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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549

FORM 10-K

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Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2001

Commission File No. 000-25945

NETWORK ACCESS SOLUTIONS CORPORATION(Exact name of registrant as specified in its charter)

|Delaware                                                       |  | 54-1738938                             
|-------------------------------------------------------------- |  | ---------------------------------------
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification Number)

13650 Dulles Technology Drive, Herndon, Virginia 20171(Address, including zip code, of principal executive offices)

Registrant's telephone number, including area code: (703) 793-5000

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

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

Common Stock, $0.001 par value(Title of each class)

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

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

The
aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of the Common Stock on April 9, 2002, as reported
on the Over-The-Counter Bulletin Board of the National Association of Security Dealers, was $2,663,537.

The
number of shares outstanding of the registrant's Common Stock on April 9, 2002, after excluding any shares in treasury, was 53,629,983.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission for the registrant's 2002 Annual Meeting of
Stockholders to be held on June 11, 2002, are incorporated by reference into Part III of this Form 10-K.

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PART I

Item 1. Business.

The Company

We are a provider of broadband network solutions and Internet service to business customers. We provide our data communications services using a variety of
high-speed access methods and market those services directly through our own sales force and through wholesale partners. With our network infrastructure, we are able to provide Internet,
private frame relay and private asynchronous transfer mode, or ATM, access to our customers through high-speed, always-on connections at speeds up to 2.3 megabits per second.
We have branded our network service "CopperNet," which we commercially launched in the northeast and mid-Atlantic regions of the United States in January 1999.

We
were incorporated in 1995 in Virginia and reincorporated in Delaware in 1998. At that time, our principal business consisted of selling data communications products and providing
related services for corporate networks. We recognized that businesses were finding it extremely expensive and time consuming to manage and secure the complex elements of their networks. To exploit
this opportunity, we began offering our customers additional services to help them design, build, maintain and secure their networks.

In
1996, we recognized the opportunity presented by the convergence of three factors:



To
exploit this opportunity, we began to develop technical standards and processes for delivery of DSL-based network services to our customers. Today, the Company is focused
primarily on solving the data communications needs of our business customers through these network services, which includes our CopperNet service offering. Our CopperNet service allows us to provide
metropolitan area networks, or MANs, and wide area networks, or WANs, to our customers. In 2001, these network services represented the majority of our revenue as our focus on this business resulted
in significant growth in both lines and revenue. Revenues have declined in our product sales and consulting businesses as we de-emphasized them and as the market and margins in these
businesses deteriorated.

We
also sought to develop relationships with other providers to continue the growth of our network services business. On February 8, 2000, in connection with the announcement of a
strategic summary operating agreement with SBC Telecom, Inc. and Teléfonos de México, S.A. de D.V. and a $150 million preferred stock investment by SBC
Communications Inc. and Telmex Communications, LLC, we announced that we would be extending our network deployment into the southeastern and western regions of the United States. We refer to
these SBC entities as SBC and these Telmex entities as Telmex. We, along with SBC and Telmex, had initially targeted deployment in the following 20 markets within these regions: Atlanta, Charlotte,
Denver, Greensboro, Jacksonville, Louisville, Memphis, Miami, Minneapolis, Nashville, New Orleans, Orlando, Phoenix, Portland, Raleigh-Durham, Salt Lake City, Seattle, Tampa, Tucson and West Palm
Beach.

As
of December 31, 2000, we had installed DSL equipment in more than 500 central offices within our northeast and mid-Atlantic markets. We had also installed
T-1 equipment in a subset of 139 offices and other switching centers. However, as a result of changes in the marketplace for high-speed telecommunications services during 2000,
we amended certain of our agreements with SBC and Telmex on December 22, 2000, and on February 28, 2001, and entered into new agreements with SBC. Collectively, these agreements provided
for:

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Although
we had elected to transfer to SBC our lease interests in the 397 central offices, the transfer was never consummated. As a result, our 2000 financial statements have been
restated to eliminate the preferred stock conversion inducement of $22,141 and record an impairment of long-lived assets. See Notes 7 and 17 to our financial statements. The
principal effect of these restatements is to increase loss from operations, net loss, additional paid-in capital, and accumulated deficit by $22,141. The restatement had no effect on net
loss applicable to common stockholders, net loss per common share applicable to common stockholders, total assets, total liabilities or total stockholders' equity.

Throughout
2001, we undertook measures to reduce expenses and streamline operations to achieve profitability. In May 2001, we implemented a restructuring plan focusing our
resources on higher margin areas of network operations with higher potential for future growth. The plan included shutting down and abandoning approximately 205 unprofitable central office collocation
facilities, which accounted for approximately 8% of network services revenue and 20% of network services operating expense. The majority of the network equipment located in these facilities, which is
owned or leased by us, was removed and redeployed to other central offices as needed. The plan also included the elimination of 140 employees, or 34% of the work force. The employee groups terminated
represented all functional areas within the Company. In November 2001, in a second restructuring of our work force, we eliminated an additional 95 positions. The employee groups represented
included several functional areas within the Company, but included a significant reduction in our sales force as we looked to focus on our existing customers and the integration and consolidation of
acquired DSL customers.

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As
a result of this restructuring, as of December 31, 2001, we had installed and had operational DSL equipment in approximately 300 central offices in cities throughout the
northeast and mid-Atlantic region of the United States, which are our target markets. While we may evaluate the acquisition of, or expansion into, new central offices in the future, there
are no current plans to expand beyond our existing footprint. In order to meet the network services needs of our existing customers outside of our network footprint and the needs of many acquired
customers, we entered into a DSL services agreement with Covad in October 2001.

In
the second half of 2001, we actively sought to expand our revenue and customer base through the acquisition of DSL customers, including acquisitions from distressed or bankrupt
companies. On August 31, 2001, we acquired approximately 1,250 DSL customers and other selected assets and assumed certain liabilities of CapuNet, LLC. The aggregate purchase price was
$1.14 million.

On
November 19, 2001, we closed the acquisition of the DSL customer list and contracts of Ardent Communications, Inc., or Ardent. Ardent, which supplied DSL service
nationwide to business customers, agreed to sell us 16,800 customer lines after they sought bankruptcy protection in October 2001. We are experiencing, as anticipated, customer attrition due to
the acquisition and are additionally terminating certain customers for non-performance. The aggregate purchase price was $7.0 million.

Our Solution

We currently offer networking using our own infrastructure in the following nine northeast and mid-Atlantic cities and their surrounding markets:
Baltimore, Boston, New York, Norfolk, Philadelphia, Pittsburgh, Richmond, Washington D.C. and Wilmington. Customer locations outside of these major metropolitan areas are served primarily through the
local facilities of other carriers, including Covad, WorldCom and AT&T.

We
have designed our network to support our customers' changing data networking needs. Our network supports newer, evolving technologies that transmit both data and, with additional
equipment, voice. Unlike traditional telecommunications networks, these newer technologies transmit data in small bundles, or packets, of information from multiple users over the same lines, and are
referred to as packet-based technologies. These packet-based technologies generally allow for a more efficient use of a network. Our CopperNet service is compatible with Internet protocol, or IP, and
packet-based communications systems, such as ATM and frame relay. This architecture also supports the traditional technologies that carry most of today's voice telephone conversations. This network
design allows us to offer businesses and their telecommuters cost-effective solutions for accessing the Internet, as well as other emerging applications and services of corporate networks,
such as video and audio conferencing, application and Web hosting, multimedia and e-commerce. We create city-wide MANs and connect them to our private, leased,
high-speed fiber optic backbone network to move traffic between MANs. This network design enables us to provide our customers seamless connections to remote offices or employees anywhere
on our network, including other cities. Our network provides dedicated connections to our customers, enabling them to operate as if they were using their own private network. Additionally, sites that
are already connected to the Internet can use our virtual private network, or VPN, products to gain similar capacity and speed as would be found on our private network.

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We
provide a full range of broadband network solutions to allow businesses to outsource effectively their Internet access, data transport, and other telecommunications or data
communications needs. We market our services both directly to businesses through our sales force and indirectly through other service providers. Our network services include:

High-speed, Last-Mile Connectivity.CopperNet is designed to solve the last mile challenge using DSL
and short-run T-1 technology to provide high-speed data connections to our customers. Our network is capable of delivering data at speeds ranging incrementally from
128 kilobits per second to 2.3 megabits per second symmetrically. The highest CopperNet speeds allow our customers to transfer data at rates faster than traditional T-1 data connections.
We provide packet-based connections, but because many of today's existing networks use channelized technology, we also provide channelized connections. Thus, CopperNet addresses both older channelized
network requirements, like traditional voice telephone
networks, and the packet-based communications better suited for newer, more efficient technologies, such as ATM and frame relay, both of which transmit data at high-speed and can
accommodate multiple types of media, including voice, video and data. In addition to ATM and frame relay, CopperNet also accommodates other technologies based on IP, which is the set of standards that
enables Internet communications.

Adaptable Network Design.Our network supports today's bandwidth-intensive business requirements, such as corporate networks,
VPNs, office-to-office connectivity, telecommuting solutions, collaborative computing of users in different areas, Internet/intranet access, traditional voice, web and
application hosting and e-commerce. We have designed our network so that we can individually configure a customer's features and speeds from our network operations center, eliminating the
need for customers to upgrade their hardware or for us to visit their premises in order to enhance or upgrade services.

Metropolitan Area Network Solutions.We recognize that businesses with city-wide locations, as well as remote
users who telecommute, need to communicate and share confidential information. We have constructed data communications networks that cover entire metropolitan areas. These MANs provide
high-capacity, secure, direct connections between remote locations and provide cost-effective private network solutions to our customers with the capacity, speed, reliability
and level of service that they require.

Wide Area Network Solutions.Many organizations have offices and employees in multiple cities. By linking our MANs, we have
constructed a data communications network that covers an entire area in the northeast and mid-Atlantic regions of the United States. This WAN provides high-capacity, secure and
reliable connections between distant locations. Because our WAN customers, like our MAN customers, are served end-to-end on our CopperNet infrastructure, we are able to deliver
a wide area, private network with the capacity, speed, reliability and level of service that they require.

Network-Enabled Broadband Communications and Services.We believe that providing high-speed access and data
communications solutions will only be part of the solution we provide to our customers. Because our emphasis is on building customer relationships through our direct sales force and working with them
to provide the best communications solutions, we believe that we will be able to identify further customer needs and effectively market and sell new solutions to meet these needs.

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Our Services and Product Offerings

Our robust and flexible portfolio of services can be provided individually or combined into a wide variety of solutions for our customers. Some examples include:



High-Speed Internet.Using our broadband network for last-mile access, customers can receive
high-speed Internet at significantly lower costs than traditional access methods. Combining these network capabilities with our consulting and integration services, we offer a full
portfolio of business-class Internet solutions, including customer premises equipment, or CPE; firewalls; domain name system, or DNS, web, and e-mail hosting and static IP addressing.

Secure Telecommuting and Branch Networking.Traditional telecommuting solutions generally suffer from either a lack of
performance due to the constraints of dial-up services, or a lack of security due to the role that the Internet plays in VPN solutions. Our unique broadband network puts
high-performance private frame relay services within reach of entirely new markets, especially residential telecommuters and branch offices. Combined with our WAN capabilities, we can
affordably serve telecommuters and branches throughout our serving area that would have otherwise not entered the broadband market.

Meshed Corporate Networking.By virtue of our ATM core, we can provide fully meshed corporate networking environments. This
is particularly valuable to customers who have offices that require secure, high-performance connections to multiple corporate data centers. Our broadband network puts these solutions
within affordable reach of customers who would have otherwise opted for dial-up.



CopperNet.In January 1999, we began commercially offering our CopperNet services. CopperNet provides
high-speed, continuously connected packet-based and channelized communications services. CopperNet connects business users to our MANs and WAN using ATM and frame relay over DSL and
T-1 lines. CopperNet customers are able to connect to our MANs to obtain high-capacity, secure and
reliable connections between distant locations. Because our customers are served end-to-end on our CopperNet network, we are able to deliver a true wide area private network
with the capacity, speed, reliability and level of service that they require.

CopperNet Frame.CopperNet Frame provides seamless access to LANs and WANs using ATM and frame relay technologies over DSL
and T-1 lines to deliver a flexible suite of services. The benefit to CopperNet Frame customers is the low cost and simplicity of use when contrasted with ISDN and long-haul
T-1 services provided by other carriers.

CopperNet Internet.CopperNet Internet is a suite of Internet services and connectivity options designed specifically for
business applications. Our customers choose their connectivity speed, ranging from 128 kilobits per second to 2.3 megabits per second, and we provide the necessary hardware, register our customers'
chosen domain name and configure and maintain our customers' e-mail and web services.

VPN Service.Our VPN service is a fully managed offering for organizations with a remote or mobile workforce that need
reliable and secure access to the corporate network. We provide a full-service VPN solution that includes necessary hardware, software and communications services for a single monthly fee.

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Consulting Services.We provide professional consulting and network integration services to complement all of our network
services. We also provide network design and integration, network management, staging, installation, maintenance and warranty services. Our consulting services include network security and
professional services, including network security architecture consulting.

Product Sales.As part of our overall data communications solutions, we sell data communications products, including the
network components and security components that our customers require in order to build, maintain and secure their networks. We do not manufacture any of this equipment ourselves. Our engineers select
product solutions to improve our customers' operations and network efficiencies, and then help install and configure the equipment in our customers' networks.

Customers

Our target customers are primarily small- and medium-sized businesses. We sell to these customers directly through our own sales force and through wholesale
partners. In particular, we believe the following market segments are especially attractive prospective customers:



As
of December 31, 2001, we had more than 17,000 customers. Network services, which includes our CopperNet service, represented approximately 78%, 35% and 10% of our revenue for
the years ended December 31, 2001, 2000, and 1999, respectively. The customers with concentrations of revenue greater than 10% of total revenue are as follows:

Years Ended December 31,2001

2000

1999AT&T

$


$


$
5,358Quest Diagnostics





3,365


$


$
3,365

$
5,358


Sales and Marketing

We emphasize direct sales and marketing to small- and medium-sized businesses and to selected large enterprises. We also sell our services indirectly through our
sales partners, including ISPs, long distance and local carriers and other networking services companies.

Direct Sales.We have structured our sales force to sell all products and support customers through a teaming atmosphere. The
teams are comprised of an Account Executive to identify and close new billing revenue each month, one or more Account Relation Manager(s) to retain and grow existing accounts and minimize customer
churn, and Administrative Support. The teams are responsible for maintaining and developing direct and indirect relationships with existing customers and new small- to medium-sized businesses. The
teams are the customer advocates, driving and managing the installation process and maintaining the customer relationship with us. We believe this adds value to our relationship with the customer and
increases customer satisfaction.

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Indirect Sales.We sell our full complement of products and services, including our network services, consulting services and
products, through network service providers, including ISPs, long distance and local carriers and other networking services companies. These providers combine one or more of our services with their
own Internet, frame relay and voice services and resell those bundled services to their existing and new customers. We continue to look for opportunities to augment our CopperNet sales through
partnerships with other service providers that offer complementary services and can offer CopperNet as part of a complete business solution.

Customer Service

Network service providers and communications managers at businesses typically have to assemble their digital communications networks using multiple vendors. This
leads to additional work and cost for the customer as well as complex coordination issues. We work with each customer to develop project implementation plans. These plans include qualifying the
customer for our service offerings, placing orders for connection facilities, coordinating the delivery of the connection, turn up and final installation. We emphasize a comprehensive service solution
for our customers and provide our service according to a predetermined service level commitment with each customer. Our comprehensive solution includes the following:

Customer Line Installation.We work with each of our customers to establish all connection and configuration requirements to
connect the customer's main location to our network. We order the copper telephone line for our customers, manage the installation process, test the copper telephone line once installed, assist our
customers in configuring the equipment that terminates the copper telephone line, and monitor the copper telephone line from our network operations center.

End-User Line Installation.We order all end-user connections from the traditional telephone
companies or other carriers according to pre-determined technical line specifications. We manage the traditional telephone company's provisioning performance, test the installed line, and
monitor the end-user line from our network operations center.

End-User Premises Wiring and Modem Configuration.We use both our own and contracted installation crews to
install any required inside wiring at each end-user site. We rely on contracted crews to meet customers' demands at peak times. Our installation crews configure and install
end-user equipment with information specific to each customer.

Customer Service and Technical Support.We provide service and technical support to all our customers
24-hours-per-day, seven-days-per-week. We serve as the sole contact for customers to whom we make direct sales. We also provide
a second level of support for our indirect customers. We have developed and will continue to expand a database containing the questions we have addressed and the answers we have provided in response
to past network issues. In this way, we are able to better respond to future customer questions.

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Network Structure and Technology

We operate a series of MANs connected by our private, leased, high-speed fiber optic backbone. Our network employs a structure designed to deliver
superior end-to-end capabilities, high-speed, last-mile connections and efficient data traffic management. Our technologically advanced network design
has positioned us to deliver the high level of data communications services, including Internet access and VPNs. We have planned for growth by ensuring that our network is scalable, flexible and
secure.



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Competition

We face competition from many companies with significantly greater financial resources, well-established brand names and large, existing installed
customer bases. While competition in 2001 for the small- and medium-sized business customers waned as several competitors filed for bankruptcy protection, we expect the level of competition to
intensify in the future. We believe that our most direct competition for broadband network solutions will come from Verizon and other traditional telephone companies and carriers operating in our
target markets. However, we also anticipate competition from service providers using other technologies.

Verizon and Other Traditional Telephone Companies.Verizon and the other traditional telephone companies present in our
target markets have commenced commercial deployment of DSL-based services. We recognize that each traditional telephone company has the potential to quickly overcome many of the obstacles
that we believe have delayed widespread deployment of DSL services by traditional telephone companies in the past. The traditional telephone companies currently represent and will in the future
increasingly represent strong competition in all of our target markets. The traditional telephone companies have an established brand name; a large number of existing customers; a reputation for high
quality in their service areas; sufficient capital to deploy DSL equipment rapidly; their own copper lines; and can bundle digital data services with their existing analog voice services to achieve
economies of scale in providing service to customers. In the absence of strong oversight by the FCC and state telecommunications regulators, traditional telephone companies also have an economic
incentive to benefit their own DSL retail operations by providing themselves with the copper telephone lines, collocation, support services and other essential DSL service inputs on more favorable
terms than they provide these facilities and services to their DSL competitors, like us. These factors give the traditional telephone companies a potential competitive advantage compared with us.
Accordingly, we may be unable to compete successfully against SBC, Verizon, BellSouth, Qwest or the other traditional telephone companies, and any failure to do so would materially and adversely
affect our business, operating results and financial condition.

