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

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

                                    FORM 10-K

                                   (MARK ONE)

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

                    FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

                                       OR

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

                    FOR THE TRANSITION PERIOD FROM           TO

                       COMMISSION FILE NUMBER 33339884-01

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

                           MPOWER HOLDING CORPORATION

             (Exact name of registrant as specified in its charter)

                      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)

                                 (585) 218-6550
              (Registrant's telephone number, including area code)

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

                                              NAME OF EACH EXCHANGE
              TITLE OF EACH CLASS              ON WHICH REGISTERED
              -------------------             ---------------------
                     NONE                             NONE

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

                    COMMON STOCK, $0.001 PAR VALUE PER SHARE

                                (Title of class)

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period 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 [ ]
<PAGE>
      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

      Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]

      As of June 28, 2002, the aggregate market value of common stock held by
non-affiliates of the registrant, based on the last sale price of such stock in
the NASD Over the Counter Bulletin Board on June 28, 2002, was approximately
$1.5 million.

      Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]

      As of March 21, 2003, the registrant had 64,999,025 shares of common stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                 Not Applicable

                      Exhibit Index is located on page 57.

================================================================================
<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-sized business
customers through our wholly owned subsidiary, Mpower Communications Corp.
("Communications") in Los Angeles, San Diego, Las Vegas, Northern California and
Chicago. We currently have approximately 45,000 business customers and
approximately 25,000 residential customers (primarily in the Las Vegas market).
We also bill a number of major carrier customers for the costs of originating
and terminating traffic on the Mpower network. We currently acquire
approximately 90% of our new sales through our direct sales force, with the
remainder acquired through agent relationships.

FINANCIAL HISTORY

      In May 1998, we completed our initial public offering of common stock,
raising net proceeds of $63.0 million. From May 1999 to March 2000, we raised
over $900 million of additional funds through debt and equity issuances to
pursue an aggressive business plan to rapidly expand our network utilizing
low-cost, facilities-based "soft-switch" voice switching technology and
integrated voice and high-speed data over a single DSL loop ("VoDSL"). As we
were building out our new markets throughout 2000, our vendors continued to
delay the commercial release of soft-switch technology and the local exchange
carriers ("LECs") were experiencing difficulty in providing high-quality DSL
loops to us over which we had planned to provide our low-cost VoDSL service to
our target customers. To address these impediments to our business plan, we
shifted our strategy and began deploying higher-cost Class 5 circuit switching
technology in each of our markets (the same as used by Verizon, SBC, and other
major telecommunication companies) and began deploying digital loop carriers in
each collocation site. This change to our business plan required significantly
higher up-front capital expenditures in each market as well as lower recurring
margins. At the same time, the capital markets became virtually inaccessible to
early stage communications ventures. Consequently, in September 2000, we
commenced what has become a 30-month process to restructure our business, both
operationally and financially.

-     From September 2000 through May 2001, we significantly scaled back our
      operations, canceling more than 500 existing collocations, and canceling
      plans to enter the Northeast and Northwest Regions (representing more than
      350 collocations).

-     From February 2002 through July 2002, we undertook a comprehensive
      recapitalization through a Chapter 11 bankruptcy plan that eliminated
      $593.9 million in carrying value of debt settled and preferred stock (as
      well as $65.3 million of associated annual interest and dividend costs) in
      exchange for cash and the substantial majority of our common stock.

-     From November 2002 to January 2003, we eliminated the remaining $51.3
      million of carrying value of our debt for cash payments, which released
      the only security interest in the vast majority of our network assets,
      giving us the ability to pursue alternative financing and strategic
      transactions.

-     In January 2003, we announced we had reached an agreement with RFC Capital
      Corporation, a wholly owned subsidiary of Textron Financial Corporation,
      for a three-year funding facility of up to $7.5 million, secured only by
      certain of our receivables.

-     In January 2003, we announced a series of strategic transactions to
      further strengthen us financially and focus our operations on our
      California, Nevada and Illinois markets. Those transactions will bring
      geographic concentration to our business by selling our customers and
      assets in Florida, Georgia, Ohio, Michigan and Texas to other service
      providers (the "Asset Sales"). The Asset Sales for customers and assets in
      Ohio and Michigan were completed on March 18, 2003 and Texas on March 27,
      2003. Completion of the remaining Asset Sales are subject to a number of
      closing conditions and contingencies. When consummated, the Asset Sales
      are expected to generate net proceeds to us of approximately $17.0 million
      to $20.0 million over the next few months.

EMERGENCE FROM CHAPTER 11 PROCEEDINGS

      On July 30, 2002, we and our subsidiary Communications, formally emerged
from Chapter 11 as our recapitalization plan (the "Plan") became effective. Also
on July 30, 2002, the Bankruptcy Court dismissed the Chapter 11 case of Mpower
Lease Corp., a subsidiary of Communications. See Note 2 in the Notes to the
Consolidated Financial Statements for a summary of the material features of the
Plan.
<PAGE>
      As of July 30, 2002, we implemented fresh-start accounting under the
provisions of Statement of Position ("SOP") 90-7. Under SOP 90-7, our
reorganization fair value was allocated to our assets and liabilities, our
accumulated deficit was eliminated, and our new equity was issued according to
the Plan as if we were a new reporting entity. In conformity with fresh-start
accounting principles, Predecessor Mpower Holding recorded a $244.7 million
reorganization charge to adjust the historical carrying value of our assets and
liabilities to fair market value reflecting the allocation of our $87.3 million
estimated reorganized equity value as of July 30, 2002. We also recorded a
$315.3 million gain on the cancellation of debt on July 30, 2002 pursuant to the
Plan. As a result, our net operating loss carryforwards, which were subject to
annual use limitations before the reorganization, may be significantly reduced.

      As a result of our reorganization, the financial statements published by
us for the periods following the effectiveness of the Plan will not be
comparable to those published before the effectiveness of the Plan.

RESHAPING MPOWER

      Our scaling back of operations from September 2000 through May 2001,
canceling more than 500 existing collocations and canceling plans to enter the
Northeast and Northwest regions followed by emergence from Chapter 11 and the
recapitalization of our balance sheet were significant steps in a sequential
process to reshape our company. Through the pre-negotiated Chapter 11
proceeding, we eliminated $593.9 million in carrying value of long-term debt
settled and preferred stock in exchange for $19.0 million in cash and
substantially all of the common stock of our reorganized company. This process
reduced our debt by roughly 95%. In November 2002, we repurchased $49.2 million
in carrying value of our 2004 Notes settled for $14.2 million in cash. In
January 2003, we repurchased the remaining $2.1 million in carrying value of our
2004 Notes for $2.2 million in cash. This transaction will remove the vast
majority of liens on our network equipment effective on or about April 3, 2003
and make us completely long-term debt free.

      With our long-term debt eliminated, the second step in the process of
reshaping our company was to significantly bring down our cash burn rate. We
first began to see cash conservation as a priority in September 2000 when we
pulled back on our network expansion plans. Since that time, we have continued
to scale back our market footprint and have made significant operational
improvements which resulted in efficiencies including reduced headcount and
lower SG&A and capital expenditures. In early January 2003, we announced the
sale of our markets in Florida, Georgia, Ohio, Michigan and Texas. The sales of
Ohio and Michigan were completed on March 18, 2003 and Texas on March 27, 2003.
The remaining Asset Sales are anticipated to be completed by the end of April
2003 and are expected to accomplish three things: significantly reduce our cash
burn; bring additional cash through the sale of the markets; and result in
geographic concentration for the rest of our business.

      The final step in reshaping our company is scaling the business for future
growth, which is intended to be our focus in 2003. As a primarily west-coast
based company, we intend to concentrate on being a significant presence and
fierce competitor in the telecommunications marketplace serving small and
medium-sized business customers in our California, Nevada and Illinois markets.
We will explore opportunities to add revenue streams to our existing network
through transactions that are accretive to shareholder value and we will
continue to invest in the success of the company by adding capacity on our
network to meet the demand for our services.

COMPANY OVERVIEW

      We provide integrated voice and high-speed data services to small and
medium-sized business customers in five markets throughout California (Los
Angeles, San Diego and Northern California) and in Nevada (Las Vegas only) and
Illinois (Chicago only). Our network consists of 294 incumbent carrier central
office collocation sites providing us access to nearly 5.3 million addressable
business lines. Substantially all of our central office collocation sites are
SDSL capable and 196 are T1 capable. We have established working relationships
with Verizon, Sprint, and Southwestern Bell Corporation (including its operating
subsidiaries PacBell and Ameritech, collectively referred to as "SBC"). We have
over 260,000 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 switches
that control how voice and data communications originate and terminate, and we
lease the telephone lines or transport systems, over which the voice and data
traffic are transmitted. We install our network equipment at collocation sites
of the incumbent carriers from whom we lease standard telephone lines. As we
have already invested and built our network, we believe our strategy has allowed
us to establish and sustain service in our markets at a comparatively low cost
while maintaining control of the access to our customers.

      Our business is to deliver integrated voice and broadband data solutions.
Specifically, we provide small and medium-sized business customers with a full
suite of communications services and features integrated on one bill with the
convenience of a single source provider. We have a total of approximately 45,000
business customers in Los Angeles, San Diego, Las Vegas, Northern
<PAGE>
California and Chicago, providing them local voice telephone service and
broadband Internet via SDSL and T1. 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. 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.

      We also generate revenue from a number of major carrier customers for the
costs of terminating traffic on our network.

      We currently acquire approximately 90% of our new sales through our direct
sales force, with the remainder being acquired through agent relationships.

      Our highest margin opportunities come from sales of our integrated T1
product, which leverages the full capability of our network.

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 or 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-sized 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-sized 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 in the telecommunications industry in recent years 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-sized 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. Our customers have the
convenience of a single point of contact for a complete package of services,
eliminating the need to manage
<PAGE>
multiple vendors.

      Dedicated Support. Our account managers personally call on the small and
medium-sized businesses. This is in contrast to many other communications
companies which primarily telemarket to these businesses.

      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.

BUSINESS STRATEGY

      Targeting Small and Medium-Sized Businesses. Based on telephone lines in
service, we believe the small and medium-sized business customer base is a large
and rapidly growing segment of the communications market. We target suburban
areas of large metropolitan markets because these areas have high concentrations
of small and medium-sized businesses. In addition to being densely clustered in
the urban and suburban 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-sized 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-sized business customers. These services
include integrated T1 services, as well as traditional voice and data services
(see Products & Services below).

      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 of our existing
network to further enhance our product portfolio and service delivery
capabilities.

      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. This network footprint is complete and operational. We have installed
SDSL technology across our existing network, and have T1 technology in the
majority of our network collocations.

      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. 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 technological flexibility that allows us to deliver our product
set in the most efficient manner regardless of the physical plant quality of the
incumbent carrier's network.

      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. 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
<PAGE>
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 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 also allows us to present our customers with one fully integrated monthly
billing statement for all communication services.

PRODUCTS & SERVICES

      As an integrated service provider, we offer a variety of voice and data
services that come as a bundled solution, or can be conveniently packaged or
purchased as stand-alone products.

-     MpowerOffice integrates both voice and data services across a single pipe
      - a T1 circuit. MpowerOffice delivers Internet access, local and long
      distance voice service, and the most highly used local voice features and
      Internet applications.

-     MpowerConnect provides customers Internet access using a T1 circuit.
      Customers may choose between three data speeds, and have all the basic
      services needed to connect their office with T1 speeds to the Internet.

-     Mpower's DSL Data-only solution provides customers an SDSL-based
      connection to the Internet. Service includes several features such as web
      hosting and custom email.

-     Data Features - We offer a variety of data features including Web hosting,
      email, DNS hosting and Subnets.

-     MpowerTrunks provides customers a group of 24 trunks across our T1
      service.

-     We offer POTS lines to customers as a stand-alone service for local
      calling and for access to long distance service. "POTS" stands for Plain
      Old Telephone Service, and is used to describe an analog voice line that
      is connected to the telephone switched network for local and long-distance
      calling capability.

-     Centrex is a set of services that enables our voice customers to get many
      of the same features and resources they would get if they had a PBX phone
      system.

-     Voice Features - We offer domestic long distance flat rate calling plans,
      in addition to the most popular telephone features including Caller ID,
      Call Transfer, 3-Way Calling, Call Forwarding and Remote Access to Call
      Forwarding.

MARKETS

      We have redefined the remaining 12 markets in our footprint as five
markets: Los Angeles, San Diego, Northern California, Las Vegas and Chicago.

      As of March 2003, we operate our five markets in three states and have 294
incumbent carrier central office collocation sites providing access to an
estimated 5.3 million addressable business lines.

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

<TABLE>
<CAPTION>
                                                                      ADDRESSABLE
                                                      NUMBER OF      LINES WITHIN
       MARKET                                       COLLOCATIONS     TARGET MARKET
<S>                                                 <C>              <C>
Los Angeles ............................                 142           2,500,000
San Diego ..............................                  28             500,000
Northern California ....................                  40             725,000
Las Vegas ..............................                  18             175,000
Chicago ................................                  66           1,400,000
                                                    ------------     -----------
Totals .................................                 294           5,300,000
                                                    ============     ===========
</TABLE>

      In January 2003, we took steps to achieve geographic concentration by
entering into agreements to sell our markets in Florida, Georgia, Ohio, Michigan
and Texas to other telecommunications providers. The sales of Ohio and Michigan
were completed on March 18, 2003 and Texas on March 27, 2003. The remaining
Asset Sales are anticipated to be completed by the end of April 2003. Our focus
is now primarily the west coast and our efforts are directed toward building
market share within our existing service territory. We believe there is
significant scaling
<PAGE>
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

      We take a "feet-on-the-street" approach to both sales and marketing. As of
March 21, 2003, we employed approximately 150 quota-carrying sales personnel and
an additional approximately 50 sales support personnel. Approximately 90% of our
new sales are acquired through our direct sales force. Our dedicated account
managers personally meet with customers to determine the best communications
solution for them. As a result, much of our business comes through referrals and
networking. Our highly focused relationship-building approach seeks to generate
well-managed, profitable growth through increased market share with minimal
customer turnover. Our sales organization is divided into teams within markets.
Each market has a sales director who oversees the team sales managers. The
directors report to our President of sales. Our direct sales efforts
are complimented by our telemarketing and agent channels, which also target the
small and medium-sized business customer.

      Our sales representatives are supported by sales coordinators, 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.

NETWORK ARCHITECTURE AND TECHNOLOGY

      We were one of the first competitive communications carriers to implement
a facilities-based network strategy. As a result, we own the network switches
that control how voice and data transmissions originate and terminate, and we
lease from the incumbent local carrier (primarily SBC) only the telephone lines
over which the voice and data traffic are transmitted. Because we have already
invested and built our network, we are able to serve a broad geographic area at
a comparatively low cost while maintaining control of the access to our
customers. By comparison, many CLECs do not control their own facilities and,
therefore, are much more dependent upon the local Bell companies and the federal
and state regulatory environment in order to ensure the viability of their
business plans.

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

      We believe that leasing the standard telephone line from the incumbent
carrier's 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 network required to connect our collocation equipment located at an
incumbent carrier's central office to our switching hardware and the network
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 network connection 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 seven operational voice switches. 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.

      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 voice and data services. Any future
changes the customer wishes to make, such as purchasing more services from us,
are under our direct control.
<PAGE>
      We have installed our equipment in 294 collocation sites as of March 21,
2003. We believe this network allows us to sell our services to an estimated
universe of small and medium-sized business customers which utilize
approximately 5.3 million lines. Our seven host switching sites are connected to
each other by fiber, which allows us to transmit data traffic using asynchronous
transfer mode (ATM) 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 more than 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,
1024 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 sometimes associated with SDSL. A T1 will consistently offer 1.5
million Mbps data speed. With this technology, we now have an alternative to
SDSL when network restrictions will not facilitate SDSL usage. Our T1 product
offerings provide customers a choice between integrated service, data-only
service and trunks. All 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 high speed 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 Internet 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, Verizon for parts
of California, and SBC (through one of its operating subsidiaries) also in
California and Illinois. We are certified as a competitive carrier in all of our
existing markets.

SERVICE DEPLOYMENT AND OPERATIONS
<PAGE>
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 customers and the incumbent carriers 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 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 were required to reduce their switched access charges
to rates no higher than 2.5 cents per minute. After one year (effective June
2002), the rate ceiling was reduced to 1.8 cents and after two years (effective
June 2003) to 1.2 cents per minute. After three years (effective June 2004), all
competitive carriers will be required to charge rates no higher than the
incumbent telephone company.

      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.
<PAGE>
      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.

      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 element
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 early 2003. 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
<PAGE>
reduce the obligation of incumbent carriers to offer network elements to us on
an unbundled basis could adversely affect our business plan.

      In May 2002, the prices that incumbent carriers may charge for access to
these network elements was determined by the Supreme Court, which affirmed that
incumbent carriers are required to price these network elements based on the
efficient replacement cost of existing technology, as the FCC methodology now
requires, rather than on their historical costs. The Court also determined that
the FCC may require incumbent carriers to combine certain previously uncombined
elements at the request of a competitive carrier.

      In November 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 sought 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.

      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.

      Verizon has obtained authority to provide interLATA long distance services
in substantially all of its operating areas and SBC has obtained authority to
provide interLATA long distance services in approximately half of its operating
areas. During 2003, the regional Bell operating companies are likely to complete
this process and be authorized to compete throughout their operating areas with
packages of bundled services, or "one stop shopping." With the completion of
this process, incentives for incumbent carriers to improve service to
competitive carriers like us in order to obtain interLATA long distance
authority will be virtually eliminated while at the same time, the regional Bell
operating companies will be in a position to become more efficient and
attractive competitors.

      In December 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.

      Also in December 2001, the FCC initiated its "triennial review" of which
unbundled network elements or UNEs the incumbent carriers are required to sell
to competitive carriers such as us at forward looking or TELRIC (total element
long run incremental cost) rates, which reflect efficient costs plus a
reasonable profit. Competitive carriers such as us may depend upon their ability
to obtain access to these UNEs in order to provision services to their
customers. On February 20, 2003, the FCC announced its decision on the
"triennial review" of UNEs. Although the Order has not yet been released, the
FCC announced that it generally would de-regulate access to the incumbent
carriers' fiber/broadband network but would continue to require that incumbents
provide access to their copper network and to DS-1 and DS-3 loops and transport.
We primarily buy access to the incumbents' copper network and to DS-1s/T-1s. The
"triennial review" decision is complex and when issued, it is likely to be
litigated. It will have a significant impact on telecommunications competition,
but it is not possible at this time to predict the full extent of its impact
upon us or our competition. A modification of the decision by the FCC or the
courts could result in an order that could have a significant adverse
competitive impact.

      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 their charges to the target level.

      In August 1999, the FCC adopted an order providing additional pricing
flexibility to incumbent carriers subject to price cap
<PAGE>
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.

      In May 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 2003, the contribution factor is $0.072805 of
a provider's interstate and international revenue for the third quarter of 2002.
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. We have now complied with the CALEA
requirements.

STATE REGULATION

      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. We have satisfied state requirements to provide local
and intrastate long distance services in the 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

      -     customer service

      -     breadth of service availability
<PAGE>
      -     network security

      -     ease of access and use

      -     bundled service offerings

      -     brand recognition

      -     operating experience

      -     capital availability

      -     exclusive contracts

      -     accurate billing

      -     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 which 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.

      Incumbent carriers also have long-standing relationships with regulatory
authorities at the federal and state levels. While 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. 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 materially adversely affected. Future regulatory decisions
which give the incumbent carriers increased pricing flexibility or other
regulatory relief could 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
<PAGE>
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 enter the
market more rapidly by installing switches and leasing standard telephone lines
and cable or by means of a type of resale known as an unbundled network element
platform or UNE-P.

      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 competitive levels 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. 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 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. Numerous long distance carriers are
            managing high-speed networks nationwide, with direct sales forces,
            and are 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 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.
<PAGE>
PERSONNEL

      As of March 21, 2003, we had approximately 900 employees, a 55% decrease
from the approximate 2,000 employees at December 31, 2001.

      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.

FAILURE TO CLOSE ONE OR MORE OF A SERIES OF STRATEGIC AND FINANCIAL TRANSACTIONS
CURRENTLY PENDING COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND OPERATING
RESULTS

      On January 8, 2003, we announced a series of strategic and financial
transactions to further strengthen the business financially, and focus on our
operations in California, Nevada and Illinois. We are bringing geographic
concentration and operating efficiencies to the business by selling our
customers and assets in Florida, Georgia, Ohio, Michigan and Texas to other
service providers (the "Asset Sales"). The Asset Sales in Ohio and Michigan were
completed on March 18, 2003 and Texas on March 27, 2003. Completion of the
remaining Asset Sales are subject to a number of closing conditions and
contingencies, and all are expected to be completed by the end of April 2003,
although we cannot assure investors that all or any of the remaining Asset Sales
will occur. The Asset Sales are expected to generate net proceeds to us of
approximately $17.0 million to $20.0 million over the next few months.

      Our inability to close one or more of these transactions could have a
material adverse effect on our results of operations and financial condition.

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

We will require capital to fund the development of our business and services as
well as our operating costs. 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 any capital
requirements through existing resources, internally generated funds and debt or
equity financing, if needed. The inability to close one or more of the Asset
Sales as planned could have a material adverse effect on our liquidity. We
cannot assure you we will be successful in raising sufficient debt or equity
financing, if needed, on acceptable terms or at all.

THE VALUE OF THE EQUITY SECURITIES MAY BE NEGATIVELY AFFECTED BY ADDITIONAL
ISSUANCES OF EQUITY SECURITIES BY THE REORGANIZED COMPANY AND GENERAL MARKET
FACTORS

      Issues or sales of equity by us will likely be heavily dilutive. There can
be no certainty as to the effect, if any, that future issuances or sales of
equity securities by us, 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

      Our common stock is traded on the NASD OTC Bulletin Board (under the
symbol "MPOW.OB"). As a result, 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.
<PAGE>
WE HAVE HISTORICALLY RECORDED LOSSES AND NEGATIVE CASH FLOW

      We recorded net losses of $94.4 million in 2002, $467.7 million in 2001
and $244.7 million in 2000. In addition, we had negative cash flow from
operations of $124.2 million in 2002, $219.3 million in 2001 and $141.3 million
in 2000. At the present time, we do not generate enough cash flow to cover our
operating and investing expenses. We expect to record significant net losses and
generate negative cash flow from operations for the first six months of 2003. If
the Asset Sales are not completed as planned, there could be a material adverse
effect on our cash flow. 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 any future debt service
requirements.

FUTURE DEBT MAY CREATE FINANCIAL AND OPERATING RISK

      Debt we may incur in the future could have important consequences to you,
including the following:

      -     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.

      -     Future agreements which may govern the terms of debt we may incur
             may 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 and sell assets; and

            -     engage in transactions with affiliates.

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

      Our ability to make payments on and to refinance any future 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
any future debt service requirements. Our cash flow from operations may be
insufficient to repay any future indebtedness at scheduled maturity and some or
all of any 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
<PAGE>
      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;

      -     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 and maintain 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

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

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

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. 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.

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 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
<PAGE>
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.

      While we had experienced rapid growth since our inception through 2001, we
do not anticipate significant rapid growth in 2003. However, any sustained
growth will place a strain on our operational, human and financial resources.
Any significant 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
which may 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.

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

      We must renew favorable interconnection agreements 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 carriers' 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 trunk circuits installed
between incumbent carriers' 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 customers' standard telephone lines to assure uninterrupted
service. The incumbent carriers are our competitors and have limited experience
leasing standard telephone lines to other companies. Therefore, the incumbent
carriers might not be able 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.
<PAGE>
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
suppliers 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 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.
<PAGE>

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 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.

CHANGES IN LAWS OR REGULATIONS COULD RESTRICT THE WAY WE OPERATE OUR BUSINESS
AND NEGATIVELY AFFECT OUR COSTS AND COMPETITIVE POSITION
<PAGE>
      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 state 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.

A FAILURE TO OBTAIN APPROVAL OF A SETTLEMENT OF OUR CLASS ACTION LAWSUIT AND A
SUBSEQUENT ADVERSE DECISION IN AN APPEAL OF THAT LAWSUIT COULD ADVERSELY AFFECT
OUR FINANCIAL CONDITION.

      In September 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. 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 have been appealed to the United States Court of Appeals
for the Second Circuit. On April 8, 2002, we filed a petition for a relief under
Chapter 11 of the Bankruptcy Code, and as of the effective date of our First
Amended Joint Plan of Reorganization (July 30, 2002), we were was discharged and
released from any "Claim, Debt and Interest," except as otherwise stated in the
Plan, as set forth in the final Confirmation Order entered by the United States
Bankruptcy Court for the District of Delaware on July 17, 2002. Although we are
no longer a defendant in the class action lawsuit and can have no direct
liability to the plaintiffs; we nevertheless remain obligated to indemnify the
remaining individual defendants in the event of an adverse decision against them
in the lawsuit. The plaintiffs and the remaining individual defendants have
entered into a tentative settlement of the class action lawsuit, and have
submitted a Preliminary Approval Order to the Court, seeking approval of the
settlement in accordance with a Stipulation of Settlement dated February 6,
2003. If approved, the settlement would dismiss the action with prejudice. All
settlement payments and remaining attorneys fees and other legal expenses
incurred by the defendants are to be paid by our insurance carrier. A hearing is
scheduled for October 1, 2003 to determine whether the proposed settlement of
the action on the terms and conditions provided for in the Stipulation is fair,
reasonable and adequate and should be approved by the Court. While we believe
the remaining individual defendants anticipate that the proposed Settlement will
be approved, will continue to deny any wrongdoing and will vigorously contest
the suit if not settled, any judgment which we must indemnify the remaining
defendants for that is significantly larger than our available insurance
coverage could have a material adverse effect on our results of operations
and/or financial condition.

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. In April 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. This 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 subject
to periodic review by state regulatory agencies. Change in these prices may
adversely affect our business. For more details about our regulatory situation,
please see "Government Regulations".
<PAGE>
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 Pittsford, New York, a suburb of
Rochester, where we maintain our corporate headquarters. The lease expires in
March 2005.

        We also lease space in Las Vegas, Nevada for our national customer
service operations, national network operating center and local sales personnel.
This lease expires in November 2004.

        As described further in Item 1, in January 2003, we decided to bring
geographic concentration to our business by selling our business, assets and
customers in Florida, Georgia, Ohio, Michigan and Texas to other service
providers.

        We are now geographically focused in five markets in California, Nevada,
and Illinois. We own property housing three of our switches in California and
one in Illinois. We also lease switch sites for our three remaining switches in
Nevada and California with lease terms expiring in 2010 and 2011. In addition,
we have leased facilities to house our local sales and administration staff in
the markets in which we operate.

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

      -     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
<PAGE>
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.

      In September 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. In
February 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 have been appealed to the United States Court of Appeals for
the Second Circuit. On April 8, 2002, we filed a petition for relief under
Chapter 11 of the Bankruptcy Code, and as of the effective date of our First
Amended Joint Plan of Reorganization (July 30, 2002), we were was discharged and
released from any "Claim, Debt and Interest," except as otherwise stated in the
Plan, as set forth in the final Confirmation Order entered by the United States
Bankruptcy Court for the District of Delaware on July 17, 2002. Although we are
no longer a defendant in the class action lawsuit and can have no direct
liability to the plaintiffs, we nevertheless remain obligated to indemnify the
remaining individual defendants in the event of an adverse decision against them
in the lawsuit. The plaintiffs and the remaining individual defendants have
entered into a tentative settlement of the class action lawsuit, and have
submitted a Preliminary Approval Order to the Court, seeking approval of the
settlement in accordance with a Stipulation of Settlement dated February 6,
2003. If approved, the settlement would dismiss the action with prejudice. All
settlement payments and remaining attorneys fees and other legal expenses
incurred by the defendant are to be paid by our insurance carrier. A hearing is
scheduled for October 1, 2003 to determine whether the proposed settlement of
the action on the terms and conditions provided for in the Stipulation is fair,
reasonable and adequate and should be approved by the Court. We believe the
remaining individual defendants anticipate that the proposed Settlement will be
approved, will continue to deny any wrongdoing and will vigorously contest the
suit if not settled. We cannot predict the final outcome of this lawsuit.

