----

----

**SECURITIESAND EXCHANGE COMMISSION****Washington, DC 20549**

----

**FORM10-Q**

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**Forthe quarterly period ended June 30, 2001**

**Commissionfile number 0-29281**

**CYPRESSCOMMUNICATIONS, INC.******(Exact name ofregistrant as specified in its charter)

----

| **Delaware**                                                  | **58-2330270**       |
|---------------------------------------------------------------|----------------------|
| (State  or other jurisdiction                                 | (I.R.S.  Employer    |
| of  incorporation or organization)                            | Identification  No.) |
|                                                          |                 |
| **Fifteen Piedmont Center, Suite 100**                        |
| **Atlanta, GA 30305**                                         |
| (Address  of principal executive offices, including zip code) |
|                                                          |
| **(404) 869-2500**                                            |
| (Registrant's  telephone number, including area code)         |
|                                                          |
| (Former  name, if changed since last report)                  |
|                                                          |
|                                                               |

Indicate bycheck mark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x No o

APPLICABLE ONLY TOCORPORATE ISSUERS

Indicate thenumber of shares outstanding of each of the issuer's classes of common stock,as of the latest practicable date:

The number ofshares of common stock outstanding at August 1, 2001 was 49,220,000.

----

----

CYPRESS COMMUNICATIONS,INC. AND SUBSIDIARIESQUARTERLY REPORT ON FORM 10-QFOR THE THREE MONTHS ENDED JUNE 30, 2001

Table of Contents

|       | Part I – Financial  Information                                                                |
|------------|-----------------------------------------------------------------------------------------------------|
|       |                                                                                                |
| Item 1.    | Financial Statements                                                                                |
|       |                                                                                                |
|       | Balance Sheets as of  December 31, 2000 and June 30, 2001 (Unaudited)                               |
|       |                                                                                                |
|       | Statements  of Operations (Unaudited) for the three months ended June 30, 2000 and 2001             |
|       |                                                                                                |
|       | Statements  of Operations (Unaudited) for the six months ended June 30, 2000 and 2001               |
|       |                                                                                                |
|       | Statements  of Cash Flows (Unaudited) for the six months ended June 30, 2000 and 2001               |
|       |                                                                                                |
|       | Notes  to Interim Financial Statements (Unaudited) for the six months ended June 30,  2000 and 2001 |
|       |                                                                                                |
| Item  2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations         |
|       |                                                                                                |
| Item  3.   | Quantitative  and Qualitative Disclosures About Market Risk                                         |
|       |                                                                                                |
|       |                                                                                                |
|       | Part II – Other Information                                                                    |
|       |                                                                                                |
| Item 1.    | Legal Proceedings                                                                                   |
|       |                                                                                                |
| Item  2.   | Changes  in Securities and Use of Proceeds                                                          |
|       |                                                                                                |
| Item 3.    | Defaults Upon  Senior Securities                                                                    |
|       |                                                                                                |
| Item  4.   | Submission  of Matters to a Vote of Security Holders                                                |
|       |                                                                                                |
| Item 5.    | Other Information                                                                                   |
|       |                                                                                                |
| Item 6.    | Exhibits and  Reports on Form 8-K                                                                   |
|       |                                                                                                |
| Signatures |                                                                                                |
|       |                                                                                                |
|       |                                                                                                |

Part I. Financial Information

Item1.  Financial Statements.

CYPRESS COMMUNICATIONS,INC. AND SUBSIDIARIES CONSOLIDATEDBALANCE SHEETS

|                                                                                                                    | DECEMBER 31,                                                                                                                                                              |         | JUNE 30,    |         |
|-------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|-------------|--------------|
|                                                                                                                    | 2000                                                                                                                                                                      |         | 2001        |         |
|                                                                                                                    |                                                                                                                                                                           |         |             |         |
|                                                                                                                    |                                                                                                                                                                      |         | (UNAUDITED) |         |
| ASSETS                                                                                                                  |                                                                                                                                                                      |         |        |         |
| CURRENT ASSETS:                                                                                                         |                                                                                                                                                                      |         |        |         |
|                                                                                                                    | Cash  and cash equivalents                                                                                                                                                | $            | 28,108,000  |         | $ | 15,609,000 |   |
|                                                                                                                    | Short-term  investments                                                                                                                                                   | 67,809,000   |        | 32,183,000   |   |
|                                                                                                                    | Accounts  receivable, net                                                                                                                                                 | 2,499,000    |        | 2,930,000    |   |
|                                                                                                                    | Other  accounts receivable                                                                                                                                                | 397,000      |        | 1,232,000    |   |
|                                                                                                                    | Prepaid  expenses and other                                                                                                                                               | 606,000      |        | 1,211,000    |   |
|                                                                                                                    |                                                                                                                                                                           |         |             |         |
|                                                                                                                    | Total  current assets                                                                                                                                                     | 99,419,000   |        | 53,165,000   |   |
|                                                                                                                    |                                                                                                                                                                           |         |             |         |
| PROPERTY  AND EQUIPMENT, net of accumulated depreciation of $11,737,000 and $19,105,000  in 2000 and 2001, respectively | 101,368,000                                                                                                                                                               |         | 90,700,000  |         |
|                                                                                                                    |                                                                                                                                                                           |         |             |         |
| OTHER ASSETS:                                                                                                           |                                                                                                                                                                      |         |        |         |
|                                                                                                                    | Real  estate access rights, net                                                                                                                                           | 121,117,000  |        | 88,334,000   |   |
|                                                                                                                    | Other  intangible assets, net                                                                                                                                             | 6,743,000    |        | 6,289,000    |   |
|                                                                                                                    | Other                                                                                                                                                                     | 2,758,000    |        | 2,595,000    |   |
|                                                                                                                    |                                                                                                                                                                           |         |             |         |
|                                                                                                                    | Total  other assets                                                                                                                                                       | 130,618,000  |        | 97,218,000   |   |
|                                                                                                                    |                                                                                                                                                                           |         |             |         |
|                                                                                                                    | Total  assets                                                                                                                                                             | $            | 331,405,000 |         | $ | 241,083,000 |   |
|                                                                                                                    |                                                                                                                                                                           |         |             |         |
| LIABILITIES  AND STOCKHOLDERS' EQUITY                                                                                   |                                                                                                                                                                      |         |        |         |
| CURRENT LIABILITIES:                                                                                                    |                                                                                                                                                                      |         |        |         |
|                                                                                                                    | Accounts  payable                                                                                                                                                         | $            | 4,081,000   |         | $ | 734,000 |   |
|                                                                                                                    | Accrued  expenses                                                                                                                                                         | 21,403,000   |        | 16,728,000   |   |
|                                                                                                                    | Current  portion of capital lease obligations                                                                                                                             | 195,000      |        | 409,000      |   |
|                                                                                                                    |                                                                                                                                                                           |         |             |         |
|                                                                                                                    | Total  current liabilities                                                                                                                                                | 25,679,000   |        | 17,871,000   |   |
| LONG-TERM  PORTION OF CAPITAL LEASE OBLIGATIONS                                                                         | 235,000                                                                                                                                                                   |         | 583,000     |         |
|                                                                                                                    |                                                                                                                                                                           |         |             |         |
|                                                                                                                    | Total  liabilities                                                                                                                                                        | 25,914,000   |        | 18,454,000   |   |
|                                                                                                                    |                                                                                                                                                                           |         |             |         |
| STOCKHOLDERS'  EQUITY:                                                                                             |                                                                                                                                                                      |         |        |         |
|                                                                                                                    | Common  stock, $.001 par value; 150,000 shares authorized in 2000 and 2001;  48,540,000 and 49,246,000 shares issued  and outstanding in 2000 and 2001, respectively | 49,000       |        | 49,000       |   |
|                                                                                                                    | Additional  paid-in capital                                                                                                                                               | 395,399,000  |        | 385,529,000  |   |
|                                                                                                                    | Warrants  outstanding                                                                                                                                                     | 185,187,000  |        | 185,187,000  |   |
|                                                                                                                    | Deferred  compensation                                                                                                                                                    | (19,663,000  | )           | (8,412,000   | ) |
|                                                                                                                    | Other  comprehensive income                                                                                                                                               | 345,000      |        | (23,000      | ) |
|                                                                                                                    | Accumulated  deficit                                                                                                                                                      | (255,826,000 | )           | (339,701,000 | ) |
|                                                                                                                    |                                                                                                                                                                           |         |             |         |
|                                                                                                                    | Total  stockholders' equity                                                                                                                                               | 305,491,000  |        | 222,629,000  |   |
|                                                                                                                    |                                                                                                                                                                           |         |             |         |
|                                                                                                                    | Total  liabilities and stockholders' equity                                                                                                                               | $            | 331,405,000 |         | $ | 241,083,000 |   |
|                                                                                                                    |                                                                                                                                                                           |         |             |         |
|                                                                                                                         |                                                                                                                                                                           |              |             |              |  |  |  |  |

