<PAGE>   1

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

                                    FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 1999

                                       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)

<TABLE>
<S>                                                            <C>
    Delaware                                                    52-1947746
    --------                                                    ----------
    (State or other jurisdiction of                             (I.R.S. Employer
    incorporation or organization)                              Identification No.)

    12975 Worldgate Drive
    Herndon, Virginia                                           20170
    -----------------                                           -----
    (Address of principal executive offices)                    (Zip code)
</TABLE>

                                  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  /X/    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 (31,944,046 shares) as of
March 31, 2000, was $ 224,566,643. The number of shares of common stock of
e.spire, outstanding on March 31, 2000, was 51,990,718.



                                       1
<PAGE>   2


                       DOCUMENTS INCORPORATED BY REFERENCE

The Index to Exhibits appears on page E-1.
     The registrant's definitive 2000 Proxy Statement that will be filed
pursuant to Regulation 14A is incorporated by reference into Part III of this
Annual Report on Form 10-K.



                                       2
<PAGE>   3


E.SPIRE COMMUNICATIONS, INC.
FORM 10-K

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                        Page
  Part I.                                                                              Number
<S>                    <C>                                                            <C>

         Item 1.        Business                                                           7
         Item 2.        Properties                                                        20
         Item 3.        Legal Proceedings                                                 20
         Item 4.        Submission of Matters to a Vote of Security Holders               20

  Part II.

         Item 5.        Market for Registrant's Common Equity and Related

                        Stockholder Matters                                               21
         Item 6.        Selected Financial Data                                           22
         Item 7.        Management's Discussion and Analysis                              23
         Item 7a.       Quantitative & Qualitative Disclosure About Market Risk           34
         Item 8.        Financial Statements and Supplementary Data                       35
         Item 9.        Changes in and Disagreements with Accountants on
                        Accounting and Financial Disclosure                               35

  Part III.

         Item 10.       Directors and Executive Officers of the Registrant                35
         Item 11.       Executive Compensation                                            35
         Item 12.       Security Ownership of Certain Beneficial
                        Owners and Management                                             35
         Item 13.       Certain Relationships and Related Transactions                    35

  Part IV.

         Item 14.       Exhibits, Financial Statement Schedules,
                        and Reports on Form 8-K                                           37

  SIGNATURES                                                                              __
</TABLE>



                                       3
<PAGE>   4



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 expectation, beliefs, future plans and
        strategies, anticipated developments and other matters that are not
        historical facts.

        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. The important 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, risks associated with
debt service requirements and interest rate fluctuations, risks associated with
acquisitions and the integration thereof, the impact of restriction 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.

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

    -   operating and financial risks related to managing rapid growth and
        sustaining operating cash flow to meet e.spire's debt service
        requirements, and making capital expenditures and fund operations;

    -   potential fluctuation in quarterly results;

    -   compliance with debt covenants

    -   obtaining additional capital to finance operations

    -   attracting and retaining management

    -   volatility of stock price;

    -   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
        e.spire's business; and

    -   failure to maintain necessary rights of way.

         Because the statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by the
forward-looking statements. e.spire cautions 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 statements to reflect events or circumstances after the date of
this report or to reflect the occurrence of unanticipated events.


                                       4
<PAGE>   5


                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

THE COMPANY

    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 Competitive Local Exchange Carriers ("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, 1999, was
comprised of 3,830 route miles of fiber in its 38 local networks in 21 states,
and 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.

    With the passage of the federal Telecommunications Act of 1996 ("Telecom
Act, FTA or the Act"), the Company enhanced the scope of its product offerings
from dedicated services to a full range of switched voice, data and Internet
services in order to meet the needs of business end-users, and is expanding its
sales, marketing, customer care and operations support systems ("OSS")
capabilities. The Company introduced local switched voice services, including
local exchange services, in late 1996 and long distance services in late 1997.
In late 1998, e.spire announced that it would begin to eliminate its resale
business. As of December 31, 1999, e.spire had installed 165,290 customer access
lines of which approximately 95% were on-switch. This represents a significant
increase over the 133,090 access lines installed as of December 31, 1998 of
which approximately 47% were on-switch.

    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 expenses, which may
provide positive contributions to cash flow. The Company has made specific
strategic decisions to build high capacity networks with broad market coverage,
which initially increases its level of capital expenditures and operating
losses. However, the Company believes that over the long term this strategy will
enhance the Company's financial performance by increasing the traffic flow over
its network.

STRATEGY

    The Company seeks to provide its customers via its facilities-based network
infrastructure state-of-the-art voice, data and Internet solutions from a single
communications provider. In order to increase penetration in its target markets,
build brand recognition and achieve its strategic objectives, the Company seeks
to:

PROVIDE "ONE-STOP" INTEGRATED COMMUNICATIONS SERVICES

    To meet customer demand and to accelerate penetration in its markets, the
Company has broadened the range of voice, data and Internet services it offers
and has integrated these services into a bundled package offering a single
source solution designed to meet its customers' communications needs. Since
1998, the Company has offered a suite of products that provide an integrated
communications service for voice, data and Internet over a single multipurpose
T1 line. In 1999, e.spire introduced the e.spire XpressLink branding for the
product suite of integrated products that combine traditional voice services
with frame relay or high-speed dedicated Internet. The Company believes that its
ability to provide one-stop integrated communications services will enable it to
capture a larger portion of its customers' total expenditures on communication
services, and reduce customer turnover.



                                       5
<PAGE>   6


EXPLOIT RAPIDLY GROWING MARKET FOR DATA/INTERNET SERVICES

    The Company believes that data/Internet services is one of the fastest
growing segments of the communications market. The Company's suite of products
consists primarily of the e.spire family of high-speed Internet and data
products such as frame relay and ATM for small and medium-sized businesses.
Product traffic will be transported over the Company's coast-to-coast, leased
broadband data communications network and through CyberGate, Inc. ("CyberGate"),
the Company's wholly-owned Internet Service Provider ("ISP") subsidiary.
CyberGate's subsidiary FloridaNet, Inc. d/b/a ValueWeb ("ValueWeb") provides
Web-hosting services to customers around the world.

ENHANCE FACILITIES-BASED INFRASTRUCTURE

    Expansion of the Company's facilities-based infrastructure will increase the
proportion of communications traffic that is originated and/or terminated on its
network and switching facilities, which the Company believes will result in
higher long-term operating margins and greater control over its network
operations. The Company employs an on-net strategy to capture new customers. The
Company's expansion decisions are structured to efficiently deploy capital and
are based upon a number of economic factors, including customer demographics in
each market and anticipated cost savings associated with particular
installations. The Company's state-of-the-art infrastructure and high capacity
bandwidth facilitate efficient network expansion.

BUILD MARKET SHARE THROUGH CUSTOMER SALES AND SERVICE

    The Company believes that its local sales structure allows e.spire to
target customers in specific geographic regions to develop and maintain customer
relationships. In addition to its field sales force, the Company's major account
team targets large national accounts, and its carrier sales group targets
dedicated services to long distance carriers and ISPs.

    e.spire is building its OSS environment with a strategic blend of
"off-the-shelf" applications and customized development. As the industry
continues to evolve towards integrated services and as interfaces with ILECs and
other CLECs begins to stabilize, e.spire will continue to enhance its OSS
platform with systems that deliver proven business solutions and provide the
essential amounts of flexibility and scalability to support aggressive growth.
These systems must also enable unimpeded access to all operational data elements
so they can be integrated into an overall Customer-centric back-office platform.

    e.spire has completed its implementation of its billing, general ledger,
accounts payable and purchasing financial systems and has implemented new
modules for its provisioning and network management systems. e.spire will be
upgrading the functionality of our order management and circuit inventory
systems. While the development and support of an OSS platform is an ongoing
process, e.spire believes that progress on its system integration, and order
entry streamlining projects will reap significant benefits within the next six
to twelve months.

EXTEND GEOGRAPHIC FOCUS ON ATTRACTIVE MARKETS NATIONALLY

    In 1999, the Company expanded its geographic coverage by turning up local
area networks in the New York, Philadelphia and Washington, D.C./Northern
Virginia local markets, and launching a long-haul fiber network between New York
and Baltimore through a long-term lease with Metromedia Fiber Network, Inc.
e.spire plans to continue to enhance its infrastructure of its 38 local area
networks and nationwide Tier 1 ATM network in 2000.



                                       6
<PAGE>   7


DESIGN AND MANAGE THE CONSTRUCTION OF ADVANCED FIBER OPTIC NETWORKS

    Through its ACSI Network Technologies, Inc. ("ACSI NT") subsidiary, the
Company designs and constructs high speed advanced fiber optic networks for
third parties, such as other CLECS, interexchange carriers ("IXC's") 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 has built its
reputation performing the 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.

E.SPIRE SERVICES

VOICE SERVICES

SWITCHED VOICE SERVICES. As of December 31, 1999, the Company had installed 28
voice switches to provide facilities-based local exchange service in 28 of its
38 markets. As an adjunct to its local switched services, the Company provides
long distance, calling card and other interLATA services on a resale basis.

    The Company'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 PBX and routing local, intraLATA and interLATA 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 utilizing the Company's local switch.

        DEDICATED SERVICES. The Company's dedicated services provide high
capacity non-switched interconnections: (i) between Points of Presence ("POPs")
of the same Inter Exchange Carriers ("IXC"); (ii) between POPs of different
IXCs; (iii) between large business and government end-users and their selected
IXCs; (iv) between an IXC POP and an Incumbent Local Exchange Carrier ("ILEC")
central office or between two ILEC 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 IXC, or links between IXC POPs,
        thus bypassing the facilities of the ILEC. These services, which may be
        ordered by either the long distance customer or directly by its IXC,
        typically provide the customer better reliability, shorter installation
        intervals, and lower costs than similar services offered by the ILEC.
        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
        IXCs that have large volumes of long distance traffic aggregated by an
        ILEC switch at a central office where the Company has collocated its
        network. The Company provides dedicated facilities for transporting
        these aggregated volumes of long distance traffic from the ILEC central
        office to its POP or between ILEC central offices.



                                       7
<PAGE>   8


    -   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). The Company expects the demand for
        private line service to increase in conjunction with higher bandwidth
        customer applications.

DATA/INTERNET SERVICES

    HIGH SPEED INTERNET AND DATA SERVICES AND CYBERGATE ACQUISITION. In January
1997, the Company acquired CyberGate. CyberGate, an ISP, delivers high-speed
data communications services, including computer network connections and related
infrastructure services, that provide both commercial and residential customers
access to the Internet through their personal computers and the use of a modem.
As of December 31, 1999, CyberGate had more than 100,000 customers. Of these,
approximately 50,000 were dial-up access customers, and 50,000 were Web-hosting
customer accounts of subsidiary ValueWeb.

    In 1997, the Company introduced the e.spire family of high-speed Internet
and data services for businesses, educational institutions, ISPs and carriers.
The e.spire family of services operates over the Company's coast-to-coast,
leased broadband data communications network which supports the following
services:

    -   e.spire INTERNET ACCESS SERVICE. The data and Internet backbone is
        connected to the Global Internet via public and private peering
        arrangements with Tier I-Internet backbone providers at strategic
        Network Access Points ("NAPs") across the United States. This enables
        the Company to provide high-quality dedicated and dial-up Internet
        connectivity and IP transport for the business and reseller community.
        The service is targeted to consumers, local and regional ISPs 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.

    -   e.spire 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.

    -   e.spire 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.

    -   e.spire DIGITAL SUBSCRIBER LINE (DSL). In 1999, e.spire began offering
        DSL service in 11 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 time 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.

    -   e.spire 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 commercial grade Unix
        servers, complete with operating system and web server software. Each
        server is provisioned with its' own 10Mb Ethernet connection to the
        Internet.

    -   e.spire BUNDLED INTERNET SOLUTIONS. The Company also provides turnkey
        business Internet solutions. These solutions include dedicated Internet
        Access, pre-configured Customer Premises Equipment, web site hosting
        account, domain



                                       8
<PAGE>   9

        name registration and maintenance, news feed, and end-to-end service
        installation. These solutions enable businesses to benefit from
        integrated billing and network management.

    -   e.spire 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 the Company 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.

    -   e.spire 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 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.

    -   e.spire 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. The Company's custom network services are designed
        to eliminate many of the timing, coordination and inter-operability
        issues that arise in installations requiring multiple vendors.

    -   e.spire 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.

ACSI NT

    e.spire's wholly-owned network development subisidiary, ACSI NT, formed in
1998, designs and constructs fiber optic networks for municipalities, IXCs and
other providers. ACSI NT is prepared to manage any and all aspects of network
development projects, including business planning, market analysis, engineering,
project management, construction and network monitoring center design. In 1999,
ASCI NT announced that since its formation in 1998 it had signed contracts with
a total value of more than $100 million.

SALES, MARKETING AND SERVICE DELIVERY

    The Company seeks to provide its customers a choice for local access,
utilizing its facilities-based network infrastructure to deliver both voice and
data solutions. The Company's customers include corporations, financial services
companies, local government entities, and academic, scientific and other major
institutions as well as ISPs, IXCs and other carriers.

    The Company's sales and marketing approach is to build long-term business
relationships with its customers, with the intent of becoming the single source
provider of their telecommunications services. The Company's sales force
includes specialized professionals who focus on sales to retail, wholesale and
alternate channel (agents and value-added resellers) consumers of the Company's
telecommunications services. The Company's sales staff works to gain a better
understanding of the customer's operations in order to develop innovative,
application-specific solutions to each customer's needs. Sales personnel locate
potential business customers by several methods, including customer referral,
market research, cold calling and networking alliances.

    Enhanced data services, like all other Company services, are sold through
the Company's existing sales force and supported by engineers and other sales
channels such as agents and value-added resellers, including independent
providers of communications hardware to customers. This approach enables the
Company to (i) emphasize the applications solutions aspects of enhanced data
services and (ii) utilize the expertise and resources of other vendors. The
Company intends to continue expanding its sales and engineering support staff
and other technical specialists in order to meet the growing demand for enhanced
data services.

    Historically, the Company has established new customer relationships by
providing customers with local or data services and subsequently marketing
additional services to such customers. The Company intends to emphasize its
ability to provide customers



                                       9
<PAGE>   10

"one-stop" integrated voice, data and Internet communications services in its
sales and marketing efforts.

    The Company's service delivery staff is primarily responsible for
coordinating service and installation activities. Service delivery activities
include coordinating installation dates and equipment delivery and testing. The
Company's customer service and technical staff plans, engineers, monitors and
maintains the integrity, quality and availability of the Company's networks. The
Company's technical staff are available to customers 24 hours every day.

NETWORK

    The Company has deployed its network infrastructure approach by selecting
economic alternatives of constructing or leasing facilities or a combination
thereof. As of December 31, 1999, the Company had local fiber optic networks in
service in 38 markets. The Company generally chooses to own facilities where
(i) there is no attractive fiber optic network alternative, (ii) ownership
creates strategic value for the Company and/or (iii) large concentrations of
telecommunications traffic are accessible, or have been secured, to justify
network construction. In addition to the "build" vs. "lease" decision for
network deployment, the Company also will consider potential network
acquisitions from time to time.

    The Company also seeks to expand the reach of its backbone data network
through agreements with certain third parties to deliver enhanced data
communications services through a seamless data network. Often, the Company
offers data services in geographic markets where it has not deployed its own
local fiber optic network by leasing facilities from a variety of entities,
including ILECs, utilities, IXCs, cable companies and various transit/highway
authorities. In many cases, such capacity is obtained through the purchase or
lease of "dark fiber." The combination of the Company's local networks and its
broadband data backbone network comprise the seamless network platform which the
Company utilizes to offer its broad array of telecommunications services to
customers.

    The Company utilizes state of the art networking technology on its data
backbone network, allowing its network capacity to be efficiently shared between
multiple platforms. The Company's local networks are comprised of fiber optic
cable, integrated switching facilities, advanced electronics, data switching
equipment (e.g., frame relay and ATM), transmission equipment and associated
wiring and equipment. By virtue of their state-of-the-art equipment and
ring-like architecture, the Company's networks offer electronic redundancy and
diverse access routing. Through automatic protection switching, if any
electrical component or fiber optic strand fails, the signal is instantaneously
switched to a "hot standby" component or fiber. Since network outages and
transmission errors can be very disruptive and costly to long distance carriers
and other customers, consistent reliability is critical to customers.

    In those markets where the Company chooses to deploy broadband fiber
networks, the Company's strategy is to first develop the "carrier ring" portion
of its network, a high capacity network designed to be accessible to all the
major long distance carriers and key ILEC central offices in the area. This
portion of the network allows the Company to provide access to the ILEC central
offices, the IXC POPs and customer buildings. Second, the Company designs a
larger "backbone ring" extending from the carrier ring, with a view toward
making the 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, the Company concentrates
its sales and marketing efforts on adding business and government customers
located on or very near its backbone network and hub locations. Once the Company
determines that there is sufficient customer demand in a particular area, it
extends "distribution rings" from the backbone ring to reach specific business
customers in that area. The Company's emphasis is on the building and expansion
of these local networks to reach end user customers in buildings or office parks
with substantial telecommunications needs.

