##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2000

OR



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
	EXCHANGE ACT OF 1934

For the transition period from
          to

Commission file number: 0-25314


e.spire COMMUNICATIONS, INC.

(Exact name of registrant as specified in its
charter)

|                                                                          |  |                                                  
|------------------------------------------------------------------------- |  | -------------------------------------------------
|Delaware
	(State or other jurisdiction
	of incorporation or organization) |  | 52-1947746
	(I.R.S. Employer
	Identification No.)
|12975 Worldgate Drive                                                     |  | 20170                                            
|Herndon, Virginia                                                         |  | (Zip code)                                       
|(Address of principal executive offices)                                  |  |                                                  

703.639.6000

(Issuers telephone number including area
code)


Securities registered pursuant to Section 12(b) of the
Act: None

Securities registered pursuant to section 12(g) of the
Act:

Common Stock, $0.01 par value

Title of Securities


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

Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K
(Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.

The aggregate market value of the Common Stock of e.spire
Communications, Inc. (e.spire), held by
non-affiliates of the registrant (40,735,310 shares) as of
June 1, 2001, was $4,888,237. The number of shares of
common stock of e.spire, outstanding on June 1, 2001, was
57,586,836.

DOCUMENTS INCORPORATED BY REFERENCE

The Index to Exhibits appears on page E-1.









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TABLE OF CONTENTS



|                                                   |                                                                                                    |  |  |  |  |  |  | 
|-------------------------------------------------- | -------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                            
|                                                   | Item 1. Description of Business                                                                   
|                                                   | Item 2. Properties                                                                                
|                                                   | Item 3. Legal Proceedings                                                                         
|                                                   | Item 4. Submission of Matters to a Vote of Security Holders                                       
|PART II                                           
|                                                   | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                     
|                                                   | Item 6. Selected Financial Data                                                                   
|                                                   | Item 7. Managements Discussion and Analysis                                                      
|                                                   | Item 7a. Quantitative and Qualitative Disclosures About Market Risk                               
|                                                   | Item 8. Financial Statements and Supplementary Data                                               
|                                                   | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      
|PART III                                          
|                                                   | Item 10. Directors and Executive Officers of the Registrant                                       
|                                                   | Item 11. Executive Compensation                                                                   
|                                                   | Item 12. Security Ownership of Certain Beneficial Owners and Management                           
|                                                   | Item 13. Certain Relationships and Related Transactions and Indebtedness of Directors and Officers
|PART IV                                           
|                                                   | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                         
|                                                   | SIGNATURES                                                                                        
|Ex-10.56 First Amendment to Restated Credit Agrmnt
|Ex-10.57 Second Amend. to Restated Credit Agrmnt  
|Ex-10.58 Loan Put Modification Agreement          
|Ex-10.59 Assignment Agreement                     
|Ex-10.60 Employment Agreement re: Schmitt         
|Ex-10.61 Employment Agreement re: Sparks          
|Ex-10.62 Employment Agreement re: Mikaelsson      
|Ex-10.63 Employment Agreement re: Resavy          
|Ex-10.64 Employment Agreement re: Pryor           
|Ex-10.65 Employment Agreement re: Miller          
|Ex-10.66 Loan and Security Agreement              
|Ex-10.67 First Amendment of the Loan & Security Ag
|Ex-23.1 Consent of KPMG LLP                       
|Ex-99.1 Supplemental Financial Information        



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##### Table of Contents



e.spire COMMUNICATIONS, INC.

FORM 10-K

TABLE OF CONTENTS

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|Part I                        |           |  |                                                                                       |        |  |   
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|                              | Item  1.  |  | Description of Business                                                               |        |  | 10 | 
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|                              | Item  2.  |  | Properties                                                                            |        |  | 25 | 
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|                              | Item  3.  |  | Legal Proceedings                                                                     |        |  | 26 | 
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|                              | Item  4.  |  | Submission of Matters to a Vote of Security
	Holders                                  |        |  | 26 | 
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|Part II                       |           |  |                                                                                       |        |  |   
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|                              | Item  5.  |  | Market for Registrants Common Equity and
	Related Stockholder Matters                |        |  | 28 | 
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|                              | Item  6.  |  | Selected Financial Data                                                               |        |  | 29 | 
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|                              | Item  7.  |  | Managements Discussion and Analysis                                                  |        |  | 31 | 
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|                              | Item  7a. |  | Quantitative and Qualitative Disclosures About
	Market Risk                           |        |  | 44 | 
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|                              | Item  8.  |  | Financial Statements and Supplementary Data                                           |        |  | 45 | 
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|                              | Item  9.  |  | Changes in and Disagreements With Accountants on
	Accounting and Financial Disclosure |        |  | 45 | 
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|Part III                      |           |  |                                                                                       |        |  |   
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|                              | Item  10. |  | Directors and Executive Officers of the Registrant                                    |        |  | 46 | 
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|                              | Item  11. |  | Executive Compensation                                                                |        |  | 51 | 
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|                              | Item  12. |  | Security Ownership of Certain Beneficial Owners
	and Management                       |        |  | 60 | 
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|                              | Item  13. |  | Certain Relationships and Related Transactions                                        |        |  | 61 | 
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|Part IV                       |           |  |                                                                                       |        |  |   
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|                              | Item  14. |  | Exhibits, Financial Statement Schedules, and
	Reports on Form 8-K                     |        |  | 63 | 
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|SIGNATURES                    |           |  | 72                                                                                    |       
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|Index of Exhibits             |           |  | 73                                                                                    |       
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|Index to Financial Statements |           |  | 74                                                                                    |       

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RISK FACTORS

You should carefully consider the risks described below
before making an investment decision. The risks described below
are not the only ones facing our company. Additional risks not
presently known to us or that we currently deem immaterial may
also impair our business operations.

Risks relating to our substantial debt and negative cash
flow

We have a history of losses, anticipate future
losses and may never be profitable.

Since formation, we have incurred significant net operating
losses and negative cash flow from operating activities. As of
December 31, 2000, we had an accumulated deficit of
$931.9 million. During the year ended December 31,
2000, we incurred a net loss of $293.6 million, and
generated negative cash flow from operating activities of
$44.5 million. We expect to continue to incur negative cash
flow from operating activities into 2001. We may never achieve
or sustain profitability or generate positive cash flow in the
future.

We filed for voluntary petitions under
Chapter 11 of the United States Bankruptcy Code.

On March 22, 2001, e.spire and its subsidiaries filed
voluntary petitions for protection under Chapter 11 of the
United States Bankruptcy Code in the Federal District of
Delaware in order to facilitate the restructuring of
e.spires long-term debt, trade liabilities and other
obligations. e.spire and its bankruptcy filing subsidiaries are
currently operating as debtors-in-possession under the
supervision of the United States District Court for the District
of Delaware. e.spire entered into a Debtor-in-Possession Loan
and Security Agreement dated as of April 10, 2001
(DIP Loan), which consists of a $25 million
term loan and a $60 million revolver. The United States
Bankruptcy Court for the District of Delaware granted final
approval of this agreement on June 12, 2001. Management
believes that current cash, short term investments and the
debtor-in-possession financing, along with protection under
bankruptcy law, should enable e.spire to fund operations through
the bankruptcy restructuring process. In the event that plans or
assumptions change, or prove to be inaccurate, significant
unexpected expenses are incurred, or cash resources, together
with borrowings under the debtor-in-possession financing
arrangement, prove to be insufficient to fund operations,
e.spire may be required to seek additional sources of capital
(or seek additional capital sooner than currently anticipated).
There can be no guarantee, however, that additional capital will
be available on reasonable terms, or at all.

By filing for bankruptcy e.spire has taken advantage of the
benefits of Chapter 11 to facilitate a financial
restructuring that e.spire believes will significantly reduce
its burdensome debt structure and enable it to compete more
effectively in the future. By using the Chapter 11 process,
e.spire can continue business operations without interruption
while it seeks to obtain the necessary approval of its financial
restructuring plan. In sum, e.spire believes that the bankruptcy
filing is a critical step to establishing a more appropriate
capital structure and a strong competitive future for e.spire.
While it is not e.spires intention to go out of business
or liquidate it can not make any assurances that it will be able
to obtain the financing necessary for it to successfully exit
Chapter 11 and continue its future operations.

Our prepetition debt and preferred stock
instruments restrict our ability to obtain exit
financing.

Our debt and preferred stock instruments restrict our ability to
obtain additional debt or obtain financing. Moreover, even if we
are able to secure the consent of the holders of those
securities to additional financing, we cannot assure you that we
will be able to obtain the additional financing necessary to
exit Chapter 11, satisfy our operating and other cash
requirements or to implement our strategy successfully. In
particular, you should note that other competitive local
exchange carriers have not been able to access the public debt
and equity markets in the recent past and many competitive
providers have also recently filed Chapter 11 bankruptcy
petitions. Currently, we do not have any commitments for exit
financing.

We have substantial debt obligations.

As of December 31, 2000, we had $994.0 million of
indebtedness and the accreted value of our redeemable preferred
stock was $327.5 million. In addition, as previously
discussed e.spire entered into a Debtor-in-Possession Loan and
Security Agreement dated as of April 10, 2001 (DIP
Loan), which consists of a $25 million term loan and
a $60 million revolver. The United States Bankruptcy Court
for the District of

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We depend upon suppliers for key components of
our network infrastructure and the failure to obtain components
or services from these suppliers on a timely basis could have a
material adverse effect on our business.

We rely on other companies to supply key components of our
network infrastructure, including telecommunications services,
network capacity and switching and networking equipment, which,
in the quantities and quality demanded by us, are available only
from limited sources. We are also dependent upon other local
exchange carriers to provide telecommunications services and
facilities to us and our customers. We have, from time to time,
experienced delays or other problems in receiving
telecommunications services and facilities which we request, and
we may not be able to obtain such services or facilities on the
scale and within the time frames required by us at an affordable
cost, or at all. Any failure to obtain such components, services
or additional capacity on a timely basis, at an affordable cost,
or at all, would have a material adverse effect on our business,
financial condition and results of operations.

We may not be able to collect on all of our
receivables from customers.

We may experience difficulties in collection of receivables from
our customers due to disputes regarding amounts due, financial
difficulties of customers or other factors beyond our control.
Several of our customers recently announced that they were
experiencing liquidity problems. Some of these customers have
filed for protection under applicable bankruptcy laws. We cannot
predict the outcome of our ability to recover amounts due from
customers filing bankruptcy. In the aggregate, the inability to
collect these outstanding account receivables could have a
material adverse effect on e.spires financial position and
future revenues.

Any failure of our network infrastructure
system would negatively affect our business.

Our success in marketing our services to business and government
users requires that we provide superior reliability, capacity
and security through our network infrastructure. Our networks
and the networks upon which we depend are subject to factors
which may cause interruptions in service or reduced capacity for
customers, including, but not limited to, physical damage, power
loss, capacity limitations, software defects, and breaches of
security (due to computer virus, break-ins or otherwise).
Interruptions in service, capacity limitations or security
breaches could have a material adverse effect on our business,
financial condition and results of operations.

Our operations and our network depend on our
ability to obtain and maintain rights-of-way and other third
party agreements; if we are unable to obtain and maintain these
agreements over desired routes on commercially reasonable terms,
our profitability could be adversely affected.

In order to construct our networks, we must obtain local
franchises and other permits, as well as rights to use
underground conduit and aerial pole space and other
rights-of-way. We also need rights to use conduits and other
rights-of-way from entities such as local exchange carriers and
other utilities, railroads, long-distance companies, state
highway authorities, local governments and transit authorities.
We may not be able to maintain our existing franchises, permits
and rights or to obtain and maintain the other franchises,
permits and rights needed to implement our business plan on
acceptable terms. Although we have no reason to believe

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Our success depends on a small number of key
employees, the loss of whom could have a material adverse effect
on the successful completion of our business plans.

We are currently managed by a small number of key management and
operating personnel whose efforts will largely determine our
success. Our success also depends upon our ability to attract
and retain qualified operating, marketing, sales, financial,
accounting and technical personnel. Competition for qualified
personnel in the telecommunications industry is intense and,
accordingly, we may not be able to continue to hire or retain
necessary personnel. The loss of key management personnel would
likely have a material adverse impact on our business, results
of operations and financial condition.

Risks related to our securities.

Anti-takeover provisions affecting us could
prevent or delay a change of control that is beneficial to
you.

Provisions of our debt and preferred stock instruments and other
agreements, and provisions of applicable Delaware law and
applicable federal and state regulations may discourage, delay
or prevent a merger or other change of control that shareholders
may consider favorable. These provisions could:



| |   |                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------
| |  | have the effect of delaying, deferring or preventing a change in
	control of our company;                
|
| |  | discourage bids for our securities at a premium over the market
	price;                                  
|
| |  | adversely affect the market price of, and the voting and other
	rights of the holders of, our securities;
|
| |  | impede the ability of the holders of our securities to change
	our management.                           

Our business is subject to regulation by the FCC and state
regulatory commissions or similar state regulatory agencies in
the states in which we operate. A change of control could be
deemed to have occurred under applicable FCC and state statutes
or regulations when a specific percentage of our securities is
acquired. Upon any deemed change of control additional
regulatory consents may be required. The obligation to obtain
these consents may have any or all of the effects listed in the
above paragraph.

You may lose all or part of your investment in
e.spires Common Stock or debt.

The Bankruptcy Code requires that all debts be paid in full
before shareholders can receive any recovery in our
restructuring. In our ongoing negotiations with an informal
committee of our bondholders, we have sought to give some value
to all shareholders. We cannot assure you that our restructuring
will ultimately result in any significant value for our
stockholders. In the event of our liquidation, we believe that
our equity would have no value.

Furthermore, we cannot predict the value of any recovery to the
holders of our debt. The holders of our unsecured debt will
likely receive substantially less than the holders of our
secured debt. As discussed in Business  Liquidity and
Capital Resources, all of our assets and the assets of all our
subsidiaries are pledged to secure our indebtedness obligations
to the Senior Secured Credit Facility lenders and the DIP Loan
lenders. Under applicable law, secured creditors will have a
priority claim, and our unsecured creditors will recover only
after the satisfaction of our secured debts.

A liquid public market for our Common Stock
does not exist, which may make it difficult for you to sell our
Common Stock.

Our Common Stock is traded on the OTC Pinksheets. There may be
very limited demand for our Common Stock.

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Risks relating to our relationship with The Huff Alternative
Income Fund

Our principal shareholder, The Huff
Alternative Income Fund, effectively controls our company and
may take actions that could negatively affect other
shareholders.

As of December 31, 2000, approximately 39.2% of our common
stock was beneficially owned by The Huff Alternative Income Fund
In calculating that amount, we have included shares of common
stock that Huff has the right to acquire within 60 days,
including upon conversion or exercise of securities. Designees
of Huff occupy five of nine positions on our board of directors.
In addition, The Huff Alternative Income Fund is the beneficial
owner of approximately 13% of the 14 3/4% preferred stock,
and 23,281 shares of 12.75% Junior Redeemable Preferred Stock
due 2009, which shares have voting rights under certain
circumstances. On September 19, 2000, The Huff Alternative
Income Fund purchased 28,572 shares of exchangeable preferred
stock for an aggregate purchase price of $28,572,000. The
exchangeable preferred stock are exchangeable at our option,
into common stock, convertible preferred stock or warrants, as
specified by The Huff Alternative Income Fund, which could
further increase its ownership of our common stock. Due to the
extent of equity ownership. The Huff Alternative Income Fund is
able to effectively control the election of our board of
directors and other matters voted upon by shareholders. As a
result, The Huff Alternative Income Fund is in a position to
cause us to take actions that benefit only The Huff Alternative
Income Fund and may be adverse to other holders. In addition,
The Huff Alternative Income Fund may be able to transfer a
controlling interest in our company without permitting the other
shareholders to receive a premium for their shares as a result
of any change of control of e.spire. In addition, The Huff
Alternative Income Fund, L.P. owns $100.5 million face
amount 13% Senior Discount Notes due 2005; $36.4 million
face amount 12.75% Senior Discount Notes due 2006;
$62.0 million face amount 13.75% Senior Discount Notes due
2007 and $147.3 million face amount 10.625% Senior Discount
Notes due 2008.

Risks relating to our industry

We operate in a highly regulated industry and
we may not receive the necessary regulatory approvals to conduct
our operations.

Our networks and the provision of telecommunications services
are subject to significant regulation at the federal, state and
local levels. The costs of complying with these regulations and
the delays in receiving required regulatory approvals or the
enactment of new adverse regulation or regulatory requirements
may have a material adverse effect upon our business, financial
condition and results of our operations.

Regulatory requirements have not, to date, significantly
impaired our ability to enter new markets, introduce new
services, and change our prices in response to market
conditions, but the FCC and state regulatory commissions have
jurisdiction to restrict us in each of these areas. It is
possible that the FCC or state commissions may not grant
required authority for us to offer services, or they may not
permit us to introduce all of the services and pricing options
that we wish to offer. We could also incur substantial legal and
administrative expenses to respond to claims by regulators or
other persons that we have not fully complied with the rules of
the FCC or state commissions.

The Telecommunications Act remains subject to judicial review
and additional FCC rulemaking, and thus it is difficult to
predict what effect the legislation will have on us and our
operations. There are currently many regulatory actions underway
and being contemplated by federal and state authorities that
could result in significant changes to the business conditions
in the telecommunications industry. These changes could have a
material adverse effect on our business, financial condition or
results of operations. Please read Business 
Government Regulation, below for additional information
about the regulatory environment in which we operate.

We depend on reciprocal compensation related
to Internet service providers for a significant portion of our
revenue; our right to this revenue is being challenged by
various incumbent providers and if they are successful it will
negatively impact our revenues.

A number of incumbent local exchange carriers around the country
have been contesting whether the obligation to pay reciprocal
compensation of competitive local exchange carriers, such as us,
should apply to local telephone calls terminating to Internet
service providers. Like other competitive carriers, we have

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Under its interconnection agreements with ILECs, the Company has
a right to charge ILECs reciprocal compensation for the
transport and termination of local traffic routed from ILEC end
users to end users of the Companys local exchange
services. Many CLECs, like the Company, have recorded
substantial revenue based on reciprocal compensation for the
termination of calls placed to Internet Service Providers
(ISPs) that are subscribers to their local exchange
services. ILECs have taken the position that calls placed to
ISPs do not terminate at the ISP and, therefore, are not
local traffic for which the CLEC is entitled to
receive reciprocal compensation under the FTA or various
interconnection agreements. Consequently, certain ILECs
currently are refusing to pay reciprocal compensation amounts
for traffic attributable to calls placed to ISPs. Since a
significant portion of the Companys customer base is
comprised of ISPs, a failure by ILECs to pay ISP-related
reciprocal compensation could have a significant impact on the
Companys past and future revenues. The obligation of ILECs
to remit such compensation currently is the subject of numerous
proceedings at the FCC and state PUCs, and in federal and state
courts, including complaint proceedings initiated by the Company
at state commissions and through commercial arbitration for
collection of such compensation under its interconnection
agreements. Any final order by the FCC or a state PUC in a state
in which the Companys interconnection agreements entitle
it to reciprocal compensation, or a final determination by a
federal or applicable state court or arbitration panel that no
reciprocal compensation is owed for calls placed to ISPs, could
have a material adverse effect on the Company.

In late 1998 and early 1999 the FCC determined that both
dedicated access and dial-up calls from
an end user to an ISP are primarily interstate in nature and
therefore are to be considered interstate services, subject to
the FCCs jurisdiction. The FCC then initiated a proceeding
to determine the effect that this regulatory classification will
have on the obligation of a service provider to pay reciprocal
compensation for dial-up calls to ISPs that originate on one
service providers network and terminate on another service
providers network. In that same order, the FCC permitted
existing reciprocal compensation arrangements between service
providers, as set forth in interconnection agreements and
approved and interpreted by state PUCs, to remain intact.
However, on March 24, 2000, the FCCs determination
with respect to dial-up traffic to ISPs was vacated by the DC
Circuit and remanded to the FCC for further proceedings.

The FCC is expected to adopt shortly an order on remand from the
DC Circuit setting forth a new compensation mechanism for
ISP-bound traffic. If adopted by the FCC, reduced rates for this
type of traffic may result in a reduction in the Companys
revenues generated from inter-carrier compensation.

The FCC is expected to adopt shortly a notice of proposed
rulemaking seeking to unify its rules regarding inter-carrier
compensation. The FCC is expected to address disparities in
rates for access charges and reciprocal compensation 
the rates which carriers pay each other for completing calls
exchanged between them. Future adoption by the FCC of a unified
inter-carrier compensation regime that adopts a bill and keep
regime or otherwise reduces the rates that the Company (and
other carriers) may charge for access charges and/or reciprocal
compensation may significantly reduce the Companys
inter-carrier compensation revenues and may have a materially
adverse impact on the Companys financial position.

As of March 2001, over 30 state PUCs have rendered
decisions holding that ILECs were required to make reciprocal
compensation payments to CLECs for dial-up traffic originating
on ILEC networks and terminated by CLECs to ISPs. On the other
hand, several state PUCs have ruled that CLECs are not entitled
to collect reciprocal compensation for terminating ISP-bound
traffic. Several state PUCs also have ruled that CLECs are not
entitled to collect reciprocal compensation for terminating
ISP-bound traffic prospectively under newly arbitrated
interconnection agreements.

The Company has successfully prosecuted multiple complaints
against ILECs for past due reciprocal compensation, resulting in
both commission and arbitrator orders, as well as substantial
settlements. Adverse decisions on future complaints could have a
materially adverse effect on the Companys financial
position.

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We operate in a highly competitive industry
and we cannot be certain that we will be able to effectively
compete.

The telecommunications industry is highly competitive, and one
of the primary purposes of the Telecommunications Act of 1996 is
to foster further competition. Due to extensive competition, we
may not be able to achieve or maintain adequate market share or
margins, or compete effectively, in any of our markets. In each
of our markets, we principally compete with the established
incumbent telephone company serving such market. The established
telephone companies have longstanding relationships with their
customers, financial, technical and marketing resources
substantially greater than ours and the potential to fund
competitive services with cash flows from a variety of
businesses. They also currently benefit from existing
regulations that favor the established telephone companies over
integrated communications providers and competitive local
exchange carriers in some respects. Furthermore, the regional
Bell operating companies recently have been granted, under
particular conditions, pricing flexibility from federal
regulators with regard to some services with which we compete.
This may present established telephone companies with an
opportunity to subsidize services that compete with our services
and offer competitive services at lower prices.

We also face competition from other integrated communications
providers and facilities-based competitive local exchange
carriers, and many other competitors in some of our markets. We
expect to experience increasing competition. Moreover, many of
our current and potential competitors have financial, technical,
marketing, personnel and other resources substantially greater
than ours as well as other competitive advantages, including
brand name recognition. Any of the foregoing factors could have
a material adverse effect on our business, financial condition
and results of operations. See Business 
Competition incorporated by reference to our Annual Report
on Form 10-K for additional information on the competitive
environment in our industry.

The industry in which we operate is subject to
rapid technological change which could render our operations
obsolete.

The telecommunications industry is subject to rapid and
significant technological changes that materially affect the
continued use of fiber optic cable or the electronics utilized
in our networks. Future technological changes, including changes
related to the emerging wireline and wireless transmission and
switching technologies and Internet-related services and
technologies, could have a material adverse effect on our
business, results of operations and financial condition.

The market for our telecommunications services is characterized
by rapidly changing technology, evolving industry standards,
emerging competition and frequent new product and service
introductions. We may not be able to successfully identify new
service opportunities and develop and bring new services to
market. Our pursuit of necessary technological advances may
require substantial time and expense, and we may not succeed in
adapting our telecommunications services business to alternate
access devices, conduits and protocols.

Other Risks

Forward-looking statements contained in or
incorporated by reference in this prospectus are subject to
assumptions, risks and uncertainties, and therefore should not
be relied upon.

Information Regarding Forward-Looking Statements

This report contains or incorporates by reference
forward-looking statements (as such term is defined
in the Private Securities Litigation Reform Act of 1995) about
the Companys financial condition, results of operations
and business. These statements include, among others:



| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | statements concerning the benefits that e.spire expects will
	result from its business activities and certain transactions
	e.spire has completed, and       
|
| |  | other statements of e.spires expectations, beliefs, future
	plans and strategies, anticipated developments and other matters
	that are not historical facts.

8



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These statements may be made expressly in this document, or may
be incorporated by reference to other documents e.spire has
filed with the SEC. You can find many of these statements by
looking for words such as believes,
expects, anticipates,
estimates, or similar expressions used in this
report or incorporated by reference in this report.

These forward-looking statements are subject to numerous
assumptions, risks and uncertainties that may cause
e.spires actual results to be materially different from
any future results expressed or implied by e.spire in those
statements including risks associated with bankruptcy filing.
Factors that could cause actual results to differ materially
from those in the forward-looking statements include, without
limitation, the Companys degree of financial leverage, the
impact of restrictions under the Companys financial
instruments, dependence on availability of transmission
facilities, regulation risks including the impact of the
Telecommunications Act of 1996, contingent liabilities, the
impact of competitive services and pricing, and the ability of
the Company to successfully implement its strategies. In
addition, the risks and uncertainties include those risks,
uncertainties and risk factors identified, among other places,
under Risk Factors in e.spires registration
statement on Form S-4, SEC file number 333-64079, beginning
on page 10, incorporated by reference, and under
Managements Discussion and Analysis of Financial
Condition and Results of Operations contained in this
report.

Other important factors that could prevent e.spire from
achieving its stated goals include, but are not limited to, the
following:



| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the uncertainty of our future associated with our filing for
	protection under Chapter 11 of the United States Bankruptcy
	Code;                                                               
|
| |  | obtaining additional capital to finance operations and exit
	bankruptcy;                                                                                                                       
|
| |  | potential fluctuation in quarterly results;                                                                                                                                                    
|
| |  | attracting and retaining qualified management and employees;                                                                                                                                   
|
| |  | intense competition in the communications services market;                                                                                                                                     
|
| |  | dependence on new product development;                                                                                                                                                         
|
| |  | rapid and significant changes in technology and markets;                                                                                                                                       
|
| |  | adverse changes in the regulatory or legislative environment
	affecting our business;                                                                                                          
|
| |  | failure to maintain necessary rights of way;                                                                                                                                                   
|
| |  | our significant amount of indebtedness and our ability to
	successfully restructure this indebtedness;                                                                                         
|
| |  | our ability to successfully maintain commercial relationships
	with critical vendors and suppliers;                                                                                            
|
| |  | our ability to retain major customers on profitable terms;                                                                                                                                     
|
| |  | the availability and terms of significant additional capital
	required to fund ourcontinued operations; and                                                                                    
|
| |  | our ability to access markets and obtain any required
	governmental authorizations, franchises and permits, in a timely
	manner, at reasonable costs and on satisfactory terms and
	conditions.

Because the statements are subject to risks and uncertainties,
actual results may differ materially from those expressed or
implied by the forward-looking statements. We caution you not to
place undue reliance on the statements, which speak only as of
the date of this report or, in the case of documents
incorporated by reference, the date of the document.

The cautionary statements contained or referred to in this
section should be considered in connection with any subsequent
written or oral forward-looking statements that e.spire or
persons acting on its behalf may issue. e.spire undertakes no
obligation to review or confirm analysts expectations or
estimates or to release publicly any revisions to any forward
looking statement to reflect events or circumstances after the
date of this report or to reflect the occurrence of
unanticipated events, except as required by the Securities
Exchange Act, as amended.

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PART I




Item 1.  Description of Business

Bankruptcy Proceedings

On March 22, 2001 (the Petition Date), e.spire
and its subsidiaries filed voluntary petitions for protection
under Chapter 11 of the United States Bankruptcy Code in
the Federal District of Delaware in order to preserve cash and
to facilitate the restructuring of e.spires long-term
debt, trade liabilities and other obligations. e.spire and its
bankruptcy filing subsidiaries (collectively the
Debtors) are currently operating as
debtors-in-possession under the supervision of the United States
District Court for the District of Delaware. The bankruptcy
petitions were filed in order to preserve cash and to give the
Debtors the opportunity to restructure their debt.

Under the Bankruptcy Code, the rights and treatment of
pre-petition creditors and shareholders are expected to be
substantially altered. As a result of these bankruptcy
proceedings, substantially all liabilities, litigation and
claims against the Debtors in existence at the Petition Date are
stayed unless the stay is modified or lifted or payment has been
otherwise authorized by the Bankruptcy Court. At this time, it
is not possible to predict the outcome of the Chapter 11
cases in general or the effects of such cases on our business,
or on the interest of creditors and shareholders. As a result of
the bankruptcy filing, all of our liabilities incurred prior to
the Petition Date are subject to compromise. No assurance can be
given that e.spire will be successful in reorganizing its
affairs within the Chapter 11 bankruptcy proceedings.

Further, due to the bankruptcy filing and related events, there
is no assurance that the carrying amounts of assets will be
realized or that liabilities will be liquidated or settled for
the amounts recorded. In addition, a plan of reorganization, or
rejection thereof, could change the amounts reported in the
financial statements. As a result, there is substantial doubt
about e.spires ability to continue as a going concern. The
ability of e.spire to continue as a going concern is dependent
upon, but not limited to, formulation, approval, and
confirmation of a plan of reorganization, adequate sources of
capital and obtaining exit financing, customer and employee
retention, the ability to provide high quality services and the
ability to sustain improved results of operations and cash flows
sufficient to continue to operate.

The Company

e.spire Communications, Inc., a Delaware corporation, is a
facilities-based integrated communications provider that
primarily serves business customers by offering an extensive
range of telecommunications services. Established in 1993, as
American Communications Services, Inc., we originally operated
as a competitive access provider (CAP), competing
with local telephone companies by placing our own fiber optic
cables in cities and selling various private line
telecommunications services. The passage of the Federal
Telecommunications Act of 1996 provided the framework for us to
evolve into a competitive local exchange carrier
(CLEC), competing directly with the former monopoly
local telephone companies by providing similar services, as well
as additional services.

We moved our headquarters from Chicago, IL to Annapolis
Junction, MD in May 1995. By this time, we had begun an
aggressive campaign to build local fiber networks in key markets
across the Southern United States. We introduced local switched
voice services, including local exchange services in late 1996,
following the launch of our first local network in Columbus, GA
in August, and, in 1997, began offering long distance services.
By the end of 1997, we had become one of the first competitive
local exchange carriers to offer dedicated, local, and long
distance voice services in combination with high-speed data and
Internet services. By adding data services, we became a
facilities-based integrated communications provider, capable of
being a business customers single source for integrated
communications services.

In April 1998, we changed our name to e.spire
Communications, Inc., and, in 1998 and 1999, continued to build
and enhance our local networks. In February 2000, we
announced the move of our headquarters, including our network
operating center, from Annapolis Junction to Herndon, VA, near
Dulles Airport in Northern Virginia. We also opened a new
state-of-the-art data center nearby in Sterling, VA. In
March 2000,

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Since the passage of the Telecommunications Act of 1996, which
encourages competition in the industry, we have continued to
enhance our broadband networks and introduce additional products
and services that meet the demands of doing business in the
networked economy.

As a competitive local exchange carrier we offer a combination
of local, long distance, dedicated Internet access, and advanced
data services, which allows for the switching and transmission
of mixed voice, data and video multi-media information,
delivered over our own fiber-optic networks. Because we deliver
our services over our own networks and supporting switching and
routing equipment, we can offer our customers integrated
products and services at competitive prices.

We own and operate fiber networks in 38 metropolitan markets, 28
of which are supported by large voice switches, data switches,
and carrier-grade Internet routers. Seven of these 28 are
located in the top-ranking U.S. metropolitan areas by population
size. We also have a 194-mile-long network between New York and
Northern Virginia connecting the New York, Philadelphia,
Baltimore, Washington, DC/ Northern Virginia markets, and a
nationwide Internet network that supports our advanced,
high-speed data applications. As of December 31, 2000, in
addition to the 28 voice switches, our network was comprised of
3,775 route miles, 185,040 fiber miles, 46 e.spire owned and
operated data switches, 51 carrier-grade routers, and a leased
coast-to-coast data network that encompasses approximately
26,000 miles. Through network-to-network interconnections, the
e.spire data network accesses nearly 400 points of presence, or
POPS, throughout the United States.

e.spire has networks in the following metropolitan markets (a *
indicates networks that are not equipped with a voice switch):
Albuquerque, NM; Amarillo, TX*; Atlanta, GA; Austin, TX;
Baltimore, MD; Baton Rouge, LA*; Birmingham, AL; Charleston,
SC*; Chattanooga, TN*; Colorado Springs, CO; Columbia, SC;
Columbus, GA; Corpus Christi, TX*; Dallas, TX; El Paso, TX; Fort
Worth, TX; Fort Lauderdale/ Miami, FL; Greenville, SC; Irving,
TX*; Jackson, MS*; Jacksonville, FL; Kansas City, KS/ Kansas
City, MO; Las Vegas, NV; Lexington, KY*; Little Rock, AR;
Louisville, KY; Mobile, AL; Montgomery, AL; New Orleans, LA; New
York, NY; Philadelphia, PA; San Antonio, TX; Shreveport, LA*;
Spartanburg, SC*; Tampa, FL; Tucson, AZ; Tulsa, OK; and
Washington, DC/ Northern Virginia.

In markets where we deployed our own fiber networks, our
strategy was to first develop the carrier ring
portion of the network, a high capacity network designed to be
accessible to all the major long distance carriers and key
incumbent local exchange carriers central offices in the
area. The carrier ring allows e.spire to provide access to the
incumbents central offices, interexchange carriers
POPs, and customer buildings. Second, we built a backbone
ring extending from the carrier ring. This ring makes
e.spires network accessible to the largest concentration
of telecommunications-intensive business and government
customers in the area. Hubs are strategically located on the
backbone ring. Third, we concentrated our sales and marketing
efforts on adding business and government customers located on
or near our backbone network and hub locations. After we have
identified sufficient customer demand in a particular area, we
extend distribution rings from the backbone ring to
reach specific business customers in that area. We focused on
building distribution rings that reach a large number of
potential customers, located in nearby buildings and office
parks and needing significant telecommunications services.

As part of our business plan, we continue to improve our sales,
marketing, customer care, and operations support systems
capabilities, and we have completed the elimination of our
low-margin resale business. The development of our business and
the construction, acquisition, and expansion of our networks
required significant capital expenditures. A substantial portion
of these costs was incurred before realization of revenues.
These costs, together with the associated early operating
expenses, result in negative cash flow until an adequate
customer base is established. However, as our customer base
grows, we expect incremental revenues to be generated with
decreasing incremental operating expenses, which may provide
positive contributions to cash flow. We have made specific
strategic decisions to build high capacity networks with broad
market coverage, which initially increases capital expenditures
and operating losses. However, we

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e.spire monitors and manages our entire network from our network
operations center in Herndon, Virginia. By centralizing the
control of the networks, we avoid both duplication in effort and
the installation of costly equipment in each of our local
markets. Also, with a consolidated operations center, e.spire
realizes lower 24x7 per customer monitoring and customer service
costs than if it operated a center near each local network. In
2000, e.spire enhanced the use of this facility to include the
monitoring of switched voice services and expects to add this
capability for data services in 2001. The center also
implemented a software upgrade to enhance our overall monitoring
capabilities.

Our customers are typically small- to medium-sized business
customers whose offices require 10 to 100 telephone lines and
which can benefit from our portfolio of integrated products and
services. e.spires core telecommunications business relies
on our own networks and switching equipment to cost-effectively
deliver a broad range of voice, data, and Internet services to
our target customers.

Our products integrate, or bundle, traditional voice services,
including local, long distance, toll-free, and custom calling,
with high-speed data and dedicated Internet services. These
services are typically carried to and from the customers
office location and our local fiber network over a single access
platform. We can provide a pre-packaged bundle of services or a
customized solution, whichever is best for the customer. As a
customers business grows, it can easily add voice lines
and services, such as custom-calling features, or high-speed
data lines and services. Businesses that choose to combine voice
and data traffic on the e.spire network typically save on their
communications costs. The combination of services improves the
efficiency of access facilities and, thus, also reduces our
costs of doing business.

In addition to our core business described above, we have two
subsidiaries that operate separately but complement our
telecommunications service business. ACSI Network Technologies,
Inc. (ACSI NT)which constructs fiber networks
and performs strategic network design services for organizations
deploying networks in major metropolitan areas throughout the
United States. We also provide Web hosting services through our
subsidiary CyberGate, Inc. (CyberGate) and its
subsidiary, FloridaNet, Inc. d/b/a ValueWeb
(ValueWeb), headquartered in Fort Lauderdale, FL.
CyberGate previously offered dial-up Internet access.

ACSI Network Technologies

In June 1998, e.spire launched its subsidiary ACSI NT, Inc
which constructs fiber networks and provides strategic network
design services for organizations deploying networks in major
metropolitan areas throughout the United States.

Through ACSI NT, we design and construct high-speed advanced
fiber optic networks for third parties, such as other
competitive carriers, interexchange carriers and businesses. The
continued growth of the Internet and bandwidth intensive
advanced data services has generated increasing demand for
optimal network design and efficient network construction by the
providers of such services. ACSI NT intends to meet the growing
demand for network capacity by designing and constructing
high-quality, low-cost, customized networks that provide its
customers with unparalleled speed-to-market advantages. ACSI NT
performs mission critical services that few telecommunications
service providers or construction contractors are equipped to
provide, including: executing preliminary market analyses,
authoring business plans, performing site assessments, managing
liability and risk, managing construction and installing fiber.

CyberGate, Inc./ ValueWeb

In January 1997, e.spire purchased CyberGate, a
Florida-based Internet service provider and its subsidiary
ValueWeb , which provides Web hosting services. Through our
subsidiary CyberGate and its subsidiary ValueWeb, we offer
dedicated, shared, and colocation Web hosting services and
related managed services. The continued growth of the Internet
and the ongoing development of the concept of the corporate

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In January 2000, CyberGate completed a move from Deerfield
Beach to a state-of-the-art facility in Fort Lauderdale. The new
facility is equipped with the latest features for storing and
protecting our bank of servers. In September 2000, e.spire
sold CyberGates Internet dial-up customer base to
EarthLink, Inc., a strategic move to focus our resources on
CyberGates subsidiary ValueWeb and its growing,
higher-margin Web hosting, colocation, and managed services
business.

e.spire Services

Voice Services

Switched Voice Services. e.spires switched voice
services include telephone exchange service, including optional
enhanced services such as call waiting, caller ID and three-way
conference calling; switching traffic between e.spires
switch and a business customers Private Branch Exchange
(PBX) and routing local, intraLATA (calls that
originate and terminate in the same local access and transport
area) and interLATA (calls that originate in one and terminate
in another local access and transport area) phone calls,
according to the customers specific requirements;
providing local dial tone services with functionality such as
free internal communications, call forwarding, call transfer,
conference call, and speed dialing; Integrated Services Digital
Network (ISDN) data services; and origination and
termination of long distance traffic between a customer premises
and interexchange carrier via shared trunks using e.spires
local switch.

Dedicated Services. E.spires dedicated services
provide high capacity non-switched interconnections:
(i) between POPs of the same interexchange carriers ;
(ii) between POPs of different interexchange carriers;
(iii) between large business and government end-users and
their selected interexchange carriers; (iv) between an
interexchange carriers POP and an incumbent local exchange
carriers central office or between two incumbent
carriers central offices; and (v) between different
locations of business or government end-users.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Special Access Services. Special access services provide
	a link between an end-user location and the POP of its
	interexchange carrier, or links between interexchange carrier
	POPs, thus bypassing the facilities of the incumbent local
	exchange carrier. These services, which may be ordered by either
	the long distance customer or directly by its interexchange
	carrier, typically provide the customer better reliability,
	shorter installation intervals and lower costs than similar
	services offered by the incumbent. Customer charges are based on
	the number of channel terminations, fixed and mileage-sensitive
	transport charges and costs for any services required to
	multiplex circuits.
|
| |  | Switched Transport Services. Switched transport services
	are offered to interexchange carriers that have large volumes of
	long distance traffic aggregated by an incumbent local exchange
	carriers switch at a central office where e.spire has
	colocated our network. e.spire provides dedicated facilities for
	transporting these aggregated volumes of long distance traffic
	from the incumbent local exchange carriers central office
	to its POP or between incumbent local exchange carriers
	central offices.                                                                                                                                                                                         
|
| |  | Private Line Services. Private line services provide
	dedicated facilities between two end-user locations in the same
	metropolitan area (e.g., a central banking facility and a branch
	office or a manufacturing facility and its remote data
	processing center) and are priced like special access services
	(channel termination charges plus transport and any associated
	multiplexing charges). e.spire expects the demand for private
	line service to increase in conjunction with higher bandwidth
	customer applications.                                                                                                                                                                                 

Data/ Internet Services

In 1997, e.spire introduced our family of high-speed Internet
and data services for businesses, educational institutions,
Internet service providers, and carriers. The e.spire family of
services operates over our coast-to-coast, leased broadband data
communications network that supports the following services:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Internet Access Service. The data and Internet backbone
	is connected to the Global Internet via public and private
	peering arrangements with Internet backbone providers at
	strategic network access

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | points across the United States. This enables e.spire to provide
	high-quality dedicated and dial-up Internet connectivity and
	Internet protocol transport for the business and reseller
	community. The service is targeted to consumers, local and
	regional Internet service providers and corporate Internet users
	requiring dedicated access. The service operates at dedicated
	speeds ranging from 56 kbps to 45 Mbps and at industry-standard
	dial-up speeds.                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Colocation Service. To provide customers that own a
	server appliance with a cost-effective way to enhance their Web
	site throughput and data security, ValueWeb introduced
	colocation service in 1999. Through this service, automated
	security is provided via a proximity badge system Biometric palm
	scanner. This provides security for the customers
	equipment, limits access solely to the customer and authorized
	personnel and greatly reduces chances for human error, security
	risks and potential breaches. Multiple data transfer plans are
	available, including burstable bandwidth. As opposed to paying
	for bandwidth up to a predetermined amount, our facility bills
	bandwidth based on the average amount used per month. As a
	result, customers gain a tremendous amount of additional
	bandwidth capacity which prevents customers from losing site
	traffic due to a lack of bandwidth.
|
| |  | Dedicated Servers Offered Through ValueWeb. To provide
	customers, particularly those in a shared hosting environment, a
	cost-effective way to enhance their Web site capacity, ValueWeb
	introduced dedicated servers. Dedicated servers are an
	innovative option for businesses with limited reinvestment
	capital to quickly upgrade their server disk space and bandwidth
	without incurring considerable overhead costs or additional
	debt. This provides a foundation for managed services and
	application hosting without incurring overhead costs that
	typically amount to many thousands of dollars.                                                                                                                                                                                                                                                                                                       
|
| |  | Digital Subscriber Line (DSL). In 1999, e.spire began
	offering DSL service in eight metropolitan markets. The DSL
	service is available to e.spire customers in Atlanta, GA;
	Austin, TX; Baltimore, MD; Dallas/ Ft. Worth, TX; West Palm
	Beach/ Ft. Lauderdale/ Miami, FL; New York, NY; Philadelphia,
	PA; and Washington, D.C./ Northern Virginia. e.spires DSL
	services enable businesses and telecommuters to use standard
	phone lines to access the Internet or a corporate local area
	network at speeds ranging from 144 Kbps to 1.1 Mbps. DSL service
	is an always-on, dedicated connection that can be up to 25 times
	faster than a connection via a standard 56K modem. Turnkey
	service packages include DSL modem/routers, e-mail accounts,
	domain name registration services and around-the-clock
	monitoring.                                                                                     
|
| |  | Web Hosting Offered Through ValueWeb. Web hosting allows
	customers to benefit from high-speed network connectivity, high
	performance servers, around the clock monitoring and emergency
	provisioning, at a fraction of what it would cost the customer
	to put a comparable internal infrastructure in place. e.spire
	provides the hardware and software necessary to establish a
	companys presence on the Web. Hosted sites are provisioned
	on shared and dedicated, complete with operating system and Web
	server software. Each server is provisioned with a dedicated
	10Mb Ethernet connection to the Internet.                                                                                                                                                                                                                                                                                             
|
| |  | Bundled Internet Solutions. e.spire also provides turnkey
	business Internet solutions. These solutions include dedicated
	Internet access, pre-configured Customer Premises Equipment, Web
	site hosting account, domain name registration and maintenance,
	news feed, and end-to-end service installation. These solutions
	enable businesses to benefit from integrated billing and network
	management.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Frame Relay Service. This service is designed for
	bandwidth needs that vary and for interconnecting geographically
	dispersed networks and equipment. Businesses of any size can
	take advantage of e.spire frame relay for internetworking,
	application sharing, e-mail, file transfer, PC-to-PC and
	PC-to-server communications. The frame relay backbone is
	connected to frame relay networks of other key providers via
	NNIs (Network-to-Network Interfaces) thus enabling e.spire to
	offer comprehensive solutions to local, regional, and national
	businesses regardless of their location. This service supports
	standard multi-protocol encapsulation, which makes it easier to
	integrate new and legacy systems. The service supports user port
	connections ranging from 56 kbps to 1.5 Mbps with a wide range
	of Committed Information Rates.                                                       

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Asynchronous Transfer Mode (ATM) Service.
	This service provides a solution to local, regional and national
	businesses with high-bandwidth, delay-sensitive data
	communications applications. With e.spire ATM service, the
	performance needs of complex, media-rich applications such as
	computer aided design/computer aided manufacturing (CAD/
	CAM), remote super-computing, medical imaging, video
	conferencing, and voice calls are easily met. This service is
	also ideal for higher-volume users of applications such as
	PC-to-server and file transfer. The service supports both
	Constant Bit Rate and Variable Bit Rate service levels over
	Permanent Virtual Circuits with user port speeds ranging from 2
	Mbps to 45 Mbps.
|
| |  | Custom Network Services. These services include design,
	installation, maintenance, hardware (such as switches, routers
	and modems) and configuration (such as maintaining consistent
	versions of the router software and deploying consistent
	configurations) of a customers network. e.spires
	custom network services are designed to eliminate many of the
	timing, coordination and inter-operability issues that arise in
	installations requiring multiple vendors.                                                                                                                                                                                                                                                                       
|
| |  | Managed Network Service. This service provides complete
	management and monitoring of all customer equipment and network
	elements needed to operate dedicated Internet or frame relay
	services. Companies of all sizes can enhance their competitive
	performance, eliminating the need to commit their own resources
	to the costly, time-consuming job of network management.                                                                                                                                                                                                                                                                                                                                                                     

Status of Operations and Reorganization Plan

During the pendency of its Chapter 11 case, e.spire expects
to continue to provide on-going service to its customers while
implementing a revised strategy intended to meet customer
commitments and maximize short-term cash flow. Operations are
expected to focus on existing markets and on product sales that
utilize existing infrastructure. In general, e.spire will scale
its geographic expansion and delivery of new products to better
match its technical capabilities and capital availability. We
have no expansion plans for the immediate future.

e.spire filed a motion requesting that the bankruptcy court
grant it authorization to enter into a debtor in possession loan
agreement in the amount of $85.0 million. On April 10,
2001, the bankruptcy court entered an Interim order authorizing
e.spire to borrow $25.0 million to fund ordinary working
capital and general corporate needs. A hearing before the
bankruptcy court was held on May 16, 2001, at which time
the bankruptcy court approved e.spire to borrow an additional
$15 million to continue to fund working capital and general
corporate needs and also approved e.spires retention plan.
On June 12, 2001, the bankruptcy court approved the
borrowing of the remaining $45 million of the debtor in
possession loan. The Company is continuing its negotiations with
its bondholders and is seeking exit financing with the intent to
emerge from bankruptcy.

Industry Overview

The continuing deregulation of the telecommunications industry
and technological change have resulted in an increasingly
information-intensive business environment. Regulatory,
technological, marketing and competitive trends have expanded
substantially e.spires opportunities in the converging
voice and data communications services markets. Technological
advances, including rapid growth of the Internet, the increased
use of packet switching technology for voice communications and
the growth of multimedia applications, are expected to result in
substantial growth in the high-speed data services market.

Dedicated Services. Competition in the local exchange
services market began in the mid-1980s. In New York City,
Chicago and Washington, D.C., newly formed companies provided
dedicated non-switched services by installing fiber optic
facilities connecting POPs of IXCs within a metropolitan area
and, in some cases, connecting business and government end-users
with IXCs. Most of the early competitors operated limited
networks in the central business districts of major cities in
the United States where the highest concentration of voice and
data traffic, including IXC traffic, is typically found.
Competitive Access Providers used the substantial capacity and
economies of scale inherent in fiber optic cable to offer
customers service that was generally less expensive and of
higher quality than could be obtained from the Incumbent Local

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Local Switched Voice Services. The Federal Communications
Commission (FCC) Interconnection Decisions in 1992
and 1993 enabled CAPs to provide interstate switched access
services in competition with ILECs, which has encouraged the
development of the competitive interstate switched access
market. Competition in this market was further enhanced with the
passage of the Federal Telecommunications Act of 1996
(FTA), which requires (i) removal of state,
local and long distance entry barriers, (ii) ILECs to
provide interconnections to their facilities, and
(iii) access to rights-of-way.