The accompanying notes are an integral part ofthese consolidated balance sheets.

CYPRESS COMMUNICATIONS,INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFOPERATIONS(UNAUDITED)FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 2001

|                                                   | 2000                                                                                                                           |       | 2001        |       |
|--------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|
|                                                   |                                                                                                                                |       |             |       |
| REVENUES                                               | $                                                                                                                              | 3,310,000  |        | $          | 4,751,000 |   |
|                                                   |                                                                                                                                |       |             |       |
| OPERATING EXPENSES:                                    |                                                                                                                           |       |        |       |
|                                                   | Cost  of services                                                                                                              | 3,552,000  |        | 6,632,000  |   |
|                                                   | Sales  and marketing, including noncash compensation expense of $263,000 and  $178,000 in 2000 and 2001, respectively          | 5,525,000  |        | 2,480,000  |   |
|                                                   | General  and administrative, including noncash compensation expense of $1,353,000 and  $447,000 in 2000 and 2001, respectively | 14,177,000 |        | 8,095,000  |   |
|                                                   | Amortization  of real estate access rights                                                                                     | 4,670,000  |        | 2,769,000  |   |
|                                                   | Depreciation  and other amortization                                                                                           | 1,785,000  |        | 4,170,000  |   |
|                                                   | Restructuring  and other unusual and infrequent charges                                                                        | 0          |        | 4,617,000  |   |
|                                                   |                                                                                                                                |       |             |       |
|                                                   | Total  operating expenses                                                                                                      | 29,709,000 |        | 28,763,000 |   |
|                                                   |                                                                                                                                |       |             |       |
| OPERATING  LOSS                                        | (26,399,000                                                                                                                    | )          | (24,012,000 | )          |
| INTEREST  INCOME, net                                  | 2,601,000                                                                                                                      |       | 695,000     |       |
|                                                   |                                                                                                                                |       |             |       |
| LOSS  BEFORE INCOME TAXES                              | (23,798,000                                                                                                                    | )          | (23,317,000 | )          |
| INCOME  TAX BENEFIT                                    | 0                                                                                                                              |       | 0           |       |
|                                                   |                                                                                                                                |       |             |       |
| NET  LOSS                                              | (23,798,000                                                                                                                    | )          | (23,317,000 | )          |
| NET LOSS PER COMMON SHARE:                             |                                                                                                                           |       |        |       |
|                                                   | Basic  and diluted                                                                                                             | $          | (0.50       | )          | $ | (0.48 | ) |
|                                                   |                                                                                                                                |       |             |       |
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES  OUTSTANDING: |                                                                                                                           |       |        |       |
|                                                   | Basic  and diluted                                                                                                             | 47,779,000 |        | 48,143,000 |   |
|                                                   |                                                                                                                                |       |             |       |
|                                                        |                                                                                                                                |            |             |            |  |  |  |  |

The accompanying notesare an integral part of these consolidated statements.

CYPRESS COMMUNICATIONS,INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFOPERATIONS(UNAUDITED)FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 2001

|                                                   | 2000                                                                                                                              |       | 2001        |       |
|--------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|
|                                                   |                                                                                                                                   |       |             |       |
| REVENUES                                               | $                                                                                                                                 | 5,840,000  |        | $          | 9,408,000 |   |
|                                                   |                                                                                                                                   |       |             |       |
| OPERATING EXPENSES:                                    |                                                                                                                              |       |        |       |
|                                                   | Cost  of services                                                                                                                 | 5,906,000  |        | 14,800,000 |   |
|                                                   | Sales  and marketing, including noncash compensation expense of $536,000 and  $348,000 in 2000 and 2001, respectively             | 7,951,000  |        | 6,183,000  |   |
|                                                   | General  and administrative, including noncash compensation expense of $2,444,000 and  $1,034,000, in 2000 and 2001, respectively | 22,001,000 |        | 19,049,000 |   |
|                                                   | Amortization  of real estate access rights                                                                                        | 7,052,000  |        | 6,202,000  |   |
|                                                   | Depreciation  and other amortization                                                                                              | 2,816,000  |        | 8,358,000  |   |
|                                                   | Restructuring  and other unusual and infrequent charges                                                                           | 0          |        | 40,527,000 |   |
|                                                   |                                                                                                                                   |       |             |       |
|                                                   | Total  operating expenses                                                                                                         | 45,726,000 |        | 95,119,000 |   |
|                                                   |                                                                                                                                   |       |             |       |
| OPERATING  LOSS                                        | (39,886,000                                                                                                                       | )          | (85,711,000 | )          |
| INTEREST  INCOME, net                                  | 4,658,000                                                                                                                         |       | 1,836,000   |       |
|                                                   |                                                                                                                                   |       |             |       |
| LOSS  BEFORE INCOME TAXES                              | (35,228,000                                                                                                                       | )          | (83,875,000 | )          |
| INCOME  TAX BENEFIT                                    | 0                                                                                                                                 |       | 0           |       |
|                                                   |                                                                                                                                   |       |             |       |
| NET  LOSS                                              | (35,228,000                                                                                                                       | )          | (83,875,000 | )          |
| NET LOSS PER COMMON SHARE:                             |                                                                                                                              |       |        |       |
|                                                   | Basic  and diluted                                                                                                                | $          | (0.93       | )          | $ | (1.74 | ) |
|                                                   |                                                                                                                                   |       |             |       |
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES  OUTSTANDING: |                                                                                                                              |       |        |       |
|                                                   | Basic  and diluted                                                                                                                | 37,763,000 |        | 48,101,000 |   |
|                                                   |                                                                                                                                   |       |             |       |
|                                                        |                                                                                                                                   |            |             |            |  |  |  |  |

The accompanying notesare an integral part of these consolidated statements.

