with Providence,
JK&B III and their affiliates (the "Purchasers") under which the Purchasers
purchased 1,250,000 shares of newly issued Series C Convertible Preferred Stock
("Series C Preferred Stock") at $28.00 per share for a total consideration of
$35.0 million. Of the total consideration, $4.9 million was paid by an
interest-bearing promissory note which was paid in February 2000. The
transaction was consummated on December 30, 1999.

     Dividends accrue on the Series C Preferred Stock at the rate of 10% per
annum, are cumulative and are payable in preference to any dividends that may be
paid with respect to the Company's common stock. No accrued dividends in excess
of $2.80 per share will be paid if the Company requires conversion of the Series
C Preferred Stock within 30 months of issuance. The Company may require
conversion if the Company's stock price exceeds $37.33 for 20 consecutive
trading days.

     The Series C Preferred Stock is convertible into common stock at any time
at the option of the holder. The initial conversion price was $28.00 per share
and each share of Series C Preferred Stock was initially convertible into one
share of common stock. The conversion price is subject to adjustment as a result
of stock splits, stock dividends and certain other issuances of additional
stock. The conversion price has been adjusted to $18.60 per share to reflect the
3-for-2 stock split in August 2000 and each share of Series C Preferred Stock is
now convertible into one and one-half shares of common stock.

     The Series C Preferred Stock was issued in December 1999 with a beneficial
conversion feature totaling $25.0 million measured as the difference between the
initial conversion price of $28.00 per share and the fair value of the
underlying common stock at the time of issuance. The beneficial conversion
feature has been recognized as an increase in additional paid-in capital, with
an offsetting decrease in additional paid-in capital.

     The Company has recorded a pro rata accretion of the Series C Preferred
Stock to its anticipated redemption value. Such accretion is based on the market
value of the common stock at the balance sheet date, not to exceed $37.33 per
share based on the Market Threshold. For the year ended December 31, 2000, the
Company recorded accretion of $4.3 million related to the Series C Preferred
Stock which has been recorded
                                       F-16
<PAGE>

as an increase in redeemable preferred stock with a corresponding decrease in
additional paid-in capital. No accretion was recorded for the year ended
December 31, 2001.

     The holders of the Series C Preferred Stock have the right to require the
Company to redeem the Series C Preferred Stock after December 2005 or upon a
sale of the Company. The redemption price will be equal to the greater of (x)
$28.00 per share plus the greater of $2.80 per share or accrued and unpaid
dividends, or (y) the value of the common stock into which the Series C
Preferred Stock is then convertible.

     If the Company fails to redeem all shares of Series C Preferred Stock
within six months of the date specified by the holders of the Series C Preferred
Stock, then the holders of the Series C Preferred Stock will have the right to
elect a majority of the Company's Board of Directors.

     The Series C Preferred Stock will vote along with the common stock on an
as-converted basis. The purchasers of the Series C Preferred Stock have the
right to nominate two or more of the directors depending on the size of the
Company's Board of Directors and the percentage of the Company's stock
represented by the outstanding Series C Preferred Stock. The purchasers of the
Series C Preferred Stock also have the right to have their Board representative
serve on each committee of the Company's Board and on the Board of each of the
Company's subsidiaries.

     In February 2000, the Company completed an offering in which 4,140,000
shares of 7.25% Series D Convertible Redeemable Preferred Stock ("Series D
Preferred Stock") at $50.00 per share were issued for $207.0 million in gross
proceeds. Dividends accrue on the liquidation amount of $50.00 per share at the
rate of 7.25% per year, which is equivalent to $3.625 per year, and are payable
quarterly commencing on May 15, 2000, and must be paid before any dividends may
be paid on the Company's common stock. At the Company's option, dividends may be
paid in cash or in shares of the Company's common stock. During 2000, the
Company declared regular quarterly dividends of $0.91 per share payable in
1,010,533 shares of the Company's common stock.

     If quarterly dividends are in arrears and unpaid for six or more quarters
then the holders of the Series D Preferred Stock, voting separately as a class,
shall have the right to elect two of the Company's directors. If such an event
occurs, then the number of members of the board of directors will be immediately
and automatically increased by the number of directors elected by the holders of
Series D Preferred Stock. The voting rights of the Series D Preferred Stock
discussed in this subparagraph will be continued until all accrued and unpaid
quarterly dividends have been paid, at which time, the term of any directors
elected pursuant to the provisions of this subparagraph will terminate and the
number of directors constituting the Company's board of directors will be
immediately and automatically decreased by that number.

     Beginning in January 2001, the Company entered into privately negotiated
conversions of its Series D Preferred Stock into shares of the Company's common
stock. As of December 31, 2001, the Company had converted 1,126,612 preferred
shares into 2,199,831 common shares, primarily resulting from these agreements.

     The Company recognized an additional $6.6 million charge to stockholders'
equity associated with the inducement feature included in the conversion of
preferred shares into common stock, calculated as the excess of the fair value
of the common stock issued in the exchange over the fair value of the common
stock issuable under the current conversion terms for the Series D Preferred
Stock. This amount has been recognized in the Consolidated Balance Sheet as an
increase in additional paid-in capital, with an offsetting decrease in
additional paid-in capital, and has been included as a part of preferred stock
dividends within the Consolidated Statement of Operations.

     On January 24, 2001, the Company's Board of Directors declared a quarterly
dividend of $0.91 per share on the Company's Series D Preferred Stock payable in
shares of the Company's common stock on February 15, 2001 to Series D Preferred
stockholders of record on January 31, 2001. The number of shares of common stock
issued on February 15, 2001 was 427,070.

     Beginning in April 2001, the Company announced deferrals of the quarterly
dividends on the Company's Series D Preferred Stock. Dividends will continue to
accrue on the liquidation amount of $50.00 per share at

                                       F-17
<PAGE>

the rate of 7.25% per year and will be payable, at the option of the Company, in
cash or in shares of the Company's common stock.

     The holders of Series D Preferred Stock have no voting rights, except as
otherwise required under Delaware law or as provided in the certificate of
designation.

     Upon the Company's liquidation, the holders of the Series D Preferred Stock
will be entitled to receive their liquidation amounts plus accumulated and
unpaid dividends, if any, on a pro rata basis with the holders of any series of
preferred stock which ranks equally with the Series D Preferred Stock and before
any amounts may be paid to holders of the Company's common stock or other junior
securities. The liquidation amount is $50.00 per share.

     A holder of shares of Series D Preferred Stock may convert those shares
into the Company's common stock at any time. Initially, each share of Series D
Preferred Stock was convertible into 0.7652 shares of the Company's common stock
at a conversion price of $65.34 per share. The conversion price and number of
shares may be adjusted as a result of stock splits, stock dividends, exchange or
tender offers and other issuances of additional stock or non-stock distributions
and has been adjusted to 1.1478 shares of the Company's common stock at a
conversion price of $43.56 per share to reflect the 3-for-2 split in August
2000.

     On or after February 15, 2003, the Company may, at its option, cancel the
conversion rights of the Series D Preferred Stock if the closing price of the
Company's common stock equals or exceeds 140% of the conversion price for at
least 20 trading days within any 30 trading day period.