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Other Major DSL Providers.Other competitive telecommunications companies plan to offer or have begun offering
DSL-based access services in our target markets, and others are likely to do so in the future. Competitive telecommunications companies that provide DSL service include Covad
Communications Group, Inc. and DSL.Net, Inc.

Other Service Providers and Technologies.Many of our competitors are offering, or may soon offer, technologies and services
that will compete with some or all of our high-speed offerings. These technologies include T-1, ISDN, satellite, cable modems and analog modems and could be provided by the
following:



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Relationship with Verizon

Our relationship with Verizon is critical to our current business. We depend on Verizon for collocation facilities, copper telephone lines, support services and
some of the fiber optic transport that we use for CopperNet in our target markets. Our interconnection agreements with Verizon govern much of this critical relationship. We have signed interconnection
agreements with Verizon in each of the states covering our target markets. These agreements cover a number of aspects, including:



We
have entered into interconnection agreements with Verizon that expire in June 2002 for Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New
York, Pennsylvania, Rhode Island, Vermont, Virginia, Washington, D.C. and West Virginia. These agreements continue indefinitely, absent three-month's notice by either party, except that
i) notice cannot be provided earlier than March 20, 2002 and ii) once notice is provided, the agreements continue in effect for the lesser of nine months or the successful
negotiation of a new agreement, assuming that the party receiving notice requests negotiation of a new agreement within 90 days of receiving termination notice. As of April 4, 2002,
there has been no notice of termination given by either party.

Additionally,
the FCC, state telecommunications regulators and the courts have authority to interpret our interconnection agreements and to resolve disputes in the event of a
disagreement between Verizon and us. There can be no assurance that these bodies will not interpret the terms or prices of our interconnection agreements in ways that could adversely affect our
business, operating results and financial condition.

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Government Regulation

The facilities and services that we obtain from Verizon in order to provide CopperNet are regulated extensively by the FCC and state telecommunications regulatory
agencies. To a lesser extent, these regulators also exercise regulatory control over the terms under which we provide CopperNet to the public. Municipalities also regulate limited aspects of our
telecommunications business by imposing zoning requirements, permit or right-of-way procedures or fees, among other regulations. Regulatory agencies generally have the
authority to condition, modify, cancel, terminate or revoke operating authority for failure to comply with applicable laws, rules, regulations or policies. Fines or other penalties also may be imposed
for such violations. We believe that we operate our business in compliance with applicable laws and regulations of the various jurisdictions in which we operate and that we possess the approvals
necessary to conduct our current operations. However, there can be no assurance that regulators or third parties would not raise issues regarding our compliance or non-compliance with
applicable laws and regulations.

Federal Regulation.The 1996 Telecom Act substantially departs from prior telecommunications law by establishing competition
as a national policy in all telecommunications markets. This legislation removes many state regulatory barriers to competition in telecommunications markets dominated by traditional telephone
companies and preempts, after notice and an opportunity to comment, laws restricting competition in those markets. The 1996 Act also greatly expands the obligation of traditional telephone companies
to make available to competitors the facilities and services that competitors need in order to provide telecommunications service, and it requires traditional telephone companies to interconnect their
networks on reasonable terms with the networks of competitors. More specifically, the 1996 Act requires the traditional telephone companies to:



Traditional
telephone companies also are required by the 1996 Telecom Act to negotiate interconnection agreement in good faith with competing carriers requesting any or all of the above
arrangements. If a requesting carrier cannot reach an agreement within the prescribed time, either carrier may request binding arbitration by the applicable state telecommunications regulatory
agencies.

The
FCC and state telecommunications regulators also are instructed by the 1996 Telecom Act to perform certain duties to implement the regulatory policy changes prescribed by the 1996
Act, including the adoption of rules and regulations to carry out Congressional intent. The outcome of various ongoing proceedings to carry out these responsibilities, or judicial appeals of these
proceedings, could materially affect our business, operating results and financial condition. Below, we summarize recent regulatory initiatives that have a potential impact on our company. This
summary is illustrative of the types of regulations that potentially affect our business rather than describing every telecommunications regulatory initiative that could negatively affect us.

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The
United States Supreme Court is presently reviewing an FCC order which defines the methodology that state telecommunications regulators must use in setting the prices competitors pay
for those parts of their telephone networks that the agency requires traditional telephone companies to make available to their competitors. Under existing FCC rules, traditional telephone companies
must sell us several inputs that we use in order to provide our CopperNet services (including, but not limited to, copper telephone lines, transmission facilities between local telephone company
offices and various back-office support services). These inputs are often referred to as "unbundled network elements." In the order under Supreme Court review, the FCC had instructed state
telecommunications regulatory agencies to set the price that the traditional telephone companies charge competitors for unbundled network elements under an incremental costing methodology that
traditional telephone companies claim is unlawfully favorable to competitors. The Supreme Court has agreed to review the FCC order establishing that pricing methodology at the request of traditional
telephone companies, and a decision by the Supreme Court may be imminent. If the Supreme Court agrees with the traditional telephone companies, the Court's decision could have a significant negative
impact on the price we pay for inputs we must obtain from Verizon telephone companies in order to provide CopperNet service.

The
U.S. Court of Appeals for the D.C. Circuit is presently reviewing an FCC order released August 8, 2001 that had substantially reaffirmed an earlier FCC decision defining the
types of equipment that competitors may place inside the telephone switching offices of traditional telephone companies like Verizon in order to facilitate the competitors' provision of
telecommunications services. In order to provide CopperNet service, we must place certain electronic equipment inside Verizon's switching offices. The traditional telephone companies petitioned the
U.S. Appeals Court to review the FCC's August 8, 2001 order, claiming that it unlawfully permits competitors to place equipment inside the switching offices of traditional telephone companies.
If the Court agrees with the petitioners, the Court's decision could have a significant negative impact on our ability to provide CopperNet service by giving Verizon the right to prohibit us from
placing equipment in its offices.

In
an order released December 20, 2001, the FCC announced that it would consider proposals to amend its existing rules defining which unbundled network elements traditional
telephone companies must make available to competitors. It is possible that traditional telephone companies will propose revisions to the existing rules that would authorize them to discontinue
providing to us the network elements we need in order to provide CopperNet service. The adoption of any such proposals would have a significant negative impact on our ability to provide CopperNet
service. Even if the FCC were to reject any proposals that allows Verizon to discontinue providing us with the network elements we need in order to offer our existing version of CopperNet service, it
is possible that the agency might adopt proposals that would prevent us from obtaining certain network elements we may need in the future in order to make our CopperNet offering more attractive to a
broader base of prospective customers, such as residential customers or customers located in suburban and rural areas. Any such action could complicate our ability to expand our customer base.

In
another order released December 20, 2001, the FCC announced its intention to consider proposals to loosen its regulation of certain high-speed data services
provided by traditional telephone companies, such as Verizon, that compete with our CopperNet offerings. In response, the traditional telephone companies have filed proposals with the FCC that would
eliminate numerous regulatory controls that
presently apply to their provision of such services. A decision by the FCC to implement these proposals could harm us by making it easier for Verizon to provide services that compete with CopperNet on
terms that we consider unfair.

The
FCC's tentative finding in a notice of proposed rulemaking released February 15, 2002 that services like CopperNet may be "information services" rather than
"telecommunications services" in certain circumstances could be a two-edged sword in several ways. For example, classifying such services as information services could be desirable in the
sense that information services typically are subject to less stringent FCC regulation than telecommunications services. On the other hand, classifying these services as

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information services could mean that traditional telephone companies would no longer be required to provide competitors with the network elements that the competitors need in order to provide such
services since traditional telephone companies are required by law to provide their competitors with the network elements for the provision of telecommunications services, but not information
services. In its February 15 notice of proposed rulemaking, the FCC requested comments on its tentative conclusions before it takes any final action. Comments will be filed in April and
May 2002.

On
August 27, 1999, the FCC issued an order that establishes a procedure by which traditional telephone companies may apply for authority to set the retail prices they charge for
certain high-speed data transmission services, including services that may compete with our CopperNet service, without substantial regulatory oversight. In an order released
March 14, 2001, the FCC granted pricing flexibility to Verizon's traditional telephone companies in some of the areas where we provide competing service, thereby giving the Verizon companies
additional flexibility to price their retail high-speed data services.

FCC
orders granting Verizon's applications to provide long distance telephone service in three states where we provide CopperNet (New York, Pennsylvania, and Massachusetts) arguably
reduce Verizon's incentive to provide us, on reasonable terms, with the unbundled network elements we need in order to provide CopperNet. Under the Communications Act of 1934 as amended in 1996,
Verizon is barred from providing certain long distance services in a state where it provides local phone service unless it demonstrates in an application filed with the FCC that it is providing
services and facilities to competitors like us on reasonable terms. Many Verizon competitors, including us, had urged the FCC to find, in response to Verizon's applications to provide long distance
service in each of these three states, that the company does not provide competitors with certain network elements on reasonable terms. But the FCC rejected these claims. The FCC's finding that
Verizon provides network elements to competitors in these states in compliance with existing regulatory requirements could reduce Verizon's incentive to improve its provisioning of network elements to
competitors in these three states. In late March 2002, Verizon filed an application to provide long distance service in New Jersey, another state where we provide CopperNet. By law, the FCC
must decide whether to grant this application within 90 days of the date it is filed. A decision to grant the New Jersey application could reduce Verizon's incentive to provide competitors like
us with the network elements we need to provide CopperNet in New Jersey in the same way that the agency's decisions to grant the New York, Pennsylvania and Massachusetts applications have done.

On
December 9, 1999, the FCC issued an order requiring that traditional telephone companies make available to competitors the upper frequencies of a local telephone line that
serves a given address so that the competitor may provide high speed data service to the customer over the same line that the traditional telephone company uses in providing regular local telephone
service to that customer. On January 19, 2001, the FCC issued an order that clarified certain aspects of the December 9, 1999 order, but the FCC's orders are under review in the U.S.
Court of Appeals. The outcome of court review is uncertain. In the meantime, Verizon started to make available this functionality to competitors in the last half of 2000. We do not presently use this
functionality in providing high-speed data services, although some of our competitors do.

In
the January 19, 2001 order referred to above, the FCC also invited comments on whether it should adopt regulations requiring traditional telephone companies to make available
to competitors the specialized services and facilities that are necessary in order to provide high-speed data services using DSL technologies to customers whose local telephone lines
consist partially of fiber and partially of copper wire, rather than entirely of copper wire. At present, companies using DSL technology are unable to provide the fastest speed service to customers
whose local phone lines contain some fiber optic wiring. Since an estimated 15 or 20 percent of all customer locations may be served by local telephone lines containing some fiber, the adoption
of FCC rules in this area could significantly increase the number of customer locations to which high speed data service using DSL technologies can be provided. However, we have no way of predicting

15

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whether the FCC will adopt regulations in this area. We also have no way of predicting whether any such regulations that it adopts will require traditional telephone companies to make available the
services and facilities that are necessary to provide DSL services over such lines in an efficient and cost effective manner. We also cannot predict the timing of any FCC regulations in this area.

Several
traditional telephone companies have petitioned the FCC to eliminate the requirement that they provide competitors with leased access to high-capacity loops, and that
petition is under review by the FCC. We could be negatively impacted if the FCC were to eliminate the requirement that traditional telephone companies provide access to high-capacity loops
since we require high capacity loops in order to provide service to some customers.

We
are required to submit to certain federal regulators obligations that attach to all telecommunications carriers. For example, we are required to make quarterly payments into the
federal universal service fund ("FUSF"). The FUSF is a fund mandated by Congress to provide cost support for various programs that ensure the availability of telecommunications services to, for
example, schools and libraries, hospitals, and high-cost regions of the country. We are required to pay a percentage of our interstate and international telecommunications revenue to the
FUSF, and we generally pass that percentage through to our customers pursuant to FCC rules. The amount we are required to pay into the FUSF varies depending on the breakdown between our
telecommunications revenue and non-telecommunications revenue (such as revenue from equipment sales, as well as revenue from installation services and from the provision of information
services). The FCC has a proceeding underway to reexamine its FUSF contribution rules, and the FCC and its FUSF collection agent periodically change the rules related to those contributions, including
the percentage of interstate telecommunications revenue that a carrier must contribute to the FUSF. To the extent those rules are changed, or interpretation of those rules results in an increase in
the FUSF contributions that we must make, we may be subject to increased liability for payments beyond what we have already contributed.

Congressional Action.In early 2002, the U.S. House of Representatives passed legislation that would make it much more
difficult for the competitors of traditional telephone companies to provide certain high speed data services like the service that we provide. Before this legislation can become law, it first must be
passed by the U.S. Senate and be signed by the President. We cannot predict whether this legislation will become law.

State Regulation.While the FCC has broad authority to implement provisions in the 1996 Telecom Act that are intended to open
telecommunications markets to competition, state telecommunications regulators also have substantial authority in this area. For example, although the FCC has jurisdiction to prescribe the methodology
traditional telephone companies must use in setting the price of copper telephone wires and other network elements, the FCC has exercised that jurisdiction by adopting a pricing standard and has given
state regulators substantial authority to apply that standard in order to determine actual prices. Some states have set only temporary prices for some network elements that are critical to the
provision of DSL services because they have not yet completed the regulatory proceedings necessary to determine permanent prices. However, two states where we competeNew York and New
Jerseyhave recently lowered the prices that competitors must pay for the network elements we need in order to provide CopperNet service. The results of these various proceedings determine
the price we pay for, and whether it is economically attractive for us to use, these network elements and services.

The
1996 Telecom Act also gives state telecommunications regulators broad authority to approve or reject interconnection agreements that competitive telecommunications companies enter
with traditional telephone companies and broad authority to resolve disputes that arise under these interconnection agreements. Under the 1996 Telecom Act, if we request agreements for interconnection
and access to unbundled network elements, traditional telephone companies have a statutory duty to negotiate in good faith with us. A separate agreement is signed for each of the states in which we
operate. During these negotiations,

16

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either the traditional telephone company or we may submit disputes to the state regulatory commissions for mediation and, after the expiration of the statutory negotiation period provided in the 1996
Telecom Act; we may submit outstanding disputes to the states for arbitration. The 1996 Telecom Act also allows state regulators to supplement FCC regulations as long as the state regulations are not
inconsistent with FCC requirements.

The
applicability of the various state regulations on our business will be further affected by the extent to which our services are determined to be intrastate services. Jurisdictional
determinations of our services as intrastate services could harm our business. In particular, we could be deemed liable for payments into state universal service funds, which are programs that require
telecommunications carriers providing intrastate services to pay a percentage of their intrastate revenues to support various state programs that ensure universal availability of telecommunications
and related services. We do not believe that the services we offer on an interstate basis are subject to such state assessments, but a state commission or judicial decision to the contrary could
subject us to liability for such payments.

It
is possible that a variety of other state regulatory policies could be adopted that address other matters that affect our business. We are unable to predict what policies may be
adopted in the future, to what extent existing laws and regulations may be found applicable to our business, or the impact such new or existing laws or regulations may have on our business. In
addition, laws or regulations could be adopted in the future that may decrease the growth and expansion of the Internet's use, thereby decreasing demand for our services.

Local Government Regulation.In certain instances, we may be required to obtain various permits and authorizations from
municipalities in which we operate our own facilities. The extent to which such actions by local governments pose barriers to entry for competitive telecommunications companies that may be preempted
by the FCC is the subject of litigation. Although our network consists primarily of unbundled network elements of the traditional telephone companies, in certain instances we may deploy our own
facilities and therefore may need to obtain certain municipal permits or other authorizations. The actions of municipal governments in imposing conditions on the grant of permits or other
authorizations or their failure to act in granting such permits or other authorizations could have a material adverse effect on our business, operating results and financial condition.

Intellectual Property

We regard our products, services and technology as proprietary and attempt to protect them with copyrights, trademarks, trade secret laws, restrictions on
disclosure and other methods. There can be no assurance these methods will be sufficient to protect our technology and intellectual property. We also generally enter into confidentiality agreements
with our employees and consultants, and generally control access to and distribution of our documentation and other proprietary information. Despite these precautions, it may be possible for a third
party to copy or otherwise obtain and use our products, services or technology without authorization, or to develop similar technology independently. We own federal trademarks for the marks CuNet, CU
COPPERNET and COPPERNET for use with "communications services, namely, high-speed electronic data transmission services." We expect to seek registration of our copyrights in software and
other intellectual property to the extent possible. There is no assurance that we will obtain any significant copyright protection for our systems that would protect our intellectual property from
competition. Currently, we have not filed any patent applications. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited in certain foreign
countries, and the global nature of the Internet makes it virtually impossible to control the ultimate destination of our proprietary information. There can be no assurance that the steps we have
taken will prevent misappropriation or infringement of our technology. In addition, litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets,
or to determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resources and could have a material adverse
effect on our business, operating results and financial condition. In addition, some of our information, including our competitive carrier status in individual states and our interconnection
agreements, is a matter of public record and can be readily obtained by our competitors and potential competitors, possibly to our detriment.

17

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Employees

As of December 31, 2001, we employed 190 individuals in engineering, sales, marketing, customer support and related activities and general and
administrative functions. None of these employees are represented by a labor union, and we consider our relations with our employees to be satisfactory. We are not a party to any collective bargaining
agreement. Our ability to achieve our financial and operational objectives depends in large part upon the continued service of our senior management and key technical, sales, marketing and managerial
personnel, and our continuing ability to attract and retain highly qualified technical, sales, marketing and managerial personnel. There is competition for qualified personnel and we may be unable to
identify, attract and retain such personnel in the future. In May 2001 and November 2001, we eliminated approximately 140 and 95 positions, respectively, as part of our actions to reduce
selling, general and administrative expenses.

Item 2. Properties.

Our headquarters is located in Herndon, Virginia. Our lease for this space, executed on October 27, 1999, originally comprised the entire facility,
consisting of approximately 113,093 square feet. On December 22, 2000, we entered into an agreement with SBC under which SBC agreed to assume or sublease for the remaining term of our lease
with the landlord, 47,312 square feet of the original 113,093 square feet leased office space. On February 14, 2002, we and the landlord entered into a settlement agreement and an amended lease
that returned to the landlord 34,022 square feet of office space. In addition, we lease a facility in Sterling, Virginia, of which SBC has sublet the majority of the leased space as part of our
settlement agreement with them.