    The Company's network management center in Herndon, Virginia monitors all of
the Company's networks from one central location. Centralized electronic
monitoring and control of the Company's networks allows the Company to avoid
duplication of this function in each city. This consolidated operations center
also helps make the Company's per customer monitoring and customer service costs
lower than if such costs were monitored on a single-city basis. The Company also
plans to enhance its use of this facility to monitor the performance of data and
switched voice services.

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 the Company'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.



                                       10
<PAGE>   11

    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
("CAPs") 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 ILECs due, in part, to antiquated
copper-based facilities used in many ILEC networks.

    LOCAL SWITCHED VOICE SERVICES. The 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 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.

    ACSI NT. 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 lease of
conduit or 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 incumbent
local exchange carrier ("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 Federal Communications Commission ("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 ILEC, 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 example, AT&T,
MCI Worldcom and Sprint, which historically have been purely long distance
carriers, have each begun to offer local telecommunications services in major
U.S. markets using their own facilities or by resale of the ILECs' or other
providers' unbundled network elements or services. In addition to these long



                                       11
<PAGE>   12


distance service providers, entities that currently offer or are potentially
capable of offering local switched services include companies that have
previously been known purely as competitive access providers, cable television
companies, electric utilities, microwave carriers, wireless telephone system
operators and large customers who build private networks. These entities, upon
entering into appropriate interconnection agreements or resale agreements with
ILECs, including Regional Bell Operating Companies ("RBOCs"), can offer single
source local and long distance services, like those offered by the Company. New
start-up companies also may enter markets and provide services in competition
with the Company. In addition, a continuing trend towards business combinations
and alliances in the telecommunications industry may create significant new
competitors to the Company. Many of these combined entities may have resources
far greater than those of the Company. These combined entities may provide a
bundled package of telecommunications products, including local and long
distance telephony, that is in direct competition with the products offered by
the Company.

  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. The
FCC has denied the following applications for such approval: Southwestern Bell's
Oklahoma application in June 1997; Ameritech's Michigan application in August
1997; BellSouth's applications for South Carolina in December 1997; and two
BellSouth applications for Louisiana, in February and October 1998. In December
1999, the FCC approved Bell Atlantic's Section 271 application for New York and
thereby granted Bell Atlantic authority to provide long-distance service to New
Yorkers. Southwestern Bell currently has pending before the FCC an application
for Section 271 authority for the state of Texas. An FCC decision on that
application is due in July 2000. The Company anticipates that several RBOCs will
file additional applications for in-region long distance authority in 2000. 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 on a number of factors, including: market presence; the
ability to execute a rapid expansion strategy: the capacity, reliability and
security of its network infrastructure; ease of access to and navigation of the
Internet; the pricing policies of its competitors and suppliers; the timing of
the introduction of new services by the Company and its competitors; the
Company's ability to support industry standards; and general industry and
economic trends. The Company's success in this market will depend heavily upon
its ability to provide high quality Internet connectivity and value-added
Internet services at competitive prices.

  The Company's subsidiary, ACSI NT, provides complete turnkey
telecommunications infrastructure solutions to its 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. 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.



                                       12
<PAGE>   13

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 regulatory
commissions 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 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. We cannot predict the outcome of
these proceedings or their impact upon the Internet service and
telecommunications industries or upon us.

  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 long distance services and
international services between the United States and foreign countries and have
filed the required tariffs. While we believe we are in compliance with
applicable laws and regulations, we cannot assure you that the FCC or third
parties will not raise issues with regard to our compliance.



                                       13
<PAGE>   14



         THE FEDERAL TELECOMMUNICATIONS ACT

  In February 1996, the FTA was passed by the United States Congress and signed
into law by President Clinton. 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 telecommunications providers 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 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.

  ILECs, including GTE and the 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 access to individual network elements and "unbundled 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 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 traditional
telephone company services, to prevent ILECs from disaggregating existing
combinations of network elements, and to establish rules enabling competitors to
select all or portions of any existing traditional telephone company
interconnection agreements for use in their own interconnection agreements with
traditional telephone companies. The Supreme Court, however, did not evaluate
the specific pricing methodology adopted by the FCC and has remanded the case to
the Eighth Circuit for further consideration. While the Supreme Court resolved
many issues, including the FCC's jurisdictional authority, other issues remain
subject to further consideration by the courts and the FCC.

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 for requiring ILECs to make unbundled network elements available to
competitive telecommunications providers. 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 network elements. Various interested parties have sought
reconsideration and filed appeals of the FCC's order. We are unable to predict
the outcome of those reconsideration and appellate proceedings. Notably, rates
charged for unbundled network elements are established through negotiation or by
state regulatory commissions, subject to general FCC rules governing pricing
methodology. Also as a result of the Supreme Court's decision, FCC rules that
require ILECs to establish geographically deaveraged pricing for network
elements will become effective in May 2000. Such deaveraging could result in
significant changes in the prices of network elements and may result in a
significant price increase for network elements in certain non-urban markets
served by the Company.

  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 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



                                       14
<PAGE>   15

represents the first approval by the FCC of a regional Bell operating company
request to provide long distance services to customers located in their local
operating region. The FCC's approval of Bell Atlantic's application to provide
such long distance services is likely to strengthen its competitive position in
New York substantially. We anticipate that Bell Atlantic will soon apply to the
FCC to obtain such long distance service authority in other states in its
fourteen state operating region. Southwestern Bell currently has pending before
the FCC an application to provide traditional long distance services in Texas.
The FCC must issue a decision on that application in July 2000. We are unable to
predict the outcome of that decision. In addition, each RBOC has begun the
process to obtain permission to provide long distance services in various other
states. Entry of Bell Atlantic, 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 regional Bell operating companies 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 DSL technology 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
interconnection and unbundling rules. These orders have been appealed and are
the subject of further FCC proceedings as well. The FCC has not yet ruled on a
preliminary FCC proposal that would permit ILECs to deploy advanced
telecommunications services through a separate affiliate, which would not be
regulated as a traditional telephone company and therefore would not be subject
to the FTA's unbundling and resale provisions. However, the FCC in 1999 approved
a merger between SBC and Ameritech and imposed a requirement that those
companies establish separate affiliates for the provisioning of advanced
telecommunications services. Notably, a number of legislative proposals have
been made which would relieve ILECs of some or all of their obligations to
provide interconnection or unbundled network elements with respect to advanced
services.

  In March 1999, the FCC adopted an order strengthening the rights of
competitive telecommunications providers such as the Company to obtain physical
collocation for purposes of interconnecting with ILEC networks, as well as
requiring that the ILECs permit competitive telecommunications providers to
collocate equipment used for interconnection and/or access to unbundled network
elements. The FCC also adopted rules designed to limit traditional telephone
companies' ability to deny competitive telecommunications providers 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 U.S. Court of
Appeals for the District of Columbia vacated significant portions of these FCC
collocation rules, and remanded the matter to the FCC for further consideration.
Among other things, the appeals court vacated new FCC rules that would have
required ILECs to permit collocation of 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.
Further FCC and appellate proceedings are expected.

         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 these 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. On remand from an appeals court, the FCC
is conducting further proceedings to explain and refine its recent reforms
affecting access charge rate levels. In addition, the FCC is considering several
proposals to further reform access charge rate structures, including a proposal
submitted by a coalition of long distance companies and regional Bell companies
referred to as "CALLS". These and related actions may change access rates
structures and rate levels. If access rates are reduced, access revenues of all
local telecommunications carriers, including those of the Company, could be
reduced, and the costs to ILECs and long distance carriers to provide long
distance services also could be reduced significantly. The impact of these new
changes will not be known until they are fully implemented.

  The FCC has also raised the issue of whether it should begin to regulate the
access charges imposed by competitive telecommunications providers. Currently,
competitive telecommunications providers are free to charge access rates at any
levels they deem appropriate so long as they are "just and reasonable" and
nondiscriminatory. The current proceeding seeks comment from the industry on
whether competitive telecommunications providers should be required to
cost-justify the access charges they impose on long distance carriers or whether
such rates should be limited to a prescribed range of "reasonable" charges. A
decision by the FCC to



                                       15
<PAGE>   16

regulate competitive telecommunications providers' access charges could result
in the reduction of those charges for all competitive telecommunications
providers. Over the past few years, the FCC has granted ILECs significant
flexibility in pricing their interstate special and switched access services. We
anticipate that this pricing flexibility will result in ILECs lowering their
prices in high traffic density areas, the probable areas of competition with us.
We also anticipate that the FCC will grant ILECs increasing pricing flexibility
as the number of potential competitors increases in each of these markets.

In August 1999, the FCC released an order that granted substantial additional
pricing flexibility to ILECs for certain interstate services. Among other
things, the FCC granted immediate pricing flexibility to many ILECs in the form
of streamlined introduction of new services, the ability to change rates for
certain interstate services based on geographic location, and removal, after
certain local toll dialing restrictions are lifted, of certain interstate long
distance services from restrictive pricing regulation. The FCC also established
a framework for granting many ILECs greater flexibility in the pricing of all
interstate access services once they satisfy certain prescribed competitive
criteria. The FCC also invited public comment on proposals for yet further
traditional telephone company pricing flexibility.

  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.

         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 year. Various states are also in the
process of implementing their own universal service programs. The Company
currently is unable to quantify the amount of subsidy payments it will be
required to make in the future or the effect that these required payments will
have on its financial condition. Moreover, the FCC's universal service rules
remain subject to change, which could increase the Company's costs.

         DETARIFFING

  In November 1996, the FCC issued an order that required non-dominant, long
distance carriers, like the Company, to cease filing tariffs for their domestic
long distance services. Tariffing is a traditional requirement of telephone
companies whereby such companies publish for public inspection at state and
federal regulatory agencies all terms, conditions, pricing, and available
services governing the sale of all such services to the public. Traditional long
distance service tariffs are filed with the FCC and tariffs for local telephone
services are filed with state regulatory commissions. The FCC's order required
mandatory detariffing for long distance services and gave interstate long
distance service providers nine months to withdraw federal tariffs and move to
contractual relationships with their customers. This order is subject to a stay
issued by a federal appeals court, and it is unclear at this time whether or
when the detariffing order will be implemented. In March 1999, the FCC adopted
further rules that, while still maintaining mandatory detariffing, required long
distance carriers to make specific public disclosures on their Internet websites
of their rates, terms, and conditions for domestic interstate services. The
effective date of these rules also is delayed until a court decision is rendered
on the appeal of the FCC's detariffing order. If the FCC's orders become
effective, non-dominant interstate services providers 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 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 continues to require that service providers
obtain authority to provide service between the United States and foreign points
and file tariffs for international service.

         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



                                       16
<PAGE>   17

Company, have accrued 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
these 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 substantial 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 Commissions, 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 Public Utility Commission ("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 a customer 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 Internet service providers
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 by state regulatory commissions, to
remain intact. However, on March 24, 2000, the FCC's jurisdictional
determination with respect to dial-up access traffic to Internet service
providers was vacated by the U.S. Court of Appeals for the District of Columbia
and remanded to the FCC for further proceedings.

  The FCC is currently determining whether a new compensation mechanism should
be implemented. Presumably, in the context of the remand of its order on
reciprocal compensation from the Court of Appeals, the FCC also will further
consider whether dial-up traffic to Internet service providers is interstate in
nature and whether such traffic is subject to requirements governing the payment
of reciprocal compensation. Any decision that invalidates current reciprocal
compensation arrangements could result in the reduction, or elimination, of
potential revenues we may receive from reciprocal compensation payments for
traffic terminated over our network to ISPs.

  As of March 2000, 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, a few other state PUCs recently have ruled that CLECs are not
entitled to collect reciprocal compensation for terminating ISP-bound traffic. A
few 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. Several favorable state PUC decisions are
currently on appeal. We are unable to predict the outcome of these appeals and
note that a reversal could have a materially adverse effect on the Company's
financial position. In addition, the Company has filed arbitration petitions
against BellSouth seeking to ensure that successor interconnection agreements
with BellSouth provide for reciprocal compensation for dial-up access traffic to
ISPs. Adverse decisions on this issue could have a materially adverse effect on
the Company's financial position.

         STATE REGULATION

  The FTA preempts state and local statutes and regulations that prohibit the
provision of competitive telecommunications services. As a result, we will 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 public utility and public service commissions
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 approval for
transfers of control of certified providers, corporate reorganizations,
acquisitions of telecommunications operations, assignment of carrier assets,
carrier stock offerings, and incurrence of significant debt obligations. States
generally retain the right to sanction a service provider or to revoke
certification if a service provider violates applicable laws or regulations. If
any regulatory agency were to conclude that we are or were providing



                                       17
<PAGE>   18

intrastate services without the appropriate authority or in violation of any
regulation, the agency could initiate enforcement actions, which could include
the imposition of fines, a requirement to disgorge revenues or the refusal to
grant the regulatory authority necessary for the future provision of intrastate
telecommunications services.

  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 local services authority, 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 receive such authorizations.

         LOCAL INTERCONNECTION

  The FTA imposes a duty upon all ILECs to negotiate in good faith with
potential 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, we have a right to seek arbitration with the state
regulatory authority 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, U S West, Bell Atlantic, GTE and Sprint/Central Telephone.
Arbitration decisions involving the Company's interconnection arrangements in
several states have been challenged in lawsuits filed in U.S. 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 have caused the Company to file complaints
against BellSouth and U S West. Similar problems have been experienced with
other ILECs, and there can be no assurance that ILEC performance will improve.

  A number of the Company's interconnection agreements will expire at various
times over the next six months, after which time, the Company will be required
to renegotiate each such agreement. The initial term of our interconnection
agreement with BellSouth already has lapsed, but its terms continue to apply
until a successor agreement is established through negotiation or state
regulatory commission arbitration proceedings. The Company has filed for
arbitration of a successor agreement in several BellSouth states. There can be
no assurance that these arbitrations, negotiations, and renegotiations of
interconnection agreements will be successful, that the agreements can be
extended in a favorable manner, or that State PUC arbitration of any unresolved
issues will be decided favorably 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 the existing
franchise or license agreements prior to their expiration dates could have a
materially adverse effect on the Company. 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 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 such 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.

         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
U.S. 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



                                       18
<PAGE>   19

November 12, 1997, the U.S. 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 will 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, 1999, the Company employed a total of 1,418 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.



                                       19
<PAGE>   20


ITEM 2.  PROPERTIES

  As of 12/31/99, e.spire leases 59,545 and 24,255 square foot office spaces in
Annapolis Junction, Maryland for its former corporate headquarters for $100,406
and $32,272 per month, respectively, as of December 31,1999, subject to periodic
increases in specified amounts. The primary lease expires in 2003 with an option
to renew for one additional five-year period. The secondary lease terminates in
April 2005. As of December 31, 1999, additional office space of 128,954 square
feet is leased in Columbia, Maryland and Laurel, Maryland for two additional
corporate offices, and the Company's billing center. These leases expire in
2007, 2000, and 2000, respectively. e.spire leases 167,285 square feet in
Herndon, Virginia, for corporate offices for $395,629 per month as of December
31, 1999, 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 $28,642. This lease expires in 2009 with
an option to renew for one additional five-year period.

  As of December 31, 1999, the Company's various operating subsidiaries have
leased facilities for their offices and network nodes. The aggregate monthly
rent on these properties is approximately $925,300. The various leases expire on
dates ranging from March 2000 to December 2013. Most have renewal options.
Additional office space and equipment rooms will be leased as additional
networks are constructed and the Company's operations are expanded.

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

ITEM 3.  LEGAL PROCEEDINGS

    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

    No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1999.



                                       20
<PAGE>   21


                                     PART II

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

    The Company's Common Stock trades on The NASDAQ Stock Market under the
symbol "ESPI".

    The following table sets forth, for the periods indicated, the range of high
and low closing bid quotations for the Common Stock obtained from The Nasdaq
Stock Market.

<TABLE>
<CAPTION>
                                                    HIGH PRICE      LOW PRICE
                                                    ----------      ---------
<S>                                                <C>           <C>
          FISCAL YEAR ENDED DECEMBER 31, 1997
            First Quarter ...................       $   11.13    $    6.50
            Second Quarter ..................            7.69         4.75
            Third Quarter ...................           12.25         6.38
            Fourth Quarter ..................           14.00        10.63
          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
</TABLE>

    On March 31, 2000, the last reported sales price for the Common Stock as
reported on The Nasdaq Stock Market was $7.031. As of December 31, 1999, there
were approximately 399 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. The
Company's indentures, Credit Facilities 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, in consideration of approximately $100.7 million, e.spire
issued an aggregate of 81,777 shares of Series A Convertible Preferred Stock and
175,000 warrants to The Honeywell International Inc. Master Retirement Trust,
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., and TRV Executive 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). The securities were issued pursuant to Section 4(2) of the
Securities Act of 1933.



                                       21
<PAGE>   22


ITEM 6.   SELECTED FINANCIAL DATA

    The selected consolidated financial data presented below under the captions
"Statement of Operations Data" for the years ended June 30, 1995 and 1996,
December 31, 1996, 1997, 1998 and 1999, and "Balance Sheet Data" as of June 30,
1995 and 1996, December 31, 1996, 1997, 1998 and 1999 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".