     On February 15, 2012, the Company will be required to redeem all of the
outstanding shares of the Series D Preferred Stock at a redemption price,
payable in cash, equal to the liquidation amount plus accumulated and unpaid
dividends, if any, whether or not declared, to the date of redemption.

     On or after February 15, 2002, but before February 15, 2003, if the closing
price of the Company's common stock equals or exceeds 150% of the conversion
price for at least 20 trading days within any 30 day trading period, the Company
may redeem the Series D Preferred Stock, which is referred to as a provisional
redemption. If the Company redeems the Series D Preferred Stock, the redemption
price will be 105.8% of the liquidation amount, plus accumulated and unpaid
dividends, if any, whether or not declared, to the date of the provisional
redemption. If the Company undertakes a provisional redemption, the holders of
shares of the Series D Preferred Stock called for redemption also will receive
an additional payment in an amount equal to the present value of the dividends
that would have been payable on the Series D Preferred Stock for the period from
the date of the provisional redemption to February 15, 2003. The Company may pay
the redemption price, including any additional payment in cash or, at its
option, if the Company satisfies conditions specified in the certificate of
designation for the Series D Preferred Stock, in shares of the Company's common
stock or a combination thereof.

(6) STOCK OPTION PLAN

     The Company has a stock option plan, which allows the Board of Directors to
grant incentives to employees in the form of incentive stock options and
non-qualified stock options. As of December 31, 2001, the Company had reserved
12,960,000 shares of common stock to be issued under the plan.

     Substantially all options have been granted to employees at a price equal
to fair market value and vest primarily over a three to five year period with an
acceleration provision for certain events or qualified changes in control. All
options expire within ten years of the date of grant. In connection with the
acquisition of Primary Network, the Company assumed all the outstanding options
of Primary Network.

                                       F-18
<PAGE>

     Stock option transactions during 2001, 2000 and 1999 are as follows:

<Table>
<Caption>
                                                                           WEIGHTED
                                                                           AVERAGE
                                                                NUMBER     EXERCISE
                                                              OF SHARES     PRICE
                                                              ----------   --------
<S>                                                           <C>          <C>
Outstanding at December 31, 1998............................   2,739,300    $ 3.45
Granted.....................................................   3,654,360    $10.39
Exercised...................................................    (518,550)   $ 3.25
Canceled....................................................    (547,200)   $ 9.28
                                                              ----------
Outstanding at December 31, 1999............................   5,327,910    $11.25
Granted.....................................................  15,992,615    $21.54
Exercised...................................................  (1,089,032)   $ 2.71
Canceled....................................................  (9,912,030)   $29.21
                                                              ----------
Outstanding at December 31, 2000............................  10,319,463    $11.03
Granted.....................................................   5,807,390    $ 0.69
Exercised...................................................    (114,050)   $ 0.67
Canceled....................................................  (9,777,152)   $10.98
                                                              ----------
Outstanding at December 31, 2001............................   6,235,651    $ 1.84
                                                              ==========
Exercisable at December 31, 1999............................   1,222,610    $ 2.73
                                                              ==========
Exercisable at December 31, 2000............................     644,532    $ 8.28
                                                              ==========
Exercisable at December 31, 2001............................     650,863    $ 5.64
                                                              ==========
</Table>

     The Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", in accounting for its plan.
Accordingly, compensation expense is recognized for stock based compensation
plans to the extent that stock options have an exercise price below fair market
value on the measurement date. During 2001 and 2000, the Company recognized
related stock-based compensation expense of $3.1 million and $3.3 million,
respectively.

     In September 2000, the Board of Directors approved a re-pricing of stock
options for all employees who made an election by the close of business on
September 14, 2000. The Company re-priced 7.1 million options to an exercise
price of $8.70 per share with a vesting period of four years.

     On August 27, 2001, the Company announced an offer to exchange outstanding
stock options for all eligible employees who made an election by the close of
business on September 27, 2001. The re-pricing offer provided each eligible
employee the opportunity to exchange outstanding stock options granted under the
stock option plan for new options to purchase the Company's common stock. Each
new option is exercisable for a number of shares of common stock equal to 75% of
the number of shares of common stock for which the eligible options were
exercisable. Each new option has an exercise price equal to the closing sale
price of the Company's common stock as reported by the NASDAQ on September 27,
2001 and vests over a three-year period beginning September 27, 2001. On
September 27, 2001, eligible options to purchase 6.3 million shares of common
stock were tendered for exchange. Subject to the terms and conditions of the
offer to exchange, the Company issued new options to purchase 4.7 million shares
of common stock at a grant price of $0.22 per share, of which 4.4 million shares
were outstanding as of December 31, 2001.

     In accordance with APB Opinion No. 25 and variable plan accounting, the
Company measures compensation for options subject to re-pricing as the amount by
which the quoted market value of the Company's stock exceeds the option price,
multiplied by the number of shares granted under the options. Changes in the
quoted market value of those shares between the date of grant and the
measurement date result in a change in the measure of compensation. Over the
vesting period of the options, compensation is expensed ratably. Between the end
of the vesting period and the measurement date, changes in compensation
                                       F-19
<PAGE>

are recognized immediately in operations. The Company has recognized $0.1
million in stock-based compensation expense for the options exchanged in
September 2001 as the market price of the common stock at December 31, 2001 was
above the current exercise prices. The Company has not recognized compensation
expense for the options re-priced in September 2000 as the market price of the
common stock was below the exercise prices.

     The Company has adopted the disclosure-only requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation". In accordance with SFAS No. 123, the
Company has elected not to recognize compensation cost related to stock options
with exercise prices equal to the market price at date of issuance. Had the
Company determined compensation cost using the fair value based method defined
in SFAS No. 123, the Company's results from operations would have been as
follows for the years ended December 31 (in thousands, except per share
amounts):

<Table>
<Caption>
                                                              AS REPORTED   PRO FORMA
                                                              -----------   ---------
<S>                                                           <C>           <C>
2001
Net loss before extraordinary item..........................   $(500,062)   $(594,897)
Net loss....................................................    (467,740)    (562,575)
Basic and diluted loss per share of common stock............       (8.26)       (9.86)
Gain per share applicable to extraordinary item.............        0.55         0.55
2000
Net loss before extraordinary item..........................   $(224,649)   $(277,916)
Net loss....................................................    (244,714)    (297,981)
Basic and diluted loss per share of common stock............       (5.20)       (6.23)
Loss per share applicable to extraordinary item.............       (0.39)       (0.39)
1999
Net loss....................................................   $ (69,769)   $ (73,547)
Basic and diluted loss per share of common stock............       (5.09)       (5.22)
</Table>

     For options granted during the year ended December 31, 2001, the weighted
average fair value of options on the date of grant, estimated using the
Black-Scholes option pricing model, was $3.89, using the following assumptions:
dividend yield of 0%; expected option life of 6.0 years; risk free interest rate
4.87% and an expected volatility of 155%.

     For options granted during the years ended December 31, 2000 and 1999, the
weighted average fair value of options, on the date of grant, estimated using
the Black-Scholes option pricing model, was $27.85 and $15.87, respectively,
using the following assumptions: dividend yield of 0%; expected option life at
December 2000 and 1999 of 6.0 and 6.5 years; risk free interest rate of 5.24%
and 6.54% and expected volatility of 128% and 153.7%, respectively.