In
2001 we closed branch offices in Wilmington, Delaware; Columbia, Maryland; Woburn, Massachusetts; East Brunswick and Morristown, New Jersey; New York and Uniondale, New York; Malvern
and Pittsburgh, Pennsylvania; and in Richmond and Virginia Beach, Virginia.

We
also lease collocation space in central offices from Verizon where we operate under the terms of our interconnection agreements with Verizon and regulations imposed by state
telecommunications regulators and the FCC. While the terms of these leases are perpetual, the productive use of our collocation facilities is subject to the terms of our interconnection agreements.
See "Item 1BusinessRelationship with Verizon."

Item 3. Legal Proceedings.

We are currently involved in a number of legal proceedings, some of which, as described below, could have a material adverse effect on our business, financial
position, results of operations or cash flows. Additionally, our present and possible future legal proceedings and claims, whether with or without merit, could be expensive to defend, divert
management's attention, and consume our time and
resources. There can be no assurance concerning the outcome of current or future legal proceedings or claims.

We
implemented a restructuring plan in May 2001, as discussed in "Item 1Business". As part of this plan, we stopped lease and rent payments as of May 31, 2001.
Since this date we have been renegotiating most rent and capital lease obligations with our landlords and lessors. Various landlords and lessors have filed default notices and notices of acceleration
with us. We are currently in arbitration proceedings with respect to the branch office we closed in Malvern, Pennsylvania, and are a defendant in legal proceedings with respect to the branch offices
closed in Woburn, Massachusetts, and in New York, New York. In addition, we are a defendant in a case filed with respect to our headquarters in Herndon, Virginia. We and the landlord have entered into
a settlement agreement and an amended lease and we believe we have complied with substantially all our obligations under the settlement agreement and that the case should be dismissed. There can be no
assurance that we will successfully renegotiate our rent and capital lease obligations.

18

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We
were a defendant, along with two directors and a principal stockholder, and a counter-claimant, in a case filed in the United States District Court for the Eastern District of
Virginia in November 2000 by former officer Christopher J. Melnick. The case was settled in May 2001 with the payment of $0.2 million in costs, removal of the restrictive legend
on 200,000 shares of common stock and the issuance of 1,063,533 shares of common stock. As a result of the issuance of common stock, we recorded compensation expense in the amount of
$0.6 million for the year ended December 31, 2001.

In
April 2001, DMR Consulting Group, Inc. (DMR) initiated an action against us in the Circuit Court of the County of Fairfax, Virginia. DMR sought monetary damages of
approximately $1.1 million. The case was settled in September 2001 with the payment of $0.3 million.

In
July 2001, a former employee commenced an action against us in the United States District Court for the District of Maryland seeking $1.0 million in compensatory damages
and $0.5 million in punitive damages for sex discrimination and unlawful retaliation. This case was settled for an immaterial amount in November 2001.

We
were a defendant in a case filed in the United States District Court for the Eastern District of Virginia in July 2001 by Wells Fargo Equipment Finance, Inc., or Wells
Fargo. Wells Fargo alleged default under a loan agreement; in particular, Wells Fargo alleged that we failed to make loan payments and maintain certain minimum unrestricted cash pursuant to a rider to
the loan agreement. Wells Fargo sought recovery of the alleged outstanding balance under the loan agreement ($6.1 million) or the posting of a letter of credit. On November 16, 2001, the
District Court entered judgment in favor of Wells Fargo for $5.7 million, plus interest calculated at the official court rate, which was 1.99% per annum, after this date. On January 25,
2002, we satisfied and discharged in full the judgment.

On
September 28, 2001, we received a notice of acceleration from Lucent Technologies (Lucent). Lucent demanded payment of principal and interest of $2.4 million related to
a note payable. On October 4, 2001, we filed a Demand of Arbitration with the American Arbitration Association concerning various claims against Lucent Technologies, Inc.
regarding the Ascend Communications, Inc./ Lucent Technologies, Inc., Purchase and Sale Agreement (Lucent Agreement). The demand asserts breach of contract for failure to place equipment
purchases on capital leases as required by the Lucent Agreement. In addition, the demand asserts breach of contract for failure to provide equipment that materially conforms to the specifications in
the Lucent Agreement. Finally, the demand asserts breach of contract for failure to correct accounts receivable records on credits and returns, and requests accounting for certain invoices. We
requested to be relieved of our obligations under the Lucent Agreement, including accounts payable of $0.8 million and notes payable and accrued interest of $2.4 million and other
related damages to be proven in the arbitration. Lucent has filed a counterclaim against us seeking recovery of the amounts due and owing under the Lucent Agreement, including the promissory note
(which is an exhibit to the Lucent Agreement). The amounts sought by Lucent are to be determined at the arbitration hearing. The arbitration proceedings are in discovery. There can be no assurance
that we will be successful in these proceedings. We have classified the $2.4 million as a current liability at December 31, 2001.

In
November 2000, InterConnX Inc. (InterConnX) initiated an action against us in the United States District Court for the Eastern District of Virginia. InterConnX alleged claims
for breach of contract and sought monetary damages in the amount of approximately $1.0 million. We filed an answer substantially denying InterConnX's allegations. The case was settled in
April 2001 with the payment of $0.2 million and the issuance of a $0.2 million, 9% interest promissory note, payable over twenty-four months.

In
November 2000, Vitria Technology, Inc. (Vitria) initiated an action against us in the Fairfax County Circuit Court, Virginia. Vitria alleged several causes of action and sought
monetary damages in the amount of approximately $0.5 million. We filed an answer substantially denying Vitria's allegations. The case was settled in April 2001 with the payment of
$0.4 million.

19

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In
March 2002, ALS Scan, Inc. (ALS) initiated an action against us in the United States District Court for the District of Maryland. ALS alleges copyright infringement against us
and another defendant, and seeks statutory damages and other damages in an amount to be determined at trial. We are currently evaluating our response.

Additionally,
we are subject to state telecommunications regulators, FCC and court decisions as they relate to the interpretation and implementation of the 1996 Telecom Act, the Federal
Communications Act of 1934, as amended, various state telecommunications statutes and regulations, the interpretation of competitive telecommunications company interconnection agreements in general
and our interconnection agreements in particular. In some cases, we may be deemed to be bound by the results
of ongoing proceedings of these bodies or the legal outcomes of other contested interconnection agreements that are similar to our agreements. The results of any of these proceedings could have a
material adverse effect on our business, financial condition, results of operations and cash flows.

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

None.

PART II

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

Stock Data.Our common stock trades on the Over-The-Counter Bulletin Board of the National
Association of Securities Dealers, or OTCBB, under the symbol "NASC.OB." On July 27, 2001, our shares of common stock were delisted from the NASDAQ Stock Market and began trading on the OTCBB,
after we received notification from NASDAQ on July 20, 2001 that we were no longer in compliance with NASDAQ rules that require companies to maintain a minimum bid price of $1 for 30
consecutive trading days and $4 million in net tangible assets. As of April 9, 2002, there were 140 record holders and we estimate that there are approximately 6,600 beneficial holders
of our common stock.

The
following table sets forth a) for the period during which our common stock traded on the NASDAQ Stock Market, the quarterly high and low closing prices for our common stock,
and b) for the period during which our common stock has traded on the OTCBB, quarterly information with respect to the high asked and low bid prices of our shares of common stock, which we
obtained from our records (this information represents bid prices between broker-dealers and does not include retail mark-ups or mark-downs or any commissions to dealers and
may not reflect actual transactions):

2001

2000

1999QuarterHigh

Low

High

Low

High

LowFirst

$
1.94

$
0.56

$
35.13

$
22.00





Second

$
0.84

$
0.29

$
22.94

$
9.56

$
13.94

$
8.63Third

$
0.38

$
0.16

$
11.44

$
4.13

$
18.00

$
10.00Fourth

$
0.35

$
0.15

$
4.06

$
0.47

$
36.50

$
12.25


On
April 9, 2002, the last reported sales price of our common stock on the OTCBB was $0.13.

We
have never paid cash dividends. It is our present policy to retain earnings to finance ongoing operations and potential future growth and development of our business, and therefore we
do not anticipate paying cash dividends on our common stock in the foreseeable future.

Additional Investor Relations Information.All of our current press releases and other investor relations information,
including all of our current required filings may be obtained without charge by

20

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request to us addressed to: Investor Relations, Network Access Solutions Corporation, Three Dulles Tech Center, 13650 Dulles Technology Drive, Herndon, VA 20171.

Transfer Agent.Our transfer agent is American Stock Transfer & Trust Company, 59 Maiden Lane, New York, NY 10038,
telephone (877) 777-0800.

Annual Meeting.Our next Annual Meeting of Stockholders is scheduled to be held at 9:00 a.m. on Tuesday,
June 11, 2002, at Three Dulles Tech Center, 13650 Dulles Technology Drive, in Herndon, Virginia.

Use of Proceeds.In June 1999, we commenced and completed a firm commitment underwritten initial public offering of
7,500,000 shares of our common stock. The shares were registered with the Securities and Exchange Commission pursuant to a registration statement on Form S-1
(No. 333-74679), which was declared effective on June 3, 1999. After deducting underwriting discounts and commissions of $5.5 million and expenses of
$1.8 million, we received net proceeds of $81.8 million.

21

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Item 6. Selected Financial and Other Data.

We present below summary financial and other data for our company. The summary historical statement of operations and other data for each of the three years in
the period ended December 31, 2001 have been derived from our audited financial statements that are included elsewhere in this Form 10-K. The statement of operations and
other data for the years ended December 31, 1998 and 1997 have been derived from audited financial statements that were included in our prior public filings. The summary balance sheet data as
of December 31, 2001 and 2000 has been derived from our audited financial statements that are included elsewhere in this Form 10-K. The balance sheet data as of
December 31, 1999, 1998 and 1997 has been derived from audited financial statements that were included in our prior public filings.

|                                                                                         |                                                                                                          | Year ended December 31,  |           
|---------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | ------------------------ | ----------
|
|
|
|Statement of Operations Data:                                                            |                                                                                                          |                          |           
|Revenue:                                                                                 |                                                                                                          |                          |           
|                                                                                         | Network services                                                                                         |                          | $         
|                                                                                         | Product sales and consulting services                                                                    |                          |           
|                                                                                         |                                                                                                          |                          |           
|                                                                                         |                                                                                                          | Total revenue            |           
|                                                                                         |                                                                                                          |                          |           
|Operating expenses:                                                                      |                                                                                                          |                          |           
|                                                                                         | Network services costs (exclusive of depreciation and amortization presented below)                      |                          |           
|                                                                                         | Product sales and consulting services costs (exclusive of depreciation and amortization presented below) |                          |           
|                                                                                         | Selling, general and administrative                                                                      |                          |           
|                                                                                         | Amortization of deferred compensation on stock options                                                   |                          |           
|                                                                                         | Depreciation and amortization                                                                            |                          |           
|                                                                                         | Restructuring                                                                                            |                          |           
|                                                                                         | Impairment of long-lived assets                                                                          |                          |           
|                                                                                         |                                                                                                          |                          |           
|                                                                                         |                                                                                                          | Total operating expenses |           
|                                                                                         |                                                                                                          |                          |           
|Income (loss) from operations                                                            |                                                                                                          |                          | (105,474  
|Interest income (expense), net                                                           |                                                                                                          |                          | (2,870    
|Follow-on offering costs                                                                 |                                                                                                          |                          |          
|                                                                                         |                                                                                                          |                          |           
|Income (loss) before income taxes                                                        |                                                                                                          |                          | (108,344  
|Provision (benefit) for income taxes                                                     |                                                                                                          |                          |          
|                                                                                         |                                                                                                          |                          |           
|Net income (loss)                                                                        |                                                                                                          |                          | (108,344  
|Preferred stock dividends and accretion                                                  |                                                                                                          |                          | 5,304     
|                                                                                         |                                                                                                          |                          |           
|Net income (loss) applicable to common stockholders                                      |                                                                                                          | $                        | (113,648  
|                                                                                         |                                                                                                          |                          |           
|Net income (loss) per common share applicable to common stockholders (basic and diluted) |                                                                                                          | $                        | (2.14     
|                                                                                         |                                                                                                          |                          |           
|Weighted average common shares outstanding (basic and diluted)                           |                                                                                                          |                          | 53,086,116
|                                                                                         |                                                                                                          |                          |           

22

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|                                                    |  | Year ended December 31, |        
|--------------------------------------------------- |  | ----------------------- | -------
|
|
|
|Other Data:                                         |  |                         |        
|Adjusted EBITDA(1)                                  |  | $                       | (42,044
|Capital expenditures                                |  |                         | 5,999  
|Net cash provided by (used in) operating activities |  |                         | (33,210
|Net cash provided by (used in) investing activities |  |                         | 27,770 
|Net cash provided by financing activities           |  |                         | 1,328  

|                                                  |  | As of December 31,
|------------------------------------------------- |  | ------------------
|
|
|Balance Sheet Data:                               |  |                   
|Cash, cash equivalents and short-term investments |  | $                 
|Property and equipment, net                       |  |                   
|Total assets                                      |  |                   
|Total debt (including capital lease obligations)  |  |                   
|Mandatorily redeemable preferred stock            |  |                   
|Total stockholders' (deficit) equity              |  |                   

23

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Quarterly Results of Operations

The following table presents our quarterly results of operations data and the components of net loss for 2001 and 2000. In the opinion of management, this
information has been prepared substantially on the same basis as the financial statements appearing elsewhere in this Form 10-K, and all necessary adjustments, consisting only of
normal recurring adjustments, have been included in the amounts stated below to present fairly the unaudited quarterly results when read in conjunction with our financial statements and related notes
thereto appearing elsewhere in this Form 10-K. The operating results for any quarter are not necessarily indicative of the operating results for any future period.

|                                           |                                                                                                          | 2001                     |         | 2000  |       
|------------------------------------------ | -------------------------------------------------------------------------------------------------------- | ------------------------ | ------- | ----- | ------
|
|
|
|Revenue:                                   |                                                                                                          |                          |         |       |       
|                                           | Network services                                                                                         |                          | $       | 7,725 |       
|                                           | Product sales and consulting services                                                                    |                          |         | 538   |       
|                                           |                                                                                                          |                          |         |       |       
|                                           |                                                                                                          | Total revenue            |         |       | 8,263 
|                                           |                                                                                                          |                          |         |       |       
|Operating expenses:                        |                                                                                                          |                          |         |       |       
|                                           | Network services costs (exclusive of depreciation and amortization presented below)                      |                          |         | 9,848 |       
|                                           | Product sales and consulting services costs (exclusive of depreciation and amortization presented below) |                          |         | 1,380 |       
|                                           | Selling, general and administrative                                                                      |                          |         | 7,476 |       
|                                           | Amortization of deferred compensation on stock options                                                   |                          |         | 266   |       
|                                           | Depreciation and amortization                                                                            |                          |         | 7,825 |       
|                                           | Restructuring                                                                                            |                          |         | 1,212 |       
|                                           | Impairment of long-lived assets                                                                          |                          |         | 2,214 |       
|                                           |                                                                                                          |                          |         |       |       
|                                           |                                                                                                          | Total operating expenses |         |       | 30,221
|                                           |                                                                                                          |                          |         |       |       
|Loss from operations                       |                                                                                                          |                          | (21,958 | )     |       
|Interest income (expense), net             |                                                                                                          |                          | (1,322  | )     |       
|Follow-on offering costs                   |                                                                                                          |                          |        |       |       
|                                           |                                                                                                          |                          |         |       |       
|Loss before income taxes                   |                                                                                                          |                          | (23,280 | )     |       
|Provision (benefit) for income taxes       |                                                                                                          |                          |        |       |       
|                                           |                                                                                                          |                          |         |       |       
|Net loss                                   |                                                                                                          | $                        | (23,280 | )     | $     
|Preferred stock dividends and accretion    |                                                                                                          |                          | 1,323   |       |       
|                                           |                                                                                                          |                          |         |       |       
|Net loss applicable to common stockholders |                                                                                                          | $                        | (24,603 | )     | $     
|                                           |                                                                                                          |                          |         |       |       

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, the Financial Statements and Notes.
Historical results and percentage relationships among any amounts in the Financial Statements are not necessarily indicative of trends in operating results for any future period.

Overview

We are focused on solving the data communications needs of small- and medium-sized business customers through broadband network services, which includes our
CopperNet service offering. Our CopperNet service allows us to provide metropolitan area networks, or MANs, and wide area networks, or WANs, to our customers. In 2001, these network

24

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services
represented the majority of our revenue as our focus on this business resulted in significant growth in both customer lines and revenue. Revenues have declined in our product sales and
consulting businesses as we de-emphasized them and as the market and margins in these businesses deteriorated.

We
currently offer networking using our own infrastructure in the following nine northeast and mid-Atlantic cities and their surrounding markets: Baltimore, Boston, New York,
Norfolk, Philadelphia, Pittsburgh, Richmond, Washington D.C. and Wilmington. Customer locations outside of these major metropolitan areas are served primarily through the local facilities of other
carriers, including Covad, WorldCom and AT&T.

We
have invested in the development and deployment of the network we use to deliver our CopperNet service. We have funded the deployment of our CopperNet services through proceeds
received from a preferred and common stock financing in August 1998, issuance of promissory notes that were converted into common stock during the three months ended June 30, 1999,
capital lease financing, our initial public offering and the proceeds received from the sale of $150 million of our Series B preferred stock to SBC and Telmex Communications, LLC, or
Telmex.    From February 1997 through the third quarter
2000, we increased our operating expenses and capital expenditures in an effort to continue to rapidly expand our equipment and human resource-related infrastructure and DSL-based network
services.

In
an effort to increase revenue from our installed network and conserve capital, in the fourth quarter of 2000 we decided to suspend the build-out of additional central
offices including those initiated as a result of our agreements with SBC and Telmex and focus our efforts on increasing revenue through increased penetration in our existing service areas. In
addition, we took actions designed to reduce selling, general and administrative expenses by 24%, including a workforce restructuring that eliminated approximately 145 positions, representing about
23% of the workforce at that time.