                      SELECTED CONSOLIDATED FINANCIAL DATA
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                FISCAL
                                              YEAR ENDED     YEAR ENDED       YEAR ENDED
                                               JUNE 30,       JUNE 30,       DECEMBER 31,
                                                 1995          1996             1996
                                              -------------------------------------------
<S>                                           <C>            <C>             <C>
STATEMENT OF OPERATIONS DATA:
   Revenues .............................     $     389      $   3,415       $   9,417
   Operating expenses:
   Network, development and operations...         3,282          5,265          11,046
   Selling, general and administrative...         4,598         13,464          30,656
   Non-cash stock compensation ..........         6,419          2,736           2,081
   Depreciation and amortization ........           498          3,078           7,228
                                              ---------      ---------       ---------
     Total operating expenses ...........        14,797         24,543          51,011
                                              ---------      ---------       ---------
   Loss from operations .................       (14,408)       (21,128)        (41,594)
   Interest and other income ............           218          4,410           6,390
   Interest and other expense ...........          (170)       (10,477)        (18,032)
   Debt conversion expense...............          (385)             0               0
                                              ---------      ---------       ---------
   Net loss before minority interest.....       (14,746)       (27,195)        (53,236)
   Minority interest.....................            48            413             417
                                              ---------      ---------       ---------
   Net loss .............................     $ (14,698)     $ (26,782)      $ (52,819)
                                              =========      =========       =========
   Preferred stock dividends and
   accretion ............................        (1,071)        (3,871)         (4,021)
                                              ---------      ---------       ---------
   Net loss to common stockholders ......     $ (15,769)     $ (30,653)      $ (56,840)
                                              =========      =========       =========
   Net loss per common share ............     $   (3.30)     $   (4.96)      $   (8.54)
                                              =========      =========       =========
   Weighted average shares outstanding ..         4,772          6,185           6,653
OTHER DATA:
   Adjusted EBITDA(1)....................     $  (7,443)     $ (14,901)      $ (31,868)
   Capital expenditures .................        15,303         60,856         107,773


<CAPTION>

                                            YEAR ENDED       YEAR ENDED       YEAR ENDED
                                           DECEMBER 31,     DECEMBER 31,     DECEMBER 31,
                                              1997              1998             1999
                                           ----------------------------------------------
<S>                                         <C>              <C>              <C>
STATEMENT OF OPERATIONS DATA:
   Revenues .............................   $  59,001        $ 156,759        $ 244,009
   Operating expenses:
   Network, development and operations...      52,881          106,813          159,368
   Selling, general and administrative...      59,851          103,639          169,180
   Non-cash stock compensation ..........       4,274            9,928           11,473
   Depreciation and amortization ........      24,131           47,332           95,943
                                            ---------        ---------        ---------
     Total operating expenses ...........     141,137          267,712          435,964
                                           ---------        ---------        ---------
   Loss from operations .................    (82,136)        (110,953)        (191,955)
   Interest and other income ............      8,685           23,348           10,602
   Interest and other expense ...........    (41,565)         (75,474)         (96,395)
   Debt conversion expense...............          0                0                0
                                           ---------        ---------        ---------
   Net loss before minority interest.....   (115,016)        (163,079)        (277,748)
   Minority interest.....................          0                0                0
                                           ---------        ---------        ---------
   Net loss .............................  $(115,016)       $(163,079)       $(277,748)
                                           =========        =========        =========
   Preferred stock dividends and
   accretion ............................    (11,630)         (36,080)         (40,646)
                                           ---------        ---------        ---------
   Net loss to common stockholders ......  $(126,646)       $(199,159)       $(318,394)
                                           =========        =========        =========
   Net loss per common share ............  $   (4.65)       $   (4.45)       $   (6.38)
                                           =========        =========        =========
   Weighted average shares outstanding ..     27,234           44,752           49,892
OTHER DATA:
   Adjusted EBITDA(1)....................  $ (53,731)       $ (53,693)       $ (84,160)
   Capital expenditures .................    135,036          249,256          286,744
</TABLE>



<TABLE>
<CAPTION>
BALANCE SHEET DATA (END OF PERIOD):         JUNE 30,   JUNE 30,    DECEMBER 31,  DECEMBER 31,  DECEMBER 31,  DECEMBER 31,
                                              1995      1996          1996           1997         1998          1999
------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>         <C>          <C>          <C>         <C>          <C>
Cash and cash equivalents                    $20,351    $134,116     $ 78,619     $260,837    $ 328,758    $  62,525
Total assets                                  37,627     223,600      230,038      638,896      982,957      941,242
Working capital (deficit)                     13,908     114,966       46,001      272,234      325,734      (60,505)
Networks, equipment and furniture, net        15,567      76,739      136,083      250,478      485,934      682,474
Long-term debt, including current portion      3,798     184,382      210,410      461,285      749,815      970,124
Long-term liabilities                          4,723     189,072      216,484      461,321      746,765      805,202
Redeemable stock and options                   2,931       2,155        2,000      206,160      241,044      281,596
Stockholders' equity (deficit)                22,144       8,982      (27,038)     (65,356)    (101,734)    (401,195)
</TABLE>

NOTE TO SELECTED CONSOLIDATED FINANCIAL DATA

(1) Adjusted EBITDA consists of net income (loss) before net interest, income
taxes, depreciation and amortization, and noncash stock compensation. 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.


                                       22
<PAGE>   23


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 Competitive Local Exchange Carriers ("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, 1999, was
comprised of 3,830 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.

    With the passage of the federal Telecommunications Act of 1996 ("Telecom
Act, FTA or the Act"), the Company enhanced the scope of its product offerings
from dedicated services to a full range of switched voice, data and Internet
services in order to meet the needs of business end-users, and is expanding its
sales, marketing, customer care and operations support systems ("OSS")
capabilities. The Company introduced local switched voice services, including
local exchange services, in late 1996 and long distance services in late 1997.
In late 1998, e.spire announced that it would begin to eliminate its resale
business. As of December 31, 1999, e.spire had installed 165,290 customer access
lines of which approximately 95% were on-switch. This represents a significant
increase over the 133,090 access lines installed as of December 31, 1998 of
which approximately 47% were on-switch.

    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 expenses. The Company has
made specific strategic decisions to build high capacity networks with broad
market coverage, which initially increases its level of capital expenditures and
operating losses. However, the Company believes that over the long term this
strategy will enhance the Company's financial performance by increasing the
traffic flow over its network.

    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.

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.

TELECOMMUNICATIONS SERVICES

    The Company reported an increase in Telecommunications 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.



                                       23
<PAGE>   24


    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")

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.



                                       24
<PAGE>   25

TELECOMMUNICATIONS SERVICES

    Cost of sales for Telecommunications 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.

TELECOMMUNICATIONS SERVICES

    Telecommunications services gross margin increased 810 basis points to 31.0
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



                                       25
<PAGE>   26

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.

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.

RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED
DECEMBER 31, 1997

REVENUES

    The Company reported an increase in total revenues of $97.7 million, or
166%, to $156.8 million for the year ended December 31, 1998, compared with
revenues of $59.1 million for the year ended December 31, 1997 as discussed
below.

TELECOMMUNICATIONS SERVICES

    The Company reported an increase in telecommunications services revenues of
$71.2 million, or 127%, to $127.3 million for the



                                       26
<PAGE>   27

year ended December 31, 1998, compared with revenues of $56.2 million for the
year ended December 31, 1997. Included in Telecommunications services are
revenues from the dedicated access, switch services and data/Internet products.
The increase in revenues was attributable to the Company's greater presence and
expansion in its 35 local fiber optic networks. Also, the introduction of new
service offerings such as e.spire Platinum and Gold have contributed to the
increase in revenues. The Company also increased the number of route miles,
buildings connected and voice and data switches deployed. Between December 31,
1997 and December 31, 1998, the Company increased route miles by 681, or 64% and
buildings connected increased by 1,308, or 82%. Lucent 5ESS switches deployed
increased to 19 as of December 31, 1998 from 16 as of December 31, 1997. In
addition, the Company has deployed 66 ATM switches over its coast-to-coast data
network as of December 31, 1998, up from 44 as of December 31, 1997. Also,
access lines installed, net of disconnects resulting from the Company's
previously announced plan to eliminate switched resale, increased by 97,965, or
279% to 133,070 at December 31, 1998, from 35,105 at December 31, 1997. More
than 80% of net access lines installed during the three months ended December
31, 1998 were on-net.



                                       27
<PAGE>   28


    Included in telecommunications services revenues are revenues of
approximately $17.7 million and $1.6 million, for the years ended December 31,
1998 and 1997, respectively, for reciprocal compensation relating to the
transport and termination of local traffic primarily to ISPs from customers of
incumbent local exchange carriers pursuant to various interconnection
agreements. These local exchange carriers have not paid and have disputed the
majority of 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. The resolution of these disputes will be based on rulings by
state PUCs, or the FCC, the courts and/or commercial arbitrators. The FCC
recently ruled that ISP-bound traffic is jurisdictionally "interstate in nature"
but delegated to state PUCs the decision of whether reciprocal compensation must
be paid under the terms of existing local interconnection agreements. To date,
there have been no unfavorable final rulings concerning payment of past due
reciprocal compensation amounts for ISP traffic in states in which e.spire
billed reciprocal compensation through December 31, 1998. Although there can be
no assurance that future regulatory rulings will be favorable to the Company,
the Company believes that all of these amounts are ultimately collectible,
although the timing of receipts cannot be predicted at this time. (See
"Regulation")

NETWORK TECHNOLOGIES SERVICES

    Network technologies services revenues increased $26.5 million, or 930%, to
$29.4 million for the year ended December 31, 1998, compared with revenues of
$2.9 million for the year ended December 31, 1997. 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
fiber optic network design, project management and construction services by ACSI
NT. Also, included in network technologies revenues are revenues for
construction contracts and grants of indefeasible rights of use ("IRUs") on
portions of e.spire's networks to IXCs and other 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 recognized approximately $14 million in
non-monetary proceeds from agreements to exchange IRUs multiple fibers along
certain sections of e.spire's networks for IRUs on other companies networks. The
Company expects to see continued increases in revenues from network technologies
due to future growth and expansion in this line of business.

COST OF SALES

    For the year ended December 31, 1998, compared with the year ended December
31, 1997, total cost of sales increased $53.9 million, or 102%, to $106.8
million from $52.9 million for the twelve months ended December 31, 1997, as
discussed below.

TELECOMMUNICATIONS SERVICES

    Cost of sales for telecommunications services increased $45.6 million, or
87%, to $98.1 million for the year ended December 31, 1998, from $52.5 million
for the same period of 1997. 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 charges
and services. Such costs increased to approximately $84.6 million for the year
ended December 31, 1998, from approximately $39.7 million for the year ended
December 31, 1997. 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, 1998 and 1997, these costs were approximately $22.2 million and
$13.2 million, respectively.

NETWORK TECHNOLOGIES SERVICES

    Cost of sales for network technologies services increased $8.3 million, to
approximately $8.7 million for the year ended December 31, 1998, compared with
$.4 million for the same period of 1997. Included in network technologies cost
of sales are direct materials and labor associated with the construction of
networks and costs associated with contracted services. The increase in these
costs was 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.



                                       28
<PAGE>   29


GROSS MARGIN

    For the year ended December 31, 1998, total gross margins increased $43.8
million, or 716%, to $49.9 million from $6.1 million for the year ended December
31, 1997.

TELECOMMUNICATIONS SERVICES

    Telecommunications services gross margin increased $25.6 million, or 699% to
$29.3 million for the year ended December 31, 1998 from $3.7 million for the
same period of 1997. This increase was due to the increased sales volume as
described above.

NETWORK TECHNOLOGIES SERVICES

    Network technologies services gross margin increased $18.2 million, or 742%
to $20.7 million for the twelve months ended December 31, 1998 from $2.5 million
for the twelve months ended December 31, 1997. The increase was due to the sale
of new higher margin construction projects in 1998.

OPERATING EXPENSES

SELLING, GENERAL AND ADMINISTRATIVE

    For the year ended December 31, 1998, selling, general and administrative
(SG&A) expenses increased $43.8 million, or 73%, to $103.6 million from $59.9
million for the same period of 1997.

    Included in selling, general and administrative expenses are personnel costs
such as employee salaries, benefits and commissions. Such costs increased to
$32.4 million for the year ended December 31, 1998, from $19.9 million for the
year ended December 31, 1997. Also, included in selling, general and
administrative expenses are operating costs such as rent, advertising and
general administrative and office expenses. These expenses increased to $71.2
million for the year ended December 31, 1998 from $40.0 million for the year
ended December 31, 1997.

    Increases in selling, general and administrative expenses are a result of
the Company's efforts directed at obtaining more on-net customers through direct
sales, as well as conversion of customers that are not presently served on the
Company's facilities. The costs associated with the increase in direct sales
include commissions and marketing costs that have increased from 1997 and are
expected to continue to increase. Also contributing to the increases in SG&A
costs were backoffice expenses that were a result of increases in personnel and
professional service costs associated with the Company's rapid growth which were
necessary to maintain and improve existing processes. In addition, as the
Company implement continues implementation of its operations support systems
("OSS") program over the next twelve to eighteen months in which it will
continue to invest capital dollars. As these systems are being installed, the
Company will continue to incur backoffice operating expenses to support the
existing processes.

NON-CASH STOCK COMPENSATION

    Non-cash stock compensation expense increased $5.7 million, or 132%, to $9.9
million for the year ended December 31, 1998 from $4.3 million for the year
ended December 31, 1997. Included in non-cash compensation for 1998 are accruals
for the issuance of common stock in connection with 1998 performance bonuses,
costs of grants of employee stock options, as well as costs associated with
stock options for former executives. Costs associated with the accrual for
performance bonuses were approximately $6.1 million and $2.9 million for the
years ended December 31, 1998 and 1997, respectively. The costs for the
compensation associated with stock option plans was approximately $3.8 million
for the year ended December 31, 1998 and $1.4 million for the same period of
1997.

DEPRECIATION AND AMORTIZATION

    Depreciation and amortization expenses increased $23.2 million, or 96%, to
$47.3 million for the year ended December 31, 1998 from $24.1 million for the
year ended December 31, 1997. These increases were due to an increase in gross
capital assets to $562.0 million at December 31, 1998 compared with capital
assets of $282.2 million at December 31, 1997.



                                       29
<PAGE>   30


INTEREST AND OTHER INCOME

    Interest and other income increased $14.7 million, or 169%, to $23.3 million
for the year ended December 31, 1998 from $8.7 million for the year ended
December 31, 1997. The increases in interest and other income reflects the
increase in earnings from the proceeds received from the issuance of the 13 3/4%
Senior Notes due 2007 (the "2007 Notes"), the 14 3/4% Redeemable Preferred Stock
due 2008 (the "14 3/4% Preferred Stock"), the 12 3/4% Junior Redeemable
Preferred Stock due 2009 (the "12 3/4% Preferred Stock"), the 8,100,000 shares
of Common Stock (the "1998 Common Stock Offering") and the 10.625% Senior
Discount Notes due 2008 (the "2008 Notes") which have been invested in
commercial paper, U.S. Government Securities and money market instruments.

INTEREST AND OTHER EXPENSE

    Interest and other expense increased $33.9 million, or 82%, to $75.5 million
for the year ended December 31, 1998 from $41.6 million for the year ended
December 31, 1997. The increase reflected 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 2008 Notes as well as
interest expense associated with the 2007 Notes and the Company's capital
leases.

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 $48.1 million, or 42%, to $163.1 million for the
year ended December 31, 1998 from $115.0 million for the year ended December 31,
1997. Further, net loss applicable to common stockholders increased $72.5
million, or 57%, to $199.2 million for the year ended December 31, 1998 from
$126.6 million for the same period of 1997. 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.



                                       30
<PAGE>   31


CAPITAL EXPENDITURES; OPERATING CASH FLOW

    As of December 31, 1999, the Company was operating 38 digital local fiber
optic networks. The costs associated with the initial construction and operation
of a network may vary, primarily due to market variations in geographic and
demographic characteristics, and the types of construction technologies, which
can be used to deploy the network. In addition, the Company has implemented
aggressive network expansion and optimization programs. This is evidenced by an
increase in fiber miles to 182,703 fiber miles at December 31, 1999, from
159,633 fiber miles at December 31, 1998. The Company also significantly
increased the number of buildings connected to its network to 4,149 at December
31, 1999 from 2,912 at December 31, 1998.

    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 will be incurred. The amount of these costs will vary, based
on the number of customers served and the actual services provided to the
customers.

    Although, as of December 31, 1999, the Company was generating revenues from
all of its fiber optic networks, on a consolidated basis it is still incurring
negative cash flows due, in part, to the funding requirements for continuing
network construction or development and to the roll-out of new data and voice
services. In 1999, the Company invested approximately $200 million in network
and telecommunications equipment. The Company expects it will continue to incur
negative cash flow for at least two years. There can be no assurance that the
Company's networks or any of its other services will ever provide a revenue base
adequate to sustain profitability or generate positive cash flow. The Company
estimates that in 2000, capital required for implementation of its integrated
networks and its other services and to fund negative cash flow, including
interest payments, will be approximately $275 million. As of December 31, 1999,
the Company's unrestricted cash balance was approximately $81,279. As of
December 31, 1999, the Company was in default of its Credit Facilities as
discussed below. However, on April 13, 2000, the Company obtained a waiver to
remedy the default under the Credit Facilities. In addition, the Company has
obtained additional financing commitments as discussed below. The Company
anticipates that current cash resources, together with amounts expected to be
available pursuant to the funding commitments described below, will be
sufficient to fund its continuing negative cash flow and required capital
expenditures through 2000.