      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.
<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 "MPWR" until March 22, 2002, when we voluntarily
moved from the NASDAQ to the NASD Over the Counter ("OTC") Bulletin Board, a
regulated service that displays real-time quotes, last-sale prices and volume
information in over-the-counter equity securities. On July 31, 2002, in
connection with our emergence from Chapter 11 proceedings, our new common stock,
$0.001 par value, began trading under the symbol "MPOW.OB" on the OTC Bulletin
Board. As of March 21, 2003, the closing price of our common stock was $0.20.
The following sets forth the reported high and low sale prices for the common
stock for each quarterly period in fiscal 2001 and 2002.

<TABLE>
<CAPTION>
                                                                   HIGH     LOW
                                                                   ----     ---
<S>                                                               <C>      <C>
         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
         Quarter Ending March 31, 2002.........................   $0.69    $0.04
         Quarter Ending June 30, 2002..........................   $0.06    $0.02
         Quarter Ending September 30, 2002.....................   $0.60    $0.01
             Period from July 1, 2002 - July 30, 2002..........   $0.02    $0.01
             Period from July 31, 2002 - September 30, 2002....   $0.60    $0.09
         Quarter Ending December 31, 2002......................   $0.42    $0.07
</TABLE>

      As of March 21, 2003, there were approximately 250 holders of record of
our common stock.

      The stock prices indicated above for periods before and after July 31,
2002, are not comparable in that the common stock outstanding before our
emergence from bankruptcy on July 30, 2002 was exchanged for 974,025 shares of
new common stock, on the basis of approximately one share for each 61 shares
previously outstanding, and 64,025,000 shares of new common stock were issued to
the holders of our senior debt and preferred stock. The stock prices indicated
for periods before July 31, 2002, have not been adjusted for this exchange.

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 may in the future be restricted by convenants
in debt indentures we may enter into.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

      The following table provides information regarding options, warrants or
other rights to acquire equity securities under our equity compensation plans:

<TABLE>
<CAPTION>
                                                                                                                     NUMBER OF
                                                                                                                SECURITIES REMAINING
                                                             NUMBER OF SECURITIES TO BE     WEIGHTED-AVERAGE       AVAILABLE FOR
                                                                ISSUED UPON EXERCISE        EXERCISE PRICE OF     FUTURE ISSUANCE
                                                               OF OUTSTANDING OPTIONS,    OUTSTANDING OPTIONS,     UNDER EQUITY
                                                                 WARRANTS AND RIGHTS       WARRANTS AND RIGHTS   COMPENSATION PLANS
                                                                 -------------------       -------------------   ------------------
<S>                                                          <C>                          <C>                    <C>
Equity compensation plans approved by security holders ....                  --                     --                       --
Equity compensation plans not approved by security  holders          11,103,832                  $0.49                2,118,390
                                                                     ----------                  -----                ---------
Total .....................................................          11,103,832                  $0.49                2,118,390
</TABLE>

ITEM 6. SELECTED FINANCIAL DATA

      The information required by this Item is as follows:
<PAGE>
<TABLE>
<CAPTION>
                                     REORGANIZED    PREDECESSOR    PREDECESSOR     PREDECESSOR     PREDECESSOR    PREDECESSOR
                                        MPOWER        MPOWER         MPOWER          MPOWER           MPOWER        MPOWER
                                       HOLDING        HOLDING        HOLDING         HOLDING         HOLDING        HOLDING
                                         2002          2002           2001            2000            1999           1998
                                         ----          ----           ----            ----            ----           ----
                                                               (IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                                  <C>             <C>           <C>             <C>             <C>            <C>
Operating revenues ..............      $ 62,815      $ 83,289       $ 136,116       $  111,292       $ 43,732       $ 17,172
Income (loss) before discontinued
  operations ....................        17,754       (43,204)       (400,343)        (211,738)       (59,626)       (27,888)
Income (loss) before discontinued
  operations per common share (1)          0.27         (0.79)          (7.13)           (4.56)         (2.30)         (1.31)
Total assets (2) ................       127,423            --         613,647        1,172,460        402,429        252,119
Long-term debt and capital lease
  obligations including current
  maturities (2) ................         5,009            --         430,686          485,081        161,935        157,295
Predecessor Mpower Holding
  Series B Convertible Redeemable
  Preferred Stock (2) ...........            --            --              --               --         55,363             --
Predecessor Mpower Holding
  Series C Convertible Redeemable
  Preferred Stock (2) ...........            --            --          46,610           42,760         29,610             --
Predecessor Mpower Holding
  Series D Convertible Redeemable
  Preferred Stock (2) ...........            --            --         156,220          202,126             --             --
</TABLE>

----------
(1) See Note 1 to accompanying consolidated financial statements

(2) Not provided for "Predecessor Mpower Holding 2002" column since year end
information is indicated in "Reorganized Mpower Holding 2002" column.

      The numbers reflected above may not be comparable because of our rapid
growth until 2000, reduction of markets thereafter and the elimination of a
substantial portion of our debt and all of our preferred stock in connection
with our reorganization in 2002.

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

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-sized business
customers through our wholly owned subsidiary, Mpower Communications Corp.
("Communications").

      We provide integrated voice and high-speed data services to small and
medium-sized business customers in five markets in California, Nevada and
Illinois. Our network consists of 294 incumbent carrier central office
collocation sites providing us access to an estimated 5.3 million addressable
business lines. All of our central office collocation sites are SDSL capable and
196 are T1 capable. We have established working relationships with Verizon,
Sprint, and Southwestern Bell Corporation (including its operating subsidiaries
PacBell and Ameritech collectively referred to as "SBC"). We have over 260,000
lines currently 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 switches
that control how voice and data communications originate and terminate, and we
lease the telephone lines or transport systems, over which the voice and data
traffic are transmitted. We install our network equipment at collocation sites
of the incumbent carriers from whom we rent standard telephone lines. As we have
already invested in and built out our own network, we believe that our strategy
has allowed us to establish and sustain service in our markets at a
comparatively low cost, while maintaining control of the access to our
customers.

      Our business is to deliver integrated voice and broadband data solutions.
Specifically, we provide small and medium-sized business customers with a full
suite of communications services and features, integrated on one bill, with the
convenience of a single source provider. We have approximately 45,000 business
customers, providing them local voice telephone service and broadband Internet
via SDSL and T1. By leveraging our existing equipment and 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. 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.

MARKETS
<PAGE>
     We have redefined the remaining 12 markets in our footprint as five
markets: Los Angeles, San Diego, Northern California, Las Vegas and Chicago.

      As of March 2003, we operate our five markets in three states and have 294
incumbent carrier central office collocation sites providing access to an
estimated 5.3 million addressable business lines.

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

<TABLE>
<CAPTION>
                                             ADDRESSABLE
                            NUMBER OF        LINES WITHIN
    MARKET                COLLOCATIONS      TARGET MARKET
    ------                ------------      -------------
<S>                       <C>               <C>
Los Angeles .......            142            2,500,000
San Diego .........             28              500,000
Northern California             40              725,000
Las Vegas .........             18              175,000
Chicago ...........             66            1,400,000
                               ---            ---------
Totals ............            294            5,300,000
                               ===            =========
</TABLE>

      As described earlier, in January 2003, we took steps to bring geographic
concentration and efficiencies to our company and entered into agreements to
sell our markets in Florida, Georgia, Ohio, Michigan and Texas, to other
telecommunications providers. Our focus is now primarily the west coast and our
efforts are directed toward building market share within that existing service
territory. We believe there is significant growth 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 base of
markets.

EMERGENCE FROM CHAPTER 11 PROCEEDINGS

      We announced on April 8, 2002, that we had formally filed a voluntary,
pre-negotiated Chapter 11 proceeding. As part of the Chapter 11 proceeding, we
and our subsidiaries, Mpower Communications Corp. and Mpower Lease Corporation,
filed a recapitalization plan with the Bankruptcy Court. On July 30, 2002, we
announced that we had formally emerged from the proceedings, and our
recapitalization plan became effective as of this date.

      The following background summarizes the events leading up to the formal
recapitalization, and includes the material features of the 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 (the "2010 Notes") on a comprehensive
recapitalization plan that eliminated a significant portion of our long-term
debt and all of our preferred stock. Under the recapitalization plan, we paid
$19.0 million of cash on hand and issued common stock to eliminate $593.9
million in carrying value of debt settled and preferred stock, as well as $49.5
million of annual interest expense related to our 2010 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 Notes entering into voting agreements 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 entered into
voting agreements with us in support of the proposed recapitalization plan.

      On April 8, 2002, we filed a voluntary, pre-negotiated reorganization plan
for us along with our subsidiaries, Mpower Communications Corp.
("Communications") and Mpower Lease Corporation, a wholly owned subsidiary of
Communications, (collectively, "the Debtors"), under Chapter 11 of the Federal
bankruptcy code in the U.S. Bankruptcy Court for the District of Delaware. None
of our other direct or indirect subsidiaries were parties to the Chapter 11
Cases or any related bankruptcy, reorganization or liquidation proceedings. The
Chapter 11 Cases were jointly administered (Case No 02-11046 (PJW)). We operated
as a debtor in possession from April 8, 2002 until our emergence from bankruptcy
on July 30, 2002.

      On May 20, 2002, we filed the Debtors' First Amended Joint Plan of
Reorganization and a related Debtors' First Amended Disclosure Statement with
the Bankruptcy Court. Mpower Lease Corporation was not a party to the Joint
Plan.

      On July 12, 2002, we filed an affidavit certifying the ballots accepting
or rejecting the Joint Plan that indicated that, in accordance with the
Bankruptcy Code, the Plan was accepted by all classes entitled to vote on the
Plan.

      On July 17, 2002, the Bankruptcy Court confirmed the pre-negotiated Plan,
as modified by the Findings of Fact, Conclusions of
<PAGE>
Law, and Order Under Section 1129 of the Bankruptcy Code and Rule 3020 of the
Bankruptcy Rules Confirming Debtors' First Amended Joint Plan of Reorganization
entered by the Bankruptcy Court on the same date.

     On July 30, 2002, we and our subsidiary Mpower Communications Corp.,
formally emerged from Chapter 11 as our recapitalization plan (the "Plan")
became effective. Also on July 30, 2002, the Bankruptcy Court dismissed the
Chapter 11 case of Mpower Lease Corporation. See Note 2 of the accompanying
consolidated financial statements for a summary of the material features of the
Plan.

ADOPTION OF FRESH-START ACCOUNTING

        As a consequence of the reorganization occurring as of July 30, 2002,
the 2002 financial results have been separately presented under the label
"Predecessor Mpower Holding" for the period January 1 to July 30, 2002 and
"Reorganized Mpower Holding" for the period July 31 to December 31, 2002. For
discussion purposes, the operating results for the periods January 1, 2002 to
July 30, 2002 and July 31, 2002 to December 31, 2002 have been added together to
compare 2002 results to the fiscal years ended December 31, 2001 and 2000.

        As of July 30, 2002, we implemented fresh-start accounting under the
provisions of Statement of Position ("SOP") 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code". Under SOP 90-7, our
reorganization fair value was allocated to our assets and liabilities, our
accumulated deficit was eliminated, and our new equity was issued according to
the Plan as if we were a new reporting entity. In conformity with fresh-start
accounting principles, Predecessor Mpower Holding recorded a $244.7 million
reorganization charge to adjust the historical carrying value of our assets and
liabilities to fair market value reflecting the allocation of our $87.3 million
estimated reorganized equity value as of July 30, 2002. We also recorded a
$315.3 million gain on the cancellation of debt on July 30, 2002 pursuant to the
Plan.

        As a result of reorganization, the financial statements published for
the periods following the effectiveness of the Plan will not be comparable to
those published before the effectiveness of the Plan.

     We are continuing our review of the overall tax impact of the
implementation of the Plan. However, our net operating loss carryforwards, which
were subject to annual use limitations before the reorganization, may be
significantly reduced. Furthermore, other tax attributes, including the tax
basis of certain assets, could also be reduced as a result of the cancellation
of indebtedness as part of the Plan. In addition, Section 382 of the Internal
Revenue Code of 1986, which generally applies after a more than 50 percentage
point ownership change has occurred, may impose other limitations on the annual
utilization of any remaining net operating losses. We believe that we have
experienced such an ownership change as a result of the implementation of the
Plan. However, since we were under jurisdiction of a court in a Chapter 11 case
at the time of the ownership change, various alternatives pertaining to the
application of Section 382 are available. At this time, we have not yet
determined which of the alternatives to elect. A valuation allowance has been
recorded to offset the entire net deferred tax asset due to the uncertainty of
our realizing a benefit related to the net operating loss carryforwards or the
other future tax deductible amounts.

RECAPITALIZATION

        Our emergence from Chapter 11 and the recapitalization of our balance
sheet was a significant first step in a multi-step and sequential process to
reshape our company. Through the pre-negotiated Chapter 11 proceeding, we
eliminated $593.9 million in carrying value of long-term debt settled and
preferred stock in exchange for $19 million in cash. This process reduced our
debt by roughly 95%. On November 26, 2002, we announced that we repurchased
$49.2 million of our $51.3 million in carrying value of our 13% Senior Secured
Notes due 2004 for $14.2 million in cash. On January 3, 2003, pursuant to the
terms of our 13% Senior Secured Notes due 2004, we redeemed the remaining $2.1
million principal amount of Notes at a redemption price of 103.25% of their
principal amount. With the repurchase of the remaining noteholder debt, we have
no debt remaining on our balance sheet other than $2.9 million in capital
leases. These transactions have also allowed for the removal of the liens on our
network equipment, effective on or about April 3, 2003. These transactions and
processes have made us long-term debt free.

        With our long-term debt eliminated, the second step in the process of
reshaping the business was to significantly bring down our cash burn rate. We
first began to see cash conservation as a priority in September 2000, when we
decided to pull back on our network expansion plans into the Northeast and
Northwest regions, and instead focus on operational efficiencies in our existing
markets.

        During 2001 and 2002, we continued to scale back our market footprint
and have made significant operational improvements through a concerted focus on
market efficiencies. These improvements have resulted in operational and
financial improvements including; reduced headcount, lower operating expenses,
and a substantial reduction in capital expenditures.
<PAGE>
        In January 2003, we furthered our commitment to reshaping our business
with the announcement of the sale of 15 of our markets to three other regional
companies. These transactions which we expect to be completed by the end of
April 2003, are expected to significantly reduce our cash burn, bring additional
cash to the business, and result in geographic concentration and efficiencies
for the rest of the business.

        The final step in reshaping our company is successfully scaling the
business for future growth. During 2003, we expect to focus on this aspect of
our business. To do this, we intend to concentrate on being a significant
presence and fierce competitor in the telecommunications marketplace serving
small and medium sized business customers. Our remaining markets will be in
California, Nevada and Illinois. We intend to continue to explore opportunities
to add revenue streams to our existing network through transactions that are
accretive to shareholder value. In addition, we intend to continue to invest in
our successful markets by adding capacity on our network to meet the demand for
our services.

        We have experienced operating losses since our inception as a result of
efforts to build our customer base, develop and construct our communications
network infrastructure, build our back-office capabilities, and expand our
market base. We intend to continue to focus on increasing our customer base and
bringing increased capabilities to our existing customer base, along with
increasing our operating margins by improving the cost effectiveness of our
network, offering higher margin products to our customers as well as
streamlining our general and administrative functions. A focus on higher margin
products could have a negative impact on our revenue growth, but we believe it
will better contribute to our ability to produce more profitable revenues.

        With a challenging regulatory and competitive environment, we may be
forced to change our strategy. We cannot assure you that we will be able to
achieve and maintain satisfactory operating margins. We cannot assure you that
through our revised strategy we will be able to achieve or sustain profitability
or positive cash flows.

SALE OF MARKETS - DISCONTINUED OPERATIONS

        On January 8, 2003, we announced a series of strategic and financial
transactions to further strengthen the business financially, and focus on our
operations in California, Nevada and Illinois. We are bringing geographic
concentration and operating efficiencies to the business by selling our
customers and assets in Florida, Georgia, Ohio, Michigan and Texas to other
service providers (the "Asset Sales"). The Asset Sales in Ohio and Michigan were
completed on March 18, 2003 and Texas on March 27, 2003. Completion of the
remaining Asset Sales are subject to a number of closing conditions and
contingencies, and all are expected to be completed by the end of April 2003,
although we cannot assure investors that all or any of the remaining Asset Sales
will occur. The Asset Sales are expected to generate net proceeds to us of
approximately $17.0 million to $20.0 million over the next few months.

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 accounting principles generally accepted in the
United States of America. 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 revenue recognition, allowance for doubtful accounts, network
optimization accruals, disputes with carriers and impairment of long-lived
assets. 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.

      Revenue Recognition: Revenue from monthly recurring charges, enhanced
features and usage is recognized in the period in which service is provided.
Deferred revenue represents advance billings for services not yet provided. Such
revenue is deferred and recognized in the period in which service is provided.
We recognize revenue from switched access in the period in which service is
provided, when the price is fixed, the earnings process is complete and the
collectability is reasonably assured. As part of the revenue recognition process
for switched access, we evaluate whether receivables are reasonably assured of
collection based on certain factors, including the likelihood of billings being
disputed by customers. In situations where a dispute is likely, we generally
defer recognition until cash is collected. Approximately 78% of the switched
access minutes carried on our network in the year ending December 31, 2002, were
from our largest carriers with whom we have existing contracts governing the
amount of our switched access charges. If the amount we collect, in the future,
from our switched access charges varies significantly from our estimates, our
revenue may be negatively affected. These judgments in measuring revenue may
affect our results and cause our revenue to be difficult to predict. Any
shortfall in revenue or delay in recognizing revenue could cause our operating
results to vary significantly and could result in or increase future operating
losses.
<PAGE>
      Allowance For Doubtful Accounts: We maintain allowances for doubtful
accounts for estimated losses resulting from our inability to collect all
amounts owed by our customers 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, or certain carriers dispute amounts we have billed, additional
allowances may be required. Several of the carriers that terminate or originate
traffic for our customers are currently in Chapter 11 proceedings. The largest
of these vendors include Global Crossing and Worldcom. In establishing the
allowance for doubtful accounts, we have taken into consideration the aggregate
risk of our receivables, including the potential exposure from Global Crossing
and Worldcom Chapter 11 proceedings. If actual results differ from our
estimates, we may need to adjust our allowance for doubtful accounts in the
future.

      Network Optimization Accruals: In establishing the accrual for 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 network
optimization accrual. If actual results differ significantly from the estimates,
we may need to adjust our network optimization accrual in the future. With the
emergence from the Chapter 11 proceedings, we were able to conclude settlements
with several network carriers and numerous office landlords. As a result of
these settlements, our future liabilities were dramatically reduced and we were
subsequently able to reduce our network optimization accrual by $6.4 million in
the year ended December 31, 2002, with a remaining accrual of $1.5 million.

      Fresh-Start Accounting: In accordance with SOP 90-7, we adopted
fresh-start accounting as of July 30, 2002, on the effective date of the Plan.
Since July 31, 2002, our financial statements have been prepared as if we were a
new reporting entity. Under fresh-start accounting, all assets and liabilities
were restated to reflect our reorganization value, which approximated fair value
at the date of reorganization. The reorganization value of our common equity was
determined to be $87.3 million at July 30, 2002, by an independent valuation and
financial specialist based on several factors including using projections by
management and various valuation methods including appraisals, discounted cash
flow analysis and other relevant industry information. Our reorganization value
was allocated to various asset categories pursuant to fresh-start accounting
principles. We recorded a $244.7 million reorganization charge to adjust the
historical carrying value of our assets and liabilities to fair market value
reflecting the allocation of our $87.3 million estimated reorganized equity
value as of July 30, 2002. We also recorded a $315.3 million gain on the
cancellation of debt on July 30, 2002, pursuant to the Plan.

      Billing From Network 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 tariff 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. As of December 31, 2002, we had $7.7
million of disputes with carriers. We have reserved $5.5 million against those
disputed balances. Based on the nature and history of disputes with the
carriers, we believe this amount to be adequate. Any significant victories or
losses when these disputes are resolved may require us to adjust our reserves in
the future.

     Deferred Taxes. As of December 31, 2002, we have established a full
valuation allowance against our deferred tax asset as we do not believe we will
recognize any future benefits from the gross deferred tax asset.


     Impairment of Long-Lived Assets. We periodically evaluate the carrying
value of our long-lived assets, including property, equipment and 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 estimated discounted
cash flows of the asset or other relevant measures. We believe no material
impairment in the value of the long-lived assets existed at December 31, 2002 or
2001. Considerable management judgment is necessary to complete this analysis.
Although we believe these estimates to be reasonable, actual results could vary
significantly from these estimates and our estimates could change based on
market conditions. Variances in results or estimates could result in changes to
the carrying value of our assets including, but not limited to, recording an
impairment loss for some of these assets in future periods.
<PAGE>
DISCONTINUED OPERATIONS

        On January 8, 2003, we announced several strategic transactions under
which our business, customers and assets in Florida, Georgia, Ohio, Michigan and
Texas will be sold to other service providers and will focus our operations on
our California, Nevada and Illinois markets.

      -     With respect to our Southeast markets, we have entered into an
            agreement to sell our business and customers in Atlanta, Ft.
            Lauderdale, West Palm Beach, Miami, Boca Raton and Tampa to
            Orlando-based Florida Digital Network Inc., a full-service
            integrated communications provider.

      -     With respect to our Texas markets, we have entered into an agreement
            to sell our business and customers in Dallas, Ft. Worth, Houston,
            Austin and San Antonio to Xspedius Equipment Leasing, an affiliate
            of Xspedius Communications, a competitive communications carrier
            headquartered in St. Louis. This transaction was completed on March
            27, 2003.

      -     With respect to our Michigan and Ohio markets, we have entered into
            an agreement to sell our business and customers in Detroit, Ann
            Arbor, Cleveland and Columbus to LDMI Telecommunications, an
            integrated communications provider serving primarily business
            customers in the Great Lakes region. This transaction was completed
            on March 18, 2003.

        During the fourth quarter of 2002, our management, with the approval of
our board of directors, committed to plans to divest these markets and engage in
transactions to sell these markets to these other providers. As a result of this
decision, the operating revenue and expense of these segments have been
classified as discontinued operations under Statement of Financial Accounting
Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, for all periods presented and the assets and liabilities of
the disposal group have been written down to their fair value, net of expected
selling expense. The write down and results of operations of the discontinued
segments of the Florida, Georgia, Michigan, Ohio and Texas markets resulted in a
charge to discontinued operations for all periods presented. Net sales and
operating loss related to these markets in 2002, 2001 and 2000, are as
follows:

<TABLE>
<CAPTION>
                                               REORGANIZED       PREDECESSOR        PREDECESSOR
                                                 MPOWER            MPOWER              MPOWER
                                                 HOLDING          HOLDING             HOLDING
                                             JULY 31, 2002 TO  JANUARY 1, 2002       YEAR ENDED
                                                DECEMBER 31,     TO JULY 30,         DECEMBER 31,
                                                 -------      ---------------   ---------------------
                                                  2002           2002           2001           2000
                                                  ----           ----           ----           ----
<S>                                            <C>             <C>          <C>              <C>
Operating revenues .......................      $ 36,284       $ 45,282       $ 58,028       $ 34,280
Operating expenses (excluding depreciation
    and amortization) ....................        45,723         67,323        105,806         57,801
Depreciation and amortization ............         3,236         12,724         19,619          9,455
Loss on disposal .........................        21,518             --             --             --
                                                --------       --------       --------       --------
Loss from discontinued operations ........      $(34,193)      $(34,765)      $(67,397)      $(32,976)
                                                ========       ========       ========       ========
</TABLE>

RESULTS OF CONTINUING OPERATIONS

      Our revenues are generated from the sale of communications services
consisting primarily of local phone services, data services, long-distance
services, switched access billings and non-recurring charges, such as
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

      -     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, 2002, we have agreements with
those carriers providing over 78% 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
<PAGE>
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 20% for
the year ending December 31, 2002, and 32% and 41 % for the years ending
December 31, 2001 and 2000 respectively. As a result, revenue from core trade
customers was 80% of total fiscal year 2002 revenues as compared to 68% and 59%
of total revenues for the years ending 2001 and 2000 respectively.

      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. Costs of
operating revenues and selling, general and administrative expenses do not
include an allocation of our depreciation or amortization expenses.

      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 and software in our network and back
office systems, provision for bad debts, professional fees, insurance, property
taxes, customer care and billing expense and facilities expenses.

      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.

      To date, we have experienced operating losses and generated negative cash
flow from operations. With the completion of the transactions selling customers
and assets in Florida, Georgia, Ohio, Michigan and Texas, as planned, combined
with our cost-saving initiatives, and our accounts receivable based financing
arrangement, we will generate enough liquidity to fully fund our business on a
continuing basis. 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, 2002 VS. 2001

      Results from discontinued operations have been excluded from this
comparison.

      Total operating revenues increased to $146.1 million for the year ended
December 31, 2002 as compared to $136.1 million for the year ended December 31,
2001. The 7% increase in revenue was primarily the result of an increase in the
average lines in service and an increase in the number of our business customers
on one of our data service delivery platforms. Our switched access revenues
decreased $13.6 million or 31% from the year ended December 31, 2001. This
decrease in switched access revenues was primarily a result of the reduction in
rates we negotiated with our major carriers and a decrease in rates mandated by
the FCC. We expect switched access revenue to continue to decline as a
percentage of total revenue.

      The following tables summarize revenue from continuing operations:

<TABLE>
<CAPTION>
               ($IN MILLIONS)

REVENUE FROM
CONTINUING OPERATIONS:                2002                 2001                 2000
----------------------                ----                 ----                 ----
<S>                          <C>         <C>       <C>         <C>       <C>         <C>
Switched access revenue      $ 29.8       20.4%    $ 43.4       31.9%    $ 46.0       41.3%
End customer trade and
  other revenue .......       116.3       79.6%      92.7       68.1%      65.3       58.7%
                             ------      -----     ------      -----     ------      -----
Total .................      $146.1      100.0%    $136.1      100.0%    $111.3      100.0%
                             ======      =====     ======      =====     ======      =====
</TABLE>

<TABLE>
<CAPTION>
          ($IN MILLIONS)

REVENUE FROM
CONTINUING OPERATIONS:           2002                  2001                  2000
----------------------           ----                  ----                  ----
<S>                      <C>         <C>       <C>         <C>       <C>         <C>
CA. NV, IL markets.      $145.9       99.9%    $125.4       92.1%    $ 94.8       85.2%
Other markets .....         0.2        0.1%      10.7        7.9%      16.5       14.8%
                         ------      -----     ------      -----     ------      -----
Total .............      $146.1      100.0%    $136.1      100.0%    $111.3      100.0%
                         ======      =====     ======      =====     ======      =====
</TABLE>
<PAGE>
      Other markets consist of markets we have exited but do not qualify
for classification as discontinued operations under SFAS No. 144.

      Cost of operating revenues for the year ended December 31, 2002 was $84.7
million as compared to $103.6 million for the year ended December 31, 2001. The
18% decrease in the cost of operating revenues is due to a decrease in the
number of markets in which we operate and management efforts to "groom" the
network by negotiating better rates with providers and reducing inefficiencies
and redundancies in network traffic management.

      For the year ended December 31, 2002, selling, general and administrative
expenses totaled $108.4 million, a 23% decrease over the $140.0 million for the
year ended December 31, 2001. We have experienced substantial reduction in
selling, general and administrative expenses due to a reduced workforce. This
decreased workforce is a result of operating in fewer markets, the streamlining
of our operations and other cost reduction efforts undertaken as part of our
operating improvement initiatives and comprehensive reshaping.

      For the year ended December 31, 2002, we recorded $0.7 million in
stock-based compensation compared to $3.1 million recorded in 2001. Outstanding
options at December 31, 2002 were granted subsequent to our emergence from
bankruptcy, and have been accounted for as fixed awards. The expense in the
period from July 31, 2002 to December 31, 2002 relates to options granted in
2002 with an exercise price below the market price of the stock.

      During February 2001, we announced the cancellation of our plans to enter
12 Northeast and Northwest markets and the related elimination of 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 our
consolidated financial statements.