On
December 22, 2000, and on February 28, 2001, we amended various separate agreements with SBC and with Telmex, and entered into separate new agreements with SBC. These
new and amended agreements with SBC resulted in a reduction of our property and equipment related to the transfer of our lease interest in certain central offices of approximately $1.6 million
and a conversion of preferred stock of $79.2 million, including accrued dividends of $4.2 million, into 2,554,375 shares of our common stock. Related to this transfer we recorded an
impairment charge for long-lived assets of approximately $22.1 million, plus an account receivable of $1.6 million for our lease interests in certain central offices that SBC
agreed to purchase from us for cash as described in more detail in "Item 1BusinessThe Company.

Throughout
2001, we continued to undertake measures to reduce expenses, streamline operations and improve profitability. In May 2001, we implemented a restructuring plan focusing
our resources on higher margin areas of network operations with higher potential for future growth. The plan included shutting down and abandoning approximately 205 unprofitable central office
collocation facilities, which accounted for approximately 8% of network services revenue and 20% of network services operating expense. The majority of the network equipment located in these
facilities, which is owned or leased by us, was removed and redeployed to other central offices as needed. The plan also included the elimination of 140 employees, or 34% of the work force, and
closure of all outside sales offices. The employee groups in which terminations occurred included all functional areas within the Company.

As
a result of this restructuring, as of December 31, 2001, we had installed and had operational DSL equipment in approximately 300 central offices within the northeast and
mid-Atlantic region of the United States. While we may consider the acquisition of, or expansion into, new central offices in the future, there are no current plans to expand beyond our
existing footprint.

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In
the second half of 2001, we actively sought to expand our revenue and customer base through the acquisition of DSL customers, including acquisitions from distressed or bankrupt
companies. On August 31, 2001, we acquired approximately 1,250 DSL customers and other selected assets and assumed certain liabilities of CapuNet, LLC. The aggregate purchase price was
$1.14 million. In order to meet the network services needs of our existing customers outside of our network footprint and the
needs of many acquired customers, we entered into a DSL services agreement with Covad in October 2001.

On
November 19, 2001, we closed the acquisition of the DSL customer list and contracts of Ardent Communications, Inc., or Ardent. Ardent, which supplied DSL service
nationwide to business customers, agreed to sell us 16,800 customer lines after they sought bankruptcy protection in October 2001. The aggregate purchase price was $7.0 million. We are
experiencing, as anticipated, customer attrition due to the acquisition and are additionally terminating certain customers for non-performance.

On
November 16, 2001, in another restructuring of our work force, we eliminated an additional 95 positions. The employee groups terminated were part of several functional areas
within the Company, but also included a significant reduction in our sales force as we looked to focus on our existing customers and the integration and consolidation of acquired DSL customers.

Categories of Revenue

Revenue consists of:

Network services.We charge monthly service fees for access to our CopperNet local, metropolitan and wide area networks. We
also provide a wide variety of network services to customers, including remote network management and monitoring, network security, dedicated private connections to our network, Internet access,
e-commerce and other data applications. Some of these services are delivered to customers using resources from third-party providers under contract to us.

Consulting services & product sales.We provide professional consulting and network integration services to complement
all of our network services. We also provide network design and integration, network management, staging, installation, maintenance and warranty services. Our consulting services include network
security and professional services, including network security architecture consulting. In addition, as part of our overall data communications solutions, we sell data communications products,
including the network components and security components that our customers require in order to build, maintain and secure their networks. We do not manufacture any of this equipment ourselves. Our
engineers select product solutions to improve our customers' operations and network efficiencies, and then help install and configure the equipment in our customers' networks.

Categories of Operating Expenses

Operating expenses consists of:

Network services costs.Our network services costs generally consist of non-employee-based charges such as:



26

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Product sales and consulting services costs.We purchase equipment from various vendors whose technology and hardware
solutions we recommend to our customers. We do not manufacture any of this equipment. Consulting services cost of revenue consists of charges for hardware maintenance, installation and certain
contract services that we purchase from third parties.



Our selling, general and administrative expenses include all employee-based charges, including field technicians, engineering support, customer service and
technical support, information systems, billing and collections, general management and overhead and administrative functions.



We had outstanding stock options to purchase a total of 2,843,577, 10,454,328 and 10,984,459 shares of common stock as of December 31, 2001, 2000 and 1999,
respectively, at weighted average exercise prices of $1.92, $3.60 and $1.71 per share, respectively. At December 31, 2001, 813,286 of these options were exercisable for restricted shares of our
common stock that generally vest over a three- to four-year period. In certain instances, the fair market value of the underlining common stock on the date of grant was in excess of the
exercise price of the options resulting in deferred compensation on stock options which is recognized as compensation expense over the vesting period.

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Related to these options we recognized $2.8 million, $7.5 million and $8.2 million of stock compensation expense for the years ended December 31, 2001, 2000 and 1999,
respectively. In addition, as a result of cancellations and forfeitures of unvested stock options, a decrease to deferred compensation and
additional paid-in-capital was recorded. During 2001, we recorded a reduction of deferred compensation of $14.3 million related to cancellations and forfeitures.

On
April 1, 1999, we entered into a stock option agreement that granted one of our directors an option to purchase 250,000 shares of our common stock at an exercise price of $6.67
per share. On June 3, 1999, this director exercised this option. In addition, the agreement stipulated that this director will be issued an additional option to purchase 407,500 shares of
common stock at an exercise price of $3.00 per share. These options immediately vested upon our initial public offering. As a result, we recognized approximately $3.5 million of compensation
expense during the year ended December 31, 1999 related to these options. Subsequently, on May 8, 2001 options to acquire 407,500 shares of common stock were cancelled upon the
director's resignation.



Depreciation expense represents our network and equipment purchases for our customers' premises, build-out costs, including one-time
installation and activation fees, collocation fees and other DSL-based equipment costs that have been capitalized and amortized over estimated useful lives ranging from two to five years.

Interest Income (Expense), Net

Interest income (expense), net, primarily consists of interest income from our cash and cash equivalents less interest expense associated with our debt and
capital leases.

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Results of Operations

The following tables present our results of operations data and the components of net income (loss) as a percentage of our revenue.

|                                           |                                                                                                          | Years Ended December 31, |      
|------------------------------------------ | -------------------------------------------------------------------------------------------------------- | ------------------------ | -----
|
|
|Revenue:                                   |                                                                                                          |                          |      
|                                           | Network services                                                                                         |                          | 77.8 
|                                           | Product sales and consulting services                                                                    |                          | 22.2 
|                                           |                                                                                                          |                          |      
|                                           |                                                                                                          | Total revenue            |      
|                                           |                                                                                                          |                          |      
|Operating expenses:                        |                                                                                                          |                          |      
|                                           | Network services costs (exclusive of depreciation and amortization presented below)                      |                          | 90.4 
|                                           | Product sales and consulting services costs (exclusive of depreciation and amortization presented below) |                          | 20.1 
|                                           | Selling, general and administrative                                                                      |                          | 117.1
|                                           | Amortization of deferred compensation on stock options                                                   |                          | 8.5  
|                                           | Depreciation and amortization                                                                            |                          | 91.9 
|                                           | Restructuring                                                                                            |                          | 9.8  
|                                           | Impairment of long-lived assets                                                                          |                          | 82.1 
|                                           |                                                                                                          |                          |      
|                                           |                                                                                                          | Total operating expenses |      
|                                           |                                                                                                          |                          |      
|Loss from operations                       |                                                                                                          | (319.9                   | )    
|Interest (expense) income, net             |                                                                                                          | (8.7                     | )    
|Follow-on offering costs                   |                                                                                                          |                         |      
|                                           |                                                                                                          |                          |      
|Loss before income taxes                   |                                                                                                          | (328.6                   | )    
|Provision (benefit) for income taxes       |                                                                                                          |                         |      
|                                           |                                                                                                          |                          |      
|Net loss                                   |                                                                                                          | (328.6                   | )    
|                                           |                                                                                                          |                          |      
|Preferred stock dividends and accretion    |                                                                                                          | 16.1                     |      
|                                           |                                                                                                          |                          |      
|Net loss applicable to common stockholders |                                                                                                          | (344.7                   | )%   
|                                           |                                                                                                          |                          |      

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Revenue.We recognized $33.0 million in revenue for the year ended December 31, 2001, as compared to
$30.6 million for the year ended December 31, 2000, an increase of $2.4 million. This increase was attributable to a $14.9 million increase in network services offset by a
$12.6 million decrease in product sales and consulting services. Network services increased from $10.7 million for the year ended December 31, 2000 to $25.6 million for the
year ended December 31, 2001. This was primarily the result of increased sales of services related to our DSL-enabled network, completed in 2000 for which revenues were received in
2001. Product sales and consulting services revenue decreased from $19.9 million for the year ended December 31, 2000 to $7.3 million for the year ended December 31, 2001.
This decrease was primarily attributable to a de-emphasis by the Company as the market and margins related to our product sales and consulting business deteriorated.

Network services costs.We recorded network services costs of $29.8 million for the year ended December 31,
2001 and $22.6 million for the year ended December 31, 2000. The increase of $7.2 million is primarily attributable to the full year impact of rent and power for the central
offices and backbone connectivity charges along with the increase in CopperNet service fees associated with increased customer lines increased revenue of $14.9 million, offset by reduced cost.

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Product sales and consulting services costs.Product sales and consulting services costs were $6.6 million for the
year ended December 31, 2001, as compared to $18.3 million for the year ended December 31, 2000, a decrease of $11.7 million. This was due to a decrease in product sales
and consulting services revenue of $12.6 million over the same period.

Selling, general and administrative expenses.Selling, general and administrative expenses were $38.6 million for the
year ended December 31, 2001, as compared to $78.1 million for the year ended December 31, 2000, a decrease of $39.5 million. This decrease was due to reduced expenditures
attributable to a workforce reduction in the fourth quarter of 2000 and the second and fourth quarters of 2001.

Amortization of deferred compensation on stock options.Amortization of deferred compensation was $2.8 million for the
year ended December 31, 2001, as compared to $7.5 million for the year ended December 31, 2000, a decrease of $4.7 million. This decrease is attributable to the decrease in
the unamortized deferred compensation principally due to the cancellation of stock options for common shares granted to key employees as a result of termination of their employment and forfeitures of
stock options granted to employees which resulted from workforce reductions.

Depreciation and amortization expense.Depreciation and amortization expense was $30.3 million for the year ended
December 31, 2001, as compared to $24.7 million for the year ended December 31, 2000, an increase of $5.6 million. This increase was primarily due to additions related to
our CopperNet network, computer equipment and software, office furnishings and leasehold improvements.

Restructuring expense.During the year ended December 31, 2001 we had restructuring charges of $3.2 million. In
May 2001, we implemented a restructuring plan to reduce expenses, streamline operations, and improve profitability. The plan included the elimination of 140 employees and closure of all outside
sales offices. In November 2001, in a second restructuring of our work force, we eliminated an additional 95 positions. Total restructuring charges for the year were comprised of
$1.1 million for employee terminations, $1.5 million for lease terminations, and $0.6 million for other related costs. There were no similar costs during the comparable period in
2000.

Impairment of long-lived assets.Impairment of long-lived assets was $27.1 million for the
year ended December 31, 2001 and $22.1 million for the year ended December 31, 2000. In May 2001, we implemented a restructuring plan to reduce expenses, streamline
operations, and improve profitability. The plan included the shut down and abandonment of approximately 205 unprofitable central office collocation facilities. In November 2001 we completed an
additional restructuring plan impairing certain assets, mainly furniture and fixtures, located at our corporate headquarters. The impairment charges are composed of three long-lived asset
categories: network placed in service of $11.9 million, office and computer equipment and software of $13.0 million, and furniture and fixtures of $2.2 million. The impairment
related to 2000 resulted from our agreements entered into on December 22, 2000, and subsequently amended on February 28, 2001, with SBC and Telmex, which provided, among other things,
for the termination of the parties' efforts to expand our network into the southeastern and the western United States.

Loss from operations.Our loss from operations was $105.5 million for the year ended December 31, 2001, as
compared to $142.7 million for the year ended December 31, 2000, a decrease of $37.2 million. The decreased loss for the year ended December 31, 2001 was primarily due to
decreased selling, general and administrative expenses due to reduced expenditures attributable to the workforce reduction in the fourth quarter of 2000 and the second and fourth quarter of 2001, as
described above in "Restructuring and impairment of long-lived assets."

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Interest (expense) income, net.For the year ended December 31, 2001, we recorded net interest expense of
$2.9 million, consisting of interest income of $2.5 million and interest expense of $5.4 million. For the year ended December 31, 2000 we recorded net interest income of
$2.7 million, consisting of interest income of $6.5 million and interest expense of $3.8 million. The increase in interest expense is primarily due to interest on capital lease
obligations and significant reduced interest income due to lower cash and cash equivalent balances earning interest.

Follow-on offering costs.During the year ended December 31, 2000, we expensed $0.6 million related
to our follow-on offering of common stock that we commenced earlier in the year but subsequently withdrew due to unfavorable market conditions. There were no similar costs during the
comparable period in 2001.

Provision (benefit) for income taxes.We had a provision for income taxes of $0.0 million for the year ended
December 31, 2001, as compared to $0.1 million for the year ended December 31, 2000.

Preferred stock dividends and accretion.During the year ended December 31, 2001, the amount of preferred stock
dividends was $5.3 million, as compared to $8.6 million for the year ended December 31, 2000 a decrease of $3.3 million. This decrease is attributable to the conversion of
Series B preferred stock held by SBC into common stock on December 22, 2000. During the year ended December 31, 2001, the amount of preferred stock accretion to redemption price
recognized was $0.1 million, as compared to $0.1 million for the year ended December 31, 2000.

Net loss applicable to common shareholders.For the foregoing reasons, our net loss applicable to common shareholders was
$113.6 million for the year ended December 31, 2001, as compared to $149.3 million for the year ended December 31, 2000, a decrease of $35.7 million.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Revenue.We recognized $30.6 million in revenue for the year ended December 31, 2000, as compared to
$17.4 million for the year ended December 31, 1999, an increase of $13.2 million. This increase was attributable to an $8.9 million increase in network services and a
$4.3 million increase in product sales and consulting services. Network services increased from $1.8 million for the year ended December 31, 1999 to $10.7 million for the
year ended December 31, 2000. This was the result of increased sales of services related to our DSL-enabled network, which was introduced in early 1999. Product sales and consulting
services revenue increased from $15.6 million for the year ended December 31, 1999 to $19.9 million for the year ended December 31, 2000. This increase was mainly due to
significant sales to two customers that comprised $5.2 million during the year ended December 31, 2000.

Network services costs.Network services costs were $22.6 million for the year ended December 31, 2000, as
compared to $4.8 million for the year ended December 31, 1999, an increase of $17.8 million. This increase was principally attributable to an increase in expenses incurred to
continue to expand, develop and operate our CopperNet and other networking services.

Product sales and consulting services costs.Product sales and consulting services costs were $18.3 million for the
year ended December 31, 2000, as compared to $13.0 million for the year ended December 31, 1999, an increase of $5.3 million. This was due to an increase in product sales
and consulting services revenue of $4.3 million over the same period.

Selling, general and administrative expenses.Selling, general and administrative expenses were $78.1 million for the
year ended December 31, 2000, as compared to $27.7 million for the year ended December 31, 1999, an increase of $50.4 million. This increase was primarily due to increased
staffing and other expenses incurred to develop, operate and sell our CopperNet network and other networking solutions.

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Amortization of deferred compensation on stock options.Amortization of deferred compensation was $7.5 million for the
year ended December 31, 2000, as compared to $8.2 million for the year ended December 31, 1999, a decrease of $0.7 million. This decrease is attributable to the decrease in
the unamortized deferred compensation from $18.4 million to $17.9 million as of December 31, 1999 and 2000, respectively, which is principally due to the cancellation of stock
options granted to key employees at less than fair market value, and the related amortization of this balance over the remaining vesting period for these options.

Depreciation and amortization expense.Depreciation and amortization expense was $24.7 million for the year ended
December 31, 2000, as compared to $5.2 million for the year ended December 31, 1999, an increase of $19.5 million. This increase was primarily due to investments in our
CopperNet network, computer equipment and software, office furnishings and leasehold improvements, which increased from $60.4 million at December 31, 1999, to $120.5 million at
December 31, 2000.

Impairment of long-lived assets.The impairment of long-lived assets represents the
$22.1 million impairment of our lease interests in certain traditional telephone company central offices located primarily in the southeastern and western United States. The impairment resulted
from our agreements entered into on December 22, 2000, and subsequently amended on February 28, 2001, with SBC and Telmex, which provided, among other things, for the termination of the
parties' efforts to expand our network into the southeastern and western United States.

Loss from operations.Our loss from operations was $142.7 million for the year ended December 31, 2000, as
compared to $41.4 million for the year ended December 31, 1999, an increase of $101.3 million. The increased loss for the year ended December 31, 2000 was primarily due to
increased staffing and other operating expenses we incurred in connection with the development, expansion, operation and support of our CopperNet network and the impairment of certain
long-lived assets associated with the discontinuation of our network expansion.

Interest (expense) income, net.For the year ended December 31, 2000, we recorded net interest income of
$2.7 million, consisting of interest income of $6.5 million and interest expense of $3.8 million. For the year ended December 31, 1999 we recorded net interest income of
$1.1 million, consisting of interest income of $2.1 million and interest expense of $1.0 million. The increase in interest income was primarily attributable to interest earned
from the net proceeds of $149.8 million received from our preferred stock offering in March 2000. The increase in interest expense is primarily due to interest on capital lease
obligations, which have increased from $20.9 million at December 31, 1999 to $41.8 million at December 31, 2000.

Follow-on offering costs.During the year ended December 31, 2000, we expensed $0.6 million related
to our follow-on offering of common stock that we commenced earlier in the year but subsequently withdrew due to unfavorable market conditions. There were no similar costs during the
comparable period in 1999.

Provision (benefit) for income taxes.We had a provision for income taxes of $0.1 million for the year ended
December 31, 2000, as compared to a benefit of $0.1 million for the year ended December 31, 1999.

Preferred stock dividends and accretion.During the year ended December 31, 2000, the amount of preferred stock
dividends was $8.5 million, as compared to $0.3 million for the year ended December 31, 1999 an increase of $8.2 million. This increase is attributable to the issuance of
our Series B preferred stock of $150.0 million during March 2000. We accrued dividends at 7% per annum on the Series B preferred stock and 8% per annum on the
Series A preferred stock, on the outstanding principal amount. During the year ended December 31, 2000, the amount of preferred stock accretion to redemption price recognized was
$0.1 million, as compared to $0.3 million for the year ended December 31, 1999, a decrease of $0.2 million.