LIQUIDITY AND CAPITAL RESOURCES

    The Company's further development and enhancement of new services, the
continued development, construction, expansion, operation and potential
acquisition of networks will require substantial capital expenditures. The
funding of these expenditures is dependent upon the Company's ability to raise
substantial financing. From the Company's inception through December 31, 1999,
the Company has raised net proceeds of approximately $1.2 billion from debt and
equity financings. The Company's cash, cash equivalents and restricted cash
decreased $293,373 for the year ended December 31, 1999, due to capital expended
for the expansion of the Company's infrastructure and services and to fund
negative cash flow, including principal and interest payments. The Company
expects to incur additional capital expenditures for the expansion of its
infrastructure and services and to fund negative cash flow in the future. At
December 31, 1999, the Company had approximately $81,279 of cash, cash
equivalents and restricted cash available for such purposes. In the first
quarter of 2000, the Company announced that it had secured $175 million in
funding commitments from Greenwich Street Capital Partners II, L.P., The Huff
Alternative Income Fund, L.P. and Honeywell International Inc. Master Retirement
Trust. The Company has an additional $36 million available under the Credit
Facilities, contingent upon the Company obtaining an amendment to the financial
covenants under the Credit Facilities as discussed below. The Company continues
to consider potential acquisitions or other arrangements that may fit the
Company's strategic plan. Any such acquisitions or arrangements that the Company
might consider are likely to require additional equity or debt financing, which
the Company will seek to obtain as required and which may also require that the
Company obtain the consent of its debt holders.

    e.spire signed commitment letters with Greenwich Street Capital Partners II,
L.P., and The Huff Alternative Income Fund , L.P. for a total of $125 million in
equity funding. In addition, e.spire signed a commitment letter with Honeywell
International Inc. Master Retirement Trust, in cooperation with Allied Capital
Management, L.L.C., a subsidiary of Honeywell International, Inc. for $50
million in equity funding. Pursuant to the commitment letters, e.spire will
issue 175,000 shares of Series A Convertible Preferred Stock (liquidation
preference $1,000 per share) and 175,000 warrants that will entitle the holders
to purchase, in the aggregate, a total of up to 7.72 million shares of Common
Stock. On March 3, 2000, e.spire completed a private offering of the first
tranche of these securities and received $100.7 million. In connection with the
private offering, e.spire issued 81,777 shares of Series A Convertible Preferred
Stock and 175,000 warrants. The issuance of the remaining shares of Series A
Convertible Preferred Stock and warrants is subject to shareholder approval and
satisfaction of various closing conditions, including the absence of any
material adverse change. 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


                                       31
<PAGE>   32

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 7.0% of 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
percent upon a change of control. Dividends on the convertible preferred stock
are cumulative and shall accrue whether or not the company 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 the Company.
Dividends on the convertible preferred stock are payable only when and if
declared by the Company; provided that all accrued but unpaid dividends on any
share of convertible preferred stock must be paid by the Company upon the
conversion of such share of convertible preferred stock. The 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 the Company 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. In connection with the issuance of the convertible preferred
stock, the Company has agreed to certain restrictive covenants, which are
substantially similar to the covenants that were entered into in connection with
the issuance of the Company's 12 3/4% Junior 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.

    In December 1999, e.spire obtained an additional commitment of $50 million
in capital lease financing from GATX Capital Corporation, a diversified
financial services company, and its telecommunications investing affiliate, GATX
Telecom Investors II-A, L.L.C. (collectively "GATX"). The proceeds will be used
primarily to finance voice switches, including remote modules and associated
software, as well as other related telecommunications networking equipment. As
of December 31, 1999, e.spire had drawn approximately $16 million under these
capital leases. The Company's ability to draw the balance of approximately $34
million is subject to GATX discretion in light of EBIDTA loss.

    On August 12, 1999, the Company closed the Credit Facilities which consists
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. Of the
Credit Facilities, a total of $164 million was immediately available to the
Company and is outstanding as of December 31, 1999. The remaining $36 million is
available to the Company contingent upon the Company obtaining an amendment to
the financial covenants under the Credit Facilities. Also, the Credit Facilities
contain an Incremental Facility of up to an additional $100 million, although no
lender is obligated to participate in the Incremental Facility. In conjunction
with the Credit Facilities, the Company retired a $35 million credit facility
with Newcourt Commercial Finance Corporation on August 12, 1999.

    The Credit Facilities are collateralized by the capital stock of all of the
restricted subsidiaries of the Company and the assets of the Company and its
restricted subsidiaries, including promissory notes representing intercompany
indebtedness. In addition, the Credit Facilities contain certain covenants,
which impose restrictions on the Company and its restricted subsidiaries. These
include, without limitation, restrictions on the declaration or payment of
dividends with respect to the capital stock of the Company, 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 Senior Secured Credit Facilities (as described in note 8) 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 the financial covenants as of December 31, 1999,
resulting in a default under the Credit Facilities which allows 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 (the
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 is currently in discussion with its lenders and
believes that it will be successful in amending its financial covenants on a
going forward basis to amounts that the Company believes will allow for
compliance. However, there can be no assurance that the Company will be
successful in amending its covenants, that the Company will be in compliance
with its debt covenants throughout 2000 or that the Credit Facilities will not
be accelerated, causing an acceleration of other obligations. The Company has
classified its obligation under the Credit Facilities as a current liability as
a result of the debt covenant violation. 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, 1999. In
the event that the Company is unsuccessful in negotiating amendments to the
financial covenants, the Company believes that it will have access to sufficient
financial resources to ensure that the Notes will not be accelerated.

    A significant portion of the Company's cash resources are committed to
existing obligations. However, management anticipates that the Company's current
cash resources, together with other available sources of cash, will be
sufficient to fund the Company's continuing negative cash flow and required
capital expenditures through 2000. To meet its additional remaining capital
requirements and to successfully implement its strategy, the Company will be
required to sell additional equity securities, increase its existing Credit
Facilities, acquire additional credit facilities or sell additional debt
securities. The Company is currently exploring additional sources of financing
including increases to its existing capital lease programs. Accordingly, there
can be no assurance that the Company will be able to obtain the additional
financing necessary to satisfy its cash requirements or to implement its
strategy successfully, in which event the Company will be unable to fund its
ongoing operations, which would have a material adverse effect on its business,
results of operations and financial condition.



                                       32
<PAGE>   33

    On November 14, 1995, the Company completed a private offering of the 2005
Notes and warrants from which the Company received approximately $96.1 million
in net proceeds. The 2005 Notes will accrue to an aggregate principal amount of
$190.0 million by November 1, 2000, after which cash interest will accrue and be
payable on a semi-annual basis.

    On March 21, 1996, the Company completed a private offering of the 2006
Notes from which the Company received net proceeds of approximately $61.8
million. The 2006 Notes will accrue to an aggregate principal amount of $120.0
million by April 1, 2001, after which cash interest will accrue and be payable
on a semi-annual basis.

    On April 15, 1997, the Company completed the offering of 8,000,000 shares of
Common Stock. In connection therewith, the Company completed the sale of an
additional 660,000 shares on May 14, 1997 upon exercise of the underwriters'
over-allotment option and received aggregate net proceeds of approximately $40.0
million from the sale of these 8,660,000 shares.

    On July 10, 1997, the Company completed the issuance and sale of 75,000
units (the "Unit Offering"), consisting of 14 3/4% Redeemable Preferred Stock
due 2008 and warrants (the "Unit Warrants") from which the Company received net
proceeds of approximately $67.7 million. Dividends on the 14 3/4% Preferred
Stock accrue from the date of issuance, are cumulative and are payable quarterly
in arrears, at a rate per annum of 14 3/4% of the liquidation preference per
share. Dividends on the 14 3/4% Preferred Stock will be paid, at the Company's
option, either in cash or by the issuance of additional shares of 14 3/4%
Preferred Stock; provided, however, that after June 30, 2002, to the extent and
for so long as the Company is not precluded from paying cash dividends on the 14
3/4% Preferred Stock by the terms of any then outstanding indebtedness or any
other agreement or instrument to which the Company is then subject, the Company
shall pay dividends on the 14 3/4% Preferred Stock in cash.

    On July 23, 1997, the Company completed the sale of the 2007 Notes. Of the
total net proceeds of $204.3 million, the Company placed $70.0 million
representing funds sufficient to pay the first five interest payments on the
2007 Notes into an escrow account for the benefit of the holders thereof.
Payments of interest on the 2007 Notes are payable semi-annually, and began in
January 1998.

    In October 1997, the Company issued the 12 3/4% Preferred Stock from which
the Company received net proceeds of approximately $146.0 million. Dividends on
the 12 3/4% Preferred Stock accrue from the date of issuance, are cumulative and
are payable quarterly in arrears, at a rate per annum of 12 3/4% of the
liquidation preference per share. Dividends on the 12 3/4% Preferred Stock will
be paid, at the Company's option, either in cash or by the issuance of
additional shares of 12 3/4% Preferred Stock; provided, however, that after
October 15, 2002, to the extent and for so long as the Company is not precluded
from paying cash dividends on the 12 3/4% Preferred Stock by the terms of any
agreement or instrument governing any of its then outstanding indebtedness, the
Company shall pay dividends on the 12 3/4% Preferred Stock in cash.

    On February 26, 1998, the Company paid approximately $10.3 million to effect
amendments (the "Amendments") to the indentures under which 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 increases
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 March 31, 1998, the Company restructured certain leases resulting in a
change from operating to capital lease treatment. This transaction resulted in
capital leases obligations totaling $24.5 million being included in liabilities
as of December 31, 1998.

    On April 3, 1998, the Company completed the 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 certain stockholders of the Company sold
597,582 shares. Total net proceeds to the Company from the 1998 Common Stock
Offering and the exercise of certain options and warrants in connection
therewith were approximately $134.2 million.

    On July 24,1998, the Company completed a private placement of 10 5/8% Senior
Discount Notes due 2008 yielding net proceeds to the Company of approximately
$225 million. The 2008 Notes will accrue to an aggregate principal amount of
$375 million by July 2008. The 2008 Notes will require payment of cash interest
semi-annually in arrears beginning January 1, 2004.


                                       33
<PAGE>   34

YEAR 2000 PROGRAM

    There have been no material Year 2000 impacts reported with respect to the
Company's products, services or back office systems that were classified as Year
2000 ready. The Company has experienced no material supply chain problems
attributable to the Year 2000 date transition. The Company's mission critical
systems for its telecommunications network, network construction and Internet
services, have not, as of March 2, 2000, experienced any material adverse
impacts as a result of the Year 2000 date transition. For the purposes of this
disclosure, the Company defines the term "mission critical" to mean: any
component or system involved in the delivery of telecommunication, internet or
network construction services. Because of its reliance on third party vendors,
and because of the possibility that some latent problem that has not yet
manifested itself could still occur, it is possible that the Company may
experience adverse impacts as a result of the Year 2000 date transition that
have not yet been identified.

    As of March 2, 2000, the Company has incurred approximately $3 million
cumulatively for the initial Year 2000 Assessment Report, inventory database and
validation, remediation and contingency planning efforts. The total cost of the
Year 2000 Program has been expensed as incurred and funded with existing cash
resources. The costs of the program and the date on which the Company believed
it would complete the Year 2000 modifications were based on management's best
estimates, which were derived from numerous assumptions of then future events,
including the continued availability of certain resources, third party
modification plans and other factors.

NEW ACCOUNTING PRONOUNCEMENTS

    In June 1999, the Financial Accounting Standards Board (the FASB) issued
FASB Interpretation No. 43, Real Estate Sales, an interpretation of FASB
Statement No. 66 (FIN 43). FIN 43 establishes standards for recognition of
profit on all real estate sales transactions without regard to the nature of the
seller's business. Specifically, FIN 43 expands the concept of real estate to
include "integral equipment," which is defined in FIN 43 as "any physical
structure or equipment attached to the real estate that cannot be removed and
used separately without incurring significant costs." The provisions of FIN 43
are effective for all sales of real estate with property improvements or
integral equipment entered into after June 30, 1999.

    The Company believes FIN 43 limits the application of sale-type lease
accounting to grants of indefeasible rights of use (IRUs) of constructed dark
fiber in exchange for cash unless the Company transfers ownership of the
underlying assets to the customer as, under this interpretation, dark fiber and
conduit are considered integral equipment and, accordingly, title must transfer
to a customer in order for a lease transaction to be accounted for as a
sales-type lease. In the event that sales-type lease accounting is not
applicable to portions of or all of an IRU, the Company will apply operating
lease accounting and recognize revenue and operating costs ratably over the term
of the agreement. The effect of adopting the provisions of FIN 43 on 1999
results was to decrease revenues by $12.3 million and increase net loss by $10.9
million. Revenues for 2000 and forward will be negatively impacted by FIN 43.

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 exposure to interest rate changes.
The following table provides information about the Company's significant
financial instruments that are sensitive to changes in interest rates. (In
thousands)


<TABLE>
<CAPTION>
                                                                                        Future Principal Payments
                                                              ESTIMATED
                                                              FAIR VALUE
                                                         ON DECEMBER 31, 1999    2000   2001   2002   2003  2004  THEREAFTER
                                                         --------------------    ----   ----   ----   ----  ----  ----------
<S>                                                            <C>              <C>     <C>   <C>    <C>    <C>  <C>
Long-term debt, including Current portion:

 Fixed rate:

     2005 Senior Discount Notes, interest at 13%,
         maturing 2005                                         $100,947              0    0     0      0      0    $165,632
     2006 Senior Discount Notes, interest at 12 3/4%,
         maturing 2006                                         $ 57,156              0    0     0      0      0    $102,791
     2007 Senior Discount Notes, interest at 13 3/4%,
          maturing 2007                                        $156,200              0    0     0      0      0    $220,000
     2008 Senior Discount Notes, interest at 10 5/8%,
          maturing 2008                                        $168,750              0    0     0      0      0    $260,983
     Senior Secured Credit Facility                            $164,000        164,000    0     0      0      0    $      0

     Total                                                     $647,053        164,000    0     0      0      0    $749,406
</TABLE>


                                       34
<PAGE>   35


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



                                       35
<PAGE>   36


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The sections of the Company's 1999 Proxy Statement entitled "Election of
Directors - Information Concerning Director Nominees," "- -Business Experience
of Director Nominees," "Section 16(a) Beneficial Ownership Reporting
Compliance," and "Management - Business Experience of Executive Officers" are
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The sections of the Company's 1999 Proxy Statement entitled "Election of
Directors - Directors' Compensation," "--Compensation Committee Interlocks and
Insider Participation," "Compensation of Executive Officers and Directors -
Summary Compensation Table," "--Option Grants in Fiscal Year Ended December 31,
1998," "--Option Exercises and Fiscal Year End Values," and "Management
Employment and Termination Agreements" are incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The section of Company's 1999 Proxy Statement entitled "Stock Ownership of
Certain Beneficial Owners, Directors and Management" is incorporated herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The section of the Company's 1999 Proxy Statement entitled "Certain
Relationships and Related Transactions" is incorporated herein by reference.