                                       F-20
<PAGE>

     The following table summarizes information about stock options outstanding
at December 31, 2001:

<Table>
<Caption>
                                                         WEIGHTED
                                            SHARES        AVERAGE     WEIGHTED     NUMBER      WEIGHTED
                                          OUTSTANDING    REMAINING    AVERAGE    EXERCISABLE   AVERAGE
                                          AT DEC. 31,   CONTRACTUAL   EXERCISE   AT DEC. 31,   EXERCISE
RANGE OF EXERCISE PRICE                      2001          LIFE        PRICE        2001        PRICE
-----------------------                   -----------   -----------   --------   -----------   --------
<S>                                       <C>           <C>           <C>        <C>           <C>
$0.20 to $8.33..........................   5,386,967     8.7 years     $ 0.70      423,544      $ 3.71
$8.34 to $12.49.........................     819,734     4.7 years     $ 8.71      216,597      $ 8.72
$12.50 to $18.74........................      22,200     7.2 years     $16.63        8,700      $16.61
$18.75 to $28.11........................       2,250     7.5 years     $23.83          900      $23.83
$28.12 to $42.17........................       3,000     8.1 years     $36.70          748      $36.70
$42.18 to $63.25........................       1,500     8.2 years     $46.83          374      $46.83
                                           ---------     ---------     ------      -------      ------
$0.20 to $63.25.........................   6,235,651     8.2 years     $ 1.84      650,863      $ 5.64
                                           =========                               =======
</Table>

(7) LOSS PER SHARE

     SFAS No. 128, "Earnings Per Share," requires the Company to calculate its
earnings per share based on basic and diluted earnings per share, as defined.
Basic and diluted loss per share for the years ended December 31, 2001, 2000,
and 1999 were computed by dividing net loss applicable to common stockholders by
the weighted average number of shares of common stock during the period.

     The Company had options and warrants to purchase common shares, and
redeemable preferred stock which can be converted to common shares, outstanding
at December 31, 2001, 2000 and 1999, that were not included in the calculation
of diluted loss per share because the effect would be antidilutive, as follows:

<Table>
<Caption>
                                                               2001         2000        1999
                                                             ---------   ----------   ---------
<S>                                                          <C>         <C>          <C>
Options and Warrants.......................................  6,353,164   10,436,976   5,380,848
Redeemable preferred stock.................................  5,334,915    6,626,892   9,791,668
</Table>

(8) INCOME TAXES

     The net deferred tax asset as of December 31, 2001 and 2000 is as follows
(in thousands):

<Table>
<Caption>
                                                                2001       2000
                                                              --------   ---------
<S>                                                           <C>        <C>
Deferred Tax Asset
  Net operating loss carry-forward..........................  $301,975   $ 169,345
  Other.....................................................    10,049       6,965
                                                              --------   ---------
                                                               312,024     176,310
  Less: valuation allowance.................................  (261,825)   (138,751)
                                                              --------   ---------
  Net deferred tax asset....................................    50,199      37,559
                                                              --------   ---------
Deferred Tax Liability
  Property and equipment....................................    41,753      30,392
  Other.....................................................     8,446       7,167
                                                              --------   ---------
  Net deferred tax liability................................    50,199      37,559
                                                              --------   ---------
Net.........................................................  $     --   $      --
                                                              ========   =========
</Table>

     SFAS No. 109 requires recognition of the future tax benefit of these assets
to the extent realization of such benefits is more likely than not; otherwise, a
valuation allowance is applied. At December 31, 2001 and 2000, the Company
determined that $261.8 million and $138.8 million, respectively, of tax benefits
did not meet the realization criteria because of the Company's historical
operating results. Accordingly, a valuation allowance was applied to reserve
against the applicable deferred tax asset.

                                       F-21
<PAGE>

     At December 31, 2001 and 2000, the Company had net operating loss
carry-forwards available for income tax purposes of approximately $816.5 million
and $457.7 million, respectively, which expire principally from 2011 to 2021.

(9) NETWORK OPTIMIZATION COST

     In September 2000, the Company announced the cancellation of 339
collocations and the delay of entrance into twelve markets in the Northeast and
Northwest. The Company recognized a $12.0 million network optimization charge in
the third quarter of 2000 associated with commitments made for collocation
sites. As of December 31, 2001 and 2000, the Company had incurred $9.1 million
and $7.0 million, respectively, of these charges and had $2.9 million and $5.0
million, respectively, of remaining reserves classified as Accrued Network
Optimization Cost in the Consolidated Balance Sheet.

     In February 2001, the Company announced the cancellation of its plans to
enter those markets, representing more than 350 collocations. The Company
recognized a network optimization charge of $24.0 million in the first quarter
of 2001 associated with the commitments made for switch sites and collocations
for these markets. At the time of its initial network optimization charge, the
Company had switch site lease commitments of $13.6 million related to these
markets, expiring from 2005 through 2010, of which $2.0 million was included in
the estimated charge representing lease commitments through December 31, 2001.
During the fourth quarter of 2001, as a result of unfavorable lease
negotiations, the Company revised its original estimate and recorded an
additional network optimization charge of $2.1 million to cover lease
commitments through July 2002. As of December 31, 2001, the Company has incurred
$24.4 million of these charges and has $1.7 million of remaining reserves
classified as Accrued Network Optimization Cost in the Consolidated Balance
Sheet.

     In May 2001, the Company announced plans to close down operations in twelve
of its recently opened markets, representing more than 180 collocations and
recognized a network optimization charge of $209.1 million in the second quarter
of 2001. The Company exited these markets in the third quarter of 2001. Included
in the charge was $126.8 million for the goodwill and customer base associated
with the Primary Network business, which was eliminated as a result of the
market closings, $65.1 million for property and equipment including collocations
and switch sites and $17.2 million for other costs associated with exiting these
markets. During the fourth quarter of 2001, as a result of favorable
negotiations with various carriers, the Company reduced its original network
optimization charge by $2.1 million. As of December 31, 2001, the Company has
incurred $65.1 million and $6.1 million of charges related to property and
equipment and other costs, respectively, and has $9.0 million of remaining
reserves classified as Accrued Network Optimization Costs.

     These Accrued Network Optimization costs as of December 31, 2001 represent
amounts paid or estimated to be paid. Actual payments will be based on ultimate
settlements with various carriers, net of any costs that may be recoverable
through sales of the related assets, and the Company's ability to enter into
sublease agreements for its switch site and sales office leases.

     At December 31, 2001, the Company has total switch and office lease
commitments as a result of the actions taken in the three network optimization
charges of $18.0 million related to these markets, expiring from 2002 through
2010. These remaining commitments of $4.6 million have been included in Accrued
Network Optimization Cost representing lease commitments through June 2003. The
Company estimates that it will be successful in entering into sublease
agreements or terminating the remaining lease commitments within the period
estimated.

(10) 401(K) PLAN

     The Company maintains a defined contribution 401(k) plan (the "Plan")
pursuant to Section 401(k) of the Internal Revenue Code ("IRC"). The Plan covers
substantially all employees that meet certain service requirements. Under the
Plan, eligible employees may voluntarily contribute a percentage of their
compensation, subject to limits under the IRC. The Plan provides for
discretionary matching contributions by the

                                       F-22
<PAGE>

Company which were $0.8 million, $0.6 million and $0.1 million for the years
ended December 31, 2001, 2000 and 1999, respectively.