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Net loss applicable to common shareholders.For the preceding reasons, our net loss applicable to common shareholders was
$149.3 million for the year ended December 31, 2000, as compared to $40.9 million for the year ended December 31, 1999, an increase of $108.4 million.

Liquidity and Capital Resources

During the years ended December 31, 2001, 2000 and 1999, we incurred operating losses of $105.5 million, $142.7 million and
$41.4 million, respectively, and negative cash flows from operations of
$33.2 million, $77.6 million and $20.2 million, respectively. We had an accumulated deficit of $291.1 million at December 31, 2001 and expect to incur operating
losses for the foreseeable future but at reduced levels than previously incurred. Our management has taken actions to significantly reduce operating, selling, general and administrative expenses and
capital expenditures. We currently expect minimal expenditures for capital equipment in 2002 and expect continued reductions in the size of our operating losses, net losses and net operating cash
outflows as we continue to see the benefits from the cost reduction actions completed in 2001. Our business plan contemplates additional required funding to offset negative cash flow resulting
primarily from ongoing operating losses, the repayment of existing capital lease, settlement of existing litigation, and other obligations. We are attempting to obtain additional equity or debt
funding and are evaluating other strategic alternatives as well. Such debt, equity and other strategic options may involve significant potential dilution to common stockholders.

If,
as a result of existing market conditions or other factors, we fail or are unable to raise sufficient capital, we may have to drastically alter our business plan so as to conserve
cash, or sell all or a portion of our assets, possibly pursuant to a liquidation proceeding in bankruptcy court, or both.

Initial Public Offering.The net proceeds from our initial public offering, completed in June 1999, were approximately
$81.9 million.

Borrowings and Sale of Preferred Stock.In February 2000, we borrowed $15 million from each of SBC and Telmex
until we received regulatory approvals for the issuance of 1,500,000 shares of our Series B preferred stock on March 7, 2000. The loans bore interest at a rate of prime plus 2% during
the time they were outstanding, and we repaid both loans plus accrued interest in full upon consummation of the preferred stock sale on March 7, 2000. The net proceeds from our sale of
preferred stock in March 2000 were approximately $149.8 million.

Operating Activities.Net cash used in operating activities for the year ended December 31, 2001 was
$33.2 million. This was primarily the result of losses of $108.3 million attributable to the development of our CopperNet services, but also the result of an increase in accounts
receivable of $1.9 million. These were partially offset by increases in non-cash expenses consisting primarily of depreciation of $30.3 million, impairment of
long-lived assets of $27.1 million and provision for doubtful accounts receivable of $0.9 million. These were accompanied by increases in accounts payable of
$3.9 million and accrued expenses of $7.3 million.

Net
cash used in operating activities for the year ended December 31, 2000 was $77.6 million. This was primarily the result of losses of $140.6 million attributable
to the expansion of our CopperNet network and development of our CopperNet services, but also the result of an increase in accounts receivable of $4.0 million and an increase in other assets of
$1.1 million. These uses of cash were partially offset by increases in non-cash expenses consisting primarily of depreciation of $24.7 million, amortization of deferred
compensation on stock options of $7.5 million and provision for doubtful accounts receivable of $1.3 million, as well as increases in accounts payable of $4.7 million and accrued
expenses of $7.5 million.

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Net
cash used in operating activities for the year ended December 31, 1999 was $20.2 million. This was primarily the result of operating losses of $40.3 million
attributable to the expansion of our network and development of our CopperNet services, accompanied by an increase in accounts receivable of $1.8 million. This was partially offset by an
increase in non-cash expenses consisting primarily of amortization of deferred compensation on stock options of $8.2 million and depreciation of $5.2 million, accompanied by
an increase in accounts payable of $6.2 million and an increase in accrued expenses of $3.3 million.

Investing Activities.Net cash provided by investing activities was $27.8 million for the year ended
December 31, 2001. This was primarily the result of sales of short-term investments of $46.9 million offset by purchases of property and equipment of $11.4 million and
the acquisition of both CapuNet and Ardent of $5.5 million.

Net
cash used in investing activities was $66.8 million for the year ended December 31, 2000. This was primarily the result of purchases of short-term
investments of $28.3 million and purchases of property and equipment of $22.0 million. This was accompanied by deployment of equipment for our CopperNet services of $16.6 million.

Net
cash used in investing activities was $61.4 million for the year ended December 31, 1999. This was primarily the result of the deployment of equipment for our CopperNet
services of $28.4 million, short-term investments of $24.6 million and purchases of property and equipment of $6.8 million.

Financing Activities.Net cash provided by financing activities was $1.3 million for the year ended
December 31, 2001. This was the result of proceeds from a note payable with SBC of $5.0 million offset primarily by principal payments on capital lease obligations of
$3.5 million.

Net
cash provided by financing activities was $140.9 million for the year ended December 31, 2000. This was primarily the result of net proceeds from our preferred stock
offering of $150.0 million and borrowings on sale/leaseback arrangements of $5.5 million. These were partially offset primarily by principal payments on capital lease obligations of
$14.3 million.

Net
cash provided by financing activities was $94.3 million for the year ended December 31, 1999. This was primarily the result of net proceeds from our initial public
offering of $83.7 million and borrowings on notes payable of $12.0 million. These were partially offset by issuance costs paid of $1.9 million and principal payments on capital
lease obligations of $1.7 million.

Debt and Capital Lease Arrangements.As of December 31, 2001, we had no debt or capital lease facilities available.

Critical Accounting Policies and Estimates

Financial Reporting Release (FRR) No. 60, which was released in December 2001, by the Securities and Exchange Commission or SEC, requires all
companies filing Annual Reports on Form 10-K to include a discussion of critical accounting policies or methods used in the preparation of financial statements. We have identified
the accounting principles critical to our business and results of operations, and Note 2 to our financial statements includes a summary of the significant accounting policies and methods used
in the preparation of our financial statements. The following is a brief discussion of the more significant accounting policies and methods used by us.

Our
discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosures of contingent assets and liabilities. We base our accounting estimates on historical experience and other factors that are believed to be reasonable under the
circumstances. However, actual results may vary from these estimates under different assumptions or conditions.

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We
recognize revenues when (i) persuasive evidence of an arrangement between the customer and us exists, (ii) service has been provided to the customer, (iii) the
price to the customer is fixed and determinable and (iv) collectibility of the sales price is reasonably assured. We defer the recognition of revenue related to up-front fees
associated with installations over the expected term of the customer relationship, which is presently estimated at 36 months, the deferred revenue is recognized as revenue on a straight line
basis. Similarly, we treat the incremental direct costs of installations as deferred charges in amounts no greater than the up-front fees that are deferred. These incremental direct costs
are amortized to expense using the straight-line method over 36 months.

As
more fully described in Notes 2 and 7 to our financial statements, property and equipment and intangible assets are recorded at cost, subject to adjustments for impairment. Property
and equipment and intangible assets are depreciated or amortized using the straight-line method over their estimated useful lives, certain of which were significantly revised in 2001, as
more fully described in Note 2 to our financial statements. In assessing the recoverability of our property and equipment and intangible assets, we must make assumptions regarding estimated
future cash flows and other factors to determine the fair value of the respective assets. If these estimates and assumptions change in the future, we may
be required to record additional impairment charges relating to our property and equipment and intangible assets. See further discussion below concerning the adoption of Statement of Financial
Accounting Standards (SFAS) No. 142,Goodwill and Other Intangibles Assets,and SFAS No. 144,Accounting for the
Impairment or Disposal of Long-Lived Assets, and our framework for evaluating the impairment of long-lived assets in periods ending after
December 31, 2001.

We
recognize expenses related to telecom costs based on a running average of the past several months of invoices received from the incumbent local exchange carriers, since the invoices
for the current month's service are received the following month. Telecom costs comprise of monthly service fees for each line, rent and power for each collocation arrangement, access fees and monthly
backbone charges for the fiber optic network paid to competitive or traditional telephone companies. These costs also include data connections, engineering supplies, installation and other utility
costs related to the network operations.

As
more fully described in Note 11 to the financial statements, we are a party to a variety of legal proceedings, as either plaintiff or defendant, and are engaged in other
disputes that arise in the ordinary course of business. We are required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses
for certain of these matters. The determination of the liabilities required, if any, for loss contingencies is made after careful analysis of each individual issue. However, it is reasonably possible
that certain of the liabilities reflected in our consolidated balance sheets associated with various loss contingencies could change in the near term due to new developments or changes in settlement
strategies.

Financial
Reporting Release No. 61 (FRR61), which was released in December 2001 by the SEC, requires all companies to include a discussion to address, among other things,
liquidity, off-balance sheet arrangements, contractual obligations and commercial commitments. We have applied the guidance set forth in FRR61 in completing this Item 7.

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Recent Accounting Pronouncements

On January 1, 2001, we adopted SFAS No. 133,Accounting for Derivative Instruments and Hedging
Activities, as amended. SFAS No. 133 standardizes the accounting for derivatives and hedging activities and requires that all derivatives be recognized in the statement
of financial position as either assets or liabilities at fair value. Changes in the fair value of derivatives that do not meet the hedge accounting criteria are required to be reported in operations.
The adoption of SFAS No. 133 had no effect on our consolidated financial statements as of, and for the year ended, December 31, 2001, as the Company does not utilize derivatives.

In
July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141,Business Combinationsand SFAS
No. 142,Goodwill and Other Intangibles Assets. SFAS No. 141 eliminated the pooling-of-interests method of
accounting for business combinations, except for qualifying business combinations that were initiated prior to July 1, 2001. Under SFAS No. 142, goodwill and indefinite-lived intangible
assets are no longer amortized, but are reviewed annually, or more frequently if impairment indicators arise, for impairment. We adopted SFAS No. 142 on January 1, 2002. We do not
believe the adoption of SFAS Nos. 141 and 142 will have a material effect on our consolidated financial statements because we do not presently have any indefinite-lived intangible assets.

In
August 2001, the FASB issued SFAS No. 143,Accounting for Asset Retirement Obligations. SFAS No. 143
requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. We are required to adopt SFAS No. 143 on January 1, 2003, and we do not believe
the adoption of SFAS No. 143 will have a material effect on our consolidated financial statements.

In
October 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets,
which supersedes SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, and provides a single accounting model for long-lived assets to be disposed of. We adopted SFAS No. 144 on January 1, 2002, and we do not believe
the adoption of SFAS No. 144 will have a material effect on our consolidated financial statements.

In
April 2001, the FASB's Emerging Issues Task Force (EITF) reached a consensus regarding the provision in EITF Issue No. 00-25,Vendor
Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products, dealing with consideration from a vendor to a reseller under cooperative advertising and other arrangements. This provision of EITF Issue
No. 00-25 states that consideration from a vendor to a reseller of the vendor's products or services is presumed to be a reduction of the selling price of the vendor's products or
services, unless the vendor (i) receives an identifiable benefit in return for the consideration and (ii) can reasonably estimate the fair value of the benefit received. If the amount of
consideration paid by the vendor exceeds the estimated fair value of the benefit received, the excess amount is to be recorded by the vendor as a reduction of revenues. We are required to adopt this
provision of EITF Issue No. 00-25 on January 1, 2002, and are currently assessing the impact of the guidance on our financial statements.

In
February 2002, the EITF released Issue No. 01-09,Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the
Vendor's Products. This issue addresses the income statement classification, recognition and measurement for consideration given by a vendor to a customer, including both
resellers and end customers. We are required to adopt the consensuses of EITF Issue No. 01-09 as of January 1, 2002 and are currently assessing the impact of the guidance on
our financial statements.

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Forward-looking Statements

Many statements made in this Form 10-K are forward-looking statements relating to future events and our future performance within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs,
intentions or future strategies that are signified by the words "expects," "anticipates," "intends," "believes" or similar language. These forward-looking statements address, among other things, the
following factors, any of which could, if unfavorable, affect our business:



These
statements may be found in this section, and in this Form 10-K generally.

We
have based these forward-looking statements on our current expectations and projections about future events based on information available to us on this date, and we assume no
obligation to update any forward-looking statements. All written and oral forward-looking statements made in connection with this Form 10-K are expressly qualified in their entirety
by the "Trends, Risks and Uncertainties" and other cautionary statements included in this Form 10-K. Our actual results could differ materially from those anticipated in these
forward-looking statements.

Trends, Risks and Uncertainties



We began operations in 1995 by helping our customers integrate their network equipment, by selling them network equipment and by providing them with related
network services. Starting in 1999, we refocused our company, through our CopperNet services, on providing DSL-based high-speed digital communications services. Consequently,
our financial results now and in the future are not, and will not be, directly comparable to our prior financial results. Substantially all of our revenue in 1995, 1996, 1997, 1998 and 1999, and the
majority of our revenue in 2000, was derived from product sales and consulting services. In 2001 the majority of our revenue was derived from network services, which includes our CopperNet services.
As a result, not only have we changed the focus of our company, there also is limited historical financial information upon which to base an evaluation of our performance.

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Similarly,
because we have a limited history of providing CopperNet services, it is difficult for us to predict the extent to which CopperNet will achieve market acceptance. The market
for DSL-based services is highly competitive and quickly changing. Providers of high-speed data communications services are testing products from various suppliers for certain
applications, and suppliers have not broadly adopted an industry standard. Critical issues concerning commercial use of DSL for Internet and local area network access, including security, reliability,
ease and cost of access and quality of service, remain unresolved and may affect the growth of this market. If the market for CopperNet fails to develop, grows more slowly than anticipated or becomes
saturated with competitors, our business will not reach or maintain the level of profitability we hope to achieve.



We face competition in the data communications market from many competitors with significantly greater financial resources, well-established brand
names and large, existing installed customer bases. We expect the level of competition to continue to be intense in the future, including through consolidation of our industry. Many of our competitors
are offering, or may soon offer, technologies and services that will directly compete with some or all of our service offerings. Our competitors use technologies for local access connections that
include DSL, wireless data, cable modems and ISDN technologies. Some of our competitors or potential competitors may have the financial resources to
withstand substantial price competition. Moreover, our competitors may be able to negotiate contracts with suppliers of telecommunications services that are more favorable than contracts negotiated by
us.



Our industry is subject to rapid and significant technological changes. DSL technology does not currently have widely accepted standards and continues to develop.
Alternative technologies for providing high-speed data communications are available and may be superior to the technology we use. As a consequence:



If
we fail to adapt successfully to technological changes or fail to obtain access to important technologies, our business, prospects, financial condition and results of operations could
be materially adversely affected.



As part of a preferred stock investment by SBC and Telmex in March 2000, we intended to expand CopperNet into the southeastern and western regions of the
United States. Due to a number of reasons, including significant external changes throughout the telecommunications industry and our changing relationship with SBC and Telmex, in the latter part of
2000 we ceased efforts to enter into collocation agreements with traditional telephone companies that would enable us to place DSL equipment in central offices outside of the northeast and
mid-Atlantic regions. Instead, we adopted new elements to our strategy to leverage our existing capital base and take advantage of our completed network in the northeastern and
mid-Atlantic regions. These elements include focusing our sales and marketing efforts on attracting "high-yield" business customers, or customers needing bundled and integrated
network services, which

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generally contribute to higher profit margins. Our failure to sell more of our service offerings to current customers or to attract new customers to purchase these service offerings, could impair our
ability to achieve profitability or positive cash flow and could have a material adverse effect on our business.



We have incurred substantial losses and experienced negative cash flow since 1997. As of December 31, 2001, we had an accumulated deficit of approximately
$291.1 million. To date, we have incurred capital expenditures in order to expand our business. Although we have significantly reduced our capital expenditures, we expect to incur future net
losses and negative cash flow for the next several years due to continued development of CopperNet.



Prices for data communication services have fallen historically, a trend we expect will continue. Accordingly, we cannot predict to what extent we may need to
reduce our prices to remain competitive or whether we will be able to sustain future pricing levels as our competitors introduce competing services or similar services at lower prices. Our failure to
achieve or sustain market acceptance at desired pricing levels could impair our ability to achieve profitability or positive cash flow, which would have a material adverse effect on our business,
prospects, financial condition and results of operations.



Our failure to address the risks, expenses and difficulties we may encounter providing CopperNet services, including those frequently encountered by companies in
new and rapidly evolving markets, may limit our revenue growth and make it difficult for us to compete effectively with others. These risks include:



39

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Our
failure to manage these risks successfully could materially adversely affect our financial performance in the near term and on a continuing basis.



Verizon, as the dominant traditional telephone company operating in our target markets, is both an essential supplier of facilities and services for CopperNet and
potentially a significant DSL competitor. Traditional telephone companies, like Verizon, pose a significant risk to the success of our business. Verizon has existing networks in local areas and across
metropolitan areas and has its own Internet service provider business. It has also increased its residential sales of DSL-based access services. We believe that Verizon is deploying DSL
services to businesses on a widespread basis.

Verizon
is currently our sole supplier of copper telephone lines and of the central office space we need to place, or collocate, our DSL equipment and support services for CopperNet.
Verizon may be reluctant to cooperate with us in meeting our supply needs. Verizon has in the past, and may in the future, reject certain of our collocation applications or telephone line requests or
delay providing us with the collocation space or telephone lines we need. We have experienced lengthy delays between the time we apply for collocation space and the time that Verizon actually permits
us to place our equipment in this space. We may face competition for this space from other competitive telecommunications companies. Verizon's position as both a DSL competitor and a supplier of
numerous essential inputs to our DSL offering also gives Verizon an incentive to subsidize its own DSL offerings by failing to fully allocate to its retail DSL service the costs it incurs in providing
that service. See "Item 1BusinessRelationship with Verizon."

We
also significantly depend on the quality of the copper telephone lines and Verizon's maintenance of such lines. We cannot ensure that we will be able to obtain the copper telephone
lines and services we require from Verizon at quality levels, prices, terms and conditions satisfactory to us. Our failure to do so would have a material adverse effect on our business, prospects,
financial condition and results of operations. See "Item 1BusinessRelationship with Verizon."