                                       36
<PAGE>   37


                                     PART IV

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

a) EXHIBITS


<TABLE>
<CAPTION>
                                                                                                                     EXHIBIT NO. OR
 EXHIBIT                                                                                                             INCORPORATION
   NO.                               DESCRIPTION                                                                     BY REFERENCE
-----------------------------------------------------------------------------------------------------------------------------------
<S>        <C>                                                                                                       <C>
    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                                        E-1
    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.                      ####
   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.                                                               ####
</TABLE>


                                       37
<PAGE>   38

<TABLE>
<S>           <C>                                                                                                    <C>
   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.
</TABLE>



                                       38
<PAGE>   39


<TABLE>
<CAPTION>
                                                                                                                     EXHIBIT NO. OR
 EXHIBIT                                                                                                             INCORPORATION
   NO.                                        DESCRIPTION                                                            BY REFERENCE
-----------------------------------------------------------------------------------------------------------------------------------
<S>          <C>                                                                                                     <C>
   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 amended 1994 Stock Option Plan.                                                                ++
  10.4       Company's Employee Stock Purchase Plan                                                                   ++++
  10.5       Registration Rights Agreement dated July 1, 1992, between American
             Lightwave, Inc. and persons named therein.                                                               *
  10.6       Supplemental Registration Rights Agreement dated June 26, 1995.                                          ****
  10.7       Management Registration Rights Agreement dated June 30, 1995.                                            ****
  10.8       Registration Rights Agreement dated June 26, 1995, between the Company
             and certain Preferred Stockholders.                                                                      **
  10.9       Form of Warrant Agreement issued to certain Preferred Stockholders on
             June 26, 1995.                                                                                           ****
 10.10       Form of $.01 Warrant Agreement.                                                                          ****
 10.11       Form of $1.79 Warrant Agreement.                                                                         ****
 10.12       Form of $2.25 Warrant Agreement.                                                                         ****
 10.13       Stockholders Agreement dated June 26, 1995, between the Company and
             certain Preferred Stockholders.                                                                          ****
 10.14       2nd Amendment to the Third Amended and Restated Employment Agreement between the Company and             %%%
             Anthony J. Pompliano                                             ##
 10.15       Third Amended and Restated Employment Agreement between the Company                ##                    ****
             and Riley M. Murphy.
 10.16       Employment Agreement between the Company and David L. Piazza                           ##                *****
 10.17       Form of Stock Option Certificates, as amended, issued to executive officers under employment             ****
             agreements.
 10.18       Agreement, dated October 19, 1994, between the Company and Marvin                                        *
             Saffian & Company.
 10.19       Lease Agreement for the Company's executive offices at 131 National **** Business Parkway,
             Suite 100, Annapolis Junction, Maryland, as amended.
 10.20       Note Purchase Agreement, dated June 28, 1994.                                                            *
 10.21       Stock Purchase Agreement dated December 17, 1996 by and between the Company and CyberGate, Inc.          + + + +
 10.22       Stock and Warrant Purchase Agreement, dated June 26, 1995, between the Company and                       **
             the Purchasers named therein.
 10.23       Form of Indemnity Agreement between the Company and its Director, as                                     ****
             amended.
 10.24       Assignment and Assumption Agreement dated June 21, 1995, between the                                     ****
             Company and Apex Investment Fund II, L.P.
 10.25       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.
 10.26       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").
 10.27       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").
 10.28       Amended 1994 Stock Option Plan of the Company.                                                           ++
 10.29       Amendment to Amended 1994 Stock Option Plan of the Company                                               !!!!!
 10.30       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.
 10.31       Registation Rights Agreement dated as of July 23, 1997 among the Company and BT Securities as
             representatives of the Initial Purchase therein.                                                         ####
 10.32       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.
 10.33       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.
 10.34       Registration Rights Agreement, dated as of July 24, 1998 between the Company and Goldman Sachs &         !!
             Co., Bear, Stearns & Co. Inc. and ING Furman Selz LLC
 10.35       Form of Non-Qualified Stock Option Certificates, as amended, issued to                                   ++++
             Anthony J. Pompliano.
</TABLE>



                                       39
<PAGE>   40

<TABLE>
<CAPTION>
                                                                                                                  EXHIBIT NO. OR
EXHIBIT                                                                                                           INCORPORATION BY
  NO.                                      DESCRIPTION                                                            REFERENCE
-----------------------------------------------------------------------------------------------------------------------------------
<S>           <C>                                                                                                  <C>
   10.36      Registration Rights Agreement dated March 6, 1997 between the Company and MCI metro                  ++++
              Access Transmission Services, Inc.
   10.37      American Communications Services, Inc. Annual Performance Plan effective as of January 1, 1997       ###
   10.38      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.                       %%%%
   10.39      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
   10.40      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
   10.41      Employment Agreement between American Communications Services, Inc. and Richard Putt                 &
   10.42      Amendment No. 1 to Employment Agreement between American Communications Services, Inc.               &
              and Richard Putt
   10.43      $200 million Senior Secured Credit Facility Agreement                                                &&
   10.44      Lease Agreement between e.spire Communications, Inc. and CMD Properties, Inc.                        &&
   10.45      Lease Agreement between e.spire Communications, Inc. and Colgate Drive Associates, L.P.              &&
   10.46      Master Equipment Lease Agreement, dated as of December 13, 1999, between e.spire                     E-2
              Communications, Inc. and GATX Capital Corporation
   10.47      Master Equipment Lease Agreement, dated as of December 13, 1999, between e.spire                     E-3
              Communications, Inc. and GATX Telecom Investors II-A, L.L.C.
   10.48      Purchase Agreement for units consisting of Series A Convertible Preferred Stock and Warrants         E-4
              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
   10.49      Purchase Agreement for units consisting of Series A Convertible Preferred Stock and Warrants         E-5
              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.
   10.50      Purchase Agreement for units consisting of Series A Convertible Preferred Stock and Warrants         E-6
              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.
   10.51      Registration Rights Agreement (the "Agreement"), dated as of March 1, 2000, among e.spire            E-7
              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").
   10.52      Warrant Agreement among e.spire Communications, Inc. and The Huff Alternative Income Fund, L.P.,     E-8
              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.
    11.1      Statement re:  computation of per share earnings (loss).                                             E-9
    16.1      Letter re: change in certifying accountant.                                                          ***
    21.1      Subsidiaries of the Registrant.                                                                      %%%%
    23.1      Consent of KPMG LLP                                                                                  E-10
    27.1      Financial Data Schedules.                                                                            E-11
    99.1      Supplemental Financial Information                                                                   E-12
</TABLE>


      *       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.


                                       40
<PAGE>   41





+       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.

+++++   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. 333-71387) 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.



                                       41
<PAGE>   42

&&      Previously filed as an exhibit to the Company's Quarterly Report on
        Form 10-QSB for the fiscal quarter ended September 30, 1999.

b) REPORTS ON FORM 8-K


        a)      Form 8-K, as filed on February 22, 1999, announcing resignation
                of Ronald E. Spears, effective July 1, 1999, and appointment of
                Dennis Kern as Chief Operating Officer.

        b)      Form 8-K, as filed July 8, 1999, announcing $200 million Secured
                Credit Facilities.

        c)      Form 8-K, as filed on October 28, 1999, announcing third quarter
                results and resignation of David Piazza.

        d)      Form 8-K, as filed on November 1, 1999, announcing William R.
                Huff and Frederick Galland appointments to the Board and Olivier
                Trouveroy and Benjamin P. Giess resignations from the Board.

        e)      Form 8-K, as filed December 3, 1999, announcing waiver to Credit
                Agreement default.


                                       42
<PAGE>   43


                          E.SPIRE COMMUNICATIONS, INC.
                  SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                           BALANCE AT    CHARGED TO                                  BALANCE
                                           BEGINNING     COSTS AND     CHARGED TO                     AT END
          DESCRIPTION                      OF PERIOD      EXPENSES       REVENUE    DEDUCTIONS      OF PERIOD
----------------------------------------  ------------  ------------  ------------ ------------    -----------
<S>                                        <C>             <C>          <C>          <C>            <C>
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

Year ended December 31, 1997 Deducted
  from assets accounts:
    Allowance for doubtful accounts         $   433       $ 2,171       $     0       $   683       $ 1,921
</TABLE>



                                       43
<PAGE>   44


                                   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.

<TABLE>
<S>                                              <C>
               April 14, 2000                    By: /s/ George F. Schmitt
               --------------                    -------------------------
               Date                              George F. Schmitt, Chairman of the Board of Directors and
                                                 Interim Chief Executive Officer
</TABLE>

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

<TABLE>
<S>                                             <C>
               April 14, 2000                    By: /s/ George F. Schmitt
               --------------                    -------------------------
               Date                              George F. Schmitt, Chairman of the Board of Directors
                                                 (Principal Executive Officer)

               April 14, 2000                    By:
               --------------                    -----------------------
               Date                              William R. Huff, Vice Chairman of the Board of Directors

               April 14, 2000                    By:
               --------------                    -----------------------
               Date                              Edwin M. Banks, Director

               April 14, 2000                    By: /s/ Christopher L. Rafferty
               --------------                    -------------------------------
               Date                              Christopher L. Rafferty, Director

               April 14, 2000                    By: /s/ Frederick Galland :
               --------------                    ---------------------------
               Date                              Frederick Galland, Director

               April 14, 2000                    By: /s/ Joseph Thornton
               --------------                    -----------------------
               Date                              Joseph Thornton, Director

               April 14, 2000                    By: /s/ Peter C. Bentz:
               --------------                    -----------------------
               Date                              Peter C. Bentz, Director
</TABLE>



                                       44
<PAGE>   45



<TABLE>
<CAPTION>
                                                  INDEX OF EXHIBITS
                                                  -----------------
  EXHIBIT NO.             DESCRIPTION                                                     PAGE NO.
  -----------             -----------                                                     --------
<S>                       <C>                                                            <C>
   11.1                   Statement re: computation of per share earnings (loss).             E-3
   23.1                   Consent of KPMG LLP                                                 E-4
   27.1                   Financial Data Schedule                                             E-5
   99.1                   Supplemental Financial Information                                  E-6
</TABLE>



                                       45

<PAGE>   46

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S>                                                                                     <C>
Independent Auditors' Report..........................................................   F-2
Consolidated Balance Sheets as of December 31, 1997, 1998 and 1999....................   F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999......................................................   F-4
Consolidated Statements of Stockholders' Deficit for the Years Ended
December 31, 1997, 1998 and 1999......................................................   F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999......................................................   F-6
Notes to Consolidated Financial Statements............................................   F-8
</TABLE>


                                      F-1
<PAGE>   47

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
e.spire Communications, Inc.:


We have audited the accompanying consolidated balance sheets of e.spire
Communications, Inc. and subsidiaries as of December 31, 1998 and 1999, 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, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.

As discussed in Note 1 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.
March 24, 2000, except as
  to Notes 2, 8 and 19, which
  are as of April 13, 2000


                                      F-2
<PAGE>   48

                          e.spire COMMUNICATIONS, INC.

                           Consolidated Balance Sheets

                 (in thousands, except share and per share data)


<TABLE>
<CAPTION>
                                                                                                            DECEMBER 31,
                                                                                                   --------------------------------
                                              ASSETS                                                   1998              1999
                                                                                                   --------------   ---------------
<S>                                                                                              <C>                <C>
Current assets:
    Cash and cash equivalents                                                                    $       328,758            62,525
    Restricted cash and investments                                                                       30,769            18,754
    Trade accounts receivable, net of allowance for doubtful accounts of
       $5,581 and $28,707 at December 31, 1998 and 1999, respectively                                     42,254            97,238
    Unbilled revenue                                                                                      12,093            14,032
    Other current assets                                                                                   8,742             9,435
                                                                                                   --------------   ---------------
                  Total current assets                                                                   422,616           201,984
Networks, equipment and furniture, gross                                                                 561,954           848,698
Less - accumulated depreciation and amortization                                                         (76,020)         (166,224)
                                                                                                   --------------   ---------------
                  Networks, equipment and furniture, net                                                 485,934           682,474
Deferred financing fees, net of accumulated amortization of $7,855 and
    $13,246 at December 31, 1998 and 1999, respectively                                                   42,184            44,660
Intangible assets, net of accumulated amortization of $3,897 and $11,203
    at December 31, 1998 and 1999, respectively                                                           14,743             7,452
Restricted cash and investments                                                                           15,125                --
Other assets                                                                                               2,355             4,672
                                                                                                   --------------   ---------------
                  Total assets                                                                   $       982,957           941,242
                                                                                                   ==============   ===============
                                        LIABILITIES, REDEEMABLE STOCK,
                                            AND STOCKHOLDERS' DEFICIT
Current liabilities:
    Notes payable - current portion                                                              $         2,188           164,000
    Obligations under capital leases - current portion                                                     3,607             9,932
    Accounts payable                                                                                      66,647            46,106
    Accrued interest                                                                                      13,864            14,344
    Accrued employee costs                                                                                 1,682             5,262
    Other accrued liabilities                                                                              8,894            15,995
                                                                                                   --------------   ---------------
                  Total current liabilities                                                               96,882           255,639
Long-term liabilities:
    Notes payable, less current portion                                                                  723,105           749,406
    Obligations under capital leases, less current portion                                                20,915            46,786
    Other long-term liabilities                                                                            2,745             9,010
                                                                                                   --------------   ---------------
                  Total liabilities                                                                      843,647         1,060,841
Redeemable stock:
    14 3/4% Redeemable Preferred Stock due 2008 (liquidation value $107,235
       at December 31, 1999)                                                                              70,136            87,051
    12 3/4% Junior Redeemable Preferred Stock due 2009 (liquidation value $197,054
       at December 31, 1999)                                                                             170,908           194,545
                                                                                                   --------------   ---------------
                  Total redeemable stock                                                                 241,044           281,596
                                                                                                   --------------   ---------------
Stockholders' deficit:
    Common stock, $.01 par value, 125,000,000 shares authorized, 48,446,064, and
       51,149,825 shares issued and outstanding at
       December 31, 1998 and 1999, respectively                                                              484               511
    Additional paid-in capital                                                                           258,317           236,577
    Accumulated deficit                                                                                 (360,535)         (638,283)
                                                                                                   --------------   ---------------
                  Total stockholders' deficit                                                           (101,734)         (401,195)
                                                                                                   --------------   ---------------
Commitments and contingencies (notes 1, 2, 7, 8, 12, 13, 16 and 19)
                  Total liabilities, redeemable stock, and stockholders' deficit                 $       982,957           941,242
                                                                                                   ==============   ===============
</TABLE>
          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>   49
                          e.spire COMMUNICATIONS, INC.

                      Consolidated Statements of Operations

                 (in thousands, except share and per share data)


<TABLE>
<CAPTION>
                                                                                   YEARS ENDED DECEMBER 31,
                                                                        -----------------------------------------------
                                                                            1997             1998            1999
                                                                        --------------  ---------------  --------------
<S>                                                                 <C>                 <C>              <C>
Revenues:
    Telecommunications services                                      $         56,144          127,343         175,704
    Network technologies services                                               2,857           29,416          68,305
                                                                        --------------  ---------------  --------------
                                                                               59,001          156,759         244,009
                                                                        --------------  ---------------  --------------
Cost of sales:
    Telecommunications services (excluding noncash stock
       compensation of $983, $3,673 and $2,868, respectively)                  52,481           98,074         121,170
    Network technologies services (excluding noncash stock
       compensation of $342, $298 and $229, respectively)                         400            8,739          38,198
                                                                        --------------  ---------------  --------------
                                                                               52,881          106,813         159,368
                                                                        --------------  ---------------  --------------
Gross margin:
    Telecommunications services                                                 3,663           29,269          54,534
    Network technologies services                                               2,457           20,677          30,107
                                                                        --------------  ---------------  --------------
                                                                                6,120           49,946          84,641
                                                                        --------------  ---------------  --------------
Operating expenses:
    Selling, general, and administrative (excluding noncash stock
       compensation of $2,949, $5,957 and $8,376, respectively)                59,851          103,639         169,180
    Noncash stock compensation                                                  4,274            9,928          11,473
    Depreciation and amortization                                              24,131           47,332          95,943
                                                                        --------------  ---------------  --------------
            Total operating expenses                                           88,256          160,899         276,596
                                                                        --------------  ---------------  --------------
            Operating loss                                                    (82,136)        (110,953)       (191,955)
Nonoperating income (expenses):
    Interest and other income                                                   8,685           23,348          10,602
    Interest and other expense                                                (41,565)         (75,474)        (96,395)
                                                                        --------------  ---------------  --------------
            Net loss                                                         (115,016)        (163,079)       (277,748)
Preferred stock dividends and accretion                                       (11,630)         (36,080)        (40,646)
                                                                        --------------  ---------------  --------------
            Net loss applicable to common
               stockholders                                          $       (126,646)        (199,159)       (318,394)
                                                                        ==============  ===============  ==============
Basic and diluted net loss per common

    share                                                            $          (4.65)           (4.45)          (6.38)
                                                                        ==============  ===============  ==============
Weighted average number of common

    shares outstanding                                                     27,233,642       44,751,690      49,891,910
                                                                        ==============  ===============  ==============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>   50

                          e.spire COMMUNICATIONS, INC.