CYPRESS COMMUNICATIONS,INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OFCASH FLOWS(UNAUDITED)FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 2001

|                                              | 2000                                                                         |         | 2001        |        |       |
|---------------------------------------------------|------------------------------------------------------------------------------|--------------|-------------|-------------|------------|
|                                              |                                                                              |         |             |        |       |
| CASH FLOWS FROM OPERATING ACTIVITIES:             |                                                                         |         |        |        |       |
|                                              | Net  loss                                                                    | $            | (35,228,000 | )           | $          | (83,875,000 | ) |   |
|                                              | Adjustments to  reconcile net loss to net cash used in operating activities: |         |        |        |       |   |
|                                              | Depreciation  and other amortization                                         | 9,868,000    |        | 14,560,000  |       |   |
|                                              | Amortization  of deferred compensation                                       | 2,765,000    |        | 1,382,000   |       |   |
|                                              | Restructuring  and other unusual and infrequent charges                      | 0            |        | 38,890,000  |       |   |
|                                              | Other  non-cash items                                                        | 215,000      |        | (6,000      | )          |   |
|                                              | Changes in operating  assets and liabilities:                                |         |        |        |       |   |
|                                              | Accounts  receivable, net                                                    | (540,000     | )           | (431,000    | )          |   |
|                                              | Prepaid  expenses and other current assets                                   | (952,000     | )           | 867,000     |       |   |
|                                              | Other  assets                                                                | (929,000     | )           | 84,000      |       |   |
|                                              | Accounts  payable and accrued expenses                                       | 2,813,000    |        | (8,489,000  | )          |   |
|                                              |                                                                         |              |        |             |       |   |
|                                              | Net  cash used in operating activities                                       | (21,988,000  | )           | (37,018,000 | )          |   |
|                                              |                                                                              |         |             |        |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:             |                                                                         |         |        |        |       |
|                                              | Purchases  of property and equipment                                         | (57,033,000  | )           | (13,840,000 | )          |   |
|                                              | Sale  of property and equipment                                              | 0            |        | 5,813,000   |       |   |
|                                              | Cash  acquired in acquisitions                                               | 295,000      |        | 0           |       |   |
|                                              | Sale  (purchases) of short-term investments, net                             | (75,890,000  | )           | 35,231,000  |       |   |
|                                              | Other                                                                        | (252,000     | )           | 0           |       |   |
|                                              |                                                                              |         |             |        |       |
|                                              | Net  cash (used in) provided by investing activities                         | (132,880,000 | )           | 27,204,000  |       |   |
|                                              |                                                                              |         |             |        |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:             |                                                                         |         |        |        |       |
|                                              | Return  of investment in Cypress Canada                                      | 0            |        | (2,333,000  | )          |   |
|                                              | Proceeds  from exercise of stock options                                     | 209,000      |        | 0           |       |   |
|                                              | Principal  payments on capital lease obligations                             | (133,000     | )           | (240,000    | )          |   |
|                                              | Proceeds  from initial public offering, net of offering costs                | 179,908,000  |        | 0           |       |   |
|                                              |                                                                              |         |             |        |       |
|                                              | Net  cash provided by (used in) financing activities                         | 179,984,000  |        | (2,573,000  | )          |
|                                              |                                                                              |         |             |        |       |
| EFFECT  OF EXCHANGE RATE CHANGES ON CASH          | 0                                                                            |         | (112,000    | )           |       |
|                                              |                                                                              |         |             |        |       |
| INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS | 25,116,000                                                                   |         | (12,499,000 | )           |       |
| CASH  AND CASH EQUIVALENTS, beginning of period   | 69,475,000                                                                   |         | 28,108,000  |        |       |
|                                              |                                                                              |         |             |        |       |
| CASH  AND CASH EQUIVALENTS, end of period         | $                                                                            | 94,591,000   |        | $           | 15,609,000 |   |   |
|                                              |                                                                              |         |             |        |       |
| SUPPLEMENTAL DISCLOSURES:                         |                                                                         |         |        |        |       |
|                                              | Common  stock issued to acquire SiteConnect                                  | $            | 7,908,000   |        | $          | 0 |   |   |
|                                              |                                                                         |              |        |             |       |   |
|                                              | Assets  acquired under capital leases                                        | $            | 0           |        | $          | 802,000 |   |   |
|                                              |                                                                              |         |             |        |       |
|                                                   |                                                                              |              |             |             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

The accompanying notesare an integral part of these consolidated statements.

CYPRESS COMMUNICATIONS,INC. AND SUBSIDIARIESNOTES TO INTERIM CONSOLIDATEDFINANCIAL STATEMENTSJUNE 30, 2000 AND 2001

1. ORGANIZATION AND NATURE OF BUSINESS

             Cypress Communications, Inc. andits subsidiaries ("Cypress Communications" or the"Company") provide a full range of broadband communications servicesto businesses in multi-tenant office buildings located in select major metropolitanmarkets within the United States. These communications services include highspeed Internet access and data services, local and long distance voiceservices, feature rich digital telephone systems, digital satellite businesstelevision, voicemail, e-mail, website hosting, security/monitoring servicesand other advanced communications services. The Company delivers these servicesover state-of-the-art fiber-optic, digital and broadband networks that CypressCommunications designs, constructs, owns and operates inside large- andmedium-sized office buildings. In addition, in January 2001, the Company beganoffering wholesale services to other communications providers using ourexisting fiber-optic and copper network infrastructure.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

             The accompanying unauditedconsolidated financial statements have been prepared in accordance withgenerally accepted accounting principles for interim financial information andwith the instructions for Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby generally accepted accounting principles for complete financial statements.In the opinion of management, all adjustments (consisting of normal recurringaccruals) necessary to present fairly the information set forth therein havebeen included. The accompanying condensed consolidated financial statementsshould be read in conjunction with the financial statements and footnotes includedin the Annual Report on Form 10-K of Cypress Communications for the year endedDecember 31, 2000. Operating results for the six-month period ended June 30,2001 are not necessarily an indication of the results that may be expected forthe year ended December 31, 2001.

3. CAPITAL TRANSACTIONS

STOCK OPTION REPRICING

             On February 16, 2001, the Company'sboard of directors approved a plan to reprice certain existing stock optionshaving an exercise price of greater than $2.52 per share. Pursuant to the plan,options to purchase 1,566,788 shares of common stock, having an originalweighted average exercise price of $10.25 per share, were repriced to anexercise price of $1.28 per share. In addition, options to purchase 1,619,500shares of common stock held by certain executive officers of the Company,having an original weighted average exercise price of $5.01 per share, wereconverted into (i) options to purchase 910,000 shares of common stock at $1.28per share, and (ii) 496,700 shares of restricted common stock. The Companyrecorded deferred compensation of $528,000 for the restricted stock, which isbeing amortized over the three year vesting period. The vesting schedulesapplicable to the employee stock options affected by this repricing andconversion did not change. The Company accounted for the repriced stock optionsunder the variable accounting method. For the six-month period ending June 30,2001, Cypress Communications was not required to recordany incremental compensation expense related to the repriced options, as thefair value of the Company's common stock was below $1.28 per share as of June30, 2001.