Data Communications Services. The Company believes that
high-speed data communications services represent one of the
fastest growing segments of the telecommunications services
market, due in part to the continuing proliferation of computers
and the increasing need to interconnect these computers via
local and wide area networks, the dramatic growth of the
Internet and the emergence of multimedia applications. Together,
these applications have spawned numerous network technologies
and communications protocols to support legacy, current and
emerging needs. The domestic network infrastructure currently
supporting both voice and data transport requirements, which
focuses on IP switching and framed relay services, is being
strained by the increasing demand for high-bandwidth transport
at both the local and national levels. The Company believes that
the increasing volume and complexity of high-speed applications
will further strain the domestic network infrastructure and
create an opportunity for e.spire to provide a single
high-quality ATM-based network capable of consistently
supporting diverse data communications needs. In addition,
businesses are increasingly using the Internet to transmit
e-mail, engage in commercial transactions (e.g., electronic
commerce) and develop internal communications networks, or
intranets. Increasing business utilization of the
Internet has added to the demand for higher-speed access
applications.

Network Construction and Management Services. ACSI NT was
established as a separate business unit of the Company to design
and manage the construction of fiber optic telecommunication
networks for third parties. ACSI NT provides broadband
telecommunications infrastructure solutions to communications
carriers, corporate clients, and government agencies throughout
the United States. ACSI NTs service offering covers the
full range of fiber optic infrastructure solutions from initial
design, planning, and implementation of the data communications
network to the construction of the network management center and
required network management architecture. ACSI NT provides both
customer driven services that are customized to meet a specific
client development plan either with project-based consulting or
a turn-key solution, and high-bandwidth infrastructure, that may
include the sale or lease of conduit or fiber that is not used
(dark fiber).

Competition

The Company operates in a highly competitive environment and
currently does not have a significant market share in any of its
markets. Most of its actual and potential competitors have
substantially greater financial, technical, marketing and other
resources (including brand name recognition) than the Company.
Also, the continuing trend toward business alliances in the
telecommunications industry and the absence of substantial
barriers to entry in the data and Internet services markets,
could give rise to significant new competition.

In each of its markets, the Companys primary competitor is
the ILEC serving that geographic area. ILECs are established
providers of dedicated and local telephone services to all or
virtually all telephone subscribers within their respective
service areas. ILECs also have long-standing relationships with
regulatory authorities at the federal and state levels. While
recent FCC administrative decisions and initiatives provide
increased business opportunities to voice, data and
Internet-service providers such as the Company, they also
provide the ILECs with increased pricing flexibility for their
private line and special access and switched access services. If
future regulatory decisions afford the ILECs increased access
services pricing flexibility or other regulatory relief, such
decisions could also have a material adverse effect on
competitors to the ILECs, including the Company.

In the local exchange market, the Company also faces competition
or prospective competition from several other carriers, many of
which have significantly greater financial resources than the
Company. For

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The Company will also face competition from various fixed
wireless services, including Multichannel Multipoint
Distribution Service (MMDS), Local Multipoint
Distribution Service (LMDS), 24 GHz and 38 GHz
wireless communications systems, Wireless Communications Service
(WCS), FCC Part 15 unlicensed wireless radio
devices, and other services that use existing point-to-point
wireless channels on other frequencies. The FCC has issued or is
in the process of issuing licenses for these services to provide
broadband integrated telecommunications services on a
point-to-point and/or point-to-multipoint basis. Many of these
service providers have already raised substantial capital and
have commenced building their wide-area networks, primarily in
urban areas. Upon entering into appropriate interconnection
agreements with ILECs, these service providers are expected to
provide integrated voice and data services comparable to those
the Company currently offers or intends to offer. Many of these
companies have announced plans to target small and medium-sized
businesses and may enjoy certain advantages over the Company
with respect to the speed with which they can deploy their own
facilities directly serving end user premises to the extent that
they need not lease or resell last mile facilities
from the ILEC. In addition, the FCC has allocated a number of
spectrum blocks for use by wireless devices that do not require
site or network licensing. A number of vendors have developed
such devices that may provide competition to the Company, in
particular for certain low data-rate transmission services.

With respect to mobile wireless telephone system operators, the
FCC has authorized cellular, personal communications service
(PCS), and other cellular mobile radio service
(CMRS) providers to offer wireless services to fixed
locations, rather than just to mobile customers, in whatever
capacity such CMRS providers choose. Previously, cellular
providers could provide service to fixed locations only on an
ancillary or incidental basis. This authority to provide fixed
as well as mobile services will enable CMRS providers to offer
wireless local loop service and other services to fixed
locations (e.g., office and apartment buildings) in direct
competition with the Company and other providers of traditional
wireless telephone service.

Section 271 of the Federal Telecommunications Act
(FTA) prohibits a RBOC from providing long-distance
service that originates (or in certain cases terminates) in one
of its in-region states until the RBOC has satisfied certain
statutory conditions in that state and has received the approval
of the FCC. To date, the FCC has approved the following
applications for such approval: Verizon/ New York; Verizon/
Massachusetts; Southwestern Bell/ Texas; Southwestern Bell/
Oklahoma; Southwestern Bell/ Kansas. Southwestern Bell currently
has pending before the FCC an application for Section 271
authority for the state of Missouri and Verizon has such an
application pending for the state of Connecticut. FCC decisions
on both applications are due in July 2001. The Company
anticipates that several RBOCs will file additional applications
for in-region long distance authority in 2001. The FCC has
90 days from the date an application for in-region long
distance authority is filed to decide whether to grant or deny
the application.

The market for data communications and Internet access services,
including Internet protocol (IP) switching, is
extremely competitive. There are no substantial barriers to
entry, and the Company expects that competition will intensify
in the future. The Company believes that its ability to compete
successfully depends

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The Companys subsidiary, ACSI NT, provides complete
turnkey telecommunications infrastructure solutions to its
carrier customers throughout the United States. These services
encompass initial design, planning and implementation of the
data communications network to the construction of the network
management center and required network management architecture.
ACSI NTs customers are those that demand optimal network
design and efficient network construction. These customers look
to outside independent suppliers to meet growth needs and to
address other high-level service and network management
requirements. Although the Company believes that ACSI NT is one
of the few suppliers that are able to provide the complete
telecommunications infrastructure solutions that customers
demand, it nevertheless faces competition from a variety of
companies that offer services that compete with some or all of
ACSI NTs offerings. The Companys success in this
market will depend heavily upon its ability to provide high
quality services at a competitive price and the ability of ACSI
NTs carrier customers to continue to devote significant
amounts of capital to network expansion and construction.

Government Regulation

The following summary of regulatory developments and legislation
describes the primary present and proposed federal, state, and
local regulation and legislation that is related to the Internet
service and telecommunications industries and would have a
material effect on our business. Existing federal and state
regulations are currently subject to judicial proceedings,
legislative hearings and administrative proposals that could
change, in varying degrees, the manner in which our industries
operate. In addition, a number of legislative proposals have
been announced or made which could prove adverse to the Company.
We cannot predict the outcome of these proceedings or
legislation, or their impact upon the Internet service and
telecommunications industries or upon us.

Overview

Our telecommunications services are subject to regulation by
federal, state, and local government agencies. Generally,
Internet and certain data services are not directly regulated,
although the underlying telecommunications services may be
regulated in certain instances. We hold various federal and
state regulatory authorizations for our regulated service
offerings. The FCC has jurisdiction over our facilities and
services to the extent those facilities are used in the
provision of interstate or international telecommunications.
State public utility commissions (PUCs) also have
jurisdiction over our facilities and services to the extent they
are used in intrastate telecommunications. Municipalities and
other local government agencies may require telecommunications
services providers to obtain licenses or franchises regulating
use of public rights-of-way necessary to install and operate
their networks. The networks also are subject to certain other
local regulations such as building codes and generally
applicable public safety and welfare requirements. Many of the
regulations issued by these regulatory bodies may change and are
the subject of various judicial proceedings, legislative
hearings and administrative proposals. We cannot predict what
impact, if any, these proceedings or changes will have on our
business or results of operations.

Federal Regulation

The FCC regulates us as a non-dominant common carrier, or one
that is not considered to be dominant over other service
providers in the relevant product or geographic markets in which
it operates. Non-dominant carriers are subject to lesser
regulation than dominant carriers but remain subject to the
general requirements that they offer just and reasonable rates
and terms of service and do not unreasonably discriminate in the
provision of services. We have obtained authority from the FCC
to provide domestic interstate access and long distance services
as well as international services between the United States and
foreign countries and have

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The Federal Telecommunications Act

In February 1996, the Telecommunications Act of 1996, an
amendment to the Communications Act of 1934, (together, the
Federal Telecommunications Act or FTA)
became law. This comprehensive telecommunications legislation
was designed to increase competition in the long distance and
local telecommunications industries. The FTA imposes a variety
of duties on competitive local exchange carriers
(CLECs), such as the Company, to facilitate
competition in the provision of local telecommunications and
access services. Like all local telecommunications carriers,
where we provide local telephone services, we are required to:



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | interconnect our networks with those of other telecommunications
	carriers;                  
|
| |  | originate calls to and terminate calls from competing providers
	on a reciprocal basis;      
|
| |  | permit resale of our services;                                                               
|
| |  | permit end users to retain their telephone numbers when changing
	providers; and             
|
| |  | provide competing providers with access to poles, ducts,
	conduits and rights-of-way, if any.

Incumbent Local Exchange Carriers (ILECs), including
large independent providers and the Regional Bell
Operating Companies (RBOCs), are subject to
requirements in addition to these, including the duty to:



| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | undertake additional obligations applicable to the
	interconnection of their networks with those of competitors;                                                                                  
|
| |  | permit collocation of competitors equipment at their
	central offices;                                                                                                                           
|
| |  | provide unbundled access to individual network elements
	(unbundled network elements) including network
	facilities, features and capabilities, on non-discriminatory and
	cost-based terms; and
|
| |  | offer their retail services for resale at wholesale rates.                                                                                                                                        

The FCC is charged with establishing national rules implementing
certain portions of the FTA. In August 1996, the FCC
released an order adopting an extensive set of regulations
governing network interconnection, network unbundling, and
resale of traditional telephone company services, under the FTA.
In July 1997, the United States Court of Appeals for the
Eighth Circuit (Eighth Circuit) issued a decision
vacating substantial portions of these rules, principally on the
ground that the FCC had improperly intruded into matters
reserved for state jurisdiction.

In January 1999, the United States Supreme Court reversed
many aspects of the Eighth Circuits decision, concluding
that the FCC has jurisdiction to implement the local competition
provisions of the FTA. In so doing, the Supreme Court found that
the FCC has authority to establish pricing guidelines applicable
to the provision of unbundled network elements and the resale of
ILEC services, to prevent ILECs from disaggregating existing
combinations of network elements, and to establish rules
enabling competitors to select all or portions of any effective
ILEC interconnection agreement for use in their own
interconnection agreements with the same ILEC. As a result of
the Supreme Courts decision, FCC rules that require ILECs
to establish geographically deaveraged pricing for network
elements became effective in May 2000.

The Supreme Court, however, did not evaluate the specific
pricing methodology adopted by the FCC and remanded the case to
the Eighth Circuit for further consideration. The Eighth
Circuit, on remand, ruled on the FCCs resale and
unbundling pricing methodologies and found fault with aspects of
both. Notably, rates charged for unbundled network elements are
established through negotiation or by state regulatory
commissions, subject to general FCC rules governing pricing
methodology. The Eighth Circuit also found that ILECs do not
have to combine unbundled network elements that are not already
combined. This decision was in turn appealed to the Supreme
Court and reviewed by the Court. While the Supreme Court
resolved many issues,

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Although most of the challenged FCC rules were upheld by the
Supreme Court, the Court found that the FCC had not adequately
considered certain statutory criteria requiring ILECs to make
unbundled network elements available to CLECs. The FCC then
conducted new proceedings to reexamine which unbundled network
elements ILECs must provide. On November 5, 1999, the FCC
released an order in which it required that ILECs make available
most, but not all, of the network elements specified in its
initial order, as well as certain new sub-types of network
elements not included on the original list. The FCC also
clarified the obligation of ILECs to provide certain
combinations of unbundled network elements, in the November
order and supplemental orders issued later in November 1999
and June 2000.

Various interested parties have sought reconsideration and filed
appeals of the FCCs orders. We are unable to predict the
outcome of those reconsideration and appellate proceedings. In
addition, on April 5, 2001, several RBOCs filed a petition
with the FCC seeking the elimination of the dedicated transport
and high capacity loop unbundling requirements. Elimination of
such requirements substantially could increase the
Companys costs and would impair its ability to provide
competitive service offerings. We are unable to predict how or
when the FCC will respond to the RBOCs petition.

The FTA also eliminates certain pre-existing prohibitions on the
provision of traditional long distance services by the RBOCs on
a phased-in basis. On December 22, 1999, the FCC approved
an application filed by Verizon (then, Bell Atlantic) seeking
authority to begin providing long distance services to customers
located in the state of New York, where it also provides local
telephone service. This action represented the first approval by
the FCC of a RBOC request to provide long distance services to
customers located in their local operating region. The FCC has
since approved similar applications relating to Southwestern
Bells provision of long distance service in Texas, Kansas
and Oklahoma, as well as with respect to Verizons request
in Massachusetts. The FCCs approval of these applications
to provide such long distance services is likely to strengthen
substantially the RBOCs competitive position in each of
the respective states. These and other RBOCs have applied and
will continue to apply to the FCC to obtain such long distance
service authority in other states. We are unable to predict the
outcome of these decisions. Entry of Verizon, SBC and additional
RBOCs, into the long distance business could result in
substantial competition to our services and may have a material
adverse effect on us as they will be able to offer integrated
local and long distance services and may enjoy a significant
competitive advantage.

In the first half of 1998, four RBOCs petitioned the FCC to be
relieved of certain regulatory requirements in connection with
their provision of advanced telecommunications services.
Advanced telecommunications services are wireline, broadband
telecommunications services, as opposed to traditional voice
services, and are widely used for Internet access, often relying
on digital subscriber line (DSL) and
packet-switching technology. In response, in August 1998, the
FCC issued an order and notice which clarified its views on the
applicability to advanced services of existing statutory
requirements in the FTA relating to network interconnection and
unbundling. The FCC also solicited public comments on a wide
variety of issues associated with the provision of advanced
services by wireline carriers. The FCC generally determined that
advanced telecommunications services are subject to its resale,
interconnection and unbundling rules. However, in
November 1999, the FCC determined that application of the
FTAs resale rule required a fact specific determination.
In its first such fact specific determination, the FCC found
that certain advanced services sold to Internet service
providers were not subject to the FTAs resale requirement.

Some aspects of these orders have been appealed and some are the
subject of petitions for reconsideration or further rulemaking
before the FCC. In addition, some aspects of these orders have
been vacated and remanded to the FCC. The FCC has not yet ruled
on a proposal that would permit ILECs to deploy advanced
telecommunications services through a separate affiliate, which
would not be regulated as an ILEC and therefore would not be
subject to the FTAs unbundling and resale provisions.
However, in 1999, the FCC approved a merger between SBC and
Ameritech and imposed a requirement that those companies
establish separate affiliates for the provisioning of advanced
telecommunications services. In January, 2001, the United States
Court of Appeals for the District of Columbia (DC
Circuit) overturned that requirement and thus

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In March 1999, the FCC adopted an order strengthening the
rights of CLECs such as the Company to obtain physical
collocation for purposes of interconnecting with ILEC networks,
as well as requiring that the ILECs permit CLECs to collocate
equipment used for interconnection and/or access to unbundled
network elements. The FCC also adopted rules designed to limit
ILECs ability to deny CLECs the ability to deploy
transmission hardware in collocation space by purporting that
the equipment will cause electrical interference with other
wires, requiring the construction of caged enclosures, and
imposing large minimum space requirements and space preparation
fees, among other things. The FCC also proposed rules making
these requirements more specific. On March 17, 2000, the DC
Circuit vacated significant portions of these FCC collocation
rules, and remanded the matter to the FCC for further
consideration. Among other things, the DC Circuit vacated new
FCC rules that would have required ILECs to permit collocation
of multi-functional equipment usable to provide enhanced
services, use collocation space to cross connect to third party
carriers, and collocate their equipment in any unused space in
their central offices. In August 2000, the FCC adopted
national provisioning intervals for various forms of collocation
it requires ILECs to provide and requested comment on issues
remanded to it by the DC Circuit. Since then, each of the RBOCs
has been granted a waiver of the FCCs intervals. Issues on
remand remain pending before the FCC.

Access Regulation

The FCC regulates the interstate access rates charged by ILECs
for the origination and termination of interstate long distance
traffic. Those access rates make up a significant portion of the
cost of providing long distance services. Over the past few
years, the FCC has implemented changes in interstate access
rules that result in the restructuring of the access charge
system and changes in access charge rate levels.

In addition, the FCC adopted a proposal submitted by a coalition
of long distance companies and RBOCs referred to as
CALLS. Pursuant to this plan, ILEC access rates must
be decreased in stages over five years, while the ILECs were
granted new pricing flexibility in other services. In line with
other FCC decisions made in recent years, the FCC has granted
ILECs additional flexibility in pricing their interstate special
and switched access services. This pricing flexibility may
result in ILECs lowering their prices in high traffic density
areas, the probable areas of competition with us. It is possible
that the FCC will grant ILECs increasing pricing flexibility as
the number of potential competitors increases in each of these
markets.

Ongoing FCC proceedings may further change access rate
structures and rate levels. Public statements by FCC officials
indicate that an FCC order specifically addressing CLEC access
charges is expected shortly. In that order, the FCC may require
reductions in the access charge rates imposed by the Company and
other CLECs. Such reductions would result in reduced access
charge revenues for the Company. Such reductions, along with
those already imposed on the RBOCs would reduce virtually all
carriers costs of providing long distance services. The
full impact of all these aspects of access charge reform will
not be known until FCC action is complete and its orders are
implemented.

In addition, in various contexts, certain ILECs have asked the
FCC to rule that certain calls made over the Internet are
subject to regulation as telecommunications services including
the assessment of interstate switched access charges and
universal service fund assessments. Although the FCC has
suggested that Internet-based telephone-to-telephone calls may
be considered telecommunications services, it has not reached a
final decision on that issue.

The FCC is expected to adopt shortly a notice of proposed
rulemaking seeking to unify its rules regarding inter-carrier
compensation. The FCC is expected to address disparities in
rates for access charges and reciprocal compensation 
the rates which carriers pay each other for completing calls
exchanged between

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Reciprocal Compensation

Under its interconnection agreements with ILECs, the Company has
a right to charge ILECs reciprocal compensation for the
transport and termination of local traffic routed from ILEC end
users to end users of the Companys local exchange
services. Many CLECs, like the Company, have recorded
substantial revenue based on reciprocal compensation for the
termination of calls placed to Internet Service Providers
(ISPs) that are subscribers to their local exchange
services. ILECs have taken the position that calls placed to
ISPs do not terminate at the ISP and, therefore, are not
local traffic for which the CLEC is entitled to
receive reciprocal compensation under the FTA or various
interconnection agreements. Consequently, certain ILECs
currently are refusing to pay reciprocal compensation amounts
for traffic attributable to calls placed to ISPs. Since a
significant portion of the Companys customer base is
comprised of ISPs, a failure by ILECs to pay ISP-related
reciprocal compensation could have a significant impact on the
Companys past and future revenues. The obligation of ILECs
to remit such compensation currently is the subject of numerous
proceedings at the FCC and state PUCs, and in federal and state
courts, including complaint proceedings initiated by the Company
at state commissions and through commercial arbitration for
collection of such compensation under its interconnection
agreements. Any final order by the FCC or a state PUC in a state
in which the Companys interconnection agreements entitle
it to reciprocal compensation, or a final determination by a
federal or applicable state court or arbitration panel that no
reciprocal compensation is owed for calls placed to ISPs, could
have a material adverse effect on the Company.

In late 1998 and early 1999 the FCC determined that both
dedicated access and dial-up calls from
an end user to an ISP are primarily interstate in nature and
therefore are to be considered interstate services, subject to
the FCCs jurisdiction. The FCC then initiated a proceeding
to determine the effect that this regulatory classification will
have on the obligation of a service provider to pay reciprocal
compensation for dial-up calls to ISPs that originate on one
service providers network and terminate on another service
providers network. In that same order, the FCC permitted
existing reciprocal compensation arrangements between service
providers, as set forth in interconnection agreements and
approved and interpreted by state PUCs, to remain intact.
However, on March 24, 2000, the FCCs determination
with respect to dial-up traffic to ISPs was vacated by the DC
Circuit and remanded to the FCC for further proceedings.

The FCC is expected to adopt shortly an order on remand from the
DC Circuit setting forth a new compensation mechanism for
ISP-bound traffic. If adopted by the FCC, reduced rates for this
type of traffic may result in a reduction in the Companys
revenues generated from inter-carrier compensation.

The FCC is expected to adopt shortly a notice of proposed
rulemaking seeking to unify its rules regarding inter-carrier
compensation. The FCC is expected to address disparities in
rates for access charges and reciprocal compensation 
the rates which carriers pay each other for completing calls
exchanged between them. Future adoption by the FCC of a unified
inter-carrier compensation regime that adopts a bill and keep
regime or otherwise reduces the rates that the Company (and
other carriers) may charge for access charges and/or reciprocal
compensation may significantly reduce the Companys
inter-carrier compensation revenues and may have a materially
adverse impact on the Companys financial position.

As of March 2001, over 30 state PUCs have rendered
decisions holding that ILECs were required to make reciprocal
compensation payments to CLECs for dial-up traffic originating
on ILEC networks and terminated by CLECs to ISPs. On the other
hand, several state PUCs have ruled that CLECs are not entitled
to collect reciprocal compensation for terminating ISP-bound
traffic. Several state PUCs also have ruled that CLECs are not
entitled to collect reciprocal compensation for terminating
ISP-bound traffic prospectively under newly arbitrated
interconnection agreements.

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The Company has successfully prosecuted multiple complaints
against ILECs for past due reciprocal compensation, resulting in
both commission and arbitrator orders, as well as substantial
settlements. Adverse decisions on future complaints could have a
materially adverse effect on the Companys financial
position.

Universal Service

In 1997, the FCC established a significantly expanded universal
service regime to subsidize the cost of telecommunications
services to high cost areas, and to low-income customers and
qualifying schools, libraries and rural health care providers.
Providers of telecommunications services, like us, as well as
certain other entities, must pay for these programs. The
Companys share of the payments into these subsidy funds
will be based on its share of certain defined telecommunications
end-user revenues. Currently, the FCC is assessing these
payments on the basis of a telecommunications services
providers interstate and international revenue for the
previous six months. Various states are also in the process of
implementing their own universal service programs. The Company
has begun paying and passing through federal universal service
payments without significant impact on the Company. FCC and
state universal service rules remain subject to change, which
could increase the Companys costs.

Detariffing

Tariffing is a traditional regulatory requirement whereby
telecommunications carriers publish for public inspection at
state and federal regulatory agencies all terms, conditions,
pricing, and available services governing the sale of
telecommunications services to the public. Traditionally,
interstate and international long distance service tariffs are
filed with the FCC and tariffs for intrastate long distance
service and local telephone services are filed with state PUCs.
In May 2000, the FCC ordered mandatory detariffing for
domestic long distance services provided by non-dominant
carriers, such as the Company and adopted a transition period
during which carriers would withdraw federal tariffs, move to
contractual relationships with their customers and implement
rules requiring them to make specific public disclosures on
their Internet Web Sites of their rates, terms, and conditions
for domestic interstate services. The compliance/implementation
transition period will end on July 31, 2001. In
March 2001, the FCC imposed similar detariffing
requirements with respect to international services provided by
non-dominant carriers such as the Company. The detariffing of
international services must be completed by January 27,
2002. As a result of the FCCs orders, non-dominant
interstate and international services providers such as the
Company will no longer be able to rely on the filing of tariffs
with the FCC as a means of providing notice to customers of
prices, terms and conditions under which they offer their
domestic interstate services, and will have to rely more heavily
on Web-based and individually negotiated agreements with end
users.

In June 1997, the FCC issued an order stating that
non-dominant local service providers may withdraw their tariffs
for interstate access services provided to long distance
carriers. The FCC has since opened a proceeding to explore
whether it should regulate CLEC access charges, and as explained
above, with respect to federal access regulation, has indicated
that it intends to do so.

State Regulation

The FTA preempts state and local statutes and regulations that
prohibit the provision of competitive telecommunications
services. As a result, we should be free to provide the full
range of local, long distance and data services in all states in
which we currently operate, and in any states into which we may
wish to expand. While this action greatly increases our
potential for growth, it also increases the amount of
competition to which we may be subject. Because we provide
intrastate common carrier services, we are subject to various
state laws and regulations. Most state PUCs require some form of
certification or registration. We must acquire this authority
before commencing intrastate common carrier service. In most
states, we are also required to file tariffs or price lists
setting forth the terms, conditions, and prices for services
that are classified as intrastate.

We are required to update or amend these tariffs when we adjust
our rates or add new products and are subject to various
reporting and record-keeping requirements in these states. Many
states also require prior

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We are authorized to provide competitive local
telecommunications services in 24 states. We have authority to
provide intrastate long distance services in all states where we
hold such authorizations, and in numerous other states as well.
We may apply for additional state authority in the future.
However, there can be no assurance that we will be granted such
authorizations

Local Interconnection

The FTA imposes a duty upon all ILECs to negotiate in good faith
with requesting competitive telecommunications providers to
provide interconnection to their networks, exchange local
traffic, make unbundled network elements available, and permit
resale of most local telephone services. In the event that
negotiations do not succeed, either party has the right to seek
arbitration with the relevant state PUC of any unresolved
issues. Arbitration decisions involving interconnection
arrangements in several states have been challenged and appealed
to federal courts.

We have entered into interconnection agreements with BellSouth,
Pacific Bell, Southwestern Bell, Qwest, Verizon and Sprint.
Arbitration decisions involving the Companys
interconnection arrangements in several states have been
challenged in lawsuits filed in United States District Courts by
the affected ILECs. The Company has experienced some difficulty
in obtaining timely ILEC implementation of local interconnection
agreements. Delays encountered in obtaining facilities and
ensuring proper implementation of local interconnection
agreements have caused the Company to file complaints against
BellSouth, Qwest, Southwestern Bell and Verizon. Similar
problems have been experienced with other ILECs, and there can
be no assurance that the performance of any ILEC will improve.

A number of the Companys interconnection agreements have
expired or will expire at various times over the next year. The
Company typically operates pursuant to the terms of an expired
agreement until such time as it has successfully negotiated or
adopted a new agreement with a particular ILEC in a particular
state. There can be no assurance that the Company will be able
to replace expired agreements with agreements that are at least
as favorable to the Company.

Local Government Authorizations

The Company is required to obtain street use and construction
permits and licenses, encroachment agreements and/or franchises
to install and expand its fiber optic networks using municipal
rights-of-way. Termination of such franchise, permit, or license
agreements, prior to their expiration dates could significantly
impact the Companys ability to provide service to end
users in affected markets. In some municipalities where the
Company has installed or anticipates constructing networks, it
will be required to pay license or franchise fees based on a
percentage of gross revenues or on a per linear foot basis, as
well as post performance bonds or letters of credit. There can
be no assurance that the Company will not be required to post
similar bonds or letters of credit in the future, nor is there
any assurance that, following the expiration of existing
franchises, fees will remain at their current levels. In many
markets, the ILECs do not pay franchise fees or pay fees that
are substantially less than those required to be paid by the
Company. To the extent that competitors do not pay the same
level of fees as the Company, the Company could be at a
competitive disadvantage. However, the FTA provides that any
compensation extracted by states and localities for use of
public rights-of-way must be fair and reasonable,
applied on a competitively neutral and nondiscriminatory
basis, and be publicly disclosed by such
government entity. In February and March 2001, certain
e.spire bonds associated with its street use and construction
permits and licenses, encroachment agreements and/or

24



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Content Regulation

Because the Company does not hold itself out as editing or
otherwise controlling the content of communications that
traverse its systems, it is generally unaffected by government
content regulation. On June 26, 1997, the United States
Supreme Court ruled unconstitutional provisions of the FTA,
referred to as the Communications Decency Act, which restricted
transmission of indecent or patently
offensive material over the Internet, though it upheld
restrictions on transmission of obscene material. Congress
attempted to remedy the constitutional defects of the
Constitutional Decency Act in 1998 by adopting the Child Online
Protection Act, but on February 1, 1999, a federal district
court judge issued a preliminary injunction against enforcement
of that legislation on the ground that it, too, will probably be
held unconstitutional.

In recent years, Congress has adopted legislation designed to
limit the liability of data communications and online service
providers. On November 12, 1997, the United States Court of
Appeals for the Fourth Circuit ruled that under certain defined
circumstances the FTA protects interactive computer service
providers from liability for defamatory material posted on their
systems by third parties; the Supreme Court declined to review
that case on June 22, 1998. The Digital Millenium Copyright
Act, signed into law on October 28, 1998, provides limitations
against liability for online copyright infringement, provided
that certain conditions are met. Both acts are subject to
interpretation, however, and it is not certain that the Company
would be able to make successful use of the defenses provided if
plaintiffs were to accuse it of facilitating the dissemination
of defamatory or copyright-infringing material. Moreover, those
statutes do not address every potential form of content
liability. For example, some courts have held that
communications companies can be held liable for consequential
damages if they are grossly negligent or engage in willful
misconduct that delays or distorts the transmission of important
or time-sensitive information.

Employees

As of December 31, 2000, the Company employed a total of
1,806 individuals full time. The Company believes that its
future success will depend on its continued ability to attract
and retain highly skilled and qualified employees. None of the
Companys employees are subject to a collective bargaining
agreement. The Company believes that its relations with its
employees are good.




Item 2.  Properties

As of December 31, 2000, office space of 103,633 square
feet is leased in Columbia, Maryland and Laurel, Maryland for
two corporate offices, including the Companys billing
center for $151,282 per month subject to periodic increases in
specified amounts. These leases expire in 2007. As of
December 31, 2000, e.spire also leases a 24,255 square foot
office space in Annapolis Junction, Maryland for an additional
corporate office for $33,563 per month subject to periodic
increases in specified amounts. The lease terminates in
January 2005. e.spire leases 167,285 square feet in
Herndon, Virginia, for corporate offices for $405,527 per month
as of December 31, 2000, subject to periodic increases in
specified amounts. The lease expires in 2009 with two options to
renew for additional three-year and five-year periods. e.spire
leases 25,460 square foot office space in Sterling, Virginia for
its network management center for $29,502 per month. This lease
expires in 2009 with an option to renew for one additional
five-year period.

As of December 31, 2000, the Companys various
operating subsidiaries have leased facilities for their offices
and network nodes. The aggregate monthly rent on these
properties is approximately $988,305. The various leases expire
on dates ranging from June 2001 to June 2014. Most
have renewal options. Additional

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The Company believes that its insurance coverage on these
properties is adequate and in compliance with the related leases.

As part of the Companys restructuring under
Chapter 11, e.spire is evaluating all of its property
leases. We have the right, subject to the bankruptcy courts
approval, to assume or reject any unexpired leases in existence
at the date of filing. Parties having claims as a result of any
such rejection may file claims with the bankruptcy court that
will be dealt with as part of the bankruptcy cases.




Item 3.  Legal Proceedings

On March 22, 2001, the Company filed voluntary petitions
for protection under Chapter 11 of the United States
Bankruptcy Code in the Federal District of Delaware. The Company
is currently operating as debtors-in-possession under the
supervision of the Bankruptcy Court.

On April 19, 2000, a consolidated securities class action
complaint was filed alleging failure to disclose material
information during the period of August 12, 1999 through
March 30, 2000 in the United States District Court for the
district of Maryland against e.spire and certain of its former
directors and officers. The complaint was dismissed with
prejudice by the court in January 2001.

The Company and its subsidiaries are currently parties to
routine litigation incidental to their business, none of which,
individually or in the aggregate, are expected to have a
material adverse effect on the Company. The Company and its
subsidiaries are parties to various court appeals and regulatory
arbitration proceedings relating to certain of the
Companys interconnection agreements and continue to
participate in regulatory proceedings before the FCC and state
regulatory agencies concerning the authorization of services and
the adoption of new regulations. (See Regulation)




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

On December 1, 2000, the Company held a special meeting of
stockholders and three proposals were considered. All such
proposals were approved by the stockholders.

The first proposal was to approve and ratify that the Company is
authorized to issue the following securities (some of which were
issued by the Company on March 3, 2000 for an aggregate
amount of approximately $100.7 million) pursuant to purchase
agreements between the Company and certain investors:
a) Series A convertible preferred stock that is
currently convertible into 10,682,759 shares of our Common Stock
and provides that the Company will issue additional shares of
Common Stock payable as dividends on the Series A
convertible preferred stock; and b) warrants that are
exercisable into up to 7,717,500 shares of common stock at an
exercise price of $9.89 per share and each exercisable into 44.1
shares of Common Stock. The following is a breakdown of the vote
on such matter.

|          |         |     |  |         |            |                  |  |  |           |  |  |  |   | 
|--------- | ------- | --- |  | ------- | ---------- | ---------------- |  |  | --------- |  |  |  | - | 
|Abstained |         | For |  | Against |            | Broker Non-Votes
|          |         |     |  |         |            |                 
|          | 122,980 |     |  |         | 28,955,577 |                  |  |  | 1,477,096 |  |  |  | 0 | 

The second proposal was to approve and ratify that the Company
is authorized to issue up to: a) 124.3 million shares
of common stock at a price per share equal to the lesser of
$3.37 per share and 80% of the market price at time of issuance
(to be sold for cash or in exchange for outstanding exchangeable
preferred stock); b) $124.3 million of convertible
preferred stock in one or more series which will be convertible
into common stock at a purchase price per share equal to the
lesser of $3.37 and 80% of the market price at time of issuance
(to be sold for cash or in exchange for outstanding exchangeable
preferred stock), and the issuance of common stock as dividends
thereon; c) $124.3 million of warrants, the terms of
which shall be determined by the Board of Directors based on the
written opinion of the financial advisor to the Company that
such terms are fair to the Company and the public stockholders
of the Company from a financial point of view; and
d) transaction fee warrants to purchase common stock at an
exercise price of $.01 per share in an amount

26



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|          |         |     |  |         |            |                  |  |  |           |  |  |  |   | 
|--------- | ------- | --- |  | ------- | ---------- | ---------------- |  |  | --------- |  |  |  | - | 
|Abstained |         | For |  | Against |            | Broker Non-Votes
|          |         |     |  |         |            |                 
|          | 128,974 |     |  |         | 28,905,156 |                  |  |  | 1,521,523 |  |  |  | 0 | 

The third proposal was to approve and ratify the amendment of
the Companys Third Amended and Restated Certificate of
Incorporation, as amended, providing for an increase in the
number of shares of the Companys common stock authorized
to be issued from 125 million to 250 million. The
following is a breakdown of the vote on such matter.

|          |         |     |  |         |            |                  |  |  |           |  |  |  |   | 
|--------- | ------- | --- |  | ------- | ---------- | ---------------- |  |  | --------- |  |  |  | - | 
|Abstained |         | For |  | Against |            | Broker Non-Votes
|          |         |     |  |         |            |                 
|          | 116,109 |     |  |         | 28,856,128 |                  |  |  | 1,583,416 |  |  |  | 0 | 

27



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##### Table of Contents






PART II




Item 5.  Market for Registrants
Common Equity and Related Stockholder Matters

The Companys Common Stock traded on The NASDAQ Stock
Market under the symbol ESPI. On March 22,
2001, trading of our Common Stock was halted after we issued a
press release announcing the filing of the Chapter 11 case.
The Common Stock was voluntarily delisted from the Nasdaq Stock
Market on April 2, 2001. Since April 2, 2001, the
Companys Common Stock has been traded on the OTC Pink
Sheets under the symbol ESPIQ.

The following table sets forth, for the periods indicated, the
range of high and low closing bid quotations for the Common
Stock traded on The NASDAQ Stock Market.

|                                    |                |            |   |           |  |  |   |       | 
|----------------------------------- | -------------- | ---------- | - | --------- |  |  | - | ----- | 
|                                    |                | High Price |   | Low Price
|                                    |                |            |   |          
|Fiscal Year Ended December 31, 1998 |                |            |   |           |  |  |   |      
|                                   
|                                   
|                                   
|                                   
|                                    | First Quarter  |            | $ | 19.63     |  |  | $ | 11.63 | 
|                                   
|                                   
|                                   
|                                   
|                                    | Second Quarter |            |   | 22.56     |  |  |   | 15.00 | 
|                                   
|                                   
|                                   
|                                   
|                                    | Third Quarter  |            |   | 23.03     |  |  |   | 9.00  | 
|                                   
|                                   
|                                   
|                                   
|                                    | Fourth Quarter |            |   | 14.06     |  |  |   | 5.31  | 
|                                   
|                                   
|                                   
|                                   
|Fiscal Year Ended December 31, 1999 |                |            |   |           |  |  |   |      
|                                   
|                                   
|                                   
|                                   
|                                    | First Quarter  |            | $ | 13.75     |  |  | $ | 4.50  | 
|                                   
|                                   
|                                   
|                                   
|                                    | Second Quarter |            |   | 16.75     |  |  |   | 9.63  | 
|                                   
|                                   
|                                   
|                                   
|                                    | Third Quarter  |            |   | 12.69     |  |  |   | 7.19  | 
|                                   
|                                   
|                                   
|                                   
|                                    | Fourth Quarter |            |   | 8.91      |  |  |   | 5.50  | 
|                                   
|                                   
|                                   
|                                   
|Fiscal Year Ended December 31, 2000 |                |            |   |           |  |  |   |      
|                                   
|                                   
|                                   
|                                   
|                                    | First Quarter  |            | $ | 15.75     |  |  | $ | 6.50  | 
|                                   
|                                   
|                                   
|                                   
|                                    | Second Quarter |            |   | 6.94      |  |  |   | 3.50  | 
|                                   
|                                   
|                                   
|                                   
|                                    | Third Quarter  |            |   | 7.75      |  |  |   | 2.81  | 
|                                   
|                                   
|                                   
|                                   
|                                    | Fourth Quarter |            |   | 2.97      |  |  |   | .50   | 

On June 1, 2001, the last reported sales price for the
Common Stock as reported on The OTC Pink Sheets, was $0.12 per
share. As of December 31, 2000, there were approximately
585 holders of record of the Common Stock.

Dividend Policy

The Company has never paid dividends on the Common Stock and
does not expect to declare any dividends on the Common Stock in
the foreseeable future. As discussed in
Item 3  Legal Proceedings
e.spire filed for protection under Chapter 11 of the
Bankruptcy Code and, is precluded from paying such dividends.
The Companys indentures, Credit Facilities,
debtor-in-possession financing and preferred stock instruments
contain certain covenants that restrict the Companys
ability to declare or pay dividends on the Common Stock.

Recent Sales of Unrestricted Securities

On March 3, 2000, e.spire completed a private offering of
81,777 shares of Series A Convertible Preferred Stock and
175,000 warrants with Greenwich Street Capital Partners II,
L.P., The Huff Alternative Income Fund, L.P. and Honeywell
International Inc. Master Retirement Trust. This transaction was
consummated as a private transaction pursuant to
Section 4(2) of the Securities Act of 1933. Each share of
Series A Convertible Preferred Stock is initially
convertible into 126.4 shares of Common Stock (an effective
conversion price of $7.91 per share), and each warrant is
initially exercisable for 44.1 shares of Common Stock (at an
initial exercise price of $9.89 per share). The warrants will
automatically expire on the tenth anniversary after the date
that they are issued. This transaction was consummated as a
private transaction pursuant to Section 4(2) of the
Securities Act of 1933.

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On March 14, 2000, in connection with a breach of contract
dispute, e.spire issued to Harold VanArnem, 46,444 shares of
common stock pursuant to a Confidential Settlement and Release
Agreement dated as of March 10, 2000. This transaction was
consummated as a private transaction pursuant to
Section 4(2) of the Securities Act of 1933.

On July 20, 2000, in connection with a breach of contract
dispute, e.spire issued to Thomas Benham, Sr., 50,000 shares of
common stock pursuant to a Confidential Settlement and Release
Agreement dated as of May 19, 2000. This transaction was
consummated as a private transaction pursuant to
Section 4(2) of the Securities Act of 1933.

On September 19, 2000, e.spire issued an aggregate of
50,000 shares of exchangeable preferred stock to The Huff
Alternative Income Fund, Honeywell Master Retirement Trust and
Greenwich Street for an aggregate purchase price of
$50 million. At e.spires option the exchangeable
preferred stock may be converted into Purchaser Junior
Securities, which includes common stock, preferred stock or
warrants to purchase common stock, the type of security to be
determined by Huff. This transaction was consummated as a
private transaction pursuant to Section 4(2) of the
Securities Act of 1933.

On November 6, 2000, in connection with a breach of
contract dispute, e.spire issued to William Rogers, 179,202
shares of common stock pursuant to a Confidential Settlement and
Release Agreement dated as of November 6, 2000. This
transaction was consummated as a private transaction pursuant to
Section 4(2) of the Securities Act of 1933.

On December 1, 2000, e.spire issued to Marvin Saffian &
Co., 186,497 shares of common stock pursuant to a Consulting
Agreement dated October 19, 1994. On February 22,
2001, e.spire issued to Marvin Saffian & Co. 36,777 shares
of common stock pursuant to this same Consulting Agreement.
These transactions were consummated as private transactions
pursuant to Section 4(2) of the Securities Act of 1933.

On December 8, 2000, e.spire issued an aggregate of 893,542
Transaction Fee warrants to purchase shares of common stock to
The Huff Alternative Income Fund, Honeywell Master Retirement
Trust and Greenwich Street pursuant to a Transaction Fee Warrant
Agreement dated December 8, 2000. Each warrant is initially
exercisable for 1 share of Common Stock (at an initial exercise
price of $.01 per share). The warrants will automatically expire
on the tenth anniversary after the date that they are issued.
This transaction was consummated as a private transaction
pursuant to Section 4(2) of the Securities Act of 1933.

Effective December 29, 2000, e.spire agreed to sell to
George F. Schmitt 1,500,000 shares of common stock for $0.50 per
share pursuant to an Employment Agreement dated as of
December 29, 2000. This transaction was consummated as a
private transaction pursuant to Section 4(2) of the
Securities Act of 1933.




Item 6.  Selected Financial Data

The selected consolidated financial data presented below under
the captions Statement of Operations Data for the
years ended December 31, 1997, 1998, 1999 and 2000, and
Balance Sheet Data as of December 31, 1997,
1998, 1999 and 2000 are derived from and qualified by reference
to the audited Consolidated Financial Statements of the Company
and the related notes thereto, and should be read in conjunction
therewith and in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations. Subsequent to June 30, 1996, the Company
changed its fiscal year end from June 30 to
December 31. The Statement of Operations Data
for the year ended December 31, 1996 has been derived from
the unaudited consolidated financial statements of the Company
which, in the opinion of management includes all adjustments
consisting of normal recurring adjustments which the Company
considers necessary for a fair presentation of the results of
operations for that period.

29



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##### Table of Contents



SELECTED CONSOLIDATED FINANCIAL DATA

(in thousands, except per share data)


|                              |                                                                           |                          |   |              |        |              |   |              |         |              |   |          |         |  |   |          |         |  |   |          |         | 
|----------------------------- | ------------------------------------------------------------------------- | ------------------------ | - | ------------ | ------ | ------------ | - | ------------ | ------- | ------------ | - | -------- | ------- |  | - | -------- | ------- |  | - | -------- | ------- | 
|                              |                                                                           |                          |   |              |        |              |   |              |         |             
|                              |                                                                           | Year Ended               |   | Year Ended   |        | Year Ended   |   | Year Ended   |         | Year Ended  
|                              |                                                                           | December 31,             |   | December 31, |        | December 31, |   | December 31, |         | December 31,
|                              |                                                                           | 1996                     |   | 1997         |        | 1998         |   | 1999         |         | 2000        
|                              |                                                                           |                          |   |              |        |              |   |              |         |             
|                              |                                                                           | (unaudited)              |   |              |        |              |   |              |         |             
|                             
|                             
|                             
|                             
|Statement of Operations Data: |                                                                           |                          |   |              |        |              |   |              |         |              |   |          |         |  |   |          |         |  |   |         
|                             
|                             
|                             
|                             
|                              | Revenues                                                                  |                          | $ | 9,417        |        |              | $ | 59,001       |         |              | $ | 156,759  |         |  | $ | 244,009  |         |  | $ | 344,190  |        
|                             
|                             
|                             
|                             
|                              | Operating expenses:                                                       |                          |   |              |        |              |   |              |         |              |   |          |         |  |   |          |         |  |   |          |        
|                             
|                             
|                             
|                             
|                              | Cost of sales                                                             |                          |   | 11,046       |        |              |   | 52,881       |         |              |   | 106,813  |         |  |   | 159,368  |         |  |   | 193,580  |        
|                             
|                             
|                             
|                             
|                              | Gross margin                                                              |                          |   | (1,629       | )      |              |   | 6,120        |         |              |   | 49,946   |         |  |   | 84,641   |         |  |   | 150,610  |        
|                             
|                             
|                             
|                             
|                              | Selling, general and
	administrative                                      |                          |   | 30,656       |        |              |   | 59,851       |         |              |   | 103,639  |         |  |   | 169,180  |         |  |   | 187,267  |        
|                             
|                             
|                             
|                             
|                              | Non cash stock compensation                                               |                          |   | 2,081        |        |              |   | 4,274        |         |              |   | 9,928    |         |  |   | 11,473   |         |  |   | 14,377   |        
|                             
|                             
|                             
|                             
|                              | Depreciation and amortization                                             |                          |   | 7,228        |        |              |   | 24,131       |         |              |   | 47,332   |         |  |   | 95,943   |         |  |   | 109,425  |        
|                             
|                             
|                             
|                             
|                              | Impairment on assets held for sale                                        |                          |   | 0            |        |              |   | 0            |         |              |   | 0        |         |  |   | 0        |         |  |   | 16,877   |        
|                              |                                                                           |                          |   |              |        |              |   |              |         |              |   |          |         |  |   |          |         |  |   |         
|                              |                                                                           | Total operating expenses |   |              | 51,011 |              |   |              | 141,137 |              |   |          | 267,712 |  |   |          | 435,964 |  |   |          | 327,946 | 
|                              |                                                                           |                          |   |              |        |              |   |              |         |              |   |          |         |  |   |          |         |  |   |         
|                              | Loss from operations                                                      |                          |   | (41,594      | )      |              |   | (82,136      | )       |              |   | (110,953 | )       |  |   | (191,955 | )       |  |   | (177,336 | )      
|                             
|                             
|                             
|                             
|                              | Interest and other income                                                 |                          |   | 6,390        |        |              |   | 8,685        |         |              |   | 23,348   |         |  |   | 10,602   |         |  |   | 3,622    |        
|                             
|                             
|                             
|                             
|                              | Interest and other expense                                                |                          |   | (18,032      | )      |              |   | (41,565      | )       |              |   | (75,474  | )       |  |   | (96,395  | )       |  |   | (124,339 | )      
|                             
|                             
|                             
|                             
|                              | Gain on sale of Internet dial-up customer base                            |                          |   | 0            |        |              |   | 0            |         |              |   | 0        |         |  |   | 0        |         |  |   | 4,467    |        
|                              |                                                                           |                          |   |              |        |              |   |              |         |              |   |          |         |  |   |          |         |  |   |         
|                              | Loss before minority interest                                             |                          |   | (53,236      | )      |              |   | (115,016     | )       |              |   | (163,079 | )       |  |   | (277,748 | )       |  |   | (293,586 | )      
|                             
|                             
|                             
|                             
|                              | Minority interest                                                         |                          |   | 417          |        |              |   | 0            |         |              |   | 0        |         |  |   | 0        |         |  |   | 0        |        
|                              |                                                                           |                          |   |              |        |              |   |              |         |              |   |          |         |  |   |          |         |  |   |         
|                              | Net loss                                                                  |                          | $ | (52,819      | )      |              | $ | (115,016     | )       |              | $ | (163,079 | )       |  | $ | (277,748 | )       |  | $ | 293,586  | )      
|                              |                                                                           |                          |   |              |        |              |   |              |         |              |   |          |         |  |   |          |         |  |   |         
|                              | Preferred stock dividends and accretion and
	beneficial conversion charge |                          |   | (4,021       | )      |              |   | (11,630      | )       |              |   | (36,080  | )       |  |   | (40,646  | )       |  |   | (81,119  | )      
|                              |                                                                           |                          |   |              |        |              |   |              |         |              |   |          |         |  |   |          |         |  |   |         
|                              | Net loss to common stockholders                                           |                          | $ | (56,840      | )      |              | $ | (126,646     | )       |              | $ | (199,159 | )       |  | $ | (318,394 | )       |  | $ | (374,705 | )      
|                              |                                                                           |                          |   |              |        |              |   |              |         |              |   |          |         |  |   |          |         |  |   |         
|                              | Net loss per common share                                                 |                          | $ | (8.54        | )      |              | $ | (4.65        | )       |              | $ | (4.45    | )       |  | $ | (6.38    | )       |  | $ | (7.05    | )      
|                              |                                                                           |                          |   |              |        |              |   |              |         |              |   |          |         |  |   |          |         |  |   |         
|                              | Weighted average shares outstanding                                       |                          |   | 6,653        |        |              |   | 27,234       |         |              |   | 44,752   |         |  |   | 49,892   |         |  |   | 53,184   |        
|                             
|                             
|                             
|                             
|Other Data:                   |                                                                           |                          |   |              |        |              |   |              |         |              |   |          |         |  |   |          |         |  |   |         
|                             
|                             
|                             
|                             
|                              | Adjusted EBITDA(1)                                                        |                          | $ | (31,868      | )      |              | $ | (53,731      | )       |              | $ | (53,693  | )       |  | $ | (84,160  | )       |  | $ | (36,657  | )      
|                             
|                             
|                             
|                             
|                              | Capital expenditures                                                      |                          |   | 107,773      |        |              |   | 135,036      |         |              |   | 249,256  |         |  |   | 286,719  |         |  |   | 142,607  |        

|                   |                                           |              |   |              |   |              |   |              |   |              |   |          |   |  |   |          |   |  |   |          |  
|------------------ | ----------------------------------------- | ------------ | - | ------------ | - | ------------ | - | ------------ | - | ------------ | - | -------- | - |  | - | -------- | - |  | - | -------- | -
|                   |                                           | December 31, |   | December 31, |   | December 31, |   | December 31, |   | December 31,
|                   |                                           | 1996         |   | 1997         |   | 1998         |   | 1999         |   | 2000        
|                   |                                           |              |   |              |   |              |   |              |   |             
|Balance Sheet Data |                                           |              |   |              |   |              |   |              |   |              |   |          |   |  |   |          |   |  |   |         
|                  
|                  
|                  
|                  
|(End of Period):   |                                           |              |   |              |   |              |   |              |   |              |   |          |   |  |   |          |   |  |   |         
|                  
|                  
|                  
|                  
|                   | Cash and cash equivalents                 |              | $ | 78,619       |   |              | $ | 260,837      |   |              | $ | 328,758  |   |  | $ | 62,525   |   |  | $ | 7,352    |  
|                  
|                  
|                  
|                  
|                   | Total assets                              |              |   | 230,038      |   |              |   | 638,896      |   |              |   | 982,957  |   |  |   | 941,242  |   |  |   | 885,640  |  
|                  
|                  
|                  
|                  
|                   | Working capital (deficit)                 |              |   | 46,001       |   |              |   | 272,234      |   |              |   | 325,734  |   |  |   | (60,505  | ) |  |   | (131,444 | )
|                  
|                  
|                  
|                  
|                   | Networks, equipment and furniture, net    |              |   | 136,083      |   |              |   | 250,478      |   |              |   | 485,934  |   |  |   | 627,015  |   |  |   | 605,997  |  
|                  
|                  
|                  
|                  
|                   | Long-term debt, including current portion |              |   | 210,410      |   |              |   | 461,285      |   |              |   | 749,815  |   |  |   | 970,124  |   |  |   | 993,978  |  
|                  
|                  
|                  
|                  
|                   | Long-term liabilities                     |              |   | 216,484      |   |              |   | 461,321      |   |              |   | 746,765  |   |  |   | 805,202  |   |  |   | 860,255  |  
|                  
|                  
|                  
|                  
|                   | Redeemable stock and options              |              |   | 2,000        |   |              |   | 206,160      |   |              |   | 241,044  |   |  |   | 281,596  |   |  |   | 327,472  |  
|                  
|                  
|                  
|                  
|                   | Stockholders deficit                     |              |   | (27,038      | ) |              |   | (65,356      | ) |              |   | (101,734 | ) |  |   | (401,195 | ) |  |   | (571,874 | )

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Note to Selected Consolidated Financial Data

(1)  Adjusted EBITDA consists of net loss before net
interest, income taxes, depreciation and amortization, noncash
stock compensation, fixed asset impairment and for 2000, the
gain on sale of Internet dial-up customer base included in
non-operating income. It is a measure commonly used in the
telecommunications industry and is presented to assist in
understanding the Companys operating results. However, it
is not intended to represent cash flow or results of operations
in accordance with Generally Accepted Accounting Principles.