     In February 2002, we closed down our operations in Charlotte, North
Carolina and eliminated certain other non-performing sales offices. We also
cancelled the implementation of a new billing system in February 2002. We
recognized a network optimization charge of $19.0 million in the first quarter
of 2002. Included in the charge was $12.5 million for the write down of our
investment in software and assets for a new billing system, $3.7 million for
property and equipment including collocations and switch sites and $2.8 million
for other costs associated with exiting these markets.

      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. With the emergence from the Chapter 11 proceedings, we were able to
conclude settlements with several network carriers and numerous office
landlords. As a result of these settlements, our future liabilities were
dramatically reduced and we were subsequently able to reduce our network
optimization accrual in 2002 by $6.4 million.

      For the year ended December 31, 2002, depreciation and amortization was
$36.6 million as compared to $56.5 million for the year ended December 31, 2001.
This decrease is attributable primarily to the write down of property and
equipment due to fresh-start accounting.

     Gross interest expense for 2002 totaled $22.0 million, as compared to $63.8
million for 2001. Interest capitalized for the year ended December 31, 2002
decreased to $1.4 million as compared to $4.9 million for the year ended
December 31, 2001. The decrease in interest capitalized is due to the decrease
in switching equipment under construction as we have pulled back on our network
expansion. 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 1997. Interest expense on our 13% Senior Notes due 2010 ceased to accrue
after our filing of Chapter 11 on April 8, 2002. With the retirement of all of
our 2004 and 2010 Notes, our interest expense will be significantly reduced in
future periods.

      Interest income was $4.2 million during the year ended December 31, 2002,
compared to $20.8 million for the year ended December 31, 2001. The 80% decrease
is a result of decreases in cash and investments during 2002. Cash and
investments have been
<PAGE>
used to pay interest on the senior secured notes, fund operating losses, capital
expenditures, pay the $19.0 million consent fee and other costs of
recapitalization.

      For the year ended December 31, 2002, we recorded a gain on the discharge
of debt of $350.3 million, attributable to the cancellation of our 2010 Notes
and our repurchase of $49.2 million in carrying value of our 2004 Notes, as
compared to $32.3 million for the year ended 2001, that was attributable to a
series of exchanges on our long-term debt as further described in Note 8 of the
accompanying consolidated financial statements.

      We incurred net losses before discontinued operations of $25.5 million and
$400.3 million for the years ended December 31, 2002 and 2001, respectively.

      As of the effective date of our emergence from Chapter 11, the authorized,
issued and outstanding Series C and Series D Preferred Stock were cancelled.
Dividends on these series of preferred stock ceased to accrue after we filed our
bankruptcy petition on April 8, 2002.

YEAR ENDED DECEMBER 31, 2001 VS. 2000

      Results from discontinued operations have been excluded from this
comparison. As a result, this comparison will differ from any comparison
previously presented.

      Total operating revenues increased to $136.1 million for the year ended
December 31, 2001 as compared to $111.3 million for the year ended December 31,
2000. The 22% increase in revenue was primarily the result of an increase in the
average lines in service. Our switched access revenues decreased $2.6 million or
6% 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.

      Cost of operating revenues for the year ended December 31, 2001 was $103.6
million as compared to $82.6 million for the year ended December 31, 2000. The
25% 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, general and administrative
expenses totaled $140.0 million, a 12% decrease over the $159.1 million for the
year ended December 31, 2000. The decrease was primarily a result of decreased
advertising expense. The decrease was also the result of costs attributable to
the reduction of personnel and expenses related to the markets we exited in
2001.

      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
related to in-the-money stock options granted in 1999, 2000, and 2001. Due to
our re-pricings of stock options, we were 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.

      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.

      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 our
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
<PAGE>
growth in our existing network and other factors. With the emergence from the
Chapter 11 proceedings, we were able to conclude settlements with several
network carriers and numerous office landlords. As a result of these
settlements, our future liabilities were dramatically reduced and we were
subsequently able to reduce our network optimization accrual in 2002 by $6.4
million.


      For the year ended December 31, 2001, depreciation and amortization was
$56.5 million as compared to $41.5 million for the year ended December 31, 2000.
This increase was a result of placing additional assets in service in accordance
with the planned build-out of our network.

      Gross interest expense for 2001 totaled $63.8 million, as compared to
$56.6 million for 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 was due to the decrease
in switching equipment under construction as our network expansion slowed during
2001. 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
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 had been used to purchase switching equipment, pay interest on the
senior secured notes, fund operating losses and fund other capital expenditures.

      For the year ended December 31, 2001, we recorded a gain on the discharge
of debt of $32.3 million. This was attributable to a series of exchanges of our
long-term debt as further described in Note 8 of the accompanying consolidated
financial statements. For  the year ended December 31, 2000, we recorded a loss
on the discharge of debt of $20.1 million that was attributable to a series of
exchanges on our long-term debt.

      We incurred net losses before discontinued operations of $400.3 million
and $211.7 million for the years ended December 31, 2001 and 2000, respectively.

      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. Preferred stock dividends have been eliminated as a result of our
recapitalization.

      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.

LIQUIDITY AND CAPITAL RESOURCES

      To date, we continue to incur negative cash flows from operating
activities; however, we believe that we have sufficient resources to fund our
planned operations, assuming the completion, as planned, of the transactions to
sell customers and assets in Florida, Georgia, Ohio, Michigan and Texas; and
successful implementation of other management initiatives. The Asset Sales for
our customers and assets in Ohio and Michigan were completed on March 18, 2003.
The funding necessary for our ongoing operations could be materially affected by
the failure to complete one or more of the transactions described above or a
number of other factors. These factors, among others, may indicate that we may
not be able to continue as a going concern.

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

      -     Implementing our balance sheet recapitalization as described in
            Notes 2 and 8 to the accompanying consolidated financial statements

      -     Selling customers and assets in our Florida, Georgia, Ohio, Michigan
            and Texas markets. The sale of Ohio and Michigan markets was
            completed on March 18, 2003 and Texas on March 27, 2003. The
            remaining sales are expected to be completed by the end of April
            2003

      -     Continuing to have available $7.5 million, three-year funding
            facility secured by certain customer accounts receivables

      -     Seeking additional equity or other debt financing on terms
            acceptable to us

      -     Pursuing discussions with companies who may be interested in
            acquiring our assets or business, in whole or in part, and
            discussions with companies who may be interested in selling their
            assets or business, in whole or in part, to us

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

      -     Closing or selling unprofitable or under-performing markets or
            collocations
<PAGE>
      -     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
successfully meet the above initiatives, among others.

      As of December 31, 2002, we had $10.8 million in unrestricted cash and
cash equivalents and investments available for sale. To date, our revenues have
generated 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 continue to incur
operating losses into the second quarter of 2003. Our near-term source of
liquidity is our unrestricted cash accounts and management of accounts payable.
Our accounts receivable financing arrangement which allows us to receive
advances of up to $7.5 million against certain accounts receivable expected to
be received in the future will also be a source of near-term liquidity. In
addition, the successful completion of the customer and asset sale transactions
described above will generate approximately $17.0 to $20.0 million in cash over
the next few months. This cash inflow when combined with our cost-saving
initiatives, and our accounts receivable based financing arrangement, will
generate enough liquidity to fully fund our business on a continuing basis.

      We cannot assure investors that we will be able to successfully complete
the initiatives described above to allow us to generate the funds needed to
operate our business. We cannot assure investors that we will be successful in
obtaining additional debt or equity financing on terms acceptable to us, or at
all, or that our estimate of cash flow or need for any additional funds is
accurate.

      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 customer premises equipment. Cash outlays for
capital expenditures during 2002 were $16.8 million.

        Our capital expenditures will focus on the augmentation of our network
to add new products and customers and to improve the cost efficiency of our
network, 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. We will
continue to rely on our existing operational support systems, which we believe
are adequate to support our business

      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:

      -     our ability to obtain any necessary financing

      -     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

      -     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.
<PAGE>
CASH FLOW DISCUSSION

      In summary our cash flows for the year ended December 31, 2002 were:

<TABLE>
<CAPTION>
                                               YEAR ENDED
                                                DECEMBER
                                                31, 2002
                                                --------
<S>                                            <C>
(IN THOUSANDS)

Net Cash Used in Operating Activities ...      $(124,238)
Net Cash Provided by Investing Activities      $ 146,059
Net Cash Used in Financing Activities ...      $ (20,198)
</TABLE>

      The above summary of cash flows includes cash and cash equivalents and it
does not include investments available for sale.

      Cash, Cash Equivalents And Investments Available For Sale: At December 31,
2002, cash and cash equivalents were $10.8 million. There are no investments
available-for-sale at December 31, 2002. Restricted cash amounted to $13.6
million as of December 31, 2002. The restricted cash primarily represents a
commitment we made in September 2001, to pay up to $4.5 million 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 if they terminate voluntarily with good cause. In November
2001, we established an irrevocable grantor trust, which was funded at a level
sufficient to cover the maximum commitment for retention, incentive compensation
and severance payments. For the year ended December 31, 2002 we paid out $4.3
million relating to these commitments and an additional $0.6 million out of
restricted investments to settle a dispute related to an acquisition made by one
of our subsidiaries in June 1999. In October 2002, we established and funded an
irrevocable grantor trust with $2.0 million, an amount sufficient to pay all
severance benefit obligations pursuant to employment agreements for several of
our executives and any other severance or retention agreements in effect that
were not funded by the trust adopted by us in November, 2001. In November 2002,
we established a $2.0 million trust for the future purchase, if needed, of
run-off directors and officers insurance. Restricted investments at December 31,
2002, also includes $1.9 million of escrow funds related to disputed charges
between SBC Telecommunications and us. In February 2003, a final settlement of
the disputed charges was reached and $1.2 million was released and returned to
us, while $0.7 million was released and paid to SBC Telecommunications.

      Operating Activities: We used $124.2 million in cash for operations for
the year ending December 31, 2002. The use of cash in 2002 was primarily the
result of operating expenses incurred in the on-going operation of our business,
and reorganization expense payments offset by cash revenues.

      Investing Activities: For the year ending December 31, 2002, we were
provided with $146.1 million in cash from investing activities. The cash
provided in 2002 primarily represents sale of investments available-for-sale to
fund our operating losses and capital requirements and proceeds from the sale of
our corporate aircraft.

      Financing Activities: For the year ending December 31, 2002, we used $20.2
million of cash for financing activities. The cash used in 2002 represents
primarily payments on capital lease obligations and the repurchase of our Senior
Notes due 2004.

GOING CONCERN

    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.

    We incurred losses applicable to common stockholders of $98.4 million,
$489.5 million and $268.4 million in 2002, 2001 and 2000, respectively. We have
continued to generate negative cash flows from operating and investing
activities to date in 2003; however, we believe that we will have sufficient
resources to fund our planned operations, assuming the completion, as planned,
of the transactions to sell customers and assets in Florida, Georgia and Texas,
and successful implementation of other management initiatives.

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

    o   As further described in Note 4 to the accompanying consolidated
        financial statements, on January 8, 2003, we announced plans to sell
        customers and assets in Florida, Georgia, Texas, Michigan and Ohio to
        other service providers. The transactions for Ohio and Michigan were
        completed on March 18, 2003 and Texas on March 27, 2003. The remaining
        transactions are expected to close by the end of April 2003 and are
        expected to provide approximately $17.0 to $20.0 million of cash to us
        over the next few months.

    o In January 2003, we obtained a three-year, $7.5 million funding facility
secured by certain accounts receivables

    o   Discussions with companies who may be interested in acquiring us or our
        other remaining assets, in whole or in part, and discussions with
        companies who may be interested in selling their assets or business, in
        whole or in part, to us

    o  Aggressively seeking possible additional equity or other financing
       sources on terms acceptable to us

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

    o  Closing unprofitable or underperforming markets

    o  Reducing general and administrative expenses through various cost cutting
       measures

    o  Introducing new products and services with higher profit margins

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

    o  Redeploying 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, and especially the completion, as planned, of
the remaining sales of customers and assets in Florida and Georgia. However,
there can be no assurance that we will be successful in completing the above
initiatives. We cannot assure that our estimate of funding required is accurate.
Our 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 we be unable to
continue as a going concern.

EFFECTS OF NEW ACCOUNTING STANDARDS

Accounting for Asset Retirement Obligations

      In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143). 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. This statement is effective for fiscal
years beginning after June 15, 2002, with earlier application encouraged. As
required by SOP 90-7, we have implemented this statement as part of fresh-start
accounting. The adoption of SFAS No. 143 did not have a material effect on our
consolidated financial statements.

Accounting for the Impairment or Disposal of Long-Lived Assets

      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 adopted the provisions of this
standard on January 1, 2002. This standard addresses financial accounting and
reporting for the impairment and disposal of long-lived assets. The adoption of
SFAS No. 144 did not have a material effect on our consolidated financial
statements other than the presentation of assets held for sale and discontinued
operations.
<PAGE>

      In April 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS
No. 145). This standard rescinds FASB No. 4 and an amendment to that Statement,
FASB No. 64, which relates to extinguishment of debt. It rescinds FASB No. 44,
which relates to certain sale-leaseback transactions. We adopted this standard
on July 30, 2002, in connection with the implementation of fresh-start
accounting. The adoption of SFAS No. 145 did not have a material effect on our
consolidated financial statements, other than classifying in continuing
operations amounts related to debt extinguishment previously presented as
extraordinary in the accompanying statements of operations.

Accounting for Costs Associated with Exit or Disposal Activities

      In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" (SFAS No. 146). This standard addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". This Statement
requires recognition of a liability for a cost associated with an exit or
disposal activity when the liability is incurred, as opposed to when the entity
commits to an exit plan under EITF No. 94-3. The provisions of this standard are
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. We adopted this standard on July 30,
2002, in connection with the implementation of fresh-start accounting. The
adoption of SFAS No. 146 did not have a material effect on our consolidated
financial statements.

Accounting for Stock-Based Compensation

      In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (SFAS No. 148). SFAS No. 148 amends
FASB Statement No. 123, "Accounting for Stock-Based Compensation"(SFAS No. 123),
to provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. These amendments to SFAS 123 are effective for financial
statements for fiscal years ending after December 15, 2002. SFAS No. 148 also
amends the disclosure provisions of SFAS No. 123 to require prominent disclosure
about the effects on reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation. Finally, SFAS No.
148 amends Accounting Principles Board ("APB") Opinion No. 28, "Interim
Financial Reporting" (APB No. 28), to require disclosure about those effects in
interim financial information. These amendments to SFAS 123 and APB No. 28 are
effective for financial reports containing condensed financial statements for
interim periods beginning after December 15, 2002. The adoption of SFAS No. 148
in 2002 did not have a material effect on our consolidated financial statements.

RISK FACTORS AND TRENDS/UNCERTAINTIES THAT MAY AFFECT OUR BUSINESS

FAILURE TO CLOSE ONE OR MORE OF A SERIES OF STRATEGIC AND FINANCIAL TRANSACTIONS
CURRENTLY PENDING COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND OPERATING
RESULTS

      On January 8, 2003, we announced a series of strategic and financial
transactions to further strengthen us financially and focus our operations on
the California, Nevada and Illinois markets. We are bringing geographic
concentration to our business by selling our customers and assets in Florida,
Georgia, Ohio, Michigan and Texas to other service providers (the "Asset
Sales"). The Asset Sales for customers and assets in Ohio and Michigan were
completed on March 18, 2003 and Texas on March 27, 2003. Completion of the
remaining Asset Sales is subject to a number of closing conditions and
contingencies. When consummated, the Asset Sales are expected to generate net
proceeds to us of approximately $17.0 million to $20.0 million over the next few
months.

      Our inability to close one or more of these transactions could have a
material adverse effect on our results of operations and financial condition.

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

      We will require capital to fund the development of our business and
services as well as our operating costs. 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 any capital
requirements through existing resources, internally generated funds and debt or
equity financing, if needed. The inability to close one or more of the Asset
Sales as planned could have a material adverse effect on our liquidity. We
cannot assure you we will be successful in raising sufficient debt or equity
financing, if needed, on acceptable terms or at all.
<PAGE>
THE VALUE OF THE EQUITY SECURITIES MAY BE NEGATIVELY AFFECTED BY ADDITIONAL
ISSUANCES OF EQUITY SECURITIES BY THE REORGANIZED COMPANY AND GENERAL MARKET
FACTORS

      Issues or sales of equity by us will likely be heavily dilutive. There can
be no certainty as to the effect, if any, that future issuances or sales of
equity securities by us, 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

      Our common stock is traded on the NASD OTC Bulletin Board (under the
symbol "MPOW.OB"). As a result, 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 HAVE HISTORICALLY RECORDED LOSSES AND NEGATIVE CASH FLOW

      We recorded net losses of $94.4 million in 2002, $467.7 million in 2001
and $244.7 million in 2000. In addition, we had negative cash flow from
operations of $124.2 million in 2002, $219.3 million in 2001 and $141.3 million
in 2000. At the present time, we do not generate enough cash flow to cover our
operating and investing expenses. We expect to record significant net losses and
generate negative cash flow from operations for the first six months of
2003. If the Asset Sales are not completed as planned, there could be a material
adverse effect on our cash flow. 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 any future debt
service requirements.

FUTURE DEBT MAY CREATE FINANCIAL AND OPERATING RISK

      Debt we may incur in the future could have important consequences to you,
including the following:

      -     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.

      -     Future agreements which may govern the terms of debt we may incur
            may contain covenants that may restrict our ability to:

           -     incur additional debt;
<PAGE>
           -     pay dividends and make other distributions;

           -     prepay subordinated debt;

           -     make investments and other restricted payments;

           -     create liens and sell assets; and

           -     engage in transactions with affiliates.

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

      Our ability to make payments on and to refinance any future 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
any future debt service requirements. Our cash flow from operations may be
insufficient to repay any future indebtedness at scheduled maturity and some or
all of any 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;

      -     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 and maintain 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

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

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

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. Under our circumstances, it may
<PAGE>
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.

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.

      While we had experienced rapid growth since our inception through 2001, we
do not anticipate significant rapid growth in 2003. However, any sustained
growth will place a strain on our operational, human and financial resources.
Any significant 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
which may 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
<PAGE>
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.

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

      We must renew favorable interconnection agreements 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 carriers' 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 trunk circuits installed
between incumbent carriers' 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 customers' standard telephone lines to assure uninterrupted
service. The incumbent carriers are our competitors and have limited experience
leasing standard telephone lines to other companies. Therefore, the incumbent
carriers might not be able 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
suppliers 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 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
<PAGE>
      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 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
<PAGE>
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.

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 state 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.

A FAILURE TO OBTAIN APPROVAL OF A SETTLEMENT OF OUR CLASS ACTION LAWSUIT AND A
SUBSEQUENT ADVERSE DECISION IN AN APPEAL OF THAT LAWSUIT COULD ADVERSELY AFFECT
OUR FINANCIAL CONDITION.

      In September 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. 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 have been appealed to the United States Court of Appeals
for the Second Circuit. On April 8, 2002, we filed a petition for a relief under
Chapter 11 of the Bankruptcy Code, and as of the effective date of our First
Amended Joint Plan of Reorganization (July 30, 2002), we were was discharged and
released from any "Claim, Debt and Interest," except as otherwise stated in the
Plan, as set forth in the final Confirmation Order entered by the United States
Bankruptcy Court for the District of Delaware on July 17, 2002. Although we are
no longer a defendant in the class action lawsuit and can have no direct
liability to the plaintiffs; we nevertheless remain obligated to indemnify the
remaining individual defendants in the event of an adverse decision against them
in the lawsuit. The plaintiffs and the remaining individual defendants have
entered into a tentative settlement of the class action lawsuit, and have
submitted a Preliminary Approval Order to the Court, seeking approval of the
settlement in accordance with a Stipulation of Settlement dated February 6,
2003. If approved, the settlement would dismiss the action with prejudice. All
settlement payments and remaining attorneys fees and other legal expenses
incurred by the defendants are to be paid by our insurance carrier. A hearing is
scheduled for

<PAGE>
October 1, 2003 to determine whether the proposed settlement of the action on
the terms and conditions provided for in the Stipulation is fair, reasonable and
adequate and should be approved by the Court. While we believe the remaining
individual defendants anticipate that the proposed Settlement will be approved,
will continue to deny any wrongdoing and will vigorously contest the suit if not
settled, any judgment which we must indemnify the remaining defendants for that
is significantly larger than our available insurance coverage could have a
material adverse effect on our results of operations and/or financial condition.

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. In April 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. This 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 subject
to periodic review by state regulatory agencies. Change in these prices may
adversely affect our business. For more details about our regulatory situation,
please see "Government Regulations".

TABLE OF FUTURE COMMITMENTS

      As of December 31, 2002, we are obligated to make cash payments in
connection with our capital leases, debt, operating leases and circuit lease
obligations. The effect of these obligations and commitments on our liquidity
and cash flows in future periods are listed below. All of these arrangements
require cash payments over varying periods of time. Certain of these
arrangements are cancelable on short notice and others require termination or
severance payments as part of any early termination. Included in the table below
are obligations for continuing operations. Certain of the circuit lease
obligations associated with continuing operations are interrelated with the
discontinued operations. If we are successful in our negotiations with certain
suppliers, upon the sale of the discontinued operations we may be relieved of
certain of the circuit lease obligations.

<TABLE>
<CAPTION>
                                                                      2006 AND
CONTRACTUAL OBLIGATIONS:           2003        2004        2005        BEYOND
------------------------           ----        ----        ----        ------
                                             (IN THOUSANDS)
<S>                              <C>         <C>          <C>         <C>
Capital lease obligations .      $ 2,570      $  371      $   --      $    --
Long-term debt ............        2,068          --          --           --
Operating lease obligations        6,265       5,837       3,124        8,207
Circuit lease obligations .       19,267       2,463          79           --
                                 -------      ------      ------      -------
Total .....................      $30,170      $8,671      $3,203      $ 8,207
                                 =======      ======      ======      =======
</TABLE>

      Cumulative future obligations for switching facilities and office rents in
discontinued markets is $19.7 million. Once our discontinued operations are
sold, we will remain contingently liable for several of the obligations in these
markets.

      We have no material off-balance sheet debt or other unrecorded obligations
other than the items noted in the above table.

      Approximately $1.5 million of the operating lease payments and circuit
lease payments are remaining as part of our accrued network optimization costs
originally recorded in June 2001 and February 2002. We have had sufficient
liquidity and capital resources to fund these obligations through the end of
2002 and will have funds available to continue to pay these obligations assuming
the sales of certain markets as further described in the Capital Resources and
Liquidity section are completed as scheduled. There can be no assurances that
additional funding, if needed, 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 or more favorable terms.

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, the consummation of the Asset Sales and the
expected financial and operational improvements from
<PAGE>
the transactions described herein, anticipated cost reductions, market makers
independent decisions to create a market in our common stock, future sales
growth, market acceptance of our product offerings, our ability to secure
adequate financing or equity capital to fund our operations, network expansion,
our ability to manage rapid growth and maintain a high level of customer
service, the performance of our network and equipment, our ability to enter into
strategic alliances or transactions, 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 and risks detailed from time to time in our filings with the
Securities and Exchange Commission. We undertake no obligation to update
publicly any forward-looking statements, whether as a result of future events,
new information, or otherwise.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      In November 2002, $49.2 million in carrying value of our 13% Senior Notes
due 2004 (the "2004 Notes") were repurchased for $14.2 million in cash, leaving
$2.1 million of 2004 Notes outstanding at December 31, 2002. On January 3, 2003,
the remainder of our 2004 Notes with a Face value of $2.1 million were
repurchased for $2.2 million in cash. The 2004 Notes bore fixed interest rates.
As a result, the fair market value of this debt was sensitive to changes in
prevailing interest rates. We ran the risk that market rates would decline and
the required payments would exceed those based on the current market rate. We
did not use interest rate derivative instruments to manage our exposure to
interest rate changes. The fair value of our 2004 Notes outstanding was
approximately $2.1 million at December 31, 2002 as compared to a carrying value
of $2.1 million. A hypothetical 1% decrease in interest rates would have had no
material effect on our long-term debt.

      The remainder of our long-term debt consists primarily of fixed and
variable rate capital lease obligations.
<PAGE>
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

        The information required by this Item was previously disclosed in a Form
8-K and 8-K/A dated July 30, 2002.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      Our executive officers and directors, and their respective ages as of
March 21, 2003, are as follows:

<TABLE>
<CAPTION>
NAME                          AGE                   POSITION
----                          ---                   --------
<S>                           <C>    <C>
Rolla P. Huff..............    46    Chief Executive Officer and Chairman of the
                                     Board
Michael E. Cahr............    62    Director
Michael M. Earley..........    47    Director
Robert M. Pomeroy..........    40    Director
Richard L. Shorten, Jr.....    35    Director
Joseph M. Wetzel...........    47    President, Chief Operating Officer and
                                     Director
S. Gregory Clevenger.......    39    Executive Vice President - Chief Financial
                                     Officer and Director
Russell I. Zuckerman.......    55    Senior Vice President, General Counsel and
                                     Corporate Secretary
Roger A. Pachuta...........    60    Senior Vice President Network Services
Steven A. Reimer...........    47    Senior Vice President Customer Operations
Michele D. Sadwick.........    36    Vice President Customer Base Management
Robert L. Scott............    40    Senior Vice President and Chief Information Officer
G. Bradley Terry...........    43    President of Sales
Michael J. Tschiderer......    43    Vice President of Finance and Controller
</TABLE>

      Rolla P. Huff currently serves as our chief executive officer and has been
chairman of our board of directors since July 2001. Mr. Huff was elected to our
board of directors pursuant to the terms of his employment agreement. Mr. Huff
was elected as our chief executive officer and president and as a member of our
board of directors in November 1999. From March 1999 to September 1999, Mr. Huff
served as president and chief operating officer of Frontier Corporation and
served as executive vice 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 1995
to 1997. From 1994 to 1995, Mr. Huff was financial vice president of mergers and
acquisitions for AT&T.

      Michael E. Cahr has served on our board of directors since July 30, 2002.
Since April 1999, Mr. Cahr has been president and chief executive officer of
Saxony Consultants. He also served as president of that company from 1980 to
1987. During the interim, from 1994 to March 1999, Mr. Cahr served as chairman,
president and chief executive officer of Allscripts, a medication management
solutions company. From 1987 to 1994, Mr. Cahr was Venture Group Manager for
Allstate Venture Capital. Mr. Cahr was president, chief executive officer and
owner of Abbey Fishing Company from 1973 to 1980. From 1963 to 1973 Mr. Cahr
held various positions at Sun Chemical Corporation. Mr. Cahr also serves as a
director of Lifecell Corporation, Truswal Systems and PacificHealth
Laboratories, Inc.

      Michael M. Earley has served on our board of directors since July 30,
2002. Mr. Earley has been an advisor to a number of businesses, acting in a
variety of management roles since 1997. He was appointed president and chief
executive officer of Metropolitan Health Networks, Inc., a provider of
healthcare and pharmacy services in March 2003. During 2000 and 2001, Mr. Early
was a consultant to and acting chief executive officer of Collins Associates, an
institutional money management firm. From 1998 to 1999, Mr. Earley served as
principal and owner of Triton Group Management Inc, a business advisory concern.
From 1994 to 1997 served as president of Triton Group Ltd., a public diversified
holding company. From 1991 to 1993, Mr. Earley was senior vice president, chief
financial officer and director of Intermark, Inc. and Triton Group Ltd., during
which time the two companies were restructured and consolidated through a
pre-arranged Chapter 11 proceeding. From 1986 to 1990, Mr. Earley held the
positions of chief financial officer of Triton Group Ltd.
<PAGE>
and vice president corporate development for Triton Group Ltd. and Intermark,
Inc. Mr. Earley was controller for International Robomation/Intelligence from
1983 to 1985 and an audit and tax member of the Ernst & Whinney accounting firm
from 1978 to 1983.

      Robert M. Pomeroy has served on our board of directors since July 30,
2002. Mr. Pomeroy is a C.P.A. and served as chief financial officer of Graphnet,
Inc. from September 2000 to August 2001. From June 1999 to August 2000, Mr.
Pomeroy was a senior equity research analyst for Goldman Sachs & Co. He was a
vice president at Credit Suisse First Boston from May 1998 to June 1999, vice
president at Credit Lyonnais Securities (USA) from 1995 to February 1998. Mr.
Pomeroy served as an associate analyst at Bear Stearns from 1994 to 1995 and
with Lehman Brothers from 1992 to 1994. From 1984 to 1992, Mr. Pomeroy held
financial positions at Kidder Peabody Asset Management, Ernst & Whinney, and
Touche Ross.