(11) COMMITMENTS AND CONTINGENCIES

  LEASE OBLIGATIONS

     The Company has entered into various operating lease agreements with
expirations through 2010, for its switching facilities, offices, and office
equipment. Future minimum lease obligations in effect as of December 31, 2001
are as follows (in thousands):

<Table>
<S>                                                            <C>
Payments during the year ending December 31:
  2002......................................................   $13,779
  2003......................................................    13,001
  2004......................................................    12,804
  2005......................................................     9,628
  2006......................................................     7,183
  Thereafter................................................    19,558
                                                               -------
                                                               $75,953
                                                               =======
</Table>

     Rent expense was $10.5 million, $10.1 million and $1.6 million for the
years ended December 31, 2001, 2000 and 1999, respectively. As discussed in Note
9, the Company plans to reduce the future commitments associated with switch
site and sale leases in turned down markets through negotiated settlements.

  EMPLOYMENT AGREEMENTS

     The Company's Employment Agreement with the CEO provided a $1.0 million
signing bonus, which was subject to repayment if the CEO's employment was
terminated before three years of employment under certain circumstances.
Pursuant to the terms of the amended Employment Agreement, the Company agreed
that the signing bonus shall become immediately fully vested such that the CEO
would not be required to repay the bonus or any portion thereof. Upon acceptance
of the amended Employment Agreement, the Company recognized the remaining
unamortized portion of the signing bonus as a component of general and
administrative expenses within the Consolidated Statement of Operations

  PURCHASE COMMITMENTS

     In the ordinary course of business, the Company enters into purchase
agreements with its equipment vendors and collocation site providers. As of
December 31, 2001, the Company had total unfulfilled commitments with equipment
vendors of approximately $3.3 million and with collocation site providers of
approximately $1.0 million for the augmentation of collocation sites. The
Company also has various agreements with certain carriers for transport, long
distance and other network services. At December 31, 2001, the Company's minimum
commitment under these agreements is $16.7 million, which expire through July
2005.

  LITIGATION

     The Company is party to various legal proceedings, most of which relate to
routine matters incidental to its business. In addition to these incidental
legal proceedings, the Company was also named in a class action lawsuit brought
by various shareholders in September 2000. The Company was named in a judicial
complaint in August 2001 brought by Fir Tree Partners, a bondholder of the
Company.

     On September 20, 2000, a class action lawsuit was commenced against the
Company and its CEO in federal court for the Western District of New York. On
March 6, 2001, an amended consolidated class action complaint was served in that
action, seeking to recover damages for alleged violations by the Company of the
Securities Exchange Act of 1934 and rule 10(b)-5 thereunder (the "Exchange Act")
and section 11 of the

                                       F-23
<PAGE>

Securities Act of 1933. The amended consolidated complaint also seeks to recover
damages against several of the Company's officers and members of its board of
directors in addition to the CEO. The amended consolidated complaint also names
various underwriters as defendants in the action.

     The Company and the individual defendant officers and board members have
denied any wrongdoing and will vigorously contest the class action suit. Any
judgment that is significantly greater than the Company's available insurance
coverage could have a material adverse effect on the Company's results of
operations and/or financial condition.

     On February 11, 2002, the United States District Court for the Western
District of New York entered its Decision and Order dismissing the class action
lawsuit. On March 11, 2002, the plaintiffs in this suit filed their appeal of
the Decision and Order in the United States Court of Appeals in the second
circuit. The Company cannot predict the outcome of this appeal.

     On August 1, 2001, the Company was named in a judicial complaint seeking
declaratory relief for certain obligations to Fir Tree Partners, a bondholder of
the Company. On November 8, 2001, the New York State Supreme Court granted the
Company's motion to dismiss the complaint. No appeal was taken by Fir Tree
Partners from the dismissal.

  INTERCONNECTION AGREEMENTS

     The Company has interconnection agreements with seven incumbent local
exchange carriers. These agreements expire on various dates through October
2003.

     The Company is dependent on the cooperation of the incumbent local exchange
carriers to provide access service for the origination and termination of its
local and long distance traffic. Historically, charges for these services have
made up a significant percentage of the overall cost of providing these
services. To the extent the access services of the local exchange carriers are
used, the Company and its customers are subject to the quality of service,
equipment failures and service interruptions of the local exchange carriers.

(12) RISKS AND UNCERTAINTIES

     Various long distance carriers and Incumbent Carriers lease loop, transport
and network facilities to the Company. The pricing of such facilities are
governed by either a tarriff or an interconnection agreement. These carriers
bill the Company for its use of such facilities. From time to time, the carriers
present inaccurate bills to the Company, which it disputes. As a result of such
billing inaccurracies, the Company records an estimate of its liability based on
its measurement of services received. Actual results may differ from these
estimates.

(13) RELATED PARTY TRANSACTIONS

     The facilities which house the Company's office in Las Vegas are owned by
an entity principally owned by two of the Company's former directors. Total
related rent expense was $1.6 million, $1.6 million and $0.8 million for the
years ended December 31, 2001, 2000 and 1999, respectively.

     During 1999, the Company entered into a capital lease agreement for an
aircraft, the owners of which were former directors of the Company. All assets
under capital leases were capitalized using interest rates appropriate at the
inception of each lease. Capital leases were recorded at cost and depreciated
over the lesser of the estimated life or lease term. Total related lease
payments were $0.3 million and $0.1 million in 2000 and 1999, respectively. The
lease was terminated during May 2000.

(14) SUBSEQUENT EVENTS

     During January 2002, the Company entered into certain agreements with
former employees, whereby in consideration for the payment of $0.1 million and
return of 81,000 shares of the Company's common stock, the former employees were
released from $0.4 million of obligations related to the notes receivable from
stockholders for issuance of common stock.

                                       F-24
<PAGE>

     On February 25, 2002, the Company announced that it had reached an
agreement with an informal committee representing approximately 66% of the
outstanding principal amount of its 2010 Notes on a comprehensive
recapitalization plan that would eliminate a significant portion of the
Company's long-term debt and all of its preferred stock. Under the proposed
recapitalization plan, the Company would use $19.0 million of cash on hand and
issue common stock to eliminate $583.4 million in debt and preferred stock, as
well as the associated $49.5 million of annual interest expense related to the
Company's 2010 Notes and $15.8 million of annual dividend payments on its
preferred stock.

     On March 22, 2002, the Company announced that it had successfully completed
its bondholder solicitation which resulted in more than 99% of the holders of
the Company's 2010 Notes entering into voting agreements with the Company in
support of the proposed recapitalization plan announced on February 25, 2002. On
March 27, 2002, each bondholder who participated in the solicitation received a
consent fee equal to their pro-rata share of the $19.0 million.

     In addition, more than two-thirds of the holders of the Company's issued
and outstanding shares of preferred stock have also entered into voting
agreements with the Company in support of the proposed recapitalization plan.

     With the necessary backing of these key constituencies, the Company plans
to move forward with its recapitalization plan, which would retire $583.4
million in debt and preferred stock in exchange for a consent fee of $19.0
million in cash and new equity in the reorganized company. The Company and its
subsidiaries, Communications and Mpower Lease Corporation, intend to implement
the proposed recapitalization plan by commencing a voluntary, pre-negotiated
Chapter 11 proceeding no later than April 30, 2002. This Chapter 11 proceeding
may also include other subsidiaries. The Company will continue ongoing efforts
to secure the additional funding needed to complete the recapitalization plan.