Bankruptcy Proceedings

On March 22, 2001 (the Petition Date), e.spire
and its subsidiaries filed voluntary petitions for protection
under Chapter 11 of the United States Bankruptcy Code in
the Federal District of Delaware in order to preserve cash and
to facilitate the restructuring of the Companys long-term
debt, trade liabilities and other obligations. The Company and
its bankruptcy filing subsidiaries (collectively the
Debtors) are currently operating as
debtors-in-possession under the supervision of the United States
District Court for the District of Delaware.

Under the Bankruptcy Code, the rights and treatment of
pre-petition creditors and shareholders are expected to be
substantially altered. As a result of these bankruptcy
proceedings, substantially all liabilities, litigation and
claims against the Debtors in existence at the Petition Date are
stayed unless the stay is modified or lifted or payment has been
otherwise authorized by the Bankruptcy Court. At this time, it
is not possible to predict the outcome of the Chapter 11
cases in general or the effects of such cases on the
Companys business, or on the interest of creditors and
shareholders. As a result of the bankruptcy filing, all of the
Companys liabilities incurred prior to the Petition Date,
including certain secured debt, are subject to compromise. No
assurance can be given that the Company will be successful in
reorganizing its affairs within the Chapter 11 bankruptcy
proceedings.

Further, due to the bankruptcy filing and related events, there
is no assurance that the carrying amounts of assets will be
realized or that liabilities will be liquidated or settled for
the amounts recorded. In addition, a plan of reorganization, or
rejection thereof, could change the amounts reported in the
financial statements. As a result, there is substantial doubt
about the Companys ability to continue as a going concern.
The ability of the Company to continue as a going concern is
dependent upon, but not limited to, formulation, approval, and
confirmation of a plan of reorganization, adequate sources of
capital, customer and employee retention, the ability to provide
high quality services and the ability to sustain positive
results of operations and cash flows sufficient to continue to
operate.






Item 7.  Managements Discussion and
Analysis


e.spire Communications, Inc., formed in 1993, seeks to be a
leading facilities-based integrated communications provider to
businesses. The Company currently operates in 38 markets
throughout the United States where it has state-of-the-art local
fiber optic networks. By the end of 1997, the Company had become
one of the first CLECs to combine the provision of dedicated,
local and long distance voice services with frame relay, ATM and
Internet services. Having established this suite of
telecommunications services which emphasizes data capabilities
in addition to traditional CLEC offerings, e.spire seeks to
provide customers with superior service and competitive prices
while offering a single source for integrated communications
services designed to meet its business customers needs.
The Companys facilities-based network infrastructure is
designed to provide services to customers on an end-to-end
basis, and, as of December 31, 2000, was comprised of 3,834
route miles of fiber in its 38 local networks in 21 states,
state of the art equipment including 46 ATM switches, 51
routers, 28 voice switches and approximately 26,000 backbone
long haul miles in its leased coast-to-coast broadband data
network.

The development of the Companys business and the
construction, acquisition and expansion of its networks require
significant capital expenditures, a substantial portion of which
are incurred before realization of revenues. These expenditures,
together with the associated early operating expenses, result in
negative cash flow until an adequate customer base is
established. However, as the Companys customer base grows,
the Company expects that incremental revenues can be generated
with decreasing incremental operating

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ACSI NT was formed to pursue opportunities in fiber optic
network design and construction with carriers, large end user
customers and municipalities. ACSI NT is a wholly owned
subsidiary of e.spire which provides full service network
development solutions including business planning, market
analysis, engineering, project management, construction and
network monitoring center design.

In January 1997, e.spire purchased CyberGate, a
Florida-based Internet service provider and its subsidiary
ValueWeb , which provides Web hosting services. Through our
subsidiary CyberGate and its subsidiary ValueWeb, we offer
dedicated, shared, and colocation Web hosting services and
related managed services. In September 2000, e.spire sold
CyberGates Internet dial-up customer base to EarthLink,
Inc., a strategic move to focus our resources on
CyberGates subsidiary ValueWeb and its growing,
higher-margin Web hosting, colocation, and managed services
business.

Results of Operations  Year Ended
December 31, 2000 Compared to Year Ended December 31,
1999

Revenues

The Company reported an increase in total revenues of
$100.2 million, or 41%, to $344.2 million for the year
ended December 31, 2000, compared with revenues of
$244.0 million for the year ended December 31, 1999 as
discussed below.

Telecommunications Services

The Company reported an increase in Telecommunications services
revenues of $82.1 million, or 55%, to $232.7 million
for the year ended December 31, 2000, compared with
revenues of $150.6 million for the year ended
December 31, 1999. The increase is primarily due to
$17.8 million increase in reciprocal compensation,
$8.5 million from the continued focus on data services,
$30.0 million related to the continued expansion of switched
voice services and $20.5 million from special access services.
Included in Telecommunications services are revenues from the
dedicated access, switched local, long distance, reciprocal
compensation and data products. The increase in revenues was
primarily attributable to the Companys greater presence in
its markets, an expanded customer base and increases in
offerings to our existing customers. The revenue increase was
partially due to increased reciprocal compensation revenue as
discussed below and increases in the Companys other
service offerings such as special access, on-net switched and
data services. Also, these increases in revenues were partially
offset by a decrease in resale revenue due to the Companys
elimination of its switched resale portfolio.

Included in telecommunications services revenue is reciprocal
compensation of approximately $56.8 million and
$38.9 million, for the twelve months ended
December 31, 2000 and 1999, respectively. Reciprocal
compensation relates to the transport and termination of local
traffic (in our case, primarily to ISPs from ILEC customers)
pursuant to various interconnection agreements. Several ILECs
have not paid a substantial portion of the amounts for
reciprocal compensation billed by the Company and have disputed
these charges based on the belief that such calls are not local
traffic as defined by the various interconnection agreements and
under state and federal law and public policies. As of
December 31, 2000, the Company has received cumulative
payments of approximately $73.5 million for reciprocal
compensation. The continued resolution of the remaining disputes
will be based on rulings by state PUCs, the FCC, the courts
and/or commercial arbitrators.

In February 1999, the FCC ruled that ISP-bound traffic is
jurisdictionally interstate in nature. The FCC also
found that the reciprocal compensation provisions of the FTA did
not apply to ISP-bound traffic but delegated to state PUCs the
decision of whether reciprocal compensation must be paid under
the terms of

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The FCC is expected to adopt shortly an order on remand from the
DC Circuit setting forth a new compensation mechanism for
ISP-bound traffic. If adopted by the FCC, reduced rates for this
type of traffic may result in a reduction in the Companys
revenues generated from inter-carrier compensation.

The FCC is expected to adopt shortly a notice of proposed
rulemaking seeking to unify its rules regarding inter-carrier
compensation. The FCC is expected to address disparities in
rates for access charges and reciprocal compensation 
the rates which carriers pay each other for completing calls
exchanged between them. Future adoption by the FCC of a unified
inter-carrier compensation regime that adopts a bill and keep
regime or otherwise reduces the rates that the Company (and
other carriers) may charge for access charges and/or reciprocal
compensation may significantly reduce the Companys
inter-carrier compensation revenues and may have a materially
adverse impact on the Companys financial position.

There can be no assurance that future regulatory or arbitration
rulings or settlements will be favorable to the Company and the
timing of receipts cannot be predicted at this time. The Company
believes that its outstanding receivables for reciprocal
compensation of $47.2 million at December 31, 2000,
net of allowance, are ultimately collectible, although the
timing of receipts cannot be predicted at this time and may be
impacted by the bankruptcy filing.

Network Technologies Services

Network Technologies services revenues increased
$14.5 million, or 21%, to $82.8 million for the year
ended December 31, 2000, compared with revenues of
$68.3 million for the year ended December 31, 1999.
The increase in revenues is attributable to the increased growth
in the size and number of construction contracts in this
expanded operation. The Network Technologies segment offers
construction services, including the sale of IRUs on portions of
e.spires networks to IXCs and other customers, fiber optic
network design and project management services. Also, included
in Network Technologies services revenues are revenues for
construction contracts and grants of IRUs on portions of
e.spires networks to IXCs and other customers. The Company
recognized approximately $0.6 million and
$14.9 million for the twelve months ended December 31,
2000 and 1999, respectively, in revenues from agreements to
exchange IRU multiple fibers along certain sections of
e.spires networks for dissimilar assets or for IRUs on
other companies networks with substantial cash payments.
Included in the twelve months ended December 31, 2000, are
revenues of approximately $60.0 million derived from
contracts with three major customers. Included in the year ended
December 31, 1999 revenues was approximately
$40.1 million derived from contracts with three major
customers. The Company expects to see continued increases in
revenues from Network Technologies services due to future growth
and expansion in this line of business subject to the
availability of adequate capital.

Internet Services

Internet services reported an increase in revenues of
$3.6 million, or 14%, to $28.7 million for the year
ended December 31, 2000, compared with revenues of
$25.1 million for the year ended December 31, 1999.
Included in Internet services are revenues from Internet access
and Web hosting sold through our subsidiary,

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Cost of Sales

For the year ended December 31, 2000, compared with the
year ended December 31, 1999, total cost of sales increased
$34.2 million, or 22%, to $193.6 million from
$159.4 million for the twelve months ended
December 31, 1999, as discussed below.

Telecommunications Services

Cost of sales for Telecommunications services increased
$23.5 million, or 21%, to $133.5 million for the year
ended December 31, 2000, from $110.0 million for the same
period of 1999. These increases relate to growth in the delivery
of switched, data and special access services and the addition
of engineering and operations personnel dedicated to supporting
the network infrastructure.

Included in cost of sales are costs of Telecommunications
services paid to IXCs, ILECs and others for leased
telecommunications facilities, access and services. Such costs
increased to approximately $115.2 million for the year
ended December 31, 2000, from approximately
$100.1 million for the year ended December 31, 1999.
These increases were partially offset by credits in the amount
of $4.9 million awarded to the Company in the third and
fourth quarters of 2000 for the settlement of a rate dispute.
Also, for the third quarter of 2000, there was a decrease in
costs due to the disconnection of one major customer. In
addition, network related personnel costs such as employee
salaries and benefits are also included in cost of sales. For
the year ended December 31, 2000 and 1999, these costs were
approximately $18.3 million and $9.9 million,
respectively. The increase was due to the additional employees
in the network area.

Network Technologies Services

Cost of sales for Network Technologies services increased
$8.0 million, to approximately $46.2 million for the
year ended December 31, 2000, compared with
$38.2 million for the same period of 1999. The increases
were attributable to the increased growth in the size and number
of construction contracts in this expanded operation. Included
in Network Technologies cost of sales are direct materials and
labor associated with the construction of networks and costs
associated with contracted services.

Internet Services

Cost of sales for Internet services increased $2.7 million,
or 24%, to approximately $13.8 million for the year ended
December 31, 2000, compared with $11.1 million for the
same period of 1999. These increases were due to increased
charges for domain registration associated with the increase in
the web hosting customer base. The increases were partially
offset by decreases in telco expenses due to the decrease in
Internet access customers. This decrease in telecommunications
expenses is expected to continue as the Company completed the
sale of its dial-up internet customers at the end of the third
quarter of 2000.

Gross Margin

For the year ended December 31, 2000, total gross margin
increased 910 basis points to 43.8 percent from
34.7 percent for the year ended December 31, 1999, as
discussed below.

Telecommunications Services

Telecommunications services gross margin increased 1,560 basis
points to 42.6 percent for the year ended December 31,
2000 from 27.0 percent for the year ended December 31,
1999. These increases were primarily due to increases in sales
volume, including reciprocal compensation as described earlier.
As discussed above, these increases were also due to credits in
the amount of $4.9 awarded to the Company for the settlement of

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Network Technologies Services

Network Technologies services gross margin remained constant at
approximately 44 percent for the year ended
December 31, 2000 and 1999. Gross margin remained constant
due to the similar type of revenue contracts in both years.

Internet Services

Internet services gross margins decreased 390 basis points to
51.8 percent for the year ended December 31, 2000,
compared with 55.7 percent for the year ended 1999. These
decreases were primarily due to the Companys announced
exit from providing dial-up internet services, which resulted in
lower margins. Going forward, the Company will focus on its web
hosting business in which the Company expects to earn higher
margins.

Operating Expenses

Selling, General and Administrative

For the year ended December 31, 2000, selling, general and
administrative (SG&A) expenses increased $18.1 million,
or 11%, to $187.3 million from $169.2 million for the same
period of 1999.

Included in SG&A expenses are personnel costs such as
employee salaries, benefits and commissions. Such costs
increased to $72.4 million for the year ended
December 31, 2000, from $64.5 million for the year
ended December 31, 1999. Also, included in SG&A
expenses are operating costs such as rent, advertising and
general administrative and office expenses. These expenses
increased to $114.9 million for the year ended
December 31, 2000 from $104.7 million for the year ended
December 31, 1999.

Increases in SG&A expenses are the result of increases in
the Companys personnel that are necessary to support and
grow the Companys operations. Costs directly related to
the increase in personnel include salaries, benefits, bonuses
and commissions. Another significant portion of the SG&A
increase is due to backoffice expenses such as professional
services cost which have been necessary to maintain and improve
existing processes. In addition, increases in costs for
facilities and related expenses have been incurred due to an
increased number of office locations and facilities. Also, in
connection with the Companys growth in revenue, bad debt
allowances have increased. The Company continues to monitor on
an ongoing basis its SG&A costs to evaluate any costs that
can be eliminated.

Non-Cash Stock Compensation

Non-cash stock compensation expense increased $2.9 million,
or 25%, to $14.4 million for the year ended
December 31, 2000 from $11.5 million for the year
ended December 31, 1999.

Included in non-cash compensation are accruals for the issuance
of common stock in connection with performance bonuses and costs
of grants of employee stock options. Costs associated with the
accrual for performance bonuses were approximately
$12.0 million and $9.6 million for the years ended
December 31, 2000 and 1999, respectively. The costs for the
compensation associated with stock option plans was
approximately $.2 million for the year ended December 31,
2000 and $1.9 million for the same period of 1999. Also
included in non-cash compensation for the year ended
December 31, 2000 are $2.2 million related to
settlement agreements with outside parties. Included in the
Companys 2000 results are accruals related to employee
performance bonuses of approximately $12.0 million that
were to be paid in 2001. Due to the bankruptcy filing, the
Company believes that the performance bonus will not be paid as
anticipated.

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Depreciation and Amortization and Impairment on Assets Held
for Sale

Depreciation and amortization expenses increased
$13.5 million, or 14%, to $109.4 million for the year
ended December 31, 2000 from $95.9 million for the
year ended December 31, 1999. These increases were due to
an increase in gross capital assets to $968.8 million at
December 31, 2000 compared with capital assets of
$848.7 million at December 31, 1999.

During the fourth quarter of 2000, the Company determined based
on changes to the operating plans that certain network assets
would not be placed in service. Accordingly, the Company
recorded an impairment charge of approximately
$16.9 million to reduce the assets to their estimated
realizable value at December 31, 2000.

Interest and Other Income

Interest and other income decreased $7.0 million, or 66%,
to $3.6 million for the year ended December 31, 2000
from $10.6 million for the year ended December 31,
1999. The decrease in interest and other income reflects a
decrease in the cash and cash equivalents balance of
$55.1 million from $62.5 million at December 31, 1999
to $7.4 million at December 31, 2000. These funds have
been invested in commercial paper, U.S. Government Securities
and money market instruments.

Interest and Other Expense

Interest and other expense increased $27.9 million, or 29%,
to $124.3 million for the year ended December 31, 2000 from
$96.4 million for the year ended December 31, 1999.
The increase was primarily due to additional interest incurred
in connection with the Credit Facilities and higher levels of
debt outstanding.

Net Loss & Net Loss Applicable to Common Stockholders

As a result of the previously discussed fluctuations in
revenues, cost of sales, operating expenses, depreciation and
amortization, and interest income and expense, net loss
increased $15.9 million, or 6%, to $293.6 million for
the year ended December 31, 2000 from $277.7 million
for the year ended December 31, 1999. Further, net loss
applicable to common stockholders increased $56.3 million, or
18%, to $374.7 million for the year ended December 31,
2000 from $318.4 million for the same period of 1999. These
increases to net loss applicable to common stockholders were
also affected by the preferred stock dividends and accretion
related to the 14 3/4% Preferred Stock and the 12 3/4%
Preferred Stock, a charge of $16.9 million related to
impairment charges tied to certain e.spire assets and to the
beneficial conversion charges, as described below, related to
the convertible Preferred Stock issued in the first quarter of
2000 and to the exchangeable Preferred Stock issued during the
third quarter of 2000.

The Series A Convertible Preferred Stock and the
Exchangeable Preferred Stock were issued at conversion prices
that were less than market price of the Companys Common
Stock at the time of the funding commitment. Thus the Company
recognized a beneficial conversion charge of approximately
$24.6 million related to the Series A Convertible
Preferred Stock issued on March 3, 2000. Also, the Company
incurred a beneficial conversion charge of approximately
$9.4 million in 2000 related to the exchangeable preferred
stock issued on September 19, 2000, after final shareholder
approval was received in the fourth quarter.

Results of Operations  Year Ended
December 31, 1999 Compared to Year Ended December 31,
1998

Revenues

The Company reported an increase in total revenues of
$87.2 million, or 56%, to $244.0 million for the year
ended December 31, 1999, compared with revenues of
$156.8 million for the year ended December 31, 1998 as
discussed below.

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Telecommunications Services

The Company reported an increase in Telecommunications services
revenues, including Internet services revenues, of
$48.4 million, or 38%, to $175.7 million for the year
ended December 31, 1999, compared with revenues of
$127.3 million for the year ended December 31, 1998.
Included in Telecommunications services are revenues from the
dedicated access, switched local, long distance, reciprocal
compensation and data/ Internet products. The increase in
revenues was attributable to the Companys greater presence
and expansion in its markets. The increase was principally due
to increased reciprocal compensation revenue as discussed below
and increases in the Companys other service offerings such
as special access, switch and data services. Also, these
increases in revenues were partially offset by a decrease in
resale revenue due to the Companys elimination of its
switched resale portfolio. The Companys revenue was also
adversely affected by increased revenue reserves for customer
churn, related in part to the Companys previously
announced elimination of its local switched resale business and
increased reserves for reciprocal compensation.

The Company also increased the number of route miles, fiber
miles, co-locations, buildings connected, voice switches and
data POPs. Between December 31, 1999 and December 31,
1998, the Company increased route miles by 2,088 miles, or 120%
and increased fiber miles by 23,070 or 14%. Of the 2,088 route
miles added over the 12 month period, 1,670 route miles are
long haul connections between selected local metropolitan fiber
networks of the Company, with an associated 7,000 fiber miles.
Co-locations increased by 17 or 18% and buildings connected
increased by 1,237, or 42%. Lucent 5ESS switches deployed
increased to 28 as of December 31, 1999, from 19 as of
December 31, 1998. In addition, the growth is attributable
to the Companys leased coast-to-coast broadband network
infrastructure by which it delivers both ATM and frame relay
products via its 388 data POPs, which are a combination of both
e.spires infrastructure and various network-to-network
interconnection arrangements. The number of data POPs has
increased to 388 as of December 31, 1999, from 66 as of
December 31, 1998. Net access lines installed increased by
32,220, or 24% to 165,290 at December 31, 1999, from
133,070 at December 31, 1998. In line with the
Companys previously announced initiative to eliminate
local switched resale, over 60,000 resale lines have been
eliminated from the access line base through forced attrition
and a multi-phase sale. At December 31, 1999, approximately
95% of total installed lines were on-switch versus
approximately 47% as of December 31, 1998.

Included in Telecommunications services revenues is reciprocal
compensation of approximately $38.9 million for the twelve
months ended December 31, 1999 and approximately
$17.7 million for the twelve months ended December 31,
1998. Reciprocal compensation relates to the transport and
termination of local traffic, primarily to ISPs from ILEC
customers, pursuant to various interconnection agreements. These
ILECs have not paid a substantial portion of the amount billed
by the Company and have disputed these charges based on the
belief that such calls are not local traffic as defined by the
various agreements and under state and federal law and public
policies. As of December 31, 1999, the Company has received
approximately $14.4 million for reciprocal compensation. In
the first quarter of 2000, the Company received approximately
$16 million in reciprocal compensation from BellSouth and
GTE. The continued resolution of the remaining disputes will be
based on rulings by state PUCs, the FCC, the courts and/or
commercial arbitrators. In February 1999, the FCC ruled that
ISP-bound traffic is jurisdictionally interstate in
nature. The FCC also found that the reciprocal
compensation provisions of the Telecommunications Act did not
apply to ISP traffic but delegated to state PUCs the decision of
whether reciprocal compensation must be paid under the terms of
local interconnection agreements. On March 24, 2000, the
United States Court of Appeals for the District of Columbia
Circuit vacated and remanded the FCCs decision on the
grounds that the FCC did not provide an adequate basis for its
decision that the reciprocal compensation provisions of the
Telecommunications Act did not apply to ISP traffic, and
remanded further consideration. e.spire has obtained favorable
rulings from the Georgia and Florida PSCs requiring payment of
past due reciprocal compensation from BellSouth in those states,
although those ruling have been appealed by BellSouth. e.spire
has several pending proceedings before state PSCs and commercial
arbitrators to collect outstanding amounts from multiple ILECs.
Although there can be no assurance that future regulatory or
arbitration rulings will be favorable to the Company and the
timing of receipts cannot be predicted at this time, the Company
believes that its receivables for reciprocal compensation of
$46.9 million at December 31, 1999, net of allowance, are
ultimately collectible. (see Government Regulation)

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Network Technologies Services

Network Technologies services revenues increased
$38.8 million, or 132%, to $68.3 million for the year
ended December 31, 1999, compared with revenues of
$29.4 million for the year ended December 31, 1998.
The increase in revenues is attributable to the increased growth
in the size and number of construction contracts in this
expanded operation. The Network Technologies segment offers
construction services, including the sale of IRUs on portions of
e.spires networks to IXCs and other customers, fiber optic
network design and project management services. Also, included
in Network Technologies revenues are revenues for construction
contracts and grants of IRUs on portions of e.spires
networks to IXCs and other customers. The Company recognized
approximately $14.9 million and $14.0 million for the
twelve months ended December 31, 1999 and 1998,
respectively, in revenues from agreements to exchange IRU
multiple fibers along certain sections of e.spires
networks for dissimilar assets or for IRUs on other companies
networks with substantial cash payments. Included in the twelve
months ended December 31, 1999, are revenues of
approximately $40.1 million derived from contracts with
three major customers. Included in the year ended
December 31, 1998 revenues was approximately
$23.5 million derived from contracts with five major
customers with approximately $9.5 million coming from a single
customer. The Company expects to see continued increases in
revenues from Network Technologies due to future growth and
expansion in this line of business. However, the timing of
future revenue recognition will be adversely affected by the
Companys adoption of FIN 43 which effects the recognition
of revenue for dark fiber sales. See Note 1 of the Notes to
Consolidated Financial Statements.

Cost of Sales

For the year ended December 31, 1999, compared with the
year ended December 31, 1998, total cost of sales increased
$52.5 million, or 49%, to $159.4 million from
$106.8 million for the twelve months ended
December 31, 1998, as discussed below.

Telecommunications Services

Cost of sales for Telecommunications services including Internet
Services, increased $23.0 million, or 23%, to
$121.2 million for the year ended December 31, 1999,
from $98.2 million for the same period of 1998. These
increases relate to growth in the delivery of switched, data and
special access services and the addition of engineering and
operations personnel dedicated to supporting the network
infrastructure.

Included in cost of sales are costs of Telecommunications
services paid to IXCs, ILECs and others for leased
telecommunications facilities, access and services. Such costs
increased to approximately $108.2 million for the year
ended December 31, 1999, from approximately
$84.7 million for the year ended December 31, 1998. In
addition, network related personnel costs such as employee
salaries and benefits are also included in cost of sales. For
the year ended December 31, 1999 and 1998, these costs were
approximately $13.0 million and $13.4 million,
respectively.

Network Technologies Services

Cost of sales for Network Technologies services increased
$29.6 million, to approximately $38.2 million for the
year ended December 31, 1999, compared with
$8.7 million for the same period of 1998. Included in
Network Technologies cost of sales are direct materials and
labor associated with the construction of networks and costs
associated with contracted services. Increases in the costs are
attributable to the increased growth in this expanded line of
business. The Company expects this growth to continue into the
future as Network Technologies continues to expand. However, the
costs associated with revenues deferred as a result of the
adoption of FIN 43 will be recognized ratably over the IRU
period.

Gross Margin

For the year ended December 31, 1999, total gross margin
increased 280 basis points to 34.7 percent from
31.9 percent for the year ended December 31, 1998, as
discussed below.

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Telecommunications Services

Telecommunications services gross margin increased 410 basis
points to 27.0 percent for the year ended December 31,
1999 from 22.9 percent for the year ended December 31,
1998. These increases were primarily due to increases in sales
volume, which resulted in increases in reciprocal compensation
as described above. Furthermore, the Company continues to
achieve network cost savings through negotiations with vendors.

Network Technologies Services

Network Technologies services gross margin decreased 2,660 basis
points to 44.1 percent for the year ended December 31,
1999 from 70.7 percent for the year ended December 31,
1998. The decrease was due to the sale of lower margin
construction projects in 1999. The Company expects 1999 results
to be more in line with what future results will be for this
line of business. The Company expects that the gross margins in
the future will be adversely effected due to the provisions of
FIN 43 as discussed above.

Operating Expenses

Selling, General and Administrative

For the year ended December 31, 1999, selling, general and
administrative (SG&A) expenses increased $65.5 million,
or 63%, to $169.2 million from $103.6 million for the same
period of 1998.

Included in SG&A expenses are personnel costs such as
employee salaries, benefits and commissions. Such costs
increased to $64.5 million for the year ended
December 31, 1999, from $32.4 million for the year
ended December 31, 1998. Also, included in SG&A
expenses are operating costs such as rent, advertising and
general administrative and office expenses. These expenses
increased to $104.7 million for the year ended
December 31, 1999 from $71.2 million for the year ended
December 31, 1998.

Increases in SG&A expenses are the result of increases in
the Companys personnel that are necessary to support and
grow the Companys operations. Costs directly related to
the increase in personnel include salaries, benefits, bonuses
and commissions. Another significant portion of the SG&A
increase is due to backoffice expenses such as professional
services cost which have been necessary to maintain and improve
existing processes. In addition, increases in costs for
facilities and related expenses have been incurred due to an
increased number of office locations and facilities. Also, in
connection with the Companys growth in revenue, bad debt
allowances have increased. Costs associated with Year 2000
remediation efforts have also contributed to the increases. The
Company continues to monitor on an ongoing basis its SG&A
costs to evaluate any costs that can be eliminated.

Non-Cash Stock Compensation

Non-cash stock compensation expense increased $1.6 million,
or 16%, to $11.5 million for the year ended
December 31, 1999 from $9.9 million for the year ended
December 31, 1998.

Included in non-cash compensation are accruals for the issuance
of common stock in connection with performance bonuses and costs
of grants of employee stock options. Costs associated with the
accrual for performance bonuses were approximately $6.1 and
$9.6 million for the years ended December 31, 1998 and
1999, respectively. The costs for the compensation associated
with stock option plans was approximately $3.8 for the year
ended December 31, 1998 and $1.9 for the same period of
1999.

Depreciation and Amortization

Depreciation and amortization expenses increased
$48.6 million, or 103%, to $95.9 million for the year
ended December 31, 1999 from $47.3 million for the
year ended December 31, 1998. These increases were due to
an increase in gross capital assets to $849 million at
December 31, 1999 compared with capital assets of
$562.0 million at December 31, 1998.

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Interest and Other Income

Interest and other income decreased $12.7 million, or 55%,
to $10.6 million for the year ended December 31, 1999 from
$23.3 million for the year ended December 31, 1998.
The decrease in interest and other income reflects a decrease in
the unrestricted cash and cash equivalents balance of $266.2
million from $328.8 million at December 31, 1998 to
$62.5 million at December 31, 1999. These funds have been
invested in commercial paper, U.S. Government Securities and
money market instruments.

Interest and Other Expense

Interest and other expense increased $20.9 million, or 28%,
to $96.4 million for the year ended December 31, 1999 from
$75.5 million for the year ended December 31, 1998.
The increase was primarily due to the accrual of interest
related to the 10 5/8% Senior Discount Notes due 2008 which
were issued in July 1998 and the interest incurred in
connection with the Credit Facilities. Furthermore, the accrual
of interest related to the 13% Senior Discount Notes due 2005
(the 2005 Notes), the 12  3/4% Senior Discount
Notes due 2006 (the 2006 Notes) and the interest
expense associated with the Companys capital leases also
contributed to the increase in interest expense. Also, beginning
in the fourth quarter of 2000, cash interest payments under the
2005 Notes will begin.

Net Loss & Net Loss Applicable to Common Stockholders

As a result of the aforementioned increases in revenues, cost of
sales, operating expenses, depreciation and amortization, and
interest income and expense, net loss increased
$114.6 million, or 70%, to $277.7 million for the year
ended December 31, 1999 from $163.1 million for the
year ended December 31, 1998. Further, net loss applicable to
common stockholders increased $119.2 million, or 60%, to
$318.4 million for the year ended December 31, 1999
from $199.2 million for the same period of 1998. These
increases to net loss applicable to common stockholders are
primarily attributable to the preferred stock dividends and
accretion related to the 14  3/4% Preferred Stock and the
12  3/4% Preferred Stock.

Capital Expenditures; Operating Cash Flow

As of December 31, 2000, the Company was operating 38
digital local fiber optic networks. The initial buildout of all
38 markets is complete. Most capital expenditures during 2000
have gone to meet customer demand by expanding the
Companys current infrastructure to serve new and existing
customers. The Company increased the number of buildings
connected to its network to 5,197 at December 31, 2000 from
4,149 at December 31, 1999.

As the Company develops, introduces and expands its high-speed
data/ Internet and voice services in each of its markets,
additional capital expenditures and net operating costs are
being and will continue to be incurred. The amount of these
costs will vary, based on the number of customers served and the
actual services provided to the customers. The Company will
concentrate on increasing capacity in key switch markets and
improving operating margins and profitability in our existing
markets rather than building any new networks.

The Company has never been profitable, has never generated
positive cash flow from consolidated operations and, since its
inception, has incurred significant net operating losses and
negative cash flow. As of December 31, 2000, the Company
had an accumulated deficit of approximately $932 million,
stockholders deficit of approximately $572 million
and negative working capital of approximately $132 million.

As of December 31, 2000, the Company was generating
revenues from all of its fiber optic networks. In 2000, the
networks generated positive operating cash flow, before general
corporate overhead. In 2000, the Company invested approximately
$120 million in network and telecommunications equipment.
The Company estimates that in 2001, capital required to fund
general corporate overhead and capital expenditures for its ICP
division will be under $50 million. The source of these funds
will be from our existing revenue base, debtor in possession
financing and additional financing that the Company is seeking
to raise during its voluntary reorganization.

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Network Technologies completed new networks in Washington, DC;
Houston, Texas and nearly all of South Florida during 2000.
During 2001, networks in Dallas, Texas and an overbuild in
Atlanta, Georgia are expected to be complete. A network in
Tampa, Florida may be completed, depending on future financing
arrangements. Cash flow from contracts in the completed markets
nearly funded all of the costs of construction, leaving the
remaining fiber assets available for future sale.

As of December 31, 2000, the Companys unrestricted
cash balance was approximately $7.4 million. On
February 15, 2001, the Company failed to make an interest
payment that was due. As part of the Companys negotiations
with its creditors during voluntary reorganization, the Company
is seeking additional capital to allow it to continue to
maintain and grow, on a limited basis, its operations.

Liquidity and Capital Resources

As previously discussed in the Description of Business section,
e.spire and its subsidiaries filed voluntary petitions for
protection under Chapter 11 of the United States Bankruptcy
Code in the Federal District of Delaware on March 22, 2001
in order to preserve cash facilitate the restructuring of
e.spires long-term debt, trade liabilities and other
obligations. e.spire and its bankruptcy filing subsidiaries are
currently operating as debtors-in-possession under the
supervision of the United States District Court for the District
of Delaware.

e.spires construction, and operation of local networks, as
well as the further development of additional services,
including local switched voice and high-speed data services,
will require continued substantial capital expenditures. The
funding of these expenditures is dependent upon e.spires
ability to raise substantial financing. From the Companys
inception through December 31, 2000, the Company has raised
net proceeds of approximately $1.5 billion from debt and equity
financing. The Company is highly leveraged. As of
December 31, 2000, the accreted value of its four senior
discount notes totaled approximately $811 million. The
principal amount outstanding under its senior secured credit
facility totaled $136.7 million. e.spires cash, cash
equivalents and restricted cash decreased $71.2 million for
the year ended December 31, 2000, due to capital expended
for the expansion of e.spires infrastructure and services
and to fund negative cash flow, including principal and interest
payments partially offset by approximately $150 million
capital infusion during the period. At December 31, 2000,
e.spire had approximately $7.4 million of cash and cash
equivalents available for such purposes.

As a result of filing for protection under bankruptcy law,
e.spire is not currently paying any of the debt service
obligations that are outstanding as of March 22, 2001. In
addition, future payment of principal and interest on all of the
outstanding indebtedness and dividends on the preferred shares
is subject to court approval and may be discharged in whole or
in part from any future court approved plan of reorganization or
liquidation of e.spire. There can be no assurance that any
amounts owed to creditors will be paid or be paid in full.

e.spire filed a motion requesting that the bankruptcy court
grant it authorization to enter into a debtor in possession loan
agreement in the amount of $85.0 million. On April 10,
2001, the bankruptcy court entered an Interim order authorizing
e.spire to borrow $25.0 million to fund ordinary working
capital and general corporate needs. A hearing before the
bankruptcy court was held on May 16, 2001, at which time
the bankruptcy court approved e.spire to borrow an additional
$15 million to continue to fund working capital and general
corporate needs and also approved e.spires employee
retention plan. On June 12, 2001, the bankruptcy court
approved the borrowing of the remaining $45 million of the
debtor in possession loan.

e.spire entered into a Debtor in Possession Loan and Security
Agreement dated as of April 10, 2001 (DIP
Loan), which consists of a $25 million term loan and
$60 million revolver with a maturity date that occurs upon
: substantial consummation of a plan of reorganization that has
been confirmed by the bankruptcy court, October 10, 2002, a
conversion of our chapter 11 bankruptcy filing to chapter 7, the
appointment of a trustee under chapter 11, the appointment of an
examiner with expanded power under the bankruptcy code, the sale
of all or substantially all of the assets of e.spire or ACSI NT
under section 363 of the bankruptcy code, a final bankruptcy
order is not entered, or we cease and discontinue our ordinary
course business. The DIP Loan includes the following covenants:
without limitation, restrictions on our ability to incur further
indebtedness and liens subject to certain specified exceptions,
restrictions on certain fundamental changes in

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Management believes that current cash, short-term investments
and the debtor-in-possession financing, along with protection
under bankruptcy law, should enable e.spire to fund operations
through the bankruptcy restructuring process. In the event that
plans or assumptions change, or prove to be inaccurate,
significant unexpected expenses are incurred, or cash resources,
together with borrowings under the debtor-in-possession
financing arrangement, prove to be insufficient to fund
operations, e.spire may be required to seek additional sources
of capital (or seek additional capital sooner than currently
anticipated). There can be no guarantee, however, that
additional capital will be available on reasonable terms, or at
all. Additionally, there can be no assurance that there will be
approval of the reorganization plan by the Bankruptcy Court.

On September 19, 2000 we entered into purchase agreements
with the Huff Alternative Income Fund, L.P., Greenwich Street
Capital Partners II, L.P., and Honeywell International Inc.
Master Retirement Fund to sell up to $124.3 million of
convertible preferred stock, common stock or warrants which are
convertible or exercisable into our common stock. Of this
amount, we issued $50 million of securities in the form of
exchangeable preferred stock. The investors obligations to
provide future financings were subject to certain conditions
which include, but are not limited to, receiving shareholder
approval, the absence of any material adverse change and
satisfaction of certain debt covenants under the Credit
Facilities. On December 1, 2000, e.spires
shareholders approved the transaction. e.spire expected that
these investors and other investors would purchase the remaining
$75 million in Junior Securities as funding was needed by
e.spire.

On December 9, 2000, pursuant to a loan put agreement
between Huff and the senior secured credit facility lenders,
e.spires senior secured credit facility lenders required
that Huff purchase $25 million of e.spires
indebtedness under the senior secured credit. This debt purchase
reduced by $25 million Huffs commitment to e.spire
under the September 19, 2000 purchase agreements.

Prior to filing for bankruptcy on March 22, 2001, e.spire
sent purchase notices to each of Huff, Greenwich and Honeywell
requesting payment of the remaining committed $49.3 million
for junior purchaser securities. e.spire received from the three
investors notice of rejection of e.spires purchase notice
as well as notice of termination of the purchase agreements.

The Exchangeable Preferred Stock is exchangeable at the option
of e.spire into Purchaser Junior Securities that includes
preferred stock, warrants or common stock (based upon the
accreted amount that includes accrued but unpaid dividends at
the purchase price on the date of the closing of such Purchaser
Junior Securities), the exchange of which may be subject to
shareholder approval. At the time of exchange, Huff will
designate which type of security will be issued. An aggregate of
893,523 transaction fee warrants will be issued in connection
with the issuance of the exchangeable preferred stock. We are
obligated to issue an additional 1,327,775 transaction fee
warrants that are exercisable into common stock to the
purchasers simultaneously with the closing of each sale of the
securities under those purchase agreements. Each warrant will be
initially exercisable for one share of Common Stock (at an
initial exercise price of $.01). The warrants will automatically
expire on the tenth anniversary after the date they are issued.
Dividends accrue from the date of issuance, are cumulative and
are payable quarterly in arrears, in additional shares of
Exchangeable Preferred Stock, at a per annum rate of 30% of
$1,000 (the stated value), plus the accrued but
unpaid dividends thereon. Dividends are cumulative and shall
accrue whether or not e.spire has earnings or profits,

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On March 3, 2000, e.spire completed a private offering of
81,777 shares of Series A Convertible Preferred Stock and
175,000 warrants with Greenwich Street Capital Partners II,
L.P., The Huff Alternative Income Fund, L.P. and Honeywell
International Inc. Master Retirement Trust, and received
$100.7 million in proceeds therefrom. Each share of
Series A Convertible Preferred Stock is initially
convertible into 126.4 shares of Common Stock (an effective
conversion price of $7.91 per share), and each warrant is
initially exercisable for 44.1 shares of Common Stock (at an
initial exercise price of $9.89 per share). The warrants will
automatically expire on the tenth anniversary after the date
that they are issued. Dividends on the Series A Preferred
Stock accrue from the date of issuance, are cumulative and are
payable quarterly in arrears, at a per annum rate of 7% of
$1,000 (the stated value), plus the accrued but
unpaid dividends thereon, subject to an adjustment in the
dividend rate to 15% upon the occurrence of certain events and
to 20% upon a change of control. Dividends on the convertible
preferred stock are cumulative and shall accrue whether or not
e.spire has earnings or profits, whether or not there are funds
legally available for the payment of such dividends and whether
or not dividends are declared by e.spire. Dividends on the
convertible preferred stock are payable only when and if
declared by e.spire; provided that all accrued but unpaid
dividends on any share of convertible preferred stock must be
paid by e.spire upon the conversion of such share of convertible
preferred stock. The Series A Convertible Preferred Stock
is junior to the 14.75% Redeemable Preferred Stock and ranks
pari passu to the 12.75% Redeemable Preferred Stock. All
dividends will be paid by e.spire in shares of its Common Stock
equal to accrued dividends divided by a rate equal to the
effective conversion price described above or, if no shareholder
approval has been obtained, the closing price of the common
stock on March 6, 2000 ($13.44). In connection with the
issuance of the Series A Convertible Preferred Stock,
e.spire has agreed to certain restrictive covenants, which are
substantially similar to the covenants that were entered into in
connection with the issuance of e.spires 12 3/4%
Redeemable Preferred Stock. The Certificate of Designation
provides that these covenants shall be deemed waived
automatically if waived or amended by the holders of the
12 3/4% preferred stock.

On August 12, 1999, e.spire entered into the credit
facility which consisted of a $35 million revolver, a
$55 million multiple draw term loan, each with a
6.5 year maturity, and a $110 million term loan with a
7 year maturity. In conjunction with the Credit Facility,
e.spire retired a $35 million credit facility with Newcourt
Commercial Finance Corporation on August 12, 1999. On
September 19, 2000 the credit facility was amended as
discussed below. We were not in compliance with certain
financial covenants of our credit facilities on
December 31, 1999, March 30, 2000, and June 30,
2000. We entered into a series of standstill agreements and
ultimately received a waiver for such non-compliance. As of
September 30, 2000, e.spire was in compliance with the
amended and restated credit facilities. We received an amendment
to certain of these covenants at December 31, 2000, but we
were subsequently not in compliance, resulting in a default
under these credit facilities which would allow the lenders to
accelerate maturity of the borrowings under the credit facility.

Pursuant to the amendment and restatement of the credit facility
on September 19, 2000, all commitments to make additional
loans under the credit facility were canceled. e.spire prepaid
$25 million of loans outstanding under the credit facility
during the third quarter of 2000. The series A revolving loans
repaid in connection with the amended and restated credit
facility were no longer permitted to be re-borrowed and After
such prepayments, there were $139 million of loans
outstanding under the amended and restated credit facility which
includes the series A revolving loans of $35 million,
series B term loans of $4.3 million and series C term loans
of $99.7 million. e.spire also agreed to pay a .5% point
increase in interest rates. The amendment

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e.spire and the lenders amended and restated our credit facility
to, among other things, replace certain financial covenants. The
covenants include without limitation, adjusted EBITDA (Earnings
before interest, taxes, depreciation, amortization, and noncash
compensation), debt to capital ratio, capital expenditures,
minimum cash balance requirements, and maintaining certain
totals of combined voice, data and ISP lines. The amended and
restated credit facility is subject to mandatory prepayment
provisions in amounts equal to (i) net
insurance/condemnation proceeds, (ii) the net proceeds of
the sale or other disposition of any of our assets, subject to
specified exceptions, provided however, e.spire may retain under
certain conditions fifty percent of the net proceeds for
reinvestment in telecommunications assets, and (iii) seventy
percent of our consolidated excess cash flow for each fiscal
year commencing with the 2002 fiscal year.

The credit facility is collateralized by the capital stock of
all of the restricted subsidiaries of e.spire and the assets of
e.spire and its restricted subsidiaries, including promissory
notes representing intercompany indebtedness. On April 10,
2001, the bankruptcy court subordinated the lenders secured
interest to the extent of the outstanding principal and interest
of the DIP Loan. In addition, the credit facility contains
certain covenants, which impose restrictions on e.spire and
its restricted subsidiaries. The Company was in compliance
with such covenants at December 31, 2000, but was
subsequently not in compliance. These include, without
limitation, restrictions on the declaration or payment of
dividends with respect to the capital stock of e.spire, the
conduct of certain activities, certain investments, the creation
of additional liens or indebtedness, the disposition of assets,
transactions with affiliates and fundamental changes. The credit
facility contains financial covenants with which e.spire must
comply, including adjusted EBITDA (Earnings before interest,
taxes, depreciation, amortization, and noncash compensation),
debt to capital ratio, and capital expenditures.

New Accounting Pronouncements

In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin (SAB)
No. 101Revenue Recognition in Financial Statements.
This SAB expresses the SECs views in applying generally
accepted accounting principles to revenue recognition in
financial statements. The adoption of SAB No. 101 in 2000
did not have a material effect on the Companys financial
position or results of operations.

In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by
SFAS 138 implementation is delayed until January 1, 2001.
The new standard establishes accounting and reporting standards
for derivative instruments embedded in other contracts and for
hedging activities. This statement, as amended, is effective for
all fiscal quarters of all fiscal years beginning after
June 15, 2000. The Company does not expect SFAS 133 to have
a material effect on our financial position or results of
operations as we do not invest in derivative financial
instruments.

In March 2000, the Financial Accounting Standards Board
issued FASB Interpretation (FIN) No. 44, Accounting
for Certain Transactions Involving Stock Compensation. FIN 44
further defines the accounting consequence of various
modifications to the terms of a previously fixed stock option or
award under APB 25. FIN 44 became effective on July 1,
2000, but certain conclusions in FIN 44 cover specific events
that occur after December 15, 1998 or January 12,
2000. FIN 44 did not have a material affect on our financial
position or results of operations.