      Richard L. Shorten, Jr. has served on our board of directors since July
30, 2002. Mr. Shorten has been managing director of Pacific Alliance Limited,
LLC since August 2001. Mr. Shorten has been a director and on the audit
committee of First Avenue NetWorks, Inc., since November 2001. From May 2000 to
August 2001, Mr. Shorten was executive vice president and director of Graphnet,
Inc. From December 1999 to April 2000, Mr. Shorten served as senior vice
president of Data Services for Viatel Inc., following the company's acquisition
of Destia Communication where he held the position of Senior Vice President from
December 1997 to December 1999. Mr. Shorten was a corporate associate with
Cravath, Swaine and Moore from 1992 to 1997.

      S. Gregory Clevenger has served as our executive vice president and chief
financial officer since April 2002. Mr. Clevenger joined our company as senior
vice president - corporate development in January 2000 and served from May 2001
to April 2002 as our executive vice president - chief strategic and planning
officer. He was elected to our board of directors in March 2002. From 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 1992 to 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.

      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 in that role from August 2000 through July 2001 and at which
time he assumed his current position. He was elected to our board of directors
in March 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. Prior to December 2000, Mr. Zuckerman had been in private practice
since 1973 with Underberg & Kessler, LLP, and served as managing partner and
chairman of the firm's litigation department.

      Michael J. Tschiderer joined our company in May 2000 and has served as our
vice president of finance and controller since March 2001. Mr. Tschiderer served
as our 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 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, New York
area. He is a certified public accountant in the state of New York.

      Roger J. Pachuta joined our company as senior vice president of
network services in February 2000. Prior to joining our company, Mr. Pachuta
held vice president of network field operations and various other network
operations positions for AT&T Wireless from 1993 to 2000. From 1987 to 1992, Mr.
Pachuta served as vice president of customer and network services for Ameritech
Mobile Communications, first starting with that company in 1983. Beginning in
1970, Mr. Pachuta's professional network experience includes engineering and
network operations positions at AT&T and Ohio Bell Telephone Company.

      Steven A. Reimer is our senior vice president of customer operations
joining our company in January 2001. Mr. Reimer was formerly with AT&T Broadband
from June 1999 to December 2000 where he was most recently vice president of
operations. Mr. Reimer joined AT&T Broadband through its acquisition of
MediaOne, where he had been vice president of operations from 1994 to June 1999.
From 1981 to 1984, Mr. Reimer held management positions at Continental
Cablevision, ultimately serving as vice president/district manager. From 1979 to
1981, he was manager of operations for United Cable Television.

      Michele D. Sadwick is our vice president of customer base management
serving in that role since October 2002. Ms. Sadwick joined our company in
November 1999 as vice president of corporate communications. Ms. Sadwick
previously served as director of internal and external communications for Global
Crossing Ltd., joining that firm through its acquisition of Frontier Corporation
where she held communications management positions since 1994.
<PAGE>
      Robert L. Scott has been our senior vice president and chief information
officer since April 2000. Mr. Scott joined our company
from Logix Communications, where he was senior vice president and chief
technology and strategy officer from February 1998 to February 2000. From 1994
to 1998, Mr. Scott served in strategic planning and network systems roles for
Johnson & Johnson. From 1986 to 1989, he held technical management positions at
General Electric, RCA and ABC Television.

      G. Bradley Terry is our president of sales, serving in that role since
July 2001. Mr. Terry joined our company in September 2000 as president of west
region sales. From 1992 to September 2000, Mr. Terry held sales management
positions at PageNet, last serving as western region sales vice president. Mr.
Terry served as operations manager for Windsor Court Capital, Inc. from 1990 to
1992 and co-founded the training company Hughston-Terry Associates in 1988 where
he served as managing partner and sales consultant until 1990.

      All of our current executive officers served in such capacity at the time
we initiated our voluntary pre-negotiated petition in bankruptcy in February
2002.

      Robert M. Pomeroy, Michael E. Cahr, Richard L. Shorten, Jr. and Michael M.
Earley were selected as directors effective July 30, 2002 as designees of the
holders of our senior notes due 2010 in accordance with the terms of our
reorganization plan implemented upon the completion of our bankruptcy
proceeding. This plan provides that these individuals will serve for a term of
two years during which they cannot be removed without cause. Thereafter, our
board of directors will be elected in accordance with our certificate of
incorporation, by-laws and applicable law.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION

      The following table shows, for the fiscal years ended December 31, 2002,
2001 and 2000, 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, 2002. This table also
indicates the principal capacities in which they served during 2002.

                           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,                                2002      509,692      624,097(8)       11,834           2,206,250            --
  Chief executive                             2001      500,000      136,000          50,771             956,250(7)         --
  officer and director(2)                     2000      500,000          --           67,150             675,000(4)         --
Joseph M. Wetzel,                             2002      263,462      344,537(8)       16,304           1,456,250          3,585
  President and chief operating               2001      250,000      125,000          38,716             206,250(7)         --
  officer(3)                                  2000       77,884      300,000             --              275,000(4)         --
S. Gregory Clevenger,                         2002      236,748      325,787(9)          --            1,428,125            --
  Executive vice president -                  2001      200,000       60,077             --              178,125(7)         --
  chief strategic and planning                2000      182,692      105,000             --               50,000(4)      66,092
  and chief financial officer(5)
Russell I. Zuckerman,                         2002      185,385      227,436(9)          --              925,000            --
  Senior vice president -                     2001      178,942       15,000             --               75,000(7)         --
  general counsel and secretary               2000       97,528       15,000             --               52,000(4)         --
G. Bradley Terry,                             2002      210,000      180,324(9)      220,625(10)          59,999            --
  President -                                 2001      192,769       50,000         122,500                 --             --
  sales(6)                                    2000       61,023          --              --                  --             --
</TABLE>

----------

(1)   All stock options issued in 2001 and 2000 have been adjusted to reflect
      the 3-for-2 stock split on August 28, 2000 and all of these options have
      now been replaced with the options granted in 2002. The options granted in
      2002 are the only remaining options outstanding as of December 31, 2002.

(2)   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.
<PAGE>
(4)   These options were repriced in September 2001.

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

(6)   Mr. Terry commenced employment with us in September 2000, therefore, the
      salary shown for him in 2000 is for the period from September 2000 through
      December 2000.

(7)   The options granted in 2001 replaced all previously granted options and
      were the only remaining options outstanding as of December 31, 2001.

(8)   Includes 2001 and 2002 annual bonuses, both paid in 2002.

(9)   Includes 2001 and 2002 annual bonuses and various retention payments, all
      paid in 2002.

(10)  Represents forgiveness of his loan pursuant to his October 19, 2001
      employment agreement

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

      Our compensation committee consists of Michael Earley, Michael Cahr,
Richard Shorten and Robert Pomeroy. 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 $536,000 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 our
board of directors in conjunction with our annual operating budget or in the
discretion of our 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 on September 18, 2003. 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 ceases, Mr. Huff will be entitled to severance pay equal to the
greater of (a) $1.5 million or (b) two times the salary and bonus paid to him
during the previous 12 months with payments to be made in a lump-sum.

      Joseph M. Wetzel. Our employment agreement with Mr. Wetzel provides for a
base salary of $300,000 per year and an annual bonus of up to 75% of his base
salary based upon achieving established corporate, functional and individual
goals. Mr. Wetzel is required to devote his full time and efforts to the
business of our company during the term of his employment agreement, which
expires on September 18, 2003. Mr. Wetzel's employment may be terminated by
either us or Mr. Wetzel at any time. Mr. Wetzel has agreed not to participate in
a competitive business during the term of his employment and for a period of
twelve months following termination. 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 or salary or a relocation of more than 35 miles
from his present place of business, Mr. Wetzel will receive severance pay equal
to two times the salary and bonus paid to him during the previous 12 months with
payments to be made in a lump-sum.

      Mr. Wetzel also received a $300,000 signing bonus at the time he began
employment. The signing bonus vests equally over three years with full vesting
as of August 2003. 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.

      S. Gregory Clevenger. Our employment agreement with Mr. Clevenger provides
for a base salary of $300,000 per year and an annual bonus of up to 75% of his
base salary based upon achieving established corporate, functional and
individual goals. Mr. Clevenger is required to devote his full time and efforts
to the business of our company during the term of his employment agreement,
which expires on September 18, 2003. Mr. Clevenger's employment may be
terminated by either us or Mr. Clevenger at any time. Mr. Clevenger has agreed
not to participate in a competitive business during the term of his employment
and for a period of twelve months following termination. If Mr. Clevenger's
employment is terminated by us without cause or due to a change of control or
there is a material change in Mr. Clevenger's responsibilities or salary or a
relocation of more than 35 miles from his present place of business, Mr.
Clevenger will receive severance pay equal to two times the salary and bonus
paid to him during the previous 12 months with payments to be made in a
lump-sum.
<PAGE>
      Russell I. Zuckerman. Our employment agreement with Mr. Zuckerman provides
for a base salary of $200,000 per year and an annual bonus of up to 60% of his
base salary based upon achieving established corporate, functional and
individual goals. Mr. Zuckerman is required to devote his full time and efforts
to the business of our company during the term of his employment agreement,
which expires on September 18, 2003. Mr. Zuckerman's employment may be
terminated by either us or Mr. Zuckerman at any time. Mr. Zuckerman has agreed
not to participate in a competitive business during the term of his employment
and for a period of twelve months following termination. If Mr. Zuckerman's
employment is terminated by us without cause or there is a material change in
Mr. Zuckerman's responsibilities or salary or a relocation of more than 35 miles
from his present place of business, Mr. Zuckerman will receive severance pay
equal to two times the salary and bonus paid to him during the previous 12
months with payments to be made in a lump-sum.

      Michael J. Tschiderer. Our employment agreement with Mr. Tschiderer
provides for a severance benefit of one times base salary as of December 31,
2002, to be paid in a lump sum if terminated by us without cause or voluntarily
by the officer for good reason. Mr. Tschiderer has agreed not to participate in
a competitive business during the severance period.

      Roger J. Pachuta. Our employment agreement with Mr. Pachuta provides for a
severance benefit of 75 percent of his base salary as of October 1, 2001, to be
paid in a lump sum if terminated by us without cause or voluntarily by the
officer for good reason. Mr. Pachuta has agreed not to participate in a
competitive business during the severance period.

      Steven A. Reimer. Our employment agreement with Mr. Reimer provides for a
severance benefit of 75 percent of his base salary as of October 1, 2001, to be
paid in a lump sum if terminated by us without cause or voluntarily by the
officer for good reason. Mr. Reimer has agreed not to participate in a
competitive business during the severance period.

      Michele D. Sadwick. Our employment agreement with Ms. Sadwick provides for
a severance benefit of one times base salary as of October 1, 2001, to be paid
in a lump sum if terminated by us without cause or voluntarily by the officer
for good reason. Ms. Sadwick has agreed not to participate in a competitive
business during the severance period.

      Robert L. Scott. Our employment agreement with Mr. Scott provides for a
severance benefit of one times base salary as of October 1, 2001, to be paid in
a lump sum if terminated by us without cause or voluntarily by the officer for
good reason. Mr. Scott has agreed not to participate in a competitive business
during the severance period.

      G. Bradley Terry. Our employment agreement with Mr. Terry provides for a
severance benefit of one times base salary as of October 1, 2001, to be paid in
a lump sum if terminated by us without cause or voluntarily by the officer for
good reason. Mr. Terry has agreed not to participate in a competitive business
during the severance period.

OPTION GRANTS IN LAST FISCAL YEAR

      The table below sets forth information regarding all stock options granted
in the 2002 fiscal year under our Stock Option Plan to those executive officers
named in the Compensation Table above.

<TABLE>
<CAPTION>
                           NUMBER OF     % OF TOTAL                                                   POTENTIAL REALIZED
                          SECURITIES      OPTIONS                   MARKET                           ASSUMED ANNUAL RATES
                          UNDERLYING    GRANTED TO                 PRICE OR                             OF STOCK PRICE
                            OPTIONS      EMPLOYEES                FAIR VALUE                            APPRECIATION (1)
                            GRANTED      IN FISCAL    EXERCISE    ON DATE OF     EXPIRATION   ----------------------------------
                            IN 2002         YEAR       PRICE         GRANT          DATE         0%           5%          10%
                            -------         ----       -----         -----          ----      --------    ---------     ---------
<S>                       <C>           <C>           <C>         <C>            <C>          <C>          <C>          <C>
Rolla P. Huff..........      956,250         8.3%       $0.22        $0.38        08/02/12    $153,000     $381,525     $732,126
Rolla P. Huff..........    1,250,000        10.9%       $0.18        $0.18        12/19/12    $     --     $141,501     $358,592
Joseph M. Wetzel.......      206,250         1.8%       $0.22        $0.38        08/02/12    $ 33,000     $ 82,290     $157,910
Joseph M. Wetzel.......      100,000         0.9%       $0.22        $0.14        09/18/12    $     --     $     --     $ 13,016
Joseph M. Wetzel.......    1,150,000        10.0%       $0.18        $0.18        12/19/12    $     --     $130,181     $329,905
S. Gregory Clevenger...      178,125         1.6%       $0.22        $0.38        08/02/12    $ 28,500     $ 71,068     $136,376
S. Gregory Clevenger...      100,000         0.9%       $0.22        $0.14        09/18/12    $     --     $     --     $ 13,016
S. Gregory Clevenger...    1,150,000        10.0%       $0.18        $0.18        12/19/12    $     --     $130,181     $329,905
Russell I. Zuckerman...       75,000         0.7%       $0.22        $0.38        08/02/12    $ 12,000     $ 29,923     $ 57,422
Russell I. Zuckerman...      100,000         0.9%       $0.22        $0.14        09/18/12    $     --     $     --     $ 13,016
Russell I. Zuckerman...      750,000         6.5%       $0.18        $0.18        12/19/12    $     --     $ 84,901     $215,155
G. Bradley Terry.......       59,999         0.5%       $0.22        $0.38        08/02/12    $  9,600     $ 23,938     $ 45,937
</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
<PAGE>
      Commission and therefore are not intended to forecast possible future
      appreciation, if any, of the price of our common stock.

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

      The following table shows aggregate exercises of options during 2002 and
the values of options held as of December 31, 2002 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, 2002      DECEMBER 31, 2002 (1)
                                ACQUIRED ON       VALUE       EXERCISABLE(E)/          EXERCISABLE(E)/
                                 EXERCISE       REALIZED     UNEXERCISABLE(U)         UNEXERCISABLE(U)
                                 --------       --------     ----------------         ----------------
<S>                             <C>             <C>         <C>                     <C>
Rolla P. Huff.............         --              --             735,417(E)                 $8,333(E)
Rolla P. Huff.............         --              --           1,470,833(U)                $16,667(U)
S. Gregory Clevenger......         --              --             442,709(E)                 $7,667(E)
S. Gregory Clevenger......         --              --             985,416(U)                $15,333(U)
Joseph M. Wetzel..........         --              --             452,084(E)                 $7,667(E)
Joseph M. Wetzel..........         --              --           1,004,166(U)                $15,333(U)
Russell I. Zuckerman......         --              --             275,000(E)                 $5,000(E)
Russell I. Zuckerman......         --              --             650,000(U)                $10,000(U)
G. Bradley Terry..........         --              --              20,000(E)                     --(E)
G. Bradley Terry..........         --              --              39,999(U)                     --(U)
</TABLE>

----------

(1)   Amounts shown are based upon the closing sale price for our common stock
      on December 31, 2002, which was $0.20 per share.

TEN-YEAR OPTION REPRICINGS

      In connection with our emergence from bankruptcy in July 2002, all of our
previously granted stock options were cancelled. As of August 2, 2002, our
employees received an initial grant of options under our new option plan to
replace their cancelled options, on a one-for-one basis. The new options have
the same terms and conditions as the corresponding cancelled outstanding
employee options, including provisions relating to option period, exercise
price, termination of employment and vesting. No adjustment was made to the
exercise price that would have otherwise been required under the terms of the
existing option agreements upon our recapitalization despite the fact that all
of our previously outstanding common stock was exchanged on the basis of
approximately one share of new common stock for each 61 shares of common stock
outstanding before the reorganization.

      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 our 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 were identical to the cancelled options, except that the number of
options granted in each case was reduced by 25% and the vesting periods provided
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 our 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.

<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)
                                                                                     (3)          (3)         (3)
          ----             ------------------             ----     ---------      ----------   ----------    -----        --------
<S>                      <C>                            <C>       <C>             <C>          <C>          <C>         <C>
Rolla P. Huff.........   Chief Executive Officer        8/02/02      450,000         $0.38       $13.33       $0.22           74
                         and Chairman of the Board

Rolla P. Huff.........                                  8/02/02      225,000         $0.38       $46.67       $0.22           79
Rolla P. Huff.........                                  8/02/02      281,250         $0.38       $36.33       $0.22           79
Rolla P. Huff.........                                  9/27/01      450,000(1)      $0.22       $13.33       $0.22           97
Rolla P. Huff.........                                  9/27/01      225,000(1)      $0.22       $46.67       $0.22          102
Rolla P. Huff.........                                  9/27/01      281,250(1)      $0.22       $36.33       $0.22          102
Joseph M. Wetzel......   President, Chief Operating     8/02/02      150,000         $0.38       $ 8.88       $0.22           85
                         Officer and Director
Joseph M. Wetzel......                                  8/02/02       56,250         $0.38       $ 2.53       $0.22           88
Joseph M. Wetzel......                                  9/27/01      150,000(1)      $0.22       $ 8.88       $0.22          108
Joseph M. Wetzel......                                  9/27/01       56,250(1)      $0.22       $ 2.53       $0.22          110
</TABLE>
<PAGE>
<TABLE>
<S>                      <C>                            <C>          <C>             <C>         <C>          <C>            <C>
Joseph M. Wetzel......                                  9/14/00      200,000(2)      $8.70       $ 8.88       $8.70          119
Michael R. Daley......   Former Executive Vice          9/27/01      225,000         $0.22       $16.67       $0.22           98
                         President 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(2)      $8.70       $16.67       $8.70          110
S. Gregory Clevenger..   Executive Vice President       8/02/02      140,625         $0.38       $23.58       $0.22           76
                         - Chief Financial Officer
                         and Director

S. Gregory Clevenger..                                  8/02/02       37,500         $0.38       $ 2.53       $0.22           88
S. Gregory Clevenger..                                  9/27/01      140,625(1)      $0.22       $23.58       $0.22           99
S. Gregory Clevenger..                                  9/27/01       37,500(1)      $0.22       $ 2.53       $0.22          110
S. Gregory Clevenger..                                  9/14/00      187,500(2)      $8.70       $23.58       $8.70          111
Russell I. Zuckerman..   Senior Vice President          8/02/02       36,000         $0.38       $25.67       $0.22           76
                         General Counsel and
                         Secretary

Russell I. Zuckerman..                                  8/02/02        6,000         $0.38       $ 5.50       $0.22           86
Russell I. Zuckerman..                                  8/02/02       33,000         $0.38       $ 2.94       $0.22           88
Russell I. Zuckerman..                                  9/27/01       36,000(1)      $0.22       $25.67       $0.22           99
Russell I. Zuckerman..                                  9/27/01        6,000(1)      $0.22       $ 5.50       $0.22          109
Russell I. Zuckerman..                                  9/27/01       33,000(1)      $0.22       $ 2.94       $0.22          111
Russell I. Zuckerman..                                  9/14/00       48,000(2)      $8.70       $25.67       $8.70          112
Paul D. Celuch........   Former President - Sales       9/14/00      112,500         $8.70       $32.67       $8.70          116
Michael J. Tschiderer.   Vice President of Finance      8/02/02       33,750         $0.38       $33.87       $0.22           78
                         and Controller

Michael J. Tschiderer.                                  8/02/02        5,624         $0.38       $ 2.53       $0.22           88
Michael J. Tschiderer.                                  8/02/02        3,750         $0.38       $ 2.53       $0.22           80
Michael J. Tschiderer.                                  9/27/01       33,750(1)      $0.22       $33.87       $0.22          100
Michael J. Tschiderer.                                  9/27/01        5,624(1)      $0.22       $ 2.53       $0.22          110
Michael J. Tschiderer.                                  9/27/01        3,750(1)      $0.22       $ 2.53       $0.22          114
Michael J. Tschiderer.                                  9/14/00       45,000(2)      $8.70       $33.87       $8.70          112
Sean T. Higman........   Former Vice                    9/27/01       33,750         $0.22       $32.67       $0.22          105
                         President and Treasurer

Sean T. Higman........                                  9/27/01        3,750         $0.22       $ 2.53       $0.22          114
Sean T. Higman........                                  9/14/00       45,000(2)      $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          8/02/02      112,500         $0.38       $33.87       $0.22           78
                         - Network Services
Roger J. Pachuta......                                  9/27/01      112,500(1)      $0.22       $33.87       $0.22           85
Roger J. Pachuta......                                  9/14/00      150,000(2)      $8.70       $33.87       $8.70          113


Robert Scott..........   Senior Vice President -        8/02/02       28,125         $0.38       $33.92       $0.22          109
                         Chief Information
                         Officer
Robert Scott..........                                  8/02/02       56,250         $0.38       $38.00       $0.22          109
Robert Scott..........                                  9/27/01       28,125(1)      $0.22       $33.92       $0.22          108
Robert Scott..........                                  9/27/01       56,250(1)      $0.22       $38.00       $0.22           10
Robert Scott..........                                  9/14/00       37,500(2)      $8.70       $33.92       $8.70          115
Robert Scott..........                                  9/14/00       75,000(2)      $8.70       $38.00       $8.70          113

Michele Sadwick.......   Vice President Customer        8/02/02       11,250         $0.38       $ 2.53       $0.22           74
                         Base Management

Michele Sadwick.......                                  8/02/02       67,500         $0.38       $18.33       $0.22           74
Michele Sadwick.......                                  9/27/01       11,250(1)      $0.22       $ 2.53       $0.22          111
Michele Sadwick.......                                  9/27/01       67,500(1)      $0.22       $18.33       $0.22           85
Steven Reimer.........   Senior Vice President          8/02/02       75,000         $0.38       $ 2.53       $0.22           87
                         Customer Operations

Steven Reimer.........                                  9/27/01       75,000(1)      $0.22       $ 2.53       $0.22          110
G. Bradley Terry......   President of Sales             8/02/02       45,000         $0.38       $ 8.88       $0.22           85
G. Bradley Terry......                                  8/02/02       15,000         $0.38       $ 0.95       $0.22          106
G. Bradley Terry......                                  9/27/01       15,000(1)      $0.22       $ 0.95       $0.22          117
G. Bradley Terry......                                  9/27/01       45,000(1)      $0.22       $ 8.88       $0.22          108
G. Bradley Terry......                                  9/14/00       60,000(2)      $8.70       $ 8.88       $8.70          120
</TABLE>

----------

(1)   All of these options were exchanged for an identical number of options in
      August 2002.

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

(3)   The option prices indicated above for periods before and after July 31,
      2002, are not comparable in that the common stock outstanding before our
      emergence from bankruptcy on July 31, 2002 was exchanged for 974,025
      shares of new common stock, on the basis of approximately one share for
      each 61 shares previously outstanding, and 64,025,000 shares of new common
      stock were issued to the holders of our senior debt and preferred stock.
      The option prices indicated for periods before July 31, 2002, have not
      been adjusted for this exchange.

DIRECTOR COMPENSATION

      Our outside directors have each received approximately $35,000 as
compensation for their services in 2002. In addition, the outside directors were
each granted 5,000 stock options on August 8, 2002, and 100,000 stock options on
September 18, 2002, with those options vesting immediately on their respective
grants dates. Our outside directors will each receive quarterly payments, in
advance, of $12,000, paid on January 1, April 1, July 1, and October 1, 2003, as
compensation for their services as board members for 2003. The outside directors
also received an additional 150,000 non-qualified stock options, with one-third
vesting on the grant date of December 19, 2002, one-third on December 19, 2003,
and the remaining one-third on December 19, 2004. All of the options
<PAGE>
granted on December 19, 2002 would become fully vested upon termination of the
board member without cause or his resignation for good reason.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

      The following table shows information known to us with respect to
beneficial ownership of common stock as of March 31, 2003, by (A) each director,
(B) each of the executive officers named in the Summary Compensation Table
beginning on page 43, (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.

<TABLE>
<CAPTION>
                                                                     NUMBER OF SHARES        PERCENTAGE OF
            NAME OF BENEFICIAL OWNER                              BENEFICIALLY OWNED (1)     OWNERSHIP (2)
            ------------------------                              ----------------------     -------------
<S>                                                               <C>                        <C>
West Highland Capital, Inc. (3)...............................           9,110,367               14.02%
Aspen Advisors, LLC (4).......................................           6,000,000                9.23%
UBS AG (5)....................................................           4,875,184                7.50%
Rolla P. Huff, chief executive officer and chairman of
  the board (6)...............................................             735,564                1.12%
Joseph M. Wetzel, president, chief operating officer
  and director (7)............................................             452,083                *
S. Gregory Clevenger, executive vice president,
  chief financial officer and director (8)....................             442,954                *
Russell I. Zuckerman, senior vice president (9)...............             275,033                *
Michael E Cahr, director (10).................................             155,000                *
Michael M. Earley, director (11)..............................             155,000                *
Robert M. Pomeroy, director (12)..............................             155,000                *
Richard L. Shorten, Jr., director (13)........................             155,000                *
G. Bradley Terry, president - sales (14)......................              19,999                *
All executive officers and directors as a group (14 persons)
  (6)(7)(8)(9)(10)(11)(12)(13)(14)(15)........................           2,785,350                4.1%
</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 held by the holder which are currently exercisable or
      which will become exercisable within 60 days after the date indicated and
      no exercise of options held by any other person.

(2)   Applicable percentage of ownership for each holder is based on 64,999,025
      shares of Common Stock outstanding on March 21, 2003, plus any Common
      Stock equivalents and presently exercisable stock options held by each
      such holder, and options held by each such holder which will become
      exercisable within 60 days after March 21, 2003.

(3)   Information is based on a Schedule 13G filed with the Securities and
      Exchange Commission on February 14, 2003. West Highland Capital, Inc.
      ("WHC") is a registered investment adviser whose clients have the right to
      receive or the power to direct the receipt of dividends from, or the
      proceeds from the sale of, the shares owned by them. Lang H. Gerhard is
      the sole shareholder of WHC and the manager of Estero Partners, LLC, which
      is a general partner with WHC of West Highland Partners, LP, an investment
      limited partnership ("WHPLP"). Each of the foregoing is identified on the
      Schedule 13G as having shared dispositive power of the shares owned by
      WHC. WHC, Estero and Gerhard are identified in the Schedule 13G as a
      group, and WHPLP disclaims membership in the group. The address of West
      Highland Capital, Inc. is 300 Drake's Landing Road, Suite 290, Greenbrae,
      CA 94904.

(4)   Information is based on a Schedule 13G filed with the Securities and
      Exchange Commission on February 14, 2003 by Aspen Partners, Aspen Capital
      LLC (general partner of Aspen Partners), Aspen Advisors LLC (investment
      advisor to Aspen Partners) and Nikos Hecht (managing member of Aspen
      Capital LLC and Aspen Advisors LLC). Aspen Partners LLC directly owns
      5,098,971 shares, and Aspen Advisors LLC and Nikos Hecht share the power
      to vote and dispose of 6,000,000 shares. Aspen Partners, Aspen Capital,
      Aspen Advisors and Hecht each share the power to vote and dispose of
      5,098,971 shares. Aspen Advisors and Hecht share the power to vote and
      dispose of an additional 901,029 shares. The address of Aspen Partners and
      its affiliates is 152 West 57th Street, 46th Floor, New York, New York
      10019.

(5)   Information is based on a Schedule 13G filed with the Securities and
      Exchange Commission on February 14, 2003. The address of UBS AG is
      Bahnhofstrasse 45, 8021 Zurich, Switzerland.