     Subject to the court's approval, the Company's proposed recapitalization
plan would provide that its 2010 Noteholders receive 85% of the common stock of
the recapitalized company's issued and outstanding stock on the effective date
of the plan, and be entitled to nominate four new members to the reorganized
company's seven member Board of Directors. The Company's preferred and common
stockholders would receive 13.5% and 1.5% respectively of the common stock of
the re-capitalized company on the effective date of the plan, and the preferred
stockholders would be entitled to nominate one new director to the reorganized
company's Board of Directors.

     The series of planned transactions included in the Chapter 11 filing and
recapitalization plan would reduce federal income tax attributes by the amount
of any debt forgiveness income. The federal and state net operating loss ("NOL")
carryforwards would be reduced and any remaining NOL carryforward amount would
be subject to limitations under Section 382 of the Internal Revenue Code.

     As part of the Chapter 11 proceeding, the Company will be required to file
a plan of reorganization with the Bankruptcy Court. In order for the plan to be
confirmed by the Court, among other things, the requisite votes under the
Bankruptcy Code must be received and the plan must satisfy the requirements set
forth in Section 1129 of the Bankruptcy Code.

     During the Chapter 11 proceeding, the Company plans to continue to provide
customers with its complete range of services. The Company does not currently
expect any significant impact on its employees, customers or suppliers. Due to
its remaining available cash resources, the Company does not believe that it
will require debtor-in-possession financing.

     The proposed recapitalization plan also provides for an employee stock
option plan for up to 10% of the common stock of the re-capitalized company's
issued and outstanding common stock on the effective date of the plan (including
existing options), which would dilute the ownership percentages referenced
above.

     On March 22, 2002 the Company also announced that it will voluntarily move
from NASDAQ National Market (the "NASDAQ") to the NASD Over the Counter (the
"NASD") Bulletin Board, a regulated quotation service that displays real-time
quotes, last-sale prices and volume information in over-the-counter (OTC) equity
securities. The Company expects that its common and preferred stock will
continue to trade

                                       F-25
<PAGE>

under the symbols MPWR and MPWRP, respectively. After the Company files Chapter
11, the Company expects its stock will continue to trade on the OTC Bulletin
Board, but the ticker symbol may change.

     The Company started to scale back the markets it served in early 2001, to
focus its resources on the markets it expected to be the most profitable. Most
recently, on February 25, 2002, the Company announced that it was ceasing
operations in Charlotte, North Carolina, where it was serving approximately 500
customers. The Company is in the process of estimating the costs associated with
exiting this market.

(15) RECENT ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS No. 141).
The standard is effective for acquisitions initiated after June 30, 2001. This
standard eliminates the pooling-of-interests method of accounting for business
combinations and requires the purchase method of accounting for business
combinations. The adoption of SFAS No. 141 has not had a material effect on the
financial results of the Company.

     In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS No. 142). The Company will adopt this standard on January 1, 2002. Upon
adoption of SFAS No. 142, goodwill and other acquired intangible assets with
indefinite lives will no longer be amortized, but will be subject to at least an
annual assessment for impairment through the application of a fair-value-based
test. Management does not expect the adoption of SFAS No. 142 to have a material
effect on the financial results of the Company.

     In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143). The Company will adopt this standard on January 1,
2003. Upon adoption of SFAS No. 143, the fair value of a liability for an asset
retirement obligation will be recognized in the period in which it is incurred.
The associated retirement costs will be capitalized as part of the carrying
amount of the long-lived asset and subsequently allocated to expense over the
asset's useful life. Management does not expect the adoption of SFAS No. 143 to
have a material effect on the financial results of the Company.

     In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS No. 144). The Company will adopt this
standard on January 1, 2002. This standard addresses financial accounting and
reporting for the impairment and disposal of long-lived assets. Management does
not expect the adoption of SFAS No. 144 to have a material effect on the
financial results of the Company.

                                       F-26
<PAGE>

(16) SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED):

<Table>
<Caption>
                                                       FIRST      SECOND      THIRD    FOURTH
                                                      QUARTER     QUARTER    QUARTER   QUARTER
                                                     ---------   ---------   -------   -------
<S>                                                  <C>         <C>         <C>       <C>
Year Ended December 31, 2001:
Operating Revenues.................................  $  46,602   $  49,653   $49,810   $49,630
Loss from Operations...............................    (93,241)   (276,440)  (49,991)  (47,925)
Loss from Operations before Extraordinary Item.....    (98,506)   (284,686)  (57,973)  (58,897)
Loss Applicable to Common Stockholders.............   (108,229)   (257,060)  (61,573)  (62,660)
Basic and Diluted Loss per Share of Common Stock...      (1.85)      (4.32)    (1.04)    (1.06)
Gain per Share Applicable to Extraordinary Item....         --        0.54        --        --
Year Ended December 31, 2000:
Operating Revenues.................................  $  25,458   $  30,918   $45,905   $44,581
Loss from Operations...............................    (29,250)    (40,938)  (79,403)  (70,692)
Loss from Operations before Extraordinary Item.....    (25,344)    (40,677)  (83,537)  (75,091)
Loss Applicable to Common Stockholders.............    (31,840)    (65,901)  (89,276)  (81,351)
Basic and Diluted Loss per Share of Common Stock...      (0.79)      (1.23)    (1.60)    (1.44)
Loss per Share Applicable to Extraordinary Item....         --       (0.36)       --     (0.01)
</Table>

(17) GOING CONCERN MATTERS

     The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business.

     The Company incurred losses applicable to common stockholders of $489.5
million, $268.4 million and $151.0 million in 2001, 2000 and 1999, respectively.
The Company continues to generate negative cash flows from operating and
investing activities and estimates that it has the resources to fund the
Company's current operations through the end of 2002, but that additional
resources could be required thereafter. In addition, as described in Note 14,
the Company intends to implement its recapitalization plan by commencing a
voluntary Chapter 11 proceeding, most likely in the second quarter of 2002.
These factors, among others, indicate that the Company may be unable to continue
as a going concern.

     The Company's operations require substantial capital investment for the
purchase of equipment and the development and maintenance of its network.
Management expects to continue to require substantial amounts of capital to
acquire customers, fund operating losses, augment the network in existing
markets and develop new products and services.

     The Company has completed, and is pursuing, several initiatives intended to
increase liquidity and better position the Company to compete under current
conditions and anticipated changes in the telecommunications sector. These
include:

     - Implementing the recapitalization of its balance sheet as described in
       Note 14 as soon as possible

     - Retaining financial advisors to assist in obtaining additional equity or
       debt financing

     - Aggressively seeking possible funding sources

     - Continuing to update its prospective business plans and forecasts to
       assist in monitoring current and future liquidity

     - Closing unprofitable or underperforming markets

     - Reducing general and administrative expenses through various cost cutting
       measures

     - Introducing new products and services with greater profit margins

                                       F-27
<PAGE>

     - Analyzing the pricing of its current products and services to ensure they
       are competitive and meet Company objectives

     - Redeploying assets held for future use to reduce the requirement for
       capital expenditures

     The Company's continuation as a going concern is dependent on its ability
to meet the above initiatives, among others. However, there can be no assurance
that the Company will be successful in obtaining additional debt or equity
financing, or in obtaining a bank facility on terms acceptable to the Company,
or at all, or that management's estimate of additional funds required is
accurate. The financial statements do not include any adjustments relating to
the recoverability and classification of assets and the satisfaction and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.