Item 7a.  Quantitative and Qualitative
Disclosures About Market Risk

The Companys long term debt includes both fixed and
variable rate instruments. The fair market value of the
Companys fixed rate long-term debt is sensitive to changes
in interest rates. The Company runs the risk that market rates
will decline and the required payments will exceed those based
on current market rate. Under its current policies, the Company
does not use interest rate derivative instruments to manage its

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|                                           |                                |                                                                  |       |                           |         |         |  |         |   |         |  |      |   |            |  |   |   |   |  |   |   |   |  |   |         |         |   |   |         |         | 
|------------------------------------------ | ------------------------------ | ---------------------------------------------------------------- | ----- | ------------------------- | ------- | ------- |  | ------- | - | ------- |  | ---- | - | ---------- |  | - | - | - |  | - | - | - |  | - | ------- | ------- | - | - | ------- | ------- | 
|                                           |                                | Estimated                                                        |       |                          
|                                           |                                | Fair Value on                                                    |       | Future Principal Payments
|                                           |                                | December 31,                                                     |       |                          
|                                           |                                | 2000                                                             |       | 2001                      |         | 2002    |  | 2003    |   | 2004    |  | 2005 |   | Thereafter
|                                           |                                |                                                                  |       |                           |         |         |  |         |   |         |  |      |   |           
|Long-term debt, including current portion: |                                |                                                                  |       |                           |         |         |  |         |   |         |  |      |   |            |  |   |   |   |  |   |   |   |  |   |         |         |   |  
|                                          
|                                          
|                                          
|                                          
|                                           | Fixed rate:                    |                                                                  |       |                           |         |         |  |         |   |         |  |      |   |            |  |   |   |   |  |   |   |   |  |   |         |         |   |   |        
|                                          
|                                          
|                                          
|                                          
|                                           |                                | 2005 Senior Discount Notes, interest at 13%,
	maturing 2005      |       | $                         | 49,400  |         |  |         | 0 |         |  |      | 0 |            |  |   | 0 |   |  |   | 0 |   |  |   | 190,000 |         |   |   | 0       |        
|                                          
|                                          
|                                          
|                                          
|                                           |                                | 2006 Senior Discount Notes, interest at 12 3/4%,
	maturing 2006. |       | $                         | 28,800  |         |  |         | 0 |         |  |      | 0 |            |  |   | 0 |   |  |   | 0 |   |  |   | 0       |         |   | $ | 120,000 |        
|                                          
|                                          
|                                          
|                                          
|                                           |                                | 2007 Senior Discount Notes, interest at 13 3/4%,
	maturing 2007. |       | $                         | 90,200  |         |  |         | 0 |         |  |      | 0 |            |  |   | 0 |   |  |   | 0 |   |  |   | 0       |         |   | $ | 220,000 |        
|                                          
|                                          
|                                          
|                                          
|                                           |                                | 2008 Senior Discount Notes, interest at
	10 5/8%, maturing 2008. |       | $                         | 191,250 |         |  |         | 0 |         |  |      | 0 |            |  |   | 0 |   |  |   | 0 |   |  |   | 0       |         |   | $ | 375,000 |        
|                                          
|                                          
|                                          
|                                          
|                                           | Senior Secured Credit Facility |                                                                  | $     | 136,740                   |         |         |  | 136,740 |   |         |  | 0    |   |            |  | 0 |   |   |  | 0 |   |   |  | 0 |         |         | $ | 0 |        
|                                           |                                |                                                                  |       |                           |         |         |  |         |   |         |  |      |   |            |  |   |   |   |  |   |   |   |  |   |         |         |   |  
|                                           |                                |                                                                  | Total |                           | $       | 496,390 |  |         |   | 136,740 |  |      |   | 0          |  |   |   | 0 |  |   |   | 0 |  |   |         | 190,000 |   |   | $       | 715,000 | 




Item 8.  Financial Statements and
Supplementary Data

The financial statements required by this item are included in
this Report beginning on page F-1 following the signature page.




Item 9.  Changes in and Disagreements With
Accountants on Accounting and Financial Disclosure

None

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##### Table of Contents






PART III




Item 10.  Directors and Executive Officers
of the Registrant

The Board is currently comprised of nine members. On
January 3, 2001, the Board of Directors, in accordance with
e.spires By-laws, resolved to increase the number of
directorships from seven to nine. Other than as described in
this Form 10-K, no arrangement or understanding exists
between an officer or director and any other person under which
any officer or director was or may be elected. All directors of
e.spire hold office until the next annual meeting of
stockholders and until their successors are duly elected and
qualified. No director or officer is related to any other
director or officer by blood, marriage, or adoption.

Information Concerning Director Nominees

|                           |  |     |    |          |  |                                                                        |  |  |      | 
|-------------------------- |  | --- | -- | -------- |  | ---------------------------------------------------------------------- |  |  | ---- | 
|                           |  |     |    |          |  | Director                                                              
|Name                       |  | Age |    | Position |  | Since                                                                 
|                           |  |     |    |          |  |                                                                       
|George F. Schmitt (4)      |  |     | 57 |          |  | Chairman of the Board of Directors and Acting
	Chief Executive Officer |  |  | 2000 | 
|                          
|                          
|                          
|                          
|William R. Huff(3)(4)      |  |     | 51 |          |  | Vice-Chairman of the Board of Directors                                |  |  | 1999 | 
|                          
|                          
|                          
|                          
|Edwin M. Banks (3)(4)      |  |     | 37 |          |  | Director                                                               |  |  | 1994 | 
|                          
|                          
|                          
|                          
|Peter C. Bentz (1)         |  |     | 35 |          |  | Director                                                               |  |  | 1995 | 
|                          
|                          
|                          
|                          
|Dennis Feely (1)(2)        |  |     | 49 |          |  | Director                                                               |  |  | 2001 | 
|                          
|                          
|                          
|                          
|Frederick Galland(2)(3)(4) |  |     | 56 |          |  | Director                                                               |  |  | 1999 | 
|                          
|                          
|                          
|                          
|Christopher L. Rafferty(1) |  |     | 51 |          |  | Director                                                               |  |  | 1994 | 
|                          
|                          
|                          
|                          
|Joseph R. Thornton(3)      |  |     | 39 |          |  | Director                                                               |  |  | 2000 | 
|                          
|                          
|                          
|                          
|Stanton Williams (2)       |  |     | 39 |          |  | Director                                                               |  |  | 2001 | 

| | 
| | 
| | 

| |     |                                 
| | --- | --------------------------------
| | (1) | Member of Compensation Committee



| |     |                              
| | --- | -----------------------------
| | (2) | Member of Audit Committee    
|
| | (3) | Member of Finance Committee  
|
| | (4) | Member of Executive Committee

Business Experience of Director Nominees

George Schmitt, Chairman of the Board and Acting Chief Executive
Officer, was elected a director of e.spire in January 2000
and was elected Chairman of the Board and Acting Chief Executive
Officer in March 2000. Mr. Schmitt has more than
35 years of industry experience in telecommunications.
Prior to joining e.spire, he served as President of Omnipoint
Communications Services, LLC and Executive Vice President of
Omnipoint Corporation from 1996 until February 2000, when
VoiceStream Wireless acquired Omnipoint. Prior to joining
Omnipoint in 1996, he was President and Chief Executive Officer
of PCS PrimeCo L.P., (now known as PrimeCo Personal
Communications), a national PCS (personal communications
services) partnership owned by AirTouch Communications and Bell
Atlantic. From 1993 to 1994, Mr. Schmitt served as Chairman
of the GSM (Global System for Mobile) MoU Association, now
called the GSM Association, the international organization that
oversees the worldwide implementation of GSM wireless
technology. He continues to hold a seat on the
organizations Executive Committee. From January 1990
until 1993, Mr. Schmitt served as a member and head of the
technical department of the Board of Management at Mannesmann
Mobilfunk D2 in Germany. In 1993, Mr. Schmitt began
employment with AirTouch Communications, where he was Executive
Vice President of International Operations, leading the
Companys ventures in Belgium, France, Germany, Italy,
Japan, Korea, Portugal, Spain, Sweden and Thailand. He began his
career in 1965 when he joined Pacific Telephone, now Pacific
Bell, a division of SBC Corp. He held various positions there in
business, marketing, technical and operations departments,
eventually serving as Vice President of Operations, Vice
President of Financial Management and Vice President of

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Mr. Schmitt is also actively involved in many industry
organizations. In addition to his participation in the GSM
Association, he is currently Chairman of the Personal
Communications Industry Association. He serves on the Boards of
Telesoft Partners and EdgeNet Communications Corporation.

William R. Huff, Vice-Chairman of the Board of Directors, was
elected a director of e.spire in November 1999.
Mr. Huff is a founder of W.R. Huff Asset Management Co.,
L.L.C., and The Huff Alternative Income Fund, L.P.
(Huff), a principal stockholder of e.spire.
Mr. Huff has been affiliated with Huff since its inception
in 1994. Mr. Huff currently serves as a director of Texas
Petrochemicals Corporation.

Edwin M. Banks was elected a director of e.spire in
October 1994. Since 1988, Mr. Banks has been employed
by W. R. Huff Asset Management Co., L.L.C., an affiliate of
Huff, and currently serves as a portfolio manager concentrating
in the healthcare, communications, food and food services
industries. From 1985 until he joined W. R. Huff Asset
Management Co., L.L.C., Merrill Lynch & Company employed
Mr. Banks. Mr. Banks received his B.A. degree from
Rutgers College and his MBA degree from Rutgers University.
Mr. Banks also serves as a director of Caremark Rx and
Rymer Foods.

Peter C. Bentz was elected a director of e.spire in
June 1995. Since 1992, Mr. Bentz has been employed by 
W. R. Huff Asset Management Co., L.L.C., as a research analyst
specializing in telecommunications, media and healthcare. Mr.
Bentz received his Bachelor of Science degree from Boston
College in 1987 and his MBA from the Wharton School of the
University of Pennsylvania in 1992.

Frederick Galland was elected a director of e.spire in
November 1999. Mr. Galland previously served on the Board
from November 1995 until February 1996.
Mr. Galland was Chief Executive Officer and sole
stockholder of the In-Health Group, Inc. a/k/a The Pro Care
Group from 1990 to present. From 1981 to 1988, Mr. Galland
served as Chief Executive Officer and Chairman of Fundsnet,
Inc., a publicly traded provider of electronic funds transfer.
He also served on the boards of Graphic Scanning Corp. from 1975
to 1984; Digital Paging Systems, Inc. from 1973 to 1980;
Graphnet Systems, Inc. from 1978 to 1981 and Cellular Systems,
Inc. from 1982 to 1984.

Dennis Feely was elected a director of e.spire in
January 2001. In 1992, he founded Telecom Group, Inc., a
satellite, cellular, GSM and wireless telecommunications
consulting and service provider with an international customer
base and served as its chief executive officer from 1992 to
2000. Mr. Feely also founded IDB/ Worldcom, an international
data communications company in 1982, where he served as
Executive Vice President from 1983 to 1992. From 1976 to 1983 he
held the position of Project Engineer and Director of
Engineering to ABC-TV Radio Networks where his duties involved
overseeing mergers and acquisitions and the subsequent
transition efforts to incorporate the new entities with the
parent company. Mr. Feely holds a BS degree in Electrical
Engineering from the University of Delaware in 1976.

Christopher L. Rafferty was elected a director of e.spire in
October 1994. The general partner of Huff has employed
Mr. Rafferty since June 1994. From January 1993
to February 1994, Mr. Rafferty was Vice President
 Acquisitions for Windsor Pet Care, Inc., a venture
capital-backed firm focusing on consolidating the pet care
services industry. From October 1990 to January 1993,
Mr. Rafferty was a consultant specializing in merchant
banking, leveraged acquisitions and venture capital
transactions. From June 1987 to the time he started his
consulting business, Mr. Rafferty was a Managing Director
of Chase Manhattan Capital Corporation, the merchant banking and
private equity investment affiliate of The Chase Manhattan
Corporation. Mr. Rafferty received his undergraduate degree
from Stanford University and his law degree from Georgetown
University.

Joseph R. Thornton was elected a director of e.spire in
January 2000. Mr. Thornton is counsel to W.R. Huff Asset
Management Co. L.L.C. and has worked with the firm since 1990.
Mr. Thornton received his undergraduate, MBA and JD degrees
from the University of North Carolina at Chapel Hill. He also
serves as a director of Rymer Foods.

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Stanton Williams was elected a director of e.spire in
January 2001. Mr. Williams is currently a consultant to
NTL, Inc., where he previously served as Director of Corporate
Development from 1993 to 1997. From 1995 to 1999 he served as
Vice President and Chief Financial Officer of Cellular
Communications International, Inc. and was Vice President and
Chief Financial Officer of Cellular Communications Puerto Rico,
Inc. from 1996 to 1999. Prior to this, he held the position of
Director of Corporate Development of Cellular Communications
Inc. from 1989 to 1996. Mr. Williams received a degree from
Harvard Business School in 1989 and graduated magna cum laude
from Dartmouth College in 1983 with a degree in physics.

Information Concerning Board Meetings

Fourteen meetings of e.spires Board of Directors were held
during the fiscal year ended December 31, 2000. Each
director who served during 2000 attended at least 75% (except
Edwin M. Banks who attended 53%, Peter C. Bentz who attended
71%, William R. Huff who attended 28%, and Christopher L.
Rafferty who attended 64%,) of the total number of meetings of
the Board and any Committees of the Board of which he was a
member.

Information Concerning Committees of the Board

e.spires Board of Directors has an Audit Committee,
Compensation Committee, Finance Committee and Executive
Committee.

The Audit Committee is currently comprised of three directors,
Dennis Feely, Frederick Galland and Stanton Williams. George F.
Schmitt, also served on the Audit Committee from
January 18, 2000 until he resigned from the Audit Committee
on May 31, 2000. Edwin Banks resigned from the Audit
Committee on January 16, 2001. Dennis Feely and Stanton
Williams were appointed to the Audit Committee on
January 16, 2001. The Audit Committee is responsible for
selecting e.spires independent auditors and reviewing
their audit, as well as reviewing and approving e.spires
internal controls and accounting systems. In accordance with
Nasdaq audit committee requirements, on May 31, 2000 the
Board adopted an Audit Committee Charter that provides that the
primary purpose of the Committee is to assist the Board in
fulfilling its responsibility to oversee managements
conduct of the Companys financial reporting process,
including by overviewing the financial reports and other
financial information provided by the Company to any
governmental or regulatory body, the public or other users
thereof, the Companys systems of internal accounting and
financial controls, the annual independent audit of the
Companys financial statements and the Companys legal
compliance and ethics programs as established by management and
the Board. In so doing, it is the responsibility of the
Committee to maintain free and open means of communication
between the directors, the independent auditors, the internal
auditors and the financial and senior management of the Company.
In addition, the Committee shall review the adequacy of the
Charter on an annual basis.

In discharging its oversight role, the Committee is empowered to
investigate any matter brought to its attention with full access
to all books, records, facilities and personnel of the Company
and the power to retain outside counsel, auditors or other
experts for this purpose. The Board and the Committee are in
place to represent the Companys shareholders; accordingly,
the outside auditor is ultimately accountable to the Board and
the Committee.

The Audit Committee may be granted additional powers and duties
as the Board may from time to time determine. The Audit
Committee held three meetings during the fiscal year ended
December 31, 2000.

The Compensation Committee is comprised of three directors,
Peter C. Bentz, Christopher L. Rafferty and Dennis Feely. Edwin
Banks served on the Compensation Committee from January 18,
2000 until he resigned from the Compensation Committee on
May 31, 2000. George F. Schmitt served on the Compensation
Committee from January 18, 2000 until he resigned from the
Compensation Committee on May 31, 2000. Dennis Feely was
appointed to the Compensation Committee on January 16,
2001. Peter C. Bentz was appointed to the Compensation Committee
on January 16, 2001. The Compensation Committee is
responsible for recommending to the full Board all stock option
grants, bonuses and other compensation arrangements for
executives and key employees and loans and other non salary
payments and other benefits and arrangements with employees,
affiliates and associates of e.spire. The Compensation Committee
may be granted additional

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The Finance Committee was established by the Board of Directors
in January 2000, and is currently comprised of four directors,
William R. Huff, Edwin M. Banks, Frederick Galland and Joseph R.
Thornton. The Finance Committee is responsible for the oversight
of financial plans and policies of e.spire to ensure conformance
with e.spires requirements for fiscally sound operation,
including but not limited to: (i) reviewing annual business
plans, financial arrangements, methods of external financing,
and financial audits of capital expenditures and
(ii) advising the Board about sources and uses of
e.spires funds.

The Executive Committee was established by the Board of
Directors in January 2000, and is currently comprised of
four directors, George F. Schmitt, William R. Huff, Edwin M.
Banks, and Frederick Galland. The Executive Committee is
responsible, between meetings of the Board, all powers and
authority of the Board in the direction and management of
e.spire, except as prohibited by applicable law, e.spires
Certificate of Incorporation, or By-laws and except to the
extent another committee shall have been accorded authority over
the matter.

Directors Compensation

Beginning with the third quarter of 1998, members of the Board
receive cash compensation for acting as members of the Board or
Committees of the Board, in addition to reimbursement for
reasonable out-of-pocket expenses incurred in connection with
their attendance at meetings of the Board and its committees.
e.spires policy for compensation of non-employee directors
is: (i) an annual retainer in the amount of $12,000 for each
year such director serves on the Board, payable in quarterly
installments of $3,000, prorated if necessary, and
(ii) payment for each quarterly meeting of the Board
attended by such non-employee  $1,000 for in person
meetings or $500 for telephonic meetings. During fiscal year
2000 compensation to non-employee directors was paid as follows:
Mr. Banks $9,000, Messrs. Galland and Thornton $10,000
each, Mr. Huff $12,000, Mr. Rafferty $12,500,
Mr. Bentz $13,000. Directors who serve as executive
officers receive compensation for acting in their capacity as
executive officers. See  Summary Compensation Table.
From time to time prior to 1998, the Board has granted options
to purchase shares of Common Stock to members of the Board who
are not also officers of e.spire in consideration for their
service as directors. In 1998, the Board adopted a policy to
award formula grants to outside directors under
e.spires 1994 Stock Option Plan, as amended (the
Stock Option Plan), of 10,000 for each year. Initial
options granted to new outside directors vest in full twelve
months after the date of grant. Options granted upon reelection
of an outside director vest immediately. For fiscal year ended
December 31, 2000, each outside director was granted 10,000
options in his capacity as such.

Information Concerning Current Executive Officers

|                        |  |     |    |          |  |                                                                        |  |  |      | 
|----------------------- |  | --- | -- | -------- |  | ---------------------------------------------------------------------- |  |  | ---- | 
|                        |  |     |    |          |  | Officer                                                               
|Name                    |  | Age |    | Position |  | Since                                                                 
|                        |  |     |    |          |  |                                                                       
|George F. Schmitt       |  |     | 57 |          |  | Chairman of the Board of Directors and Acting
	Chief Executive Officer |  |  | 2000 | 
|                       
|                       
|                       
|                       
|Juliette Williams Pryor |  |     | 36 |          |  | Senior Vice President, General Counsel and
	Secretary                  |  |  | 2000 | 
|                       
|                       
|                       
|                       
|Christopher J. Resavy   |  |     | 40 |          |  | Chief Operating Officer                                                |  |  | 2000 | 
|                       
|                       
|                       
|                       
|Bradley E. Sparks       |  |     | 54 |          |  | Chief Financial Officer                                                |  |  | 2000 | 
|                       
|                       
|                       
|                       
|Donald Bush             |  |     | 54 |          |  | Treasurer                                                              |  |  | 2000 | 
|                       
|                       
|                       
|                       
|Sean Scarlis            |  |     | 34 |          |  | Chief Accounting Officer                                               |  |  | 2000 | 
|                       
|                       
|                       
|                       
|Michael Miller          |  |     | 50 |          |  | President  ACSI Network Technologies                                  |  |  | 2001 | 
|                       
|                       
|                       
|                       
|Tomas Mikaelsson        |  |     | 44 |          |  | President  CyberGate                                                  |  |  | 2001 | 

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Business Experience of Executive Officers

The following is a description of the background of the
executive officers of e.spire who are not directors:

Juliette Williams Pryor, Senior Vice President, General Counsel
and Secretary, joined e.spire in February 1997 as its first
Associate General Counsel. During her first three years with
e.spire, Ms. Pryor created e.spires first round of
standard customer and vendor agreements, was chief negotiator
for its acquisition of small Internet service providers, as well
as the agreements governing e.spires divestiture of its
resale customer base. Ms. Pryor was promoted to the General
Counsel post in March 2000, and now serves as
e.spires chief legal officer, responsible for determining
corporate legal policy, ensuring all SEC compliance, managing
all corporate governance issues, directing all litigation
involving e.spire, and protecting the legal interests of the
corporation. Ms. Pryor has ten years of legal experience.
Before joining e.spire, she served as counsel to the Vice
Chairman of the U.S. International Trade Commission and as an
Attorney with IBM Corporation. Ms. Pryor received her law
degree as well as a Master of Science in Foreign Service from
Georgetown University. She also graduated with honors from Fisk
University in Nashville, TN, where she received a B.A. degree in
Political Science and Spanish. Ms. Pryor is admitted to
practice law in the District of Columbia and New York.

Christopher J. Resavy, Chief Operating Officer, has twenty years
of industry experience in telecommunications. He joined e.spire
as Chief Operating Officer in March 2000. He most recently
served as Senior Director of Engineering and Information
Services for Omnipoint Communications Inc. Mr. Resavy joined
Omnipoint in 1994 as Chief Engineer and then became Chief
Technology Officer. For fourteen months he was responsible for
organizing the engineering, operations and information
systems/information technology organizations. Before joining
Omnipoint, he was Engineering Manager for New Technologies at
Cellular One of New York. He began at Cellular One in 1987 as an
RF engineer and held various technical and administrative
positions before managing the New Technologies department. Prior
to joining Cellular One, Mr. Resavy was an RF engineer for GTE
Mobilnet in Houston. He worked at NYNEX Mobile Communications in
engineering before moving to GTE. He began his career in
wireless telecommunications as a temporary employee for
AT&Ts Advanced Mobil Phone System division, while
still an engineering student at Rutgers University.

Bradley E. Sparks, Chief Financial Officer, has more than twenty
five years of experience in finance. He joined e.spire as
Interim Chief Financial Officer in April 2000.
Mr. Sparks accepted the position of Chief Financial Officer
in June 2000. Most recently he served as Chief Financial
Officer at Digex, Inc., a leading Web and application hosting
service provider for businesses worldwide. He led Digexs
successful initial public offering (IPO) in July 1999. From
September 1998 to July 1999, he served as Executive
Vice President and Chief Financial Officer of WAM!NET, a global
provider of digital network services. From 1995 to
September 1998, he served as Chief Financial Officer of
OmniPoint Corporation. From 1993 to 1995, Mr. Sparks served
as Vice President and Controller and from 1988 to 1993 as Vice
President and Treasurer of MCI Communications Corporation, which
is now a subsidiary of MCI WorldCom. Mr. Sparks earned his
B.S. from the United States Military Academy at West Point, and
his M.S. in management from the Sloan School at Massachusetts
Institute of Technology. Mr. Sparks is also a Certified
Public Accountant.

Sean S. Scarlis, Vice President, Controller and Chief Accounting
Officer, joined e.spire in August 1997 as Manager of
Financial Reporting. He was named Assistant Controller and
Director in September 1998. In November 1999 he became
Acting Controller, and then in April 2000 he assumed his
current role. Prior to joining e.spire, Mr. Scarlis served
in several management and accounting positions with The Ryland
Group, Inc. from May 1993 until August 1997. He has a
Bachelor of Business Administration in Accounting from Loyola
College and a Masters of Business Adminstration from the
Sellinger School of Business and Management at Loyola College.
Mr. Scarlis is a Certified Public Accountant.

Michael P. Miller, President of ACSI Network Technologies, Inc,
e.spires network design, construction and consulting
subsidiary. Mr. Miller was named President of ACSI Network
Technologies, Inc. in January 2000. He previously served as
ACSI Network Technologies Senior Vice President,
responsible for sales and operations support system outsourcing.
He joined e.spire in 1996 to assume the position of Regional
Vice President and General Manager, responsible for sales and
operations in the eastern United States. Before

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Tomas V. B. Mikaelsson, President and Chief Operating Officer of
CyberGate, Inc./ ValueWeb, e.spires Internet subsidiary,
joined e.spire in May 2000. He previously served as General
Manager, Southern Region, of Omnipoint Communications, Inc.
Prior to joining Omnipoint, Mr. Mickaelsson held various
positions with Ericsson, including Director of Business
Operations for the North East for Ericsson, Inc.; Director of
Marketing and Sales for Market Operations for The Americas for
Ericsson Radio Systems AB in Sweden; Director of Marketing and
Sales for Ericsson GmbH in Germany; and Area Manager of Ericsson
Radio Systems AB in Sweden. He also served as Export Manager of
Telia in Sweden. Mr. Mikaelsson was educated in Sweden,
where he received his Gymnasium degree (college equivalent
degree) in Mechanical Engineering in Jonkoping, Sweden, and his
degree in Business Administration from IHM (The Institute for
Higher degrees in Marketing) in Stockholm, Sweden. He is also a
graduate of the Ericsson Management Program.

Donald W. Bush joined e.spire in June 2000 as Vice
President and Treasurer, responsible for new financing, capital
structure, bank relations, insurance and cash management.
Mr. Bush, who has more than 24 years of experience in
finance, most recently served as a Managing Director at Banc of
America Securities Media and Telecommunications. While at
Banc of America Securities and Bank of America, he arranged
financing for seasoned and startup telecommunications companies
such as Omnipoint, GTE, Bell Atlantic, MCI, Intelsat and
Teligent. Mr. Bush earned his Bachelors Degree in
Economics from The University of California at Irvine and his
MBA from New York University Stern School of Business.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 (the
Exchange Act) requires e.spires executive
officers and directors, and any persons who own more than ten
percent of the outstanding shares of e.spires Common
Stock, to file with the Securities and Exchange Commission
(SEC) reports of ownership and changes in ownership
of e.spires Common Stock. Officers, directors and greater
than ten-percent stockholders are required by SEC regulation to
furnish e.spire with copies of all Section 16(a) forms they
file.

Based solely on its review of the copies of such forms received
by it, or written representations from certain reporting
persons, e.spire believes that, except as described below, there
was compliance for the period from January 1, 2000 to
December 31, 2000 with all Section 16(a) filing
requirements applicable to its officers, directors and greater
than ten-percent beneficial owners. The Huff Alternative Income
Fund, LP failed to file a Form 5 reporting two transactions
that occurred in March 2000 and two transactions that
occurred in September 2000. Mr. Huff submitted one
late-filed Form 4 in June 2000, reporting one
transaction that occurred in May 2000, in connection with
the transfer of stock options granted to him under
e.spires Stock Option Plan to The Huff Alternative Income
Fund, LP. Mr. Galland submitted one late-filed Form 4 in
August 2000 reporting one transaction that occurred in
May 2000 in connection with the granting of stock options
under e.spires Stock Option Plan that are qualified under
Rule 16b-3. Mr. Schmitt filed a late-filed Form 4
in July 2000 reporting one transaction that occurred in
June 2000. Mr. Resavy submitted a Form 5
reporting two transactions that occurred in December 2000.
Mr.Sparks submitted one late-filed Form 5 reporting an
exempt Rule 16b-3 transaction that occurred in
September 2000.




Item 11.  Executive Compensation

Summary Compensation Table

The following table provides a summary of compensation for the
fiscal years ended December 31, 1998, 1999 and 2000, with
respect to e.spires Acting Chief Executive Officer, the
other four most highly compensated executive officers of e.spire
who were serving as executive officers at the end of the fiscal
year

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|                               |                                                                               |                                                                                  |      |           |      |            |         |                 |         |            |         |              |        |   |           |           |      |  |         |         |        |   |       |       |      | 
|------------------------------ | ----------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ---- | --------- | ---- | ---------- | ------- | --------------- | ------- | ---------- | ------- | ------------ | ------ | - | --------- | --------- | ---- |  | ------- | ------- | ------ | - | ----- | ----- | ---- | 
|                               |                                                                               |                                                                                 
|                               |                                                                               | Annual Compensation                                                             
|                               |                                                                               |                                                                                 
|                               |                                                                               |                                                                                  |      | Number of |      |           
|                               |                                                                               |                                                                                  |      | Other     |      | Securities |         |                
|Name and Principal Position on |                                                                               |                                                                                  |      | Annual    |      | Underlying |         | All Other      
|December 31, 2000              |                                                                               | Year                                                                             |      | Salary    |      | Bonus      |         | Compensation(1) |         | Options(2) |         | Compensation
|                               |                                                                               |                                                                                  |      |           |      |            |         |                 |         |            |         |             
|George F. Schmitt (3)          |                                                                               |                                                                                  | 2000 |           |      | $          |        |                 |         | $          |        |              |        | $ |          |           |      |  | 10,000  |         |        | $ |      |      
|                               | Chairman of the Board of Directors and Acting
        Chief Executive Officer |                                                                                  |      |           |      |            |         |                 |         |            |         |              |        |   |           |           |      |  |         |         |        |   |       |       |     
|Bradley E. Sparks (4)          |                                                                               |                                                                                  | 2000 |           |      | $          | 124,000 |                 |         | $          |        |              |        | $ |          |           |      |  | 150,000 |         |        | $ | 3,750 | (5)  
|                               | Chief Financial Officer                                                       |                                                                                  |      |           |      |            |         |                 |         |            |         |              |        |   |           |           |      |  |         |         |        |   |       |       |     
|Christopher J. Resavy (6)      |                                                                               |                                                                                  | 2000 |           |      | $          | 124,250 |                 |         | $          | 12,467  | (7)          |        | $ |          |           |      |  | 153,500 |         |        | $ | 4,250 | (5)  
|                               | Chief Operating Officer                                                       |                                                                                  |      |           |      |            |         |                 |         |            |         |              |        |   |           |           |      |  |         |         |        |   |       |       |     
|Juliette Williams Pryor        |                                                                               |                                                                                  | 2000 |           |      | $          | 165,910 |                 |         | $          | 66,936  | (7)          |        | $ |          |           |      |  | 62,500  |         |        | $ | 3,142 | (8)  
|                               | Senior Vice President  General                                               |                                                                                  |      | 1999      |      |            | $       | 139,167         |         |            | $       | 19,498       |        |   | $         |          |      |  |         | 20,500  |        |   | $     | 2,158 | (8) 
|                               |                                                                               | Counsel and Secretary                                                            |      |           | 1998 |            |         | $               | 113,889 |            |         | $            | 30,000 |   |           | $         |     |  |         |         | 14,000 |   |       | $     |     | 
|Michael Miller                 |                                                                               |                                                                                  | 2000 |           |      | $          | 240,000 |                 |         | $          | 116,660 | (7)          |        | $ |          |           |      |  | 150,000 |         |        | $ |      |      
|                               |                                                                               | President and Chief Operating Officer of ACSI
        Network Technologies, Inc. |      |           | 1999 |            |         | $               | 195,902 |            |         | $            | 20,000 |   |           | $         |     |  |         |         | 0      |   |       | $     |     | 
|                               |                                                                               |                                                                                  | 1998 |           |      | $          | 130,225 |                 |         | $          | 61,620  |              |        | $ |          |           |      |  | 35,000  |         |        | $ |      |      
|Tomas Mikaelsson (9)           |                                                                               |                                                                                  | 2000 |           |      | $          | 113,692 |                 |         | $          | 20,779  | (7)          |        | $ |          |           |      |  | 150,000 |         |        | $ | 7,000 | (5)  
|                               | President and Chief Operating Officer CyberGate,
        Inc.                 |                                                                                  |      |           |      |            |         |                 |         |            |         |              |        |   |           |           |      |  |         |         |        |   |       |       |     
|Sean S. Scarlis                |                                                                               |                                                                                  | 2000 |           |      | $          | 111,138 |                 |         | $          | 55,796  | (7)          |        | $ |          |           |      |  | 42,500  |         |        | $ | 1,675 | (8)  
|                               | Vice President of the Company,                                                |                                                                                  |      |           |      |            |         |                 |         |            |         |              |        |   |           |           |      |  |         |         |        |   |       |       |     
|                               | Corporate                                                                     |                                                                                  |      | 1999      |      |            | $       | 75,000          |         |            | $       | 9,603        |        |   | $         |          |      |  |         | 16,500  |        |   | $     | 1,080 | (8) 
|                               |                                                                               | Controller and Chief Accounting                                                  |      |           |      |            |         |                 |         |            |         |              |        |   |           |           |      |  |         |         |        |   |       |       |      | 
|                               |                                                                               | Officer                                                                          |      |           | 1998 |            |         | $               | 72,020  |            |         | $            | 3,000  |   |           | $         |     |  |         |         | 3,000  |   |       | $     |     | 
|Anthony J. Pompliano (10)      |                                                                               |                                                                                  | 2000 |           |      | $          | 41,250  |                 |         | $          |        |              |        | $ | 3,933,170 | (13)      |      |  | 0       |         |        | $ |      |      
|                               | Former Chairman of the Board of Directors and
Former Chief Executive Officer  |                                                                                  |      | 1999      |      |            | $       | 330,000         |         |            | $       |             |        |   | $         | 2,085,390 | (13) |  |         | 160,000 |        |   | $     | 3,931 | (12)
|                               |                                                                               |                                                                                  |      | 1998      |      |            | $       | 302,500         |         |            | $       | 100,000      | (11)   |   | $         |          |      |  |         | 0       |        |   | $     |      |     




|    |                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes perquisites and other personal benefits that in the
        aggregate do not exceed $50,000 or 10% of Named Officers
        total annual salary and bonus.                                                                                                                                                
|   
|(2) | See information provided in Option Grants in Fiscal Year
        Ended December 31, 2000.                                                                                                                                                                                                                          
|   
|(3) | Mr. Schmitt commenced his employment with the Company in
        March 2000. Mr.  Schmitt does not receive a salary
        from the Company.                                                                                                                                                                        
|   
|(4) | Mr. Sparks commenced his employment with the Company in
        April 2000.                                                                                                                                                                                                                                          
|   
|(5) | Represents car allowance paid to named executive.                                                                                                                                                                                                                                                                    
|   
|(6) | Mr. Resavy commenced his employment with the Company in
        March 2000.                                                                                                                                                                                                                                          
|   
|(7) | Represents bonuses awarded in Common Stock of the Company
        pursuant to the Annual Performance Plan. In addition, for
        Ms. Pryor, Mr. Miller and Mr. Scarlis, also
        includes cash bonuses of $19,500, $29,167 and $10,000,
        respectively, for the attainment of certain performance goals.
|   
|(8) | Represents the Companys 401(K) match.                                                                                                                                                                                                                                                                               
|   
|(9) | Mr. Mikaelsson commenced his employment with the Company in
        May 2000.                                                                                                                                                                                                                                        



|     |                                                                                                                                                                
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Mr. Pompliano voluntarily resigned as Chairman of the Board
        and Chief Executive Officer effective January 21, 2000.                                    
|    
|(11) | Pursuant to his employment agreement, as amended,
        Mr. Pompliano is entitled to $200,000 annual bonus,
        $100,000 of which was paid in March 1999.
|    
|(12) | Represents payments received for medical or disability insurance
        in excess of that provided to other employees.                                        
|    
|(13) | Represents proceeds from stock option exercise.                                                                                                                

52



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##### Table of Contents



Option Grants in Fiscal Year Ended December 31, 2000

The following table contains information concerning the grant of
stock options to Named Officers during the fiscal year ended
December 31, 2000.

|                        |  |                    |        |              |  |             |       |                 |  |            |       |  |  |   |       |  |  |  |         | 
|----------------------- |  | ------------------ | ------ | ------------ |  | ----------- | ----- | --------------- |  | ---------- | ----- |  |  | - | ----- |  |  |  | ------- | 
|                        |  |                    |        |              |  |            
|                        |  | Individual Grants  |        |              |  |            
|                        |  |                    |        |              |  |            
|                        |  |                    |        | % of Total   |  |             |       | Market Price of |  |           
|                        |  | Number of          |        | Options      |  | Exercise or |       | Underlying      |  |           
|                        |  | Securities         |        | Granted to   |  | Base        |       | Securities      |  |           
|                        |  | Underlying Options |        | Employees in |  | Price       |       | on Date         |  | Expiration
|                        |  | Granted            |        | Period       |  | (Per/Share) |       | Grant           |  | Date      
|                        |  |                    |        |              |  |             |       |                 |  |           
|George F. Schmitt       |  |                    | 10,000 |              |  |             | 0.11% |                 |  | $          | 7.625 |  |  | $ | 7.625 |  |  |  | 1/17/05 | 
|                       
|                       
|                       
|                       
|Bradley E. Sparks       |  |                    | 37,500 |              |  |             | 0.40% |                 |  | $          | 3.813 |  |  | $ | 3.813 |  |  |  | 5/31/06 | 
|                        |  |                    | 37,500 |              |  |             | 0.40% |                 |  | $          | 3.813 |  |  | $ | 3.813 |  |  |  | 5/31/07 | 
|                        |  |                    | 37,500 |              |  |             | 0.40% |                 |  | $          | 3.813 |  |  | $ | 3.813 |  |  |  | 5/31/08 | 
|                        |  |                    | 37,500 |              |  |             | 0.40% |                 |  | $          | 3.813 |  |  | $ | 3.813 |  |  |  | 5/31/09 | 
|                       
|                       
|                       
|                       
|Christopher J. Resavy   |  |                    | 38,375 |              |  |             | 0.41% |                 |  | $          | 3.813 |  |  | $ | 3.813 |  |  |  | 5/31/06 | 
|                        |  |                    | 38,375 |              |  |             | 0.41% |                 |  | $          | 3.813 |  |  | $ | 3.813 |  |  |  | 5/31/07 | 
|                        |  |                    | 38,375 |              |  |             | 0.41% |                 |  | $          | 3.813 |  |  | $ | 3.813 |  |  |  | 5/31/08 | 
|                        |  |                    | 38,375 |              |  |             | 0.41% |                 |  | $          | 3.813 |  |  | $ | 3.813 |  |  |  | 5/31/09 | 
|                       
|                       
|                       
|                       
|Juliette Williams Pryor |  |                    | 3,125  |              |  |             | 0.03% |                 |  | $          | 6.500 |  |  | $ | 6.500 |  |  |  | 1/3/06  | 
|                        |  |                    | 3,125  |              |  |             | 0.03% |                 |  | $          | 6.500 |  |  | $ | 6.500 |  |  |  | 1/3/07  | 
|                        |  |                    | 3,125  |              |  |             | 0.03% |                 |  | $          | 6.500 |  |  | $ | 6.500 |  |  |  | 1/3/08  | 
|                        |  |                    | 3,125  |              |  |             | 0.03% |                 |  | $          | 6.500 |  |  | $ | 6.500 |  |  |  | 1/3/09  | 
|                        |  |                    | 12,500 |              |  |             | 0.13% |                 |  | $          | 5.531 |  |  | $ | 5.531 |  |  |  | 2/28/06 | 
|                        |  |                    | 12,500 |              |  |             | 0.13% |                 |  | $          | 5.531 |  |  | $ | 5.531 |  |  |  | 2/28/07 | 
|                        |  |                    | 12,500 |              |  |             | 0.13% |                 |  | $          | 5.531 |  |  | $ | 5.531 |  |  |  | 2/28/08 | 
|                        |  |                    | 12,500 |              |  |             | 0.13% |                 |  | $          | 5.531 |  |  | $ | 5.531 |  |  |  | 2/28/09 | 
|                       
|                       
|                       
|                       
|Michael Miller          |  |                    | 25,000 |              |  |             | 0.27% |                 |  | $          | 6.500 |  |  | $ | 6.500 |  |  |  | 1/1/06  | 
|                        |  |                    | 25,000 |              |  |             | 0.27% |                 |  | $          | 6.500 |  |  | $ | 6.500 |  |  |  | 1/1/07  | 
|                        |  |                    | 25,000 |              |  |             | 0.27% |                 |  | $          | 6.500 |  |  | $ | 6.500 |  |  |  | 1/1/08  | 
|                        |  |                    | 25,000 |              |  |             | 0.27% |                 |  | $          | 6.500 |  |  | $ | 6.500 |  |  |  | 1/1/09  | 
|                        |  |                    | 12,500 |              |  |             | 0.13% |                 |  | $          | 3.813 |  |  | $ | 3.813 |  |  |  | 5/31/06 | 
|                        |  |                    | 12,500 |              |  |             | 0.13% |                 |  | $          | 3.813 |  |  | $ | 3.813 |  |  |  | 5/31/07 | 
|                        |  |                    | 12,500 |              |  |             | 0.13% |                 |  | $          | 3.813 |  |  | $ | 3.813 |  |  |  | 5/31/08 | 
|                        |  |                    | 12,500 |              |  |             | 0.13% |                 |  | $          | 3.813 |  |  | $ | 3.813 |  |  |  | 5/31/09 | 
|                       
|                       
|                       
|                       
|Tomas Mikaelsson        |  |                    | 37,500 |              |  |             | 0.40% |                 |  | $          | 3.813 |  |  | $ | 3.813 |  |  |  | 5/31/06 | 
|                        |  |                    | 37,500 |              |  |             | 0.40% |                 |  | $          | 3.813 |  |  | $ | 3.813 |  |  |  | 5/31/07 | 
|                        |  |                    | 37,500 |              |  |             | 0.40% |                 |  | $          | 3.813 |  |  | $ | 3.813 |  |  |  | 5/31/08 | 
|                        |  |                    | 37,500 |              |  |             | 0.40% |                 |  | $          | 3.813 |  |  | $ | 3.813 |  |  |  | 5/31/09 | 
|                       
|                       
|                       
|                       
|Sean S. Scarlis         |  |                    | 5,000  |              |  |             | 0.05% |                 |  | $          | 5.875 |  |  | $ | 5.875 |  |  |  | 4/6/06  | 
|                        |  |                    | 5,000  |              |  |             | 0.05% |                 |  | $          | 5.875 |  |  | $ | 5.875 |  |  |  | 4/6/07  | 
|                        |  |                    | 5,000  |              |  |             | 0.05% |                 |  | $          | 5.875 |  |  | $ | 5.875 |  |  |  | 4/6/08  | 
|                        |  |                    | 5,000  |              |  |             | 0.05% |                 |  | $          | 5.875 |  |  | $ | 5.875 |  |  |  | 4/6/09  | 
|                        |  |                    | 5,625  |              |  |             | 0.06% |                 |  | $          | 3.813 |  |  | $ | 3.813 |  |  |  | 5/31/06 | 
|                        |  |                    | 5,625  |              |  |             | 0.06% |                 |  | $          | 3.813 |  |  | $ | 3.813 |  |  |  | 5/31/07 | 
|                        |  |                    | 5,625  |              |  |             | 0.06% |                 |  | $          | 3.813 |  |  | $ | 3.813 |  |  |  | 5/31/08 | 
|                        |  |                    | 5,625  |              |  |             | 0.06% |                 |  | $          | 3.813 |  |  | $ | 3.813 |  |  |  | 5/31/09 | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                        |  |                          |   |    |  |     |        |  |  |   |         | 
|----------------------- |  | ------------------------ | - | -- |  | --- | ------ |  |  | - | ------- | 
|                        |  |                         
|                        |  | Potential Realizable    
|                        |  | Value at Assumed        
|                        |  | Annual Rates of         
|                        |  | Stock Price Appreciation
|                        |  | for Option Term (1)     
|                        |  |                         
|                        |  | 0%                       |   | 5% |  | 10%
|                        |  |                          |   |    |  |    
|George F. Schmitt       |  | $                        |  |    |  | $   | 21,066 |  |  | $ | 46,551  | 
|                       
|                       
|                       
|                       
|Bradley E. Sparks       |  | $                        |  |    |  | $   | 48,629 |  |  | $ | 110,324 | 
|                        |  | $                        |  |    |  | $   | 58,210 |  |  | $ | 135,655 | 
|                        |  | $                        |  |    |  | $   | 68,270 |  |  | $ | 163,519 | 
|                        |  | $                        |  |    |  | $   | 78,833 |  |  | $ | 194,170 | 
|                       
|                       
|                       
|                       
|Christopher J. Resavy   |  | $                        |  |    |  | $   | 49,764 |  |  | $ | 112,898 | 
|                        |  | $                        |  |    |  | $   | 59,569 |  |  | $ | 138,820 | 
|                        |  | $                        |  |    |  | $   | 69,863 |  |  | $ | 167,334 | 
|                        |  | $                        |  |    |  | $   | 80,672 |  |  | $ | 198,700 | 
|                       
|                       
|                       
|                       
|Juliette Williams Pryor |  | $                        |  |    |  | $   | 6,908  |  |  | $ | 15,672  | 
|                        |  | $                        |  |    |  | $   | 8,269  |  |  | $ | 19,271  | 
|                        |  | $                        |  |    |  | $   | 9,698  |  |  | $ | 23,229  | 
|                        |  | $                        |  |    |  | $   | 11,199 |  |  | $ | 27,583  | 
|                        |  | $                        |  |    |  | $   | 23,513 |  |  | $ | 53,344  | 
|                        |  | $                        |  |    |  | $   | 28,146 |  |  | $ | 65,592  | 
|                        |  | $                        |  |    |  | $   | 33,010 |  |  | $ | 79,065  | 
|                        |  | $                        |  |    |  | $   | 38,117 |  |  | $ | 93,885  | 
|                       
|                       
|                       
|                       
|Michael Miller          |  | $                        |  |    |  | $   | 55,266 |  |  | $ | 125,379 | 
|                        |  | $                        |  |    |  | $   | 66,154 |  |  | $ | 154,167 | 
|                        |  | $                        |  |    |  | $   | 77,587 |  |  | $ | 185,833 | 
|                        |  | $                        |  |    |  | $   | 89,591 |  |  | $ | 220,666 | 
|                        |  | $                        |  |    |  | $   | 16,210 |  |  | $ | 36,775  | 
|                        |  | $                        |  |    |  | $   | 19,403 |  |  | $ | 45,218  | 
|                        |  | $                        |  |    |  | $   | 22,757 |  |  | $ | 54,506  | 
|                        |  | $                        |  |    |  | $   | 26,278 |  |  | $ | 64,723  | 
|                       
|                       
|                       
|                       
|Tomas Mikaelsson        |  | $                        |  |    |  | $   | 48,629 |  |  | $ | 110,324 | 
|                        |  | $                        |  |    |  | $   | 58,210 |  |  | $ | 135,655 | 
|                        |  | $                        |  |    |  | $   | 68,270 |  |  | $ | 163,519 | 
|                        |  | $                        |  |    |  | $   | 78,833 |  |  | $ | 194,170 | 
|                       
|                       
|                       
|                       
|Sean S. Scarlis         |  | $                        |  |    |  | $   | 9,990  |  |  | $ | 22,665  | 
|                        |  | $                        |  |    |  | $   | 11,959 |  |  | $ | 27,869  | 
|                        |  | $                        |  |    |  | $   | 14,025 |  |  | $ | 33,593  | 
|                        |  | $                        |  |    |  | $   | 16,195 |  |  | $ | 39,890  | 
|                        |  | $                        |  |    |  | $   | 7,294  |  |  | $ | 16,549  | 
|                        |  | $                        |  |    |  | $   | 8,732  |  |  | $ | 20,348  | 
|                        |  | $                        |  |    |  | $   | 10,241 |  |  | $ | 24,528  | 
|                        |  | $                        |  |    |  | $   | 11,825 |  |  | $ | 29,125  | 

53



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##### Table of Contents



Option Exercises and Fiscal Year End Values

|                        |                 |             |         |              |  |                              |           |                          |  |             |         |               |  |  |         |  |  |   |   |  |  |   |   | 
|----------------------- | --------------- | ----------- | ------- | ------------ |  | ---------------------------- | --------- | ------------------------ |  | ----------- | ------- | ------------- |  |  | ------- |  |  | - | - |  |  | - | - | 
|                        |                 |             |         |              |  |                              |           |                         
|                        |                 |             |         |              |  | Number of Securities         |           | Value of Unexercised    
|                        |                 |             |         |              |  | Underlying Unexercised       |           | In-The-Money Options    
|                        |                 |             |         |              |  | Options at December 31, 2000 |           | at December 31, 2000 (2)
|                        | Shares Acquired |             | Value   |              |  |                              |          
|Name                    |                 | on Exercise |         | Received (1) |  | Exercisable                  |           | Unexercisable            |  | Exercisable |         | Unexercisable
|                        |                 |             |         |              |  |                              |           |                          |  |             |         |              
|George F. Schmitt       |                 |             |        |              |  | $                            |          |                          |  |             | 10,000  |               |  |  |        |  |  | $ |  |  |  | $ |  | 
|                       
|                       
|                       
|                       
|Bradley E. Sparks       |                 |             |        |              |  |                              |          |                          |  |             |        |               |  |  | 150,000 |  |  | $ |  |  |  | $ |  | 
|                       
|                       
|                       
|                       
|Christopher J. Resavy   |                 |             |        |              |  |                              |          |                          |  |             |        |               |  |  | 153,500 |  |  | $ |  |  |  | $ |  | 
|                       
|                       
|                       
|                       
|Juliette Williams Pryor |                 |             |        |              |  |                              |          |                          |  |             | 25,875  |               |  |  | 86,125  |  |  | $ |  |  |  | $ |  | 
|                       
|                       
|                       
|                       
|Michael Miller          |                 |             |        |              |  |                              |          |                          |  |             | 68,750  |               |  |  | 199,250 |  |  | $ |  |  |  | $ |  | 
|                       
|                       
|                       
|                       
|Tomas Mikaelsson        |                 |             |        |              |  |                              |          |                          |  |             | 25,875  |               |  |  | 86,125  |  |  | $ |  |  |  | $ |  | 
|                       
|                       
|                       
|                       
|Sean S. Scarlis         |                 |             |        |              |  |                              |          |                          |  |             | 6,375   |               |  |  | 55,625  |  |  | $ |  |  |  | $ |  | 
|                       
|                       
|                       
|                       
|Anthony Pompliano       |                 |             | 549,967 |              |  | $                            | 3,933,170 |                          |  |             | 959,966 |               |  |  |        |  |  | $ |  |  |  | $ |  | 




|    |                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based upon the last sale price on the option exercise date, as
        reported by Nasdaq Stock Market, less the exercise price paid
        for the shares.                                          
|   
|(2) | Represents the difference between the per share exercise price
        of the unexercised options and $0.50, the last sale price on
        December 31, 2000, as reported by the Nasdaq Stock Market.

Directors and Officers Liability Insurance

e.spire currently has an insurance policy insuring the directors
and officers of e.spire and its subsidiaries against any
liability incurred by them while acting within the scope of
their duties as a director or officer. The policy is for a
maximum amount of $20 million and has a deductible of
$250,000.