(6)   Includes options to purchase 735,416 shares which are presently
      exercisable and 25 shares owned by Mr. Huff's wife, of which
<PAGE>
      shares Mr. Huff disclaims beneficial ownership.

(7)   Includes options to purchase 452,083 shares which are presently
      exercisable.

(8)   Includes options to purchase 442,708 shares which are presently
      exercisable.

(9)   Includes options to purchase 275,000 shares which are presently
      exercisable.

(10)  Includes options to purchase 155,000 shares which are presently
      exercisable.

(11)  Includes options to purchase 155,000 shares which are presently
      exercisable.

(12)  Includes options to purchase 155,000 shares which are presently
      exercisable.

(13)  Includes options to purchase 155,000 shares which are presently
      exercisable.

(14)  Includes options to purchase 19,999 shares which are presently
      exercisable.

(15)  Includes presently exercisable options to purchase 239,610 shares which
      are held by executive officers not named above.

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.

      Based solely on our review of the copies of such forms received by us with
respect to transactions during 2002, 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.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

      The following table provides information regarding options, warrants or
other rights to acquire equity securities under our equity compensation plans:

<TABLE>
<CAPTION>
                                                                                                               NUMBER OF SECURITIES
                                                               NUMBER OF SECURITIES      WEIGHTED-AVERAGE           REMAINING
                                                                TO BE ISSUED UPON           EXERCISE              AVAILABLE FOR
                                                             EXERCISE OF OUTSTANDING   PRICE OF OUTSTANDING      FUTURE ISSUANCE
                                                                    OPTIONS,                 OPTIONS,              UNDER EQUITY
                                                               WARRANTS AND RIGHTS     WARRANTS AND RIGHTS      COMPENSATION PLANS
                                                               -------------------     -------------------      ------------------
<S>                                                          <C>                       <C>                      <C>
Equity compensation plans approved by security holders ...                  --                    --                        --
Equity compensation plans not approved by security holders          11,103,832                 $0.49                 2,118,390
                                                                    ----------                 -----                 ---------
Total ....................................................          11,103,832                 $0.49                 2,118,390
</TABLE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      We have a lease on approximately 76,000 square feet of office space from a
limited liability company which is principally owned by two of our former
directors. The average rental rate is $1.80 per square foot per month, which
includes common area maintenance charges. We believe 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 2002, we paid
approximately $1.6 million in lease payments and leasehold improvements under
this arrangement.

      On February 20, 2003, we entered into an agreement (the "Agreement") with
Pacific Alliance Limited, LLC ("PAL") of which one of our directors, Richard L.
Shorten, Jr., is a partner. Under the Agreement, PAL is to provide assistance to
us in connection with our efforts to raise $10-15 million to finance working
capital requirements. PAL is to receive a monthly cash retainer of $15,000,
payable if a bona fide term sheet is obtained, and upon consummation of a
financing, PAL is to receive an additional cash fee equal to 5% of the gross
equity or debt proceeds raised, less any retainer paid or to be paid. The fee is
reduced pro rata to the extent any placement agent is entitled to a fee, and is
limited to 2.5% if a financing is consummated with any of the potential
financing sources identified on a schedule to the Agreement.
<PAGE>
We believe the terms and conditions of the Agreement are at least as favorable
to us as those which we could have received from an unaffiliated third party,
and that PAL is well suited to perform the services being requested.

ITEM 14. CONTROLS AND PROCEDURES

(a)   Evaluation of disclosure controls and procedures. Our principal executive
      officer and our principal financial officer, after evaluating the
      effectiveness of the our disclosure controls and procedures (as defined in
      Exchange Act Rules 13a-14(c) and 15d-14(c)) on March 20, 2003, have
      concluded that, as of such date, our disclosure controls and procedures
      were adequate and effective to ensure that material information relating
      to us and our consolidated subsidiaries would be made known to them by
      others within those entities.

(b)   Changes in internal controls. There were no significant changes in our
      internal controls or in other factors that could significantly affect our
      disclosure controls and procedures subsequent to the date of their
      evaluation, nor were there any significant deficiencies or material
      weaknesses in our internal controls. As a result, no corrective actions
      were required or undertaken.
<PAGE>
                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

      (a)

      1. The response to this portion of Item 15 is submitted as a separate
section of this report.

      2. The response to this portion of Item 15 is submitted as a separate
section of this report.

      3. Filing of Exhibits:

<TABLE>
<S>                          <C> <C>
              Exhibit 10.6   --  Retention and Serverance Agreement dated
                                 October 23, 2001, between Mpower Communications
                                 Corp. and Michael Tschiderer.
              Exhibit 10.7   --  Retention and Severance Agreement dated
                                 November 15, 2001 between Mpower Communications
                                 Corp. and G. Bradley Terry.
              Exhibit 10.8   --  Retention and Severance Agreement dated
                                 November 12, 2001 between Mpower Communications
                                 Corp. and Robert Scott.
              Exhibit 10.9   --  Retention and Severance Agreement dated
                                 October 24, 2001 between Mpower Communications
                                 Corp. and Michele Sadwick.
              Exhibit 10.10  --  Severance Agreement dated October 18, 2001
                                 between Mpower Communications Corp. and Roger
                                 Pachuta.
              Exhibit 10.11  --  Retention and Severance Agreement dated
                                 October 28, 2001 between Mpower Communications
                                 Corp. and Steve Reimer.
              Exhibit 10.17  --  RFC Capital Corporation Receivables Sale
                                 Agreement dated as of January 23, 2003.
              Exhibit 10.18  --  Mpower Communications Corp. Employee Benefit
                                 Trust Agreement II.
              Exhibit 10.19  --  Amended Retention and Severance Employment
                                 Agreement dated February 20, 2003, between
                                 Mpower Communications Corp. and Michael
                                 Tschiderer.
              Exhibit 10.20  --  Mpower Holding Corporation's Directors and
                                 Officers Insurance Premium Plan Effective
                                 November 25, 2002.
              Exhibit 10.21  --  Mpower Holding Corporation 2002 Stock Option
                                 Plan II.
              Exhibit 23.1   --  Consent of Deloitte & Touche LLP.
              Exhibit 99.1   --  Certification of Principal Executive Officer
                                 pursuant to 18 U.S.C. Section 1350
              Exhibit 99.2   --  Certification of Principal Financial Officer
                                 pursuant to 18 U.S.C. Section 1350
</TABLE>

      (b) We filed no reports on Form 8-K during the quarter ended December 31,
2002.

      (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    Findings of Fact, Conclusions of Law, and
                                    Order Under Section 1129 of the Bankruptcy
                                    Code and Rule 3020 of the Bankruptcy Rules
                                    Confirming Debtors' First Amended Joint Plan
                                    of Reorganization, dated July 17, 2002. (1)
                             2.2    Debtors' First Amended Joint Plan of
                                    Reorganization dated May 20, 2002. (1)
                             2.3    Debtors' First Amended Disclosure Statement
                                    dated May 20, 2002. (1)
                             2.4    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.
                                    (2)
                             3.1    Second Amended and Restated Certificate of
                                    Incorporation filed with the Secretary of
                                    State of the State of Delaware on July 30,
                                    2002. (3)
                             3.2    Amended and Restated By-laws. (3)
                             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. (3)
                             3.4    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. (4)
                             4.1    See the Second Amended and Restated
                                    Certificate of Incorporation filed as
                                    Exhibit 3.1 and the Amended and Restated
                                    By-laws filed as Exhibit 3.2.
                             4.2    Indenture dated as of September 29, 1997,
                                    between Mpower Communications Corp., and
                                    Marine Midland Bank, as Trustee. (5)
                             4.3    Form of Note for the Company's registered
                                    13% Senior Secured Notes due 2004. (5)
                             4.4    Form of New Key Employee Option Plan adopted
                                    by Mpower Holding Corporation. (3)(9)
                             4.5    Form of Registration Rights Agreement, to be
                                    entered into by Mpower Holding Corporation
                                    pursuant to the Final Plan. (3)
</TABLE>
<PAGE>
<TABLE>
<S>                                 <C>
                             4.6    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. (6)
                             4.7    First Supplemental Indenture dated as of May
                                    31, 2000 between Mpower Communications Corp.
                                    and HSBC Bank USA (as successor to Marine
                                    Midland Bank).
                             4.8    Second Supplemental Indenture dated as of
                                    July 12, 2001, between Mpower Communications
                                    Corp., Mpower Holding Corporation and HSBC
                                    Bank USA (as successor to Marine Midland
                                    Bank), as trustee. (8)
                             10.1   Amendment To Employment/Stock Repurchase
                                    Agreement dated August 1, 2001, between
                                    Mpower Holding Corporation and Rolla P.
                                    Huff. (9) (8)
                             10.2   Amendment To Employment/Stock Repurchase
                                    Agreement dated September 20, 2002 between
                                    Mpower Holding Corporation and Rolla P.
                                    Huff. (9) (10)
                             10.3   Amendment to Employment Agreement dated
                                    September 18, 2002 between Mpower
                                    Communications Corp. and Joseph M. Wetzel.
                                    (9) (10)
                             10.4   Amendment to Employment Agreement dated
                                    September 20, 2002 between Mpower
                                    Communications Corp. and S. Gregory
                                    Clevenger. (9) (10)
                             10.5   Employment Agreement dated September 18,
                                    2002 between Mpower Communications Corp. and
                                    Russell I. Zuckerman. (9) (10)
                             10.6   Employment Agreement dated October 23, 2001
                                    between Mpower Communications Corp. and
                                    Michael Tschiderer. (9)
                             10.7   Employment Agreement dated November 15, 2001
                                    between Mpower Communications Corp. and G.
                                    Bradley Terry. (9)
                             10.8   Employment Agreement dated October 12, 2001
                                    between Mpower Communications Corp. and
                                    Robert Scott. (9)
                             10.9   Employment Agreement dated October 24, 2001
                                    between Mpower Communications Corp. and
                                    Michele Sadwick. (9)
                             10.10  Employment Agreement dated October 18, 2001
                                    between Mpower Communications Corp. and
                                    Roger Pachuta. (9)
                             10.11  Employment Agreement dated October 28, 2001
                                    between Mpower Communications Corp. and
                                    Steve Reimer. (9)
                             10.12  Standard Office Lease Agreement dated July
                                    1, 1997, between Mpower Communications Corp.
                                    and Cheyenne Investments L.L.C. (5)
                             10.13  First Amendment to Lease dated May 1, 1998
                                    between Cheyenne Investments, LLC and Mpower
                                    Communications Corp. (11)
                             10.14  Second Amendment to Lease dated December 29,
                                    1998 between Cheyenne Investments, LLC and
                                    Mpower Communications Corp. (11)
                             10.15  Standard Office Lease Agreement dated March
                                    5, 1999, between Cheyenne Investments, LLC
                                    and Mpower Communications Corp. (12)
                             10.16  Employment Letter dated August 8, 2000
                                    between Mpower Communications Corp. and
                                    Joseph M. Wetzel. (13)
                             10.17  RFC Capital Corporation Receivables Sale
                                    Agreement dated as of January 23, 2003.
                             10.18  Mpower Communications Corp. Employee
                                    Benefit Trust Agreement II.
                             10.19  Amended Employment Agreement dated February
                                    20, 2003 between Mpower Communications Corp.
                                    and Michael Tschiderer.
                             10.20  Mpower Holding Corporation's Directors and
                                    Officers Insurance Premium Plan effective
                                    November 25, 2002.
                             10.21  Mpower Holding Corporation 2002 Stock
                                    Option Plan II.
                             21     Subsidiaries of the Registrant(6)
                             23.1   Consent of Deloitte & Touche LLP
                             99.1   Certification of Principal Executive Officer
                                    pursuant to 18 U.S.C. Section 1350
                             99.2   Certification of Principal Financial Officer
                                    pursuant to 18 U.S.C. Section 1350
</TABLE>

----------

(1)   Incorporated by reference to Mpower Holding Corporation's Current Report
      on Form 8-K filed with the Commission on July 30, 2002.

(2)   Incorporated by reference to Mpower Holding Corporation's Registration
      Statement on Form S-4 filed with the Commission on April 13, 2001.

(3)   Incorporated by reference to Mpower Holding Corporation's Registration
      Statement of Form 8-A filed with the Commission on July 30, 2002.
<PAGE>
(4)   Incorporated by reference to Mpower Holding Corporation's Current Report
      on Form 8-K filed with the Commission on June 29, 2001.

(5)   Incorporated by reference to Mpower Holding Corporation's Registration
      Statement on Form S-4 filed with the Commission on October 28, 1997, and
      amendments thereto.

(6)   Incorporated by reference to Mpower Holding Corporation's Annual Report on
      Form 10-K filed with the Commission on April 1, 2002.

(7)   Incorporated by reference to Mpower Communications Corp.'s Report on Form
      8-K filed with the Commission on June 2, 2000.

(8)   Incorporated by reference to Mpower Holding Corporation's Quarterly Report
      on Form 10-Q for the quarter ended September 30, 2001.

(9)   Management contract or compensation plan or agreement required to be filed
      as an Exhibit to this Report on Form 10-K pursuant to Item 15(c) of Form
      10-K.

(10)  Incorporated by reference to Mpower Holding Corporation's Quarterly Report
      on Form 10-Q for the quarter ended September 30, 2002.

(11)  Incorporated by reference to Mpower Communications Corp.'s Annual Report
      on Form 10-K for the year ended December 31, 1998.

(12)  Incorporated by reference to Mpower Communications Corp.'s Annual Report
      on Form 10-K for the year ended December 31, 1999.

(13)  Incorporated by reference to Mpower Communications Corp.'s Registration
      Statement on Form S-3 filed with the Commission on June 3, 1999.

      (d) Schedule II--Valuation and Qualifying Accounts and Reserves is
included below. All other 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.
<PAGE>
                           MPOWER HOLDING CORPORATION

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR ENDED
                               DECEMBER 31, 2002

<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............    $ 4,330          $ 9,880       $ --         $ 9,307        $4,903
Accrued network optimization costs.........    $13,593          $12,610       $ --         $24,723        $1,480
</TABLE>

                           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>
<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 28, 2003

      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>
       /s/ ROLLA P. HUFF                    Chief Executive Officer and                    March 28, 2003
       ----------------------------         Chairman of the Board
       Rolla P. Huff


       /s/ S. GREGORY CLEVENGER             Executive Vice President - Chief               March 28, 2003
       ----------------------------         Financial Officer and Director
       S. Gregory Clevenger


       /s/ JOSEPH M. WETZEL                 President, Chief Operating                     March 28, 2003
       ----------------------------         Officer and Director
       Joseph M. Wetzel


       /s/ MICHAEL J. TSCHIDERER            Vice President of Finance and                  March 28, 2003
       ----------------------------         Controller (principal accounting officer)
       Michael J. Tschiderer


       /s/ MICHAEL E. CAHR                  Director                                       March 28, 2003
       ----------------------------
       Michael E. Cahr

       /s/ MICHAEL M. EARLEY                Director                                       March 28, 2003
       ----------------------------
       Michael M. Earley

       /s/ ROBERT M. POMEROY                Director                                       March 28, 2003
       ----------------------------
       Robert M. Pomeroy

       /s/ RICHARD L. SHORTEN, JR.          Director                                       March 28, 2003
       ----------------------------
       Richard L. Shorten, Jr.
</TABLE>
<PAGE>
CERTIFICATIONS

I, Rolla P. Huff, certify that:

1.    I have reviewed this annual report on Form 10-K of Mpower Holding
      Corporation;

2.    Based on my knowledge, this annual report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this annual report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this annual report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this annual
      report;

4.    The registrant's other certifying officer and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
      have:

      a.    designed such disclosure controls and procedures to ensure that
            material information relating to the registrant, including its
            consolidated subsidiaries, is made known to us by others within
            those entities, particularly during the period in which this annual
            report is being prepared;

      b.    evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date
            of this annual report (the "Evaluation Date"); and

      c.    presented in this annual report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

5.    The registrant's other certifying officer and I have disclosed, based on
      our most recent evaluation, to the registrant's auditors and the audit
      committee of the registrant's board of directors (or persons performing
      the equivalent function):

      a.    all significant deficiencies in the design or operation of internal
            controls, which could adversely affect the registrant's ability to
            record, process, summarize and report financial data and have
            identified for the registrant's auditors any material weaknesses in
            internal controls; and

      b.    any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal controls; and

6.    The registrant's other certifying officer and I have indicated in this
      annual report whether or not there were significant changes in internal
      controls or in other factors that could significantly affect internal
      controls subsequent to the date of our most recent evaluation, including
      any corrective actions with regard to significant deficiencies and
      material weaknesses.

Date: March 28, 2003                        By:    /s/ Rolla P. Huff
                                                   -----------------
                                                   Rolla P. Huff
                                                   Principal Executive Officer
<PAGE>
CERTIFICATIONS

I, S. Gregory Clevenger, certify that:

1.    I have reviewed this annual report of Form 10-K on Mpower Holding
      Corporation;

2.    Based on my knowledge, this annual report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this annual report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this annual report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this annual
      report;

4.    The registrant's other certifying officer and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
      have:

      a.    designed such disclosure controls and procedures to ensure that
            material information relating to the registrant, including its
            consolidated subsidiaries, is made known to us by others within
            those entities, particularly during the period in which this annual
            report is being prepared;

      b.    evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date
            of this annual report (the "Evaluation Date"); and

      c.    presented in this annual report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

5.    The registrant's other certifying officer and I have disclosed, based on
      our most recent evaluation, to the registrant's auditors and the audit
      committee of the registrant's board of directors (or persons performing
      the equivalent function):

      a.    all significant deficiencies in the design or operation of internal
            controls, which could adversely affect the registrant's ability to
            record, process, summarize and report financial data and have
            identified for the registrant's auditors any material weaknesses in
            internal controls; and

      b.    any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal controls; and

6.    The registrant's other certifying officer and I have indicated in this
      annual report whether or not there were significant changes in internal
      controls or in other factors that could significantly affect internal
      controls subsequent to the date of our most recent evaluation, including
      any corrective actions with regard to significant deficiencies and
      material weaknesses.

Date: March 28, 2003                           By:   /s/ S. Gregory Clevenger
                                                     ------------------------
                                                     S. Gregory Clevenger
                                                     Principal Financial Officer
<PAGE>

                           MPOWER HOLDING CORPORATION

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                PAGE
                                                                                                ----
<S>                                                                                             <C>
Independent Auditors' Report ...............................................................     F-2
Consolidated Balance Sheets
     Reorganized Mpower Holding - as of December 31, 2002 ..................................     F-3
     Predecessor Mpower Holding - as of December 31, 2001 ..................................     F-3
Consolidated Statements of Operations
     Reorganized Mpower Holding - for the period July 31, 2002
     to December 31, 2002 ..................................................................     F-4
     Predecessor Mpower Holding - for the period January 1, 2002
     to July 30, 2002 ......................................................................     F-4
     Predecessor Mpower Holding - for the years ended
     December 31, 2001 and 2000 ............................................................     F-4
Consolidated Statements of Redeemable
  Preferred Stock and Stockholders'
  Equity (Deficit)
     Reorganized Mpower Holding - for the period July 31, 2002
     to December 31, 2002 ..................................................................     F-5
     Predecessor Mpower Holding - for the period January 1, 2002
     to July 30, 2002 ......................................................................     F-5
     Predecessor Mpower Holding - for the years ended
     December 31, 2001 and 2000 ............................................................     F-5
Consolidated Statements of Cash Flows
     Reorganized Mpower Holding - for the period July 31, 2002
     to December 31, 2002 ..................................................................     F-6
     Predecessor Mpower Holding - for the period January 1, 2002
     to July 30, 2002 ......................................................................     F-6
     Predecessor Mpower Holding - for the years ended
     December 31, 2001 and 2000 ............................................................     F-6
Notes to Consolidated Financial Statements .................................................     F-7
</TABLE>


                                      F-1
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Mpower Holding Corporation
Rochester, New York

      We have audited the accompanying consolidated balance sheets of Mpower
Holding Corporation (the "Company") as of December 31, 2002 (Reorganized Company
balance sheet) and 2001 (Predecessor Company balance sheet), and the related
consolidated statements of operations, redeemable preferred stock and
stockholders' equity (deficit), and cash flows for the period from July 31, 2002
to December 31, 2002 (Reorganized Company operations), for the period from
January 1, 2002 to July 30, 2002, and the years ended December 31, 2001 and 2000
(Predecessor Company operations). Our audits also include the financial
statement schedule listed in the Index at Item 15. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.

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

     As discussed in Note 2 to the financial statements, on July 17, 2002, the
Bankruptcy Court entered an order confirming the plan of reorganization which
became effective after the close of business on July 30, 2002. Accordingly, the
accompanying financial statements have been prepared in conformity with AICPA
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code," for the Reorganized Company as a new entity with
assets, liabilities, and a capital structure having carrying values not
comparable with prior periods as described in Note 2.

     In our opinion, the Reorganized Company consolidated financial statements
present fairly, in all material respects, the financial position of the Company
as of December 31, 2002, and the results of its operations and its cash flows
for the period from July 31, 2002 to December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.
Further, in our opinion, the Predecessor Company consolidated financial
statements referred to above present fairly in all material respects, the
financial position of the Predecessor Company as of December 31, 2001, and the
results of its operations and its cash flows for the period from January 1, 2002
to July 30, 2002, and for the years ended December 31, 2001 and 2000, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.

      The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 5 to the
consolidated financial statements, the Company's difficulty in sustaining
adequate cash flow to meet its obligations and sustain its operations and its
recurring losses from operations raise substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 5. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.


DELOITTE & TOUCHE LLP

Rochester, New York
March 27, 2003



                                      F-2
<PAGE>
                           MPOWER HOLDING CORPORATION
                           CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                                        REORGANIZED      PREDECESSOR
                                                                                                           MPOWER           MPOWER
                                                                                                          HOLDING          HOLDING
                                                                                                                DECEMBER 31,
                                                                                                        ----------------------------
                                                                                                            2002             2001
                                                                                                        -----------      -----------
<S>                                                                                                     <C>              <C>
                                       ASSETS
Current assets:
  Cash and cash equivalents ......................................................................       $  10,773        $   9,150
  Investments available-for-sale .................................................................              --          161,130
  Restricted investments .........................................................................          13,631           12,640
  Accounts receivable, less allowance for doubtful accounts
    of $4,903 and $4,330 at December 31, 2002 and 2001, respectively .............................          13,923           24,825
  Assets held for sale ...........................................................................          20,471               --
  Prepaid expenses and other current assets ......................................................           6,683            5,587
                                                                                                         ---------        ---------
          Total current assets ...................................................................          65,481          213,332
Property and equipment, net ......................................................................          38,497          385,872
Deferred financing costs, net of accumulated amortization of
  $32 and $2,095 at December 31, 2002 and 2001, respectively .....................................              16            8,400
Intangibles, net of accumulated amortization of $1,909 ...........................................          13,530               --
Other assets .....................................................................................           9,899            6,043
                                                                                                         ---------        ---------
          Total assets ...........................................................................       $ 127,423        $ 613,647
                                                                                                         =========        =========

                LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
                                     EQUITY (DEFICIT)
Current liabilities:
  Current maturities of long-term debt and capital lease obligations .............................       $   4,638        $   7,729
  Accounts payable:
     Trade .......................................................................................          19,563           23,608
     Property and equipment ......................................................................           2,151            4,493
  Accrued interest ...............................................................................              66           14,023
  Accrued sales taxes payable ....................................................................           5,753            7,077
  Accrued network optimization costs .............................................................           1,480           13,593
  Accrued property taxes payable .................................................................           3,030            2,893
  Accrued wages payable ..........................................................................           2,687            2,456
  Deferred revenue ...............................................................................           4,680            3,051
  Accrued other expenses .........................................................................          10,119           16,415
                                                                                                         ---------        ---------
          Total current liabilities not subject to compromise ....................................          54,167           95,338
  Current liabilities subject to compromise ......................................................           1,748               --
                                                                                                         ---------        ---------
          Total current liabilities ..............................................................          55,915           95,338
Senior notes, net of unamortized discount of $10,686 at December 31, 2001 ........................              --          420,803
Other long-term debt and capital lease obligations ...............................................             371            2,154
                                                                                                         ---------        ---------
      Total liabilities ..........................................................................          56,286          518,295
                                                                                                         ---------        ---------
Commitments and contingencies
Redeemable preferred stock:
  Predecessor Mpower Holding 10% Series C convertible preferred stock,
     1,250,000 shares authorized, issued and outstanding at December 31, 2001 ....................              --           46,610
  Predecessor Mpower Holding 7.25% Series D convertible preferred stock,
     3,013,388 shares authorized, issued and outstanding at December 31, 2001 ....................              --          156,220
Stockholders' equity (deficit):
Predecessor Mpower Holding common stock, $0.001 par value, 300,000,000 shares
     authorized, 59,488,843 shares issued and outstanding at December 31, 2001 ...................              --               59
Reorganized Mpower Holding preferred stock, 50,000,000 shares authorized but
     unissued at December 31, 2002 ...............................................................              --               --
Reorganized Mpower Holding common stock, $0.001 par value, 1,000,000,000
     shares authorized, 64,999,025 shares issued and outstanding at December 31, 2002 ............              65               --
Additional paid-in capital .......................................................................          87,511          712,334
Accumulated deficit ..............................................................................         (16,439)        (826,615)
Less: Predecessor Mpower Holding treasury stock, 13,710 shares, at cost ..........................              --              (76)
Predecessor Mpower Holding notes receivable from stockholders for issuance of
     common stock ................................................................................              --             (973)
Accumulated other comprehensive income ...........................................................              --            7,793
                                                                                                         ---------        ---------
         Total stockholders' equity (deficit) ....................................................          71,137         (107,478)
                                                                                                         ---------        ---------
         Total liabilities, redeemable preferred stock and stockholders' equity (deficit) ........       $ 127,423        $ 613,647
                                                                                                         =========        =========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-3
<PAGE>
                           MPOWER HOLDING CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                             REORGANIZED         PREDECESSOR       PREDECESSOR       PREDECESSOR
                                                                MPOWER             MPOWER             MPOWER           MPOWER
                                                                HOLDING            HOLDING            HOLDING          HOLDING
                                                           JULY 31, 2002 TO    JANUARY 1, 2002      YEAR ENDED        YEAR ENDED
                                                             DECEMBER 31,         TO JULY 30,      DECEMBER 31,      DECEMBER 31,
                                                                 2002                2002              2001              2000
                                                           ----------------    ---------------     ------------      ------------
<S>                                                        <C>                 <C>                 <C>               <C>
Operating revenues:
  Telecommunication services .........................       $     62,815        $     83,289      $    136,116      $    111,292
Operating expenses:
  Cost of operating revenues (excluding
     depreciation and amortization) ..................             33,414              51,320           103,629            82,608
  Selling, general and administrative (excluding
     depreciation and amortization) ..................             42,779              65,627           140,024           159,126
  Reorganization expense .............................                 --             266,383                --                --
  Stock-based compensation expense ...................                276                 442             3,081             3,345
  Network optimization cost ..........................             (6,390)             19,000           233,083            12,000
  Depreciation and amortization ......................              7,987              28,620            56,499            41,520
                                                             ------------        ------------      ------------      ------------
                                                                   78,066             431,392           536,316           298,599
                                                             ------------        ------------      ------------      ------------
     Loss from continuing operations .................            (15,251)           (348,103)         (400,200)         (187,307)
Other income (expense):
  (Loss) gain on sale of assets, net .................               (449)              4,417             5,596               102
  Gain (loss) on discharge of debt ...................             35,030             315,310            32,322           (20,065)
  Interest income ....................................                963               3,237            20,812            41,466
  Interest expense, net of amount capitalized
     (contractual interest was $33,470 from
       January 1, 2002 to July 30, 2002) .............             (2,539)            (18,065)          (58,873)          (45,934)
                                                             ------------        ------------      ------------      ------------
     Income (loss) before discontinued operations ....             17,754             (43,204)         (400,343)         (211,738)
Discontinued operations:
  Loss from discontinued operations ..................            (34,193)            (34,765)          (67,397)          (32,976)
                                                             ------------        ------------      ------------      ------------
     Net loss ........................................            (16,439)            (77,969)         (467,740)         (244,714)
Accretion of preferred stock to redemption value .....                 --                  --                --            (6,765)
Accrued preferred stock dividend
     (contractual dividend was $8,782 from
       January 1, 2002 to July 30, 2002) .............                 --              (3,974)          (21,782)          (16,889)
                                                             ------------        ------------      ------------      ------------
Net loss applicable to common stockholders ...........       $    (16,439)       $    (81,943)     $   (489,522)     $   (268,368)
                                                             ============        ============      ============      ============
Basic and diluted income (loss) per share
 applicable to common stockholders:

       Income (loss) before discontinued operations ..       $       0.27        $      (0.79)     $      (7.13)     $      (4.56)
                                                             ============        ============      ============      ============

       Loss applicable to discontinued operations ....       $      (0.52)       $      (0.59)     $      (1.13)     $      (0.64)
                                                             ============        ============      ============      ============

       Net loss ......................................       $      (0.25)       $      (1.38)     $      (8.26)     $      (5.20)
                                                             ============        ============      ============      ============
Basic weighted average shares outstanding ............         64,999,025          59,461,374        59,245,239        51,630,640
                                                             ============        ============      ============      ============
Diluted weighted average shares outstanding ..........         65,247,708          59,461,374        59,245,239        51,630,640
                                                             ============        ============      ============      ============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>
                           MPOWER HOLDING CORPORATION
            CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND
                         STOCKHOLDERS' EQUITY (DEFICIT)
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                            STOCKHOLDER'S EQUITY (DEFICIT)
                                                                                  --------------------------------------------------
                                                             REDEEMABLE
                                                          PREFERRED STOCK              COMMON STOCK       ADDITIONAL
                                                    -------------------------     ---------------------     PAID-IN      ACCUMULATED
                                                       SHARES        AMOUNT         SHARES      AMOUNT      CAPITAL        DEFICIT
                                                    ----------      ---------     ----------   --------   -----------    -----------
<S>                                                 <C>             <C>           <C>          <C>        <C>            <C>
BALANCE AT DECEMBER 31, 1999                         6,527,779      $  84,973     34,866,492   $    35     $ 225,288      $(114,161)
Common stock issued for cash                                --             --      9,245,564         9       316,724             --
Warrants and options exercised for
       common stock                                         --             --      1,298,728         1         2,944             --
Payment on stockholders' notes                              --          4,900             --        --            --             --
10% Series B convertible preferred
  stock converted to common stock                   (5,277,779)       (55,153)     7,916,668         8        55,145             --
7.25% Series D convertible preferred
  stock issued for cash                              4,140,000        200,575             --        --            --             --
Stock-based compensation                                    --             --             --        --         3,345             --
Accrued preferred stock dividend                            --         16,889             --        --       (16,889)            --
Preferred dividends paid in common stock                    --        (14,063)     1,448,661         2        14,061             --
Accretion of preferred stock to
redemption value                                            --          6,765             --        --        (6,765)            --
Shares issued for acquisition of
Primary Network                                             --             --      2,024,757         2        70,382             --
Options and warrants issued for
  acquisition of Primary Network                            --             --             --        --         5,171             --
Shares issued in exchange of Primary
  Network Senior Notes                                      --             --         75,000        --         2,625             --
Comprehensive loss:
  Net loss                                                  --             --             --        --            --       (244,714)
  Unrealized gain on investments available-for-sale         --             --             --        --            --             --
                                                    ----------      ---------     ----------   -------     ---------      ---------
COMPREHENSIVE LOSS

BALANCE AT DECEMBER 31, 2000                         5,390,000        244,886     56,875,870        57       672,031       (358,875)
Warrants and options exercised for
common stock                                                --             --        211,072        --            72             --
Cancellation of stockholder's note for
common stock                                                --             --       (225,000)       --        (4,904)            --
Stock-based compensation                                    --             --             --        --         3,081             --
Accrued preferred stock dividend                            --         15,157             --        --       (15,157)            --
Preferred dividends paid in common stock                    --         (2,995)       427,070        --         2,995             --
7.25% Series D convertible preferred stock
       converted to common stock                    (1,126,612)       (54,218)     2,199,831         2        54,216             --
Comprehensive loss:
  Net loss                                                  --             --             --        --            --       (467,740)
  Unrealized loss on investments available-for-sale         --             --             --        --            --             --
                                                    ----------      ---------     ----------   -------     ---------      ---------
COMPREHENSIVE LOSS

BALANCE AT DECEMBER 31, 2001                         4,263,388        202,830     59,488,843        59       712,334       (826,615)
Cancellation of stockholders' notes for
common stock                                                --             --        (81,000)       --          (435)            --
Principal stockholder's short swing
profit                                                      --             --             --        --           588             --
Stock-based compensation                                    --             --             --        --           342             --
Accrued preferred stock dividend                            --          3,974             --        --        (3,974)            --
7.25% Series D convertible preferred stock
       converted to common stock                       (50,000)        (2,425)        57,390        --         2,425             --
New common stock issued for exchange
       of 2010 Notes                                        --             --     55,250,000        55        74,150             --
Cancellation of preferred and common stock          (4,213,388)      (204,379)   (59,465,233)      (59)      191,267             --
New common stock issued for exchange of stock               --             --      9,749,025        10        13,085             --
Fresh-start accounting                                      --             --             --        --      (902,547)       904,584
Comprehensive loss:
  Net loss                                                  --             --             --        --            --        (77,969)
  Unrealized loss on investments available-for-sale         --             --             --        --            --             --
                                                    ----------      ---------     ----------   -------     ---------      ---------
COMPREHENSIVE LOSS

BALANCE AT JULY 30, 2002, Predecessor Mpower Holding        --             --     64,999,025        65        87,235             --
Stock-based compensation                                    --             --             --        --           276             --
Comprehensive Loss
  Net loss                                                  --             --             --        --            --        (16,439)
                                                    ----------      ---------     ----------   -------     ---------      ---------
Balance at December 31, 2002, Reorganized
 Mpower Holding                                             --      $      --     64,999,025   $    65     $  87,511      $ (16,439)
                                                    ==========      =========     ==========   =======     =========      =========
</TABLE>

<TABLE>
<CAPTION>
                                                                            STOCKHOLDER'S EQUITY (DEFICIT)
                                                        -----------------------------------------------------------------------
                                                                                                  ACCUMULATED
                                                                                  NOTES              OTHER            TOTAL
                                                            TREASURY STOCK     RECEIVABLE        COMPREHENSIVE    STOCKHOLDERS'
                                                       --------------------        FROM             INCOME           EQUITY
                                                        SHARES       AMOUNT    STOCKHOLDERS         (LOSS)          (DEFICIT)
                                                       -------      -------    ------------      -------------    -------------
<S>                                                    <C>          <C>        <C>               <C>              <C>
BALANCE AT DECEMBER 31, 1999                            13,710      $   (76)      $(6,219)         $ (1,086)        $ 103,781
Common stock issued for cash                                --           --            --                --           316,733
Warrants and options exercised for
       common stock                                         --           --            --                --             2,945
Payment on stockholders' notes                              --           --           925                                 925
10% Series B convertible preferred
stock converted
       to common stock                                      --           --            --                --            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
Comprehensive Loss
  Net loss                                                  --           --            --                --          (244,714)
  Unrealized gain on investments available-for-sale         --           --            --            10,110            10,110
                                                       -------      -------       -------          --------         ---------
COMPREHENSIVE LOSS                                                                                                   (234,604)
                                                                                                                    ---------
BALANCE AT DECEMBER 31, 2000                            13,710          (76)       (5,294)            9,024           316,867
Warrants and options exercised for
common stock                                                --           --            --                --                72
Cancellation of stockholder's note for
common stock                                                --           --         4,321                --              (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
Comprehensive Loss
  Net loss                                                  --           --            --                --          (467,740)
  Unrealized loss on investments available-for-sale         --           --            --            (1,231)           (1,231)
                                                       -------      -------       -------          --------         ---------
COMPREHENSIVE LOSS                                                                                                   (468,971)
                                                                                                                    ---------
BALANCE AT DECEMBER 31, 2001                            13,710          (76)         (973)            7,793          (107,478)
Cancellation of stockholders' notes for
common stock                                                --           --           435                --                --
Principal stockholder's short swing
profit                                                      --           --            --                --               588
Stock-based compensation                                    --           --           100                --               442
Accrued preferred stock dividend                            --           --            --                --            (3,974)
7.25% Series D convertible preferred stock
       converted to common stock                            --           --            --                --             2,425
New common stock issued for exchange
       of 2010 Notes                                        --           --            --                --            74,205
Cancellation of preferred and common stock             (13,710)          76            --                --           191,284
New common stock issued for exchange of stock               --           --            --                --            13,095
Fresh-start accounting                                      --           --           438            (2,039)              436
Comprehensive Loss
  Net loss                                                  --           --            --                --           (77,969)
  Unrealized loss on investments available-for-sale         --           --            --            (5,754)           (5,754)
                                                       -------      -------       -------          --------         ---------
COMPREHENSIVE LOSS                                                                                                    (83,723)
                                                                                                                    ---------
BALANCE AT JULY 30, 2002, Predecessor Mpower Holding        --           --            --                --            87,300
Stock-based compensation                                    --           --            --                --               276
Comprehensive Loss
  Net loss                                                  --           --            --                --           (16,439)
                                                       -------      -------       -------          --------         ---------
Comprehensive Loss                                                                                                    (16,439)
                                                                                                                    ---------

Balance at December 31, 2002, Reorganized
  Mpower Holding                                            --      $    --       $    --          $     --         $  71,137
                                                       =======      =======       =======          ========         =========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>
                           MPOWER HOLDING CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                    REORGANIZED        PREDECESSOR      PREDECESSOR     PREDECESSOR
                                                                       MPOWER             MPOWER           MPOWER          MPOWER
                                                                      HOLDING            HOLDING          HOLDING          HOLDING
                                                                  JULY 31, 2002 TO   JANUARY 1, 2002     YEAR ENDED      YEAR ENDED
                                                                    DECEMBER 31,       TO JULY 30,      DECEMBER 31,    DECEMBER 31,
                                                                        2002               2002             2001            2000
                                                                  ----------------   ---------------    ------------    ------------
<S>                                                               <C>                <C>                <C>             <C>
Cash flows from operating activities:
  Net loss .....................................................      $(16,439)         $ (77,969)       $(467,740)      $(244,714)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
      Depreciation and amortization ............................        11,223             41,344           76,118          50,975
      Bad debt expense .........................................         4,426              5,454            7,057           5,469
      Loss on disposal of assets from discontinued operations ..        21,518                 --               --              --
      (Gain) loss on early retirement of debt ..................       (35,030)                --          (32,322)         20,065
      Gain on discharge of debt ................................            --           (315,310)              --              --
      Non-cash reorganization expense ..........................            --            244,669               --              --
      Network optimization cost ................................        (6,390)            19,000          233,083          12,000
      (Gain) loss on sale of assets, net .......................           449             (4,417)          (5,596)            102
      Amortization of debt discount ............................            61                718            1,479           1,330
      Amortization of deferred debt financing costs ............            84                608            1,329           1,233
      Stock-based compensation expense .........................           276                442            3,081           3,345
      Changes in assets and liabilities:
          Increase in accounts receivable ......................          (854)            (2,334)          (3,420)        (15,445)
          (Increase) decrease in prepaid expenses and other
            current assets .....................................         2,176             (3,271)          (2,761)          1,820
          Decrease (increase) in other assets ..................           980             (5,724)             655          (5,427)
          (Decrease) increase in accounts payable -- trade .....       (12,792)            10,495          (12,976)          9,220
          (Decrease) increase in sales taxes payable ...........          (475)              (848)          (2,014)          4,746
          Decrease in accrued network optimization costs .......        (3,552)            (3,707)         (14,901)           (970)
          (Decrease) increase in accrued interest and other
            expenses ...........................................        (8,865)             9,816             (353)         14,962
                                                                      --------          ---------        ---------       ---------
          Net cash used in operating activities ................       (43,204)           (81,034)        (219,281)       (141,289)
                                                                      --------          ---------        ---------       ---------
Cash flows from investing activities:
  Purchase of property and equipment, net of payables ..........        (5,540)           (11,298)         (86,402)       (287,080)
  Net cash paid for acquisition of business ....................            --                 --               --         (13,475)
  Proceeds from sale of customer base ..........................            --                 --            1,601              --
  Proceeds from sale of airplane ...............................         6,119                 --               --              --
  Sale of investments available-for-sale, net ..................        52,155            105,550          336,911          17,334
  Purchase of investments available-for-sale, net ..............            --                 --               --        (373,937)
  Sale of restricted investments, net ..........................         1,361              3,614              460          21,191
  Purchase of restricted investments, net ......................        (4,000)            (1,902)         (12,050)             --
                                                                      --------          ---------        ---------       ---------
          Net cash provided by (used in) investing activities ..        50,095             95,964          240,520        (635,967)
                                                                      --------          ---------        ---------       ---------
Cash flows from financing activities:
  Proceeds from principal stockholders' short swing profit .....            --                588               --              --
  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
  Repurchase of Senior Notes ...................................       (13,707)                --          (14,134)         (9,647)
  Fees paid for repurchase of Senior Notes .....................          (450)                --               --              --
  Payments on other long term debt and capital lease
    obligations ................................................        (2,513)            (4,116)          (8,554)         (4,365)
  Payments received on stockholders' notes .....................            --                 --               --           5,825
  Proceeds from issuance of common stock .......................            --                 --               72         319,678
                                                                      --------          ---------        ---------       ---------
          Net cash (used in) provided by financing activities ..       (16,670)            (3,528)         (22,616)        744,804
                                                                      --------          ---------        ---------       ---------
          Net (decrease) increase in cash and cash equivalents .        (9,779)            11,402           (1,377)        (32,452)
Cash and cash equivalents at beginning of period ...............        20,552              9,150           10,527          42,979
                                                                      --------          ---------        ---------       ---------
Cash and cash equivalents at the end of period .................      $ 10,773          $  20,552        $   9,150       $  10,527
                                                                      ========          =========        =========       =========
Supplemental schedule of non-cash investing and financing
  activities:
   New common stock issued for exchange of Senior Notes.........      $     --          $  74,205        $      --       $      --
                                                                      ========          =========        =========       =========
   Cancellation of preferred and common stock ..................      $     --          $ (13,095)       $      --       $      --
                                                                      ========          =========        =========       =========
   New common stock issued for exchange of preferred and
   common stock.................................................      $     --          $  13,095        $      --       $      --
                                                                      ========          =========        =========       =========
   Fresh-start accounting.......................................      $     --          $     436        $      --       $      --
                                                                      ========          =========        =========       =========

   Stock issued for acquisition of subsidiary ..................      $     --          $      --        $      --       $  70,384
                                                                      ========          =========        =========       =========
   Options and warrants issued for acquisition of subsidiary ...      $     --          $      --        $      --       $   5,171
                                                                      ========          =========        =========       =========
   Preferred stock converted to common stock ...................      $     --          $   2,425        $  54,218       $  55,153
                                                                      ========          =========        =========       =========
   Preferred stock dividends accrued ...........................      $     --          $   3,974        $  15,157       $  16,889
                                                                      ========          =========        =========       =========
   Accretion of preferred stock to redemption value ............      $     --          $      --        $      --       $   6,765
                                                                      ========          =========        =========       =========
   Warrants and options exercised for common stock..............      $     --          $      --        $      72       $   2,945
                                                                      ========          =========        =========       =========
   Preferred dividends paid in common stock.....................      $     --          $      --        $   2,995       $  14,063
                                                                      ========          =========        =========       =========
   Cancellation of stockholders note for common stock...........      $     --          $      --        $     583       $      --
                                                                      ========          =========        =========       =========
   Shares issued in exchange of Primary Network Senior Notes....      $     --          $      --        $      --       $   2,625
                                                                      ========          =========        =========       =========
Other disclosures:
   Cash paid for interest, net of amounts capitalized ..........      $  3,054          $   2,150        $  55,750       $  32,276
                                                                      ========          =========        =========       =========
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>
                           MPOWER HOLDING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

(1) DESCRIPTION OF BUSINESS, PRINCIPLES OF CONSOLIDATION, BASIS OF PRESENTATION
AND SIGNIFICANT ACCOUNTING POLICIES

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 subsidiary, Mpower Communications Corp.
("Communications") and other subsidiaries of Communications. All significant
inter-company balances and transactions have been eliminated.

      As a result of the Chapter 11 reorganization occurring as of July 30,
2002, and discussed in Note 2, the financial results for the year ended December
31, 2002 have been separately presented under the label "Predecessor Mpower
Holding" for periods prior to July 30, 2002 and "Reorganized Mpower Holding" for
the period July 31, 2002 to December 31, 2002. In addition, the Company's
consolidated financial statements for the years ended December 31, 2001 and 2000
have been reclassified to reflect discontinued operations as discussed in
Note 4.

      As a result of the reorganization, the financial statements published for
periods following the effectiveness of the Plan will not be comparable to those
published before the effectiveness of the Plan.

      The Company is 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. The Company's services are offered primarily to
small and medium-sized business customers through Communications in Los Angeles,
San Diego, Northern California, Las Vegas and Chicago. The Company currently has
approximately 45,000 business customers and approximately 25,000 residential
customers (primarily in the Las Vegas market). The Company also bills a number
of major carrier customers for the costs of terminating traffic on the Mpower
network. The Company currently acquires approximately 90% of its new sales
through its direct sales force, with the remainder acquired through agent
relationships.

FINANCIAL HISTORY

      In May 1998, the Company completed its initial public offering of common
stock, raising net proceeds of $63.0 million. From May 1999 to March 2000, the
Company raised over $900 million of additional funds through debt and equity
issuances to pursue an aggressive business plan to rapidly expand its
operations. At the same time, the capital markets became virtually inaccessible
to early stage communications ventures. Consequently, in September 2000, the
Company commenced what has become a 30-month process to restructure its
business, both operationally and financially.

      From September 2000 through May 2001, the Company significantly scaled
back its operations, canceling over 500 existing collocations, and canceling
plans to enter the Northeast and Northwest Regions (representing more than 350
collocations).

     From February through July 2002, the Company undertook a comprehensive
recapitalization through a Chapter 11 bankruptcy plan that eliminated $593.9
million in carrying value of debt settled and preferred stock (as well as $65.3
million of associated annual interest and dividend costs) in exchange for cash
and the substantial majority of its common stock. See Note 2 for further
discussion of the Chapter 11 proceedings.

     From November 2002 to January 2003, the Company eliminated the remaining
$51.3 million of carrying value of its debt for cash payments, which released
the only security interest in its network assets, giving the Company the ability
to pursue alternative financing transactions.

      In January 2003, the Company announced it had reached an agreement with
RFC Capital Corporation, a wholly owned subsidiary of Textron Financial
Corporation, for a three-year funding facility of up to $7.5 million, secured
only by certain of its receivables.

     In January 2003, the Company announced a series of strategic and financial
transactions to further strengthen itself financially and focus its operations
on the California, Nevada and Illinois markets. The Company is bringing
geographic concentration to its business by selling its customers and assets in
Florida, Georgia, Ohio, Michigan and Texas to other service providers (the
"Asset Sales"). The Asset Sales in Michigan and Ohio were completed on March 18,
2003 and Texas on March 27, 2003. Completion of the remaining Asset Sales is
subject to a number of closing conditions and contingencies. The Asset Sales are
expected to generate net proceeds to the Company of $17.0 million to $20.0
million over the next few months.


                                      F-7
<PAGE>
REVENUE RECOGNITION

      Revenues for voice, data and other services to end-users, and 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 defers fees for certain activation and reactivation services
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.

      Prior to 2000, the Company had recognized switched access revenues based
on management's determination that the amount billed to carriers met the revenue
recognition criteria. As of December 31, 2000, the Company had reached
agreements with certain 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 and declined again in 2002. Included in accounts receivable in the
accompanying consolidated balance sheets as of December 31, 2002 and 2001 are
net accounts receivable related to switched access of approximately $8.9 million
and $11.0 million, respectively.

      The Company recognized in operating revenues, switched access revenues for
the periods ended in 2002, 2001 and 2000 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                       REORGANIZED   PREDECESSOR
                                                         MPOWER        MPOWER
                                                         HOLDING       HOLDING
                                                          2002          2002          2001        2000
                                                       ----------    -----------    --------    --------
<S>                                                    <C>           <C>            <C>         <C>
            Switched access revenues                   $   18,575     $   11,193    $ 43,443    $ 46,020
</TABLE>

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 the Company's 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 the
Company's 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 the Company's switches and other related services. Costs of
operating revenues do not include an allocation of depreciation and amortization
expense.

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. For the years ended December 31,
2001 and 2000, 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' equity (deficit).

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 its 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.


                                      F-8
<PAGE>
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." Available-for-sale investments are recorded at fair
value with net unrealized holding gains and losses reported in stockholders'
equity (deficit) as a component of accumulated other comprehensive income.
Interest and amortization of premiums and discounts for available-for-sale
securities are included in interest income. Gains and losses on
available-for-sale investments sold are determined based on the specific
identification method and are included in other income. For all investments,
unrealized losses that are other than temporary are recognized in net loss. The
Company does not hold these investments for speculative or trading purposes.

      Investments available-for-sale as of December 31, 2001 were as follows (in
thousands):

<TABLE>
<CAPTION>
                                                    UNREALIZED     UNREALIZED       FAIR
                                                       GAINS          LOSSES        VALUE
                                                    ----------     ----------     --------
<S>                                                 <C>            <C>            <C>
               U.S. Government and
                    Agency Securities .........       $  442        $      --     $ 10,672
               Mortgage Backed Securities .....        7,351               --      150,458
                                                      ------        ---------     --------
            Total .............................       $7,793        $      --     $161,130
                                                      ======        =========     ========
</TABLE>

      Proceeds from the sale of investments available-for-sale for the periods
ended in 2002, 2001 and 2000 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                             REORGANIZED      PREDECESSOR
                                                               MPOWER           MPOWER
                                                               HOLDING          HOLDING
                                                                2002             2002           2001           2000
                                                             -----------      -----------     --------       --------
<S>                                                          <C>              <C>             <C>            <C>
                Proceeds from the sale
                  of investments
                  available-for-sale .................       $ 52,155          $105,550       $336,911       $ 17,334
</TABLE>

      The realized gains and losses from sales of investments for the periods
ended in 2002, 2001 and 2000 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                             REORGANIZED      PREDECESSOR
                                                               MPOWER           MPOWER
                                                               HOLDING          HOLDING
                                                                2002             2002           2001           2000
                                                             -----------      -----------     --------       --------
<S>                                                          <C>              <C>             <C>            <C>
                   Gross realized gains ..............       $     39          $  4,326       $  7,390       $     --
                   Gross realized losses .............           (578)               --             --            (34)
                                                             --------          --------       --------       --------

                   Net realized (loss) gain ..........       $   (539)         $  4,326       $  7,390       $    (34)
                                                             ========          ========       ========       ========
</TABLE>

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. In November 2001, the Company established a trust,
which was funded at a level sufficient to cover the maximum commitment for
retention, incentive compensation and severance payments. For the year ended
December 31, 2002, the Company paid out $4.3 million relating to these
commitments and an additional $0.6 million out of restricted investments to
settle a dispute related to an acquisition made by one of our subsidiaries in
June 1999.

      In October 2002, the Company established and funded an irrevocable grantor
trust with $2.0 million, an amount sufficient to pay all severance benefit
obligations pursuant to employment agreements for several of the Company's
executives and any other severance or retention agreements in effect that were
not funded by the trust adopted by the Company in November 2001. In November
2002, the Company established a $2.0 million trust for the future purchase, if
needed, of run-off insurance for the directors and officers.

      Restricted investments at December 31, 2002, also includes $1.9 million of
escrow funds related to disputed charges between SBC


                                      F-9
<PAGE>
Telecommunications and the Company. In February 2003, a final settlement of the
disputed charges was reached and $1.2 million was released and returned to the
Company, while $0.7 million was released and paid to SBC Telecommunications.

ADVERTISING COSTS

      The Company expenses advertising costs in the period incurred. During
2002, advertising costs were not material. For the years ended December 31, 2001
and 2000, the Company had expensed advertising costs of $0.1 million and $7.3
million, respectively.

PREPAID EXPENSES AND OTHER CURRENT ASSETS

      Prepaid expenses 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 interest costs related to construction for the periods ended in 2002,
2001 and 2000 were as follows (in thousands):

<TABLE>
<CAPTION>
                                            REORGANIZED     PREDECESSOR
                                              MPOWER          MPOWER
                                              HOLDING         HOLDING
                                               2002            2002            2001        2000
                                            -----------     ------------     --------    --------
<S>                                         <C>             <C>              <C>         <C>
                Interest costs .......      $      129       $     1,290     $  4,896    $ 10,684
</TABLE>

     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. Repair and maintenance costs are
expensed as incurred.

      Capitalized internal labor costs for the periods ended in 2002, 2001 and
2000 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                             REORGANIZED    PREDECESSOR
                                                               MPOWER         MPOWER
                                                               HOLDING        HOLDING
                                                                2002           2002            2001        2000
                                                             -----------    ------------     --------    --------
<S>                                                          <C>            <C>              <C>         <C>
                Capitalized internal
                  labor costs ......................          $2,293          $3,956          $8,657      $9,888
</TABLE>

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

      On January 1, 2002, the Company adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 142 provides that goodwill and
other separately recognized intangible assets with indefinite lives will no
longer be amortized, but will


                                      F-10
<PAGE>
be subject to at least an annual assessment for impairment through the
application of a fair-value-based test. Intangible assets that do have finite
lives will continue to be amortized over their estimated useful lives. The
Company had no goodwill recorded on the consolidated balance sheets as of
December 31, 2002 and 2001.

INCOME TAXES

      The Company has applied the provisions of SFAS No. 109, "Accounting for
Income Taxes," which requires the recognition of deferred income 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, 2002
and 2001, 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 $2.1 million and $73.5 million, at December
31, 2002 and 2001, respectively, as compared to carrying values at December 31,
2002 and 2001 of $2.1 million and $420.8 million, respectively. The remainder of
the Company's long-term debt consists primarily of fixed and variable rate
capital lease obligations.

LONG-LIVED ASSETS

      Management periodically evaluates the carrying value of its long-lived
assets, including property, equipment and 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, 2002 or 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 accounting
principles generally accepted in the United States of America 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.

RECLASSIFICATIONS

      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.

STOCK OPTION PLAN


                                      F-11
<PAGE>
      In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure". SFAS
No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123
to require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, SFAS No. 148 amends Accounting Principles Board ("APB")
Opinion No. 28, "Interim Financial Reporting" to require disclosure about those
effects in interim financial information. The adoption of SFAS No. 148 in 2002
did not have a material effect on the financial results of the Company.

      The Company has adopted the disclosure requirements of SFAS No. 123. 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 periods ended December 31,
2002 and July 30, 2002, and December 31, 2001 and 2000 (in thousands, except per
share amounts):

<TABLE>
<CAPTION>


                                                                        REORGANIZED     PREDECESSOR      PREDECESSOR   PREDECESSOR
                                                                           MPOWER         MPOWER           MPOWER        MPOWER
                                                                           HOLDING        HOLDING         HOLDING       HOLDING
                                                                            2002            2002             2001          2000
                                                                        -----------     -----------     -----------   -----------
<S>                                                                                         <C>             <C>
    Net loss applicable to common stockholders, as reported .........  $(16,439)         $(81,943)        $(489,522)   $(268,368)
    Add: Stock-based compensation expense included in reported net
      income, net of related tax effects ............................       276               442             3,081        3,345
    Deduct: Total stock-based employee compensation expense to be
      determined under fair value based method for all awards, net
      of related tax effects ........................................    (1,260)           (4,101)          (94,835)     (53,267)
                                                                       --------         ---------         ---------    ---------
    Pro forma net loss applicable to common stockholders ............  $(17,423)         $(85,602)        $(581,276)   $(318,290)
                                                                       --------         ---------         ---------    ---------
    Basic and diluted loss per share of common stock, as reported ...  $  (0.25)         $  (1.38)        $   (8.26)   $   (5.20)
                                                                       --------          --------         ---------    ---------
    Basic and diluted loss per share of common stock pro forma ......  $  (0.27)         $  (1.44)        $   (9.81)   $   (6.16)
                                                                       --------          --------         ---------    ---------
</TABLE>

      For options granted during the period July 31, 2002 to December 31, 2002
("Reorganized Mpower Holding"), the weighted average fair value of options on
the date of grant, estimated using the Black-Scholes option pricing model, was
$0.28, using the following assumptions: dividend yield of 0%; expected option
life of 6.0 years; risk free interest rate of 3.33% and an expected volatility
of 168%.