                Consolidated Statements of Stockholders' Deficit

                  Years ended December 31, 1997, 1998 and 1999
                        (in thousands, except share data)


<TABLE>
<CAPTION>
                                                                                 SERIES A-1                      SERIES B
                                                                               PREFERRED STOCK                PREFERRED STOCK
                                                                         ----------------------------   ----------------------------
                                                                            SHARES          AMOUNT         SHARES          AMOUNT
                                                                         --------------   -----------   --------------   -----------
<S>                                                                      <C>             <C>            <C>             <C>
Balances December 31, 1996                                                     186,664    $      187          277,500    $      278
    Shares issued as consideration for acquisitions                                 --            --               --            --
    Series A and B Preferred Stock dividends                                        --            --               --            --
    Issuance of common stock                                                        --            --               --            --
    Conversion of preferred shares                                            (186,664)         (187)        (277,500)         (278)
    Preferred dividends paid in stock                                               --            --               --            --
    Warrants and stock options exercised                                            --            --               --            --
    Cancellation of put right obligation                                            --            --               --            --
    Stock compensation expense                                                      --            --               --            --
    Warrants issued                                                                 --            --               --            --
    Redeemable Preferred Warrants                                                   --            --               --            --
    Preferred stock dividends/accretion                                             --            --               --            --
    Shares issued to AT&T                                                           --            --               --            --
    Shares issued under employee stock purchase plan                                --            --               --            --
    Accretion of consulting agreement credit to exercise price of
      warrants                                                                      --            --               --            --
    Net loss                                                                        --            --               --            --
                                                                         --------------   -----------   --------------   -----------
Balances at December 31, 1997                                                       --            --               --            --
    Issuance of common stock                                                        --            --               --            --
    Warrants and stock options exercised                                            --            --               --            --
    Stock compensation expense                                                      --            --               --            --
    Warrants issued                                                                 --            --               --            --
    Preferred stock dividends/accretion                                             --            --               --            --
    Shares issued under employee stock purchase plan and performance
      plan                                                                          --            --               --            --
    Cancellation of put right obligations                                           --            --               --            --
    Shares issued as consideration for acquisitions                                 --            --               --            --
    Net loss                                                                        --            --               --            --
                                                                         --------------   -----------   --------------   -----------
Balances at December 31, 1998                                                       --            --               --            --
    Warrants and stock options exercised                                            --            --               --            --
    Stock compensation expense                                                      --            --               --            --
    Warrants issued                                                                 --            --               --            --
    Preferred stock dividends/accretion                                             --            --               --            --
    Shares issued under employee stock purchase plan and performance
      plan                                                                          --            --               --            --
    Net loss                                                                        --            --               --            --
                                                                         --------------   -----------   --------------   -----------
Balances at December 31, 1999                                                       --    $       --               --    $       --
                                                                         ==============   ===========   ==============   ===========
</TABLE>


<TABLE>
<CAPTION>

                                                                                  COMMON STOCK               ADDITIONAL
                                                                         -------------------------------      PAID-IN
                                                                              SHARES           AMOUNT         CAPITAL
                                                                         -----------------   -----------   ---------------
<S>                                                                      <C>                <C>           <C>
Balances December 31, 1996                                                      6,784,996    $       68    $       54,870
    Shares issued as consideration for acquisitions                             1,081,166            11             9,374
    Series A and B Preferred Stock dividends                                           --            --            (1,114)
    Issuance of common stock                                                    8,660,000            86            39,866
    Conversion of preferred shares                                             17,377,275           174               291
    Preferred dividends paid in stock                                           1,650,207            16             7,791
    Warrants and stock options exercised                                        1,367,460            14             3,254
    Cancellation of put right obligation                                               --            --             1,000
    Stock compensation expense                                                         --            --             4,274
    Warrants issued                                                                    --            --               480
    Redeemable Preferred Warrants                                                      --            --            21,604
    Preferred stock dividends/accretion                                                --            --           (10,516)
    Shares issued to AT&T                                                         207,964             2                (2)
    Shares issued under employee stock purchase plan                               90,351             1               538
    Accretion of consulting agreement credit to exercise price of
      warrants                                                                         --            --                18
    Net loss                                                                           --            --                --
                                                                         -----------------   -----------   ---------------
Balances at December 31, 1997                                                  37,219,419           372           131,728
    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                                                                           --            --                --
                                                                         -----------------   -----------   ---------------
Balances at December 31, 1998                                                  48,446,064           484           258,317
    Warrants and stock options exercised                                        1,768,427            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                                                                           --            --                --
                                                                         -----------------   -----------   ---------------
Balances at December 31, 1999                                                  51,149,825    $      511    $      236,577
                                                                         =================   ===========   ===============
</TABLE>

<TABLE>
<CAPTION>
                                                                                                     TOTAL
                                                                            ACCUMULATED          STOCKHOLDERS'
                                                                              DEFICIT          EQUITY (DEFICIT)
                                                                         ------------------   --------------------
<S>                                                                      <C>                 <C>
Balances December 31, 1996                                               $         (82,440)   $           (27,037)
    Shares issued as consideration for acquisitions                                     --                  9,385
    Series A and B Preferred Stock dividends                                            --                 (1,114)
    Issuance of common stock                                                            --                 39,952
    Conversion of preferred shares                                                      --                     --
    Preferred dividends paid in stock                                                   --                  7,807
    Warrants and stock options exercised                                                --                  3,268
    Cancellation of put right obligation                                                --                  1,000
    Stock compensation expense                                                          --                  4,274
    Warrants issued                                                                     --                    480
    Redeemable Preferred Warrants                                                       --                 21,604
    Preferred stock dividends/accretion                                                 --                (10,516)
    Shares issued to AT&T                                                               --                     --
    Shares issued under employee stock purchase plan                                    --                    539
    Accretion of consulting agreement credit to exercise price of
      warrants                                                                          --                     18
    Net loss                                                                      (115,016)              (115,016)
                                                                         ------------------   --------------------
Balances at December 31, 1997                                                     (197,456)               (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)              (163,079)
                                                                         ------------------   --------------------
Balances at December 31, 1998                                                     (360,535)              (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)              (277,748)
                                                                         ------------------   --------------------
Balances at December 31, 1999                                            $        (638,283)   $          (401,195)
                                                                         ==================   ====================
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>   51

                          e.spire COMMUNICATIONS, INC.

                      Consolidated Statements of Cash Flows

                        (in thousands, except share data)


<TABLE>
<CAPTION>
                                                                                    YEARS ENDED DECEMBER 31,
                                                                          ---------------------------------------------
                                                                              1997            1998            1999
                                                                          --------------  --------------  -------------
<S>                                                                     <C>               <C>             <C>
Cash flows from operating activities:
    Net loss                                                            $      (115,016)       (163,079)      (277,748)
    Adjustments to reconcile net loss to net cash used in
       operating activities:
         Depreciation and amortization                                           23,526          47,332         95,943
         Interest deferral and accretion                                         41,032          39,489         58,676
         Amortization of deferred financing fees                                  2,579           4,206          5,391
         Noncash compensation, consultants, and other
            expenses                                                              4,274           9,928         11,473
         Non-monetary revenue                                                        --         (13,950)       (14,057)
         Other operating activities                                                 498             569             --
         Changes in operating assets and liabilities:
            Trade accounts receivable                                           (12,959)        (33,766)       (42,866)
            Other assets                                                         (4,762)         (4,075)        (1,099)
            Accounts payable                                                    (19,232)         48,101        (20,541)
            Accrued liabilities                                                   3,707           7,270         17,426
                                                                          --------------  --------------  -------------
                  Net cash used in operating activities                         (76,353)        (57,975)      (167,402)
                                                                          --------------  --------------  -------------
Cash flows from investing activities:
    Acquisitions                                                                     --          (6,734)            --
    Restricted cash related to network activities                                (1,119)             (1)         2,407
    Network development costs and purchases of
       equipment and furniture                                                 (135,036)       (242,522)      (247,935)
                                                                          --------------  --------------  -------------
                  Net cash used in investing activities                        (136,155)       (249,257)      (245,528)
                                                                          --------------  --------------  -------------
Cash flows from financing activities:
    Issuance of notes payable                                                   223,698         224,959        164,000
    Payment of deferred financing fees                                          (19,230)        (21,359)        (7,867)
    Warrant and stock option exercises                                            3,268          16,799          5,340
    Payments of notes and other financing                                          (495)           (438)       (34,563)
    Payment of obligations under capital leases                                      --          (3,081)        (6,613)
    Restricted cash related to notes payable                                    (68,439)         26,007         24,733
    Shares issued under the Employee Stock Purchase Plan                            539           1,149          1,762
    Issuance of common stock                                                     39,953         130,311             --
    Issuance of redeemable preferred stock                                      216,248              --             --
    Other financing activities                                                     (816)            806            (95)
                                                                          --------------  --------------  -------------
                  Net cash provided by financing activities                     394,726         375,153        146,697
                                                                          --------------  --------------  -------------
                  Net increase (decrease) in cash and cash
                     equivalents                                                182,218          67,921       (266,233)
Cash and cash equivalents, beginning of year                                     78,619         260,837        328,758
                                                                          ==============  ==============  =============
Cash and cash equivalents, end of year                                  $       260,837         328,758         62,525
                                                                          ==============  ==============  =============
</TABLE>


                                                                     (Continued)

                                      F-6
<PAGE>   52
                          e.spire COMMUNICATIONS, INC.

               Consolidated Statements of Cash Flows (continued)

                        (in thousands, except share data)


<TABLE>
<CAPTION>
                                                                                    YEARS ENDED DECEMBER 31,
                                                                          ---------------------------------------------
                                                                              1997            1998            1999
                                                                          --------------  --------------  -------------
<S>                                                                     <C>               <C>             <C>
Supplemental disclosure of cash flow information:
    Interest paid on all debt obligations                               $         2,085          31,087         39,597
Supplemental disclosure of noncash investing and
    financing activities:
       Dividends declared in connection with Series A
         and B Preferred Stock                                          $         1,114              --             --
       Dividends declared with Preferred Stock                          $         5,349          27,730         37,106
       Accrual of stock bonuses                                         $         2,886           4,762          6,881
       Cancellation of put right obligations                            $        (1,000)         (1,000)            --
       Shares issued as consideration for acquisitions                  $         8,755           2,686             --
       Assets acquired under capital leases and
         non-monetary transactions                                      $            --          37,231         38,784
</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-7
<PAGE>   53

                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


(1)    BASIS OF PRESENTATION AND RELATED MATTERS

       (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 and long-distance services using its own
              facilities and on a resale basis.

              In 1997, the Company began offering fiber optic network design,
              construction and project management services ("network
              technologies services") to carriers, large customers and
              municipalities. The Company also began to enter into contracts
              for grants of Indefeasible Rights of Use ("IRUs") on portions of
              its fiber optic networks. In 1998, the Company formed ASCI Network
              Technologies, Inc. ("Network technologies"), a wholly owned
              subsidiary, to further pursue these opportunities.  On January
              17, 1997, the Company acquired CyberGate, Inc. ("CyberGate"), a
              Florida based ISP that delivers Internet, high-speed data
              communications and web-hosting services.

       (c)    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.

       (d)    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 $1,222 and $3,629
              at December 31, 1998 and 1999, respectively. The face amount of
              all bonds and letters of credit is approximately $21,559 as of
              December 31, 1999. 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 (see
              note 8). At December 31, 1998 and 1999, restricted cash related to
              this escrow account amounted to approximately $44,672 and $15,125,
              respectively, of which $15,125 was considered long-term at
              December 31, 1998. At December 31, 1999, the escrow account is
              invested in marketable securities consisting of government and
              commercial securities with maturity dates ranging from January 7,
              2000 to January 13, 2000.

       (e)    MARKETABLE SECURITIES

              The Company's short- and long-term debt securities and marketable
              equity securities are carried at estimated fair value. The
              estimated fair value of short- and long-term investments is
              determined based on quoted market prices. The Company's marketable
              securities have been classified as available for sale and are
              recorded at current estimated fair value with an offsetting

                                     F-8                             (Continued)
<PAGE>   54
                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


              adjustment, if any, to stockholders' deficit. At December 31, 1998
              and 1999, fair value approximated amortized cost.

       (f)    NETWORKS, EQUIPMENT, AND FURNITURE

              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 equipment and
              furniture are acquired.

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

<TABLE>
<CAPTION>
                           Networks:
<S>                                                                             <C>
                              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
</TABLE>

       (g)    INTANGIBLE ASSETS

              Intangible assets include customer lists and goodwill. Goodwill is
              being amortized on a straight-line basis over the period of
              expected benefit, generally a period of ten years. Amortization
              expense related to goodwill for the years ended December 31, 1997,
              1998 and 1999 was approximately $726, $1,144 and $2,333,
              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 $50, $1,977 and $4,973
              for the years ended December 31, 1997, 1998 and 1999,
              respectively.

       (h)    VALUATION OF LONG-LIVED ASSETS

              The Company accounts for 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

                                     F-9                             (Continued)
<PAGE>   55
                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


              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.

       (i)    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.

       (j)    REVENUE RECOGNITION

              Revenue from telecommunications services is recognized as services
              are provided. Billings to customers for services in advance of
              providing such services are deferred and recognized as revenue
              when earned.

              The Company recognizes revenue associated with engineering and
              construction contracts using the percentage-of-completion method,
              based primarily on contract costs incurred to date compared with
              total estimated contract costs. 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, an interpretation of Statement of Financial
              Accounting Standards ("SFAS") No. 66, ("FIN 43") which requires
              that sales or leases of integral equipment be accounted for in
              accordance with real estate accounting rules. The Company believes
              that the staff of the Securities and Exchange Commission requires
              the classification of dark fiber and conduit as integral equipment
              as defined by FIN 43. 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." It requires the Company to recognize the
              revenue from certain transactions as operating leases over the
              terms of the contract as opposed to the prior method of
              recognizing revenue during the period over which the Company
              delivers the fiber and generally collects payment. As a result,
              this change in accounting treatment reduces 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 on 1999
              results was to decrease revenues by $12.3 million and increase net
              loss by $10.9 million.

                                    F-10                             (Continued)

<PAGE>   56
                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


       (k)    EARNINGS (LOSS) PER COMMON SHARE

              The computations of basic and diluted earnings (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.

       (l)    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.

       (m)    STOCK OPTIONS

              The Company applies the intrinsic value-based 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-based
              method of accounting described above, and has adopted the
              disclosure requirements of SFAS No. 123.

       (n)    RECLASSIFICATIONS

              Certain reclassifications were made in the 1998 and prior
              consolidated financial statements to conform to the 1999
              presentation. Such reclassifications had no effect on net loss or
              total stockholders' deficit.

       (o)    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.

                                     F-11                            (Continued)
<PAGE>   57
                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


(2)    RISKS AND UNCERTAINTIES

       (a)    LIQUIDITY AND NEGATIVE CASH FLOW

              To date, the Company has funded the construction of its networks
              and its operations with external financing though various
              preferred stock, common stock, and debt issuances, as well as
              through capital lease financing. As a result of certain of these
              transactions, the Company will be required to satisfy
              substantially higher periodic cash debt service obligations in the
              future. There can be no assurance that the Company will be able to
              generate sufficient cash flow or otherwise obtain funds to cover
              interest, principal and redeemable preferred stock dividend
              payments associated with currently outstanding and future debt and
              other obligations.

              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. In accordance with the terms of its debt
              facilities, the Company has also deferred payment of most of its
              interest charges. During fiscal year 2000, the Company will be
              required to make cash interest payments on its 2007 Senior Notes
              and Senior Secured Credit Facility (both as described in note 8).
              The Company's continued development, construction, expansion, 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 Company's ability to fund these expenditures is
              dependent upon the Company raising substantial financing. To meet
              its remaining capital requirements and to fund operations and cash
              flow deficiencies, the Company will be required to sell additional
              equity securities, increase its existing credit facility, acquire
              additional credit facilities or sell additional debt securities,
              certain of which may require the consent of the Company's
              bondholders. There can be no assurance that the Company will be
              able to obtain the additional financing necessary to satisfy its
              cash requirements or to successfully implement its growth
              strategy. Failure to raise sufficient capital could compel the
              Company to delay or abandon some or all of its plans or
              expenditures, which could have a material adverse effect on its
              business, results of operations, and financial condition.
              Subsequent to year-end, the Company received commitment letters
              for $175,000 in equity funding. The Company received approximately
              $100,700 of this amount in March 2000. The remaining $75,000 is
              subject to shareholder approval and satisfaction of various
              closing conditions, including the absence of any material change
              or debt covenant violation. As described below, the Company
              received a waiver of the debt covenant violation on April 13,
              2000. The Company has also entered into a stand-by commitment for
              an additional $50,000 in equity funding, subject to certain
              conditions. Management believes that the Company's current cash
              resources, together with amounts expected to be available pursuant
              to the funding commitments described above, will be sufficient to
              fund the Company's continuing negative cash flow and required
              capital expenditures through 2000. If required, the Company also
              believes that it could raise additional funds from the sale of
              certain assets which are not essential to the Company's
              operations.

              The Senior Secured Credit Facilities (as described in note 8)
              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 the financial covenants as of December 31, 1999,
              resulting in a default under the Credit Facilities which allows
              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 (the 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
              is currently in discussion with its lenders and believes that it
              will be successful in amending its financial covenants on a going
              forward basis to amounts that the Company believes will allow for
              compliance. However, there can be no assurance that the Company
              will be successful in amending its covenants, that the Company
              will be in compliance with its debt covenants throughout 2000 or
              that the Credit Facilities will not be accelerated, causing an
              acceleration of other obligations. The Company has classified its
              obligation under the Credit Facilities as a current liability as a
              result of the debt covenant violation. 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, 1999. In the event that the
              Company is unsuccessful in negotiating amendments to the financial
              covenants, the Company believes that it will have access to
              sufficient financial resources to ensure that the Notes will not
              be accelerated.

                                     F-12                            (Continued)
<PAGE>   58

                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


       (b)    RECIPROCAL COMPENSATION

              The Company has recorded net revenue of approximately $1.6
              million, $17.7 million and $38.9 million for the years ended
              December 31, 1997, 1998 and 1999, 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 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.

              The FCC has initiated a rulemaking proceeding regarding the
              adoption of prospective federal rules for intercarrier
              compensation for ISP traffic. In its notice of rulemaking, the FCC
              expressed its preference that compensation rates for this traffic
              continue to be set by negotiations between carriers, with disputes
              resolved by arbitrations conducted by state commissions, pursuant
              to the Telecommunications Act.