Compensation Committee Interlocks and Insider
Participation

Only Messrs. Banks, Bentz, Rafferty, and Schmitt served on
the Compensation Committee of the Board of Directors (the
Compensation Committee) during the fiscal year ended
December 31, 2000. With the exception of Mr. Schmitt, none
of these directors has ever been an employee of e.spire or any
of its subsidiaries. During the fiscal year ended
December 31, 2000, no executive officer of e.spire served
on the Compensation Committee or Board of Directors of any other
entity which had any executive officer who also served on the
Compensation Committee or Board of Directors of e.spire.

Report of the Compensation Committee on Executive
Compensation

The Compensation Committee is responsible for setting corporate
policy for executive and other employee compensation and benefit
plans. The Compensation Committee is comprised of three
directors, Peter C. Bentz, Christopher L. Rafferty and
Dennis Feely, Christopher L. Rafferty served on the
Compensation Committee for all of the fiscal year ended
December 31, 2000. Edwin Banks served on the Compensation
Committee until his resignation on January 16, 2001.
George F. Schmitt served on the Compensation Committee from
January 18, 2000 until he resigned from the Committee on
May 31, 2000. Dennis Feely was appointed to the
Compensation Committee on January 16, 2001. Peter C.
Bentz was appointed to the Compensation Committee on
January 16, 2001. With the exception of Mr. Schmitt,
none of the Compensation Committee members was an employee of
e.spire during 2000. The Compensation Committees
responsibilities included the recommendation for approval of
executive pay structure (i.e. salary bands, guidelines for
annual merit increases and incentives and aggregate amounts and
guideline levels of participation in executive stock plans), as
well as the recommendation for approval of all compensation
matters for the Named Officers. In this connection, the
Compensation Committee has retained and relied upon the advice
of an independent compensation consultant who has conducted
market surveys and made recommendations to the Compensation
Committee consistent with the adopted compensation philosophy.

54



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##### Table of Contents



Compensation Philosophy

e.spires approach to executive compensation, as
implemented by the Compensation Committee, has been designed to
provide a competitive program that will enable e.spire to
attract, motivate, reward and retain individuals who possess the
skills, experience and talents necessary to advance the growth
and financial performance of e.spire. e.spires
compensation policies are designed to encourage shareholder
value creation, corporate teamwork, equity ownership in e.spire
and long term loyalty to e.spire. e.spires executive
compensation has two key elements: (1) an annual component,
i.e., base salary and an annual discretionary bonus based upon
achievement of corporate and personal objectives, and (2) a
long-term component consisting of stock options and awards.

e.spire strives to provide compensation opportunities that
emphasize effectively rewarding management for the achievement
of critical corporate and personal performance objectives. In
addition, the program provides stock opportunities designed to
align the interest of executives and other key employees with
other stockholders through the ownership of Common Stock. The
following is a discussion of each of the elements of
e.spires executive compensation program including a
description of the decisions and actions taken by the
Compensation Committee with respect to the 2000 compensation for
the Chief Executive Officer and all executive officers as a
group.

Executive Compensation Policy

Compensation paid to e.spires executive officers for the
fiscal year ended December 31, 2000 (as reflected in the
Summary Compensation Table set forth above with respect to the
Named Officers) consisted of the following elements: base
salary, annual bonuses, stock options under the Stock Option
Plan, participation in the Employee Stock Purchase Plan and
contributions under e.spires 401(K) Plan.

In determining the base salary of executive officers, the
Compensation Committee establishes broad salary bands as
flexible guidelines for future salary administration which take
into consideration a variety of factors, including the
executives levels of responsibility and individual
experience and performance, and the salaries of similar
positions in e.spire and in comparable companies in the CLEC
industry. The Compensation Committee believes that its process
for determining and adjusting the base salary of executive
officers is fully consistent with sound personnel practices.

Annual adjustments to base salaries typically are made effective
at the beginning of the calendar year for which they are
intended to apply for the Chairman and Chief Executive Officer,
and on the anniversary of employment for the other Named
Officers, and therefore reflect in large part achievement of the
prior years corporate and individual performance
objectives.

Annual Bonus

For the fiscal year 1998, discretionary bonuses representing 50%
of the targeted bonuses were awarded in stock by the Board on
March 15, 1999. The remaining 50% was awarded in stock by
the Board to the General Counsel, Chief Accounting Officer and
President of ACSI Network Technologies, Inc. and other e.spire
employees on September 15, 2000.

For the fiscal year 1999, discretionary bonuses representing 25%
of the targeted bonuses awarded in stock by the Board, to the
named executives and e.spires employees was paid in stock
in the second quarter of 2000. The remaining 75% of the targeted
bonuses were paid in the fourth quarter of 2000 in stock , In
April 2000, discretionary bonuses representing 33% of the
targeted bonuses was awarded in cash by the Board to employees
of ACSI NT  e.spires wholly owned
subsidiary. The balance was paid 33% during each of the second
and third quarters of 2000, in stock. A retention bonus
equivalent to 50% of the total bonus eligibility was paid to
employees of ACSI NT and CyberGate, Inc. In addition,
discretionary bonuses were awarded by the Board to employees of
CyberGate, Inc.  a wholly owned e.spire subsidiary,
which was paid in stock.

On April 16, 2001, e.spire filed a motion with the United
States Bankruptcy Court for the District of Delaware requesting
authority to implement a Retention Plan. The Company developed
the Retention Plan to

55



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##### Table of Contents





The Retention Plan as approved on May 16, 2001, provides
for: (a) cash payments to the covered employees in four
installments, with the first installment to be paid two business
days after entry of an order approving this Motion and
subsequent payments to be made on July 15, 2001,
October 1, 2001 and January 15, 2001 (each, a
Stay Bonus); (b) cash payments to covered
employees payable upon the effectiveness of a plan of
reorganization and successful completion of the Debtors
chapter 11 cases (the Success Bonus). The Board of
Directors has discretion to pay the Success Bonus to employees
at or above the Director level up to 50% stock (with the balance
paid in cash); (c) discretionary payments to key
employees in recognition of the increased responsibilities
that have been undertaken as a consequence of the Debtors
chapter 11 filings and the increase in attrition, capped at
$10,000 for any individual and $500,000 in the aggregate (the
Discretionary Bonus); and (d) discretionary
payments, to be determined by senior management, to certain
employees hired after January 1, 2001 capped at $23,000 for
any individual and $500,000 in the aggregate (the Recent
Hire Bonus).

The Debtors estimate that the maximum cost of the Stay Bonuses
(assuming all current employees remain in the Debtors
employ through the full term of the Plan) will be approximately
$13 million. Separately, the Debtors plan to pay each
employee a Success Bonus, which will be up to an amount equal to
50% of the Stay Bonus to covered employees upon the
Debtors emergence from bankruptcy. The Debtors estimate
that the maximum cost of the Success Bonus (assuming all current
employees remain in the Debtors employ through the
emergence from chapter 11) will be approximately
$6.5 million, which amounts would be funded under a
chapter 11 plan of reorganization.

Stock Incentives

The long term incentive element of e.spires management
compensation program has historically been primarily in the form
of stock option grants. The employment agreements for the Named
Officers typically specify initial stock options that vest over
a three or four year period and performance stock options which
vest upon achievement of certain criteria. All other employees
will be granted initial and/or performance options when they
join e.spire. In addition, the Named Officers and other
employees are eligible for annual option grants based on
guidelines expressed as percentages of their salaries with
variations which recognize individual performance, leadership
potential and past grant history. For 2000, these discretionary
stock options have been granted and administered by the
Compensation Committee under the Stock Option Plan, which was
designed to create an opportunity for employees of e.spire to
acquire a proprietary interest in e.spire and thereby enhance
their efforts in the service of e.spire and its stockholders.
The compensatory and administrative features of the Stock Option
Plan conform in all material respects to the design of standard
comparable plans in the industry and are, in the Compensation
Committees estimation, fair and reasonable.

During 2000, the Compensation Committee approved grants of stock
options to employees and executive officers (including certain
of those Named Officers reflected in the foregoing tables) for
an aggregate of 7,006,000 shares at exercise prices ranging from
$0.50 to $9.938 per share, which options were generally granted
with exercise prices equal to 100% of the fair market value of
the Common Stock on the dates of grants. Effective
January 1999, the Compensation Committee adopted a policy
of generally granting options under the Stock Option Plan equal
to the fair market value of the Common Stock on the dates of
grant. In most cases, one-quarter of the options become
exercisable on each succeeding anniversary of the respective
grant dates to further the executive retention goal of the Stock
Option Plan.

CHIEF EXECUTIVE OFFICER COMPENSATION

George F. Schmitt assumed the role of Acting Chief Executive
Officer and Chairman of the Board, on March 29, 2000.
Pursuant to his employment agreement, Mr. Schmitt is
entitled to a bonus of $1,000,000 upon e.spires
achievement of certain EBITDA by the third quarter of 2001.

56



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Anthony J. Pompliano assumed the role of Chief Executive
Officer, in addition to his position as Chairman of the Board,
on November 22, 1998. Mr. Pompliano voluntarily resigned as
Chairman of the Board and Chief Executive Officer effective
January 21, 2000. Pursuant to his employment agreement, as
amended, Mr. Pompliano was entitled to a bonus of $200,000,
$100,000 of which was paid in March 1999.
Mr. Pompliano did not receive $100,000 of his bonus because
of his resignation.

The following directors, are members of the Compensation
Committee as of June 1, 2001, and provide the foregoing
report.



| |                        
| | -----------------------
| | Christopher L. Rafferty
| | Peter C. Bentz         
| | Dennis Feely           

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##### Table of Contents



COMPARATIVE STOCK PERFORMANCE



|                                |  |          |     |          |  |          |     |          |  |          |     |  |  |   |     |  |  |   |     | 
|------------------------------- |  | -------- | --- | -------- |  | -------- | --- | -------- |  | -------- | --- |  |  | - | --- |  |  | - | --- | 
|                                |  | 12/31/96 |     | 12/31/97 |  | 12/31/98 |     | 12/31/99 |  | 12/31/00
|                                |  |          |     |          |  |          |     |          |  |         
|e.spire Communications, Inc.    |  | $        | 100 |          |  | $        | 119 |          |  | $        | 59  |  |  | $ | 54  |  |  | $ | 5   | 
|NASDAQ Composite Index          |  | $        | 100 |          |  | $        | 122 |          |  | $        | 173 |  |  | $ | 321 |  |  | $ | 193 | 
|NASDAQ Telecommunications Index |  | $        | 100 |          |  | $        | 146 |          |  | $        | 242 |  |  | $ | 429 |  |  | $ | 184 | 

EMPLOYMENT AGREEMENTS

George F. Schmitt. e.spire is a party to an employment
agreement with George F. Schmitt, its Chairman and Chief
Executive Officer. Under this employment agreement, e.spire sold
to Mr. Schmitt 1,500,000 shares of Common Stock at a price
of $.50 per share. Mr. Schmitt is required to pay $15,000
and deliver a promissory note to e.spire for the remaining
$735,000. Under this employment agreement, Mr. Schmitt is
entitled to a base salary of $70,000 and reimbursement up to a
maximum of $15,000 per year for fees paid to his financial
advisor and tax planner. Mr. Schmitt is eligible to receive
a one-time performance bonus of $1,000,000 based upon the
achievement of EBITDA positive financial results by the third
quarter of 2001. Mr. Schmitts employment agreement
contains non-compete and non-solicitation provisions that expire
one year from the date of termination of his employment with
e.spire. Mr. Schmitts employment agreement
also contains confidentiality provisions.

Bradley E. Sparks. e.spire is a party to an employment
agreement with Bradley E. Sparks, its Chief Financial
Officer. Under this employment agreement, Mr. Sparks was
granted options to purchase an aggregate of 150,000 shares of
Common Stock at a price of $.688 per share. Under this
employment agreement, Mr. Sparks is entitled to a base salary of
$180,000. Mr. Sparks is eligible to receive a performance
bonus of 50% of his base salary based upon the achievement of
certain performance goals under e.spires year 2000 bonus
plan. Due to e.spires filing for bankruptcy, the year 2000
bonus was cancelled. Mr. Sparks is eligible to participate in
e.spires Retention Plan as approved by the bankruptcy
court. Under this employment agreement, Mr. Sparks was
granted 100,000 shares of restricted stock that vests 25% on
January 2, 2002 and 25% on each anniversary of
January 2. In the event that Mr. Sparks is terminated
without cause or e.spire is sold, he is entitled to receive
severance in the amount of one-year base salary and the vesting
of all stock options that would vest in the applicable fiscal
year plus 10,000 unvested stock options. Mr. Sparks
employment agreement contains non-compete and non-solicitation
provisions that expire one year and eighteen months respectively
from the date of termination of his employment with e.spire.
Mr. Sparks employment agreement also contains
confidentiality provisions.

58



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Christopher J. Resavy. e.spire is a party to an
employment agreement with Christopher J. Resavy, its Chief
Operating Officer. Under this employment agreement,
Mr. Resavy was granted options to purchase an aggregate of
150,000 shares of Common Stock at a price of $.688 per
share. Under this employment agreement, Mr. Resavy is
entitled to a base salary of $180,000. Mr. Resavy is
eligible to receive a performance bonus of 50% of his base
salary based upon the achievement of certain performance goals
under e.spires year 2000 bonus plan. Due to e.spires
filing for bankruptcy, the year 2000 bonus was cancelled.
Mr. Resavy is eligible to participate in e.spires
Retention Plan as approved by the bankruptcy court. Under this
employment agreement, Mr. Resavy was granted
100,000 shares of restricted stock that vests 25% on
January 2, 2002 and 25% on each anniversary of
January 2. In the event that Mr. Resavy is terminated
without cause or e.spire is sold, he is entitled to receive
severance in the amount of one-year base salary and the vesting
of all stock options that would vest in the applicable fiscal
year plus 10,000 unvested stock options. Mr. Resavys
employment agreement contains non-compete and non-solicitation
provisions that expire one year and eighteen months respectively
from the date of termination of his employment with e.spire.
Mr. Resavys employment agreement also contains
confidentiality provisions.

Juliette Williams Pryor. e.spire is a party to an
employment agreement with Juliette Williams Pryor, its Senior
Vice President, General Counsel and Secretary. Under this
employment agreement, Ms. Pryor was granted options to
purchase an aggregate of 15,000 shares of Common Stock at a
price of $.688 per share. Under this employment agreement,
Ms. Pryor is entitled to a base salary of $170,000. Ms
Pryor is eligible to receive a performance bonus of 40% of her
base salary based upon the achievement of certain performance
goals under e.spires year 2000 bonus plan. Due to
e.spires filing for bankruptcy, the year 2000 bonus was
cancelled. Ms. Pryor is eligible to participate in
e.spires Retention Plan as approved by the bankruptcy
court. Under this employment agreement, Ms. Pryor was
granted 25,000 shares of restricted stock that vests 25% on
January 2, 2002 and 25% on each anniversary of
January 2. In the event that Ms. Pryor is terminated
without cause or e.spire is sold, she is entitled to receive
severance in the amount of one-year base salary and the vesting
of all stock options that would vest in the applicable fiscal
year plus 10,000 unvested stock options. Ms. Pryors
employment agreement contains non-compete and non-solicitation
provisions that expire one year and eighteen months respectively
from the date of termination of her employment with e.spire.
Ms. Pryors employment agreement also contains
confidentiality provisions.

Michael Miller. e.spire is a party to an employment
agreement with Michael Miller, President of its subsidiary ACSI
Network Technologies, Inc. Under this employment agreement,
Mr. Miller was granted options to purchase an aggregate of
150,000 shares of Common Stock at a price of $.688 per share.
Under this employment agreement, Mr. Miller is entitled to
a base salary of $240,000. Mr. Miller is eligible to
receive a performance bonus of 50% of his base salary based upon
the achievement of certain performance goals under
e.spires year 2000 bonus plan. Due to e.spires
filing for bankruptcy, the year 2000 bonus was cancelled.
Mr. Miller is eligible to participate in e.spires
Retention Plan as approved by the bankruptcy court. Under this
employment agreement, Mr. Miller was granted 100,000 shares
of restricted stock that vests 25% on January 2, 2002 and
25% on each anniversary of January 2. In the event that
Mr. Miller is terminated without cause or e.spire is sold,
he is entitled to receive severance in the amount of one-year
base salary and the vesting of all stock options that would vest
in the applicable fiscal year plus 10,000 unvested stock
options. Mr. Millers employment agreement contains
non-compete and non-solicitation provisions that expire one year
and eighteen months respectively from the date of termination of
his employment with e.spire. Mr. Millers employment
agreement also contains confidentiality provisions.

Tomas Mikaelsson. e.spire is a party to an employment
agreement with Tomas Mikaelsson, President of its subsidiaries
CyberGate, Inc. and FloridaNet, Inc. d/b/a Valueweb. Under this
employment agreement, Mr. Mikaelsson was granted options to
purchase an aggregate of 150,000 shares of Common Stock at a
price of $.688. Under this employment agreement,
Mr. Mikaelsson is entitled to a base salary of $180,000.
Mr. Mikaelsson is eligible to receive a performance bonus
of 50% of his base salary based upon the achievement of certain
performance goals under e.spires year 2000 bonus plan. Due
to e.spires filing for bankruptcy, the year 2000 bonus was
cancelled. Mr. Mikaelsson is eligible to participate in
e.spires Retention Plan as approved by the bankruptcy
court. Under this employment agreement, Mr. Mikaelsson was
granted 100,000 shares of restricted stock that vests 25% on
January 2, 2002 and 25% on each anniversary of
January 2

59



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Item 12.  Security Ownership of Certain
Beneficial Owners and Management

The following table sets forth as of December 31, 2000
certain information regarding the beneficial ownership of the
Companys Common Stock outstanding (assuming the exercise
of options and warrants exercisable on or within 60 days of
such date) by (i) each person who is known to the Company
to own 5% or more of the Common Stock, (ii) each director
of the Company, (iii) the Chief Executive Officer and each
of the Named Officers and (iv) all executive officers and
directors of the Company as a group.

Unless otherwise indicated, the named persons exercise sole
voting and investment power over the shares that are shown as
beneficially owned by them.

|                                                              |  |                  |            |            |  |  |      |  
|------------------------------------------------------------- |  | ---------------- | ---------- | ---------- |  |  | ---- | -
|                                                              |  |                  |            | Percent of
|Name and address of beneficial holder(1)                      |  | Number of Shares |            | Total(2)  
|                                                              |  |                  |            |           
|The Huff Alternative Income Fund, L.P.                        |  |                  | 26,868,544 | (3)        |  |  | 39.2 | %
|                                                             
|                                                             
|                                                             
|                                                             
|George F. Schmitt                                             |  |                  | 1,985,534  | (4)        |  |  | 3.5  | %
|                                                             
|                                                             
|                                                             
|                                                             
|Bradley E. Sparks                                             |  |                  | 2,352      | (5)        |  |  | *    |  
|                                                             
|                                                             
|                                                             
|                                                             
|Christopher J. Resavy                                         |  |                  | 406,487    | (6)        |  |  | *    |  
|                                                             
|                                                             
|                                                             
|                                                             
|Juliette W. Pryor                                             |  |                  | 66,331     | (7)        |  |  | *    |  
|                                                             
|                                                             
|                                                             
|                                                             
|Sean S. Scarlis                                               |  |                  | 18,295     | (8)        |  |  | *    |  
|                                                             
|                                                             
|                                                             
|                                                             
|Edwin Banks                                                   |  |                  | 6,500      | (9)        |  |  | *    |  
|                                                             
|                                                             
|                                                             
|                                                             
|Peter C. Bentz                                                |  |                  | 6,000      | (9)        |  |  | *    |  
|                                                             
|                                                             
|                                                             
|                                                             
|Frederick Galland                                             |  |                  | 41,000     | (10)       |  |  | *    |  
|                                                             
|                                                             
|                                                             
|                                                             
|William R. Huff                                               |  |                  | 228,999    | (11)       |  |  | *    |  
|                                                             
|                                                             
|                                                             
|                                                             
|Christopher L. Rafferty                                       |  |                  | 12,000     | (9)        |  |  | *    |  
|                                                             
|                                                             
|                                                             
|                                                             
|Joseph R. Thornton                                            |  |                  | 42,000     | (12)       |  |  | *    |  
|                                                             
|                                                             
|                                                             
|                                                             
|Donald Bush                                                   |  |                  | 0          | (13)       |  |  | *    |  
|                                                             
|                                                             
|                                                             
|                                                             
|Tomas Mikaelsson                                              |  |                  | 180,000    | (14)       |  |  | *    |  
|                                                             
|                                                             
|                                                             
|                                                             
|Michael Miller                                                |  |                  | 72,696     | (15)       |  |  | *    |  
|                                                             
|                                                             
|                                                             
|                                                             
|All executive officers and directors as a group
	(14 persons) |  |                  | 3,068,195  |            |  |  | 4.5  | %




|  |                       
|- | ----------------------
|* | Less than one percent.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The address of all officers and directors listed above is in the
	care of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(2) | The percentage of total outstanding for each stockholder is
	calculated by dividing (i) the number of shares of Common
	Stock deemed to be beneficially owned by such stockholder as of
	August 31, 2000 by (ii) the sum of (A) the number
	of shares of Common Stock outstanding as of August 31, 2000
	plus (B) the number of shares of Common Stock issuable upon
	the exercise of options or warrants held by such stockholder
	which were exercisable as of August 31, 2000 or will become
	exercisable within 60  days after August 31, 2000
	(currently exercisable).                                                                                                                                                                                                                                                      
|   
|(3) | Includes currently exercisable warrants to purchase 5,923,775
	shares and currently exercisable options to purchase an
	aggregate of 130,000 shares awarded pursuant to the 1994
	Employee Stock Option Plan as of December. Of this number,
	80,000 were transferred to Huff by certain of the directors and
	the remaining 50,000 were awarded to each of Messrs. Huff,
	Banks, Bentz, Rafferty and Thornton in the amount of 10,000
	shares each. Also, includes 6,217,217 shares of Common Stock
	issuable upon conversion of 49,178 shares of Series A
	convertible preferred stock. Does not include 28,572 shares of
	Exchangeable Preferred stock. Does not include 23,281 shares of
	12.75% Junior Redeemable Preferred Stock due 2009. The Huff
	Alternative Income Fund, L.P. owns $100.5 million face
	amount 13% Senior

60



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##### Table of Contents



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Discount Notes due 2005; $36.4 million face amount 12.75% Senior
	Discount Notes due 2006; $62. million face amount 13.75%
	Senior Discount Notes due 2007 and $147.3 million face
	amount 10.625% Senior Discount Notes due 2008. The address for
	The Huff Alternative Income Fund (Huff) is 1776 On
	the Green, 67  Park Place, Morristown, NJ 07960.                                                                                                                           
|   
|(4) | Includes currently exercisable options to purchase 10,000 shares
	and 1,500,000 shares the Company agreed to sell to
	Mr. Schmitt pursuant to Mr. Schmitts employment
	agreement. Does not include 2,095 shares of 12.75% Junior
	Redeemable Preferred Stock due 2009. Mr. Schmitt owns
	10,000 in his family foundation. Mr. Schmitt also owns $1
	million face amount 10.625% Senior Discount Notes due 2008 and
	$2.3 million face amount 13.75% Senior Discount Notes due
	2007.
|   
|(5) | Includes 2,352 shares issued pursuant to the 1996 Employee Stock
	Purchase Plan.                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(6) | Mr. Resavy owns 365,087 shares directly, 12,000 shares are
	held in his 401(k), 2,900 shares awarded pursuant to the
	Companys Annual Performance Plan, and 3,388 shares issued
	pursuant to the 1996 Employee Stock Purchase Plan.
	Mr. Resavy indirectly owns 41,400 shares of which 28,000
	shares are owned by his spouses 401(k) and 13,400 shares
	are owned by his minor childrens trusts.                                                                                 
|   
|(7) | Includes currently exercisable options to purchase 48,750
	shares, 200 shares owned and 17,381 shares awarded pursuant to
	the Companys Annual Performance plan.                                                                                                                                                                                                                                                                                                                    
|   
|(8) | Includes currently exercisable options to purchase 6,375 shares,
	11,920, shares awarded pursuant to the Companys Annual
	Performance plan. Does not include 7,500 shares issued pursuant
	to the 1998 Restricted Stock Plan of which 25% vests on
	September 29, 2000 and 25% on each anniversary of
	September 29.                                                                                                                                                                
|   
|(9) | Messrs. Banks and Bentz are employees of W.R. Huff Asset
	Management Co., L.L.C., an affiliate of Huff. Mr. Rafferty
	is an employee of WRH Partners, LLC, the general partner of
	Huff. Messrs. Rafferty, Bentz and Banks disclaim beneficial
	ownership of all shares held by Huff. Represents shares owned by
	each of Messrs. Rafferty, Banks and Bentz.                                                                                                                         



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Represents 31,000 shares owned and currently exercisable options
	to purchase 10,000 shares.                                                                                                                                                                                                                                                                                                                                     
|    
|(11) | Includes 228,999 shares owned directly.                                                                                                                                                                                                                                                                                                                                                                                          
|    
|(12) | Mr. Thornton is an employee of W.R. Huff Asset Management
	Co., L.L.C., an affiliate of Huff. Includes 6,000 shares owned
	directly, of which 2,000 shares are held jointly with his
	spouse. Mr. Thornton indirectly owns 36,000 shares of which
	7,000 shares are held by his spouse in her IRA, 6,000 are held
	in his SEP account and 23,000 shares are held in a family trust
	in which Mr.  Thornton directs investment(s).
|    
|(13) | Mr. Bush owns 7,500 shares directly issued pursuant to the
	1998 Restricted Stock Plan of which 25% vests on
	September 29, 2001 and 25% on each anniversary of
	September 29.                                                                                                                                                                                                                                                   
|    
|(14) | Indicates share directly owned.                                                                                                                                                                                                                                                                                                                                                                                                  
|    
|(15) | Includes currently exercisable options to purchase 42,500 shares.                                                                                                                                                                                                                                                                                                                                                                






|         |                                                                                           
|-------- | ------------------------------------------------------------------------------------------
|Item 13. | Certain Relationships and Related Transactions and
	Indebtedness of Directors and Officers

(a)  Certain Relationships and Related Transactions

On September 19, 2000, e.spire completed a private offering
of securities and received $50,000,000 from a group of investors
including The Huff Alternative Income Fund, L.P. In connection
with the private offering, e.spire issued 81,177 shares of
exchangeable preferred stock and 893,523 transaction fee
warrants, of which 28,572 and 510,595 respectively were issued
to The Huff Alternative Income Fund, L.P. The Exchangeable
Preferred Stock is exchangeable at the option of the company
into Purchaser Junior Securities that includes preferred stock,
warrants, common stock or subordinated debt (based upon the
accreted amount that includes accrued but unpaid dividends at
the purchase price on the date of the closing of such Purchaser
Junior Securities). At the time of exchange, Huff will designate
which type of security will be issued. Each warrant will be
initially exercisable for one share of Common Stock (at an
initial exercise price of $.01). The warrants will automatically
expire on the tenth anniversary after the date they are issued.
Dividends accrue from the date of issuance, are cumulative and
are payable quarterly in arrears, in additional shares of
Exchangeable

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On March 3, 2000, e.spire completed a private offering of
securities and received $100.7 million from a group of
investors, including Huff. In connection with the private
offering, e.spire issued 81,777 shares of Series A
Convertible Preferred Stock and 175,000 warrants, of which
46,387 and 100,000 respectively was issued to The Huff
Alternative Income Fund L.P. Each share of Series A
Convertible Preferred Stock is initially convertible into 126.4
shares of Common Stock (an effective conversion price of $7.91
per share), and each warrant is initially exercisable for 44.1
shares of Common Stock (at an initial exercise price of $9.89
per share).

e.spire has in place policies and procedures that enable it to
comply with the covenants in its existing indentures regarding
transactions with affiliates.

(b)  Indebtedness of Directors and Officers

Pursuant to the amended employment agreement by and between
e.spire and Riley M. Murphy, former Executive Vice President for
Legal and Regulatory Affairs, e.spire has extended three loans
to Ms. Murphy. The loans are as follows: i) a loan
dated December 28, 1998 for a principal amount of $32,088,
at an interest rate of 8% per year, with payment of principal
and accrued interest due December 28, 1999; ii) a loan
dated January 26, 1999 for a principal amount of
$16,148.80, at an interest rate of 8% per year, with payment of
principal and accrued interest due December 28, 1999; and
iii) a loan dated January 29, 1999, for a principal
amount of $57,000, at an interest rate of 8% per year, with
payment of principal and accrued interest due December 28,
1999. As of December 31, 2000, the total aggregate amount
of principal and accrued interest outstanding for all three of
the loans was $121,664. The loans are secured by shares of
Common Stock of e.spire issuable to Ms. Murphy upon
exercise of the options to purchase e.spires Common Stock
currently owned or obtained in the future by Ms. Murphy. To
date, Ms. Murphy has not repaid her loans to e.spire.
e.spire is pursuing its legal remedies to recover the monies
from Ms. Murphy.

Pursuant to the amended employment agreement by and between
e.spire and Richard Putt, e.spires former Executive Vice
President of Sales and Marketing ,e.spire extended a loan to
Mr. Putt for a principal amount of $100,000, at an interest
of 8% per year, with payment of principal and accrued interest
due. As of December 31, 2000, the total aggregate amount of
principal and accrued interest outstanding was $112,822. The
loans are secured by shares of Common Stock of e.spire issuable
to Mr. Putt upon exercise of the options to purchase
e.spires Common Stock currently owned or obtained in the
future by Mr. Putt. To date, Mr. Putt has not repaid
his loan to e.spire. e.spire is pursuing its legal remedies to
recover the monies from Mr. Putt.

e.spire extended a loan to Juliette Pryor, Senior Vice President
and General Counsel, for a principal amount of $65,000 to cover
Ms. Pryors relocation costs associated with the move
of e.spires corporate headquarters. The interest rate is
8% per year, with payment of principal and accrued interest due
in three equal payments of $21,666.67 (plus accrued interest) on
March 31, 2001, March 31, 2002 and March 31,
2003. As of December 31, 2000, the total aggregate amount
of principal and accrued interest outstanding was $69,132.

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##### Table of Contents






PART IV




Item 14.  Exhibits, Financial Statement
Schedules, and Reports on Form 8-K

(a) Exhibits

|        |      |             |  |                                                                                                                                                                                                                                             |  |  |       | 
|------- | ---- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ----- | 
|        |      |             |  | Exhibit No. or                                                                                                                                                                                                                             
|Exhibit |      |             |  | Incorporation                                                                                                                                                                                                                              
|No.     |      | Description |  | By Reference                                                                                                                                                                                                                               
|        |      |             |  |                                                                                                                                                                                                                                            
|        | 3.1  |             |  | 3rd Amended and Restated Certificate of
	Incorporation of the Company                                                                                                                                                                       |  |  | !!!   | 
|        | 3.2  |             |  | Certificate of Designation of the Companys
	14.75% Redeemable Preferred Stock due 2008                                                                                                                                                     |  |  | ####  | 
|        | 3.3  |             |  | Certificate of Amendment of the Certificate of
	Designation of the Companys 14.75% Redeemable Preferred
	Stock due 2008                                                                                                                    |  |  | ####  | 
|        | 3.4  |             |  | Amended and Restated By-Laws of the Company, as
	amended                                                                                                                                                                                    |  |  | !!!!  | 
|        | 3.5  |             |  | Governance Agreement dated November 8, 1995,
	between the Company and the holders of its Preferred Stock.                                                                                                                                   |  |  | ++    | 
|        | 3.6  |             |  | Certificate of Designation of the Companys
	12 3/4% Junior Redeemable Preferred Stock due 2009                                                                                                                                             |  |  | !     | 
|        | 3.7  |             |  | Certificate of Correction dated March 11,
	1996                                                                                                                                                                                             |  |  | #     | 
|        | 3.8  |             |  | Supplemental Governance Agreement dated
	February 26, 1996.                                                                                                                                                                                 |  |  | #     | 
|        | 3.9  |             |  | Certificate of Designation Series A
	Convertible Preferred Stock                                                                                                                                                                            |  |  | &&&   | 
|        | 3.10 |             |  | Amendment to Certificate of
	Designation  Series A Convertible Preferred
	Stock dated June 12, 2000                                                                                                                                        |  |  | &&&&  | 
|        | 3.11 |             |  | Amendment No. 2 to the Series A
	Convertible Stock Certificate of Designation dated as of
	September 19, 2000                                                                                                                               |  |  | @     | 
|        | 3.12 |             |  | Certificate of Designation 
	Exchangeable Preferred Stock dated as of September 19, 2000                                                                                                                                                   |  |  | @     | 
|        | 4.1  |             |  | Specimen Certificate of the Companys Common
	Stock                                                                                                                                                                                         |  |  | *     | 
|        | 4.2  |             |  | March 11, 1996 Supplement to 1995 Indenture                                                                                                                                                                                                 |  |  | ##### | 
|        | 4.3  |             |  | Indenture dated November 14, 1995, between
	the Company and Chemical Bank, as trustee, relating to
	$190,000,000 in principal amount of 13% Senior Discount Notes
	due 2005, including the form of global note.                             |  |  | ++    | 
|        | 4.4  |             |  | Initial Global Note dated November 14, 1995.                                                                                                                                                                                                |  |  | ++    | 
|        | 4.5  |             |  | Warrant Agreement dated November 14, 1995,
	between the Company and Smith Barney Inc. and Salomon Brothers
	Inc.                                                                                                                            |  |  | +++   | 
|        | 4.6  |             |  | Initial Global Warrant dated November 14,
	1995                                                                                                                                                                                             |  |  | +++   | 
|        | 4.7  |             |  | Indenture dated March 21, 1996, between the
	Company and Chemical Bank, as trustee, relating to $120,000,000
	in principal amount of 12 3/4% Senior Discount Notes due
	2006, including the form of global note (the 1996
	Indenture).    |  |  | +++++ | 
|        | 4.8  |             |  | Supplemental Indenture dated as of
	January 13, 1997, between the Company and the Chase
	Manhattan Bank, as trustee, to the Indenture dated
	November 14, 1995, as amended, relating to the
	Companys 13% Senior Discount Notes due 2005   |  |  | +++++ | 
|        | 4.9  |             |  | Supplemental Indenture dated as of
	January 13, 1997, between the Company and the Chase
	Manhattan Bank, as trustee, to the Indenture dated
	March 26, 1996, as amended, relating to the Companys
	12 3/4% Senior Discount Notes due 2006. |  |  | ++++  | 
|        | 4.10 |             |  | Supplemental Indenture dated as of July 7,
	1997, between the Company and the Chase Manhattan Bank, as
	trustee, to the Indenture dated November 14, 1995, as
	amended, relating to the Companys 13% Senior Discount
	Notes due 2005.      |  |  | ####  | 
|        | 4.11 |             |  | Supplemental Indenture dated as of July 7,
	1997, between the Company and the Chase Manhattan Bank, as
	trustee, to the Indenture dated March 26, 1996, as amended,
	relating to the Companys 12 3/4% Senior Discount
	Notes due 2006.     |  |  | ####  | 
|        | 4.12 |             |  | Specimen Certificate of the Companys 14.75%
	Redeemable Preferred Stock due 2008.                                                                                                                                                          |  |  | ####  | 

63



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                             |  |  |       | 
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ----- | 
|        |       |             |  | Exhibit No. or                                                                                                                                                                                                                             
|Exhibit |       |             |  | Incorporation                                                                                                                                                                                                                              
|No.     |       | Description |  | By Reference                                                                                                                                                                                                                               
|        |       |             |  |                                                                                                                                                                                                                                            
|        | 4.13  |             |  | Warrant Agreement dated as of July 10, 1997,
	between the Company and The Chase Manhattan Bank, as warrant
	agent                                                                                                                           |  |  | ####  | 
|        | 4.14  |             |  | Form of Warrant.                                                                                                                                                                                                                            |  |  | ####  | 
|        | 4.15  |             |  | Indenture dated as of July 23, 1997, between
	the Company and The Chase Manhattan Bank, as trustee, relating
	to the Companys 13 3/4% Senior Notes due 2007                                                                                |  |  | ####  | 
|        | 4.16  |             |  | Specimen Certificate of the Companys
	12 3/4% Junior Redeemable Preferred Stock due 2009                                                                                                                                                   |  |  | !     | 
|        | 4.17  |             |  | Warrant Agreement dated March 6, 1997
	between the Company and MCI metro Access Transmission Services,
	Inc.                                                                                                                                |  |  | ***** | 
|        | 4.18  |             |  | Supplemental Indenture dated as of
	February 27, 1998 between the Company and the Chase
	Manhattan Bank, as trustee, to the Indenture dated
	November 14, 1995, as amended, relating to the
	Companys 13% Senior Discount Notes due 2005   |  |  | ####  | 
|        | 4.19  |             |  | Supplemental Indenture dated as of
	February 27, 1998 between the Company and the Chase
	Manhattan Bank, as trustee, to the Indenture dated
	March 26, 1996, as amended, relating to the Companys
	12 3/4% Senior Discount Notes due 2006. |  |  | ####  | 
|        | 4.20  |             |  | Supplemental Indenture dated as of
	February 27, 1998 between the Company and the Chase
	Manhattan Bank, as trustee, to the Indenture dated July 23,
	1997, as amended, relating to the Companys 13 3/4%
	Senior Discount Notes due 2007   |  |  | ####  | 
|        | 4.21  |             |  | Indenture dated as of July 24, 1998, between
	the Company and the Chase Manhattan Bank, as trustee, relating
	to the Companys 10.625% Senior Discount Notes due
	July 1, 2008, including the form of global note                           |  |  | !!    | 
|        | 9.1   |             |  | Standstill Agreement dated June 26, 1995,
	between the Company and certain of its Preferred Stockholders                                                                                                                                    |  |  | ****  | 
|        | 9.2   |             |  | Standstill Agreement dated November 8, 1995,
	between the Company and certain of its Preferred Stockholders                                                                                                                                 |  |  | ++    | 
|        | 9.3   |             |  | Voting Rights Agreement dated November 8,
	1995, between the Company and certain of its Preferred
	Stockholders.                                                                                                                            |  |  | ++    | 
|        | 9.4   |             |  | Amendment to Voting Rights Agreement dated
	December 14, 1995                                                                                                                                                                               |  |  | #     | 
|        | 10.1  |             |  | Exchange Agreement, dated June 1, 1994,
	between the Company and certain of its Preferred Shareholders                                                                                                                                      |  |  | *     | 
|        | 10.2  |             |  | Exchange Agreement, dated June 26, 1995,
	between the Company and its 9% Series A Preferred
	Shareholders                                                                                                                                   |  |  | **    | 
|        | 10.3  |             |  | Companys Employee Stock Purchase Plan                                                                                                                                                                                                      |  |  | ++++  | 
|        | 10.4  |             |  | Registration Rights Agreement dated July 1,
	1992, between American Lightwave, Inc. and persons named therein                                                                                                                               |  |  | *     | 
|        | 10.5  |             |  | Supplemental Registration Rights Agreement dated
	June 26, 1995                                                                                                                                                                             |  |  | ****  | 
|        | 10.6  |             |  | Management Registration Rights Agreement dated
	June 30, 1995                                                                                                                                                                               |  |  | ****  | 
|        | 10.7  |             |  | Registration Rights Agreement dated June 26,
	1995, between the Company and certain Preferred Stockholders                                                                                                                                  |  |  | **    | 
|        | 10.8  |             |  | Form of Warrant Agreement issued to certain
	Preferred Stockholders on June 26, 1995                                                                                                                                                        |  |  | ****  | 
|        | 10.9  |             |  | Form of $.01 Warrant Agreement                                                                                                                                                                                                              |  |  | ****  | 
|        | 10.10 |             |  | Form of $1.79 Warrant Agreement                                                                                                                                                                                                             |  |  | ****  | 
|        | 10.11 |             |  | Form of $2.25 Warrant Agreement                                                                                                                                                                                                             |  |  | ****  | 
|        | 10.12 |             |  | Stockholders Agreement dated June 26, 1995,
	between the Company and certain Preferred Stockholders                                                                                                                                         |  |  | ****  | 
|        | 10.13 |             |  | Third Amended and Restated Employment Agreement
	between the Company and Riley M. Murphy                                                                                                                                                    |  |  | ****  | 

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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                 |  |  |           | 
|------- | ----- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | --------- | 
|        |       |             |  | Exhibit No. or                                                                                                                                                                                                                                                                                                                                                                                 
|Exhibit |       |             |  | Incorporation                                                                                                                                                                                                                                                                                                                                                                                  
|No.     |       | Description |  | By Reference                                                                                                                                                                                                                                                                                                                                                                                   
|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10.14 |             |  | Form of Stock Option Certificates, as amended,
	issued to executive officers under employment agreements                                                                                                                                                                                                                                                                                        |  |  | ****      | 
|        | 10.15 |             |  | Consulting Agreement, dated October 19,
	1994, between the Company and Marvin Saffian & Company                                                                                                                                                                                                                                                                                                 |  |  | *         | 
|        | 10.16 |             |  | Lease Agreement for the Companys executive
	offices at 131 National Business Parkway, Suite 100,
	Annapolis Junction, Maryland, as amended.                                                                                                                                                                                                                                                    |  |  | ****      | 
|        | 10.17 |             |  | Note Purchase Agreement, dated June 28, 1994                                                                                                                                                                                                                                                                                                                                                    |  |  | *         | 
|        | 10.18 |             |  | Stock and Warrant Purchase Agreement, dated
	June 26, 1995, between the Company and the Purchasers named
	therein                                                                                                                                                                                                                                                                               |  |  | **        | 
|        | 10.19 |             |  | Form of Indemnity Agreement between the Company
	and its Director, as amended                                                                                                                                                                                                                                                                                                                   |  |  | ****      | 
|        | 10.20 |             |  | Assignment and Assumption Agreement dated
	June 21, 1995, between the Company and Apex Investment Fund
	II, L.P.                                                                                                                                                                                                                                                                                |  |  | ****      | 
|        | 10.21 |             |  | Letter Agreement dated November 14, 1995,
	between the Company and ING Equity Partners, L.P.I, with respect
	to the purchase of 50,000 shares of the Companys 9%
	Series B-4 Convertible Preferred Stock and warrants to
	purchase 214,286 shares of Common Stock                                                                                                                              |  |  | ++        | 
|        | 10.22 |             |  | Warrant to Purchase Shares of American
	Communications Services, Inc. Common Stock dated
	December 28, 1995, between the Company and Gerard Klauer,
	Mattison & Co. (GKM Warrant I)                                                                                                                                                                                                           |  |  | ++        | 
|        | 10.23 |             |  | Warrant to Subscribe For and Purchase Common
	Stock of American Communications Services, Inc. dated
	December 28, 1995, between the Company and Gerard Klauer,
	Mattison & Co. (GKM Warrant II)                                                                                                                                                                                               |  |  | ++        | 
|        | 10.24 |             |  | Amended 1994 Stock Option Plan of the Company                                                                                                                                                                                                                                                                                                                                                   |  |  | ++        | 
|        | 10.25 |             |  | Amendment to Amended 1994 Stock Option Plan of
	the Company                                                                                                                                                                                                                                                                                                                                     |  |  | !!!!!     | 
|        | 10.26 |             |  | Registration Rights Agreement dated as of
	July 10, 1997 among the Company, BT Securities Corporation,
	Alex. Brown & Sons, Incorporated, The Huff Alternative
	Income Fund, L.P., General Motors Domestic Group Pension Trust,
	Societe Generale Securities Corporation, ING Baring (U.S.)
	Securities, Inc. and McDermott Inc. Master Trust representatives
	of the Initial Purchase therein. |  |  | #### #### | 
|        | 10.27 |             |  | Supplemental Registration Rights Agreement, dated
	as of July 10, 1997, among the Company, the Huff Alternative
	Income Fund, L.P., General Motors Domestic Group Pension Trust
	and McDermott Inc. Master Trust                                                                                                                                                                                |  |  | %         | 
|        | 10.28 |             |  | Lease Agreement dated as of August 26, 1997,
	between the Company and Constellation Real Estate, Inc. for the
	Companys executive offices at 133 National Business
	Parkway, Suite 200, Annapolis Junction, Maryland.                                                                                                                                                                          |  |  | ###       | 
|        | 10.29 |             |  | Form of Non-Qualified Stock Option Certificates,
	as amended, issued to Anthony J. Pompliano                                                                                                                                                                                                                                                                                                    |  |  | ++++      | 
|        | 10.30 |             |  | Registration Rights Agreement dated March 6,
	1997 between the Company and MCI metro Access Transmission
	Services, Inc.                                                                                                                                                                                                                                                                        |  |  | ++++      | 
|        | 10.31 |             |  | American Communications Services, Inc. Annual
	Performance Plan effective as of January 1, 1997                                                                                                                                                                                                                                                                                                 |  |  | ###       | 
|        | 10.32 |             |  | Lease Agreement dated as of October 28,
	1998, between the Company and Monument One LLC for the
	Companys offices at 12975 Worldgate Drive, Herndon,
	Fairfax County, Virginia                                                                                                                                                                                                                 |  |  | %%%%      | 
|        | 10.33 |             |  | Lease Agreement Between e.spire Communications,
	Inc. and B.F. Saul Real Estate Investment Trust for the
	Companys offices at 8201 Greensboro Dr., McLean, VA                                                                                                                                                                                                                                  |  |  | %%%%%     | 
|        | 10.34 |             |  | Lease Agreement between e.spire Communications,
	Inc. and Dulles North Office Park II Corporation for the
	Companys offices at 22685 Holiday Park Drive, Sterling, VA                                                                                                                                                                                                                          |  |  | %%%%%     | 

65



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  |       | 
|------- | ----- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ----- | 
|        |       |             |  | Exhibit No. or                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Exhibit |       |             |  | Incorporation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|No.     |       | Description |  | By Reference                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 10.35 |             |  | Employment Agreement between American
	Communications Services, Inc. and Richard Putt                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |  | &     | 
|        | 10.36 |             |  | Amendment No. 1 to Employment Agreement
	between American Communications Services, Inc. and Richard Putt                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  | &     | 
|        | 10.37 |             |  | Lease Agreement between e.spire Communications,
	Inc. and CMD Properties, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |  | &&    | 
|        | 10.38 |             |  | Lease Agreement between e.spire Communications,
	Inc. and Colgate Drive Associates, L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  | &&    | 
|        | 10.39 |             |  | Master Equipment Lease Agreement, dated as of
	December 13, 1999, between e.spire Communications, Inc. and
	GATX Capital Corporation                                                                                                                                                                                                                                                                                                                                                                                                           |  |  | &&&   | 
|        | 10.40 |             |  | Master Equipment Lease Agreement, dated as of
	December 13, 1999, between e.spire Communications, Inc. and
	GATX Telecom Investors II-A, L.L.C.                                                                                                                                                                                                                                                                                                                                                                                                |  |  | &&&   | 
|        | 10.41 |             |  | Purchase Agreement for units consisting of
	Series A Convertible Preferred Stock and Warrants to
	purchase shares of common stock by and between e.spire
	Communications, Inc. and Northern Trust Company, as Trustee for
	the Honeywell International Inc. Master Retirement Trust, dated
	as of March 1, 2000                                                                                                                                                                                                                                |  |  | &&&   | 
|        | 10.42 |             |  | Purchase Agreement for units consisting of
	Series A Convertible Preferred Stock and Warrants to
	purchase shares of common stock by and between e.spire
	Communications, Inc. and The Huff Alternative Income Fund, L.P.
	dated as of March 1, 2000.                                                                                                                                                                                                                                                                                          |  |  | &&&   | 
|        | 10.43 |             |  | Purchase Agreement for units consisting of
	Series A Convertible Preferred Stock and Warrants to
	purchase shares of common stock by and between e.spire
	Communications, Inc. and Greenwich Street Capital Partners II,
	L.P., GSCP Offshore Fund, L.P., Greenwich Fund, L.P., Greenwich
	Street Employees Fund, L.P., TRV Executive Fund, L.P., dated as
	of March 1, 2000                                                                                                                                                                   |  |  | &&&   | 
|        | 10.44 |             |  | Registration Rights Agreement (the
	Agreement), dated as of March 1, 2000, among
	e.spire Communications, Inc., The Huff Alternative Income Fund,
	L.P. (Huff), Greenwich Street Capital Partners II,
	L.P., GSCP Offshore Fund, L.P., Greenwich Fund, L.P., Greenwich
	Street Employees Fund, L.P. and TRV Executive Fund, L.P. ( the
	Initial Purchasers) and such other parties who may
	be made a signatory hereto from time to time (the Subsequent
	Purchasers, and, collectively with the Initial Purchasers,
	the Purchasers) |  |  | &&&   | 
|        | 10.45 |             |  | Warrant Agreement among e.spire Communications,
	Inc. and The Huff Alternative Income Fund, L.P., Greenwich
	Street Capital Partners II, L.P., GSCP Offshore Fund, L.P.,
	Greenwich Fund, L.P., Greenwich Street Employees Fund, L.P., TRV
	Executive Fund, L.P. and such other parties as may become
	signatories hereto, dated as of March 1, 2000.                                                                                                                                                                                          |  |  | &&&   | 
|        | 10.46 |             |  | Limited Waiver to the $200 Million Senior Secured
	Credit Facility dated as of April 13, 2000, by and among
	e.spire Communications, Inc., and its affiliates, the financial
	institutions, Goldman Sachs Credit Partners L.P., as sole Lead
	Arranger and Syndication Agent, The Bank of New York, as
	Administrative Agent for Lenders First Union National Bank, as
	Documentation Agent, and Newcourt Commercial Finance
	Corporation, as Collateral Agent Forbearance until June 15,
	2000                                                |  |  | &&&&& | 
|        | 10.47 |             |  | Limited Waiver to the $200 Million Senior Secured
	Credit Facility dated as of June 14, 2000, by and among
	e.spire Communications, Inc., and its affiliates, the financial
	institutions, Goldman Sachs Credit Partners L.P., as sole Lead
	Arranger and Syndication Agent, The Bank of New York, as
	Administrative Agent for Lenders First Union National Bank, as
	Documentation Agent, and Newcourt Commercial Finance
	Corporation, as Collateral Agent . Forbearance until
	July 10, 2000                                               |  |  | &&&&& | 