In markets where we have not deployed our own local DSL equipment, we utilize local DSL facilities from wholesale providers, including Covad Communications, in
order to provide service to our end-user customers. In these cases, we are dependent upon these wholesale carriers to provide, or arrange the provision of, the equipment and
on-site wiring required to provide local DSL services to our end-user customers, as well as to provide and maintain the local DSL line. In general, these carriers may terminate
the service they provide to us with little or no notice. These carriers might not continue to provide us with acceptable local DSL services for our customers on the scale, at the price levels and
within the time frames we require, or at all. If we are unable to obtain acceptable DSL services from these wholesale carriers or they terminate the service they provide us, we may be required to
install our own equipment in a central office and provide and install new equipment for our customers, or arrange for another wholesale carrier to do so. Obtaining space and provisioning equipment in
a new central office is a lengthy and costly process. We cannot assure you that we, or another carrier with whom we work, would be able to obtain the space required in a central office on a cost
effective basis, if at all, or that we could provide DSL services to such customers on a timely basis. Our failure to install and provide services to customers on a timely basis, or the disruption in
the services provided to our customers, would likely result in the loss of many, if not all, of the customers in the affected locations, and could result in claims brought by these customers against
us. This could have a material adverse effect on our competitive position, business, results of operations, financial position and prospects.

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Certain
wholesale DSL providers with whom we work offer services that compete with ours, or have other customers whose services compete with ours. Such competing interests may affect the
ability or willingness of these providers to provide us with acceptable services on acceptable terms. In addition, certain of these providers are relatively young companies that are facing substantial
operational and financial challenges. Covad Communications Group, which had filed a pre-negotiated plan of reorganization and voluntary petition to reorganize under Chapter 11 of the U.S.
Bankruptcy Code, emerged from bankruptcy in December 2001. Nonetheless, there can be no assurances that Covad will be successful in managing its operations and business plans. The operational
success and abilities of these carriers to operate their businesses could materially affect our business. The failure of any of these companies could cause us to lose customers and revenue, expose us
to claims and otherwise have a material adverse effect on our competitive position, business, results of operations, financial position and prospects.

We
depend on the availability of fiber optic transmission facilities from third parties to connect our equipment within and between metropolitan areas. If these facilities are
unavailable, we may not have alternative means immediately available to connect our DSL equipment in different locations. These fiber optic carriers include long distance carriers, traditional
telephone companies like Verizon and other competitive telecommunications companies. Many of these entities are, or may become, our DSL competitors. We may be unable to negotiate or renew favorable
supply agreements. We depend on the timeliness of fiber optic carriers to process our orders for customers who seek to use our services. We
have in the past experienced supply problems with some of our fiber optic suppliers, and they may not be able to meet our needs on a timely basis in the future.

We
also purchase our equipment from many vendors, including Lucent and Cisco. We outsource a significant percentage of installation and field service to third parties. Because we depend
on third parties, we do not have guaranteed capacity nor do we fully control delivery schedules, quality assurance, production yields and costs. If any significant installer or field service provider
interrupts its service to us or fails to perform to required specifications, or if any of our vendors reduces or interrupts its supply, this interruption or reduction would force us to seek
alternative vendors and providers, which could disrupt our business. Our suppliers may be unable to manufacture and deliver the amount or quality of equipment we order, or the available supply may be
insufficient to meet our demand. Currently, the DSL modem and other equipment we use for a single connection over a copper telephone line must come from the same vendor since there are no existing
interoperability standards for the equipment used in our higher speed services. If our competitors enter into exclusive or restrictive arrangements with our suppliers or licensors, then these events
may materially and adversely affect the availability and pricing of the equipment we purchase and the technology we license.



We depend on contractual arrangements, or interconnection agreements, which enable us to use traditional telephone companies' copper telephone lines, to collocate
our equipment in their offices and to obtain from the traditional telephone companies the back office support systems we need in order to provide CopperNet services. The success of our strategy
depends on our ability to renew our interconnection agreements on a timely basis and on satisfactory terms and conditions. Delays in obtaining renewals or a failure to obtain satisfactory terms and
conditions could have a material adverse effect on our business, prospects, financial condition and results of operations. We cannot guarantee that we will be able to negotiate new agreements with the
traditional telephone companies that will benefit us.

Interconnection
agreements are also subject to state telecommunications regulatory, FCC and judicial oversight. These governmental bodies may modify the terms or prices of our
interconnection agreements in ways that adversely affect our business, prospects, financial condition and results of operations. See "Item 1Relationship with Verizon" and "Item
1Government Regulation."

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On July 27, 2001, our shares of common stock were delisted from the NASDAQ Stock Market and began trading on the OTCBB after we received notification from
NASDAQ on July 20, 2001 that we were no longer in compliance with NASDAQ rules that require companies to maintain a minimum bid price of $1 for 30 consecutive trading days and $4 million
in net tangible assets. As a result of our delisting, we cannot assure you that the market for our common stock will be liquid, meaning that there are a large number of transactions in the stock. Many
shares listed on the OTCBB trade only sporadically and then in small denominations. If the trading market for our stock is inactive, the market may not efficiently value our stock and it may not be
possible for you to sell our stock at the time you desire or for the price at which the most recent transactions occurred. As a result, you may not be able to sell our common stock on favorable terms
or at all. Additionally, our common stock may not remain quoted on the OTCBB.



The price at which our common stock trades depends upon many factors, including the volume of the trading market for our common stock our historical and
anticipated quarterly and annual operating results, variations between our actual results and securities analyst and investor expectations, announcements by us or others and developments affecting our
business, securities analyst and investor perceptions of our company and comparable public companies, changes in our industry and general market and economic conditions. Some of these factors are
beyond our control. As a result, our operating results in one or more future periods could fail to meet or exceed the expectations of securities analysts or investors. If this happens, the trading
price of our common stock would likely decline.



To finance future operating activities, we may choose to sell shares of our common stock or instruments convertible into our common stock in public or private
offerings. Sales of substantial amounts of common stock in the public market or the appearance that a large number of shares is available for sale, could adversely affect the market price for our
common stock. In addition to the adverse effect a price decline could have on holders of common stock, that decline would likely impede our ability to raise capital through the issuance of additional
shares of common stock or other equity securities.



To fund continued development of CopperNet and fund operating losses, we may need access to the capital markets on reasonable terms. If adequate funds are
unavailable or not available on acceptable terms, we may further revise our business strategies. Should we revise our business strategies, we may not achieve break even on a cash-flow
basis or EBITDA basis or turn to profitability as quickly as planned.

We
believe that current capital market conditions, particularly for our industry, our delisting from the NASDAQ (see Item 5Stock Data), the significant reduction in our
stock price, and the relatively low value the market has placed on our equity will significantly reduce our ability to obtain additional financing on reasonable terms or at all.

If
we experience continued or prolonged barriers to raising additional financing through the capital markets, we may need to make additional significant reductions in our capital expenditures and/or
operations. Such reductions could have a material adverse effect on our financial condition and business operations and prevent us from effectively implementing our business plan. Such reductions may
also adversely affect the relationships with our customers and/or their end-users that may in turn adversely affect our growth and financial results.

42

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We
have no commitments for any future debt, equity or other financing (other than vendor financing) and there can be no assurance that we will be able to obtain additional financing in
the future from either debt or equity financings, bank loans, collaborative arrangements or other sources on terms acceptable to us, or at all. Any additional equity financing may be dilutive to our
stockholders.



Although our northeast and Mid-Atlantic network is substantially complete, our business plan contemplates additional required funding to offset
negative cash flow resulting primarily from ongoing operating losses and the repayment of existing capital lease and other obligations.

If,
as a result of existing market conditions or other factors, we fail or are unable to raise sufficient capital, we may have to drastically alter our business plan so as to conserve
cash, or sell all or a portion of our assets, possibly pursuant to a liquidation proceeding in bankruptcy court, or both.



Because many of the facilities and services we need in order to provide CopperNet are subject to regulation at the federal, state and local levels, changes in
applicable laws or regulations could have an adverse impact on our business. For example, the FCC and state telecommunications regulators help determine the terms under which collocation space is
provided to us. They also oversee the terms under which we gain access to a traditional telephone company's copper telephone lines and transport facilities, including price, that we need in order to
provide CopperNet services. Regulatory policies may also affect the terms under which traditional telephone companies provide us with the operational support and management of telephone line usage
that are crucial to the success of CopperNet. Future federal or state regulations and legislation may have an adverse impact on our business. In addition, we may choose to expend significant resources
to participate in regulatory proceedings at the federal or state level without achieving favorable results. We expect traditional telephone companies to pursue litigation in courts, institute
administrative proceedings with the FCC and state telecommunications regulators and lobby the U.S. Congress in an effort to affect the applicable laws and regulations in a manner that would be more
favorable to them and against our interests. Any changes in our regulatory environment could create greater competitive advantages for all or some of our competitors or could make it easier for
additional parties to provide DSL services.

Telecommunication
service providers also pay a variety of surcharges and fees on their gross revenue from interstate and intrastate services. The surcharges and fees we currently are
required to pay may increase due to periodic revisions of the applicable surcharges by federal and state regulators. A finding that we misjudged the applicability of the surcharges and fees could
increase our payment obligations and have a material adverse effect on our business, prospects, financial condition and results of operations. See "Item 1BusinessGovernment
Regulation."



We depend on our ability to retain and motivate high quality personnel, especially our management. Our success depends on Jonathan P. Aust, our Chairman and Chief
Executive Officer, and our other executive officers and key employees. Members of our senior management team have changed, and in some cases have worked together for only a short period of time.
Moreover, we do not have "key person" life insurance policies on any of our employees. Although we have employment agreements with certain members of the senior management team, these agreements can
be terminated by the employees on thirty days' notice. Each of our other employees may terminate his or her employment with us at any time. Our future success depends on our continuing ability to
identify, hire, train and retain highly qualified technical, sales, marketing and customer service personnel. If we are unable to recruit qualified personnel in a timely manner or to retain our
employees, we will not be able to
execute our business plan. The reductions in workforce that we made in 2000 and 2001, and the competitive nature of our industry, may make it difficult to hire qualified personnel on a timely basis
and to retain our employees.

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The reliability of our services would be impaired by a natural disaster or other unanticipated interruption of service at our owned or leased facilities. If a
traditional telephone company, competitive telecommunications company or other service provider fails to provide the communications capacity we require, as a result of a natural disaster, operational
disruption or any other reason, then this failure could interrupt our services and have a material adverse effect on our business.



Our network may be vulnerable to unauthorized access, computer viruses and other disruptive problems. Unauthorized access could also potentially jeopardize the
security of confidential information stored in the computer systems of our customers, which might cause us to be liable to our customers, and might deter potential customers. Eliminating computer
viruses and alleviating other security problems may require interruptions, delays or cessation of service to our customers and our customers' end users. Any of these factors relating to network
security could have a material adverse effect on our business.



The steps we have taken may be inadequate to protect our technology or other intellectual property. Our inability to protect our proprietary rights could have a
material adverse effect on our business, prospects, financial condition and results of operations. We currently have no patents or patent applications pending. We also rely on unpatented trade secrets
and know-how to maintain our competitive position. We seek to protect this information by confidentiality agreements with employees, consultants and others. These agreements may be
breached or terminated, leaving us with inadequate remedies. Our competitors may learn or discover our trade secrets. Our competitors may independently develop technologies that are substantially
equivalent or superior to ours. Third parties, including our competitors, may assert infringement claims against us and, in the event of an unfavorable ruling on
any claim, we may be unable to obtain a license or similar agreement to use technology we need to conduct our business.



Our executive officers, directors and principal stockholders together beneficially own approximately 75% of our common stock (not including stock options or
convertible preferred stock) as of December 31, 2001. These stockholders may determine the composition of our board of directors, approve all matters requiring stockholder approval including
any merger and exercise significant influence over our affairs. This concentration of ownership could delay or prevent a change in our control or otherwise discourage a potential acquirer from
attempting to obtain control of us, which in turn could have a material and adverse effect on the market price of our common stock.



Provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of our company, even if a change in
control would be beneficial to stockholders. Our certificate of incorporation provides for a classified board of directors and will allow our board to issue, without stockholder approval, preferred
stock with terms set by the board. The preferred stock could be issued quickly with terms that delay or prevent the change in control of our company or make removal of management more difficult. Also,
the issuance of preferred stock may cause the market price of our common stock to decrease.

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Until
the middle part of 2000, the general health of the U.S. economy had been relatively strong and growing, a consequence of which has been increasing capital spending by growing
companies to keep pace with rapid technological advances. Based on the poor general health of the U.S. economy, companies may seek to reduce expenses and reduce, in the near term, expenditures, such
as those for our services. Concern about continuing economic decline could delay decisions among certain of our customers to roll out our services or could delay decisions by prospective customers to
make initial evaluations of our services. Such delays could have a material adverse effect on our business, prospects, operating results and financial condition.



Our target customers consist of small-and-medium-sized businesses. We bill and collect numerous relatively small customer accounts. We may
experience difficulty in collecting amounts due on a timely basis. Our failure to collect accounts receivable owed to us by our customers on a timely basis could have a material adverse effect on our
business, financial condition and cash flow.



We have been, are currently, or in the future may be, involved in legal proceedings or claims regarding contracts and other matters. These legal proceedings and
claims, whether with or without merit, could be time-consuming and expensive to defend, and divert management's attention and resources. There can be no assurance regarding the outcome of
current or future legal proceedings or claims. If we are not able to resolve a claim, negotiate a settlement of the matter, obtain necessary licenses on commercially reasonable terms, and/or
successfully prosecute or defend a position, our financial condition and results of operations could be materially and adversely affected. Our success is dependent in part upon the protection of our
proprietary rights. Infringement upon our proprietary rights by a third party could result in uncompensated lost market and revenue opportunities for us. See "Item 3Legal Proceedings."



We may consider acquisitions of businesses, assets, and technologies in the future on an opportunistic basis. Acquisitions of businesses and technologies involve
numerous risks, including the diversion of management attention, difficulties in assimilating the acquired operations and customers, loss of key employees from the acquired company, and difficulties
in transitioning key customer relationships. In addition, these acquisitions may result in dilutive issuances of equity securities, the incurrence of additional debt, large one-time
expenses and the creation of goodwill or other intangible assets that
result in significant amortization expense. Any of these factors could materially harm our business or our operating results in a given period or could cause our stock price to decline.

Item 7a. Quantitative and Qualitative Disclosures about Market Risk.

We are not exposed to fluctuations in currency exchange rates because all of our services are invoiced in U.S. dollars. We are exposed to the impact of interest
rate changes on our short-term cash investments, consisting of U.S. Treasury obligations and other investments in respect of institutions with the highest credit ratings, all of which have
maturities of three months or less. These short-term investments carry a degree of interest rate risk. We believe that the impact of a 10% increase or decline in interest rates would not
be material to our investment income.

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Item 8. Financial Statements and Supplementary Data.

Index to Financial Statements

|                              |                                                                                                                         | Page
|----------------------------- | ----------------------------------------------------------------------------------------------------------------------- | ----
|Financial Statements:         |                                                                                                                         |     
|                              | Report of Independent Accountants                                                                                       |     
|                              | Balance Sheets as of December 31, 2001 and 2000                                                                         |     
|                              | Statements of Operations and Other Comprehensive Loss for the years ended December 31, 2001, 2000 (restated) and 1999   |     
|                              | Statements of Changes in Stockholders' (Deficit) Equity for the years ended December 31, 2001, 2000 (restated) and 1999 |     
|                              | Statements of Cash Flows for the years ended December 31, 2001, 2000 (restated) and 1999                                |     
|                              | Notes to Financial Statements                                                                                           |     
|Financial Statement Schedule: |                                                                                                                         |     
|                              | Schedule IIValuation and Qualifying Accounts                                                                           |     

Schedules
not listed above have been omitted because they are not applicable or the information required to be set forth therein is included in the financial statements or notes thereto.

46

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REPORT OF INDEPENDENT ACCOUNTANTS

To
the Board of Directors and Stockholders
Network Access Solutions Corporation

In
our opinion, the accompanying balance sheets and the related statements of operations and other comprehensive loss, changes in stockholders' (deficit) equity and cash flows, present
fairly, in all material respects, the financial position of Network Access Solutions Corporation (the Company) at December 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of America which 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, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As
discussed in Note 17 to the accompanying financial statements, the Company has restated its financial statements for the year ended December 31, 2000.

The
accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has
historically incurred recurring losses from operations, has a working capital deficit and will require additional capital to fund operations. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.