(18) CONDENSED CONSOLIDATING FINANCIAL INFORMATION

     The following information sets forth the condensed consolidating balance
sheets of the Company as of December 31, 2001 and 2000 and the condensed
consolidating statements of operations and cash flows for each of the three
years in the period ended December 31, 2001, for the Company, the parent
company, the subsidiary of the Company which guarantees the 2004 Notes
("Subsidiary Guarantor") and the combined subsidiaries of the Company which are
not Subsidiary Guarantors ("Subsidiary Nonguarantors.") The Subsidiary Guarantor
is wholly owned and the guarantee is full, unconditional, joint and several
obligations for the Subsidiary Guarantor. The accounting policies of the
subsidiaries are the same as those described in Note 1 Summary of Significant
Accounting Policies. There are no restrictions on the ability of the Subsidiary
Guarantor to transfer funds to the Company in the form of cash dividends, loans
or advances.

                                       F-28
<PAGE>

CONDENSED CONSOLIDATING BALANCE SHEET AT DECEMBER 31, 2001

<Table>
<Caption>
                                       PARENT     SUBSIDIARY    SUBSIDIARY
                                       COMPANY    GUARANTOR    NONGUARANTORS   ELIMINATIONS   CONSOLIDATED
                                      ---------   ----------   -------------   ------------   ------------
                                                                 (IN THOUSANDS)
<S>                                   <C>         <C>          <C>             <C>            <C>
Current assets:
  Cash and cash equivalents.........  $     100   $    6,892     $   2,144     $        --     $   9,136
  Investments available-for-sale....         --       10,671       150,473              --       161,144
  Restricted investments............         --       12,050           590              --        12,640
  Accounts receivable, net..........         --       24,001           824              --        24,825
  Prepaid expenses and other current
     assets.........................         --        5,315           272              --         5,587
  Intercompany receivable
     (payable)......................    (24,839)     588,507      (563,668)             --            --
                                      ---------   ----------     ---------     -----------     ---------
       Total current assets.........    (24,739)     647,436      (409,365)             --       213,332
  Property and equipment, net.......                 182,419       203,453              --       385,872
  Investments in subsidiaries.......    488,258     (239,148)           --        (249,110)           --
  Goodwill and other intangibles,
     net............................         --           --            --              --            --
  Other assets......................      7,746        6,697            --              --        14,443
                                      ---------   ----------     ---------     -----------     ---------
       Total assets.................  $ 471,265   $  597,404     $(205,912)    $  (249,110)    $ 613,647
                                      =========   ==========     =========     ===========     =========
Current liabilities:
  Current maturities of long-term
     debt and capital lease
     obligations....................  $      --   $      697     $   7,032     $        --     $   7,729
  Accounts payable -- Trade.........         --       26,192        (1,856)             --        24,336
  Accounts payable -- Property and
     equipment......................         --        2,685         1,808              --         4,493
  Accrued interest..................     12,367        1,656            --              --        14,023
  Other liabilities.................         --       27,200        17,557              --        44,757
                                      ---------   ----------     ---------     -----------     ---------
       Total current liabilities....     12,367       58,430        24,541              --        95,338
  Senior notes, net.................    370,366       50,437            --              --       420,803
  Other long-term debt and capital
     lease obligations, less current
     maturities.....................         --          811         1,343              --         2,154
                                      ---------   ----------     ---------     -----------     ---------
       Total liabilities............    382,733      109,678        25,884              --       518,295
  Commitments and contingencies 10%
     Series C convertible preferred
     stock..........................     46,610           --            --              --        46,610
  7.25% series D convertible
     preferred stock................    156,220           --            --              --       156,220
  Stockholders' (deficit) equity:
  Common stock......................         59           --            --              --            59
  Additional paid-in capital........    712,334    1,289,012        75,556      (1,364,568)      712,334
  Accumulated deficit...............   (826,615)    (800,754)     (314,704)      1,115,458      (826,615)
  Treasury stock and other..........        (76)        (532)        7,352              --         6,744
                                      ---------   ----------     ---------     -----------     ---------
       Total stockholders' (deficit)
          equity....................   (114,298)     487,726      (231,796)       (249,110)     (107,478)
                                      ---------   ----------     ---------     -----------     ---------
  Total liabilities, redeemable
     preferred stock and
     stockholders' (deficit)
     equity.........................  $ 471,265   $  597,404     $(205,912)    $  (249,110)    $ 613,647
                                      =========   ==========     =========     ===========     =========
</Table>

                                       F-29
<PAGE>

CONDENSED CONSOLIDATING BALANCE SHEET AT DECEMBER 31, 2000

<Table>
<Caption>
                                        PARENT     SUBSIDIARY    SUBSIDIARY
                                        COMPANY    GUARANTOR    NONGUARANTORS   ELIMINATIONS   CONSOLIDATED
                                       ---------   ----------   -------------   ------------   ------------
                                                                  (IN THOUSANDS)
<S>                                    <C>         <C>          <C>             <C>            <C>
Current assets:
  Cash and cash equivalents..........  $      --   $    4,359     $   6,078      $      --      $   10,437
  Investments available-for-sale.....         --      131,448       361,356             --         492,804
  Restricted investments.............         --           --         1,065             --           1,065
  Accounts receivable, net...........         --       25,321         2,796             --          28,117
  Prepaid expenses and other current
     assets..........................         --        1,425         1,401             --           2,826
  Intercompany receivable
     (payable).......................         --      700,874      (700,874)            --              --
                                       ---------   ----------     ---------      ---------      ----------
       Total current assets..........         --      863,427      (328,178)            --         535,249
  Property and equipment, net........                 218,581       263,684             --         482,265
  Investments in subsidiaries........    313,137       26,527            --       (339,664)             --
  Goodwill and other intangibles,
     net.............................         --           --       137,469             --         137,469
  Other assets.......................         --       16,784           693             --          17,477
                                       ---------   ----------     ---------      ---------      ----------
       Total assets..................  $ 313,137   $1,125,319     $  73,668      $(339,664)     $1,172,460
                                       =========   ==========     =========      =========      ==========
Current liabilities:
  Current maturities of long-term
     debt and capital lease
     obligations.....................  $      --   $      840     $   7,582      $      --      $    8,422
  Accounts payable -- Trade..........         --       32,260         4,324             --          36,584
  Accounts payable -- Property and
     equipment.......................         --       37,484         1,779             --          39,263
  Accrued interest...................         --       15,613            --             --          15,613
  Other liabilities..................         --       15,564        18,602             --          34,166
                                       ---------   ----------     ---------      ---------      ----------
       Total current liabilities.....         --      101,761        32,287             --         134,048
  Senior notes, net..................         --      466,845            --             --         466,845
  Other long-term debt and capital
     lease obligations, less current
     maturities......................         --        1,609         8,205             --           9,814
                                       ---------   ----------     ---------      ---------      ----------
       Total liabilities.............         --      570,215        40,492             --         610,707
  Commitments and contingencies 10%
     Series C convertible preferred
     stock...........................         --       42,760            --             --          42,760
  7.25% series D convertible
     preferred stock.................         --      202,126            --             --         202,126
  Stockholders' (deficit) equity:
  Common stock.......................         57           57            --            (57)             57
  Additional paid-in capital.........    672,031      672,031        75,556       (747,587)        672,031
  Accumulated deficit................   (358,875)    (358,875)      (49,029)       407,904        (358,875)
  Treasury stock and other...........        (76)      (2,995)        6,649             76           3,654
                                       ---------   ----------     ---------      ---------      ----------
       Total stockholders' (deficit)
          equity.....................    313,137      310,218        33,176       (339,664)        316,867
                                       ---------   ----------     ---------      ---------      ----------
  Total liabilities, redeemable
     preferred stock and
     stockholders' (deficit)
     equity..........................  $ 313,137   $1,125,319     $  73,668      $(339,664)     $1,172,460
                                       =========   ==========     =========      =========      ==========
</Table>