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|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  |       | 
|------- | ----- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ----- | 
|        |       |             |  | Exhibit No. or                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Exhibit |       |             |  | Incorporation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|No.     |       | Description |  | By Reference                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.48 |             |  | Limited Waiver to the $200 Million Senior Secured
	Credit Facility dated as of July 10, 2000, by and among
	e.spire Communications, Inc., and its affiliates, the financial
	institutions, Goldman Sachs Credit Partners L.P., as sole Lead
	Arranger and Syndication Agent, The Bank of New York, as
	Administrative Agent for Lenders First Union National Bank, as
	Documentation Agent, and Newcourt Commercial Finance
	Corporation, as Collateral Agent. Forbearance until
	July 14, 2000                  |  |  | &&&&& | 
|        | 10.49 |             |  | Limited Waiver to the $200 Million Senior Secured
	Credit Facility dated as of July 14, 2000, by and among
	e.spire Communications, Inc., and its affiliates, the financial
	institutions, Goldman Sachs Credit Partners L.P., as sole Lead
	Arranger and Syndication Agent, The Bank of New York, as
	Administrative Agent for Lenders First Union National Bank, as
	Documentation Agent, and Newcourt Commercial Finance
	Corporation, as Collateral Agent. Forbearance until
	August 15, 2000                |  |  | &&&&& | 
|        | 10.50 |             |  | Limited Waiver regarding certain closing
	conditions dated as of April 13, 2000 by and between
	e.spire and The Huff Alternative Income Fund, L.P.
	(Huff), (ii) Greenwich Street Capital Partners
	II, L.P., GSCP Offshore Fund, L.P., Greenwich Fund, L.P.,
	Greenwich Street Employees Fund, L.P. and TRV Executive Fund,
	L.P. (together, Greenwich Street) and (iii) the
	Honeywell International Inc. Master Retirement Fund
	(Honeywell, together with Huff and Greenwich Street,
	the Investors) |  |  | &&&&& | 
|        | 10.51 |             |  | Amendment regarding filing of Proxy Statement
	dated as of April 13, 2000 by and between e.spire and The
	Huff Alternative Income Fund, L.P. (Huff),
	(ii) Greenwich Street Capital Partners II, L.P., GSCP
	Offshore Fund, L.P., Greenwich Fund, L.P., Greenwich Street
	Employees Fund, L.P. and TRV Executive Fund, L.P. (together,
	Greenwich Street) and (iii) the Honeywell
	International Inc. Master Retirement Fund
	(Honeywell, together with Huff and Greenwich Street,
	the Investors)       |  |  | &&&&& | 
|        | 10.52 |             |  | Purchase Agreement by and among the Huff
	Alternative Income Fund, L.P. and e.spire Communications dated
	September 19, 2000                                                                                                                                                                                                                                                                                                                                                                                     |  |  | @     | 
|        | 10.53 |             |  | Purchase Agreement by and among Greenwich Street
	Capital Partners II, L.P., GSCP Offshore Fund, L.P., Greenwich
	Fund, L.P., Greenwich Street Employees Fund, L.P., and TRV
	Executive Fund, L.P. and e.spire Communications dated
	September 19, 2000                                                                                                                                                                                                                                                          |  |  | @     | 
|        | 10.54 |             |  | Purchase Agreement by and among Honeywell
	International Inc. Master Retirement Trust and e.spire
	Communications dated September 19, 2000                                                                                                                                                                                                                                                                                                                                                                       |  |  | @     | 
|        | 10.55 |             |  | First Amended and Restated Credit Agreement by
	and among e.spire Communications, Inc., e.spire Finance
	Corporation, the Lenders, Goldman Sachs Credit Partners L.P.,
	Arranger and syndication agent, The Bank Of New York, as
	administrative agent, First Union National Bank, as
	documentation agent, and CIT Lending Services Corporation, as
	collateral agent dated as of September 20, 2000                                                                                                            |  |  | @     | 
|        | 10.56 |             |  | First Amendment to the First Amendment and
	Restated Credit Agreement by and among e.spire Communications,
	Inc., e.spire Finance Corporation, the Lenders, Goldman Sachs
	Credit Partners L.P., Arranger and syndication agent, The Bank
	Of New York, as administrative agent, First Union National Bank,
	as documentation agent, and CIT Lending Services Corporation, as
	collateral agent dated as of November 13, 2000                                                                                    |  |  | E-1   | 

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|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |      | 
|------- | ----- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ---- | 
|        |       |             |  | Exhibit No. or                                                                                                                                                                                                                                                                                                                                                                                                              
|Exhibit |       |             |  | Incorporation                                                                                                                                                                                                                                                                                                                                                                                                               
|No.     |       | Description |  | By Reference                                                                                                                                                                                                                                                                                                                                                                                                                
|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                             
|        | 10.57 |             |  | Second Amendment to the First Amendment and Restated Credit
	Agreement by and among e.spire Communications, Inc., e.spire
	Finance Corporation, the Lenders, Goldman Sachs Credit Partners
	L.P., Arranger and syndication agent, The Bank Of New York, as
	administrative agent, First Union National Bank, as
	documentation agent, and CIT Lending Services Corporation, as
	collateral agent dated as of January 9, 2001 |  |  | E-2  | 
|        | 10.58 |             |  | Loan Put Modification Agreement by and between The Huff
	Alternative Income Fund, L.P., the Lenders and The Bank of New
	York, as Administrative Agent dated as of November 13, 2000                                                                                                                                                                                                                                         |  |  | E-3  | 
|        | 10.59 |             |  | Assignment Agreement by and between The Huff Alternative Income
	Fund, L.P. as Assignee and the Lenders as Assignors dated as of
	December 8, 2000                                                                                                                                                                                                                                                                           |  |  | E-4  | 
|        | 10.60 |             |  | Employment Agreement between George F. Schmitt dated as of
	December 29, 2000                                                                                                                                                                                                                                                                                                                                                |  |  | E-5  | 
|        | 10.61 |             |  | Employment Agreement between Bradley E. Sparks dated as of
	January 2, 2001                                                                                                                                                                                                                                                                                                                                                  |  |  | E-6  | 
|        | 10.62 |             |  | Employment Agreement between Tomas Mikaelsson dated as of
	January 2, 2001                                                                                                                                                                                                                                                                                                                                                   |  |  | E-7  | 
|        | 10.63 |             |  | Employment Agreement between Christopher J. Resavy dated as of
	February 8, 2001                                                                                                                                                                                                                                                                                                                                             |  |  | E-8  | 
|        | 10.64 |             |  | Employment Agreement between Juliette Williams Pryor dated as of
	February 8, 2001                                                                                                                                                                                                                                                                                                                                           |  |  | E-9  | 
|        | 10.65 |             |  | Employment Agreement between Michael Miller dated as of
	February 8, 2001                                                                                                                                                                                                                                                                                                                                                    |  |  | E-10 | 
|        | 10.66 |             |  | Loan and Security Agreement between e.spire Communications,
	Inc., the subsidiaries and the Lenders dated April 10, 2001                                                                                                                                                                                                                                                                                                     |  |  | E-11 | 
|        | 10.67 |             |  | First Amendment to the Loan and Security Agreement dated May 24,
	2001                                                                                                                                                                                                                                                                                                                                                       |  |  | E-12 | 
|        | 16.1  |             |  | Letter re: change in certifying accountant                                                                                                                                                                                                                                                                                                                                                                                   |  |  | ***  | 
|        | 21.1  |             |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                                                                                                                               |  |  | %%%% | 
|        | 23.1  |             |  | Consent of KPMG LLP                                                                                                                                                                                                                                                                                                                                                                                                          |  |  | E-13 | 
|        | 99.1  |             |  | Supplemental Financial Information                                                                                                                                                                                                                                                                                                                                                                                           |  |  | E-14 | 



---

|      |  |                                                                                                                                                                                                                                                                           
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*     |  | Previously filed as an exhibit to the
	Companys Registration Statement on Form SB-2 (File
	No. 33-87200) and incorporated by reference.                                                                                                                                  
|**    |  | Previously filed as an exhibit to the
	Companys Current Report on Form 8-K dated
	June 26, 1995, and incorporated by reference.                                                                                                                                          
|***   |  | Previously filed as an exhibit to the
	Companys Quarterly Report on Form 10-QSB for the
	fiscal quarter ended March  31, 1995, and incorporated by
	reference.                                                                                                           
|****  |  | Previously filed as an exhibit to the
	Companys Annual Report on Form 10-KSB for the fiscal
	year ended June 30, 1995, and incorporated Reference.                                                                                                                       
|***** |  | Previously filed as an exhibit to the
	Companys Annual Report on Form 10-KSB for the fiscal
	period ended December  31, 1996, and incorporated by
	reference.                                                                                                            
|+     |  | Previously filed as an exhibit to the
	Companys Annual Report on Form 10-QSB for the fiscal
	year ended June 30, 1995, and the Companys Quarterly
	Report on Form 10-QSB for the fiscal quarter ended
	September 30, 1995, both of which are incorporated by
	reference.
|++    |  | Previously filed as an exhibit to the
	Companys Registration Statement on Form S-4 (File
	No. 33-80305) and incorporated by reference.                                                                                                                                   
|+++   |  | Previously filed as an exhibit to the
	Companys Registration Statement on Form SB-2 (File
	No. 33-80673) and incorporated by reference.                                                                                                                                  
|++++  |  | Previously filed as an exhibit to the
	Companys Registration Statement on Form SB-2 (File
	No. 33-20867) and incorporated by reference.                                                                                                                                  

68



---



##### Table of Contents



|      |  |                                                                                                                                                                
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|+++++ |  | Previously filed as an exhibit to the
	Companys Current Report on Form 8-K dated
	March 26, 1996 and incorporated by reference.                               
|#     |  | Previously filed as an exhibit to the
	Companys Registration Statement on Form S-4 (File
	No. 333-3632) and incorporated by reference.                        
|##    |  | Management contracts or compensatory plan or
	arrangement.                                                                                                     
|###   |  | Previously filed as an exhibit to the
	Companys Quarterly Report on Form 10-QSB for the
	fiscal year ended December  31, 1998 and incorporated by
	reference. 
|####  |  | Previously filed as an exhibit to the
	Companys Quarterly Report on Form 10-QSB for the
	fiscal quarter ended June  30, 1997 and incorporated by
	reference.  
|##### |  | Previously filed as an exhibit to the
	Companys Registration Statement on Form SB-2 (File
	No. 333-20867) and incorporated by reference.                      
|!     |  | Previously filed as an exhibit to the
	Companys Registration Statement on Form S-4 (File
	No. 333-34395) and incorporated by reference.                       
|!!    |  | Previously filed as an exhibit to the
	Companys Registration Statement on Form S-4 (File
	No. 333-64079) and incorporated by reference.                       
|!!!   |  | Previously filed as an exhibit to the
	Companys Registration Statement on Form S-8 (File
	No. 333-58457) and incorporated by reference.                       
|!!!!  |  | Previously filed as exhibit to Companys
	Registration Statement on Form S-8 (File
	No. 333-38944) and incorporated by reference.                              
|!!!!! |  | Previously filed with the Definitive Proxy
	Statement filed on October 14, 1996 and incorporated by
	reference.                                                
|%     |  | Previously filed as exhibit to Companys
	Registration Statement on Form S-3 (File
	No. 333-58457) and incorporated by reference.                              
|%%    |  | Previously filed as an exhibit to the
	Companys Current Report on Form 8-K dated
	January 17, 1997 and incorporated by reference.                             
|%%%   |  | Filed as an exhibit to the Companys
	Form 10-Q filed for the quarter ending September 30,
	1998, and incorporated by reference.                               
|%%%%  |  | Previously filed as an exhibit to the
	Companys Annual Report on Form 10-KSB for the fiscal
	year ended December  31, 1998, and incorporated by
	reference.   
|%%%%% |  | Previously filed as an exhibit to the
	Companys Quarterly Report on Form 10-QSB for the
	fiscal quarter ended March  31, 1999, and incorporated by
	reference.
|&     |  | Previously filed as an exhibit to the
	Companys Quarterly Report on Form 10-QSB for the
	fiscal quarter ended June  30, 1999, and incorporated by
	reference. 
|&&    |  | Previously filed as an exhibit to the
	Companys Quarterly Report on Form 10-QSB for the
	fiscal quarter ended September 30, 1999.                             
|&&&   |  | Previously filed as an exhibit to the
	Companys Annual Report on Form 10-K for the fiscal
	year ended December 31, 1999                                       
|&&&&  |  | Previously filed as an exhibit to the
	Companys Registration Statement on Form S-8 (File
	No. 43012) and incorporated by reference.                           
|&&&&& |  | Previously filed as an exhibit to the
	Companys Quarterly Report on Form 10-Q for the fiscal
	quarter ended June 30, 2000, and incorporated by reference      
|@     |  | Previously filed as an exhibit to the
	Companys Quarterly Report on Form 10-Q for the fiscal
	quarter ended September 30, 2000, and incorporated by reference 

(b) REPORTS ON FORM 8-K

a)  Form 8-K, as filed on February 1, 2000,
announcing that William R. Huff was named as the Chairman of its
Board of Directors and that Anthony J. Pompliano retired as
Chairman and Chief Executive Officer, effective January 21,
2000; announcing that Randall Muench was appointed as Executive
Vice President of Sales and Marketing and that Michael Miller
was appointed as President of ACSI Network Technologies, Inc. a
subsidiary of e.spire. Messrs.. Muench and Miller replaced
Richard Putt and Douglas R. Hudson respectively.

69



---



##### Table of Contents



b)  Form 8-K, as filed on February 14, 2000,
announcing commitment letters with Greenwich Street Capital
Partners II, L.P. (GSC Partners) and The Huff Alternative Income
Fund, L.P. for a total of $125 million in new equity
funding and the issuance 125,000 shares of convertible preferred
stock and 5.5 million warrants.

c)  Form 8-K, as filed on April 5, 2000,
announcing the election of George F. Schmitt as Chairman, the
appointment of William R. Huff as Vice Chairman of the Board,
the appointment of Christopher J. Resavy as Chief Operating
Officer and announcing its preliminary 4th quarter and full year
financial results; announcing the resignation of Dennis J. Kern
as Chief Operating Officer, effective March 24, 2000, the
resignation of Riley M. Murphy, Executive Vice President of
Legal and Regulatory Affairs, General Counsel and Secretary on
March 14, 2000, the appointment of Juliette Pryor, as
General Counsel, Senior Vice President and Secretary and
appointment of Jim Falvey as Senior Vice President of Regulatory
Affairs.

d)  Form 8-K, as filed on April 11, 2000,
announcing the resignation of John Polchin as Chief Financial
Officer.

e)  Form 8-K, as filed on July 12, 2000,
announcing that Interim Chief Financial Officer, Bradley E.
Sparks accepted the position on a permanent basis and the
appointment of Donald W. Bush as e.spires Treasurer.

f)  Form 8-K ,as filed on July 24, 2000,
announcing that the final terms for an amendment to the Senior
Secured Credit Facility, executed in August 1999 have been
signed.

g)  Form 8-K, as filed on July 31, 2000,
announcing earnings for the quarter ended June 30, 2000.

h)  Form 8-K, as filed on September 25, 2000
announcing that on September 20, 2000 e.spire executed the
First Amended & Restated Credit Agreement with its
syndicated bank group and, that it secured additional funding
commitments, of which e.spire received $50 million on
September 19, 2000.

i)  Form 8-K, as filed on November 2, 2000,
announcing earnings for the quarter ended September 30,
2000.

j)  Form 8-K, as filed on November 20, 2000,
announcing that the special meeting of the shareholders would be
reconvened on December 1, 2000.

k)  Form 8-K, as filed on January 17, 2001,
announcing the appointment of Dennis Feely and Stanton Williams
as new members of e.spires Board of Directors.

l)  Form 8-K, as filed on February 7, 2001,
announcing preliminary earnings for the fiscal year ended
December 30, 2000.

m)  Form 8-K, as filed February 22, 2001,
announcing that the Company will collect $20 million in
outstanding past due receivables.

o)  Form 8-K, as filed April 2, 2001, announcing
that the Company has filed for Chapter 11 bankruptcy.

70



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##### Table of Contents



e.spire COMMUNICATIONS, INC.

SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

|                                                             |                                 |            |   |            |  |            |   |            |  |           |   |        |  |  |   |        |  |  |   |        | 
|------------------------------------------------------------ | ------------------------------- | ---------- | - | ---------- |  | ---------- | - | ---------- |  | --------- | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                             |                                 | Balance at |   | Charged to |  |            |   |            |  | Balance  
|                                                             |                                 | Beginning  |   | Costs and  |  | Charged to |   |            |  | at End   
|Description                                                  |                                 | of Period  |   | Expenses   |  | Revenue    |   | Deductions |  | of Period
|                                                             |                                 |            |   |            |  |            |   |            |  |          
|Year ended December 31, 2000 Deducted from
	assets accounts: |                                 |            |   |            |  |            |   |            |  |           |   |        |  |  |   |        |  |  |   |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Allowance for doubtful accounts |            | $ | 28,707     |  |            | $ | 17,603     |  |           | $ | 41,680 |  |  | $ | 54,348 |  |  | $ | 33,642 | 
|                                                            
|                                                            
|                                                            
|                                                            
|Year ended December 31, 1999 Deducted from
	assets accounts: |                                 |            |   |            |  |            |   |            |  |           |   |        |  |  |   |        |  |  |   |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Allowance for doubtful accounts |            | $ | 5,581      |  |            | $ | 10,690     |  |           | $ | 16,379 |  |  | $ | 3,943  |  |  | $ | 28,707 | 
|                                                            
|                                                            
|                                                            
|                                                            
|Year ended December 31, 1998 Deducted from
	assets accounts: |                                 |            |   |            |  |            |   |            |  |           |   |        |  |  |   |        |  |  |   |       
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Allowance for doubtful accounts |            | $ | 1,921      |  |            | $ | 5,357      |  |           | $ | 1,496  |  |  | $ | 3,193  |  |  | $ | 5,581  | 

71



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##### Table of Contents






SIGNATURES

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



| |                             
| | ----------------------------
| | e.spire COMMUNICATIONS, INC.



| |     |                      
| | --- | ---------------------
| | By: | /s/ GEORGE F. SCHMITT

| |                                   
| | ----------------------------------
| |                                   
| | George F. Schmitt,                
| | Chairman of the Board of Directors
| | and Acting Chief Executive Officer



| |     |                      
| | --- | ---------------------
| | By: | /s/ BRADLEY E. SPARKS

| |                        
| | -----------------------
| |                        
| | Bradley E. Sparks,     
| | Chief Financial Officer



| |     |                    
| | --- | -------------------
| | By: | /s/ SEAN S. SCARLIS

| |                         
| | ------------------------
| |                         
| | Sean S. Scarlis,        
| | Chief Accounting Officer
|
| | Date: June 15, 2001     

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

|                                                                                                                     |  |      |               | 
|-------------------------------------------------------------------------------------------------------------------- |  | ---- | ------------- | 
|                                                                                                                     |  | Date
|                                                                                                                     |  |     
|By:      /s/ GEORGE
	F. SCHMITTGeorge F. Schmitt, Chairman of the Board of
	Directors (Principal Executive Officer)  |  |      | June 15, 2001 | 
|                                                                                                                    
|By:                                         
            
	William R. Huff, Vice Chairman of the Board
	of Directors |  |      | June 15, 2001 | 
|                                                                                                                    
|By:      /s/ EDWIN
	M. BANKSEdwin M. Banks, Director                                                                 |  |      | June 15, 2001 | 
|                                                                                                                    
|By:      /s/
	CHRISTOPHER L. RAFFERTYChristopher L. Rafferty, Director                                               |  |      | June 15, 2001 | 
|                                                                                                                    
|By:      /s/
	FREDERICK GALLANDFrederick Galland, Director                                                           |  |      | June 15, 2001 | 
|                                                                                                                    
|By:      /s/ JOSEPH
	THORNTONJoseph Thornton, Director                                                               |  |      | June 15, 2001 | 
|                                                                                                                    
|By:      /s/ PETER
	C. BENTZPeter C. Bentz, Director                                                                 |  |      | June 15, 2001 | 
|                                                                                                                    
|By:      /s/
	STANTON WILLIAMSStanton Williams, Director                                                             |  |      | June 15, 2001 | 
|                                                                                                                    
|By:      /s/ DENNIS
	FEELYDennis Feely, Director                                                                     |  |      | June 15, 2001 | 

72



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##### Table of Contents



INDEX OF EXHIBITS

|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                               |  |  |      | 
|------- | ----- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ---- | 
|Exhibit |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|No.     |       | Description |  | Page No.                                                                                                                                                                                                                                                                                                                                                                                                                     
|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 10.56 |             |  | First Amendment to the First Amendment and
	Restated Credit Agreement by and among e.spire Communications,
	Inc., e.spire Finance Corporation, the Lenders, Goldman Sachs
	Credit Partners L.P., Arranger and syndication agent, The Bank
	Of New York, as administrative agent, First Union National Bank,
	as documentation agent, and CIT Lending Services Corporation, as
	collateral agent dated as of November 13, 2000 |  |  | E-1  | 
|        | 10.57 |             |  | Second Amendment to the First Amendment and
	Restated Credit Agreement by and among e.spire Communications,
	Inc., e.spire Finance Corporation, the Lenders, Goldman Sachs
	Credit Partners L.P., Arranger and syndication agent, The Bank
	Of New York, as administrative agent, First Union National Bank,
	as documentation agent, and CIT Lending Services Corporation, as
	collateral agent dated as of January 9, 2001  |  |  | E-2  | 
|        | 10.58 |             |  | Loan Put Modification Agreement by and between
	The Huff Alternative Income Fund, L.P., the Lenders and The Bank
	of New York, as Administrative Agent dated as of
	November 13, 2000                                                                                                                                                                                                                                         |  |  | E-3  | 
|        | 10.59 |             |  | Assignment Agreement by and between The Huff
	Alternative Income Fund, L.P. as Assignee and the Lenders as
	Assignors dated as of December 8, 2000                                                                                                                                                                                                                                                                            |  |  | E-4  | 
|        | 10.60 |             |  | Employment Agreement between George F. Schmitt
	dated as of December 29, 2000                                                                                                                                                                                                                                                                                                                                                 |  |  | E-5  | 
|        | 10.61 |             |  | Employment Agreement between Bradley E. Sparks
	dated as of January 2, 2001                                                                                                                                                                                                                                                                                                                                                   |  |  | E-6  | 
|        | 10.62 |             |  | Employment Agreement between Tomas Mikaelsson
	dated as of January 2, 2001                                                                                                                                                                                                                                                                                                                                                    |  |  | E-7  | 
|        | 10.63 |             |  | Employment Agreement between Christopher J.
	Resavy dated as of February 8, 2001                                                                                                                                                                                                                                                                                                                                              |  |  | E-8  | 
|        | 10.64 |             |  | Employment Agreement between Juliette Williams
	Pryor dated as of February 8, 2001                                                                                                                                                                                                                                                                                                                                            |  |  | E-9  | 
|        | 10.65 |             |  | Employment Agreement between Michael Miller dated
	as of February 8, 2001                                                                                                                                                                                                                                                                                                                                                     |  |  | E-10 | 
|        | 10.66 |             |  | Loan and Security Agreement between e.spire
	Communications, Inc., the subsidiaries and the Lenders dated
	April 10, 2001                                                                                                                                                                                                                                                                                                     |  |  | E-11 | 
|        | 10.67 |             |  | First Amendment to the Loan and Security
	Agreement dated May 24, 2001                                                                                                                                                                                                                                                                                                                                                        |  |  | E-12 | 
|        | 23.1  |             |  | Consent of KPMG LLP                                                                                                                                                                                                                                                                                                                                                                                                           |  |  | E-13 | 
|        | 99.1  |             |  | Supplemental Financial Information                                                                                                                                                                                                                                                                                                                                                                                            |  |  | E-14 | 

73



---



##### Table of Contents



INDEX TO FINANCIAL STATEMENTS

|                                                                                                       |  |   
|------------------------------------------------------------------------------------------------------ |  | --
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Independent Auditors Report                                                                           |  | 75
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Consolidated Balance Sheets as of
	December 31, 1999 and 2000                                          |  | 76
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Consolidated Statements of Operations for the
	Years Ended December 31, 1998, 1999 and 2000            |  | 77
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Consolidated Statements of Stockholders
	Deficit for the Years Ended December 31, 1998, 1999 and 2000 |  | 78
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Consolidated Statements of Cash Flows for the
	Years Ended December 31, 1998, 1999 and 2000            |  | 79
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Notes to Consolidated Financial Statements                                                             |  | 80

74



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors and Stockholders



We have audited the accompanying consolidated balance sheets of
e.spire Communications, Inc. and subsidiaries as of
December 31, 1999 and 2000, and the related consolidated
statements of operations, stockholders deficit, and cash
flows for each of the years in the three-year period ended
December 31, 2000. In connection with our audits of the
consolidated financial statements, we also have audited the
related financial statement schedule. These consolidated
financial statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on
our audits.

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

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of e.spire Communications, Inc. and subsidiaries as of
December 31, 1999 and 2000, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United
States of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
consolidated financial statements take as a whole, presents
fairly, in all material respects, the information set forth
therein.

The accompanying consolidated financial statements and financial
statement schedule have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered
recurring losses from operations, has a net capital deficiency,
defaulted on certain of its notes payable and filed voluntary
petitions for protection under Chapter 11 of the United
States Bankruptcy Code. Although the Company and its
subsidiaries are currently operating their businesses as
debtors-in-possession under the jurisdiction of the Bankruptcy
Court, the continuation of the Company as a going concern is
dependent upon, among other things, the ability to formulate a
plan of reorganization which will gain approval of the creditors
and confirmation by the Bankruptcy Court. The filing under
Chapter 11 and the other factors noted above, as discussed
in Note 1 to the consolidated financial statements, raise
substantial doubt about the Companys ability to continue
as a going concern. The accompanying consolidated financial
statements and financial statement schedule do not include any
adjustments that might result from the outcome of this
uncertainty.

As discussed in Note 2 to the consolidated financial
statements, effective July 1, 1999, the Company changed its
method of accounting for revenue recognition associated with
leasing its fiber-optic network.

Washington, D.C.







75



---



##### Table of Contents



e.spire COMMUNICATIONS, INC.

Consolidated Balance Sheets

(in thousands, except share and per share data)


|                                                                                               |                                                                                                                                       |                                                                                                                                               |                                        |          |   |           |          |          |    |           |  
|---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------- | -------- | - | --------- | -------- | -------- | -- | --------- | -
|                                                                                               |                                                                                                                                       |                                                                                                                                              
|                                                                                               |                                                                                                                                       | December 31,                                                                                                                                 
|                                                                                               |                                                                                                                                       |                                                                                                                                              
|                                                                                               |                                                                                                                                       | 1999                                                                                                                                          |                                        | 2000    
|                                                                                               |                                                                                                                                       |                                                                                                                                               |                                        |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|ASSETS                                                                                        
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Current assets:                                                                                |                                                                                                                                       |                                                                                                                                               |                                        |          |   |           |          |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Cash and cash equivalents                                                                                                             |                                                                                                                                               | $                                      | 62,525   |   |           | $        | 7,352    |   
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Restricted cash and investments                                                                                                       |                                                                                                                                               |                                        | 15,125   |   |           |          |         |   
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Trade accounts receivable, net of allowance for
	doubtful accounts of $28,707 and $33,642, respectively                               |                                                                                                                                               |                                        | 97,238   |   |           |          | 110,486  |   
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Unbilled revenue                                                                                                                      |                                                                                                                                               |                                        | 14,032   |   |           |          | 6,665    |   
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Other current assets                                                                                                                  |                                                                                                                                               |                                        | 9,435    |   |           |          | 11,146   |   
|                                                                                               |                                                                                                                                       |                                                                                                                                               |                                        |          |   |           |          |         
|                                                                                               |                                                                                                                                       |                                                                                                                                               | Total current assets                   |          |   | 198,355   |          |          |    | 135,649   |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Inventory                                                                                      |                                                                                                                                       |                                                                                                                                               | 55,459                                 |          |   |           | 86,696   |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Networks, equipment and furniture, gross                                                       |                                                                                                                                       |                                                                                                                                               | 793,239                                |          |   |           | 870,402  |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Less  accumulated depreciation and
	amortization                                              |                                                                                                                                       |                                                                                                                                               | (166,224                               | )        |   |           | (264,405 | )       
|                                                                                               |                                                                                                                                       |                                                                                                                                               |                                        |          |   |           |          |         
|                                                                                               |                                                                                                                                       |                                                                                                                                               | Networks, equipment and furniture, net |          |   | 627,015   |          |          |    | 605,997   |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Deferred financing fees, net of accumulated
	amortization of $13,246 and $19,394, respectively |                                                                                                                                       |                                                                                                                                               | 44,660                                 |          |   |           | 38,512   |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Assets held for sale                                                                           |                                                                                                                                       |                                                                                                                                               |                                       |          |   |           | 11,751   |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Intangible assets, net                                                                         |                                                                                                                                       |                                                                                                                                               | 7,452                                  |          |   |           |         |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Restricted cash and investments                                                                |                                                                                                                                       |                                                                                                                                               | 3,629                                  |          |   |           | 2,694    |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Other assets                                                                                   |                                                                                                                                       |                                                                                                                                               | 4,672                                  |          |   |           | 4,341    |         
|                                                                                               |                                                                                                                                       |                                                                                                                                               |                                        |          |   |           |          |         
|                                                                                               |                                                                                                                                       |                                                                                                                                               | Total assets                           |          | $ | 941,242   |          |          | $  | 885,640   |  
|                                                                                               |                                                                                                                                       |                                                                                                                                               |                                        |          |   |           |          |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|LIABILITIES, REDEEMABLE STOCK, AND
	STOCKHOLDERS DEFICIT                                     
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Current liabilities:                                                                           |                                                                                                                                       |                                                                                                                                               |                                        |          |   |           |          |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Notes payable  current portion                                                                                                       |                                                                                                                                               | $                                      | 164,000  |   |           | $        | 136,740  |   
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Obligations under capital leases 
	current portion                                                                                   |                                                                                                                                               |                                        | 9,932    |   |           |          | 13,627   |   
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Accounts payable                                                                                                                      |                                                                                                                                               |                                        | 46,106   |   |           |          | 66,380   |   
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Accrued interest                                                                                                                      |                                                                                                                                               |                                        | 14,344   |   |           |          | 18,065   |   
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Accrued employee costs                                                                                                                |                                                                                                                                               |                                        | 5,262    |   |           |          | 6,978    |   
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Deferred revenue                                                                                                                      |                                                                                                                                               |                                        |         |   |           |          | 6,785    |   
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Other accrued liabilities                                                                                                             |                                                                                                                                               |                                        | 15,995   |   |           |          | 21,212   |   
|                                                                                               |                                                                                                                                       |                                                                                                                                               |                                        |          |   |           |          |         
|                                                                                               |                                                                                                                                       |                                                                                                                                               | Total current liabilities              |          |   | 255,639   |          |          |    | 269,787   |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Long-term liabilities:                                                                         |                                                                                                                                       |                                                                                                                                               |                                        |          |   |           |          |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Notes payable, less current portion                                                                                                   |                                                                                                                                               |                                        | 749,406  |   |           |          | 811,153  |   
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Obligations under capital leases, less current
	portion                                                                               |                                                                                                                                               |                                        | 46,786   |   |           |          | 32,458   |   
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Deferred revenue                                                                                                                      |                                                                                                                                               |                                        | 5,905    |   |           |          | 12,159   |   
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Other long-term liabilities                                                                                                           |                                                                                                                                               |                                        | 3,105    |   |           |          | 4,485    |   
|                                                                                               |                                                                                                                                       |                                                                                                                                               |                                        |          |   |           |          |         
|                                                                                               |                                                                                                                                       |                                                                                                                                               | Total liabilities                      |          |   | 1,060,841 |          |          |    | 1,130,042 |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Redeemable stock:                                                                              |                                                                                                                                       |                                                                                                                                               |                                        |          |   |           |          |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | 14 3/4% Redeemable Preferred Stock due 2008
	(liquidation value $125,053 at December 31, 2000)                                        |                                                                                                                                               |                                        | 87,051   |   |           |          | 106,179  |   
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | 12 3/4% Junior Redeemable Preferred Stock
	due 2009 (liquidation value $224,245 at December 31, 2000)                                 |                                                                                                                                               |                                        | 194,545  |   |           |          | 221,293  |   
|                                                                                               |                                                                                                                                       |                                                                                                                                               |                                        |          |   |           |          |         
|                                                                                               |                                                                                                                                       |                                                                                                                                               | Total redeemable stock                 |          |   | 281,596   |          |          |    | 327,472   |  
|                                                                                               |                                                                                                                                       |                                                                                                                                               |                                        |          |   |           |          |         
|Stockholders deficit:                                                                         |                                                                                                                                       |                                                                                                                                               |                                        |          |   |           |          |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                                                                                                                                       | Series A Convertible Preferred Stock, $1 par
	value, 250,000 shares authorized, none and
	81,177 shares, respectively, issued and outstanding |                                        |          |  |           |          |          | 81 |          
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                                                                                                                                       | Exchangeable Preferred Stock, $1 par value,
	50,000  shares authorized, none and 50,000 shares,
	respectively, issued and outstanding         |                                        |          |  |           |          |          | 50 |          
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Common stock, $.01 par value,
	250,000,000 shares authorized, 51,149,828 and
	56,190,847 shares, respectively, issued and outstanding |                                                                                                                                               |                                        | 511      |   |           |          | 562      |   
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Additional paid-in capital                                                                                                            |                                                                                                                                               |                                        | 236,577  |   |           |          | 359,302  |   
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Accumulated deficit                                                                                                                   |                                                                                                                                               |                                        | (638,283 | ) |           |          | (931,869 | ) 
|                                                                                               |                                                                                                                                       |                                                                                                                                               |                                        |          |   |           |          |         
|                                                                                               |                                                                                                                                       |                                                                                                                                               | Total stockholders deficit            |          |   | (401,195  | )        |          |    | (571,874  | )
|                                                                                               |                                                                                                                                       |                                                                                                                                               |                                        |          |   |           |          |         
|Commitments and contingencies (notes 1, 3, 8, 9,
	12, 13 and 14)                               |                                                                                                                                       |                                                                                                                                               |                                        |          |   |           |          |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Total liabilities, redeemable stock, and
	stockholders deficit                                |                                                                                                                                       | $                                                                                                                                             | 941,242                                |          |   | $         | 885,640  |         
|                                                                                               |                                                                                                                                       |                                                                                                                                               |                                        |          |   |           |          |         

See accompanying notes to consolidated financial statements.

76



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##### Table of Contents



e.spire COMMUNICATIONS, INC.

Consolidated Statements of Operations

(in thousands, except share and per share data)


|                                                                          |                                                                                                                           |                                            |            |         |          |      |            |         |          |   |            |          |          |  
|------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ------- | -------- | ---- | ---------- | ------- | -------- | - | ---------- | -------- | -------- | -
|                                                                          |                                                                                                                           |                                           
|                                                                          |                                                                                                                           | Years Ended December 31,                  
|                                                                          |                                                                                                                           |                                           
|                                                                          |                                                                                                                           | 1998                                       |            | 1999    |          | 2000
|                                                                          |                                                                                                                           |                                            |            |         |          |     
|Revenues:                                                                 |                                                                                                                           |                                            |            |         |          |      |            |         |          |   |            |         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Telecommunications services                                                                                               |                                            | $          | 111,086 |          |      | $          | 150,632 |          |   | $          | 232,696  |         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Network technologies services                                                                                             |                                            |            | 29,416  |          |      |            | 68,305  |          |   |            | 82,794   |         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Internet services                                                                                                         |                                            |            | 16,257  |          |      |            | 25,072  |          |   |            | 28,700   |         
|                                                                          |                                                                                                                           |                                            |            |         |          |      |            |         |          |   |            |         
|                                                                          |                                                                                                                           |                                            | 156,759    |         |          |      | 244,009    |         |          |   | 344,190    |         
|                                                                          |                                                                                                                           |                                            |            |         |          |      |            |         |          |   |            |         
|Cost of sales (excluding depreciation and
	amortization):                 |                                                                                                                           |                                            |            |         |          |      |            |         |          |   |            |         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Telecommunications services (excluding noncash
	stock compensation of $3,345, $2,489 and $2,356, respectively)            |                                            |            | 90,503  |          |      |            | 110,037 |          |   |            | 133,500  |         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Network technologies services (excluding noncash
	stock compensation of $298, $229 and $835, respectively)                |                                            |            | 8,739   |          |      |            | 38,198  |          |   |            | 46,236   |         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Internet services (excluding noncash stock
	compensation of $328, $379, and $481,respectively)                            |                                            |            | 7,571   |          |      |            | 11,133  |          |   |            | 13,844   |         
|                                                                          |                                                                                                                           |                                            |            |         |          |      |            |         |          |   |            |         
|                                                                          |                                                                                                                           |                                            | 106,813    |         |          |      | 159,368    |         |          |   | 193,580    |         
|                                                                          |                                                                                                                           |                                            |            |         |          |      |            |         |          |   |            |         
|Gross margin (excluding depreciation and
	amortization):                  |                                                                                                                           |                                            |            |         |          |      |            |         |          |   |            |         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Telecommunications services                                                                                               |                                            |            | 20,583  |          |      |            | 40,595  |          |   |            | 99,196   |         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Network technologies services                                                                                             |                                            |            | 20,677  |          |      |            | 30,107  |          |   |            | 36,558   |         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Internet services                                                                                                         |                                            |            | 8,686   |          |      |            | 13,939  |          |   |            | 14,856   |         
|                                                                          |                                                                                                                           |                                            |            |         |          |      |            |         |          |   |            |         
|                                                                          |                                                                                                                           |                                            | 49,946     |         |          |      | 84,641     |         |          |   | 150,610    |         
|                                                                          |                                                                                                                           |                                            |            |         |          |      |            |         |          |   |            |         
|Operating expenses:                                                       |                                                                                                                           |                                            |            |         |          |      |            |         |          |   |            |         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Selling, general, and administrative (excluding
	noncash stock compensation of $5,957, $8,376 and $10,705,
	respectively) |                                            |            | 103,639 |          |      |            | 169,180 |          |   |            | 187,267  |         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Noncash stock compensation                                                                                                |                                            |            | 9,928   |          |      |            | 11,473  |          |   |            | 14,377   |         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Depreciation and amortization                                                                                             |                                            |            | 47,332  |          |      |            | 95,943  |          |   |            | 109,425  |         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Impairment on assets held for sale                                                                                        |                                            |            |         |          |      |            |         |          |   |            | 16,877   |         
|                                                                          |                                                                                                                           |                                            |            |         |          |      |            |         |          |   |            |         
|                                                                          |                                                                                                                           | Total operating expenses                   |            |         | 160,899  |      |            |         | 276,596  |   |            |          | 327,946  |  
|                                                                          |                                                                                                                           |                                            |            |         |          |      |            |         |          |   |            |         
|                                                                          |                                                                                                                           | Operating loss                             |            |         | (110,953 | )    |            |         | (191,955 | ) |            |          | (177,336 | )
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Nonoperating income (expenses):                                           |                                                                                                                           |                                            |            |         |          |      |            |         |          |   |            |         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Interest and other income                                                                                                 |                                            |            | 23,348  |          |      |            | 10,602  |          |   |            | 3,622    |         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Interest and other expense                                                                                                |                                            |            | (75,474 | )        |      |            | (96,395 | )        |   |            | (124,339 | )       
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                          | Gain on sale of Internet dial-up customer base                                                                            |                                            |            |        |          |      |            |        |          |   |            | 4,467    |         
|                                                                          |                                                                                                                           |                                            |            |         |          |      |            |         |          |   |            |         
|                                                                          |                                                                                                                           | Net loss                                   |            |         | (163,079 | )    |            |         | (277,748 | ) |            |          | (293,586 | )
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Preferred stock dividends and accretion and
	beneficial conversion charge |                                                                                                                           |                                            | (36,080    | )       |          |      | (40,646    | )       |          |   | (81,119    | )       
|                                                                          |                                                                                                                           |                                            |            |         |          |      |            |         |          |   |            |         
|                                                                          |                                                                                                                           | Net loss applicable to common stockholders |            | $       | (199,159 | )    |            | $       | (318,394 | ) |            | $        | (374,705 | )
|                                                                          |                                                                                                                           |                                            |            |         |          |      |            |         |          |   |            |         
|Basic and diluted net loss per common share                               |                                                                                                                           | $                                          | (4.45      | )       |          | $    | (6.38      | )       |          | $ | (7.05      | )       
|                                                                          |                                                                                                                           |                                            |            |         |          |      |            |         |          |   |            |         
|Weighted average number of common shares
	outstanding                     |                                                                                                                           |                                            | 44,751,690 |         |          |      | 49,891,910 |         |          |   | 53,184,088 |         
|                                                                          |                                                                                                                           |                                            |            |         |          |      |            |         |          |   |            |         

See accompanying notes to consolidated financial statements.

77



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##### Table of Contents



e.spire COMMUNICATIONS, INC.


Consolidated Statements of Stockholders Deficit

Years ended December 31, 1998, 1999 and 2000


(in thousands, except share data)


|                              |                                                                        |                 |        |                 |  |              |    |            |  |             |        |        |  |         |    |         |  |  |            |           |  |   |     |    |  |   |         |         |   |   |          |          |  
|----------------------------- | ---------------------------------------------------------------------- | --------------- | ------ | --------------- |  | ------------ | -- | ---------- |  | ----------- | ------ | ------ |  | ------- | -- | ------- |  |  | ---------- | --------- |  | - | --- | -- |  | - | ------- | ------- | - | - | -------- | -------- | -
|                              |                                                                        |                 |        |                 |  |              |    |            |  |             |        |        |  |        
|                              |                                                                        | Series A        |        |                 |  |              |    |            |  |             |        |       
|                              |                                                                        | Convertible     |        | Exchangeable    |  |              |    |            |  |            
|                              |                                                                        | Preferred Stock |        | Preferred Stock |  | Common Stock |    | Additional |  |            
|                              |                                                                        |                 |        |                 |  |              |    | Paid-in    |  | Accumulated
|                              |                                                                        | Shares          |        | Amount          |  | Shares       |    | Amount     |  | Shares      |        | Amount |  | Capital |    | Deficit
|                              |                                                                        |                 |        |                 |  |              |    |            |  |             |        |        |  |         |    |        
|Balances at December 31, 1997 |                                                                        |                 |       |                 |  | $            |   |            |  |             |       |        |  | $       |   |         |  |  | 37,219,419 |           |  | $ | 372 |    |  | $ | 131,728 |         |   | $ | (197,456 | )       
|                             
|                             
|                             
|                             
|                              | Issuance of common stock                                               |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            | 7,502,418 |  |   |     | 75 |  |   |         | 130,236 |   |   |          |         |  
|                             
|                             
|                             
|                             
|                              | Warrants and stock options exercised                                   |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            | 3,148,993 |  |   |     | 32 |  |   |         | 16,767  |   |   |          |         |  
|                             
|                             
|                             
|                             
|                              | Stock compensation expense                                             |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            |          |  |   |     |   |  |   |         | 8,975   |   |   |          |         |  
|                             
|                             
|                             
|                             
|                              | Warrants issued                                                        |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            |          |  |   |     |   |  |   |         | 805     |   |   |          |         |  
|                             
|                             
|                             
|                             
|                              | Preferred stock dividends/accretion                                    |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            |          |  |   |     |   |  |   |         | (36,080 | ) |   |          |         |  
|                             
|                             
|                             
|                             
|                              | Shares issued under employee stock purchase plan
	and performance plan |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            | 404,169   |  |   |     | 4  |  |   |         | 2,201   |   |   |          |         |  
|                             
|                             
|                             
|                             
|                              | Cancellation of put right obligations                                  |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            |          |  |   |     |   |  |   |         | 1,000   |   |   |          |         |  
|                             
|                             
|                             
|                             
|                              | Shares issued as consideration for acquisitions                        |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            | 171,065   |  |   |     | 1  |  |   |         | 2,685   |   |   |          |         |  
|                             
|                             
|                             
|                             
|                              | Net loss                                                               |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            |          |  |   |     |   |  |   |         |        |   |   |          | (163,079 | )
|                              |                                                                        |                 |        |                 |  |              |    |            |  |             |        |        |  |         |    |         |  |  |            |           |  |   |     |    |  |   |         |         |   |   |          |         
|Balances at December 31, 1998 |                                                                        |                 |       |                 |  |              |   |            |  |             |       |        |  |         |   |         |  |  | 48,446,064 |           |  |   | 484 |    |  |   | 258,317 |         |   |   | (360,535 | )       
|                             
|                             
|                             
|                             
|                              | Warrants and stock options exercised                                   |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            | 1,768,430 |  |   |     | 18 |  |   |         | 5,322   |   |   |          |         |  
|                             
|                             
|                             
|                             
|                              | Stock compensation expense                                             |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            | 677,056   |  |   |     | 6  |  |   |         | 11,467  |   |   |          |         |  
|                             
|                             
|                             
|                             
|                              | Warrants issued                                                        |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            |          |  |   |     |   |  |   |         | 358     |   |   |          |         |  
|                             
|                             
|                             
|                             
|                              | Preferred stock dividends/accretion                                    |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            |          |  |   |     |   |  |   |         | (40,646 | ) |   |          |         |  
|                             
|                             
|                             
|                             
|                              | Shares issued under employee stock purchase plan
	and performance plan |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            | 258,278   |  |   |     | 3  |  |   |         | 1,759   |   |   |          |         |  
|                             
|                             
|                             
|                             
|                              | Net loss                                                               |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            |          |  |   |     |   |  |   |         |        |   |   |          | (277,748 | )
|                              |                                                                        |                 |        |                 |  |              |    |            |  |             |        |        |  |         |    |         |  |  |            |           |  |   |     |    |  |   |         |         |   |   |          |         
|Balances at December 31, 1999 |                                                                        |                 |       |                 |  |              |   |            |  |             |       |        |  |         |   |         |  |  | 51,149,828 |           |  | $ | 511 |    |  | $ | 236,577 |         |   | $ | (638,283 | )       
|                              |                                                                        |                 |        |                 |  |              |    |            |  |             |        |        |  |         |    |         |  |  |            |           |  |   |     |    |  |   |         |         |   |   |          |         
|                              | Issuance of preferred stock                                            |                 |        | 81,177          |  |              |    | 81         |  |             |        | 50,000 |  |         |    | 50      |  |  |            |           |  |   |     |    |  |   |         | 148,264 |   |   |          |          |  
|                             
|                             
|                             
|                             
|                              | Warrants and stock options exercised                                   |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            | 1,331,235 |  |   |     | 13 |  |   |         | 3,075   |   |   |          |         |  
|                             
|                             
|                             
|                             
|                              | Stock compensation expense                                             |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            | 2,970,343 |  |   |     | 30 |  |   |         | 14,347  |   |   |          |         |  
|                             
|                             
|                             
|                             
|                              | Warrants issued                                                        |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            |          |  |   |     |   |  |   |         | 260     |   |   |          |         |  
|                             
|                             
|                             
|                             
|                              | Preferred stock dividends/accretion                                    |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            |          |  |   |     |   |  |   |         | (46,007 | ) |   |          |         |  
|                             
|                             
|                             
|                             
|                              | Non-cash settlement costs                                              |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            | 275,646   |  |   |     | 3  |  |   |         | 1,309   |   |   |          |         |  
|                             
|                             
|                             
|                             
|                              | Shares issued under employee stock purchase plan
	and performance plan |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            | 463,795   |  |   |     | 5  |  |   |         | 1,476   |   |   |          |         |  
|                             
|                             
|                             
|                             
|                              | Net loss                                                               |                 |        |                |  |              |    |           |  |             |        |       |  |         |    |        |  |  |            |          |  |   |     |   |  |   |         |        |   |   |          | (293,586 | )
|                              |                                                                        |                 |        |                 |  |              |    |            |  |             |        |        |  |         |    |         |  |  |            |           |  |   |     |    |  |   |         |         |   |   |          |         
|Balances at December 31, 2000 |                                                                        |                 | 81,177 |                 |  | $            | 81 |            |  |             | 50,000 |        |  | $       | 50 |         |  |  | 56,190,847 |           |  | $ | 562 |    |  | $ | 359,302 |         |   | $ | (931,869 | )       
|                              |                                                                        |                 |        |                 |  |              |    |            |  |             |        |        |  |         |    |         |  |  |            |           |  |   |     |    |  |   |         |         |   |   |          |         

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                              |                                                                        |               |          |          |  
|----------------------------- | ---------------------------------------------------------------------- | ------------- | -------- | -------- | -
|                              |                                                                        | Total        
|                              |                                                                        | Stockholders
|                              |                                                                        | (Deficit)    
|                              |                                                                        |              
|Balances at December 31, 1997 |                                                                        | $             | (65,356  | )       
|                             
|                             
|                             
|                             
|                              | Issuance of common stock                                               |               |          | 130,311  |  
|                             
|                             
|                             
|                             
|                              | Warrants and stock options exercised                                   |               |          | 16,799   |  
|                             
|                             
|                             
|                             
|                              | Stock compensation expense                                             |               |          | 8,975    |  
|                             
|                             
|                             
|                             
|                              | Warrants issued                                                        |               |          | 805      |  
|                             
|                             
|                             
|                             
|                              | Preferred stock dividends/accretion                                    |               |          | (36,080  | )
|                             
|                             
|                             
|                             
|                              | Shares issued under employee stock purchase plan
	and performance plan |               |          | 2,205    |  
|                             
|                             
|                             
|                             
|                              | Cancellation of put right obligations                                  |               |          | 1,000    |  
|                             
|                             
|                             
|                             
|                              | Shares issued as consideration for acquisitions                        |               |          | 2,686    |  
|                             
|                             
|                             
|                             
|                              | Net loss                                                               |               |          | (163,079 | )
|                              |                                                                        |               |          |         
|Balances at December 31, 1998 |                                                                        |               | (101,734 | )       
|                             
|                             
|                             
|                             
|                              | Warrants and stock options exercised                                   |               |          | 5,340    |  
|                             
|                             
|                             
|                             
|                              | Stock compensation expense                                             |               |          | 11,473   |  
|                             
|                             
|                             
|                             
|                              | Warrants issued                                                        |               |          | 358      |  
|                             
|                             
|                             
|                             
|                              | Preferred stock dividends/accretion                                    |               |          | (40,646  | )
|                             
|                             
|                             
|                             
|                              | Shares issued under employee stock purchase plan
	and performance plan |               |          | 1,762    |  
|                             
|                             
|                             
|                             
|                              | Net loss                                                               |               |          | (277,748 | )
|                              |                                                                        |               |          |         
|Balances at December 31, 1999 |                                                                        | $             | (401,195 | )       
|                              |                                                                        |               |          |         
|                              | Issuance of preferred stock                                            |               |          | 150,665  |  
|                             
|                             
|                             
|                             
|                              | Warrants and stock options exercised                                   |               |          | 3,088    |  
|                             
|                             
|                             
|                             
|                              | Stock compensation expense                                             |               |          | 14,377   |  
|                             
|                             
|                             
|                             
|                              | Warrants issued                                                        |               |          | 260      |  
|                             
|                             
|                             
|                             
|                              | Preferred stock dividends/accretion                                    |               |          | (46,007  | )
|                             
|                             
|                             
|                             
|                              | Non-cash settlement costs                                              |               |          | 1,312    |  
|                             
|                             
|                             
|                             
|                              | Shares issued under employee stock purchase plan
	and performance plan |               |          | 1,481    |  
|                             
|                             
|                             
|                             
|                              | Net loss                                                               |               |          | (293,586 | )
|                              |                                                                        |               |          |         
|Balances at December 31, 2000 |                                                                        | $             | (571,874 | )       
|                              |                                                                        |               |          |         

See accompanying notes to consolidated financial statements.