McLean, Virginia
April 5, 2002

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NETWORK ACCESS SOLUTIONS CORPORATION  BALANCE SHEETS(In thousands, except share and per share data)

|                                                                                                                                                                                                                                                                |                                                                                                                                                                       | As of December 31, |                                                                                             
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | --------------------------------------------------------------------------------------------
|
|
|ASSETS                                                                                                                                                                                                                                                          |                                                                                                                                                                       |                    |                                                                                             
|Current assets:                                                                                                                                                                                                                                                 |                                                                                                                                                                       |                    |                                                                                             
|                                                                                                                                                                                                                                                                | Cash and cash equivalents                                                                                                                                             |                    | $                                                                                           
|                                                                                                                                                                                                                                                                | Short-term investments                                                                                                                                                |                    |                                                                                             
|                                                                                                                                                                                                                                                                | Accounts receivable, net of allowance for doubtful accounts of $1,466 and $1,451 as of December 31, 2001 and 2000, respectively                                       |                    |                                                                                             
|                                                                                                                                                                                                                                                                | Prepaid and other current assets                                                                                                                                      |                    |                                                                                             
|                                                                                                                                                                                                                                                                | Inventory                                                                                                                                                             |                    |                                                                                             
|                                                                                                                                                                                                                                                                |                                                                                                                                                                       |                    |                                                                                             
|                                                                                                                                                                                                                                                                |                                                                                                                                                                       |                    | Total current assets                                                                        
|Property and equipment, net of accumulated depreciation                                                                                                                                                                                                         |                                                                                                                                                                       |                    | 40,193                                                                                      
|Restricted cash                                                                                                                                                                                                                                                 |                                                                                                                                                                       |                    | 3,906                                                                                       
|Other assets                                                                                                                                                                                                                                                    |                                                                                                                                                                       |                    | 939                                                                                         
|Intangible assets, net of accumulated amortization                                                                                                                                                                                                              |                                                                                                                                                                       |                    | 7,199                                                                                       
|                                                                                                                                                                                                                                                                |                                                                                                                                                                       |                    |                                                                                             
|                                                                                                                                                                                                                                                                |                                                                                                                                                                       |                    | Total assets                                                                                
|                                                                                                                                                                                                                                                                |                                                                                                                                                                       |                    |                                                                                             
|LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' (DEFICIT) EQUITY                                                                                                                                                                         |                                                                                                                                                                      
|Current liabilities:                                                                                                                                                                                                                                            |                                                                                                                                                                       |                    |                                                                                             
|                                                                                                                                                                                                                                                                | Accounts payable                                                                                                                                                      |                    | $                                                                                           
|                                                                                                                                                                                                                                                                | Accrued expenses                                                                                                                                                      |                    |                                                                                             
|                                                                                                                                                                                                                                                                | Current portion of capital lease obligations                                                                                                                          |                    |                                                                                             
|                                                                                                                                                                                                                                                                | Current portion of notes payable                                                                                                                                      |                    |                                                                                             
|                                                                                                                                                                                                                                                                | Deferred revenue                                                                                                                                                      |                    |                                                                                             
|                                                                                                                                                                                                                                                                |                                                                                                                                                                       |                    |                                                                                             
|                                                                                                                                                                                                                                                                |                                                                                                                                                                       |                    | Total current liabilities                                                                   
|Long-term portion of capital lease obligations                                                                                                                                                                                                                  |                                                                                                                                                                       |                    | 20,708                                                                                      
|Long-term portion of notes payable                                                                                                                                                                                                                              |                                                                                                                                                                       |                    | 5,528                                                                                       
|Long-term portion of deferred revenue                                                                                                                                                                                                                           |                                                                                                                                                                       |                    | 125                                                                                         
|                                                                                                                                                                                                                                                                |                                                                                                                                                                       |                    |                                                                                             
|                                                                                                                                                                                                                                                                |                                                                                                                                                                       |                    | Total liabilities                                                                           
|                                                                                                                                                                                                                                                                |                                                                                                                                                                       |                    |                                                                                             
|Commitments and contingencies                                                                                                                                                                                                                                   |                                                                                                                                                                       |                    |                                                                                            
|Series B mandatorily redeemable preferred stock, $0.001 par value, 750,000 shares authorized, issued and outstanding as of December 31, 2001 and 2000, respectively (liquidation preference $84,551 and $79,301 as of December 31, 2001 and 2000,
respectively) |                                                                                                                                                                       |                    | 84,541                                                                                      
|                                                                                                                                                                                                                                                                |                                                                                                                                                                       |                    |                                                                                             
|Stockholders' (deficit) equity:                                                                                                                                                                                                                                 |                                                                                                                                                                       |                    |                                                                                             
|                                                                                                                                                                                                                                                                | Common stock, $0.001 par value, 150,000,000 shares authorized, 62,243,452 and 59,573,474 shares issued and outstanding as of December 31, 2001 and 2000, respectively |                    |                                                                                             
|                                                                                                                                                                                                                                                                | Additional paid-in capital                                                                                                                                            |                    |                                                                                             
|                                                                                                                                                                                                                                                                | Accumulated other comprehensive (loss) gain                                                                                                                           |                    |                                                                                             
|                                                                                                                                                                                                                                                                | Deferred compensation on stock options                                                                                                                                |                    |                                                                                             
|                                                                                                                                                                                                                                                                | Accumulated deficit                                                                                                                                                   |                    |                                                                                             
|                                                                                                                                                                                                                                                                | Less treasury stock, at cost, 8,632,897 and 8,567,369 shares as of December 31, 2001 and 2000, respectively                                                           |                    |                                                                                             
|                                                                                                                                                                                                                                                                |                                                                                                                                                                       |                    |                                                                                             
|                                                                                                                                                                                                                                                                |                                                                                                                                                                       |                    | Total stockholders' (deficit) equity                                                        
|                                                                                                                                                                                                                                                                |                                                                                                                                                                       |                    |                                                                                             
|                                                                                                                                                                                                                                                                |                                                                                                                                                                       |                    | Total liabilities, mandatorily redeemable preferred stock and stockholders' (deficit) equity
|                                                                                                                                                                                                                                                                |                                                                                                                                                                       |                    |                                                                                             

The accompanying notes are an integral part of these financial statements.

48

---



NETWORK ACCESS SOLUTIONS CORPORATION  STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS(In thousands, except share and per share data)

|                                                                                |                                                                                                          | For the years ended December 31, |           
|------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | -------------------------------- | ----------
|
|
|Revenue:                                                                        |                                                                                                          |                                  |           
|                                                                                | Network services                                                                                         |                                  | $         
|                                                                                | Product sales and consulting services                                                                    |                                  |           
|                                                                                |                                                                                                          |                                  |           
|                                                                                |                                                                                                          | Total revenue                    |           
|                                                                                |                                                                                                          |                                  |           
|Operating expenses:                                                             |                                                                                                          |                                  |           
|                                                                                | Network services costs (exclusive of depreciation and amortization presented below)                      |                                  |           
|                                                                                | Product sales and consulting services costs (exclusive of depreciation and amortization presented below) |                                  |           
|                                                                                | Selling, general and administrative                                                                      |                                  |           
|                                                                                | Amortization of deferred compensation on stock options                                                   |                                  |           
|                                                                                | Depreciation and amortization                                                                            |                                  |           
|                                                                                | Restructuring                                                                                            |                                  |           
|                                                                                | Impairment of long-lived assets                                                                          |                                  |           
|                                                                                |                                                                                                          |                                  |           
|                                                                                |                                                                                                          | Total operating expenses         |           
|                                                                                |                                                                                                          |                                  |           
|Loss from operations                                                            |                                                                                                          |                                  | (105,474  
|Interest (expense) income, net                                                  |                                                                                                          |                                  | (2,870    
|Follow-on offering costs                                                        |                                                                                                          |                                  |          
|                                                                                |                                                                                                          |                                  |           
|Loss before income taxes                                                        |                                                                                                          |                                  | (108,344  
|Provision (benefit) for income taxes                                            |                                                                                                          |                                  |          
|                                                                                |                                                                                                          |                                  |           
|Net loss                                                                        |                                                                                                          |                                  | (108,344  
|Preferred stock dividends and accretion                                         |                                                                                                          |                                  | 5,304     
|                                                                                |                                                                                                          |                                  |           
|Net loss applicable to common stockholders                                      |                                                                                                          | $                                | (113,648  
|                                                                                |                                                                                                          |                                  |           
|Net loss per common share applicable to common stockholders (basic and diluted) |                                                                                                          | $                                | (2.14     
|                                                                                |                                                                                                          |                                  |           
|Weighted average common shares outstanding
(basic and diluted)                  |                                                                                                          |                                  | 53,086,116
|                                                                                |                                                                                                          |                                  |           
|Comprehensive loss:                                                             |                                                                                                          |                                  |           
|                                                                                | Net loss                                                                                                 |                                  | $         
|Other comprehensive loss:                                                       |                                                                                                          |                                  |           
|                                                                                | Unrealized gain (loss) on short-term investments
available for sale                                      |                                  |           
|                                                                                |                                                                                                          |                                  |           
|Total comprehensive loss                                                        |                                                                                                          | $                                | (108,529  
|                                                                                |                                                                                                          |                                  |           

The
accompanying notes are an integral part of these financial statements.

49

---



NETWORK ACCESS SOLUTIONS CORPORATION  STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY  For the years ended December 31, 2001, 2000 and 1999(In thousands, except share data)

|                                                                 |  |            |  |   |    |  |   | Other
Compre-
hensive
(Loss)
Gain |   |   |      |   |   |         |   |   |          |   |          
|---------------------------------------------------------------- |  | ---------- |  | - | -- |  | - | --------------------------------- | - | - | ---- | - | - | ------- | - | - | -------- | - | ---------
|
|
|
|Balance, December 31, 1998                                       |  | 44,550,000 |  |   | 45 |  |   | 8,098                             |   |   |     |   |   | (3,463  | ) |   | (1,848   | ) | 8,550,000
|Sale of common stock, net of direct issuance costs of $1,846,100 |  | 7,500,000  |  |   | 7  |  |   | 81,846                            |   |   |     |   |   |        |   |   |         |   |         
|Conversion of convertible notes payable                          |  | 833,334    |  |   | 1  |  |   | 9,999                             |   |   |     |   |   |        |   |   |         |   |         
|Conversion of preferred stock                                    |  | 416,667    |  |   | 1  |  |   | 5,000                             |   |   |     |   |   |        |   |   |         |   |         
|Cancellation of preferred stock                                  |  |           |  |   |   |  |   | 1,238                             |   |   |     |   |   |        |   |   |         |   |         
|Exercise of stock options                                        |  | 531,996    |  |   | 1  |  |   | 1,756                             |   |   |     |   |   |        |   |   |         |   |         
|Accrual of preferred stock dividends                             |  |           |  |   |   |  |   | (340                              | ) |   |     |   |   |        |   |   |         |   |         
|Accretion of preferred stock                                     |  |           |  |   |   |  |   | (257                              | ) |   |     |   |   |        |   |   |         |   |         
|Deferred compensation                                            |  |           |  |   |   |  |   | 23,092                            |   |   |     |   |   | (23,092 | ) |   |         |   |         
|Amortization of deferred compensation on stock options           |  |           |  |   |   |  |   |                                  |   |   |     |   |   | 8,165   |   |   |         |   |         
|Net unrealized loss on short-term investments available for sale |  |           |  |   |   |  |   |                                  |   |   | (52  | ) |   |        |   |   |         |   |         
|Net loss                                                         |  |           |  |   |   |  |   |                                  |   |   |     |   |   |        |   |   | (40,288  | ) |         
|                                                                 |  |            |  |   |    |  |   |                                   |   |   |      |   |   |         |   |   |          |   |          
|Balance, December 31, 1999                                       |  | 53,831,997 |  |   | 55 |  |   | 130,432                           |   |   | (52  | ) |   | (18,390 | ) |   | (42,136  | ) | 8,550,000
|Purchase of treasury stock, at cost                              |  |           |  |   |   |  |   |                                  |   |   |     |   |   |        |   |   |         |   | 17,369   
|Conversion of preferred stock into common stock                  |  | 2,554,375  |  |   | 2  |  |   | 79,169                            |   |   |     |   |   |        |   |   |         |   |         
|Exercise of stock options                                        |  | 3,187,102  |  |   | 3  |  |   | 920                               |   |   |     |   |   |        |   |   |         |   |         
|Accrual of preferred stock dividends                             |  |           |  |   |   |  |   | (8,472                            | ) |   |     |   |   |        |   |   |         |   |         
|Accretion of preferred stock                                     |  |           |  |   |   |  |   | (146                              | ) |   |     |   |   |        |   |   |         |   |         
|Deferred compensation                                            |  |           |  |   |   |  |   | 7,013                             |   |   |     |   |   | (7,013  | ) |   |         |   |         
|Amortization of deferred Compensation on stock options           |  |           |  |   |   |  |   |                                  |   |   |     |   |   | 7,509   |   |   |         |   |         
|Net unrealized gain on short-term investments available for sale |  |           |  |   |   |  |   |                                  |   |   | 209  |   |   |        |   |   |         |   |         
|Net loss                                                         |  |           |  |   |   |  |   |                                  |   |   |     |   |   |        |   |   | (140,640 | ) |         
|                                                                 |  |            |  |   |    |  |   |                                   |   |   |      |   |   |         |   |   |          |   |          
|Balance, December 31, 2000                                       |  | 59,573,474 |  |   | 60 |  |   | 208,916                           |   |   | 157  |   |   | (17,894 | ) |   | (182,776 | ) | 8,567,369
|Purchase of treasury stock, at cost                              |  |           |  |   |   |  |   |                                  |   |   |     |   |   |        |   |   |         |   | 65,528   
|Exercise of stock options                                        |  | 2,508,200  |  |   | 2  |  |   | 221                               |   |   |     |   |   |        |   |   |         |   |         
|Issuance of common stock, ESPP                                   |  | 161,778    |  |   |   |  |   | 72                                |   |   |     |   |   |        |   |   |         |   |         
|Accrual of preferred stock dividends                             |  |           |  |   |   |  |   | (5,250                            | ) |   |     |   |   |        |   |   |         |   |         
|Accretion of preferred stock                                     |  |           |  |   |   |  |   | (54                               | ) |   |     |   |   |        |   |   |         |   |         
|Issuance of stock warrant                                        |  |           |  |   |   |  |   | 338                               |   |   |     |   |   |        |   |   |         |   |         
|Deferred compensation                                            |  |           |  |   |   |  |   | (14,285                           | ) |   |     |   |   | 14,285  |   |   |         |   |         
|Amortization of deferred compensation on stock options           |  |           |  |   |   |  |   |                                  |   |   |     |   |   | 2,816   |   |   |         |   |         
|Net unrealized loss on short-term investments available for sale |  |           |  |   |   |  |   |                                  |   |   | (185 | ) |   |        |   |   |         |   |         
|Net loss                                                         |  |           |  |   |   |  |   |                                  |   |   |     |   |   |        |   |   | (108,344 | ) |         
|                                                                 |  |            |  |   |    |  |   |                                   |   |   |      |   |   |         |   |   |          |   |          
|Balance, December 31, 2001                                       |  | 62,243,452 |  | $ | 62 |  | $ | 189,958                           |   | $ | (28  | ) | $ | (793    | ) | $ | (291,120 | ) | 8,632,897
|                                                                 |  |            |  |   |    |  |   |                                   |   |   |      |   |   |         |   |   |          |   |          

The accompanying notes are an integral part of these financial statements.

50

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NETWORK ACCESS SOLUTIONS CORPORATION  STATEMENTS OF CASH FLOWS  (In thousands)

|                                                         |                                                                            | For the years ended December 31,                                                                   |                                      
|-------------------------------------------------------- | -------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | -------------------------------------
|
|
|Cash flows from operating activities:                    |                                                                            |                                                                                                    |                                      
|                                                         | Net loss                                                                   |                                                                                                    | $                                    
|                                                         | Adjustment to reconcile net loss to net cash used in operating activities: |                                                                                                    |                                      
|                                                         |                                                                            | Depreciation and amortization expense                                                              |                                      
|                                                         |                                                                            | Loss on sale of assets                                                                             |                                      
|                                                         |                                                                            | Interest expense related to stock warrant                                                          |                                      
|                                                         |                                                                            | Impairment of long-lived assets                                                                    |                                      
|                                                         |                                                                            | Restructuring and other non-cash items                                                             |                                      
|                                                         |                                                                            | Provision for doubtful accounts receivable                                                         |                                      
|                                                         |                                                                            | Amortization of deferred compensation on stock options                                             |                                      
|                                                         |                                                                            | Net changes in assets and liabilities net of the effects of CapuNet
and Ardent asset acquisitions: |                                      
|                                                         |                                                                            |                                                                                                    | Accounts receivable                  
|                                                         |                                                                            |                                                                                                    | Inventory                            
|                                                         |                                                                            |                                                                                                    | Prepaid and other current assets     
|                                                         |                                                                            |                                                                                                    | Other assets                         
|                                                         |                                                                            |                                                                                                    | Accounts payable                     
|                                                         |                                                                            |                                                                                                    | Accrued expenses                     
|                                                         |                                                                            |                                                                                                    | Deferred compensation liability      
|                                                         |                                                                            |                                                                                                    | Deferred revenue                     
|                                                         |                                                                            |                                                                                                    |                                      
|                                                         |                                                                            |                                                                                                    | Net cash used in operating activities
|                                                         |                                                                            |                                                                                                    |                                      
|Cash flows from investing activities:                    |                                                                            |                                                                                                    |                                      
|                                                         | Sales (purchases) of short-term investments                                |                                                                                                    |                                      
|                                                         | Expenditures for network under development                                 |                                                                                                    |                                      
|                                                         | Proceeds from sale of assets                                               |                                                                                                    |                                      
|                                                         | Purchases of property and equipment                                        |                                                                                                    |                                      
|                                                         | Acquisition of assets from CapuNet                                         |                                                                                                    |                                      
|                                                         | Acquisition of assets from Ardent                                          |                                                                                                    |                                      
|                                                         | Increase in restricted cash                                                |                                                                                                    |                                      
|                                                         |                                                                            |                                                                                                    |                                      
|                                                         |                                                                            |                                                                                                    |                                      
|                                                         |                                                                            |                                                                                                    |                                      
|Cash flows from financing activities:                    |                                                                            |                                                                                                    |                                      
|                                                         | Borrowings on notes payable                                                |                                                                                                    |                                      
|                                                         | Borrowings on sale/leaseback                                               |                                                                                                    |                                      
|                                                         | Repayments of notes payable                                                |                                                                                                    |                                      
|                                                         | Principal payments on capital leases                                       |                                                                                                    |                                      
|                                                         | Issuance of common stock related to ESPP                                   |                                                                                                    |                                      
|                                                         | Issuance of redeemable preferred stock                                     |                                                                                                    |                                      
|                                                         | Issuance costs related to common and preferred stock offerings             |                                                                                                    |                                      
|                                                         | Issuance costs related to follow-on offering                               |                                                                                                    |                                      
|                                                         | Exercise of stock options                                                  |                                                                                                    |                                      
|                                                         | Treasury stock acquired                                                    |                                                                                                    |                                      
|                                                         |                                                                            |                                                                                                    |                                      
|                                                         |                                                                            |                                                                                                    |                                      
|                                                         |                                                                            |                                                                                                    |                                      
|Net (decrease) increase in cash and cash equivalents     |                                                                            |                                                                                                    | (4,112                               
|Cash and cash equivalents at the beginning of the period |                                                                            |                                                                                                    | 14,735                               
|                                                         |                                                                            |                                                                                                    |                                      
|Cash and cash equivalents at the end of the period       |                                                                            | $                                                                                                  | 10,623                               
|                                                         |                                                                            |                                                                                                    |                                      

51

---

|Supplemental disclosure of cash flow information: |                                              |                                                                      |  |   |        |  |   |        |  |  
|------------------------------------------------- | -------------------------------------------- | -------------------------------------------------------------------- |  | - | ------ |  | - | ------ |  | -
|                                                  | Cash paid during the period for:             |                                                                      |  |   |        |  |   |        |  |  
|                                                  |                                              | Interest                                                             |  | $ | 3,509  |  | $ | 3,654  |  | $
|                                                  | Non-cash investing and financing activities: |                                                                      |  |   |        |  |   |        |  |  
|                                                  |                                              | Capital leases                                                       |  |   | 1,950  |  |   | 29,759 |  |  
|                                                  |                                              | Preferred stock dividends and accretion                              |  |   | 5,304  |  |   | 8,618  |  |  
|                                                  |                                              | Expenditures for offering costs included in accounts payable         |  |   |       |  |   |       |  |  
|                                                  |                                              | Expenditures for network included in accounts payable                |  |   |       |  |   | 1,125  |  |  
|                                                  |                                              | Purchases of property and equipment included in accounts payable     |  |   |       |  |   | 3,042  |  |  
|                                                  |                                              | Expenditures for property and equipment included in accrued expenses |  |   | 10,083 |  |   | 13,227 |  |  
|                                                  |                                              | Issuance of note payable in satisfaction of accounts payable         |  |   | 446    |  |   |       |  |  
|                                                  |                                              | Issuance of note payable related to Ardent acquisition               |  |   | 1,700  |  |   |       |  |  
|                                                  |                                              | Conversion of notes payable into common stock                        |  |   |       |  |   |       |  |  
|                                                  |                                              | Conversion of redeemable preferred stock into common stock           |  |   |       |  |   | 79,169 |  |  

The accompanying notes are an integral part of these financial statements.