4. EXECUTIVE COMPENSATION

             On February 16, 2001, CypressCommunications granted 165,000 shares of restricted common stock under anexecutive compensation agreement with its Chief Executive Officer and, inconnection therewith, recorded deferred compensation expense of $175,000, whichis being amortized over a 51-month vesting period. According to the terms ofthe agreement, one-half of the shares would vest if and when the Company'smanagement established, and the Company's board of directors approved, afully-funded business plan. The vesting of the remaining half of the shareswill be accelerated if the Company's closing sales price of common stockexceeds six dollars per share adjusted for stock split, stock dividend, orrecapitalization. On March 21, 2001, one-half of the shares vested as a resultof the Company's board of director's approval of the Company's fully-fundedbusiness plan.

             For the six-months ended June 30,2001, the Company recorded amortization expense of $95,000 for these restrictedshares.

5. CYPRESS CANADA

             In September 2000, CypressCommunications and e-ffinity properties, inc. ("e-ffinity") formedCypress Canada Communications Inc. to provide in-building communicationsservices in Canada. Cypress Communications and e-ffinity owned 51% and 49%,respectively, of Cypress Canada. Cypress Canada was originally capitalized witha total of $5 million in cash contributed by Cypress Communications ande-ffinity based on each party's respective ownership percentage.

             In January 2001, CypressCommunications and e-ffinity agreed to cease the operations of Cypress Canadaand for Cypress Communications to return e-ffinity's original investment in thejoint venture. In March 2001, Cypress Communications returned $2.3 million toe-ffinity representing e-ffinity's initial investment in Cypress Canada plusinterest earned.

6. RESTRUCTURING AND OTHER UNUSUAL ANDINFREQUENT CHARGES

             In December 2000, the Company'sboard of directors committed the Company to a revised business plan thatincluded several initiatives that were designed to extend the Company's needfor additional funding into the second quarter of 2002. The revised planincluded the Company's exit from several markets, as well as cost reductionsthrough employee reduction and other measures. This plan would focus theCompany's retail operations in the following markets: Atlanta, Boston, Chicago,Dallas, Denver, Houston, New Orleans, Phoenix, San Francisco, Seattle, SouthernCalifornia (Los Angeles and Orange County), South Florida and Washington DC.The Company had originally targeted 28 metropolitan retail markets. The Companyalso decided to implement wholesale operations in all 28 markets where it hadconstructed in-building networks whereby the Company would sell access to itsin-building networks to other communications providers. In December 2000, theCompany recorded a special charge of $64.7 million related to thisrestructuring.

             OnMarch 21, 2001, the Company's board of directors approved a revised businessplan under which Cypress Communications will concentrate its retail efforts onseven major metropolitan markets. Based on the revised plan, the companycontinues to offer comprehensive voice and data services in Atlanta, Boston,Chicago, Dallas, Houston, and Southern California (Los Angeles and OrangeCounty). In Seattle, the Company continues to offer its data services only.

             In connection with the revisedbusiness plan, the Company announced a reduction of its workforce by 187employees across all functional areas during the three-months ending March 31,2001. The Company recorded certain restructuring and other unusual andinfrequent charges in first and second quarter of 2001 related to this revisedplan.

             A detail of these charges is as follows:

|                                                           | 2000      |       | 2001       |   |       |   |
|----------------------------------------------------------------|-----------|------------|------------|--------|------------|--------|
|                                                           |           |       |            |   |       |   |
|                                                           | 4th  Qtr. |       | 1st  Qtr.  |   | 2nd Qtr.   |   | Total |   |
|                                                           | Amount    |       | Amount     |   | Amount     |   | Amount |   |
|                                                           |           |       |            |   |            |   |  |   |
| Impaired  real estate access rights                            | $         | 47,650,000 |       | $      | 26,583,000 |   | $ | 0 |   | $ | 74,233,000 |   |
| Impaired  property and equipment                               | 9,572,000 |       | 4,858,000  |   | 0          |   | 14,430,000 |   |
| Impaired  property and equipment - previous quarter adjustment |      |       |       |   | 2,000      |   | 2,000 |   |
| Circuit  termination charges                                   | 5,104,000 |       | 1,968,000  |   | 0          |   | 7,072,000 |   |
| Office  space leases                                           | 2,056,000 |       | 2,556,000  |   | 1,999,000  |   | 6,611,000 |   |
| Office  space leases - previous quarter adjustment             |      |       | (1,530,000 | )      | 1,717,000  |   | 187,000 |   |
| Severance  benefits                                            | 258,000   |       | 1,475,000  |   | 899,000    |   | 2,632,000 |   |
| Other                                                          | 106,000   |       | 0          |   | 0          |   | 106,000 |   |
|                                                           |           |       |            |   |            |   |  |   |
| Total                                                          | $         | 64,746,000 |       | $      | 35,910,000 |   | $ | 4,617,000 |   | $ | 105,273,000 |   |
|                                                           |           |       |            |   |            |   |  |   |

             The Company recorded an impairmentcharge in accordance with SFAS No. 121 to write off the net book value of realestate access rights in the markets in which the Company has suspended retailservices.

             The Company also recorded animpairment charge in accordance with SFAS No. 121 related to i) property andequipment that the Company has not placed in service, no longer plans to use,and expects to sell at a discount from its net book value, and ii) property andequipment deployed in markets in which the Company does not plan to provideretail services and that the Company believes has no salvage value. Propertyand equipment expected to be sold was written down to its estimated fair valuebased upon third party quotes to purchase such property and equipment.

             Restructuring charges include theCompany's estimate of costs it may incur to terminate contracts it has withcommunications service providers to purchase circuits and connectivity, as wellas charges for office space lease commitments in markets where the Company hasexited retail operations, net of an estimate for sublease rentals. Therestructuring charge also includes severance benefits for employees terminatedin the six-months ending June 30, 2001. Restructuring costs were accrued inaccordance with EITF 94-3.

             Inthe December 2000 restructuring charge, the Company recorded a $2,056,000accrual for office space lease commitments in markets in which the Companysuspended retail services, net of estimated sublease revenues. This accrual wasbased upon company estimates which were considered most likely at the time. InMarch 2001, the Company revised this estimate based on changes in expectedsublease revenues and lease termination charges. This resulted in a change inestimate of the December 2000 charge related to office space commitments. Therestructuring accrual for such commitments was reduced to $526,000, requiringthe reversal of $1,530,000 of the accrual in March 2001.  In June 2001, the Company revised theDecember 2000 and March 2001 charges related to office space commitments.  Due primarily to declining market conditionsin the San Francisco office space market, the Company increased the restructuringaccrual for these commitments by $1,717,000. The Company also recorded additional office space charges of $1,999,000related to excess space in markets where the Company expects to continue retailoperations but with a smaller workforce.

             The Company also revised theDecember 2000 and March 2001 charges related to impaired property andequipment.  The value of Internetequipment and other miscellaneous equipment in discontinued retail markets witha net book value of $2.5 million was estimated to be impaired.  The value of this additional impairment wasoffset by a $2.5 million revision to the salvage value of certain previouslyexpensed equipment.