78



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##### Table of Contents



e.spire COMMUNICATIONS, INC.

Consolidated Statements of Cash Flows

(in thousands, except share data)


|                                                                        |                                                                              |                                                                     |                                                              |                                                       |        |         |          |          |        |         |          |          |        |         |          |  
|----------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------------------------------------------ | ----------------------------------------------------- | ------ | ------- | -------- | -------- | ------ | ------- | -------- | -------- | ------ | ------- | -------- | -
|                                                                        |                                                                              |                                                                    
|                                                                        |                                                                              | Years Ended December 31,                                           
|                                                                        |                                                                              |                                                                    
|                                                                        |                                                                              | 1998                                                                |                                                              | 1999                                                  |        | 2000   
|                                                                        |                                                                              |                                                                     |                                                              |                                                       |        |        
|Cash flows from operating activities:                                   |                                                                              |                                                                     |                                                              |                                                       |        |         |          |          |        |         |          |         
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Net loss                                                                     |                                                                     | $                                                            | (163,079                                              | )      |         | $        | (277,748 | )      |         | $        | (293,586 | )     
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Adjustments to reconcile net loss to net cash
	used in operating activities: |                                                                     |                                                              |                                                       |        |         |          |          |        |         |          |          |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                              |                                                                     | Depreciation and amortization                                |                                                       |        | 47,332  |          |          |        | 95,943  |          |          |        | 109,425 |         
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                              |                                                                     | Interest deferral and accretion                              |                                                       |        | 39,489  |          |          |        | 58,676  |          |          |        | 61,747  |         
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                              |                                                                     | Amortization of deferred financing fees                      |                                                       |        | 4,206   |          |          |        | 5,391   |          |          |        | 6,148   |         
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                              |                                                                     | Noncash stock compensation, consultants, and
	other expenses |                                                       |        | 9,928   |          |          |        | 11,473  |          |          |        | 14,377  |         
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                              |                                                                     | Impairment on assets held for sale                           |                                                       |        |        |          |          |        |        |          |          |        | 16,877  |         
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                              |                                                                     | Gain on sale of Internet dial-up customer base               |                                                       |        |        |          |          |        |        |          |          |        | (4,467  | )       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                              |                                                                     | Non-monetary revenue                                         |                                                       |        | (13,950 | )        |          |        | (14,057 | )        |          |        |        |         
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                              |                                                                     | Other operating activities                                   |                                                       |        | 569     |          |          |        |        |          |          |        |        |         
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                              |                                                                     | Changes in operating assets and liabilities:                 |                                                       |        |         |          |          |        |         |          |          |        |         |         
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                              |                                                                     |                                                              | Trade accounts receivable                             |        |         | (33,766  | )        |        |         | (42,866  | )        |        |         | (5,881   | )
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                              |                                                                     |                                                              | Other current assets                                  |        |         |         |          |        |         |         |          |        |         | 4,529    |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                              |                                                                     |                                                              | Other assets                                          |        |         | (4,075   | )        |        |         | (1,099   | )        |        |         | 2,763    |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                              |                                                                     |                                                              | Accounts payable                                      |        |         | 48,101   |          |        |         | (20,541  | )        |        |         | 18,532   |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                              |                                                                     |                                                              | Accrued liabilities                                   |        |         | 7,270    |          |        |         | 17,426   |          |        |         | 25,005   |  
|                                                                        |                                                                              |                                                                     |                                                              |                                                       |        |         |          |          |        |         |          |         
|                                                                        |                                                                              |                                                                     |                                                              | Net cash used in operating activities                 |        |         | (57,975  | )        |        |         | (167,402 | )        |        |         | (44,531  | )
|                                                                        |                                                                              |                                                                     |                                                              |                                                       |        |         |          |          |        |         |          |         
|Cash flows from investing activities:                                   |                                                                              |                                                                     |                                                              |                                                       |        |         |          |          |        |         |          |         
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Acquisitions                                                                 |                                                                     |                                                              | (6,734                                                | )      |         |          |         |        |         |          |         |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Restricted cash related to network activities                                |                                                                     |                                                              | (1                                                    | )      |         |          | 2,407    |        |         |          | 1,042    |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Other assets  non operating                                                 |                                                                     |                                                              |                                                      |        |         |          |         |        |         |          | (2,432   | )     
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Network development costs and purchases of
	equipment and furniture          |                                                                     |                                                              | (242,522                                              | )      |         |          | (247,935 | )      |         |          | (142,251 | )     
|                                                                        |                                                                              |                                                                     |                                                              |                                                       |        |         |          |          |        |         |          |         
|                                                                        |                                                                              |                                                                     |                                                              | Net cash used in investing activities                 |        |         | (249,257 | )        |        |         | (245,528 | )        |        |         | (143,641 | )
|                                                                        |                                                                              |                                                                     |                                                              |                                                       |        |         |          |          |        |         |          |         
|Cash flows from financing activities:                                   |                                                                              |                                                                     |                                                              |                                                       |        |         |          |          |        |         |          |         
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Issuance of notes payable                                                    |                                                                     |                                                              | 224,959                                               |        |         |          | 164,000  |        |         |          |         |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Payment of deferred financing fees                                           |                                                                     |                                                              | (21,359                                               | )      |         |          | (7,867   | )      |         |          |         |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Warrant and stock option exercises                                           |                                                                     |                                                              | 16,799                                                |        |         |          | 5,340    |        |         |          | 3,088    |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Payments of notes and other financing                                        |                                                                     |                                                              | (438                                                  | )      |         |          | (34,563  | )      |         |          | (27,260  | )     
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Payment of obligations under capital leases                                  |                                                                     |                                                              | (3,081                                                | )      |         |          | (6,613   | )      |         |          | (9,234   | )     
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Restricted cash related to notes payable                                     |                                                                     |                                                              | 26,007                                                |        |         |          | 24,733   |        |         |          | 15,018   |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Shares issued under the Employee Stock Purchase
	Plan                        |                                                                     |                                                              | 1,149                                                 |        |         |          | 1,762    |        |         |          | 1,481    |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Issuance of preferred stock, net                                             |                                                                     |                                                              |                                                      |        |         |          |         |        |         |          | 148,395  |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Issuance of common stock                                                     |                                                                     |                                                              | 130,311                                               |        |         |          |         |        |         |          |         |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Other financing activities                                                   |                                                                     |                                                              | 806                                                   |        |         |          | (95      | )      |         |          | 1,511    |       
|                                                                        |                                                                              |                                                                     |                                                              |                                                       |        |         |          |          |        |         |          |         
|                                                                        |                                                                              |                                                                     |                                                              | Net cash provided by financing activities             |        |         | 375,153  |          |        |         | 146,697  |          |        |         | 132,999  |  
|                                                                        |                                                                              |                                                                     |                                                              |                                                       |        |         |          |          |        |         |          |         
|                                                                        |                                                                              |                                                                     |                                                              | Net increase (decrease) in cash and cash
	equivalents |        |         | 67,921   |          |        |         | (266,233 | )        |        |         | (55,173  | )
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Cash and cash equivalents, beginning of year                            |                                                                              |                                                                     | 260,837                                                      |                                                       |        |         | 328,758  |          |        |         | 62,525   |         
|                                                                        |                                                                              |                                                                     |                                                              |                                                       |        |         |          |          |        |         |          |         
|Cash and cash equivalents, end of year                                  |                                                                              | $                                                                   | 328,758                                                      |                                                       |        | $       | 62,525   |          |        | $       | 7,352    |         
|                                                                        |                                                                              |                                                                     |                                                              |                                                       |        |         |          |          |        |         |          |         
|Supplemental disclosure of cash flow information:                       |                                                                              |                                                                     |                                                              |                                                       |        |         |          |          |        |         |          |         
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        | Interest paid on all debt obligations                                        |                                                                     |                                                              | 31,087                                                |        |         |          | 39,597   |        |         |          | 52,035   |       
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Supplemental disclosure of noncash investing and
	financing activities: |                                                                              |                                                                     |                                                              |                                                       |        |         |          |          |        |         |          |         
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                              | Dividends declared with preferred stock                             |                                                              |                                                       | 27,730 |         |          |          | 37,106 |         |          |          | 43,163 |        
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                              | Accrual of stock bonuses                                            |                                                              |                                                       | 4,762  |         |          |          | 6,881  |         |          |          | 12,004 |        
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                              | Cancellation of put right obligations                               |                                                              |                                                       | (1,000 | )       |          |          |       |         |          |          |       |        
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                              | Shares issued as consideration for acquisitions                     |                                                              |                                                       | 2,686  |         |          |          |       |         |          |          |       |        
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|                                                                        |                                                                              | Assets acquired under capital leases and
	non-monetary transactions |                                                              |                                                       | 37,231 |         |          |          | 38,784 |         |          |          | 356    |        

See accompanying notes to consolidated financial statements.

79



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##### Table of Contents



e.spire COMMUNICATIONS, INC.

Notes to Consolidated Financial Statements

December 31, 1998, 1999 and 2000


(in thousands, except share and per share data)


(1) Basis of Presentation and Operating Environment

(a) Organization

The consolidated financial statements include the accounts of
e.spire Communications, Inc. and its wholly-owned subsidiaries
(e.spire or the Company). All material
intercompany accounts and transactions have been eliminated in
consolidation.

(b) Business

e.spire is an integrated communications provider. The Company
owns and operates digital fiber optic networks and offers a
variety of telecommunications services to other communications
providers and business, government and consumer end users in
selected target markets, principally in the southern and eastern
United States. The Company provides nonswitched dedicated
services, including special access, switched transport, and
private line services, as well as high speed data services,
Internet services, local switched voice services using its own
facilities and long-distance on a resale basis.

(c) Operating Environment

The Company has never been profitable, has never generated
positive cash flow from consolidated operations and, since its
inception, has incurred significant net operating losses and
negative cash flow. As of December 31, 2000, the Company
had an accumulated deficit of approximately $932 million,
stockholders deficit of approximately $572 million
and negative working capital of approximately $132 million.

The Companys Senior Secured Credit Facilities contain
certain financial covenants with which the Company must comply.
The Company had received an amendment to certain of these
covenants at December 31, 2000, but the Company was
subsequently not in compliance, resulting in a default under
these credit facilities which would allow the lenders to
accelerate the maturity of the borrowings under the credit
facilities. The Companys Senior Notes include cross
covenant provisions, which would result in an acceleration of
the Senior Notes upon the acceleration of any other outstanding
debt obligations.

In February of 2001, the Company did not make a required
interest payment on its Senior Notes due 2007, resulting in a
default under the terms of the notes.

On March 22, 2001, e.spire and its subsidiaries filed
voluntary petitions for protection under Chapter 11 of the
United States Bankruptcy Code (the Bankruptcy Code)
in the Federal District of Delaware in order to preserve cash,
facilitate the restructuring of e.spires long-term debt,
trade liabilities and other obligations. e.spire and its
bankruptcy filing subsidiaries are currently operating as
debtors-in-possession under the supervision of the United States
District Court for the District of Delaware. The Company has
secured a commitment for up to $85 million of
debtor-in-possession financing. The Company believes that these
funds will be sufficient to complete the restructuring process.

The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. The items described above raise substantial doubt about
the Companys ability to continue as a going concern. The
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

(d) Chapter 11 Reorganization

As of March 22, 2001, the Company is operating its business
and managing its properties as a debtor-in-possession subject to
the provisions of the Bankruptcy Code. Pursuant to the
provisions of the Bankruptcy Code, the Company is not permitted
to pay any claims or obligations which arose prior to the Filing
date (prepetition claims) unless specifically authorized by the
Court. Similarly, claimants may not enforce any claims against
the Company that arose prior to the date of the Filing. In
addition, as a debtor-in-possession, the Company has the right,
subject to the Courts approval, to assume or reject any
executory contracts and

80



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##### Table of Contents



e.spire COMMUNICATIONS, INC.


Notes to Consolidated Financial Statements 
(Continued)

unexpired leases in existence at the date of the Filing. Parties
having claims as a result of any such rejection may file claims
with the Court which will be dealt with as part of the
Chapter 11 case.

A creditors committee representing unsecured creditors has been
appointed in the Chapter 11 case. In accordance with the
provisions of the Bankruptcy Code, they have the right to be
heard on matters that come before the Court in the
Chapter 11 case.

It is the Companys intention to address all of its
prepetition claims in a plan of reorganization in its
Chapter 11 case. At this juncture, it is impossible to
predict with any degree of certainty how such a plan will treat
pre-petition claims and the impact the Companys
Chapter 11 case and any reorganization plan will have on
the shares of common stock of the Company. Generally, under the
provisions of the Bankruptcy Code, holders of equity interests
may not participate under a plan of reorganization unless the
claims of creditors are satisfied in full under the plan or
unless creditors accept a reorganization plan which permits
holders of equity interests to participate. The formulation and
implementation of a plan of reorganization in the Chapter 11
case could take a significant period of time. No assurance can
be given that e.spire will be successful in reorganizing its
affairs within the Chapter 11 bankruptcy proceedings.

Further, due to the bankruptcy filing and related events, there
is no assurance that the carrying amounts of assets will be
realized or that liabilities will be liquidated or settled for
the amounts recorded. In addition, a plan of reorganization, or
rejection thereof, could change the amounts reported in the
consolidated financial statements.

As a result of these factors, there is substantial doubt about
e.spires ability to continue as a going concern. The
ability of e.spire to continue as a going concern is dependent
upon, but not limited to, formulation, approval, and
confirmation of a plan of reorganization, adequate sources of
capital and obtaining sufficient financing to allow the Company
to emerge from bankruptcy, customer and employee retention, the
ability to provide high quality services and the ability to
sustain improved results of operations and cash flows sufficient
to continue to operate.

Accounting Impact

Subsequent to its Chapter 11 filing, the Company will apply
the provisions of AICPA Statement of Position 90-7 (SOP
90-7), Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code. SOP 90-7
provides financial reporting guidance for entities that are
reorganizing under the Bankruptcy Code. The Company will
implement this guidance in the accompanying consolidated
financial statements for all post-bankruptcy filings.

Pursuant to SOP 90-7, the Company is required to segregate
prepetition liabilities that are subject to compromise and
report them separately in the consolidated balance sheet.
Liabilities that may be affected by a plan of reorganization are
recorded at the amount of the expected allowed claims, even if
they may be settled for lesser amounts. All of the
Companys prepetition debt, is now in default, and will be
recorded at face value and classified within liabilities subject
to compromise.

Additional prepetition claims (liabilities subject to
compromise) may arise due to the rejection of executory
contracts or unexpired leases, or as a result of the allowance
of contingent or disputed claims.

SOP 90-7 also requires separate reporting of all revenues,
expenses, realized gains and losses, and provision for losses
related to the Filing as Chapter 11 reorganization items.

As a result of the Filing, realization of assets and liquidation
of liabilities are subject to uncertainty. While operating as a
debtor-in-possession, the Company may sell or otherwise dispose
of assets and liquidate or settle liabilities for amounts other
than those reflected in the consolidated financial statements.
Further, a plan of reorganization could materially change the
amounts and classifications reported in the consolidated
financial statements.

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e.spire COMMUNICATIONS, INC.


Notes to Consolidated Financial Statements 
(Continued)

(2) Summary of Significant Accounting Principles

(a) Cash and Cash Equivalents

The Company considers all highly liquid investments, with
original maturities of three months or less, to be cash
equivalents. The Companys investments consist of
commercial paper, US Government Securities and money market
instruments. The cost of these investments approximates fair
value.

(b) Restricted Cash and
Investments

The Company has provided performance bonds and letters of credit
in various cities in connection with its operations, resulting
in a restriction to cash amounting to approximately $3,629 and
$2,694 at December 31, 1999 and 2000, respectively. The
face amount of all bonds and letters of credit is approximately
$16,759 as of December 31, 2000. In addition, the Company
placed approximately $70,677 into an escrow account during 1997
to fund the first five interest payments of its 13  3/4
percent Senior Notes due 2007. At December 31, 1999 and
2000, restricted cash related to this escrow account amounted to
approximately $15,125 and $0 respectively.

(c) Networks, Equipment, Furniture and
Network Inventory

Networks, equipment, and furniture are stated at cost less
accumulated depreciation and amortization. Costs capitalized
during the network development stage include costs associated
with network engineering, design and construction, negotiation
of rights-of-way, obtaining legal and regulatory authorizations
and the amount of interest costs associated with the network
development.

Provisions for depreciation of networks, equipment, and
furniture are computed using the straight-line method over the
estimated useful lives of the assets, beginning in the month a
network is substantially complete and available for use and in
the month equipment and furniture are acquired.

The estimated useful lives of the Companys principle
classes of assets are as follows:

|                                          |  |                                                  
|----------------------------------------- |  | -------------------------------------------------
|Asset Class                               |  | Depreciable Life                                 
|                                          |  |                                                  
|Fiber optic cables and installation costs |  | 20 years                                         
|                                         
|                                         
|                                         
|                                         
|Telecommunications equipment              |  | 3  10 years                                     
|                                         
|                                         
|                                         
|                                         
|Capitalized network development costs     |  | 18 months  10 years                             
|                                         
|                                         
|                                         
|                                         
|Leasehold improvements                    |  | Shorter of term of lease or estimated useful life
|                                         
|                                         
|                                         
|                                         
|Furniture and fixtures                    |  | 5 years                                          
|                                         
|                                         
|                                         
|                                         
|Computer software                         |  | 3 years                                          

The Company classifies as inventory assets constructed for sale
to third parties. Inventory is stated at lower of cost or market
on a specific identification basis.

(d) Intangible Assets

Intangible assets include customer lists and goodwill. Goodwill
was being amortized on a straight-line basis over the period of
expected benefit. Amortization expense related to goodwill for
the years ended December 31, 1998, 1999 and 2000 was
approximately $1,144, $2,333 and $811 respectively.

The costs of purchased customer lists are amortized on a
straight-line basis over their estimated useful lives, generally
eighteen months. The Company determines the useful lives of
customer lists based upon the estimated length of the acquired
customers future service. Amortization expense related to
purchased customer lists was approximately $1,977, $4,973 and
$1,628 for the years ended December 31, 1998, 1999 and
2000, respectively.

As part of the sale of its Internet dial-up customer base during
the fourth quarter of 2000, the Company wrote off approximately
$5,774 of intangible assets.

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e.spire COMMUNICATIONS, INC.


Notes to Consolidated Financial Statements 
(Continued)

(e) Valuation of Long-Lived Assets

The Company assesses the valuation of long-lived assets under
SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of. This
statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the
assets exceeds the estimated fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount
or fair value less costs to sell.

(f) Deferred Financing Fees

Deferred financing fees include commitment fees and other costs
related to certain debt financing transactions and are being
amortized using the effective interest method over the initial
term of the related debt. Deferred financing fees also include
payments to bondholders for debt modifications that do not
result in debt extinguishment.

(g) Revenue Recognition

In December 1999, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin 101 (SAB 101),
Revenue Recognition in Financial Statements, which
provides additional guidance in applying generally accepted
accounting principles for revenue recognition in consolidated
financial statements. SAB 101 was effective beginning in the
fourth quarter of 2000 and its adoption did not have a material
impact on the consolidatedfinancial statements.

Monthly recurring telecommunications services and Internet
services are billed in advance with any portion that is billed
but unearned recorded as deferred revenue on the consolidated
balance sheet as part of accrued expenses, which are then
recognized as revenue over the period that services are
provided. Non-recurring telecommunications and Internet services
are billed in arrears and recognized as revenue in the period
services are provided. Installation fees and their related
direct and incremental costs, if significant, are initially
deferred and recognized as revenue and expense over the expected
life of a customer relationship.

The Company recognizes revenue associated with long-term
engineering and construction contracts using the
percentage-of-completion method, based primarily on contract
costs incurred to date compared with total estimated contract
costs. Revenue for sale of existing networks is recognized when
title is transferred to the customer and the network is
available for the customers use. These revenues are
included as network technologies services in the consolidated
statements of operations. Network construction costs include all
direct material and labor costs and those indirect costs related
to contract performance. General and administrative costs are
charged to expense as incurred. Revenue which has been earned
under the percentage of completion method, but has not been
billed to the customer is included in unbilled revenue in the
consolidated balance sheets. Changes to total estimated contract
costs or losses, if any, are recognized in the period in which
they are determined.

To the extent that the Companys contracts for the
provision of dark fiber entered into subsequent to June 30,
1999 do not transfer title to the customer, the contracts are
accounted for as operating leases under which the Company
recognizes recurring monthly revenues. Effective June 30,
1999, the Financial Accounting Standards Board issued FASB
Interpretation No. 43 Real Estate Sales (FIN
43), an interpretation of Statement of Financial
Accounting Standards (SFAS) No. 66, which
requires that sales or leases of integral equipment be accounted
for in accordance with real estate accounting rules. The Company
believes that FIN 43 requires the classification of dark fiber
and conduit as integral equipment. FIN 43 defines integral
equipment as, any physical structure or equipment attached
to the real estate that cannot be removed and used separately
without incurring significant costs. As a result, this
change in accounting treatment reduces

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e.spire COMMUNICATIONS, INC.


Notes to Consolidated Financial Statements 
(Continued)

the revenue and income that the Company recognizes in the early
years of the contract and recognizes it over the term of the
contract, regardless of when the cash is received or the
delivery of the fiber takes place. The effect of adopting the
provisions of FIN 43 resulted in decreasing revenue on a going
forward basis.

(h) Loss Per Common Share

The computations of basic and diluted loss per common share are
based upon the weighted average number of common shares
outstanding during the year. Dilutive earnings per share give
effect to all potentially dilutive common securities.
Potentially dilutive securities include convertible preferred
stock, stock options and warrants.

(i) Income Taxes

Deferred income taxes are recognized for temporary differences
between financial statement and income tax bases of assets and
liabilities and loss carryforwards and tax credit carryforwards
for which income tax benefits are expected to be realized in
future years. A valuation allowance is established to reduce
deferred tax assets if it is more likely than not that all, or
some portion, of such deferred tax assets will not be realized.
The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment
date.

(j) Stock Options

The Company applies the intrinsic value method of accounting
prescribed by Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations, in accounting for its fixed plan
stock options. As such, compensation expense is recorded on the
date of grant only if the current market price of the underlying
stock exceeds the exercise price. SFAS No. 123, Accounting
for Stock-Based Compensation, established accounting and
disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As
allowed by SFAS No. 123, the Company has elected to continue to
apply the intrinsic value method of accounting described above,
and has adopted the disclosure requirements of SFAS No. 123.

(k) Reclassifications

Certain reclassifications were made in the 1999 and prior
consolidated financial statements to conform to the 2000
presentation. Such reclassifications had no effect on net loss
or total stockholders deficit.

(l) Use of Estimates

The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of
the consolidated financial statements and the reported amounts
of revenue and expenses during the reporting periods. Actual
results may differ from those estimates.

(3) Risks and Uncertainties

(a) Reciprocal Compensation

The Company has recorded net revenue of approximately
$17.7 million, $38.9 million and $58.0 million for the
years ended December 31, 1998, 1999 and 2000, respectively,
for reciprocal compensation relating to the transport and
termination of local traffic, primarily to Internet Service
Providers (ISPs), from customers of Incumbent Local
Exchange Carriers (ILECs) pursuant to various
interconnection agreements. During this period, the ILECs have
not paid a substantial portion of the amounts billed by the
Company and have disputed these charges based on the belief that
such calls are not local traffic as defined by the various
agreements and are not subject to payment of transport and
termination charges under state and

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e.spire COMMUNICATIONS, INC.


Notes to Consolidated Financial Statements 
(Continued)

federal laws and public policies. However, the Company has
resolved certain of these disputes, as discussed in the
following paragraphs. The resolutions of these disputes have
been, and will continue to be, based on rulings by state public
utility commissions and/or by the Federal Communications
Commission (FCC), commercial arbitrators, or through
negotiations between the parties. To date, there have been
favorable final rulings from over 30 state public utility
commissions that ISP traffic is subject to the payment of
reciprocal compensation under current interconnection
agreements. Many of these state commission decisions have been
appealed by the ILECs. To date, five federal court decisions,
including two federal circuit court of appeals decisions have
been issued upholding state commission decisions ordering the
payment of reciprocal compensation for ISP traffic.

On February 25, 1999, the FCC issued a decision that
ISP-bound traffic is jurisdictionally interstate in nature. The
decision relies on the long-standing federal policy that ISP
traffic, although jurisdictionally interstate, is treated as
though it is local traffic for pricing purposes. The decision
also emphasized that, because the FCC concluded that there
currently are no federal rules governing inter-carrier
compensation for ISP traffic, the determination as to whether
such traffic was subject to reciprocal compensation under the
terms of interconnection agreements was properly made by the
state commissions and that carriers were bound by their
interconnection agreements and state commission decisions
regarding the payment of reciprocal compensation for ISP traffic.

Since the issuance of the FCCs decision on
February 25, 1999, 19 state public utility commissions,
have either ruled or reaffirmed that ISP traffic is subject to
reciprocal compensation under current interconnection
agreements, and two state commissions have declined to apply
reciprocal compensation for ISP traffic under current
interconnection agreements. One state has declined to order
reciprocal compensation in an arbitration proceeding, and two
states have declined to decide the issue in the arbitration
until after the FCC and/or the state commission reaches a
decision in pending proceedings on prospective compensation.

On March 24, 2000, the United States Court of Appeals for
the District of Columbia Circuit vacated and remanded the
FCCs February 25, 1999 decision. The court found that
the FCC did not provide an adequate basis for its February 1999
decision that the reciprocal compensation provisions of the
Telecommunications Act and the FCC rules did not apply to ISP
traffic. The Company does not believe that the Circuit
Courts decision will adversely affect the state decisions
noted above with respect to reciprocal compensation. The
decision does, however, create some uncertainty, and there can
be no assurance that future FCC or state rulings will be
favorable to the Company.

In January 2000, a commercial arbitrator awarded the
Company damages in the amount of approximately
$1.9 million, including interest, from an ILEC for the
state of Florida. This award settles reciprocal compensation
from such ILEC for the state of Florida through July 31,
1999. The Company has initiated the process to obtain a further
award through at least December 31, 1999. In
February 2000, a commercial arbitrator granted the Company
the right to recover $14.2 million from BellSouth,
representing reciprocal compensation, including accrued
interest, through December 31, 1999 for the states of
Alabama, Louisiana, and South Carolina. The Company has
collected these amounts. e.spire has also reached a settlement
with Southwestern Bell, settling reciprocal compensation claims
in Missouri, Oklahoma, Kansas, and Arkansas through
December 31, 2000 and also setting new rates going forward.

Certain of the Companys interconnection agreements with
the ILECs have expired or will soon expire.The Company believes
that there is substantial risk that the future rates for
reciprocal compensation under new interconnection agreements,
some of which are currently in negotiation, will be
significantly less than current rates.

The FCC is expected to adopt shortly an order on remand from the
DC Circuit setting forth a new compensation mechanism for
ISP-bound traffic. If adopted by the FCC, reduced rates for this
type of traffic may result in a reduction in the Companys
revenues generated from inter-carrier compensation.

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e.spire COMMUNICATIONS, INC.


Notes to Consolidated Financial Statements 
(Continued)

The FCC is expected to adopt shortly a notice of proposed
rulemaking seeking to unify its rules regarding inter-carrier
compensation. The FCC is expected to address disparities in
rates for access charges and reciprocal compensation 
the rates which carriers pay each other for completing calls
exchanged between them. Future adoption by the FCC of a unified
inter-carrier compensation regime that adopts a bill and keep
regime or otherwise reduces the rates that the Company (and
other carriers) may charge for access charges and/or reciprocal
compensation may significantly reduce the Companys
inter-carrier compensation revenues and may have a materially
adverse impact on the Companys financial position.

The Company has outstanding trade accounts receivable related to
reciprocal compensation of approximately $47.2 million at
December 31, 2000, net of allowances of approximately
$15.0 million. The allowances are determined based on a
state by state analysis of the collectibility of billed amounts.
The Company believes that this receivable, net of allowances, is
collectible, although the timing of receipts cannot be predicted
at this time and will be impacted by future developments.

(b) Concentration of Credit Risk

A significant amount of the Companys revenue is generated
from services provided to other telecommunications service
providers. Some of these companies have historically incurred
significant losses and negative cash flows and have required
substantial capital to operate. The availability of such capital
has been significantly curtailed and many of these companies are
currently experiencing cash flow difficulties. These market
conditions could result in the loss of significant future
revenue for the Company and exposes the Company to additional
risk with regard to collectibility of its current and future
trade accounts receivable.

The Company receives a significant portion of its revenues from
a small number of major customers, particularly the long
distance telecommunications companies that service the
Companys markets. For the years ended December 31,
1998, 1999 and 2000, approximately 12 percent,
34 percent and 9 percent, respectively, of the
Companys revenues were attributable to services provided
to five, six and seven, respectively, of the largest long
distance telecommunications companies. The loss of any one of
these customers could have a material adverse impact on the
Companys financial condition and results of operations.

The Company provides services to certain ISPs. Such companies
operate in a highly competitive and uncertain environment.
Approximately 10 percent, 5 percent and 3 percent,
respectively, of the Companys revenues for the years ended
December 31, 1998, 1999 and 2000 were attributed to these
companies. At December 31, 1999 and 2000, the Company had
trade accounts receivable of $3,900 and $1,700, respectively,
from ISPs.

The Company has one large customer which represents
approximately 13 percent and 4 percent of total revenues
for the years ended December 31, 1999 and 2000,
respectively. Of these revenues, approximately $2,400 and $9,900
was earned by the Network technologies and telecommunications
segments, respectively for 2000; and approximately $15,400 and
$17,500 was earned by the Network technologies and
telecommunications segments, respectively for 1999.

(4) Segment Reporting

The Company has identified three reportable segments:
Telecommunications, Internet and Network Technologies. The
Telecommunications segment provides special access, local
switched voice, and data transmission over the Companys
own facilities and on a resale basis. The Internet segment until
recently offered high-speed data communications and currently
offers web-hosting services. The Network Technologies segment
offers fiber optic network design, project management and
construction services. The Companys reportable segments
are strategic business units that offer different products and
services. They are managed separately because each business unit
requires different technology and marketing strategies.

The accounting policies of the segments are the same as those
described in the summary of significant accounting policies
included in note 2. The Company evaluates performance based on
revenue from third

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e.spire COMMUNICATIONS, INC.


Notes to Consolidated Financial Statements 
(Continued)

parties and gross margin. The Company also evaluates performance
based on adjusted EBITDA for the Internet segment and for all
segments beginning in 2000. Adjusted EBITDA consists of net loss
before net interest, income taxes, depreciation and
amortization, noncash stock compensation, fixed asset impairment
and for 2000 gain on sale of customers included in non-operating
income.

A summary of the information related to the Companys
operations for 1998, 1999 and 2000 is as follows (revenue is
generated solely from external customers):

|                              |                     |                    |                     |          |        |              |        |       |       |   |        |        |        |        |         |        |        |        | 
|----------------------------- | ------------------- | ------------------ | ------------------- | -------- | ------ | ------------ | ------ | ----- | ----- | - | ------ | ------ | ------ | ------ | ------- | ------ | ------ | ------ | 
|                              |                     |                   
|                              |                     | 1998              
|                              |                     |                   
|                              |                     |                    |                     | Network  |        |             
|                              |                     | Telecommunications |                     | Internet |        | Technologies |        | Total
|                              |                     |                    |                     |          |        |              |        |      
|Revenue                       |                     | $                  | 111,086             |          |        |              | 16,257 |       |       |   | 29,416 |        |        |        | 156,759 |       
|                             
|                             
|                             
|                             
|Cost of revenue               |                     |                    | 90,503              |          |        |              | 7,571  |       |       |   | 8,739  |        |        |        | 106,813 |       
|                              |                     |                    |                     |          |        |              |        |       |       |   |        |        |        |        |         |       
|                              |                     | Gross margin       |                     | $        | 20,583 |              |        |       | 8,686 |   |        |        | 20,677 |        |         |        | 49,946 |       
|                              |                     |                    |                     |          |        |              |        |       |       |   |        |        |        |        |         |       
|Adjusted EBITDA               |                     |                    |                     |          |        |              | 736    |       |       |   |        |        |        |        |         |       
|                              |                     |                    |                     |          |        |              |        |       |       |   |        |        |        |        |         |       
|Total assets                  |                     | $                  | 948,588             |          |        |              | 20,730 |       |       |   | 13,639 |        |        |        | 982,957 |       
|                              |                     |                    |                     |          |        |              |        |       |       |   |        |        |        |        |         |       
|Increase in long-lived assets |                     | $                  | 275,257             |          |        |              | 4,096  |       |       |   | 448    |        |        |        | 279,801 |       
|                              |                     |                    |                     |          |        |              |        |       |       |   |        |        |        |        |         |       
|Significant noncash items:    |                     |                    |                     |          |        |              |        |       |       |   |        |        |        |        |         |       
|                             
|                             
|                             
|                             
|                              | Noncash revenue     |                    | $                   |         |        |              |        |      |       |   |        | 13,950 |        |        |         | 13,950 |       
|                             
|                             
|                             
|                             
|                              | MCI warrant expense |                    |                     | (805     | )      |              |        |      |       |   |        |       |        |        |         | (805   | )     
|                              |                     |                    |                     |          |        |              |        |       |       |   |        |        |        |        |         |       
|                              |                     |                    | Total noncash items |          | $      | (805         | )      |       |       |  |        |        |        | 13,950 |         |        |        | 13,145 | 
|                              |                     |                    |                     |          |        |              |        |       |       |   |        |        |        |        |         |       

|                              |                     |                    |                     |          |        |              |        |       |        |   |        |        |        |        |         |        |        |        | 
|----------------------------- | ------------------- | ------------------ | ------------------- | -------- | ------ | ------------ | ------ | ----- | ------ | - | ------ | ------ | ------ | ------ | ------- | ------ | ------ | ------ | 
|                              |                     |                   
|                              |                     | 1999              
|                              |                     |                   
|                              |                     |                    |                     | Network  |        |             
|                              |                     | Telecommunications |                     | Internet |        | Technologies |        | Total
|                              |                     |                    |                     |          |        |              |        |      
|Revenue                       |                     | $                  | 150,632             |          |        |              | 25,072 |       |        |   | 68,305 |        |        |        | 244,009 |       
|                             
|                             
|                             
|                             
|Cost of revenue               |                     |                    | 110,037             |          |        |              | 11,133 |       |        |   | 38,198 |        |        |        | 159,368 |       
|                              |                     |                    |                     |          |        |              |        |       |        |   |        |        |        |        |         |       
|                              |                     | Gross margin       |                     | $        | 40,595 |              |        |       | 13,939 |   |        |        | 30,107 |        |         |        | 84,641 |       
|                              |                     |                    |                     |          |        |              |        |       |        |   |        |        |        |        |         |       
|Adjusted EBITDA               |                     |                    | (107,143            | )        |        |              | 766    |       |        |   | 22,218 |        |        |        | (84,159 | )     
|                              |                     |                    |                     |          |        |              |        |       |        |   |        |        |        |        |         |       
|Total assets                  |                     | $                  | 858,014             |          |        |              | 16,332 |       |        |   | 66,896 |        |        |        | 941,242 |       
|                              |                     |                    |                     |          |        |              |        |       |        |   |        |        |        |        |         |       
|Increase in long-lived assets |                     | $                  | 260,287             |          |        |              | 3,973  |       |        |   | 22,484 |        |        |        | 286,744 |       
|                              |                     |                    |                     |          |        |              |        |       |        |   |        |        |        |        |         |       
|Significant noncash items:    |                     |                    |                     |          |        |              |        |       |        |   |        |        |        |        |         |       
|                             
|                             
|                             
|                             
|                              | Noncash revenue     |                    | $                   |         |        |              |        |      |        |   |        | 14,057 |        |        |         | 14,057 |       
|                             
|                             
|                             
|                             
|                              | MCI warrant expense |                    |                     | (358     | )      |              |        |      |        |   |        |       |        |        |         | (358   | )     
|                              |                     |                    |                     |          |        |              |        |       |        |   |        |        |        |        |         |       
|                              |                     |                    | Total noncash items |          | $      | (358         | )      |       |        |  |        |        |        | 14,057 |         |        |        | 13,699 | 
|                              |                     |                    |                     |          |        |              |        |       |        |   |        |        |        |        |         |       

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e.spire COMMUNICATIONS, INC.


Notes to Consolidated Financial Statements 
(Continued)

|                              |                     |                    |                     |          |        |              |        |       |        |        |        |     |        |         |         |      |         |         | 
|----------------------------- | ------------------- | ------------------ | ------------------- | -------- | ------ | ------------ | ------ | ----- | ------ | ------ | ------ | --- | ------ | ------- | ------- | ---- | ------- | ------- | 
|                              |                     |                   
|                              |                     | 2000              
|                              |                     |                   
|                              |                     |                    |                     | Network  |        |             
|                              |                     | Telecommunications |                     | Internet |        | Technologies |        | Total
|                              |                     |                    |                     |          |        |              |        |      
|Revenue                       |                     | $                  | 232,696             |          |        |              | 28,700 |       |        |        | 82,794 |     |        |         | 344,190 |     
|                             
|                             
|                             
|                             
|Cost of revenue               |                     |                    | 133,500             |          |        |              | 13,844 |       |        |        | 46,236 |     |        |         | 193,580 |     
|                              |                     |                    |                     |          |        |              |        |       |        |        |        |     |        |         |         |     
|                              |                     | Gross margin       |                     | $        | 99,196 |              |        |       | 14,856 |        |        |     | 36,558 |         |         |      | 150,610 |        
|                              |                     |                    |                     |          |        |              |        |       |        |        |        |     |        |         |         |     
|Adjusted EBITDA               |                     |                    | (6,169              | )        |        |              | 116    |       |        |        | 6,569  |     |        |         | 516     |     
|                              |                     |                    |                     |          |        |              |        |       |        |        |        |     |        |         |         |     
|                              |                     |                    | Total assets        |          |        | 732,293      |        |       |        | 15,674 |        |     |        | 137,673 |         |      |         | 885,640 | 
|                              |                     |                    |                     |          |        |              |        |       |        |        |        |     |        |         |         |     
|Increase in long-lived assets |                     | $                  | 39,626              |          |        |              | 1,394  |       |        |        | 79,131 |     |        |         | 120,151 |     
|                              |                     |                    |                     |          |        |              |        |       |        |        |        |     |        |         |         |     
|Significant noncash items:    |                     |                    |                     |          |        |              |        |       |        |        |        |     |        |         |         |     
|                             
|                             
|                             
|                             
|                              | Noncash revenue     |                    | $                   |         |        |              |        |      |        |        |        | 500 |        |         |         | 500  |        
|                             
|                             
|                             
|                             
|                              | MCI warrant expense |                    | $                   | (260     | )      |              |        |      |        |        |        |    |        |         |         | (260 | )      
|                              |                     |                    |                     |          |        |              |        |       |        |        |        |     |        |         |         |     
|                              |                     |                    | Total noncash items |          | $      | (260         | )      |       |        |       |        |     |        | 500     |         |      |         | 240     | 
|                              |                     |                    |                     |          |        |              |        |       |        |        |        |     |        |         |         |     

The Company reports separately, in its consolidated statement of
operations, revenue and the associated cost of sales of each
reportable segment. Selling, general, and administrative
expenses, noncash stock compensation, depreciation and
amortization, nonoperating income and expense are not allocated
to the three segments. Also, expenses related to corporate
overhead are included in Telecommunications.

(5) Networks, Equipment, and Furniture and Assets Held
for Sale

Networks, equipment, and furniture consists of the following:

|                                                |                                                          |              |         |         |  |   |         |         | 
|----------------------------------------------- | -------------------------------------------------------- | ------------ | ------- | ------- |  | - | ------- | ------- | 
|                                                |                                                          |             
|                                                |                                                          | December 31,
|                                                |                                                          |             
|                                                |                                                          | 1999         |         | 2000   
|                                                |                                                          |              |         |        
|Networks and telecommunications equipment       |                                                          | $            | 636,329 |         |  | $ | 687,138 |        
|                                               
|                                               
|                                               
|                                               
|Furniture and fixtures                          |                                                          |              | 19,051  |         |  |   | 26,316  |        
|                                               
|                                               
|                                               
|                                               
|Operating support systems                       |                                                          |              | 109,107 |         |  |   | 118,981 |        
|                                               
|                                               
|                                               
|                                               
|Leasehold improvements                          |                                                          |              | 27,861  |         |  |   | 36,761  |        
|                                               
|                                               
|                                               
|                                               
|Vehicles                                        |                                                          |              | 891     |         |  |   | 1,206   |        
|                                                |                                                          |              |         |         |  |   |         |        
|                                                |                                                          |              | 793,239 |         |  |   | 870,402 |        
|                                               
|                                               
|                                               
|                                               
|Less: accumulated depreciation and amortization |                                                          |              | 166,224 |         |  |   | 264,405 |        
|                                                |                                                          |              |         |         |  |   |         |        
|                                                | Total, net of accumulated depreciation and
	amortization |              | $       | 627,015 |  |   | $       | 605,997 | 
|                                                |                                                          |              |         |         |  |   |         |        

For the years ended December 31, 1998, 1999 and 2000, the
Company capitalized interest of approximately $3,246, $7,873 and
$1,855, respectively.

During the fourth quarter of 2000, the Company determined, based
on changes to its operating plans, that certain network assets
would not be placed in service. Accordingly, the Company
recorded an impairment charge of approximately
$16.9 million to reduce these assets, which are held for
sale, to their estimated realizable value at December 31,
2000.

(6) Preferred Stock

On March 3, 2000, e.spire completed a private offering of
81,777 shares of Series A Convertible Preferred Stock and
175,000 warrants with Greenwich Street Capital Partners II,
L.P., The Huff Alternative Income Fund, L.P. and Honeywell
International Inc. Master Retirement Trust, and received
$100.7 million in net proceeds therefrom. Each share of
Series A Convertible Preferred Stock is initially
convertible into 126.4 shares of Common Stock (an effective
conversion price of $7.91 per share), and each warrant is
initially

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e.spire COMMUNICATIONS, INC.


Notes to Consolidated Financial Statements 
(Continued)

exercisable for 44.1 shares of Common Stock (at an initial
exercise price of $9.89 per share). The warrants will
automatically expire on the tenth anniversary after the date
that they are issued. Dividends on the Series A Preferred
Stock accrue from the date of issuance, are cumulative and are
payable quarterly in arrears, at a per annum rate of 7% of
$1,000 (the stated value), plus the accrued but
unpaid dividends thereon, subject to an adjustment in the
dividend rate to 15% upon the occurrence of certain events and
to 20% upon a change of control. Dividends on the convertible
preferred stock are cumulative and shall accrue whether or not
e.spire has earnings or profits, whether or not there are funds
legally available for the payment of such dividends and whether
or not dividends are declared by e.spire. Dividends on the
convertible preferred stock are payable only when and if
declared by e.spire; provided that all accrued but unpaid
dividends on any share of convertible preferred stock must be
paid by e.spire upon the conversion of such share of convertible
preferred stock. The Series A Convertible Preferred Stock
is junior to the 14.75% Redeemable Preferred Stock and ranks
pari passu to the 12.75% Redeemable Preferred Stock. All
dividends will be paid by e.spire in shares of its Common Stock
equal to accrued dividends divided by a rate equal to the
effective conversion price described above or, if no shareholder
approval has been obtained, the closing price of the common
stock on March 6, 2000 ($13.44). In connection with the
issuance of the Series A Convertible Preferred Stock,
e.spire has agreed to certain restrictive covenants, which are
substantially similar to the covenants that were entered into in
connection with the issuance of e.spires 12.75% Redeemable
Preferred Stock. The Certificate of Designation provides that
these covenants shall be deemed waived automatically if waived
or amended by the holders of the 12.75% Preferred Stock.

On September 19, 2000, the Company entered into agreements
with the Huff Alternative Income Fund, L.P. (Huff),
Greenwich Street Capital Partners II, L.P., and Honeywell
International Inc. Master Retirement Fund to sell up to
$124.3 million of convertible preferred stock, common stock
or warrants which were convertible or exercisable into common
stock once the Company obtained shareholder approval authorizing
such issuance. Of this amount, the Company issued
$50 million of securities in the form of exchangeable
preferred stock on September 19, 2000 and received net
proceeds of $50 million. In connection with such issuance,
the Company was to issue an aggregate of 893,523 transaction fee
warrants to the purchasers of the exchangeable preferred stock.
These warrants were not issued as of December 31, 2000. The
exchangeable preferred stock is exchangeable at the
Companys option into convertible preferred stock, common
stock or warrants, the exchange of which may be subject to
shareholder approval. At the time of exchange, Huff may
designate which type of security will be issued. Each warrant
will be initially exercisable for one share of Common Stock (at
an initial exercise price of $.01). The warrants will
automatically expire on the tenth anniversary after the date
they are issued. The Company is obligated to issue an additional
1,327,775 transaction fee warrants that are exercisable into
common stock to the purchasers simultaneously with the closing
of each future sale of the securities under those purchase
agreements. The stockholders obligation to provide such
financing was subject to certain conditions, which included, but
were not limited to, receiving shareholder approval, the absence
of any material adverse change or certain debt covenant
violations under the Senior Secured Credit Facilities
(Credit Facilities).

Prior to filing for bankruptcy on March 22, 2001, e.spire
sent purchase notices to each of Huff, Greenwich and Honeywell
requesting payment of the remaining committed $49.3 million
for junior purchaser securities. e.spire received from the three
investors notice of rejection of e.spires purchase notice
as well as notice of termination of the purchase agreements.

The Series A Convertible Preferred Stock and the
Exchangeable Preferred Stock were issued at conversion prices
that were less than market price of the Companys Common
Stock at the time of the funding commitment. Thus the Company
recognized a beneficial conversion charge of approximately
$24.6 million related to the Series A Convertible
Preferred Stock issued on March 3, 2000. Also, the Company
incurred a beneficial conversion charge of approximately
$9.4 million in 2000 related to the exchangeable preferred
stock issued on September 19, 2000, after final shareholder
approval was received in the fourth quarter.

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e.spire COMMUNICATIONS, INC.


Notes to Consolidated Financial Statements 
(Continued)

(7) Common Stock Offerings

On April 3, 1998, the Company completed a public offering
of 8,100,000 shares of Common Stock at a price of $18.50 per
share, of which 7,502,418 shares were issued and sold by the
Company and 597,582 shares were sold by certain shareholders of
the Company. The total net proceeds to the Company from this
offering were approximately $130,311, net of underwriters
discounts and other expenses of the offering.