                                       F-30
<PAGE>

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
2001

<Table>
<Caption>
                                    PARENT     SUBSIDIARY    SUBSIDIARY
                                    COMPANY    GUARANTOR    NONGUARANTORS   ELIMINATIONS   CONSOLIDATED
                                   ---------   ----------   -------------   ------------   ------------
                                                              (IN THOUSANDS)
<S>                                <C>         <C>          <C>             <C>            <C>
Operating revenues...............  $      --   $ 185,958      $  60,036       $(50,299)     $ 195,695
Cost of operating revenues.......         --     146,252         12,457             --        158,709
Selling, general and
  administrative expenses........         --     214,409         28,191        (50,299)       192,301
Stock-based compensation
  expense........................         --          --          3,081             --          3,081
Network optimization cost........         --      49,669        183,414             --        233,083
Depreciation and amortization....         --      36,075         40,043             --         76,118
                                   ---------   ---------      ---------       --------      ---------
       Loss from operations......         --    (260,447)      (207,150)            --       (467,597)
Gain on sale of assets, net......         --       3,257          2,339             --          5,596
Interest income..................         --      80,055        (59,243)            --         20,812
Interest expense, net............    (25,861)    (31,391)        (1,621)            --        (58,873)
Equity earnings in subsidiary....   (441,879)   (265,675)            --        707,554             --
                                   ---------   ---------      ---------       --------      ---------
       Loss before extraordinary
          item...................   (467,740)   (474,201)      (265,675)       707,554       (500,062)
Gain on retirement of debt.......         --      32,322             --             --         32,322
                                   ---------   ---------      ---------       --------      ---------
       Net Loss..................  $(467,740)  $(441,879)     $(265,675)      $707,554      $(467,740)
                                   =========   =========      =========       ========      =========
</Table>

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
2000

<Table>
<Caption>
                                    PARENT     SUBSIDIARY    SUBSIDIARY
                                    COMPANY    GUARANTOR    NONGUARANTORS   ELIMINATIONS   CONSOLIDATED
                                   ---------   ----------   -------------   ------------   ------------
                                                              (IN THOUSANDS)
<S>                                <C>         <C>          <C>             <C>            <C>
Operating revenues...............  $      --   $ 135,488      $ 41,660        $(30,286)     $ 146,862
Cost of operating revenues.......         --     107,856        11,911                        119,767
Selling, general and
  administrative expenses........         --     194,871        16,473         (30,286)       181,058
Stock-based compensation
  expense........................         --       3,345            --              --          3,345
Network optimization cost........         --       9,438         2,562              --         12,000
Depreciation and amortization....         --      22,779        28,196              --         50,975
                                   ---------   ---------      --------        --------      ---------
       Loss from operations......         --    (202,801)      (17,482)             --       (220,283)
Gain on sale of assets, net......         --         102            --              --            102
Interest income..................         --      68,139       (26,673)             --         41,466
Interest expense, net............         --     (45,046)         (888)             --        (45,934)
Equity earnings in subsidiary....   (244,714)    (45,043)           --         289,757             --
                                   ---------   ---------      --------        --------      ---------
       Loss before extraordinary
          item...................   (244,714)   (224,649)      (45,043)        289,757       (224,649)
Loss on retirement of debt.......         --     (20,065)           --                        (20,065)
                                   ---------   ---------      --------        --------      ---------
       Net Loss..................  $(244,714)  $(244,714)     $(45,043)       $289,757      $(244,714)
                                   =========   =========      ========        ========      =========
</Table>

                                       F-31
<PAGE>

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
1999

<Table>
<Caption>
                                      PARENT    SUBSIDIARY    SUBSIDIARY
                                     COMPANY    GUARANTOR    NONGUARANTORS   ELIMINATIONS   CONSOLIDATED
                                     --------   ----------   -------------   ------------   ------------
                                                               (IN THOUSANDS)
<S>                                  <C>        <C>          <C>             <C>            <C>
Operating revenues.................  $     --    $ 55,066       $13,823        $(13,823)      $ 55,066
Cost of operating revenues.........        --      42,078            --                         42,078
Selling, general and administrative
  expenses.........................        --      66,593            --         (13,823)        52,770
Stock-based compensation expense...        --         714            --              --            714
Depreciation and amortization......        --      10,506         8,415              --         18,921
                                     --------    --------       -------        --------       --------
       Loss from operations........        --     (64,825)        5,408              --        (59,417)
Gain on sale of assets, net........        --         224            --              --            224
Interest income....................        --       7,698             4              --          7,702
Interest expense, net..............        --     (18,278)           --              --        (18,278)
Equity earnings in subsidiary......   (69,769)      5,412            --          64,357             --
                                     --------    --------       -------        --------       --------
       Net (Loss) Income...........  $(69,769)   $(69,769)      $ 5,412        $ 64,357       $(69,769)
                                     ========    ========       =======        ========       ========
</Table>

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31,
2001

<Table>
<Caption>
                                      PARENT    SUBSIDIARY    SUBSIDIARY
                                      COMPANY   GUARANTOR    NONGUARANTORS   ELIMINATIONS   CONSOLIDATED
                                      -------   ----------   -------------   ------------   ------------
                                                                (IN THOUSANDS)
<S>                                   <C>       <C>          <C>             <C>            <C>
Net cash (used in) provided by
  operating activities..............   $100      $(28,171)     $(191,134)        $ --        $(219,205)
Cash flows from investing
  activities:
  Purchases of property and
     equipment, net.................     --       (64,175)       (22,227)          --          (86,402)
  Sale of investments available for
     sale, net......................     --       122,132        214,779           --          336,911
  (Purchase) sale of restricted
     investments....................     --       (12,050)           460           --          (11,590)
  Other.............................     --            --          1,601           --            1,601
                                       ----      --------      ---------         ----        ---------
Net cash provided by investing
  activities........................     --        45,907        194,613           --          240,520
                                       ----      --------      ---------         ----        ---------
Cash flows from financing
  activities:
  Repurchase of senior notes........     --       (14,134)            --           --          (14,134)
  Payments on other long-term debt
     and capital lease obligations,
     net............................     --        (1,141)        (7,413)          --           (8,554)
  Proceeds from issuance of common
     stock..........................     --            72             --           --               72
                                       ----      --------      ---------         ----        ---------
Net cash used in financing
  activities........................     --       (15,203)        (7,413)          --          (22,616)
                                       ----      --------      ---------         ----        ---------
Net increase (decrease) in cash and
  cash equivalents..................    100         2,533         (3,934)          --           (1,301)
Cash and cash equivalents, beginning
  of year...........................     --         4,359          6,078           --           10,437
                                       ----      --------      ---------         ----        ---------
Cash and cash equivalents, end of
  year..............................   $100      $  6,892      $   2,144         $ --        $   9,136
                                       ====      ========      =========         ====        =========
</Table>