             Impaired real estate access rights andproperty and equipment charges are non-cash charges.  Circuit termination charges, office space leases and severancebenefits are cash charges.  A portion ofthese changes were accrued as follows:

|                         | 2000      |      | 2001      |   |      |   |
|------------------------------|-----------|-----------|-----------|--------|-----------|--------|
|                         |           |      |           |   |      |   |
|                         | 4th  Qtr. |      | 1st  Qtr. |   | 2nd Qtr.  |   | Total |   |
|                         | Accrual   |      | Accrual   |   | Accrual   |   | Accrual |   |
|                         |           |      |           |   |           |   |  |   |
| Circuit  termination charges | $         | 5,104,000 |      | $      | 1,968,000 |   | $ | 0 |   | $ | 7,072,000 |   |
| Office  space leases         | 2,056,000 |      | 1,026,000 |   | 3,716,000 |   | 6,798,000 |   |
| Severance  benefits          | 258,000   |      | 615,000   |   | 122,000   |   | 995,000 |   |
| Other                        | 106,000   |      | 0         |   | 0         |   | 106,000 |   |
|                         |           |      |           |   |           |   |  |   |
| Total                        | $         | 7,524,000 |      | $      | 3,609,000 |   | $ | 3,838,000 |   | $ | 14,971,000 |   |
|                         |           |      |           |   |           |   |  |   |

             Cash payments related to theseaccruals are listed below:

|                          | 2000      |   | 2001      |   |      |   |
|-------------------------------|-----------|--------|-----------|--------|-----------|--------|
|                          |           |   |           |   |      |   |
|                          | 4th  Qtr. |   | 1st  Qtr. |   | 2nd Qtr.  |   | Total |   |
|                          | Payments  |   | Payments  |   | Payments  |   | Payments |   |
|                          |           |   |           |   |           |   |  |   |
| Circuit  termination charges  | $         | 0      |      | $      | 0         |   | $ | 0 |   | $ | 0 |   |
| Office  space leases          | 0         |   | 197,000   |   | 1,485,000 |   | 1,682,000 |   |
| Severance  benefits           | 0         |   | 258,000   |   | 615,000   |   | 873,000 |   |
| Other                         | 0         |   | 106,000   |   | 0         |   | 106,000 |   |
|                          |           |   |           |   |           |   |  |   |
| Total                         | $         | 0      |      | $      | 561,000   |   | $ | 2,100,000 |   | 2,661,000 |   |
|                          |           |   |           |   |           |   |  |   |
| Net  Accrual at June 30, 2001 |      |   |      |   |      |   | $ | 12,310,000 |   |
|                          |      |   |      |   |      |   |  |   |

             Severancein the amount of $1,637,000 was paid when expensed.

7. COMMITMENTS

             Certain communication licenseagreements include the requirement to pay the property owner or operator a basefee. As of June 30, 2001, the aggregate minimum obligation under theseagreements was approximately $2.2 million per year for approximately the nextseven years.

             In 2001, the Company entered intoadditional capital lease agreements to finance the purchase of computerhardware related to the implementation of its operational support system. As ofJune 30, 2001, future minimum lease obligations under these new agreements were$159,000, $319,000 and $319,000 for 2001, 2002 and 2003 respectively.

             The Company currently has contractswith several communications providers with minimum purchase obligations forleased transport under terms typically ranging from two to five years. As ofJune 30, 2001, approximate future minimum purchase commitments were as follows:

| 2001   |   | $         | 3,817,000 |
|--------|--------|-----------|-----------|
| 2002   |   | 3,474,000 |
| 2003   |   | 984,000   |
| 2004   |   | 461,000   |
| 2005   |   | 177,000   |
|   |   |           |
|   |   | $         | 8,913,000 |
|   |   |           |

**SPECIALCAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS**

             This report containsforward-looking statements within the meaning of the Federal securities laws.Forward-looking statements include all statements, estimates, projections,expectations or predictions about future events and often include words such as"estimate," "projects," "will,""targets," "expects," "believe," "isdesigned to" and other words or expressions indicating statements aboutthe future. Without limiting the foregoing, forward-looking statements in thisreport include statements relating to the company's plans, objectives, expectationsand prospects under "Item 2. Management's Discussion and Analysis ofFinancial Condition and Results of Operations." Reliance should not beplaced on forward-looking statements because they involve known and unknownrisks and uncertainties which may cause the actual results, performance orachievements of the company to differ materially from anticipated futureresults, performance or achievements expressed or implied by suchforward-looking statements. These risks and uncertainties, include, among otherthings whether the company will achieve targeted cost reductions and greateroperational efficiencies as a result of its revised business plan, the effectsof focusing on a limited number of markets, whether the company will besuccessful in implementing its wholesale strategy, the company's ability tomanage its restructuring, the amount and timing of restructuring charges, theability to successfully sell voice and data services, whether the company willbe successful in improving its operations, provisioning and other coreprocesses, the effect of new regulations governing communications access andservices, whether the company will be able to maintain its Nasdaq listing, andother risks and uncertainties detailed from time to time in the company's Securitiesand Exchange filings. The company disclaims any obligation to update any of theforward-looking statements contained herein to reflect future events ordevelopments.

Item 2. Management's Discussion and Analysis ofFinancial Condition and Results of Operations

Overview

             We provide a full range ofbroadband communication services to businesses located in commercial officebuildings in select major metropolitan markets in the United States. Theseservices include high speed Internet access and data services, local and longdistance voice services, feature rich digital telephone systems, digitalsatellite business television, voicemail, e-mail, website hosting,security/monitoring services and other advanced communications services. Inaddition, in January 2001, we began offering wholesale services to othercommunications providers using our existing fiber-optic and copper networkinfrastructure.

             We began providing communicationsservices and operating in-building networks in Atlanta, Georgia in June of 1996.As of June 30, 2001, we had constructed in-building networks in 562 buildingsrepresenting approximately 164 million rentable square feet in 28 majormetropolitan markets. Overall, as of June 30, 2001, we had license agreementsgiving us the right to operate our networks in over 1,000 buildingsrepresenting more than 250 million rentable square feet.

             In January 2001, in an effort toconserve existing capital, refine core business practices, streamlineoperations, increase productivity, and shorten the time needed to achievepositive cash flow, we reduced the scope of our retail business to 13 markets.In connection with this restructuring, we recorded a $64.7 million charge inthe fourth quarter of 2000 related to the impairment of certain fixed assets,the impairment of real estate access rights in markets in which we suspendedretail services for the foreseeable future, the estimated cash costs ofdisconnecting circuits and terminating office leases prior to the expiration ofapplicable communications agreements and office leases and cash severancepayments to terminated employees.

             On March 21, 2001, we suspendedretail business in six additional markets to concentrate retail operations inthe following metropolitan areas: Atlanta, Boston, Chicago, Dallas, Houston,Seattle, and Southern California (Los Angeles and Orange County). On March 21,2001, we also announced plans to reduce our workforce from approximately 400employees on March 1, 2001, to approximately 200 employees by mid-2001. Inconnection with this further restructuring, we recorded a $35.9 and$4.6 million charge in the first quarter and second quarter of 2001,respectively, related to the impairment of certain fixed assets, the impairmentof real estate access rights in the six additional markets in which wesuspended retail operations for the foreseeable future, the estimated cashcosts of disconnecting circuits and terminating office leases prior to theexpiration of applicable communications agreements and office leases, and cashseverance payments to terminated employees (see Note 6 to our financialstatements for further information).