(8) Redeemable Preferred Stock

On July 10, 1997, the Company consummated the sale of
75,000 units consisting of its 14  3/4 percent Redeemable
Preferred Stock due 2008 (the Redeemable Preferred Stock
due 2008) and warrants to purchase approximately 6,023,800
shares of its Common Stock, yielding net proceeds to the Company
of approximately $70,200, net of underwriters fees and other
related expenses. The value attributed to the warrants was
approximately $21,600. The Company will be required to redeem
all outstanding shares of Redeemable Preferred Stock due 2008 at
a price equal to $1,000 per share plus any accrued and unpaid
dividends.

The Redeemable Preferred Stock due 2008 may be redeemed, in
whole or in part, at the option of the Company, at any time
after January 1, 2003, at the redemption prices set forth
below, plus any accrued and unpaid dividends as of that date.
The redemption prices, expressed in percentages, are as follows:

|                    |  |            |         |  
|------------------- |  | ---------- | ------- | -
|Year                |  | Percentage
|                    |  |           
|2003                |  |            | 107.375 | %
|                   
|                   
|                   
|                   
|2004                |  |            | 104.917 | %
|                   
|                   
|                   
|                   
|2005                |  |            | 102.458 | %
|                   
|                   
|                   
|                   
|2006 and thereafter |  |            | 100.000 | %

On October 6, 1997, the Company consummated the sale of
150,000 shares of its 12  3/4 percent Junior Redeemable
Preferred Stock due 2009 (the Junior Redeemable Preferred
Stock due 2009) for proceeds of approximately $146,000,
net of underwriters fees and other related expenses. The Company
will be required to redeem all outstanding shares of the Junior
Redeemable Preferred Stock due 2009 on October 15, 2009 at
$1,000 per share plus any accrued and unpaid dividends.

The Junior Redeemable Preferred Stock due 2009 may be redeemed,
in whole or in part, at the option of the Company, at any time
after October 15, 2003, at the redemption prices set forth
below, plus any accrued and unpaid dividends as of that date.
The redemption prices, expressed in percentages, are as follows:

|                    |  |            |         |  
|------------------- |  | ---------- | ------- | -
|Year                |  | Percentage
|                    |  |           
|2003                |  |            | 106.375 | %
|                   
|                   
|                   
|                   
|2004                |  |            | 104.781 | %
|                   
|                   
|                   
|                   
|2005                |  |            | 103.188 | %
|                   
|                   
|                   
|                   
|2006                |  |            | 101.594 | %
|                   
|                   
|                   
|                   
|2007 and thereafter |  |            | 100.000 | %

Dividends on the Redeemable Preferred Stock due 2008 and Junior
Redeemable Preferred Stock due 2009 (collectively the
Redeemable Preferred Stock) may be paid, at the
Companys option, either in cash or by the issuance of
additional shares of the Redeemable Preferred Stock; provided,
however, that after June 30, 2002, to the extent and so long as
the Company is not precluded from paying cash dividends on the
Redeemable Preferred Stock by the terms of any then outstanding
indebtedness, the Company is required to pay dividends on the
Redeemable Preferred Stock in cash.

The holders of the Redeemable Preferred Stock are not entitled
to vote on any matter required or permitted to be voted upon by
the stockholders of the Company. If, however, after
June 30, 2002, the Company violates certain covenants,
including the payment of dividends, the Redeemable Preferred
Stockholders are permitted to vote as a single class to elect
not less than 25 percent of the members of the Board of
Directors.

90



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e.spire COMMUNICATIONS, INC.


Notes to Consolidated Financial Statements 
(Continued)

A summary of the changes in the Redeemable Preferred Stock is as
follows:

|                                                                                                |  |            |         |            |  |  |         | 
|----------------------------------------------------------------------------------------------- |  | ---------- | ------- | ---------- |  |  | ------- | 
|                                                                                                |  |            |         | Junior    
|                                                                                                |  | Redeemable |         | Redeemable
|                                                                                                |  | Preferred  |         | Preferred 
|                                                                                                |  | Stock      |         | Stock     
|                                                                                                |  | Due 2008   |         | Due 2009  
|                                                                                                |  |            |         |           
|Balance at December 31, 1998                                                                    |  |            | 70,136  |            |  |  | 170,908 | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Accrued dividends                                                                               |  |            |        |            |  |  | 5,120   | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Payment of dividends in shares of Redeemable
	Preferred Stock and accretion to redemption value |  |            | 16,915  |            |  |  | 18,517  | 
|                                                                                                |  |            |         |            |  |  |         | 
|Balance at December 31, 1999                                                                    |  |            | 87,051  |            |  |  | 194,545 | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Accrued dividends                                                                               |  |            |        |            |  |  | 5,803   | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Payment of dividends in shares of Redeemable
	Preferred Stock and accretion to redemption value |  |            | 19,128  |            |  |  | 20,945  | 
|                                                                                                |  |            |         |            |  |  |         | 
|Balance at December 31, 2000                                                                    |  |            | 106,179 |            |  |  | 221,293 | 
|                                                                                                |  |            |         |            |  |  |         | 

(9) Debt

Long-term debt consists of the following:

|                                                                         |                      |              |         |         |  |  |         |         | 
|------------------------------------------------------------------------ | -------------------- | ------------ | ------- | ------- |  |  | ------- | ------- | 
|                                                                         |                      |             
|                                                                         |                      | December 31,
|                                                                         |                      |             
|                                                                         |                      | 1999         |         | 2000   
|                                                                         |                      |              |         |        
|2005 Senior Discount notes, interest at 13%,
	maturing November 1, 2005  |                      |              | 165,632 |         |  |  | 185,367 |        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|2006 Senior Discount notes, interest at 12 3/4%,
	maturing April 1, 2006 |                      |              | 102,791 |         |  |  | 116,337 |        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|2007 Senior Notes, interest at 13 3/4%, maturing
	July 15, 2007          |                      |              | 220,000 |         |  |  | 220,000 |        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|2008 Senior Notes, interest at 10.625%, maturing
	July 1, 2008           |                      |              | 260,983 |         |  |  | 289,449 |        
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Senior secured credit facility                                           |                      |              | 164,000 |         |  |  | 136,740 |        
|                                                                         |                      |              |         |         |  |  |         |        
|                                                                         | Total long-term debt |              |         | 913,406 |  |  |         | 947,893 | 
|                                                                        
|                                                                        
|                                                                        
|                                                                        
|Less current portion                                                     |                      |              | 164,000 |         |  |  | 136,740 |        
|                                                                         |                      |              |         |         |  |  |         |        
|                                                                         |                      | $            | 749,406 |         |  |  | 811,153 |        
|                                                                         |                      |              |         |         |  |  |         |        

Principal payments for each of the years from 2001 to 2005 and
thereafter, are due as follows:

|                         |  |         
|------------------------ |  | --------
|Year Ending December 31, |  |         
|                         |  |         
|2001                     |  | $136,740
|                        
|                        
|                        
|                        
|2002                     |  |        
|                        
|                        
|                        
|                        
|2003                     |  |        
|                        
|                        
|                        
|                        
|2004                     |  |        
|                        
|                        
|                        
|                        
|2005                     |  | 185,367 
|                        
|                        
|                        
|                        
|Thereafter               |  | 625,786 
|                         |  |         
|                         |  | $947,893
|                         |  |         

(a) Senior Notes

On November 14, 1995, the Company completed an offering of
190,000 Units (the Units) consisting of $190,000
principal amount of 13 percent Senior Discount Notes due
2005 (the 2005 Notes) and warrants to purchase
2,432,000 shares of the Companys common stock at a price
of $7.15 per share (the Warrants). The 2005 Notes
accreted at a rate of 13 percent compounded semi-annually
to an aggregate principal amount of $190,000 by November 1,
2000. Interest on the 2005 Notes began accruing at the annual
rate of 13 percent and are payable in cash semi-annually.
The 2005 Notes will mature November 1, 2005. The Company
received net proceeds of approximately $96,100 from the sale of
the Units. The value ascribed to the Warrants was $8,684.

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e.spire COMMUNICATIONS, INC.


Notes to Consolidated Financial Statements 
(Continued)

On March 21, 1996, the Company completed an offering of
$120,000 of 12  3/4 percent Senior Discount Notes due 2006
(the 2006 Notes) resulting in net proceeds of
approximately $61,800. The 2006 Notes will accrete at a rate of
12 3/4 percent compounded semi-annually to an aggregate
principal amount of $120,000 by April 1, 2001. Thereafter,
interest on the 2006 Notes will accrue at the annual rate of 12
 3/4 percent and will be payable in cash semi-annually. The
2006 Notes will mature on April 1, 2006.

On July 23, 1997, the Company completed the sale of
$220,000 aggregate principal amount of 13 3/4 percent
Senior Notes due 2007 (the 2007 Notes). Of the total
net proceeds of approximately $204,300, the Company placed
approximately $70,000, representing funds, together with
interest thereon, sufficient to pay the first five semi-annual
interest payments on the 2007 Notes, into an escrow account for
the benefit of the holders. The 2007 Notes accrue interest at a
rate of 13 3/4 percent, payable in cash semi-annually, on
January 15 and July 15, commencing January 15,
1998. The 2007 Notes will mature on July 15, 2007.

On February 26, 1998, the Company paid approximately
$10.3 million to effect amendments (the
Amendments) to the indentures under which the three
classes of its outstanding debt securities were issued. The
Amendments revised certain covenants in the indentures which
significantly limited the ability of the Company and its
subsidiaries to incur additional indebtedness or make certain
investments or acquisitions. The limitations on indebtedness
contained in the indentures were amended to provide an
alternative test permitting the incurrence of additional
indebtedness based on a debt to capital ratio test, and
increased the amount of unrestricted indebtedness that the
Company can incur. The Amendments also permit the incurrence of
indebtedness solely for the construction, acquisition, and
improvement of telecommunications assets, subject to certain
limitations.

On July 24, 1998, the Company completed the sale of
$375,000 aggregate principal amount of 10.625 percent
Senior Discount Notes due 2008 (the 2008 Notes)
resulting in net proceeds of approximately $225,000. The 2008
Notes will accrete at a rate of 10.625 percent compounded
semi-annually to an aggregate principal amount of $375,000 by
July 1, 2003. No cash interest will be paid on the 2008
Notes prior to July 1, 2003. Thereafter, the 2008 Notes
will accrue cash interest at the annual rate of
10.625 percent payable semi-annually. The 2008 Notes will
mature on July 1, 2008.

The 2005 Notes, 2006 Notes, 2007 Notes and 2008 Notes
(collectively the Notes) are general, unsubordinated
and unsecured senior obligations of the Company. The
Companys subsidiaries have no obligation to pay amounts
due on the Notes and do not guarantee the notes. Therefore, the
Notes are effectively subordinated to all liabilities of the
Companys subsidiaries, including trade payables. Any
rights of the Company and its creditors, including the holders
of the Notes, to participate in the assets of any of the
Companys subsidiaries upon any liquidation or
reorganization of any such subsidiaries will be subject to the
prior claims of that subsidiarys creditors. In
February 2001, the Company did not make a required interest
payment on its Senior Notes due 2007, resulting in a default
under the terms of the notes.

The Notes are subject to certain covenants which, among other
things restrict the ability of the Company and certain of its
subsidiaries to incur additional indebtedness, pay dividends, or
make distributions.

(b) Senior Secured Credit
Facilities

On August 12, 1999, the Company entered into the Senior
Secured Credit Facilities (the Credit Facilities),
consisting of a $35 million revolver and a $55 million
multiple draw term loan, each with a 6.5 year maturity, as
well as a $110 million term loan with a 7 year
maturity. As of December 31, 1999 and 2000, the Company had
outstanding $164.0 million and $136.7 million,
respectively under the Credit Facilities. Of the Credit
Facilities, a total of $164 million was immediately
available to the Company, of which the Company drew
$110 million. On December 15, 1999, the Company drew
an additional $54 million under the Credit Facilities. The
Credit Facilities bear interest at the Eurodollar rate plus
4 percent for the revolver and multiple draw term loan and
4.5 percent for the $110 million term loan. At
December 31, 2000, the interest rate on the revolver and
multiple draw term loan was 10.1875 percent and the rate on
the $110 million term loan was 11 percent. On
September 20, 2000, the Credit Facility was amended as
discussed below.

92



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e.spire COMMUNICATIONS, INC.


Notes to Consolidated Financial Statements 
(Continued)

In addition, the Credit Facilities contain financial covenants
with which the Company must comply, including Adjusted EBITDA
(Earnings before interest, taxes, depreciation, amortization,
and noncash compensation), debt to capital ratio, and capital
expenditures. The Company was not in compliance with certain of
the financial covenants as of December 31, 1999, that
resulted in a default under the Credit Facilities which would
allow the lenders to accelerate the maturity of the borrowings
under the Credit Facilities. Any such acceleration would also
result in the acceleration of other obligations of the Company,
including the 2005 Notes, 2006 Notes, 2007 Notes and 2008 Notes.
In the event of an acceleration of its outstanding debt
obligations, the Company would not have sufficient liquidity to
meet its obligations. On April 13, 2000, the Company
obtained a waiver of the event of non-compliance as of
December 31, 1999. The Company has classified its
obligation under the Credit Facilities as a current liability as
of December 31, 1999, as a result of the debt covenant
violation.

On September 19, 2000, the Company finalized the First
Amended and Restated Senior Secured Credit Facilities with its
syndicated bank group. The Company and the lenders amended and
restated its Credit Facilities to, among other things, replace
certain financial covenants and to amend those in place in a
manner that management believed at the time would have allowed
for future compliance by the Company. As part of the agreement
with the lenders, the Company paid $15 million of the
facilitys principal on July 14, 2000 and paid an
additional $10 million of the facilitys principal on
September 19, 2000, at the final closing of the amendment.
Additionally, all commitments to make loans under the facility
were canceled. As of December 31, 2000, the Company was in
compliance with the amended covenants to the First Amended and
Restated Senior Secured Credit Facility. The Company has
classified its obligation under the Credit Facilities as a
current liability as of December 31, 2000 due to lack of
compliance subsequent to December 31, 2000. The Senior
Notes cannot be accelerated unless payment of amounts due under
the Credit Facilities is accelerated and therefore, remain
classified as long-term obligations at December 31, 2000.

(10) Stock Compensation and Stock Purchase Warrants

(a) Stock Compensation

The Company has a stock option plan which provides for the
granting of options to officers, employees, directors, and
consultants of the Company to purchase shares of its common
stock within prescribed periods.

In 1997, the Companys Board of Directors adopted an Annual
Performance Plan, through which it awarded its 1999 and planned
to award its 2000 performance bonuses to management and
employees through the issuance of shares of the Companys
common stock. The Company has recorded approximately $6,400 and
$12,003, in noncash compensation cost at December 31, 1999
and 2000, respectively, for this purpose. Included in the
Companys 2000 results are accruals related to employee
performance bonuses of approximately $12.0 million that
were to be paid in 2001. Due to the bankruptcy filing, the
Company believes that he performance bonus will not be paid as
anticipated.

The Company applies APB Opinion 25 and related Interpretations
in accounting for its plans. Accordingly, compensation cost has
been recognized for its stock option plans based on the
intrinsic value of the option at the date of grant. The
compensation cost that has been charged against income for stock
option plans was approximately $2,200, $1,900 and $202 for the
years ended December 31, 1998, 1999 and 2000, respectively.
Had compensation cost for the Companys plan and the
employee stock purchase plan (described below) been determined
based on the fair value at the grant dates, consistent with FASB
Statement No. 123,

93



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e.spire COMMUNICATIONS, INC.


Notes to Consolidated Financial Statements 
(Continued)

for all options granted after June 30, 1995, and the
intrinsic value for all options granted prior to July 1,
1995, the Companys net loss and net loss per share would
have been increased to the pro forma amounts indicated below:

|                           |             |                          |  |          |   |      |  |          |   |  |  |          |  
|-------------------------- | ----------- | ------------------------ |  | -------- | - | ---- |  | -------- | - |  |  | -------- | -
|                           |             |                         
|                           |             | Years Ended December 31,
|                           |             |                         
|                           |             | 1998                     |  | 1999     |   | 2000
|                           |             |                          |  |          |   |     
|Net loss:                  |             |                          |  |          |   |      |  |          |   |  |  |         
|                          
|                          
|                          
|                          
|                           | As reported |                          |  | (163,079 | ) |      |  | (277,748 | ) |  |  | (293,586 | )
|                          
|                          
|                          
|                          
|                           | Pro forma   |                          |  | (175,657 | ) |      |  | (288,040 | ) |  |  | (299,851 | )
|                          
|                          
|                          
|                          
|Net loss per common share: |             |                          |  |          |   |      |  |          |   |  |  |         
|                          
|                          
|                          
|                          
|                           | As reported |                          |  | (4.45    | ) |      |  | (6.38    | ) |  |  | (7.05    | )
|                          
|                          
|                          
|                          
|                           | Pro forma   |                          |  | (4.73    | ) |      |  | (6.59    | ) |  |  | (7.16    | )

Pro forma net loss reflects compensation cost under SFAS
No. 123 only for options granted for the year ended
June 30, 1996, the six months ended December 31, 1996, and
subsequent fiscal years. Therefore, the full impact of
calculating compensation cost for stock options under SFAS
No. 123 is not reflected in the pro forma net loss amounts
presented above because compensation cost is reflected over the
vesting period and compensation cost under SFAS No. 123 for
options granted prior to July 1, 1995 is not considered.

The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in the
years ended December 31, 1998, 1999 and 2000, respectively:
dividend yield of 0 percent for all periods, expected
volatility of 75 percent, 85 percent and
102 percent, risk-free interest rates of 5.14 percent,
6.36 percent and 5.06 percent and expected lives of
3.18, 3.46 and 3.11 years.

A summary of the status of the Companys stock options as
of December 31, 1998, 1999 and 2000 and changes during the
periods ending on those dates is presented below:

|                                                                |  |                   |        |                   |  |                   |       |           |  |         |        |           |  |   |      |  |  |   |        |   |  |   |      | 
|--------------------------------------------------------------- |  | ----------------- | ------ | ----------------- |  | ----------------- | ----- | --------- |  | ------- | ------ | --------- |  | - | ---- |  |  | - | ------ | - |  | - | ---- | 
|                                                                |  |                   |        |                   |  |                  
|                                                                |  | December 31, 1998 |        | December 31, 1999 |  | December 31, 2000
|                                                                |  |                   |        |                   |  |                  
|                                                                |  |                   |        | Weighted-         |  |                   |       | Weighted- |  |         |        | Weighted-
|                                                                |  |                   |        | Average           |  |                   |       | Average   |  |         |        | Average  
|                                                                |  | Shares            |        | Exercise          |  | Shares            |       | Exercise  |  | Shares  |        | Exercise 
|                                                                |  | (000s)           |        | Price             |  | (000s)           |       | Price     |  | (000s) |        | Price    
|                                                                |  |                   |        |                   |  |                   |       |           |  |         |        |          
|Outstanding at beginning of year                                |  |                   | 7,827  |                   |  | $                 | 4.69  |           |  |         | 8,644  |           |  | $ | 6.60 |  |  |   | 9,699  |   |  | $ | 7.37 | 
|                                                               
|                                                               
|                                                               
|                                                               
|Granted                                                         |  |                   | 2,873  |                   |  | $                 | 10.46 |           |  |         | 3,876  |           |  | $ | 8.97 |  |  |   | 8,933  |   |  | $ | 4.15 | 
|                                                               
|                                                               
|                                                               
|                                                               
|Exercised                                                       |  |                   | (1,411 | )                 |  | $                 | 3.23  |           |  |         | (964   | )         |  | $ | 2.30 |  |  |   | (962   | ) |  | $ | 2.78 | 
|                                                               
|                                                               
|                                                               
|                                                               
|Forfeited                                                       |  |                   | (645   | )                 |  | $                 | 9.02  |           |  |         | (1,857 | )         |  | $ | 9.66 |  |  |   | (4,208 | ) |  | $ | 7.04 | 
|                                                                |  |                   |        |                   |  |                   |       |           |  |         |        |           |  |   |      |  |  |   |        |   |  |   |      | 
|Outstanding at end of year                                      |  |                   | 8,644  |                   |  | $                 | 6.60  |           |  |         | 9,699  |           |  | $ | 7.37 |  |  |   | 13,463 |   |  | $ | 5.66 | 
|                                                                |  |                   |        |                   |  |                   |       |           |  |         |        |           |  |   |      |  |  |   |        |   |  |   |      | 
|Options exercisable at year-end                                 |  |                   | 5,279  |                   |  |                   |       |           |  |         | 5,732  |           |  |   |      |  |  |   | 4,707  |   |  |   |      | 
|                                                                |  |                   |        |                   |  |                   |       |           |  |         |        |           |  |   |      |  |  |   |        |   |  |   |      | 
|Weighted-average fair value of options granted
	during the year |  | $                 | 6.60   |                   |  |                   |       |           |  | $       | 6.06   |           |  |   |      |  |  | $ | 3.22   |   |  |   |      | 

The following table summarizes information about fixed stock
options at December 31, 2000:

|                 |  |                     |        |             |  |                     |            |             |  |           |       |  |  |  |       |  |  |   |       | 
|---------------- |  | ------------------- | ------ | ----------- |  | ------------------- | ---------- | ----------- |  | --------- | ----- |  |  |  | ----- |  |  | - | ----- | 
|                 |  |                     |        |             |  |                     |            |            
|                 |  | Options Outstanding |        |             |  |                    
|                 |  |                     |        |             |  | Options Exercisable
|                 |  |                     |        | Weighted-   |  |                     |            |            
|                 |  | Number              |        | Average     |  | Weighted-           |            | Number      |  | Weighted-
|                 |  | Outstanding         |        | Remaining   |  | Average             |            | Outstanding |  | Average  
|Range of         |  | at 12/31/00         |        | Contractual |  | Exercise            |            | at 12/31/00 |  | Exercise 
|Exercise Prices  |  | (000s)             |        | Life        |  | Price               |            | (000s)     |  | Price    
|                 |  |                     |        |             |  |                     |            |             |  |          
|$0.50 to $3.40   |  |                     | 2,220  |             |  |                     | 3.45 years |             |  | $         | 1.98  |  |  |  | 1,390 |  |  | $ | 2.01  | 
|                
|                
|                
|                
|$3.50 to $3.813  |  |                     | 4,897  |             |  |                     | 6.89 years |             |  | $         | 3.81  |  |  |  | 55    |  |  | $ | 3.53  | 
|                
|                
|                
|                
|$3.938 to $9.125 |  |                     | 3,498  |             |  |                     | 5.60 years |             |  | $         | 6.64  |  |  |  | 1,113 |  |  | $ | 7.84  | 
|                
|                
|                
|                
|$9.24 to $21.50  |  |                     | 2,848  |             |  |                     | 3.97 years |             |  | $         | 10.50 |  |  |  | 2,149 |  |  | $ | 10.51 | 
|                 |  |                     |        |             |  |                     |            |             |  |           |       |  |  |  |       |  |  |   |       | 
|$0.50 to $21.50  |  |                     | 13,463 |             |  |                     | 5.37 years |             |  | $         | 5.66  |  |  |  | 4,707 |  |  | $ | 7.28  | 
|                 |  |                     |        |             |  |                     |            |             |  |           |       |  |  |  |       |  |  |   |       | 

94



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##### Table of Contents



e.spire COMMUNICATIONS, INC.


Notes to Consolidated Financial Statements 
(Continued)

(b) Stock Purchase Warrants

During fiscal years ended June 30, 1995 and 1996, in
connection with the Series A-1 and Series B Preferred
Stock private placements and related bridge note conversions,
warrants for 4,367,078 shares of common stock were issued at
prices ranging from $.01 to $3.10. In fiscal 1996, as part of
the issuance of the 2005 Notes, detachable warrants to purchase
2,432,000 shares of the Companys common stock at a price
of $7.15 per share were issued. During 1997, as part of the
issuance of the Redeemable Preferred Stock due 2008, the Company
issued warrants to purchase 6,023,850 shares of common stock at
$7.15 per share.

On March 6, 1997, the Company entered into a preferred
provider agreement with MCIMetro Access Transmission Services,
Inc. In connection with the agreement, the Company issued
warrants to purchase 620,000 shares of the Companys common
stock at $9.87 per share. 360,000 of these warrants vested
during 1997. The value attributed to the vested warrants was
approximately $1,300, which is being recognized as network cost
over the five year term of the agreement. The Company also
agreed to issue warrants to purchase up to an aggregate of
approximately 1.7 million additional shares of the
Companys common stock at fair market value on the date of
grant in tranches every six months, contingent upon certain
increases in revenue to the Company generated under the
agreement. At December 31, 2000, the Company had issued
91,031 of such warrants with exercise prices ranging from $9.87
to $16.88 per share. The value attributed to these warrants was
approximately $917. During 1998, 1999 and 2000, respectively,
the Company recognized approximately $805, $358 and $260 in
network expense related to these warrants.

On March 3, 2000, the Company completed a private placement
of Convertible Preferred Stock with warrants. In connection with
this placement, warrants to purchase 3,579,906 shares of common
stock at a price of $9.89 per share were also issued.

On September 19, 2000, the Company issued 14,903,446 shares
of Exchangeable Preferred Stock for $3.35 per share. In
connection with this issuance, 893,523 transaction fee warrants
will be issued. Each warrant is exercisable into one share of
Common Stock at an exercise price of $0.01 per share.

At December 31, 2000, unexercised warrants outstanding are
as follows:

|                                                  |       |         |        |           |  |   |               |  | 
|------------------------------------------------- | ----- | ------- | ------ | --------- |  | - | ------------- |  | 
|                                                  |       | Number  |        | Price    
|                                                  |       | (000s) |        | per Share
|                                                  |       |         |        |          
|Series A and Series B Preferred Stock
	placements |       |         | 263    |           |  | $ | 1.79 - $ 3.10 | 
|                                                 
|                                                 
|                                                 
|                                                 
|2005 Senior Discount Notes offering               |       |         | 2,125  |           |  | $ | 6.47          | 
|                                                 
|                                                 
|                                                 
|                                                 
|Redeemable Preferred Stock due 2008 offering      |       |         | 5,646  |           |  | $ | 7.15          | 
|                                                 
|                                                 
|                                                 
|                                                 
|Convertible Preferred Stock                       |       |         | 10,880 |           |  | $ | 7.91          | 
|                                                 
|                                                 
|                                                 
|                                                 
|Convertible Preferred Stock  Warrants            |       |         | 3,580  |           |  | $ | 9.89          | 
|                                                 
|                                                 
|                                                 
|                                                 
|Exchangeable Preferred Stock                      |       |         | 14,903 |           |  | $ | 3.35          | 
|                                                 
|                                                 
|                                                 
|                                                 
|Exchangeable Preferred Stock  Warrants           |       |         | 894    |           |  | $ | 0.01          | 
|                                                 
|                                                 
|                                                 
|                                                 
|Other                                             |       |         | 306    |           |  | $ | 9.87 - $16.88 | 
|                                                  |       |         |        |           |  |   |               | 
|                                                  | Total |         |        | 38,597    |  |   |               |  | 
|                                                  |       |         |        |           |  |   |               | 

The gross proceeds that would be received by the Company on the
exercise of all outstanding options and warrants is
approximately $229,430.

(c) Employee Stock Purchase Plan

The Company adopted the Employee Stock Purchase Plan (the
ESPP) on November 15, 1996. Under the ESPP, an
aggregate of 500,000 shares of common stock may be purchased
from the Company by the employees through payroll withholding
pursuant to a series of offerings. All full-time employees who
have met certain service requirements (as defined in the ESPP),
except for employees who own common stock of the Company or
options on such stock which represent more than 5 percent
of common stock of the Company, are eligible to participate. The
purchase price of the common stock is 85 percent of the
fair market value on the

95



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##### Table of Contents



e.spire COMMUNICATIONS, INC.


Notes to Consolidated Financial Statements 
(Continued)

date the common stock is purchased. Purchases of common stock
are made on a monthly basis. During the years ended
December 31, 1998, 1999 and 2000, the Company sold 108,601,
258,278 and 463,795 shares, respectively, of common stock to the
ESPP for a total of $1,150, $1,759 and $1,480 respectively.

The fair value of the employees purchase rights of ESPP
shares is estimated using the Black-Scholes option pricing model
with the following weighted-average assumptions used for
purchases in the years ended December 31, 1998, 1999 and
2000, respectively: dividend yield of 0 percent for all
years, expected volatility of 75 percent, 85 percent
and 102 percent, risk free interest rate of
5.14 percent, 6.36 percent and 5.06 percent and
expected life of one month for all years.

The weighted-average fair value of the purchase rights granted
in 1998, 1999 and 2000 was $2.23, $1.50 and $1.33 per share.

(11) Basic and Diluted Earnings Per Share

The following tables present the computation of basic and
diluted earnings per share:

|                                          |                                 |                                      |          |               |   |           |  |            |  |  |   |       |  
|----------------------------------------- | ------------------------------- | ------------------------------------ | -------- | ------------- | - | --------- |  | ---------- |  |  | - | ----- | -
|                                          |                                 |                                     
|                                          |                                 | For the Year Ended December 31, 1998
|                                          |                                 |                                     
|                                          |                                 | Income                               |          | Shares        |   | Per Share
|                                          |                                 | (Numerator)                          |          | (Denominator) |   | Amount   
|                                          |                                 |                                      |          |               |   |          
|Net loss                                  |                                 | $                                    | (163,079 | )             |   |           |  |            |  |  |   |      
|                                         
|                                         
|                                         
|                                         
|Less: Preferred Stock dividends/accretion |                                 |                                      | (36,080  | )             |   |           |  |            |  |  |   |      
|                                          |                                 |                                      |          |               |   |           |  |            |  |  |   |      
|Basic and diluted earnings per share:     |                                 |                                      |          |               |   |           |  |            |  |  |   |      
|                                         
|                                         
|                                         
|                                         
|                                          | Net loss to common stockholders |                                      | $        | (199,159      | ) |           |  | 44,751,690 |  |  | $ | (4.45 | )
|                                          |                                 |                                      |          |               |   |           |  |            |  |  |   |      

Options and warrants to purchase 8,643,545 and 9,521,130 shares
of common stock, respectively, were not included in the
computation of diluted earnings per share for the year ended
December 31, 1998 as their inclusion would be anti-dilutive.

|                                          |                                 |                                      |          |               |   |           |  |            |  |  |   |       |  
|----------------------------------------- | ------------------------------- | ------------------------------------ | -------- | ------------- | - | --------- |  | ---------- |  |  | - | ----- | -
|                                          |                                 |                                     
|                                          |                                 | For the Year Ended December 31, 1999
|                                          |                                 |                                     
|                                          |                                 | Income                               |          | Shares        |   | Per Share
|                                          |                                 | (Numerator)                          |          | (Denominator) |   | Amount   
|                                          |                                 |                                      |          |               |   |          
|Net loss                                  |                                 | $                                    | (277,748 | )             |   |           |  |            |  |  |   |      
|                                         
|                                         
|                                         
|                                         
|Less: preferred stock dividends/accretion |                                 |                                      | (40,646  | )             |   |           |  |            |  |  |   |      
|                                          |                                 |                                      |          |               |   |           |  |            |  |  |   |      
|Basic and diluted earnings per share:     |                                 |                                      |          |               |   |           |  |            |  |  |   |      
|                                         
|                                         
|                                         
|                                         
|                                          | Net loss to common stockholders |                                      | $        | (318,394      | ) |           |  | 49,891,910 |  |  | $ | (6.38 | )
|                                          |                                 |                                      |          |               |   |           |  |            |  |  |   |      

Options and warrants to purchase 9,698,971 and 8,704,452 shares
of common stock, respectively, were not included in the
computation of diluted earnings per share for the year
December 31, 1999 as their inclusion would be anti-dilutive.

|                                          |                                 |                                      |          |               |   |           |  |            |  |  |   |       |  
|----------------------------------------- | ------------------------------- | ------------------------------------ | -------- | ------------- | - | --------- |  | ---------- |  |  | - | ----- | -
|                                          |                                 |                                     
|                                          |                                 | For the Year Ended December 31, 2000
|                                          |                                 |                                     
|                                          |                                 | Income                               |          | Shares        |   | Per Share
|                                          |                                 | (Numerator)                          |          | (Denominator) |   | Amount   
|                                          |                                 |                                      |          |               |   |          
|Net loss                                  |                                 | $                                    | (293,586 | )             |   |           |  |            |  |  |   |      
|                                         
|                                         
|                                         
|                                         
|Less: preferred stock dividends/accretion |                                 |                                      | (81,119  | )             |   |           |  |            |  |  |   |      
|                                          |                                 |                                      |          |               |   |           |  |            |  |  |   |      
|Basic and diluted earnings per share:     |                                 |                                      |          |               |   |           |  |            |  |  |   |      
|                                         
|                                         
|                                         
|                                         
|                                          | Net loss to common stockholders |                                      | $        | (374,705      | ) |           |  | 53,184,088 |  |  | $ | (7.05 | )
|                                          |                                 |                                      |          |               |   |           |  |            |  |  |   |      

Options and warrants to purchase 13,462,610 and 38,596,744
shares of common stock, respectively, were not included in the
computation of diluted earnings per share for the year
December 31, 2000 as their inclusion would be anti-dilutive.

96



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##### Table of Contents



e.spire COMMUNICATIONS, INC.


Notes to Consolidated Financial Statements 
(Continued)

(12) Retirement Plan

On February 1, 1996, the Company began sponsoring the
e.spire Communications, Inc. 401(k) Plan (the Plan),
a defined contribution plan. All individuals employed on
February 1, 1996 were eligible to participate.
Participation to all other employees is available after three
months of full-time equivalent service. The Company
contributions under the Plan are discretionary and may be as
much as 6 percent of an employees gross compensation
subject to certain limits. Total expense under the Plan amounted
to approximately $320, $275 and $635 for the years ended
December 31, 1998, 1999 and 2000, respectively.

(13) Commitments and Contingencies

Legal Proceedings

The Company is a party to certain litigation and regulatory
proceedings arising in the ordinary course of business. In the
opinion of management, based upon the advice of counsel, the
ultimate disposition of these matters will not have a material
adverse effect on the Companys consolidated financial
position or results of operations.

(14) Leases

The Company restructured several operating leases into capital
leases during 1998 and entered into new leases in 1999, for the
leasing of telecommunications equipment. The capital leases
provide for the lessee to pay taxes, maintenance, insurance and
certain other operating costs of the leased equipment. These new
leases also contain renewal provisions.

The equipment under capital leases is included in networks and
telecommunications equipment as follows:

|                                          |  |              |        | 
|----------------------------------------- |  | ------------ | ------ | 
|                                          |  | December 31,
|                                          |  | 2000        
|                                          |  |             
|Networks and telecommunications equipment |  | $            | 64,026 | 
|                                         
|                                         
|                                         
|                                         
|Less: accumulated amortization            |  |              | 13,479 | 
|                                          |  |              |        | 
|Net                                       |  | $            | 50,547 | 
|                                          |  |              |        | 

The Company is obligated under various noncancelable operating
leases for office and node space, telecommunications equipment,
and office furniture.

The minimum future lease obligations under these noncancelable
operating and capital leases as of December 31, 2000 are
approximately as follows:

|                                                         |                                            |           |        |         |  |  |        |        | 
|-------------------------------------------------------- | ------------------------------------------ | --------- | ------ | ------- |  |  | ------ | ------ | 
|                                                         |                                            | Operating |        | Capital
|Year Ending December 31,                                 |                                            | Leases    |        | Leases 
|                                                         |                                            |           |        |        
|2001                                                     |                                            |           | 18,206 |         |  |  | 16,966 |       
|                                                        
|                                                        
|                                                        
|                                                        
|2002                                                     |                                            |           | 18,609 |         |  |  | 14,328 |       
|                                                        
|                                                        
|                                                        
|                                                        
|2003                                                     |                                            |           | 18,861 |         |  |  | 10,466 |       
|                                                        
|                                                        
|                                                        
|                                                        
|2004                                                     |                                            |           | 18,121 |         |  |  | 8,084  |       
|                                                        
|                                                        
|                                                        
|                                                        
|2005                                                     |                                            |           | 17,714 |         |  |  | 4,276  |       
|                                                        
|                                                        
|                                                        
|                                                        
|Thereafter                                               |                                            |           | 52,761 |         |  |  |       |       
|                                                         |                                            |           |        |         |  |  |        |       
|                                                         | Total minimum lease payments               |           |        | 144,272 |  |  |        | 54,120 | 
|                                                         |                                            |           |        |         |  |  |        |       
|Less: amounts representing interest and executory
	costs |                                            |           |        |         |  |  | 8,035  |       
|                                                         |                                            |           |        |         |  |  |        |       
|                                                         | Present value of minimum lease payments    |           |        |         |  |  |        | 46,085 | 
|                                                        
|                                                        
|                                                        
|                                                        
|Less: current portion                                    |                                            |           |        |         |  |  | 13,627 |       
|                                                         |                                            |           |        |         |  |  |        |       
|                                                         | Long-term obligations under capital leases |           |        |         |  |  | $      | 32,458 | 
|                                                         |                                            |           |        |         |  |  |        |       

97



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##### Table of Contents



e.spire COMMUNICATIONS, INC.


Notes to Consolidated Financial Statements 
(Continued)

Rent expense for the years ended December 31, 1998, 1999
and 2000 was approximately $10,900, $15,800 and $17,700
respectively.

(15) Indefeasible Rights of Use

The Company has entered into various agreements to provide
indefeasible rights of use (IRUs) of multiple fibers
along certain sections of the Companys networks. Network
technologies revenue related to five major customers was
approximately $23,450, $48,685 and $71,748 for the years ended
December 31, 1998, 1999 and 2000, respectively. Progress
billings are made primarily based on customers acceptance
of certain performance milestones.

The Company expects to bill and collect all costs and estimated
earnings in excess of billings as of December 31, 2000, in
2001. In 1999 and 1998, the Company recognized approximately
$14,100 and $14,000, respectively, in revenue from non-monetary
proceeds from IRU transactions. Non-monetary proceeds consist of
transfers of dissimilar assets or exchanges of similar assets
with significant cash payments.

Although these construction agreements provide for certain
penalties if the Company does not complete construction within
the time frames specified in each respective agreement,
management does not anticipate that the Company will incur any
substantial penalties under these provisions.

(16) Income Taxes

Temporary differences and carryforwards that give rise to
deferred tax assets and liabilities are as follows:

|                                                                       |                                      |                                       |                             |         |        |         |        |         |        |         | 
|---------------------------------------------------------------------- | ------------------------------------ | ------------------------------------- | --------------------------- | ------- | ------ | ------- | ------ | ------- | ------ | ------- | 
|                                                                       |                                      |                                      
|                                                                       |                                      | December 31,                         
|                                                                       |                                      |                                      
|                                                                       |                                      | 1999                                  |                             | 2000   
|                                                                       |                                      |                                       |                             |        
|Deferred tax assets:                                                   |                                      |                                       |                             |         |        |         |        |        
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Capitalized start-up and other costs |                                       | $                           | 8,899   |        |         | $      | 6,232   |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Stock options  noncash compensation |                                       |                             | 7,812   |        |         |        | 7893    |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Net operating loss carryforwards     |                                       |                             | 225,288 |        |         |        | 324,370 |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Bond discounts                       |                                       |                             | 57,078  |        |         |        | 81,298  |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Other accrued liabilities            |                                       |                             | 14,482  |        |         |        | 25,673  |       
|                                                                       |                                      |                                       |                             |         |        |         |        |        
|                                                                       |                                      |                                       | Total gross deferred assets |         |        | 313,559 |        |         |        | 445,466 | 
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Less: valuation allowance            |                                       |                             | 265,707 |        |         |        | 413,309 |       
|                                                                       |                                      |                                       |                             |         |        |         |        |        
|                                                                       |                                      | Net deferred tax assets               |                             |         | 47,852 |         |        |         | 32,157 |        
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Deferred tax liabilities  fixed assets
	depreciation and amortization |                                      |                                       | 47,852                      |         |        |         | 32,157 |        
|                                                                       |                                      |                                       |                             |         |        |         |        |        
|                                                                       |                                      | Net deferred tax assets (liabilities) |                             | $       |       |         |        | $       |       |        
|                                                                       |                                      |                                       |                             |         |        |         |        |        

The net change in the total valuation allowance for the years
ended December 31, 1999 and 2000 was an increase of
$113,625 and $147,602, respectively. The valuation allowances at
December 31, 1999 and 2000 are a result of the uncertainty
regarding the ultimate realization of the tax benefits related
to the deferred tax assets. The utilization of the tax benefits
associated with net operating losses of approximately $810,925
at December 31, 2000 is dependent upon the Companys
ability to generate future taxable income. The net operating
loss carryforward period expires commencing in 2008 through the
year 2020. Further, as a result of certain financing and capital
transactions, an annual limitation on the future utilization of
a portion of the net operating loss carryforward has occurred.

No income tax provision has been provided for the years ended
December 31, 1998, 1999 and 2000 as the aforementioned
deferred tax assets have provided no tax benefit.

98



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##### Table of Contents



e.spire COMMUNICATIONS, INC.


Notes to Consolidated Financial Statements 
(Continued)

(17) Fair Value of Financial Instruments

The following notes summarize the major methods and assumptions
used in estimating the fair value of financial instruments:

(a) Cash and Cash Equivalents

The carrying amount approximates fair value due to the
relatively short period to maturity of these instruments.

The Companys short- and long-term debt securities are
carried at fair market value as determined by quoted market
prices.

(b) Letters of Credit

The fair value of the letters of credit is based on fees
currently charged for similar agreements.

(c) Long-Term Debt and Redeemable
Preferred Stock

The fair value of the Companys long-term debt and
redeemable preferred stock are estimated based on the quoted
market prices for the same or similar issues if available or
based on the present value of expected cash flows at rates
currently available to the Company for borrowings with similar
terms.

The carrying amounts and estimated fair values of the
Companys financial instruments at December 31, 2000
were:

|                                                            |  |          |         |            |  |   |         | 
|----------------------------------------------------------- |  | -------- | ------- | ---------- |  | - | ------- | 
|                                                            |  | Carrying |         | Estimated 
|                                                            |  | Value    |         | Fair Value
|                                                            |  |          |         |           
|Cash and cash equivalents (including restricted
	cash)      |  | $        | 10,046  |            |  | $ | 10,045  | 
|                                                           
|                                                           
|                                                           
|                                                           
|Letters of credit                                           |  |          |        |            |  |   | 20      | 
|                                                           
|                                                           
|                                                           
|                                                           
|Redeemable preferred stock                                  |  |          | 327,472 |            |  |   | 34,927  | 
|                                                           
|                                                           
|                                                           
|                                                           
|Long-term debt, including obligations under
	capital leases |  |          | 993,978 |            |  |   | 542,475 | 

As a result of the Companys March 22, 2001 filing for
bankruptcy protection under Chapter 11, the fair value of
the Companys financial instruments has significantly
decreased from the amounts shown above.

(18) Quarterly Financial Data (Unaudited)

|      |                                             |                                       |   |          |   |          |   |         |   |  |   |         |   |  |   |         |  
|----- | ------------------------------------------- | ------------------------------------- | - | -------- | - | -------- | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|      |                                             | Mar. 31                               |   | Jun. 30  |   | Sept. 30 |   | Dec. 31
|      |                                             |                                       |   |          |   |          |   |        
|      |                                             |                                      
|      |                                             | (in thousands, except per share data)
|     
|     
|     
|     
|2000: |                                             |                                       |   |          |   |          |   |         |   |  |   |         |   |  |   |        
|     
|     
|     
|     
|      | Revenues                                    |                                       | $ | 65,777   |   |          | $ | 92,686  |   |  | $ | 91,791  |   |  | $ | 93,936  |  
|     
|     
|     
|     
|      | Cost of sales                               |                                       |   | 43,202   |   |          |   | 55,486  |   |  |   | 49,689  |   |  |   | 45,203  |  
|     
|     
|     
|     
|      | Gross Margin                                |                                       |   | 22,575   |   |          |   | 37,200  |   |  |   | 42,102  |   |  |   | 48,733  |  
|     
|     
|     
|     
|      | Operating expenses                          |                                       |   | 76,301   |   |          |   | 76,967  |   |  |   | 75,255  |   |  |   | 82,546  |  
|     
|     
|     
|     
|      | Non-operating income (expense)              |                                       |   | (28,351  | ) |          |   | (29,020 | ) |  |   | (31,418 | ) |  |   | (44,338 | )
|     
|     
|     
|     
|      | Net loss                                    |                                       |   | (82,077  | ) |          |   | (68,787 | ) |  |   | (64,571 | ) |  |   | (78,151 | )
|     
|     
|     
|     
|      | Preferred stock dividends/accretion         |                                       |   | 36,010   |   |          |   | 12,842  |   |  |   | 13,128  |   |  |   | 19,139  |  
|     
|     
|     
|     
|      | Net loss to common stockholders             |                                       |   | (118,087 | ) |          |   | (81,629 | ) |  |   | (77,699 | ) |  |   | (97,290 | )
|     
|     
|     
|     
|      | Net loss per common share (Basic & Diluted) |                                       |   | (2.29    | ) |          |   | (1.56   | ) |  |   | (1.44   | ) |  |   | (1.77   | )

99



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##### Table of Contents



e.spire COMMUNICATIONS, INC.


Notes to Consolidated Financial Statements 
(Continued)

|      |                                             |                                       |   |         |   |          |   |         |   |  |   |         |   |  |   |         |  
|----- | ------------------------------------------- | ------------------------------------- | - | ------- | - | -------- | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|      |                                             | Mar. 31                               |   | Jun. 30 |   | Sept. 30 |   | Dec. 31
|      |                                             |                                       |   |         |   |          |   |        
|      |                                             |                                      
|      |                                             | (in thousands, except per share data)
|     
|     
|     
|     
|1999: |                                             |                                       |   |         |   |          |   |         |   |  |   |         |   |  |   |        
|     
|     
|     
|     
|      | Revenues                                    |                                       | $ | 58,073  |   |          | $ | 63,320  |   |  | $ | 65,116  |   |  | $ | 57,500  |  
|     
|     
|     
|     
|      | Cost of sales                               |                                       |   | 37,237  |   |          |   | 39,262  |   |  |   | 41,340  |   |  |   | 41,529  |  
|     
|     
|     
|     
|      | Gross Margin                                |                                       |   | 20,836  |   |          |   | 24,058  |   |  |   | 23,776  |   |  |   | 15,971  |  
|     
|     
|     
|     
|      | Operating expenses                          |                                       |   | 59,446  |   |          |   | 63,476  |   |  |   | 73,240  |   |  |   | 80,434  |  
|     
|     
|     
|     
|      | Non-operating income (expense)              |                                       |   | (18,578 | ) |          |   | (19,959 | ) |  |   | (22,519 | ) |  |   | (24,737 | )
|     
|     
|     
|     
|      | Net loss                                    |                                       |   | (57,188 | ) |          |   | (59,377 | ) |  |   | (71,983 | ) |  |   | (89,200 | )
|     
|     
|     
|     
|      | Preferred stock dividends/accretion         |                                       |   | 9,697   |   |          |   | 10,000  |   |  |   | 10,305  |   |  |   | 10,644  |  
|     
|     
|     
|     
|      | Net loss to common stockholders             |                                       |   | (66,885 | ) |          |   | (69,377 | ) |  |   | (82,288 | ) |  |   | (99,844 | )
|     
|     
|     
|     
|      | Net loss per common share (Basic & Diluted) |                                       |   | (1.37   | ) |          |   | (1.40   | ) |  |   | (1.64   | ) |  |   | (1.96   | )
|     
|     
|     
|     
|1998: |                                             |                                       |   |         |   |          |   |         |   |  |   |         |   |  |   |        
|     
|     
|     
|     
|      | Revenues                                    |                                       | $ | 27,469  |   |          | $ | 35,752  |   |  | $ | 45,460  |   |  | $ | 48,078  |  
|     
|     
|     
|     
|      | Cost of sales                               |                                       |   | 19,253  |   |          |   | 24,344  |   |  |   | 29,197  |   |  |   | 34,019  |  
|     
|     
|     
|     
|      | Gross Margin                                |                                       |   | 8,216   |   |          |   | 11,408  |   |  |   | 16,263  |   |  |   | 14,059  |  
|     
|     
|     
|     
|      | Operating expenses                          |                                       |   | 29,690  |   |          |   | 33,219  |   |  |   | 41,798  |   |  |   | 56,837  |  
|     
|     
|     
|     
|      | Non-operating income (expense)              |                                       |   | (10,621 | ) |          |   | (10,634 | ) |  |   | (13,241 | ) |  |   | (16,985 | )
|     
|     
|     
|     
|      | Net loss                                    |                                       |   | (32,095 | ) |          |   | (32,445 | ) |  |   | (38,776 | ) |  |   | (59,763 | )
|     
|     
|     
|     
|      | Preferred stock dividends/accretion         |                                       |   | 8,493   |   |          |   | 8,607   |   |  |   | 9,022   |   |  |   | 9,958   |  
|     
|     
|     
|     
|      | Net loss to common stockholders             |                                       |   | (40,588 | ) |          |   | (41,052 | ) |  |   | (47,798 | ) |  |   | (69,721 | )
|     
|     
|     
|     
|      | Net loss per common share (Basic & Diluted) |                                       |   | (1.08   | ) |          |   | (0.91   | ) |  |   | (1.00   | ) |  |   | (1.44   | )

100