              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. The

                                     F-13                            (Continued)
<PAGE>   59
                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


              Company has participated in a number of regulatory proceedings
              that address the obligation of the ILECs to pay the Company
              reciprocal compensation for ISP-bound traffic under the Company's
              interconnection agreements. These proceedings include complaint
              proceedings brought by the Company against individual ILECs for
              failure to pay reciprocal compensation under the terms of a
              current interconnection agreement; generic state commission
              proceedings concerning the obligations of ILECs to pay reciprocal
              compensation to CLECs, and arbitration proceedings before state
              commissions addressing the payment of reciprocal compensation on a
              prospective basis under new interconnection agreements.

              In January 2000, a commercial arbitrator awarded e.spire 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 e.spire the right
              to recover $14.2 million from Bell South, representing reciprocal
              compensation, including accrued interest, through December 31,
              1999 for the states of Alabama, Louisiana, and South Carolina.
              e.spire has subsequently collected these amounts.

              The Company has outstanding trade accounts receivable related to
              reciprocal compensation of approximately $46.9 million at December
              31, 1999, net of allowances of approximately $8.7 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, and that
              future reciprocal compensation will be realized, although the
              timing of receipts cannot be predicted at this time.

              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.

       (c)    CONCENTRATION OF CREDIT RISK

              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, 1997, 1998 and 1999,
              approximately 20 percent, 12 percent and 34 percent, respectively,
              of the Company's revenues were attributable to services provided
              to five, five and six, 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 20 percent, 10 percent and 5 percent, respectively,
              of the Company's revenues for the years ended December 31, 1997,
              1998 and 1999 were attributed to these companies. At December 31,
              1998 and 1999, the Company had trade accounts receivable of $4,800
              and $3,900, respectively, from ISPs. At December 31, 1999, the
              Company also has equipment with a carrying value of approximately
              $19,600 that is dedicated to providing service to these ISPs. The
              Company believes that, if necessary, this equipment can be
              redeployed throughout the Company's data network.

                                     F-14                            (Continued)

<PAGE>   60

                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


(3)    SEGMENT REPORTING

       During 1998, the Company adopted SFAS No. 131, Disclosures about
       Segments of an Enterprise and Related Information. The Company has
       identified three reportable segments: Telecommunications, CyberGate, 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. CyberGate provides Internet,
       high-speed data communications and 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 1. The
       Company evaluates performance based on revenue from third parties and
       gross margin. The Company also evaluates performance based on adjusted
       EBITDA for CyberGate.

       A summary of the information related to the Company's operations for
       1997, 1998 and 1999 is as follows (revenue is generated solely from
       external customers):

<TABLE>
<CAPTION>
                                                                            1997
                                                    ----------------------------------------------------------
                                                      TELECOMMUNICATIONS      CYBERGATE           TOTAL
                                                    ---------------------     ---------      -----------------
<S>                                              <C>                          <C>            <C>
Revenue                                          $                49,501          9,500                59,001
Cost of revenue                                                   50,328          2,553                52,881
                                                    ---------------------     ---------      -----------------
                  Gross margin                   $                  (827)         6,947                 6,120
                                                    =====================     =========      =================
Adjusted EBITDA                                                                      41
                                                    =====================     =========      =================
Total assets                                     $               625,748         13,148               638,896
                                                    =====================     =========      =================
Increase in long-lived assets                    $               276,880          2,921               279,801
                                                    =====================     =========      =================
Significant noncash items                                             --             --                    --

</TABLE>

<TABLE>
<CAPTION>
                                                                                        1998
                                                    -----------------------------------------------------------------------------
                                                           TELE-                                NETWORK
                                                       COMMUNICATIONS         CYBERGATE       TECHNOLOGIES           TOTAL
                                                    ---------------------     ---------     -----------------   -----------------
<S>                                              <C>                          <C>           <C>                 <C>
Revenue                                          $               111,086         16,257               29,416             156,759
Cost of revenue                                                   90,097          7,977                8,739             106,813
                                                    ---------------------     ---------     -----------------   -----------------
                  Gross margin                   $                20,989          8,280               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
                                                    =====================     =========     =================   =================
</TABLE>



                                     F-15                            (Continued)
<PAGE>   61
                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)



<TABLE>
<CAPTION>
                                                                                        1999
                                                    ----------------------------------------------------------------------------
                                                           TELE-                               NETWORK
                                                       COMMUNICATIONS         CYBERGATE      TECHNOLOGIES           TOTAL
                                                    ---------------------     ---------    -----------------   -----------------
<S>                                              <C>                          <C>          <C>                 <C>
Revenue                                          $            150,632            25,072           68,305             244,009
Cost of revenue                                               109,580            11,590           38,198             159,368
                                                    ---------------------     ---------    -----------------   -----------------
                  Gross margin                   $             41,052            13,482           30,107              84,641
                                                    =====================     =========    =================   =================
Adjusted EBITDA                                                                     766
                                                     =====================     =========    =================   =================
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
                                                    =====================     =========    =================   =================
</TABLE>

       The Company reports separately, in its consolidated statement of
       operations, revenue and the associated cost of sales of
       Telecommunications and Network Technologies segments. Selling, general,
       and administrative expenses, noncash stock compensation, depreciation and
       amortization, nonoperating income and expense and minority interest are
       not allocated for these two segments.

       The Company has one large customer which represents approximately 11
       percent and 13 percent of total revenues for the years ended December 31,
       1998 and 1999, respectively. Of these revenues, approximately $9,500 and
       $7,600 was earned by the Network technologies and telecommunications
       segments, respectively for 1998; and approximately $15,400 and $17,500
       was earned by the Network technologies and telecommunications segments,
       respectively for 1999.

(4)    NETWORKS, EQUIPMENT, AND FURNITURE

       Networks, equipment, and furniture consists of the following:

<TABLE>
<CAPTION>
                                                                                        DECEMBER 31,
                                                                            -------------------------------------
                                                                                  1998                1999
                                                                            -----------------   -----------------
<S>                                                                       <C>                   <C>
Networks and telecommunications equipment                                 $       494,721              691,788
Furniture and fixtures                                                             15,934               19,942
Operating support systems                                                          44,211              109,107
Leasehold improvements                                                              7,088               27,861
                                                                            -----------------   -----------------
                                                                                  561,954              848,698
Less: accumulated depreciation and amortization                                    76,020              166,224
                                                                            -----------------   -----------------
                  Total, net of accumulated depreciation
                     and amortization                                     $       485,934              682,474
                                                                            =================   =================
</TABLE>

       For the years ended December 31, 1997, 1998 and 1999, the Company
       capitalized interest of approximately $3,933, $3,246 and $7,873,
       respectively.


                                      F-16                           (Continued)
<PAGE>   62


                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


(5)    PREFERRED STOCK

       In October 1994, the Company completed a private placement of its 9
       percent Series A Convertible Preferred Stock, $1.00 par value (the
       "Series A Preferred Stock"). A total of 186,664 shares of the Series A
       Preferred Stock were issued. Further, as discussed in note 9 to the
       consolidated financial statements, certain parties obtained warrants to
       purchase shares of the Company's common stock. In June 1995, the Series A
       Preferred Stock was exchanged for an identical number of 9 percent Series
       A-1 Convertible Preferred Stock, $1.00 par value (the "Series A-1
       Preferred Stock").

       In June 1995, the Company completed a private placement of its 9 percent
       Series B-1 Convertible Preferred Stock (the "Series B-1 Preferred"), 9
       percent Series B-2 Convertible Preferred Stock (the "Series B-2
       Preferred") and 9 percent Series B-3 Convertible Preferred Stock (the
       "Series B-3 Preferred"), each having a par value of $1.00 per share.
       There were 227,500 shares issued for cash at $100 per share with proceeds
       of $20,662, net of placement agent commissions and related placement fees
       and costs. In November 1995, 50,000 shares of 9 percent Series B-4
       Convertible Preferred Stock (the "Series B-4 Preferred") were issued for
       cash of $100 per share resulting in proceeds of $5,000. The Series B-1
       Preferred, the Series B-2 Preferred, the Series B-3 Preferred and the
       Series B-4 Preferred are hereafter collectively referred to as the
       "Series B Preferred Stock." The Series A-1 Preferred Stock and the Series
       B Preferred Stock are hereafter collectively referred to as the
       "Preferred Stock." Further, as discussed in note 9 to the consolidated
       financial statements, certain parties obtained warrants to purchase
       shares of the Company's Common Stock.

       During 1997, the Preferred Stock was converted into 17,377,275 shares of
       Common Stock. In connection with its Series A-1 and Series B Preferred
       Stock, the Company recorded approximately $1,114 for the year ended
       December 31, 1997 as a reduction in additional paid-in capital, for the
       payment of anticipated dividends. The Company's certificate of
       incorporation required the Company to accrue dividends, on a quarterly
       basis, at an annual rate of 9 percent of the face value of the Series A-1
       and B Preferred Stock. These dividends were paid during 1997 in
       connection with the conversion of the Preferred Stock (see note 6).

(6)    COMMON STOCK OFFERINGS

       During 1997, the Company issued 8,660,000 shares of Common Stock for net
       proceeds of approximately $40,000, net of underwriters discounts and
       other expenses of the offering. Concurrent with this transaction, 186,664
       shares of the Company's Series A-1 Preferred Stock and 277,500 shares of
       the Company's Series B Preferred Stock were converted into 17,377,275
       shares of the Company's Common Stock (see note 5). In addition, of the
       approximately $8,000 of dividends accrued on the Preferred Stock prior to
       conversion, approximately $7,750 was paid with 1,650,207 shares of the
       Company's common stock. The remaining accrued dividends were paid in
       cash.

       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.




                                     F-17                            (Continued)
<PAGE>   63

                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


(7)    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:

<TABLE>
<CAPTION>
                  YEAR                                                         PERCENTAGE
               -------------                                                -----------------
<S>            <C>                                                          <C>
                  2003                                                          107.375%
                  2004                                                          104.917%
                  2005                                                          102.458%
                  2006 and thereafter                                           100.000%
</TABLE>

       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:

<TABLE>
<CAPTION>
                  YEAR                                                         PERCENTAGE
               -------------                                                -----------------
<S>            <C>                                                          <C>
                  2003                                                          106.375%
                  2004                                                          104.781%
                  2005                                                          103.188%
                  2006                                                          101.594%
                  2007 and thereafter                                           100.000%
</TABLE>

       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



                                     F-18                            (Continued)
<PAGE>   64
                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


       Stockholders are permitted to vote as a single class to elect not less
       than 25 percent of the members of the Board of Directors.

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

<TABLE>
<CAPTION>
                                                                                                    JUNIOR
                                                                              REDEEMABLE          REDEEMABLE
                                                                               PREFERRED           PREFERRED
                                                                                 STOCK               STOCK
                                                                               DUE 2008            DUE 2009
                                                                           ------------------  ------------------
<S>                                                                      <C>                   <C>
Balance at issuance, net of underwriters fees and
    other related expenses                                               $         48,598             146,045
Payment of dividends in shares of Redeemable
    Preferred Stock                                                                 5,349                  --
Accrued dividends                                                                      --               3,985
Accretion to redemption value                                                       1,114                  69
                                                                           ------------------  ------------------
Balance at December 31, 1997                                                       55,061             150,099

Payment of dividends in shares of Redeemable
    Preferred Stock                                                                12,480              15,250
Accrued dividends                                                                     --                4,517
Accretion to redemption value                                                       2,595               1,042
                                                                           ------------------  ------------------
Balance at December 31, 1998                                                       70,136             170,908

Payment of dividends in shares of Redeemable
    Preferred Stock                                                                14,406              18,182
Accrued dividends                                                                     --                5,120
Accretion to redemption value                                                       2,509                 335
                                                                           ------------------  ------------------
Balance at December 31, 1999                                             $         87,051             194,545
                                                                           ==================  ==================
</TABLE>



                                     F-19                            (Continued)
<PAGE>   65



                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


(8)    DEBT

       Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                        DECEMBER 31,
                                                                            -------------------------------------
                                                                                  1998                1999
                                                                            -----------------   -----------------
<S>                                                                       <C>                   <C>
AT&T Credit Corporation equipment and working
    capital financing facility                                            $        34,563                 --
2005 Senior Discount notes, interest at 13%,
    maturing November 1, 2005                                                     144,593             165,632
2006 Senior Discount notes, interest at 12 3/4%,
    maturing April 1, 2006                                                         90,821             102,791
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                                                                  235,316             260,983
Senior secured credit facility                                                         --             164,000
                                                                            -----------------   -----------------
                  Total long-term debt                                            725,293             913,406
Less current portion                                                                2,188             164,000
                                                                            -----------------   -----------------
                                                                          $       723,105             749,406
                                                                            =================   =================
</TABLE>

       Principal payments for each of the years from 1999 to 2003 and
       thereafter, are due as follows:

<TABLE>
<CAPTION>
                YEAR ENDING DECEMBER 31,
<S>             <C>                                                       <C>
                2000                                                      $          164,000
                2001                                                                     --
                2002                                                                     --
                2003                                                                     --
                2004                                                                     --
                Thereafter                                                           749,406
                                                                             -------------------
                                                                          $          913,406
                                                                             ===================
</TABLE>

       (a)    AT&T CREDIT CORPORATION EQUIPMENT AND WORKING CAPITAL FINANCING
              FACILITY

              In October 1994, the Company entered into the AT&T Credit Facility
              pursuant to which AT&T Credit Corporation agreed to provide
              financing for the development and construction of fiber optic
              networks by certain of the Company's subsidiaries. Pursuant to the
              AT&T Credit Facility, during 1996 the Company's subsidiaries in
              Louisville, Fort Worth, Greenville, Columbia, and El Paso entered
              into loan agreements with AT&T Credit Corporation providing for up
              to $31,200 in loans collateralized by the assets of such
              subsidiaries. Pursuant to the AT&T Credit Facility, AT&T Credit
              Corporation purchased 7.25 percent of the outstanding capital
              stock of each of the Company's operating subsidiaries for which it
              provided financing.

              On December 30, 1997, the Company and AT&T Credit Corporation
              agreed to amend the terms of the facility, increasing the facility
              to $35,000 and transferring the loan agreements from the Company's
              five subsidiaries to the Company as a whole.



                                     F-20                            (Continued)
<PAGE>   66

                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


              In addition, as part of the modification, the Company issued
              207,964 shares of common stock in exchange for all of AT&T Credit
              Corporation's 7.25 percent ownership interest in the five
              subsidiaries.

              The balance outstanding under the AT&T Credit Facility was paid in
              1999 in connection with the completion of the Senior Secured
              Credit Facility described below.

       (b)    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 will accrete at a rate of 13 percent compounded
              semi-annually to an aggregate principal amount of $190,000 by
              November 1, 2000. Thereafter, interest on the 2005 Notes will
              accrue at the annual rate of 13 percent and will be 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.

              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


                                     F-21                            (Continued)
<PAGE>   67
                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


              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.

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

       (c)    SENIOR SECURED CREDIT FACILITIES

              On August 12, 1999, the Company closed 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. 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 remaining
              $36 million becomes available if the Company is able to obtain
              additional junior capital of at least $100 million. Also, the
              Credit Facilities contain an Incremental Facility of up to an
              additional $100 million, although no lender is obligated to
              participate in the Incremental Facility. 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, 1999, 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.

              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 is currently
              in discussion with its lenders and believes that it will be
              successful in amending its financial covenants on a going forward
              basis to amounts that the Company believes will allow for
              compliance. However, there can be no assurance that the Company
              will be successful in amending its covenants, that the Company
              will be in compliance with its debt covenants throughout 2000, or
              that the Credit Facilities will not be accelerated, causing an
              acceleration of other obligations. 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



                                       F-22                          (Continued)
<PAGE>   68

                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


              violation. 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, 1999.

(9)    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 1994, the Company entered into employment agreements with five
              executive officers. Pursuant to the agreements, as amended, such
              officers were granted options to purchase shares of common stock
              of the Company. In accordance with their employment agreements,
              these individuals had the right to sell certain of their shares to
              the Company (the put right) for a price equal to fair market
              value. On June 26, 1995, the employment agreements were amended to
              limit the purchase price paid by the Company pursuant to the put
              right to a maximum of $2,500, which amount is subject to further
              reductions based on the employees' sales of stock. During the year
              ended December 31, 1996, the limit was further reduced to $2,000.
              During the year ended December 31, 1997, put rights related to
              $1,000 expired without exercise. During the year ended December
              31, 1998, the final $1,000 expired without exercise.

              In 1997, the Company's Board of Directors adopted an Annual
              Performance Plan, through which it will award its 1998 and 1999
              performance bonuses to management and employees through the
              issuance of shares of the Company's common stock. The Company has
              accrued approximately $4,800 and $6,400, in noncash compensation
              cost at December 31, 1998 and 1999, respectively, for this
              purpose.

              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 $1,400, $4,200 and $1,900 for the years ended
              December 31, 1997, 1998 and 1999, 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, 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 reduced to the pro forma
              amounts indicated below:

<TABLE>
<CAPTION>
                                                                       YEARS ENDED DECEMBER 31,
                                                              -------------------------------------------
                                                                  1997           1998          1999
                                                              -------------- ------------- --------------
<S>                                                         <C>                <C>            <C>
Net loss:
    As reported                                             $    (115,016)     (163,079)      (277,748)
    Pro forma                                               $    (120,538)     (175,657)      (288,040)
Net loss per common share:
    As reported:                                            $       (4.65)        (4.45)         (6.38)
    Pro forma                                               $       (4.85)        (4.73)         (6.59)
</TABLE>



                                     F-23                            (Continued)
<PAGE>   69

                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


              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, 1997, 1998 and 1999, respectively:
              dividend yield of 0 percent for all periods, expected volatility
              of 50 percent, 75 percent and 85 percent, risk-free interest rates
              of 6.0 percent, 5.14 percent and 6.36 percent and expected lives
              of 4.06, 3.18 and 3.46 years.