Resultsof Operations

Three Months Ended June 30, 2001 Compared to theThree Months Ended June 30, 2000

             Revenues. Revenues for the threemonths ended June 30, 2001 increased 44% to $4.8 million from $3.3 million forthe same period in the prior year. This increase relates to the addition of newcustomers and providing additional services to existing customers.

             Cost of services. Cost of servicesfor the three months ended June 30, 2001 increased 87% to $6.6 million from$3.6 million for the same period in the prior year. The increase in cost ofservices was primarily due to an increase in the average number of activein-building networks in the second quarter of 2001 compared to the secondquarter of 2000. The average number of active buildings for the three monthsended June 30, 2001 was 366, which is a 36% increase over the average number ofactive buildings for the three months ended June 30, 2000.  Active networks include constructedin-building networks that are connected to local, long distance and Internetproviders for the provision of voice and/or data communication services.  As of June 30, 2001, we had 324 activein-building networks versus 418 as of June 30, 2000. Cost of services increaseddespite the lower number of active buildings because the majority of buildingsincluded in the Company’s restructuring were not deactivated until June2001.  Additional increases in costs ofservices are attributable to increased penetration in mature buildings andincreased Internet backbone costs.

             Sales and marketing expenses. Salesand marketing expenses for the three months ended June 30, 2001 decreased 56%to $2.4 million from $5.5 million for the same period in the prior year. $1.8million of this decrease in expenses was due to a reduction in marketingactivities, including print media, and $1.7 million of this decrease was due toa reduction in the number of sales and marketing personnel and their relatedcompensation, travel and other expenses. These decreases were offset by a $0.4million increase in revenue sharing payments made to property owners with whomwe have license agreements.

             General and administrativeexpenses. General and administrative expenses for the three months ended June30, 2001 decreased 43% to $8.1 million from $14.2 million for the same periodin the prior year. The decrease in general and administrative expenses was dueto a $5.2 million decrease in salaries, benefits and other expenses related tothe decrease in personnel as a result of the Company’s restructuring; a $0.9million decrease in non-cash compensation related to the issuance of stockoptions at exercise prices lower than fair value on their dates of grant due toemployee turnover; and a $0.2 million decrease in accounting, consulting andlegal fees. These decreases were offset by a $0.2 million increase ininsurance, taxes and other miscellaneous expenses.

             Amortization of Real Estate AccessRights. Amortization of real estate access rights for the three months endedJune 30, 2001 decreased 41% to $2.8 million from $4.7 million for the sameperiod in the prior year. The amortization of real estate access rightsrepresents the amortization of the value of warrants issued to property ownersor operators over the terms ofthe related license agreements, which aregenerally ten years.  A portion of thesereal estate access rights were written-off in connection with the Company’srestructuring in the fourth and first quarters of 2000 and 2001, respectively(see Note 6 to our financial statements for further information).

             Depreciation and otheramortization. Depreciation and other amortization for the three months endedJune 30, 2001 increased 134% to $4.2 million from $1.8 million for the sameperiod in the prior year. $1.9 million of this increase was due to increasedcapital expenditures related to deploying our in-building networks and relatedequipment and $0.5 million of this increase was due to depreciation of computersand other back-office equipment.

             Restructuring and other unusual andinfrequent charges. In the second quarter of 2001, we recorded a $2.9 millionrestructuring charge related to the impairment of certain fixed assets, thetermination of office leases prior to their expiration, and cash severancepayments to terminated employees.  $2.0million of this charge was for the estimated costs to terminate contracts foroffice space commitments and $0.9 million of this charge was for severancebenefits paid to terminated employees. We also revised our fourth quarter 2000 and first quarter 2001 estimateswith respect to terminating office space commitments by $1.7 million primarilydue to declining market conditions in the San Francisco office space market(see Note 6 to our financial statements).

             Interest income, net. Interestincome, net for the three months ended June 30, 2001 decreased to $0.7 millionfrom $2.6 million for the same period in the prior year. The decrease ininterest income, net was due to decreased investments in short-term interestbearing securities to fund our operations. Interest expense was nominal in bothperiods.

Six Months EndedJune 30, 2001 Compared to the Six Months Ended June 30, 2000

             Revenues. Revenues for the sixmonths ended June 30, 2001 increased 62% to $9.4 million from $5.8 million forthe same period in the prior year. $3.4 million of the increase was due to theaddition of new customers and providing additional services to existingcustomers. $0.2 million of the increase resulted from the acquisition of theassets and customers of SiteConnect in April 2000.

             Cost of services. Cost of servicesfor the six months ended June 30, 2001 increased 151% to $14.8 million from$5.9 million for the same period in the prior year. The incrase in cost ofservices was primarily due to an increase in the average number of activein-building networks in the first six months of 2001 compared to the first sixmonths of 2000.  As of June 30, 2001, wehad deconstructed active networks in 104 buildings.  We had 324 active in-building networks as of June 30, 2001 versus418 as of June 30, 2000. Active networks include constructed in-buildingnetworks that are connected to local, long distance and Internet providers forthe provision of voice and/or data communication services. Cost of servicesincreased despite the lower number of active buildings because the majority ofdeconstructed buildings were not deconstructed until June 2001.  The average number of lit buildings for thesix months ended June 30, 2001 was 82% greater than the average number ofactive lit buildings for the six months ended June 30, 2000.  Additional increases in costs of servicesare attributable to increased penetration in mature buildings and increasedInternet backbone costs.

             Sales and marketing expenses. Salesand marketing expenses for the six months ended June 30, 2001 decreased 23% to$6.2 million from $8.0 million for the same period in the prior year. $1.7million of this decrease in expenses was due to a reduction in spending onprint media, and $0.9 million of this decrease in expenses was due to adecrease in the number of sales and marketing personnel and their relatedcompensation and expenses.  Thesedecreases were offset by a $0.8 million increase in revenue sharing paymentsmade to property owners with whom we have license agreements.

             General and administrativeexpenses. General and administrative expenses for the six months ended June 30,2001 decreased 13% to $19.1 million from $22.0 million for the same period inthe prior year. The decrease in general and administrative expenses was due toa $3.1 million decrease in salaries, benefits and other expenses related to theCompany’s restructuring; a $1.4 million decrease in non-cash compensationrelated to the issuance of stock options at exercise prices lower than fairvalue on their dates of grant due to employee turnover; and a $0.2 milliondecrease in various operating expenses as the Company continues to restructureoperations and reduce costs. These decreases were offset by a $1.1 millionincrease in rent expense and $0.7 million increase in accounting, consultingand legal fees.

             Amortization of Real Estate AccessRights. Amortization of real estate access rights for the six months ended June30, 2001 decreased 12% to $6.2 million from $7.1 million for the same period inthe prior year. The amortization of real estate access rights represents theamortization of the value of warrants issued to property owners or operatorsover the terms of the related license agreements, which are generally tenyears.  A portion of these real estateaccess rights were written off in connection with the Company’s restructuringin the fourth and first quarters of 2000 and 2001, respectively (see Note 6 toour financial statements for further information).