      For options granted during the period January 1, 2002 to July 30, 2002,
("Predecessor Mpower Holding"), the weighted average fair value of options on
the date of grant, estimated using the Black-Scholes option pricing model, was
$0.26, using the following assumptions: dividend yield of 0%; expected option
life of 6.0 years; risk free interest rate of 4.55% and an expected volatility
of 223%.

      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
of 4.87% and an expected volatility of 155%.

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

RECENT ACCOUNTING PRONOUNCEMENTS

      In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations". 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. This
standard is effective for fiscal years beginning after June 15, 2002, with
earlier


                                      F-12
<PAGE>
     application encouraged. The Company, as required by SOP 90-7, has
implemented this statement as part of fresh-start accounting. The adoption of
SFAS No. 143 did not have a material effect on the consolidated financial
statements of the Company.

     In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The
Company adopted the provisions of this standard on January 1, 2002. This
standard addresses financial accounting and reporting for the impairment and
disposal of long-lived assets. The adoption of SFAS No. 144 did not have a
material effect on the consolidated financial statements of the Company other
than the presentation of assets held for sale and discontinued operations.

     In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". This standard rescinds FASB No. 4
and an amendment to that Statement, FASB No. 64, which relates to extinguishment
of debt. It rescinds FASB No. 44, which relates to certain sale-leaseback
transactions. The Company adopted this standard on July 30, 2002, in connection
with the implementation of fresh-start accounting. The adoption of SFAS No. 145
did not have a material effect on the consolidated financial statements of the
Company, other than classifying in continuing operations amounts related to debt
extinguishment previously represented as extraordinary in the accompanying
statements of operations.

     In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities". This
standard addresses financial accounting and reporting for costs associated with
exit or disposal activities. This standard requires recognition of a liability
for a cost associated with an exit or disposal activity when the liability is
incurred, as opposed to when the entity commits to an exit plan. The provisions
of this standard are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. The
Company adopted this standard on July 30, 2002, in connection with the
implementation of fresh-start accounting. The adoption of SFAS No. 146 did not
have a material effect on the consolidated financial statements of the Company.

(2) EMERGENCE FROM CHAPTER 11 PROCEEDINGS

      On April 8, 2002, the Company, Communications and Mpower Lease Corporation
("Mpower LeaseCorp"), a wholly owned subsidiary of Communications (collectively,
the "Debtors"), each filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware. On July 17, 2002, the Bankruptcy Court confirmed the First
Amended Joint Plan of Reorganization (the "Plan"), as modified by the Findings
of Fact, Conclusions of Law, and Order Under Section 1129 of the Bankruptcy Code
and Rule 3020 of the Bankruptcy Rules Confirming Debtors' First Amended Joint
Plan of Reorganization entered by the Bankruptcy Court on the same date (the
"Confirmation Order," the Plan as modified by the Confirmation Order is referred
to herein as the "Final Plan"). Also, on July 17, 2002, the Bankruptcy Court
dismissed the Chapter 11 case of Mpower LeaseCorp, effective as of July 30,
2002. The general unsecured creditors of the Company, except for the holders of
the Company's 2010 Notes and lessors of certain Company real estate leases, were
unaffected by the Chapter 11 proceedings and the Plan.

      During the period from April 8, 2002 to July 30, 2002, the Debtors
operated as "debtors-in-possession." The consolidated financial statements
during the period from April 8, 2002 to July 30, 2002, the effective date of the
Plan, have been prepared in accordance with the provisions of Statement of
Position ("SOP") 90-7, "Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code." The Debtors adopted the provisions of SOP 90-7 upon
commencement of the Bankruptcy Court proceedings. The consolidated statement of
operations for the period January 1, 2002 to July 30, 2002 discloses expenses
related to the Chapter 11 proceedings as reorganization expenses. Interest
expense on the Company's 13% Senior Notes due 2010 (the "2010 Notes") and the
preferred stock dividends on the Series C Preferred Stock and Series D Preferred
Stock ceased to accrue after filing by the Debtors on April 8, 2002. Interest
and dividends ceased by operation of law.

      Upon emergence from bankruptcy, the Company implemented fresh-start
accounting under the provisions of SOP 90-7. Under SOP 90-7, the reorganization
fair value of the Company was allocated to its assets and liabilities, its
accumulated deficit was eliminated, and its new equity was issued according to
the Plan as if it were a new reporting entity. The Company recorded a $244.7
million reorganization charge to adjust the historical carrying value of its
assets and liabilities to fair market value reflecting the allocation of the
Company's $87.3 million estimated reorganized equity value as of July 30, 2002.
The Company also recorded a $315.3 million gain on the cancellation of debt on
July 30, 2002, pursuant to the Plan. The Plan became effective on July 30, 2002
(the "Effective Date"), and resulted in the following:

-     The 2010 Notes were cancelled and the indenture governing the 2010 Notes
      (the "2010 Note Indenture") was terminated. Pursuant to the Final Plan,
      holders of the 2010 Notes prior to the emergence (the "2010 Noteholders")
      received 55,250,000 shares


                                      F-13
<PAGE>
      of the Reorganized Company's common stock (the "New Common Stock")
      representing 85% of the issued and outstanding common stock of the
      Reorganized Company totaling 64,999,025 shares of New Common Stock.

-     The authorized, issued and outstanding Series C Preferred Stock and Series
      D Preferred Stock were cancelled. Pursuant to the Final Plan, holders of
      the Series C Preferred Stock and Series D Preferred Stock prior to the
      emergence (collectively, the "Preferred Stockholders") received 1,862,214
      and 6,912,786 shares of New Common Stock, respectively, which represent a
      total of 13.5% of the issued and outstanding common stock of the
      Reorganized Company.

-     The authorized, issued and outstanding common stock, par value of $0.001
      per share, (the "Old Common Stock") was cancelled. Pursuant to the Final
      Plan, holders of the Old Common Stock prior to the emergence (the "Old
      Common Stockholders") received 974,025 shares of New Common Stock
      representing 1.5% of the issued and outstanding common stock of the
      Reorganized Company.

-     Pursuant to the Final Plan, the Rights Agreement, dated as of June 28,
      2001 between the Company and Continental Stock Transfer & Trust Company,
      as rights agent, was cancelled, along with all rights granted to holders
      of the Old Common Stock thereunder. In addition, the authorized Series E
      Preferred Stock was also cancelled.

-     Pursuant to the Final Plan, no fractional shares of New Common Stock were
      issued. All distributions of New Common Stock pursuant to the Final Plan
      were rounded to avoid the issuance of fractional shares.

-     The Reorganized Company has entered into a new stock option plan for
      certain selected key employees (the "New Key Employee Option Plan") that
      is substantially identical to the existing Amended and Restated Mpower
      Holding Corporation Stock Option Plan (the "Old Option Plan"). Under the
      New Key Employee Option Plan, a total of 7,222,222 shares of New Common
      Stock have been reserved for issuance to employees of the Reorganized
      Company.

-     Upon the written request of a holder who individually received in excess
      of ten percent (10%) of the New Common Stock under the Final Plan (the
      "Eligible Holders") the Reorganized Company entered into a registration
      rights agreement (the "Registration Rights Agreement") with the holders of
      the New Common Stock.

-     The board of directors of the Reorganized Company (the "Board of
      Directors") initially consisted of six members. Among them, Rolla P. Huff
      is the Chief Executive Officer of the Reorganized Company; Joseph M.
      Wetzel is the President and Chief Operating Officer and is the designee of
      the Company; Robert M. Pomeroy, Michael E. Cahr, Richard L. Shorten, Jr.
      and Michael M. Earley are the designees of the 2010 Noteholders (the "2010
      Noteholder Designees"). The Final Plan further provides that the 2010
      Noteholder Designees will serve for a term of two years during which they
      cannot be removed without cause. Thereafter, the Board of Directors will
      be elected in accordance with the Reorganized Company's certificate of
      incorporation and by-laws, as amended and restated, and applicable law.
      Effective September 2002, S. Gregory Clevenger, the Executive Vice
      President and Chief Financial Officer, was added as a seventh member of
      the Company's board of directors, filling a vacancy on the Board.

-     As of the Effective Date, the Reorganized Company's certificate of
      incorporation, as amended and restated pursuant to the Final Plan,
      authorized 1,000,000,000 shares of common stock, $0.001 par value and
      50,000,000 shares of preferred stock, $0.001 par value. Pursuant to the
      terms of the Final Plan, on the Effective Date, the Reorganized Company
      issued 64,999,025 shares of the New Common Stock, which constituted 100%
      of the issued and outstanding common stock of the Reorganized Company as
      of the Effective Date.

-     The New Common Stock began trading on July 31, 2002 on the NASD
      Over-the-Counter Bulletin Board under the symbol MPOW.OB.

-     As of the Effective Date, 1,000 shares of Communications' common stock
      remain issued and outstanding, and are held by the Reorganized Company.

-     The Company is continuing its review of the overall tax impact of the
      implementation of the Plan. However the Company's net operating loss
      carryforwards, which were subject to annual use limitations before the
      reorganization, may be significantly reduced. Furthermore, other tax
      attributes, including the tax basis of certain assets, could also be
      reduced as a result of the cancellation of indebtedness as part of the
      Plan. In addition, Section 382 of the Internal Revenue Code of 1986, which
      generally applies after a more than 50 percentage point ownership change
      has occurred, may impose significant limitations on the annual utilization
      of any remaining net operating losses. The Company believes that it has
      experienced such an ownership change as a result of the implementation of
      the Final Plan. However, since the Company was under jurisdiction of a
      court in a Chapter 11 case at the time of the ownership change, various
      alternatives pertaining to the application of Section 382 are available.
      At this time, the Reorganized Company has not yet determined which of the
      alternatives to elect. A valuation allowance has been recorded to


                                      F-14
<PAGE>
      offset the entire net deferred tax asset due to the uncertainty of the
      Reorganized Company realizing any benefit related to the net operating
      loss carryforwards or the other future tax deductible amounts.

      Current liabilities subject to compromise: Liabilities totaling $1.7
million for which payment was subject to the Chapter 11 proceedings have been
classified as liabilities subject to compromise in the consolidated balance
sheet as of December 31, 2002.

      Reorganization expense: Reorganization expense is comprised of charges
that were realized or incurred by the Company as a result of reorganization
under Chapter 11 of the Bankruptcy Code. Reorganization expense for the period
January 1, 2002 to July 30, 2002 consisted of the following (in thousands):

<TABLE>
<S>                                                           <C>
              Consent fee                                     $ 19,025
              Fresh-start fair market value adjustments        244,669
              Professional fees                                  2,689
                                                              --------
                                                              $266,383
                                                              ========
</TABLE>

     During 2002, selling, general and administrative expenses included $6.2
million of professional fees associated with our recapitalization plan which
have been excluded from reorganization expense in accordance with SOP 90-7.

(3) FRESH-START ACCOUNTING

      As discussed in Note 2, the Company adopted the provisions of fresh-start
accounting as of July 30, 2002. Independent financial advisors were engaged to
assist in the determination of the reorganization equity value or fair value of
the Reorganized Company. The independent financial advisors determined the
estimated reorganization equity value of the Company to be $87.3 million. This
entity value was determined by an independent valuation and financial specialist
based on several factors including using projections by the Company's management
and various valuation methods including appraisals, discounted cash flow
analysis and other relevant industry information.

      SOP 90-7 requires an allocation of the reorganization equity value in
conformity with procedures specified by APB Opinion No. 16, "Business
Combinations," as amended by SFAS No. 141, "Business Combinations," for
transactions reported on the basis of the purchase method. In applying SOP 90-7,
the Company had the value of its non-current and intangible assets appraised.
The fresh-start accounting adjustments are based on the allocation of the
reorganization equity value to the non-current and intangible assets in
accordance with SOP 90-7. A reconciliation of the adjustments recorded in
connection with the debt restructuring and the adoption of fresh-start
accounting at July 30, 2002 is presented below (in thousands):


                                      F-15
<PAGE>
<TABLE>
<CAPTION>
                                                          Predecessor
                                                        Mpower Holding      Debt           Exchange of
                                                         July 30, 2002  Restructuring         Stock
                                                        --------------  -------------      -----------
<S>                                                     <C>             <C>                <C>
ASSETS:
Current assets:
     Cash and cash equivalents                             $  20,552      $      --         $      --
     Investments available-for-sale                           52,950             --                --
     Restricted investments                                   10,928             --                --
     Accounts receivable, net                                 22,908             --                --
     Prepaid expenses and other current assets                 8,859             --                --
                                                           ---------      ---------         ---------
         Total current assets                                116,197             --                --
Property and equipment, net                                  342,287             --                --
Deferred financing costs, net                                  7,792         (7,281)(a)            --
Intangibles                                                       --             --                --
Other assets                                                  10,943             --                --
                                                           ---------      ---------         ---------
       Total assets                                        $ 477,219      $  (7,281)        $      --
                                                           =========      =========         =========

LIABILITIES, REDEEMABLE PREFERRED STOCK AND
   STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
     Current maturities of long-term debt and
          capital lease obligations                        $   1,681      $      --         $      --
     Accounts payable:
             Trade                                            21,778             --                --
             Property and equipment                            1,349             --                --
     Accrued interest                                          1,932             --                --
     Accrued sales tax payable                                 6,229             --                --
     Accrued network optimization costs                        3,726             --                --
     Accrued other expenses                                   18,627             --                --
                                                           ---------      ---------         ---------
              Total current liabilities not subject to
                 compromise                                   55,322             --                --
     Current liabilities subject to compromise               429,100       (396,796)(a)            --
                                                           ---------      ---------         ---------
              Total current liabilities                      484,422       (396,796)               --
Senior notes, net of unamortized discount                     50,545             --                --
Other long-term debt and capital lease obligations               234             --                --
                                                           ---------      ---------         ---------
          Total liabilities                                  535,201       (396,796)               --
                                                           ---------      ---------         ---------

Commitments and contingencies
Redeemable preferred stock:
     10% Series C convertible preferred stock                 47,763             --           (47,763)(b)
     7.25% Series D convertible preferred stock              156,616             --          (156,616)(b)
Stockholders' equity (deficit):
     Reorganized Mpower Holding common stock                      --             55(a)             10(b)(c)
     Reorganized Mpower Holding additional paid
         in capital                                               --         74,150(a)         13,085(b)
     Predecessor Mpower Holding common stock                      59             --               (59)(c)
     Predecessor Mpower Holding additional paid
         in capital                                          711,280             --           191,267(b)(c)
     Predecessor Mpower Holding treasury stock                   (76)            --                76(c)
     Predecessor Mpower Holding note receivable
         for issuance of stock                                  (438)            --                --
     Predecessor Mpower Holding unrealized other
         income (loss)                                         2,039             --                --
     Accumulated (deficit) earnings                         (975,225)       315,310(a)             --
                                                           ---------      ---------         ---------
         Total stockholders' equity (deficit)               (262,361)       389,515           204,379
                                                           ---------      ---------         ---------
         Total liabilities, redeemable preferred stock
            and stockholders' equity (deficit)             $ 477,219      $  (7,281)        $      --
                                                           =========      =========         =========
</TABLE>

<TABLE>
<CAPTION>
                                                              Fresh-Start      Reorganized
                                                               Accounting     Mpower Holding
                                                             Adjustments(d)   July 30, 2002
                                                             --------------   --------------
<S>                                                          <C>              <C>
ASSETS:
Current assets:
     Cash and cash equivalents                                 $      --         $ 20,552
     Investments available-for-sale                                   --           52,950
     Restricted investments                                           --           10,928
     Accounts receivable, net                                        438           23,346
     Prepaid expenses and other current assets                        --            8,859
                                                               ---------         --------
         Total current assets                                        438          116,635
Property and equipment, net                                     (267,493)          74,794
Deferred financing costs, net                                         --              511
Intangibles                                                       22,512           22,512
Other assets                                                          --           10,943
                                                               ---------         --------
       Total assets                                            $(244,543)        $225,395
                                                               =========         ========

LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
     Current maturities of long-term debt and
          capital lease obligations                            $      --         $  1,681
     Accounts payable:
             Trade                                                    --           21,778
             Property and equipment                                   --            1,349
     Accrued interest                                                 --            1,932
     Accrued sales tax payable                                        --            6,229
     Accrued network optimization costs                               --            3,726
     Accrued other expenses                                           --           18,627
                                                               ---------         --------
              Total current liabilities not subject to
                 compromise                                           --           55,322
     Current liabilities subject to compromise                      (310)          31,994
                                                               ---------         --------
              Total current liabilities                             (310)          87,316
Senior notes, net of unamortized discount                             --           50,545
Other long-term debt and capital lease obligations                    --              234
                                                               ---------         --------
          Total liabilities                                         (310)         138,095
                                                               ---------         --------

Commitments and contingencies
Redeemable preferred stock:
     10% Series C convertible preferred stock                         --               --
     7.25% Series D convertible preferred stock                       --               --
Stockholders' equity (deficit):
     Reorganized Mpower Holding common stock                          --               65
     Reorganized Mpower Holding additional paid
         in capital                                                   --           87,235
     Predecessor Mpower Holding common stock                          --               --
     Predecessor Mpower Holding additional paid
         in capital                                             (902,547)              --
     Predecessor Mpower Holding treasury stock                        --               --
     Predecessor Mpower Holding note receivable
         for issuance of stock                                       438               --
     Predecessor Mpower Holding unrealized other
         income (loss)                                            (2,039)              --
     Accumulated (deficit) earnings                              659,915               --
                                                               ---------         --------
         Total stockholders' equity (deficit)                   (244,233)          87,300
                                                               ---------         --------
         Total liabilities, redeemable preferred stock
            and stockholders' equity (deficit)                 $(244,543)        $225,395
                                                               =========         ========
</TABLE>

(a)   To record the discharge of the carrying value ($370,977) and accrued
      interest ($25,819), deferred financing costs ($7,281) related to the 2010
      Notes and the Reorganized Mpower Holding Common Stock issued ($55) to the
      2010 Noteholders.

(b)   To record the conversion of the Predecessor Mpower Holding Convertible
      Series C and D Preferred Stock, and the accrued dividends thereon
      ($21,540) to Reorganized Mpower Holding Common Stock.

(c)   To eliminate the Predecessor Mpower Holding Common Stock and Treasury
      Stock and record the issuance of Reorganized Mpower Holding Common Stock.

(d)   To adjust the carrying value of assets and liabilities to fair market
      value.


                                      F-16
<PAGE>
(4) DISCONTINUED OPERATIONS

      On January 8, 2003, the Company announced a series of strategic and
financial transactions to further strengthen the Company financially and focus
its operations on its California, Nevada and Illinois markets. The Company is
bringing geographic concentration to its business by selling its customers and
assets in Florida, Georgia, Ohio, Michigan and Texas to other service providers
(the "Asset Sales"). The Asset Sales for Ohio and Michigan were completed on
March 18, 2003. The Asset Sales are expected to generate net proceeds to the
Company of approximately $17.0 million to $20.0 million over the next few
months. Completion of the remaining Asset Sales is subject to a number of
closing conditions and contingencies and there is no guarantee that all or any
of the remaining Asset Sales will occur.

      During the fourth quarter of 2002, the Company, with the approval of its
board of directors, committed to plans to divest these markets and engage in
transactions to sell these markets to other providers. As a result of this
decision, the operating revenue and expense of these markets have been
classified as discontinued operations under SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, for all periods presented and the
assets and liabilities being disposed of have been written down to their
fair value, net of expected selling expenses. The write down and results of
operations of the discontinued Florida, Georgia, Michigan, Ohio
and Texas markets resulted in a charge to discontinued operations for all
periods presented. Net sales and operating loss relating to these markets in
2002, 2001 and 2000, are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                   REORGANIZED                PREDECESSOR
                                                                     MPOWER                      MPOWER
                                                                     HOLDING                     HOLDING
                                                                   -----------    -------------------------------------
                                                                      2002          2002           2001          2000
                                                                   -----------    --------    ------------     --------
<S>                                                                <C>            <C>         <C>              <C>
            Operating revenues ................................     $ 36,284      $ 45,282      $  58,028      $ 34,280
            Operating expenses (excluding depreciation
                and amortization) .............................       45,723        67,323        105,806        57,801
            Depreciation and amortization .....................        3,236        12,724         19,619         9,455
            Loss on disposal ..................................       21,518            --             --            --
                                                                    --------      --------      ---------      --------
            Loss from discontinued operations .................     $(34,193)     $(34,765)     $ (67,397)     $(32,976)
                                                                    ========      ========      =========      ========
</TABLE>

(5) 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 $98.4
million, $489.5 million and $268.4 million in 2002, 2001 and 2000, respectively.
The Company has continued to generate negative cash flows from operating and
investing activities to date in 2003; however, the Company believes that it will
have sufficient resources to fund the Company's planned operations, assuming the
completion, as planned, of the transactions to sell customers and assets in
Florida, Georgia, Ohio, Michigan and Texas, and successful implementation of
other Company initiatives.

      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:

      -     As further described in Note 4, on January 8, 2003, the Company
            announced plans to sell customers and assets in Florida, Georgia,
            Texas, Michigan and Ohio to other service providers. The
            transactions for Ohio and Michigan were completed on March 18, 2003
            and Texas on March 27,2003. The remaining transactions are expected
            to close by the end of April 2003 and will provide approximately
            $17.0 to $20.0 million of cash to the Company over the next few
            months.

      -     In January 2003, the Company obtained a three-year, $7.5 million
            funding facility secured by certain accounts receivables

      -     Discussions with companies who may be interested in acquiring the
            Company or its other remaining assets, in whole or in part, and
            discussions with companies who may be interested in selling their
            assets or business, in whole or in part, to the Company

      -     Aggressively seeking possible additional equity or other financing
            sources on terms acceptable to the Company

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

      -     Closing unprofitable or underperforming markets


                                      F-17
<PAGE>
      -     Reducing general and administrative expenses through various cost
            cutting measures

      -     Introducing new products and services with higher profit margins

      -     Analyzing the pricing of its current products and services to ensure
            they are competitive and meet the Company's 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, and especially the completion, as
planned, of the remaining sales of customers and assets in Florida and Georgia.
However, there can be no assurance that the Company will be successful in
completing the above initiatives. The Company cannot assure that its estimate of
funding 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.

(6) PROPERTY AND EQUIPMENT

      Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,
                                                                            ------------------------------
                                                                               2002                 2001
                                                                            ---------            ---------
                                                                                      (IN THOUSANDS)
<S>                                                                         <C>                  <C>
            Buildings and property ..............................           $   1,727            $   5,715
            Telecommunication and switching equipment ...........              20,894              338,228
            Leasehold improvements ..............................               7,192               41,213
            Computer hardware and software ......................               6,817               28,436
            Office equipment and other ..........................               3,320               26,494
                                                                            ---------            ---------
                                                                               39,950              440,086
            Less accumulated depreciation and amortization ......              (5,993)            (123,687)
                                                                            ---------            ---------
                                                                               33,957              316,399
            Assets held for future use ..........................               3,616               39,381
            Construction in progress ............................                 924               30,092
                                                                            ---------            ---------
            Net property and equipment ..........................           $  38,497            $ 385,872
                                                                            =========            =========
</TABLE>

      The historical carrying value of Property and Equipment at December 31,
2002 reflects adjustments from the implementation of fresh-start accounting as
described in Note 3. Independent financial advisors were engaged to assist in
the determination of the fair value for Property and Equipment. The independent
financial advisors determined the estimated fair value of Property and Equipment
based upon the Cost Approach appraisal methodology. The Cost Approach method
measures the value of a tangible asset by determining the current cost of an
asset and deducting for various elements of depreciation, physical
deterioration, and technical, functional, and economic obsolescence.

      Depreciation expense for the periods ended 2002, 2001 and 2000 was as
follows (in thousands):

<TABLE>
<CAPTION>
                                                          REORGANIZED      PREDECESSOR
                                                            MPOWER           MPOWER
                                                            HOLDING          HOLDING
                                                             2002             2002               2001              2000
                                                          -----------      -----------         -------           -------
<S>                                                       <C>              <C>                 <C>               <C>
            Depreciation expense ................           $6,078           $28,620           $48,927           $33,461
</TABLE>

      As further discussed in Note 13 "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.

(7) 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 in
2001.


                                      F-18
<PAGE>
(8) DEBT

      Long-term borrowings at December 31, 2002 and 2001 consist of the
following:

<TABLE>
<CAPTION>
                                                                                                   DECEMBER 31,
                                                                                           ----------------------------
                                                                                             2002                2001
                                                                                           ---------          ---------
                                                                                                 (IN THOUSANDS)
<S>                                                                                        <C>                <C>
            13% Senior Notes, due 2010, net of unamortized discount of
               $10,177 in 2001 ...................................................         $      --          $ 370,366
            13% Senior Notes, due October 1, 2004, net of unamortized
              discount of $13 and $509 ...........................................             2,068             50,437
            Other long-term debt and capital lease obligations ...................             2,941              9,883
                                                                                           ---------          ---------
                                                                                               5,009            430,686
            Less current portion .................................................            (4,638)            (7,729)
                                                                                           ---------          ---------
                                                                                           $     371          $ 422,957
                                                                                           =========          =========
</TABLE>

      Maturities of long-term debt and capital lease obligations for each of the
next two years ending December 31, consist of the following (in thousands):

<TABLE>
<S>                                           <C>
                             2003......       $  4,638
                             2004......            371
                                              --------
                                              $  5,009
                                              ========
</TABLE>

     As further discussed in Note 2, pursuant to the Company's Plan of
Reorganization, on July 30, 2002, the 2010 Notes were cancelled and the 2010
Note Indenture was terminated resulting in a gain of $315.3 million on this
transaction in 2002. In addition, the 2010 Noteholders received 55,250,000
shares of the New Common Stock.

      In November 2002, the Company repurchased $49.2 million in carrying value
of its 2004 Notes for $14.2 million in cash. The Company recognized a gain of
$35.0 million on this transaction in 2002.

     In January 2003, the Company repurchased the remaining $2.1 million in
carrying value of its 2004 Notes for $2.2 million in cash, and will recognize a
loss of $0.1 million on this transaction in 2003.

      In June 2001, the Company repurchased $46.4 million in carrying 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 a gain of $32.3 million on these transactions in 2001.

      In 2000, the Company issued $179.5 million in face value of its 2010 Notes
in exchange for old notes totaling $159.4 million, resulting in a loss on
discharge of debt of $20.1 million.

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

COMMON STOCK

      As further discussed in Notes 2 and 3, pursuant to the Company's Plan of
Reorganization, on July 30, 2002, the authorized, issued and outstanding common
stock on that date was cancelled. Pursuant to the Final Plan, the Old Common
Stockholders received 974,025 shares of New Common Stock.

      A principal stockholder purchased and sold shares of the Company's common
stock, resulting in a short-swing profit under Section 16(b) of the Securities
Exchange Act of 1934. The settlement agreement between the Company and the
principal stockholder required that the Company be reimbursed for the
short-swing profit in the amount of $0.6 million. In March 2002 the Company
received $0.1 million of the settlement, and received the remaining $0.5 million
in April 2002.

      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 (the "Note Shares") at $19.21 per
share. The Company retained the right to repurchase the Note 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 with a non-recourse
promissory note in the amount of $4.3 million (the "Note"). 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 (deficit) as notes


                                      F-19
<PAGE>
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 the Note Shares were
issued to the CEO for 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 as a reduction to additional
paid-in capital and notes receivable from stockholders for issuance of common
stock.

REDEEMABLE PREFERRED STOCK

      As further discussed in Note 2, pursuant to the Company's Plan of
Reorganization, on July 30, 2002, the authorized, issued and outstanding Series
C and Series D Preferred Stock were cancelled. As further discussed in Note 1,
dividends on the Series C and Series D Preferred Stock ceased to accrue after
filing of a bankruptcy petition by the Company on April 8, 2002. Pursuant to the
final Plan, the preferred stockholders received, on a pro rata basis, 1,862,214
and 6,912,786 shares of New Common Stock.