              A summary of the status of the Company's stock options as of
              December 31, 1997, 1998 and 1999 and changes during the periods
              ending on those dates is presented below:

<TABLE>
<CAPTION>
                            DECEMBER 31, 1997           DECEMBER 31, 1998          DECEMBER 31, 1999
                        -------------------------- --------------------------- --------------------------
                                      WEIGHTED-                   WEIGHTED-                  WEIGHTED-
                                       AVERAGE                     AVERAGE                    AVERAGE
                          SHARES       EXERCISE      SHARES       EXERCISE       SHARES       EXERCISE
                          (`000S)       PRICE        (`000S)        PRICE       (`000S)        PRICE
                        ----------- -------------- ----------- --------------- ----------  --------------
<S>                      <C>          <C>           <C>          <C>            <C>           <C>
Outstanding at
   beginning of year      7,457         $ 3.60        7,827        $  4.69        8,644         $ 6.60
Granted                   2,141         $ 8.25        2,873        $ 10.46        3,876         $ 8.97
Exercised                  (926)        $ 2.39       (1,411)       $  3.23         (964)        $ 2.30
Forfeited                  (845)        $ 6.60         (645)       $  9.02       (1,857)        $ 9.66
                        -----------                -----------                 ----------
Outstanding at end
   of year                7,827         $ 4.69        8,644        $  6.60        9,699         $ 7.37
                        ===========                ===========                 ==========
Options exercisable
   at year-end            4,379                       5,279                       5,732
                        ===========                ===========                 ==========
Weighted-average fair
   value of options
   granted during the
   year                   $4.96                       $6.60                       $6.06
</TABLE>



                                     F-24                            (Continued)
<PAGE>   70

                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


              The following table summarizes information about fixed stock
              options at December 31, 1999:

<TABLE>
<CAPTION>
                             OPTIONS OUTSTANDING                                OPTIONS EXERCISABLE
                      ----------------------------------                  ---------------------------------
                                            WEIGHTED-
                           NUMBER            AVERAGE          WEIGHTED-           NUMBER          WEIGHTED-
                        OUTSTANDING         REMAINING          AVERAGE        OUTSTANDING          AVERAGE
RANGE OF                 AT 12/31/99       CONTRACTUAL        EXERCISE        AT 12/31/99          EXERCISE
EXERCISE PRICES           (`000S)             LIFE              PRICE           (`000S)             PRICE
                      -----------------  ----------------   --------------  ----------------    ---------------
<S>                   <C>                <C>               <C>              <C>                <C>
$0.875 to $4.52               2,647        2.02 years      $          2.14        2,460        $           1.97

$4.57 to $9.12                2,510        5.31 years      $          7.49        1,165        $           7.66

$9.13 to $9.38                2,446        5.77 years      $          9.27        1,200        $           9.38

$9.50 to $21.50               2,096        5.52 years      $         11.63          907        $          12.00
                      -----------------  ----------------    --------------  ----------------    ---------------
$0.875 to $21.50              9,699        4.57 years      $          7.37        5,732        $           6.26
                      =================  ================    ==============  ================    ===============
</TABLE>

       (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. The Company
              also issued 657,582 warrants to MCIMetro Access Transmission
              Services, Inc. during 1997. These warrants include certain
              anti-dilution provisions.

              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, 1999, 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 1997, 1998 and 1999, respectively, the Company
              recognized approximately $480, $805 and $358 in network expense
              related to these warrants.



                                     F-25                            (Continued)
<PAGE>   71

                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


              At December 31, 1999, unexercised warrants outstanding are as
              follows:

<TABLE>
<CAPTION>
                                                                           NUMBER
                                                                          (`000S)           PRICE PER SHARE
                                                                      -----------------   ---------------------
<S>                                                                   <C>                <C>
Series A and Series B Preferred Stock placements                                422      $         1.79 - 3.10
2005 Senior Discount Notes offering                                           2,331                       6.47
Redeemable Preferred Stock due 2008 offering                                  5,646                       7.15
Other                                                                           305               9.87 - 16.88
                                                                      -----------------   ---------------------
                  Total                                                       8,704      $        1.79 - 16.88
                                                                      =================   =====================
</TABLE>

              The gross proceeds that would be received by the Company on the
              exercise of all outstanding options and warrants is approximately
              $131,000.

       (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 date the common stock
              is purchased. Purchases of common stock are made on a monthly
              basis. During the years ended December 31, 1997, 1998 and 1999,
              the Company sold 96,784, 108,601 and 258,278 shares, respectively,
              of common stock to the ESPP for a total of $749, $1,150 and
              $1,759, 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, 1997, 1998 and 1999, respectively:
              dividend yield of 0 percent for all years, expected volatility of
              50 percent, 75 percent and 85 percent, risk free interest rate of
              6.0 percent, 5.14 percent and 6.36 percent and expected life of
              one month for all years.

              The weighted-average fair value of the purchase rights granted in
              1997, 1998 and 1999 was $1.48, $2.23 and $1.50 per share.



                                      F-26                           (Continued)
<PAGE>   72

                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


(10)   BASIC AND DILUTED EARNINGS PER SHARE

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

<TABLE>
<CAPTION>
                                                                 FOR THE YEAR ENDED DECEMBER 31, 1997
                                                        --------------------------------------------------------
                                                             INCOME             SHARES            PER SHARE
                                                          (NUMERATOR)        (DENOMINATOR)         AMOUNT
                                                        -----------------  -----------------   -----------------
<S>                                                   <C>                  <C>                 <C>
Net loss                                              $       (115,016)
Less: Preferred Stock dividends/accretion                      (11,630)
                                                        -----------------
Basic and diluted earnings per share:
    Net loss to common stockholders                   $       (126,646)       27,233,642               $ (4.65)
                                                        =================  =================   =================
</TABLE>

       Options and warrants to purchase 7,827,318 and 11,267,365 shares of
       common stock, respectively, were not included in the computation of
       diluted earnings per share for the year ended December 31, 1997 as their
       inclusion would be anti-dilutive.

<TABLE>
<CAPTION>
                                                                 FOR THE YEAR ENDED DECEMBER 31, 1998
                                                        --------------------------------------------------------
                                                             INCOME               SHARES           PER SHARE
                                                           (NUMERATOR)         (DENOMINATOR)        AMOUNT
                                                        ------------------   -----------------  ----------------
<S>                                                   <C>                    <C>                <C>
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)
                                                        ==================   =================  ================
</TABLE>

       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 December 31, 1998 as their inclusion
       would be anti-dilutive.

<TABLE>
<CAPTION>
                                                                 FOR THE YEAR ENDED DECEMBER 31, 1999
                                                        --------------------------------------------------------
                                                             INCOME               SHARES           PER SHARE
                                                           (NUMERATOR)         (DENOMINATOR)        AMOUNT
                                                        ------------------   -----------------  ----------------
<S>                                                   <C>                    <C>                <C>
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)
                                                        ==================   =================  ================
</TABLE>

       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.

(11)   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



                                     F-27                            (Continued)
<PAGE>   73

                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


       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 $244, $320 and $275 for the years ended
       December 31, 1997, 1998 and 1999, respectively.

(12)   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.

(13)   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:

<TABLE>
<CAPTION>
                                                                        DECEMBER 31, 1999
                                                                     -------------------------
<S>                                                               <C>
Networks and telecommunications equipment                         $                 65,746
Less: accumulated amortization                                                       8,687
                                                                     -------------------------
                                                                  $                 57,059
                                                                     =========================
</TABLE>

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



                                     F-28                            (Continued)
<PAGE>   74

                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


       The minimum future lease obligations under these noncancelable operating
       and capital leases as of December 31, 1999 are approximately as follows:

<TABLE>
<CAPTION>
                                                                                    OPERATING            CAPITAL
YEAR ENDING DECEMBER 31,                                                              LEASES              LEASES
                                                                                 -----------------   -----------------
<S>                                                                             <C>                 <C>
2000                                                                            $       19,597              14,405
2001                                                                                    19,708              17,034
2002                                                                                    20,196              14,768
2003                                                                                    19,434              10,845
2004                                                                                    18,984               8,442
Thereafter                                                                              73,241               4,246
                                                                                 -----------------   -----------------
                       Total minimum lease payments                             $      171,160              69,740
                                                                                 =================
Less: amounts representing interest and executory costs                                                     13,022
                                                                                                     -----------------
                       Present value of minimum lease payments                                              56,718
Less: current portion                                                                                        9,932
                                                                                                     -----------------
                       Long-term obligations under capital leases                                   $       46,786
                                                                                                     =================
</TABLE>

       Rent expense for the years ended December 31, 1997, 1998 and 1999 was
       approximately $6,100, $10,900 and $15,800, respectively.

(14)   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
       e.spire's networks. Such agreements include contracts with five major
       customers for an aggregate purchase price of approximately $78,444 at
       December 31, 1999. Network technologies revenue related to five major
       customers was approximately $0, $23,450 and $48,685 for the years ended
       December 31, 1997, 1998 and 1999, 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, 1999, in 2000. In 1998 and 1999,
       the Company recognized approximately $14,000 and $14,100, 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.



                                     F-29                            (Continued)
<PAGE>   75

                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


(15)   INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                                        DECEMBER 31,
                                                                            -------------------------------------
                                                                                  1998                1999
                                                                            -----------------   -----------------
<S>                                                                       <C>                    <C>
Deferred tax assets:
    Capitalized start-up and other costs                                  $         5,829                8,899
    Stock options - noncash compensation                                            7,162                7,812
    Net operating loss carryforwards                                              151,670              225,288
    Bond discounts                                                                 29,494               57,078
    Other accrued liabilities                                                       1,188               14,482
                                                                            -----------------   -----------------
                  Total gross deferred assets                                     195,343              313,559
    Less:  valuation allowance                                                    152,082              265,707
                                                                            -----------------   -----------------
                  Net deferred tax assets                                          43,261               47,852
Deferred tax liabilities - fixed assets depreciation and
    amortization                                                                   43,261               47,852
                                                                            -----------------   -----------------
                  Net deferred tax assets (liabilities)                   $           --                  --
                                                                            =================   =================
</TABLE>

       The net change in the total valuation allowance for the years ended
       December 31, 1998 and 1999 was an increase of $70,716 and $113,625,
       respectively. The valuation allowances at December 31, 1998 and 1999 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 $563,000
       at December 31, 1999 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 2019. 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, 1997, 1998 and 1999 as the aforementioned deferred tax assets have
       provided no tax benefit.

(16)   ACQUISITIONS

       On January 17, 1997, the Company acquired 100 percent of the outstanding
       capital stock of CyberGate, Inc. ("CyberGate") in exchange for 1,030,000
       shares of common stock plus up to an additional 150,000 shares if certain
       performance goals are achieved, for an aggregate purchase price of
       approximately $8,800. CyberGate, a Florida based ISP, delivers Internet,
       high-speed data communications and web-hosting services. The acquisition
       has been accounted for using the purchase method and, therefore, the
       Company's consolidated financial statements include the results of
       operations of CyberGate from the date of acquisition. The purchase price
       of $8,800 plus transaction expenses of approximately $500 has been
       allocated to assets and liabilities acquired based on their fair values
       and goodwill of approximately $8,400 has been recorded. The goodwill is
       being amortized on a straight-line basis over a ten year period.



                                     F-30                            (Continued)
<PAGE>   76

                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


       On October 3, 1997, the Company acquired the customers and receivables of
       NetRunner, Inc., a Florida based ISP, in exchange for 51,166 shares of
       Common Stock for an initial purchase price of $685. In conjunction with
       this acquisition, the Company also placed 130,705 shares of the Company's
       Common Stock in escrow to be issued upon the seller meeting certain
       obligations. The Company recorded an intangible asset for that portion of
       the purchase price attributable to the customer list, which is being
       amortized over 18 months. During 1998, the Company released the remaining
       130,705 shares held in escrow, resulting in a $2,200 increase in
       intangible assets.

       On September 2, 1998, the Company acquired 100 percent of the outstanding
       capital stock of Data Access Technologies, Inc. in exchange for $1,500
       and 149,275 shares of Common Stock for an aggregate purchase price of
       $2,100. In conjunction with this acquisition, 40,360 shares were issued
       on September 2, 1998 and the remaining 108,915 shares were placed in
       escrow to be issued upon the seller meeting certain obligations. At
       December 31, 1999, the 108,915 shares remained in escrow. These shares of
       Common Stock are released from escrow as contingent events occur, at
       which time the Company will record the transactions as an increase in
       goodwill. The acquisition has been accounted for using the purchase
       method and, therefore, the Company's consolidated financial statements
       include the results of operation of Data Access Technologies from the
       date of acquisition. The purchase price has been allocated to assets and
       liabilities acquired based on their estimated fair values, and goodwill
       of approximately $2,300 has been recorded. The goodwill is being
       amortized on a straight-line basis over an 18 month period.

       On November 17, 1998, the Company acquired the customers and certain
       assets of Internet Communications of America, Inc. (ICANECT) in exchange
       for $5,300 and 203,438 shares of Common Stock for an initial purchase
       price of $5,300. In accordance with the purchase agreement, these shares
       were placed in escrow to be issued upon the seller meeting certain
       obligations. As of December 31, 1999 none of these shares had been
       issued. The Company recorded an intangible asset of approximately $5,300,
       which is being amortized over an 18 month period.

(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.



                                     F-31                            (Continued)
<PAGE>   77

                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


       (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, 1999 were:

<TABLE>
<CAPTION>
                                                                       CARRYING             ESTIMATED
                                                                         VALUE             FAIR VALUE
                                                                   ------------------   ------------------
<S>                                                             <C>                      <C>
Cash and cash equivalents (including restricted cash)           $          81,279               81,279
Letters of credit                                               $             --                   37
Redeemable preferred stock                                      $         281,596               63,581
Long-term debt, including obligations under capital
    leases                                                      $         970,124              703,771
</TABLE>



                                     F-32                            (Continued)
<PAGE>   78



                          e.spire COMMUNICATIONS, INC.

                   Notes to Consolidated Financial Statements

                        December 31, 1997, 1998 and 1999
                 (in thousands, except share and per share data)


(18)   QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                     MAR. 31         JUN. 30        SEPT. 30          DEC. 31
                                                  --------------  --------------  --------------   --------------
                                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                                            <C>              <C>             <C>             <C>
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)


1997:
    Revenues                                           8,177          11,616          16,055           23,153
    Cost of sales                                      8,669          10,400          13,676           20,180
    Gross Margin                                        (492)          1,216           2,379            2,973
    Operating expenses                                18,282          20,774          22,243           26,913
    Non-operating income (expense)                    (5,249)         (6,094)        (10,100)         (11,438)
    Net loss                                         (24,023)        (25,652)        (29,964)         (35,378)
    Preferred stock dividends/accretion                  989             106           2,489            8,046
    Net loss to common stockholders                  (25,012)        (25,758)        (32,453)         (43,424)
    Net loss per common share
       (Basic & Diluted)                               (3.19)          (0.92)          (0.90)           (1.18)
</TABLE>

       The effect of adopting the provisions of FIN43, as described in note 1,
       on fourth quarter results was a reduction of revenue of $9.9 million and
       a reduction of network cost of $400, for an impact on net loss of $9.5
       million.  The Company also recorded additional reserves against revenue
       of approximately $15 million.

       The September 30, 1999 operating results have been restated to reflect
       the impact on certain transactions which occurred during the third
       quarter of adopting the provisions of FIN 43. The impact of this
       restatement on revenue was a reduction of $2,400 and the impact on
       network cost was a reduction of $400.

(19)   SUBSEQUENT EVENTS

       In the first quarter of 2000, the Company announced that it had signed
       commitment letters with Greenwich Street Capital Partners II, L.P. and
       The Huff Alternative Income Fund, L.P. for a total of $125 million in
       equity funding consisting of preferred stock and warrants.  In addition,
       during the first quarter of 2000, the Company signed a commitment letter
       with Honeywell International Inc. Master Retirement Trust, in cooperation
       with Allied Capital Management, L.L.C., a subsidiary of Honeywell
       International, Inc. for $50 million in equity funding.  The Company
       received approximately $100,000 of these amounts in March 2000.  The
       remaining $75,000 is subject to shareholder approval and satisfaction of
       various closing conditions, including the absence of any material change
       or debt covenant violation. (See note 8)

       On April 13, 2000, the Company obtained a waiver to its Credit
       Facilities to remedy its default under these facilities.  As of April
       13, 2000, the Company was in negotiations with the lenders on its Credit
       Facilities for amendments of its debt covenants on a going forward basis.

       On April 13, 2000, the Company obtained a standby commitment for an
       additional $50,000 of equity funding, subject to certain conditions.



                                      F-33