             Depreciation and otheramortization. Depreciation and other amortization for the six months ended June30, 2001 increased 197% to $8.4 million from $2.8 million for the same periodin the prior year. $4.4 million of this increase was due to increased capitalexpenditures related to deploying our in-building networks and relatedequipment; $1.0 million of this increase was due to depreciation of computersand other back-office equipment; and $0.2 million of this increase was due todepreciation and amortization of tangible and intangible assets obtainedthrough the acquisition of SiteConnect.

             Restructuring and other unusual andinfrequent charges. In the first six months of 2001, we recorded a $40.3 million restructuring charge related to theimpairment of certain fixed assets, the impairment of real estate accessrights, the estimated cash costs of disconnecting circuits and terminatingoffice leases prior to the expiration of applicable communication agreementsand office leases and cash severance payments to terminated employees.  We revised our fourth quarter and firstquarter estimates of the cost to terminate office leases by a net $0.2 millionbased on more favorable results than expected in negotiating the termination orsubleasing of several office space leases and the declining outlook of otheroffice real estate markets, primarily San Francisco (see Note 6 to ourfinancial statements).

             Interest income, net. Interest income, netfor the six months ended June 30, 2001, decreased to $1.8 million from $4.7million for the same period in the prior year. The decrease in interest income,net was due to decreased investments in short-term interest bearing securitiesto fund our operations. Interest expense was nominal in both periods.

Liquidityand Capital Resources

             Cash,cash equivalents and short-term investments were $95.9 million and $47.8million at December 31, 2000, and June 30, 2001, respectively. 

             Theresults of our operations have generated a net cash outflow due to the rate atwhich we have grown. Cash flow from operations totaled ($22.0 million) and($37.0 million) for the six months ended June 30, 2000 and 2001,respectively. The expansion of our operating, sales, marketing andadministrative personnel, the growth of our leased network, office space costs,and other growth-driven operating expenses were the principal contributors tothe increase in the net cash outflow between the periods. We expect thisoutflow to decrease as we reduce the scope of our operations.

             Cash (used in) provided byinvesting activities was ($132.9 million) and $27.2 million for thesix months ended June 30, 2000 and 2001, respectively. During the six monthsended June 30, 2001, cash provided by investing activities was due to the saleof $35.2 million in short-term investments and $5.8 million of property, plantand equipment.  These sales were offsetby capital expenditures of $13.8 million related primarily to construction ofin-building networks completed as of December 31, 2000, and the implementationof our operational support system.  Theproperty plant and equipment sold were excess inventory and deconstructedassets related to the Company’s restructuring. During the six months ended June 30, 2000, cash used in investingactivities was primarily related to the construction of our in-buildingnetworks. As of June 30, 2001, we had made capital expenditures of $128.3million since inception. We expect future capital expenditures to decrease aswe reduce the scope of our operations.

             Cash provided by (used in)financing activities was $180.0 million and ($2.6 million) for the sixmonths ending June 30, 2000 and 2001, respectively. Cash used by financingactivities during the six months ended June 30, 2001 was primarily for therepayment of e-ffinity's original investment in the joint venture of CypressCanada Communications Inc. During the six months ended June 30, 2000, cashprovided by financing activities was primarily from our initial public offeringin which we sold 11,500,000 shares of our common stock at $17 per share,netting proceeds of approximately $179.6 million.

             As of June 30, 2001, we had$993,000 in capital lease obligations outstanding. These capital leaseobligations relate to back-office equipment used for our operational supportsystem and communications equipment. Our capital lease obligations contain noprovisions that would limit our future borrowing ability.

             We currently have contracts with severalcommunications providers with minimum purchase obligations for leased voice anddata transport, equipment colocation, and other services under terms typicallyranging from one to five years. As of June 30, 2001, these minimum purchasecommitments totaled approximately $8.9 million through 2005 (seeNote 7 to our financial statements for further information).

             As of June 30, 2001, we hadoperating lease commitments, primarily related to office space, which totaled$14.9 million.

             Under our license agreements withproperty owners and/or operators of several office buildings, we are obligatedto pay approximately $2.2 million in commissions per year for the nextseven years (see Note 7 to our financial statements). Some of thesepayments relate to buildings that are located in markets where we havesuspended our retail operations but maintain certain continuing contractobligations.

             In September 2000, e-ffinityand Cypress Communications formed Cypress Canada Communications Inc. toprovide in-building communications services in Canada. In January 2001, weagreed to repay all of our joint venture partner's interest in the subsidiary,having decided to cease retail operations in Canada, except for potentialwholesale operations relating to Cypress Canada's existing networks in fourbuildings in Toronto, Canada. In March 2001, we paid e-ffinity $2.3 million asreturn of their original investment plus interest earned.

             As of June 30, 2001, we had constructedin-building networks in 562 buildings representing approximately164 million rentable square feet in 28 major metropolitan areas. InJanuary, 2001, we reduced the scope of our retail business to 13 markets, andon March 21, 2001, we suspended retail operations in 6 additional markets,having determined to concentrate our retail business in Atlanta, Boston,Chicago, Dallas, Houston, Seattle (data products and services only) andSouthernCalifornia (Los Angeles and OrangeCounty). In connection with our December 2000 restructuring, we recorded a$64.7 million charge in December 2000 related to the impairment of realestate access rights in markets in which we will not provide retail servicesfor the forseeable future and certain fixed assets, the estimated cash costs ofdisconnecting circuits and terminating office leases prior to the expiration ofapplicable connection agreements and office leases, and cash severance paymentsto terminated employees. Of the $64.7 million charge, approximately$57.3 million is related to the impairment of fixed assets and real estateaccess rights, which should not adversely affect our current or future cashposition.

             In March 2001, we revised theDecember 2000 estimate of the cost of terminating office leases based onchanges in expected sublease revenues and lease termination charges. Thisresulted in a change in estimate of the December 2000 charge related to officespace commitments.  The restructuringaccrual for such commitments was reduced to $526,000, requiring the reversal of$1,530,000 of the accrual in first quarter of 2001.

             In June 2001, the Company revisedthe December 2000 and March 2001 charges related to office spacecommitments.  Due primarily to decliningmarket conditions in the San Francisco office space market, the Companyincreased the restructuring accrual for these commitments by $1,717,000.

             In connection with our March 2001restructuring, we recorded a $40.5 million charge in the first six monthsof 2001 related to the impairment of certain fixed assets, the impairment ofreal estate access rights in the six additional markets in which we suspendedretail operations for the foreseeable future, the cash costs of disconnectingcircuits and terminating office leases prior to the expiration of applicablecommunications agreements and office leases, and cash severance payments toterminated employees (see Note 6 to our financial statements for furtherinformation). Of the $40.5 million charge, approximately $31.4 million isrelated to the impairment of fixed assets and real estate access rights, whichshould not adversely affect our current or future cash position.  We expect to incur additional restructuringcharges in 2001 related to specifically identifying on-going reductions inpersonnel as announced in March 2001.