                                       F-32
<PAGE>

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31,
2000

<Table>
<Caption>
                                     PARENT    SUBSIDIARY    SUBSIDIARY
                                     COMPANY   GUARANTOR    NONGUARANTORS   ELIMINATIONS   CONSOLIDATED
                                     -------   ----------   -------------   ------------   ------------
                                                               (IN THOUSANDS)
<S>                                  <C>       <C>          <C>             <C>            <C>
Net cash (used in) provided by
  operating activities.............  $    --   $(313,327)     $171,778        $     --      $(141,549)
Cash flows from investing
  activities:
  Purchases of property and
     equipment, net................       --    (124,822)     (162,088)             --       (286,910)
  Purchase of investments available
     for sale, net.................       --    (356,603)           --              --       (356,603)
  Net cash paid for acquisition of
     business......................       --     (13,475)           --              --        (13,475)
  Sale of restricted investments...       --      21,191            --              --         21,191
                                     -------   ---------      --------        --------      ---------
Net cash used in investing
  Activities.......................       --    (473,709)     (162,088)             --       (635,797)
                                     -------   ---------      --------        --------      ---------
Cash flows from financing
  activities:
  Proceeds from issuance of senior
     notes, net....................       --     243,220            --              --        243,220
  Costs associated with issuance of
     senior notes..................              (10,482)           --              --        (10,482)
  Proceeds from issuance of
     convertible preferred stock...       --     200,575            --              --        200,575
  Payments of senior notes.........       --      (9,647)           --              --         (9,647)
  Payments on other long-term debt
     and capital lease obligations,
     net...........................       --        (753)       (3,612)             --         (4,365)
  Payments received on stockholders
     note..........................       --       5,825            --              --          5,825
  Proceeds from issuance of common
     stock.........................       --     319,678            --              --        319,678
                                     -------   ---------      --------        --------      ---------
Net cash (used in) provided by
  financing activities.............       --     748,416        (3,612)             --        744,804
                                     -------   ---------      --------        --------      ---------
Net increase (decrease) in cash and
  cash equivalents.................       --     (38,620)        6,078              --        (32,542)
Cash and cash equivalents,
  beginning of year................       --      42,979            --              --         42,979
                                     -------   ---------      --------        --------      ---------
Cash and cash equivalents, end of
  year.............................  $    --   $   4,359      $  6,078        $     --      $  10,437
                                     =======   =========      ========        ========      =========
</Table>

                                       F-33
<PAGE>

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31,
1999

<Table>
<Caption>
                                          PARENT    SUBSIDIARY    SUBSIDIARY
                                         COMPANY    GUARANTOR    NONGUARANTORS   ELIMINATIONS   CONSOLIDATED
                                         --------   ----------   -------------   ------------   ------------
                                                                   (IN THOUSANDS)
<S>                                      <C>        <C>          <C>             <C>            <C>
Net cash (used in) provided by
  operating activities.................  $     --    $(85,017)     $ 39,104        $     --       $(45,913)
Cash flows from investing activities:
  Purchases of property and equipment,
     net...............................        --     (44,096)      (39,104)             --        (83,200)
  Purchase of investments available for
     sale, net.........................        --     (54,707)           --              --        (54,707)
  Sale of restricted investments.......        --      19,123            --              --         19,123
                                         --------    --------      --------        --------       --------
Net cash used in investing
  activities...........................        --     (79,680)      (39,104)             --       (118,784)
                                         --------    --------      --------        --------       --------
Cash flows from financing activities:
  Proceeds from issuance of convertible
     preferred stock...................        --      76,263            --              --         76,263
  Payments on other long-term debt and
     capital lease obligations, net....        --        (439)           --              --           (439)
  Proceeds from issuance of common
     stock.............................        --     119,966            --              --        119,966
                                         --------    --------      --------        --------       --------
Net cash provided by financing
  activities...........................        --     195,790            --              --        195,790
                                         --------    --------      --------        --------       --------
Net increase in cash and cash
  equivalents..........................        --      31,093            --              --         31,093
Cash and cash equivalents, beginning of
  year.................................        --      11,886            --              --         11,886
                                         --------    --------      --------        --------       --------
Cash and cash equivalents, end of
  year.................................  $     --    $ 42,979      $     --        $     --       $ 42,979
                                         ========    ========      ========        ========       ========
</Table>

                                       F-34
<PAGE>

                           MPOWER HOLDING CORPORATION

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR ENDED
                               DECEMBER 31, 2001

<Table>
<Caption>
                                                              ADDITIONS
                                                       -----------------------
                                          BALANCE AT   CHARGED TO   CHARGED TO                BALANCE AT
                                          BEGINNING    COSTS AND      OTHER                      END
DESCRIPTION                                OF YEAR      EXPENSES     ACCOUNTS    DEDUCTIONS    OF YEAR
-----------                               ----------   ----------   ----------   ----------   ----------
<S>                                       <C>          <C>          <C>          <C>          <C>
Allowance for doubtful accounts.........    $5,271      $  7,057     $     --     $  7,998     $ 4,330
Accrued network optimization costs......    $5,030      $233,083     $     --     $224,520     $13,593
</Table>

                           MPOWER HOLDING CORPORATION

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR ENDED
                               DECEMBER 31, 2000

<Table>
<Caption>
                                                              ADDITIONS
                                                       -----------------------
                                          BALANCE AT   CHARGED TO   CHARGED TO                BALANCE AT
                                          BEGINNING    COSTS AND      OTHER                      END
DESCRIPTION                                OF YEAR      EXPENSES     ACCOUNTS    DEDUCTIONS    OF YEAR
-----------                               ----------   ----------   ----------   ----------   ----------
<S>                                       <C>          <C>          <C>          <C>          <C>
Allowance for doubtful accounts.........    $  961      $  5,469     $     --     $  1,159     $ 5,271
Accrued network optimization costs......    $   --      $ 12,000     $     --     $  6,970     $ 5,030
</Table>

                           MPOWER HOLDING CORPORATION

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR ENDED
                               DECEMBER 31, 1999

<Table>
<Caption>
                                                              ADDITIONS
                                                       -----------------------
                                          BALANCE AT   CHARGED TO   CHARGED TO                BALANCE AT
                                          BEGINNING    COSTS AND      OTHER                      END
DESCRIPTION                                OF YEAR      EXPENSES     ACCOUNTS    DEDUCTIONS    OF YEAR
-----------                               ----------   ----------   ----------   ----------   ----------
<S>                                       <C>          <C>          <C>          <C>          <C>
Allowance for doubtful accounts.........    $  541      $  1,750     $     --     $  1,330     $   961
</Table>

                                       F-35