      Beginning in April 2001, the Company announced deferrals of the quarterly
dividends on the Company's Series D Preferred Stock. Dividends continued to
accrue on the liquidation amount of $50.00 per share at the rate of 7.25% per
year.

      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. During 2001, the Company 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 conversion terms for the Series D Preferred Stock. This
amount was recognized as an increase in additional paid-in capital, with an
offsetting decrease in additional paid-in capital, and was included as a part of
preferred stock dividends in the 2001 consolidated statement of operations.

      During 2000 the Company recorded a pro rata accretion of the outstanding
Series B and Series C Preferred Stock at that time to their anticipated
redemption values. Such accretion was based on the market value of the common
stock at the balance sheet date, not to exceed $18.00 and $37.33 per share based
on the Market Threshold for the Series B and Series C Preferred Stock,
respectively. For the year ended December 31, 2000, the Company recorded
accretion of $2.5 million and 4.3 million, related to the Series B and Series C
Preferred Stock, respectively, which was recorded as an increase in redeemable
preferred stock with a corresponding decrease in additional paid-in capital. No
accretion was recorded for the years ended December 31, 2001 or 2002.

      In March 2000, the holders of the Series B Preferred Stock elected to
convert their 5,277,779 shares into 7,916,668 shares of common stock, along with
$2.6 million in dividends which were converted into 438,128 shares of common
stock.

(10) STOCK OPTION PLANS

      As filed in the Company's Final Plan with the Bankruptcy Court, 7,222,222
shares of New Common Stock have been reserved for issuance pursuant to the terms
of a new stock option plan (the "New Key Employee Option Plan") adopted by the
Company for the benefit of certain selected key employees that is substantially
identical to the Amended and Restated Mpower Holding Corporation Stock Option
Plan (the "Old Option Plan") cancelled as of the Effective Date (see Note 2).

      Employees of Reorganized Mpower have received an initial grant of options
under the New Key Employee Option Plan (the "New Options") to replace their
cancelled options, on a one-for-one basis. The New Options granted under the New
Key Employee Option Plan will be subject to the same terms and conditions as the
corresponding cancelled outstanding Employee Options, including such provisions
as option period, exercise price, termination of employment and vesting.
Generally, the outstanding employee options vest over a three year period, with
one third of the options vesting on September 29, 2002, 2003, and 2004. All
outstanding employee options expire on September 29, 2010. All of the New
Options are considered to be a new grant of options from a new reporting entity,
and will be accounted for as a fixed award.

      On December 19, 2002, the Board of Directors of the Company approved a
second stock option plan (the "2002 Stock Option Plan II"). The 2002 Stock
Option Plan II was adopted by the Company for the benefit of certain selected
key employees, and is substantially identical to the New Key Employee Stock
Option Plan. The Company has reserved 6,000,000 shares of common stock for
issuance under the 2002 Stock Option Plan II. Generally, the options under the
2002 Stock Option Plan II vest immediately upon grant, one-third of the options
vesting after one-year and the remaining one-third vesting after two years.
All outstanding options expire on December 19,


                                      F-20
<PAGE>
     2012. All of the options under the 2002 Stock Option Plan II are
non-qualified stock options. All of the options, with certain exceptions, would
fully vest upon the employee's termination without cause or a resignation with
good cause and upon a change of control unrelated to any equity investment in
the Company. All of the options issued under this plan have been accounted for
as a fixed award.

      As of December 31, 2001, the Company had reserved 12,960,000 shares of
common stock to be issued under the old stock option 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.

      Stock option transactions during 2002, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                                                              WEIGHTED
                                                                                               AVERAGE
                                                                             NUMBER           EXERCISE
                                                                           OF SHARES           PRICE
                                                                          -----------         --------
<S>                                                                       <C>                 <C>
                Outstanding at December 31, 1999 ................           5,327,910          $11.25
                Granted .........................................          15,992,615          $21.54
                Exercised .......................................          (1,089,032)         $ 2.71
                Cancelled .......................................          (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
                Cancelled .......................................          (9,777,152)         $10.98
                                                                          -----------
                Outstanding at December 31, 2001 ................           6,235,651          $ 1.84
                Granted .........................................             257,696          $   --
                Exercised .......................................                  --          $   --
                Cancelled .......................................          (6,493,347)         $   --
                                                                          -----------
                Outstanding at July 30, 2002 ....................                  --          $   --
                Granted .........................................          11,509,644          $ 0.52
                Exercised .......................................                  --          $   --
                Cancelled .......................................            (405,812)         $ 1.42
                                                                          -----------
                Outstanding at December 31, 2002 ................          11,103,832          $ 0.49
                                                                          ===========
                Exercisable at December 31, 2000 ................             644,532          $ 8.28
                                                                          ===========
                Exercisable at December 31, 2001 ................             650,863          $ 5.64
                                                                          ===========
                Exercisable at December 31, 2002 ................           3,997,935          $ 0.71
                                                                          ===========
</TABLE>

      The following table summarizes information about stock options outstanding
and exercisable at December 31, 2002:

<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                    2002             LIFE             PRICE            2002            PRICE
       -----------------------                ------------      ------------     ----------      -----------      ----------
<S>                                           <C>               <C>              <C>             <C>              <C>
       $0.03 to $6.90 ...................      10,888,630        9.6 years       $     0.30       3,883,612       $     0.43
       $6.91 to $13.80 ..................         191,727        8.3 years       $     8.73         100,388       $     8.74
       $13.81 to $20.70 .................          18,600        8.7 years       $    16.58          11,160       $    16.58
       $20.71 to $27.60 .................           1,500        9.6 years       $    22.67             900       $    22.67
       $27.61 to $41.40 .................           1,875        6.8 years       $    38.04           1,125       $    38.04
       $41.41 to $48.30 .................           1,500        5.0 years       $    46.83             750       $    46.83
                                               ----------        ---------       ----------       ---------       ----------
       $0.03 to $48.30 ..................      11,103,832        9.5 years       $     0.49       3,997,935       $     0.71
                                               ==========                                         =========
</TABLE>

     The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees", in accounting for its plan. Accordingly, no compensation expense has
been recognized for its stock based compensation plans other than for stock
options issued with an exercise price below fair market value. During 2002, 2001
and 2000, the Company recognized related stock-based compensation expense of
$0.7 million, $3.1 million and $3.3 million, respectively, related to in the
money options granted in 1999, 2000 and 2001.

(11) LOSS PER SHARE

      SFAS No. 128, "Earnings Per Share," requires the Company to calculate its
loss per share based on basic and diluted loss per


                                      F-21
<PAGE>
share, as defined. Basic income (loss) per share for the period from July 31,
2002 to December 31, 2002, and basic and diluted loss per share amounts for the
period from January 1, 2002 to July 30, 2002 and the years ended December 31,
2001 and 2000 were computed by dividing net loss applicable to common
stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted income (loss) per share for the period
from July 31, 2002 to December 31, 2002 was computed by dividing the income
(loss) by the weighted average number of shares of common stock and common stock
equivalents outstanding during the period. The inclusion of common stock
equivalents in this calculation does not result in a change to the basic income
(loss) per share amounts.

      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, 2002, 2001 and 2000, that were not included in the calculation
of diluted loss per share because the effect would be antidilutive, as follows:

<TABLE>
<CAPTION>
                                                               REORGANIZED     PREDECESSOR     PREDECESSOR     PREDECESSOR
                                                                 MPOWER          MPOWER          MPOWER          MP0WER
                                                                 HOLDING         HOLDING         HOLDING         HOLDING
                                                                  2002            2002            2001            2000
                                                               ----------       ---------      ----------      ----------
<S>                                                            <C>              <C>            <C>             <C>
Options and warrants .........................                 10,855,149       6,750,789       6,493,093      10,436,976
Redeemable preferred stock ...................                         --       5,275,931       5,333,767       6,626,892
</TABLE>

(12) INCOME TAXES

      The Company has made no provision for income taxes in any period presented
in the accompanying consolidated statements of operations because it incurred
operating losses in each of these periods. In addition, the Company made no
provision for income taxes on the gain resulting from the extinguishment of debt
in 2002 (Notes 2 and 3) due to the relevant tax regulations governing the
treatment of debt extinguishment income in Chapter 11 bankruptcy proceedings.

      A reconciliation of income taxes computed at the federal statutory rate to
income tax expense recorded in the Company's consolidated statements or
operations is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31,
                                                                        ------------------------------------
                                                                          2002          2001          2000
                                                                        --------      ---------     --------
<S>                                                                     <C>           <C>           <C>
                  Federal benefit at statutory rate ............        $(33,043)     $(163,710)    $(85,650)
                  Change in valuation allowance, net of state
                    tax and rate changes .......................          31,952        116,774       93,760
                  Goodwill .....................................              --         47,043        2,425
                  Stock options exercised ......................              --            (27)     (11,865)
                  Other ........................................           1,091            (80)       1,330
                                                                        --------      ---------     --------
                Income tax expense .............................        $     --      $      --     $     --
                                                                        ========      =========     ========
</TABLE>

      Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities for federal and state income taxes
are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                                              2002           2001
                                                                           ---------       ---------
<S>                                                                        <C>             <C>
                Deferred Tax Asset
                  Net operating loss carry-forward .............           $ 277,858       $ 301,975
                  Depreciation and amortization ................              26,640              --
                  Other ........................................              10,541          10,049
                                                                           ---------       ---------
                                                                             315,039         312,024
                  Less: valuation allowance ....................            (300,473)       (261,826)
                                                                           ---------       ---------
                  Net deferred tax asset .......................              14,566          50,198
                                                                           ---------       ---------
                Deferred Tax Liability
                  Depreciation and amortization ................                  --         (37,984)
                  Other ........................................             (14,566)        (12,214)
                                                                           ---------       ---------
                  Net deferred tax liability ...................             (14,566)        (50,198)
                                                                           ---------       ---------
                Net deferred tax ...............................           $      --       $      --
                                                                           =========       =========
</TABLE>

      Realization of the Company's deferred tax assets relating to net operating
loss carryforwards is dependent upon future earnings, the timing and amount of
which are uncertain. Accordingly, the Company's net deferred tax assets have
been fully offset by a valuation allowance.

      As of December 31, 2002, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $666.7 million which will
expire in the year 2022, if not utilized. The Company's federal net operating
loss carryforwards were reduced by $350.3 million as a result of the Company's
Chapter 11 bankruptcy proceedings (See Note 2).




                                      F-22
<PAGE>
      The Company is still reviewing the overall tax impact of the
implementation of the Plan. However, its net operating loss carryforwards, which
were subject to annual use limitations before the reorganization, may be
significantly reduced. Furthermore, other tax attributes, including the tax
basis of certain assets, could also be reduced as a result of the cancellation
of indebtedness as part of the Plan. In addition, Section 382 of the Internal
Revenue Code of 1986, which generally applies after a more than 50 percentage
point ownership change has occurred, may impose other limitations on the annual
utilization of any remaining net operating losses. The Company believes that it
has experienced such an ownership change as a result of the implementation of
the Plan. However, since the Company was under jurisdiction of a court in a
Chapter 11 case at the time of the ownership change, various alternatives
pertaining to the application of Section 382 are available. At this time, the
Company has not yet determined which of the alternatives to elect. A valuation
allowance has been recorded to offset the entire net deferred tax asset due to
the uncertainty of the Company realizing a benefit related to the net operating
loss carryforwards or the other future tax deductible amounts.


(13) NETWORK OPTIMIZATION COST

      The Company has recognized several charges related to the cancellation of
certain markets.

      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.

     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 closing of certain markets and related commitments
made for switch sites and collocations. 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.

      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, $1.2 million for the termination of employment of
an estimated 281 sales and operational support personnel of which 236 have been
terminated as of December 31, 2002, and $16.0 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.

      In February 2002, the Company closed its operations in Charlotte, North
Carolina and eliminated certain other non-performing sales offices. The Company
also cancelled the implementation of a new billing system in February 2002. The
Company recognized a network optimization charge of $19.0 million in the first
quarter of 2002. Included in the charge was $12.5 million for the write down of
its investment in software and assets for a new billing system, $3.7 million for
property and equipment including collocations and switch sites, $0.2 million for
the termination of employment of an estimated 89 sales and information
technology personnel of which 86 have been terminated as of December 31, 2002,
and $2.6 million for other costs associated with exiting these markets.

     Accrued network optimization cost details for 2001 activity were as follows
(in thousands):

<TABLE>
<CAPTION>
                                                         LIABILITY AT       NETWORK                            LIABILITY AT
                                                         DECEMBER 31,    OPTIMIZATION       CASH PAID/         DECEMBER 31,
                                                             2000            COST         ASSET DISPOSALS          2001
                                                         ------------    -------------    ---------------      -------------
<S>                                                      <C>             <C>              <C>                  <C>
              Disposal of assets ..................       $  (4,742)       $ (85,415)         $  86,544          $ (3,613)
              Employee termination costs ..........              --           (1,224)             1,037              (187)
              Other exit costs ....................            (288)        (146,444)           136,939            (9,793)
                                                          ---------        ---------          ---------          --------
                                                          $  (5,030)       $(233,083)         $ 224,520          $(13,593)
                                                          =========        =========          =========          ========
</TABLE>

     Accrued network optimization cost details for 2002 activity were as follows
(in thousands):

<TABLE>
<CAPTION>
                                                         LIABILITY AT       NETWORK                            LIABILITY AT
                                                         DECEMBER 31,    OPTIMIZATION       CASH PAID/         DECEMBER 31,
                                                             2001            COST         ASSET DISPOSALS          2002
                                                         ------------    -------------    ---------------      -------------
<S>                                                      <C>             <C>              <C>                  <C>
              Disposal of assets ..................        $ (3,613)        $(11,801)          $ 15,414           $    --
              Employee termination costs ..........            (187)            (109)               296                --
              Other exit costs ....................          (9,793)            (700)             9,013            (1,480)
                                                           --------         --------           --------           -------
                                                           $(13,593)        $(12,610)          $ 24,723           $(1,480)
                                                           ========         ========           ========           =======
</TABLE>

      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, the Company's
ability to sell or re-deploy network equipment for growth in its existing
network and other factors. With the emergence from the Chapter 11 proceedings,
the Company was able to conclude settlements with several network carriers and
numerous office landlords. As a result of these settlements, the Company's
future liabilities were dramatically reduced and it was subsequently able to
reduce its network optimization accrual in 2002 by $6.4 million.

     At December 31, 2002, the Company has total switch and office lease, and
circuit commitments as a result of the actions taken in these network
optimization charges of $2.9 million related to these markets, expiring from
2004 through 2010. Of these remaining commitments, $1.5 million has 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.

(14) 401(K) PLAN

     The Company maintains a defined contribution 401(k) plan (the "401(k)
Plan") pursuant to Section 401(k) of the Internal Revenue Code ("IRC"). The
401(k) Plan covers substantially all employees that meet certain service
requirements. Under the 401(k) Plan, eligible employees may


                                      F-23
<PAGE>
voluntarily contribute a percentage of their compensation, subject to limits
under the IRC. The 401(k) plan provides for discretionary matching contributions
by the Company which were as follows for the periods ended in 2002, 2001 and
2000 (in thousands):

<Table>
<Caption>
                                Reorganized
                                  Mpower                 Predecessor
                                  Holding               Mpower Holding
                                -----------     ----------------------------------
                                   2002           2002          2001        2000
                                   ----           ----          ----        ----
<S>                               <C>            <C>           <C>         <C>
401(k) contributions.........  $   209         $   169      $   757      $   602
</Table>




(15) COMMITMENTS AND CONTINGENCIES

LEASE OBLIGATIONS

      The Company has entered into various operating lease agreements with
expirations through 2011, for its switching facilities and offices. In
addition, the Company has entered into various circuit lease obligations with
expirations through 2005. Certain of the circuit lease obligations associated
with continuing operations are interrelated with the discontinued operations. If
we are successful in our negotiations with certain suppliers, upon the sale of
the discontinued operations we may be relieved of certain of the circuit lease
obligations.

      As of December 31, 2002, the Company is obligated to make cash payments
in connection with these operating lease obligations. All of these obligations
require cash payments to be made by the Company over varying periods of time.
Certain of these arrangements are cancelable on short notice and others require
termination payments as part of any early termination. Included in the table
below are future minimum lease obligations for continuing operations in effect
as of December 31, 2002 (in thousands):
<TABLE>
<S>                                                                <C>
                 Payments during the year ending December 31:
                   2003........................................    $  25,532
                   2004........................................        8,300
                   2005........................................        3,203
                   2006........................................        2,153
                   2007........................................        1,938
                   Thereafter..................................        4,116
                                                                    --------
                                                                    $ 45,242
                                                                    ========
</TABLE>

      Rent expense from continuing operations for the periods ended in 2002,
2001 and 2000 were as follows (in thousands):

<Table>
<Caption>
                                Reorganized
                                  Mpower                 Predecessor
                                  holding               Mpower Holding
                                -----------     ----------------------------------
                                   2002           2002          2001        2000
                                   ----           ----          ----        ----
<S>                               <C>            <C>           <C>         <C>
Rent expense................      $2,488         $4,281        $7,915      $6,529
</Table>

      Circuit lease expenses for the periods ended in 2002, 2001 and 2000 are
included in cost of operating revenues in the Consolidated Statement of
Operations. As discussed in Note 13, the Company plans to reduce the future
commitments associated with switch site and sales office leases, as well as
circuits in turned down markets through negotiated settlements.

      Cumulative future obligations for switching facilities, offices and office
equipment rent in discontinued markets is $19.7 million. Once the Company's
discontinued markets are sold, it will remain contingently liable for several of
the obligations in these markets.

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 for the
year ended December 31, 2001.

PURCHASE COMMITMENTS

      In the ordinary course of business, the Company enters into purchase
agreements with its equipment vendors. As of December 31, 2002, the Company had
total unfulfilled commitments with equipment vendors of approximately $1.3
million. The Company also has various agreements with certain carriers for
transport, long distance and other network services. At December 31, 2002, the
Company's minimum commitment under these agreements is $21.8 million, which
expires 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, alleging violations of the Securities Exchange Act of 1934 and rule
10b-5 thereunder (the "Exchange Act") and Section 11 of the Securities Act of
1933. 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. On April 8, 2002,


                                      F-24
<PAGE>
the Company filed a petition for a relief under Chapter 11 of the Bankruptcy
Code, and as of the effective date of the Company's First Amended Joint Plan of
Reorganization (July 30, 2002), the Company was discharged and released from any
"Claim, Debt and Interest," except as otherwise stated in the Plan, as set forth
in the final Confirmation Order entered by the United States Bankruptcy Court
for the District of Delaware on July 17, 2002. Although the Company is no longer
a defendant in the class action lawsuit and can have no direct liability to the
plaintiffs, the Company nevertheless remains obligated to indemnify the
remaining individual defendants in the event of an adverse decision against them
in the lawsuit. The plaintiffs and the remaining individual defendants have
entered into a tentative settlement of the class action lawsuit, and have
submitted a Preliminary Approval Order to the Court, seeking approval of the
settlement in accordance with a Stipulation of Settlement dated February 6,
2003. If approved, the settlement would dismiss the action with prejudice. All
settlement payments and remaining attorneys fees and other legal expenses
incurred by the defendants are to be paid by the Company's insurance carrier. A
hearing is scheduled for October 1, 2003 to determine whether the proposed
settlement of the action on the terms and conditions provided for in the
Stipulation is fair, reasonable and adequate and should be approved by the
Court. The Company believes the remaining individual defendants anticipate that
the proposed Settlement will be approved and that they will continue to deny any
wrongdoing and will vigorously contest the suit if not settled. The Company
cannot predict the final outcome of this lawsuit.

INTERCONNECTION AGREEMENTS

      The Company has interconnection agreements with seven incumbent local
exchange carriers. These agreements expire on various dates through September
2004.

      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.

(16) 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 tariff 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 inaccuracies, the Company records an estimate of its liability based on
its measurement of services received. Actual results may differ from these
estimates.

(17) 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 for the periods ended in 2002, 2001 and 2000 were as
follows (in thousands).

<TABLE>
<CAPTION>

                            REORGANIZED               PREDECESSOR
                               MPOWER                    MPOWER
                              HOLDING                   HOLDING
                             ---------    ----------------------------------
                               2002          2002          2001        2000
                               ----          ----          ----        ----
<S>                            <C>           <C>          <C>         <C>
Rent expense................  $690          $960          $1,569      $1,492
</TABLE>

      On February 20, 2003, the Company entered into an agreement (the
"Agreement") with Pacific Alliance Limited, LLC ("PAL") of which one of the
Company's directors, Richard L. Shorten, Jr., is a partner. Under the Agreement,
PAL is to provide assistance to the Company in connection with the Company's
efforts to raise $10-15 million to finance working capital requirements. PAL is
to receive a monthly cash retainer of $15,000, payable if a bona fide term sheet
is obtained, and upon consummation of a financing, the Company shall pay an
additional cash fee equal to 5% of the gross equity or debt proceeds raised,
less any retainer paid or to be paid. The fee shall be reduced pro rata to the
extent any placement agent is entitled to a fee, and shall be limited to 2.5% if
a financing is consummated with any of the potential financing sources
identified on a schedule to the Agreement. The Company's management believes the
terms and conditions of the Agreement are at least as favorable to the Company
as those which it could have received from an unaffiliated third party, and that
PAL is well suited to perform the services being requested.

(18) INTANGIBLE ASSETS

      On January 1 2002, the Company adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 142 provides that goodwill and
other separately recognized 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. Intangible assets
that do have finite lives will continue to be amortized over their estimated
useful lives.


                                      F-25
<PAGE>
      As discussed in Note 3, in connection with the Company's adoption of
fresh-start accounting, independent appraisers assigned a value to the Company's
customer relationships and trademark of $20.8 million and $1.7 million,
respectively. The customer relationships are amortized using the straight-line
method over 3 years. The trademark was determined to have an indefinite life and
is not being amortized.

      As a result of the Asset Sales discussed in Note 4, the Company has
charged $6.1 million of carrying value of customer relationships to the loss on
disposal from discontinued operations.

      As of December 31, 2000, the Company had recorded goodwill and other
intangibles attributable to the acquisition of Primary Network in June 2000, all
of which were written off in 2001 in the network optimization cost included in
the consolidated statements of operations.

      Intangible assets as of December 31, 2002 consisted of the following (in
thousands):

<TABLE>
<S>                                                          <C>
                   Customer relationships...........         $   13,745
                   Less: accumulated amortization...             (1,909)
                                                                 11,836
                   Tradename........................              1,694
                                                             ----------
                   Intangibles, net.................         $   13,530
                                                             ==========
</TABLE>

      Amortization expense for the periods ended in 2002, 2001 and 2000 is as
follows (in thousands):

<TABLE>
<CAPTION>
                                                   REORGANIZED     PREDECESSOR
                                                      MPOWER          MPOWER
                                                     HOLDING         HOLDING
                                                       2002            2002             2001            2000
                                                   ----------      -----------       ----------      ---------
<S>                                                <C>             <C>               <C>             <C>
             Amortization expense                  $    1,909      $       --        $    7,572      $   8,059
</TABLE>

      Estimated amortization expense for each of the next three years ending
December 31, consists of the following (in thousands):

<TABLE>
<S>                                         <C>
                           2003......       $  4,582
                           2004......          4,582
                           2005......          2,672
                                            --------
                                            $ 11,836
                                            ========
</TABLE>

      Had the Company adopted the provisions of SFAS No. 142 for all periods
presented the effect would have been as follows:

<TABLE>
<CAPTION>
                                                     REORGANIZED         PREDECESSOR
                                                        MPOWER              MPOWER
                                                       HOLDING             HOLDING
                                                         2002                2002                2001                2000
                                                   ----------------    ----------------     --------------       ------------
<S>                                                <C>                 <C>                  <C>                  <C>
Net loss applicable to common stockholders,
as reported                                          $   (16,439)         $   (81,943)       $  (489,522)        $  (268,368)

Goodwill amortization                                         --                   --              6,440               6,927
                                                     -----------          -----------        -----------         -----------

Adjusted net loss applicable to common
stockholders                                         $   (16,439)         $   (81,943)       $  (483,082)        $  (261,441)
                                                     ===========          ===========        ===========         ===========

Basic and diluted loss per share applicable to
common stockholders, as reported                     $     (0.25)         $     (1.38)       $     (8.26)        $     (5.20)

Goodwill amortization per share                               --                   --               0.11                0.13
                                                     -----------          -----------        -----------         -----------

Adjusted basic and diluted loss per share
applicable common stockholders                       $     (0.25)         $     (1.38)       $     (8.15)        $     (5.07)
                                                     ===========          ===========        ===========         ===========
</TABLE>

(19) SUBSEQUENT EVENTS

      See Note 4 regarding the sale of certain customers and assets in 2003.

      During January, 2003, the Company reached an agreement with RFC Capital
Corporation, a wholly owned subsidiary of Textron Financial Corporation, for a
three-year funding facility of up to $7.5 million, secured by certain of the
company's receivables. The new funding is expected to provide near-term
liquidity for the Company as it continues to restructure its operations.


(20) SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED):


                                      F-26
<PAGE>
<TABLE>
<CAPTION>
                                                         PREDECESSOR     PREDECESSOR    PREDECESSOR    REORGANIZED    REORGANIZED
                                                            MPOWER          MPOWER        MPOWER         MPOWER          MPOWER
                                                           HOLDING          HOLDING       HOLDING        HOLDING         HOLDING
                                                            FIRST           SECOND         THIRD          THIRD          FOURTH
                                                           QUARTER         QUARTER        QUARTER        QUARTER        QUARTER
                                                         -----------     -----------    -----------    -----------    -----------
<S>                                                      <C>             <C>            <C>            <C>            <C>
Year Ended December 31, 2002:
Operating Revenue ...................................      $ 34,458        $ 36,826        $12,005       $ 24,862        $37,953
Gross Profit ........................................        11,315          15,207          5,447         11,579         17,822
Loss before Discontinued Operations .................       (56,760)(1)     (48,734)(2)     62,290(3)     (11,745)        29,499(4)
Income (Loss) Applicable to Common Stockholders .....       (77,358)        (62,258)        57,673        (16,821)           382
Loss per Share before Discontinued Operations .......         (1.01)          (0.83)          1.04          (0.18)          0.45
Income (Loss) per Share Applicable to Common
     Stockholders ...................................         (1.30)          (1.05)          0.97          (0.26)          0.01
</TABLE>

<TABLE>
<CAPTION>
                                                         PREDECESSOR     PREDECESSOR    PREDECESSOR    PREDECESSOR
                                                            MPOWER         MPOWER         MPOWER         MPOWER
                                                            HOLDING        HOLDING       HOLDING         HOLDING
                                                             FIRST         SECOND         THIRD          FOURTH
                                                           QUARTER        QUARTER        QUARTER        QUARTER
                                                         -----------     ----------     ----------     -----------
<S>                                                      <C>             <C>            <C>            <C>
Year Ended December 31, 2001:
Operating Revenues ..................................     $  35,108      $  35,283      $  33,915       $  31,810
Gross Profit ........................................         7,283          6,663          9,685           8,856
Loss before Discontinued Operations .................       (82,208)(5)   (233,820)(6)    (42,095)        (42,220)
Loss Applicable to Common Stockholders ..............      (108,229)      (257,060)       (61,573)        (62,660)
Loss per Share before Discontinued Operations .......         (1.57)         (4.01)         (0.77)          (0.78)
Loss per Share Applicable to Common Stockholders ....         (1.85)         (4.32)         (1.04)          (1.06)
</TABLE>

---------

(1) Includes a network optimization charge of $19.0 million (See Note 13)

(2) Includes reorganization expenses of $20.7 million (See Note 2)

(3) Includes reorganization expenses of $245.7 million and a $315.3 million
    gain on discharge of debt (See Note 2 and 3)

(4) Includes a network optimization charge of $(6.4) million (See Note 13) and
    a $35.0 million gain on discharge of debt (See Note 8)

(5) Includes a network optimization charge of $24.0 million (See Note 13)

(6) Includes a network optimization charge of $209.1 million (See Note 13) and
    a $32.3 million gain on discharge of debt (See Note 8)


                                      F-27