             The actual amount and timing of ourfuture capital requirements may differ materially from our estimates as aresult of many factors, some of which we cannot control. These factors include:

|   | • | obtaining favorable prices for circuits  and transport;                                                                                |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                   |
|   | • | our ability to develop, acquire and  integrate the necessary operational support systems;                                              |
|   |   |                                                                                                                                   |
|   | • | the cost of network development in each  of our markets;                                                                               |
|   |   |                                                                                                                                   |
|   | • | demand for our services;                                                                                                               |
|   |   |                                                                                                                                   |
|   | • | the nature and penetration of new  services that we may offer;                                                                         |
|   |   |                                                                                                                                   |
|   | • | the timing and extent of future  acquisitions or investments, if any, and our ability to integrate these  acquisitions or investments; |
|   |   |                                                                                                                                   |
|   | • | ability to cease operations in abandoned  markets in a timely and cost efficient manner;                                               |
|   |   |                                                                                                                                   |
|   | • | regulatory changes;                                                                                                                    |
|   |   |                                                                                                                                   |
|   | • | changes in technology and competitive  developments beyond our control; and                                                            |
|   |   |                                                                                                                                   |
|   | • | our ability to recruit, hire and retain  qualified personnel.                                                                          |

             Duringthe first quarter of 2001, the company adopted a revised business plan that isdesigned to fully fund ongoing business operations and generate positive cashflow in the second half of 2003.  As ofJune 30, 2001, the company maintained sufficient capital resources to fundcontinuing business operations in accordance with that plan.  The company is monitoring its progressagainst the revised plan and may adjust business operations as necessary toaccommodate plan requirements.

RecentAccounting Pronouncements

             We adopted Securities and ExchangeCommission SAB No. 101, "Revenue Recognition in FinancialStatements" in 2000. This did not have a material effect on our financialstatements. SFAS No. 133, "Accounting for Derivatives," which iseffective January 1, 2001,for the Company, did not have a material effect on our financial statements.

             In July 2001, the FinancialAccounting Standards Board (FASB)issued SFAS No. 141 “Business Combinations”and SFAS No. 142 “Goodwill and Other Intangible Assets”.  SFAS No. 141 requires business combinationsinitiated after June 30, 2001, to be accounted for using the purchase method ofaccounting and broadens the criteria for recording intangible assets separatefrom goodwill.  Recorded goodwill andintangibles will be evaluated against this new criteria and may result incertain intangibles being reallocated into goodwill, or alternatively, amountsinitially recorded as goodwill may be separately identified and recognized apartfrom goodwill.  SFAS No. 142 requiresthe use of a nonamortization approach to account for purchased goodwill andcertain intangibles.  Under anonamortization approach, goodwill and certain intangibles will not beamortized into results of operations, but instead would be reviewed forimpairment and written down and charged to results of operations only in theperiods in which the recorded value of goodwill and certain intangibles is morethan its fair value.    The provisions ofeach statement which apply to goodwill and intangible assets acquired prior toJune 30, 2001, will be adopted by the Company on January 1, 2002.  The Company is in the process of evaluatingthe financial statement impact of adoption of SFAS No. 142.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

             Our exposure to financial marketrisk, including changes in interest rates and marketable equity securityprices, relates primarily to our investment portfolio. We typically do notattempt to reduce or hedge the market exposure on our investment securitiesbecause a substantial majority of our investments are in fixed-rate, short-termsecurities. We do not have any derivative instruments. As of June 30, 2001, a100 basis point increase or decrease in the average interest rates earned onour investments would impact the fair value of our investment portfolio orrelated yearly income by approximately $320,000. As of June 30, 2001, we had nodebt outstanding, other than capital leases.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

             We are not currently involved inany pending legal proceedings that are expected to have a material adverseeffect on our business.

Item 2. Changes in Securities and Use of Proceeds.

             Consistent with the description ofthe use of proceeds set forth in the prospectus contained in the RegistrationStatement, during the first six months of 2001 we used approximately $48.1million in proceeds from the initial public offering for the construction ofin-building networks, the purchase of communications equipment and workingcapital and general corporate purposes. To date we have used approximately $132.1 million in proceeds from theinitial public offering for the construction of in-building networks, thepurchase of communications equipment and working capital and general corporatepurposes.

Item3.  Defaults Upon Senior Securities.

             None.

Item 4. Submission of Matters to a Vote of Security Holders.

             Weheld our annual meeting of shareholders on May 22, 2001.  Our shareholders voted to elect Laurence S.Grafstein, Randall A. Hack and P. Eric Yopes as Class II directors.  The three Class II directors were elected toserve until our 2004 annual meeting and until their successors are duly electedand qualified.  The votes cast for, andwithheld from, the election of the aforementioned directors are listed below:

|   |                  | Votes  Cast For | Votes  Withheld From |
|--------|-----------------------|-----------------|----------------------|
|   |                  |                 |                      |
|   | Laurence S. Grafstein | 35,814,238      | 63,068               |
|   | Randall A. Hack       | 35,823,953      | 53,353               |
|   | P. Eric Yopes         | 35,823,853      | 53,453               |

             The company did not submit anyother matters to a vote of security holders during the second quarter of2001.  However, on June 27, 2001, thecompany announced that its board of directors would solicit votes from itsshareholders to approve a reverse split of the company’s issued and outstandingshares in an effort to increase the market price per share of the company’scommon stock above $1.00, *i.e.,*theminimum closing bid price required to maintain a listing on The Nasdaq NationalMarket, as described below.

             On April 5, 2001, CypressCommunications received notice from Nasdaq that the company had ninety days toregain compliance with Nasdaq’s minimum closing bid price requirement.  On June 27, 2001, the company announced thatits board of directors would solicit proxies to allow a reverse split of thecompany’s issued and outstanding common stock in an effort to maintain itsNasdaq listing.  On July 6, 2001, thecompany received a Nasdaq Staff Determination that the company’s failure tocomply with the minimum closing bid price requirement subjects the company’ssecurities to delisting as of July 16, 2001, unless the company requests ahearing before a Nasdaq Listing Qualifications Panel by July 13, 2001. On July12, 2001, the company requested a hearing before a Nasdaq Listing QualificationsPanel to appeal the delisting of its securities.  By letter dated July 13, 2001, Nasdaq notified the company thatthe hearing will take place on August 24, 2001, and the company’s securitieswill continue to be traded on The Nasdaq National Market pending the outcome ofthe appeal. On July 17, 2001, the company filed a Schedule 14A InformationProxy Statement with the Securities and Exchange Commission (Commission FileNumber 00-29281), wherein the company notified its stockholders that the companywill convene a special meeting of stockholders on August 17, 2001, to considerand act upon an amendment to the Cypress Communications' Second Amended andRestated Certificate of Incorporation to permit a reverse stock split at aratio not to exceed one-for-fifteen.

             While there can be no assurancethat the Nasdaq Listing Qualifications Panel will grant Cypress Communications’request for continued listing, the company believes that the Panel will viewits reverse split proposal favorably. If, following the reverse stock split, the per share price of thecompany’s common stock exceeds $1.00 for ten consecutive trading days, thecompany believes that Nasdaq may withdraw the delisting action. 

Item 5. Other Information.

             None.

Item6.  Exhibits and Reports on Form 8-K.

             (a)         Exhibits

             None.

             (b)        Reports on Form 8-K

             Therewere no reports filed by the Company on Form 8-K during the quarter ended June30, 2001.

**SIGNATURES**

             Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

|                   | CYPRESS  COMMUNICATIONS, INC. |
|------------------------|-------------------------------|
|                   |                          |
|                   |                          |
| Date:  August 14, 2001 | By:                           | /s/  W. Frank Blount |
|                   |                          |  |
|                   |                          | W.  Frank Blount |
|                   |                          | Chairman  and Chief Executive Officer |