52

---



NETWORK ACCESS SOLUTIONS CORPORATION  NOTES TO FINANCIAL STATEMENTS(In thousands, except share data)

1.    Business



Network Access Solutions Corporation, or the Company, was originally incorporated in the Commonwealth of Virginia on December 19, 1994. On August 3,
1998, the Company reincorporated in the State of Delaware. The Company, which is a provider of high-speed data communications services and related applications, provides network services,
telecommunications products and equipment and consulting services to business customers. Through its CopperNet branded service, the Company offers its customers high-speed, continuous
connectivity using Digital Subscriber Line (DSL) technology. The Company provides metropolitan area and wide area network services, manages and monitors its customers' networks, sells
telecommunications equipment, designs networks for its customers, installs the equipment and provides related services. The Company currently offers its DSL-based networking solutions in
the following nine cities and their surrounding markets: Baltimore, Boston, New York, Norfolk, Philadelphia, Pittsburgh, Richmond, Washington, D.C., and Wilmington.



As described in Notes 7 & 9, 2001 was a year with significant restructuring activity for the purpose of preserving cash and bringing operating costs in
line with revenue. The Company has taken actions to significantly reduce operating, selling, general and administrative expenses and capital expenditures. The Company currently expects minimal
expenditures for capital equipment in 2002 and expects
continued reductions in the size of operating losses, net losses and net operating cash outflows as it continues to see the benefits from the cost reduction actions completed in 2001. The Company's
business plan contemplates additional required funding to offset negative cash flow resulting primarily from ongoing operating losses and the repayment of existing capital lease and other obligations.
The Company is attempting to obtain additional equity or debt funding and is evaluating other strategic alternatives as well. Such debt, equity and other strategic options may involve significant
potential dilution to common stockholders. There can be no assurance that such additional funding will be available on terms attractive to the Company, or at all. These matters raise substantial doubt
about the Company's ability to continue as a going concern. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of these uncertainties.

2.    Summary of Significant Accounting Policies



The preparation of 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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The estimates involve
judgments with respect to, among other things, various future factors which are difficult to predict and are beyond the control of the Company. Therefore, actual amounts could differ from these
estimates.



The Company's revenue is derived from product sales and consulting services and from network services. Revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services rendered, prices are fixed and determinable and collection is reasonably assured. The Company recognizes revenue on the sale of its products when
a valid purchase order is received, shipment occurs, collection is probable and no significant obligations remain related to the completion of installation and performance of services. The Company
provides consulting services, including network planning, design, and integration services, under time-and-material type contracts and recognizes revenue as services are
performed and as costs are incurred.

53

---

The
Company provides network services, including DSL-based services, under monthly and fixed rate service contracts. Revenue on monthly contracts is recognized when services
are performed, net of anticipated billing adjustments. Revenue on fixed rate service contracts is recognized as costs are incurred over the related contract period. Payments received in advance of
providing services are recorded as deferred revenue until the period in which such services are provided. Revenue related to installation and activation fees is deferred and amortized over the
estimated customer life. All direct incremental costs for installation and activation are deferred up to the amount of deferred revenue and are amortized over the estimated customer life. Any excess
cost over the amount of deferred revenue is expensed. Such revenue historically has not significantly exceeded the direct costs. In certain situations, the Company will waive non-recurring
installation and activation fees in order to obtain a sale.



Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash and cash equivalents, short-term
investments and accounts receivable. Cash and cash equivalents are held in a money market account at a national financial institution. Short-term investments consist of marketable
securities, which are principally composed of debt securities with corporations and foreign governments. The Company has not recognized any losses on its cash and cash equivalents.

The
Company grants uncollateralized credit in the form of accounts receivable to its customers. As of December 31, 2001, no single customer represented greater than 10% of
accounts receivable or revenue. As of December 31, 2000, SEI Investments and Quest Diagnostics comprised 12% and 13% of accounts receivable, respectively.



The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.



The Company's short-term investments consist of marketable securities that include bonds with maturities of less than two years. The marketable
securities are classified as "available for sale" since management intends to hold the investments for an indefinite period and may sell the investments prior to their maturity. The investments are
carried at fair value based generally on quoted market
prices. Gains and losses are determined based on the specific identification method. The net unrealized gains and losses are reported as a component of accumulated comprehensive income (loss) in
stockholders' (deficit) equity. Available-for-sale marketable securities that are reasonably expected by management to be sold within one year from the balance sheet date are
classified as current assets.



Inventories are stated at the lower of cost or market. Cost is determined using the weighted-average method. Inventories consist primarily of components,
subassemblies and finished products held for sale.



Property and equipment consists of network costs associated with the development and implementation of the DSL networks, office and computer equipment, and
furniture and fixtures. The costs associated with the DSL network under development are composed of collocation fees, equipment, equipment held under capital leases, and equipment installation. These
assets are stated at cost. The Company leases certain of its equipment under capital lease agreements. The capital lease

54

---

assets are stated at the lower of the present value of the net minimum lease payments or the fair value at the inception of the lease, and are depreciated over the shorter of the estimated useful
life or the lease term. Depreciation of office and computer equipment and furniture and fixtures is computed using the straight-line method, generally over three to five years, based upon
estimated useful lives, commencing when the assets are placed in service. The depreciation of the DSL network costs commences as individual network components are placed in service and are depreciated
over two to five years. Expenditures for maintenance and repairs are expensed as incurred. When assets are retired or disposed, the cost and related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is recognized in operations for the period.

The
Company capitalizes costs associated with the design and implementation of the Company's systems including internally and externally developed software in accordance with Statement
of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Capitalized external software costs include the actual costs to purchase
existing software from vendors, integration and installation costs. Capitalized internal software costs generally include personnel costs incurred in the enhancement and implementation of purchased
software packages. Costs associated with training, data conversion, and maintenance agreements are expensed as incurred.



The Company periodically evaluates the recoverability of its long-lived assets whenever events or changes in circumstances indicate the carrying value
of such assets may not be recoverable. This valuation consists of a comparison of the carrying value of the assets with the assets' expected future cash flow undiscounted and without interest costs.
If the carrying value of an asset exceeds the expected future cash flows, an impairment exists. An impairment loss is measured by the amount by which the carrying value of the asset exceeds fair value
measured by the value of future discounted cash flows, using a discount rate commensurate with the risks involved, quoted market prices in an active market, if available, option pricing models,
appraisals and fundamental analysis.



Advertising costs are expensed as they are incurred. Advertising expenses for the years ended December 31, 2001 and 2000 were $320 and $569 respectively.



The Company accounts for income taxes by utilizing the asset and liability method. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end, based on enacted tax laws and statutory
tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce net deferred tax assets to the amount
expected to be realized. The provision for income taxes consists of the Company's current provision (benefit) for federal and state income taxes and the change in net deferred tax assets and
liabilities during the period.



The Company believes the carrying amount of its financial instruments, which include cash and cash equivalents, short-term investments, accounts
payable, capital lease obligations and notes payable, approximate fair value.

55

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The Company presents basic and diluted net loss per share. Basic net loss per share is computed based on the weighted average number of outstanding shares of
common stock. Diluted net loss per share adjusts the weighted average for the potential dilution that could occur if stock options, warrants or other convertible securities were exercised or converted
into common stock. Diluted loss per share for the years ended December 31, 2001, 2000 and 1999, are the same as basic loss per share because the effects of such items were
anti-dilutive.



The Company measures compensation expense for its employee stock-based compensation using the intrinsic value method and provides pro forma disclosures of net
loss as if the fair value method had been applied in measuring compensation expense. Under the intrinsic value method of accounting for stock-based compensation, when the exercise price of options
granted to employees is less than the fair value of the underlying stock on the date of grant, deferred compensation is recognized and is amortized to compensation expense over the applicable vesting
period.



The Company has determined its reportable segments based on the Company's method of internal reporting, which disaggregates its business by product category. The
Company's reportable segments are product sales and consulting services and network services. The product sales segment provides sales of selected equipment from manufacturing partners. Engineers
select product solutions based upon customized network designs to improve the customers' operations and network efficiencies. The consulting services segment provides nonrecurring service activation
and installation, network integration, on site network management, network security consulting and professional services. In addition, the consulting services segment provides maintenance and
installation of equipment, some of which may be provided through third party providers under contract. The network services segment provides local, metropolitan and wide area data communications
services to customers. This segment also provides a wide variety of other services to customers, including remote network management and monitoring, network security, virtual private networks,
e-commerce and CopperNet, the Company's high-speed, continuously connected DSL access to telecommunications networks. The Company's business is currently conducted principally
in the Northeast and Mid-Atlantic region of the United States. There are no foreign operations.



In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141,Business
Combinations. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for under the purchase method of accounting. In
addition, SFAS No. 141 establishes criteria for the recognition of intangible assets separately from goodwill. Effective July 1, 2001, the Company adopted SFAS No.141, and the adoption
did not have a material effect on the Company's financial statements.

In
July 2001, the FASB issued SFAS No.142,Goodwill and Other Intangible Assets, which addresses how intangible assets that are
acquired individually or in a group of other assets (but not those purchased in a business combination) are accounted for upon acquisition. Under SFAS No. 142, goodwill and indefinite lived
intangible

56

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assets
will no longer be amortized, but rather will be tested for impairment at least annually. In addition, the amortization period of intangible assets with finite lives will no longer be limited to
40 years. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, which for the Company means the standard will be adopted on January 1, 2002. At the
present time, the Company does not expect that the adoption of SFAS No. 142 will have a material effect on the Company's results of operations, financial position, or cash flows.

In
August 2001, the FASB issued SFAS No. 143,Accounting for Asset Retirement Obligations. SFAS No. 143 requires that
the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset. The Company is required to adopt SFAS No. 143 on January 1, 2003, and does not believe the
adoption of SFAS No. 143 will have a material effect on the Company's results of operations, financial position or cash flows.

In
August 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived
Assets. The objectives of SFAS No. 144 are to address significant issues relating to the implementation of SFAS No. 121,Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and to develop a single accounting model based on the framework
established in SFAS No. 121, for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001, which for the Company means the standard will be adopted on January 1, 2002. At the present time, the Company does not expect that the adoption of SFAS
No. 144 will have a material effect on the Company's results of operations, financial position, or cash flows.

In
April 2001, the FASB's Emerging Issues Task Force (EITF) reached a consensus regarding the provision in EITF Issue No. 00-25,Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products, dealing with consideration from a vendor to a reseller under cooperative
advertising and other arrangements. This provision of EITF Issue No. 00-25 states that consideration from a vendor to a reseller of the vendor's products or services is presumed to
be a reduction of the selling price of the vendor's products or services, unless the vendor (i) receives an identifiable benefit in return for the consideration and (ii) can reasonably
estimate the fair value of the benefit received. If the amount of consideration paid by the vendor exceeds the estimated fair value of the benefit received, the excess amount is to be recorded by the
vendor as a reduction of revenues. The Company is required to adopt this provision of EITF Issue No. 00-25 on January 1, 2002, and is currently assessing the impact of the
guidance on its financial statements.

In
February 2002, the EITF released Issue No. 01-09,Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products. The Company intends to apply the consensuses of EITF Issue No. 01-09 as of January 1, 2002. This issue addresses
the income statement classification, recognition and measurement for consideration given by a vendor to a customer including both resellers and end customers. The Company is required to adopt the
consensuses of EITF Issue No. 01-09 as of January 1, 2002, and is currently assessing the impact of the guidance on its financial statements.

3.    Restricted Cash

At December 31, 2001, restricted cash of $3,906 was comprised of a letter of credit for $3,208, which the Company was required to issue in connection with
the Ardent acquisition. The $3,208 represents approximately two months of service charges for network services provided by Covad as a result of the Ardent acquisition. The Covad letter of credit
decreases quarterly to $2,800 on February 28, 2002, $2,400 on May 31, 2002 and $2,000 on August 31, 2002 based on the Company's satisfactory compliance with payment schedule to
Covad.

57

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The
remaining balance of restricted cash of $698 represents the balance on a letter of credit that collateralizes the Company's operating lease commitment for its headquarters in Herndon, Virginia. At
December 31, 2000, restricted cash of $1,600 was comprised of a letter of credit to collateralize the Company's operating lease commitments for its headquarters in Herndon, Virginia. In
May 2001, the Company stopped making payments on its operating lease for its headquarters. As a result, the lessor of the Company's headquarters withdrew $902 from this letter of credit.

4.    Short-term Investments

As of December 31, 2001 and 2000, the Company had invested in marketable securities with original maturity dates exceeding ninety days. These marketable
securities, which principally consist of debt securities with corporations and foreign governments, are due in one year or less and are considered "available for sale" and, as such, are stated at fair
value. The carrying value of these marketable securities was $6,036 and $53,081 at December 31, 2001 and 2000, respectively. Given the decrease in interest rates from the purchase date of these
securities the Company has recorded an unrealized loss of $185 and unrealized gain of $209 for the years ended December 31, 2001 and 2000, respectively. These net unrealized gains and losses
are reported as a part of accumulated other comprehensive loss. Realized gains and losses from the sale of marketable securities are based on the specific identification method. There were no gross
realized gains or gross realized losses on sales of available for sale securities for the years ended December 31, 2001, 2000 and 1999.

5.    Accounts Receivable

Accounts receivable at December 31 are as follows:

As of December 31,2001

2000Accounts receivable

$
6,985

$
5,842Unbilled revenue


142


1,510Allowance for doubtful accounts


(1,466
)

(1,451
)$
5,661

$
5,901


The
provision for bad debt expense was $855, $1,325 and $324 for the years ended December 31, 2001, 2000 and 1999, respectively.

6.    Acquisitions



On August 31, 2001, the Company acquired selected assets and assumed certain liabilities of CapuNet, LLC (CapuNet), a Maryland limited liability company
located in Rockville, Maryland. CapuNet is a provider of broadband services to business customers in the Company's existing territory. Because of the acquisition, the Company expects to increase
annual revenues. The aggregate purchase price was $1,140 including $940 in assumed liabilities and $200 in transaction costs.

58

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The
following table summarizes the estimated fair values, based on an independent third-party appraisal, of the assets acquired and the consideration at the date of acquisition:

Assets acquired:Property and equipment

$
275Intangible assets comprised of customer lists and contracts


865Total assets acquired

$
1,140Consideration:Accounts payable

$
(679
)Accrued expenses and other liabilities


(23
)Deferred income


(260
)Current lease liabilities


(178
)Total transaction costs and liabilities assumed

$
(1,140
)




On November 19, 2001, the Company acquired selected assets of Ardent, Inc. (Ardent), a Virginia Corporation located in Arlington, Virginia. Ardent
is a provider of broadband services to business customers nationwide. The aggregate purchase price was $7,017, including $4,700 in assumed liabilities, $2,000 cash paid to the seller and $317 paid for
transaction costs. Included in the $4,700 of assumed liabilities is $3,000 that was paid to a vendor immediately upon the close date of this transaction. The Company signed a promissory note with the
vendor for the remaining $1,700 (See Note 10).

Assets acquired:Intangible assets comprised of customer lists and contracts

$
7,017Consideration:Cash paid


(2,317
)Accounts payable


(4,700
)Total cash paid and liabilities assumed

$
(7,017
)


Intangible
assets acquired in the CapuNet and Ardent transactions, which comprised of customer lists and contracts, are amortized on a straight-line basis over their
estimated useful life which approximates 36 months. As of December 31, 2001, the accumulated amortization related to these intangible assets was $683.

7.    Property and Equipment

Property and equipment consists of the following:

As of December 31,2001

2000Network placed in service

$
80,578

$
78,884Network development in process





7,178Office and computer equipment and software


10,391


29,286Furniture and fixtures


1,351


5,122Less accumulated depreciation


(52,127
)

(30,014
)Property and equipment, net

$
40,193

$
90,456


59

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The Company's DSL-based network includes equipment under capital leases, equipment, installation, and collocation fees. Collocation fees represent nonrecurring fees paid to
obtain central office space for location of certain equipment. When a new portion of the Company's network has been completed and made available for use, it is transferred from network development to
network placed in service.

As
of December 31, 2001 and 2000, the recorded cost of the equipment under capital leases, consisting primarily of network equipment, was $41,576 and $52,698, respectively.
Accumulated amortization for this equipment under capital leases was $27,481 and $18,205 as of December 31, 2001 and 2000, respectively.

The
Company capitalized costs associated with the design and implementation of the Company's systems including internally and externally developed software. As of December 31,
2001 and 2000, the recorded cost of software and software-in development was $1,821 and $15,741, respectively.

In
May 2001, the Company implemented a restructuring plan to reduce expenses and streamline operations to achieve profitability which resulted in the impairment of certain
long-lived assets. Management identified assets in three long-lived asset categories that were impaired: network placed in service, office and computer equipment and software, and
furniture and fixtures. The network placed in service assets were network collocation facilities that were specifically identified as part of the restructuring plan. Based on an undiscounted cash flow
analysis on a central office by central office basis, the Company determined the 205 abandoned facilities had no value to the Company's future operations and there could be no assurance the Company
could anticipate cash flows from their future disposition. Therefore, the Company determined the entire net book value of the abandoned central office collocation facilities, in the amount of $10,233,
was impaired. The network equipment located in these facilities was also evaluated for impairment. The majority of the network equipment was removed and re-deployed to other facilities. An
impairment charge, in the amount of $1,647, was recorded for the network equipment that was not being re-deployed.

In
connection with the abandonment of the network placed in service, certain internally and externally developed software under development was also identified and evaluated for
impairment. The software applications related to a program to upgrade the Company's operating support systems. As a result of the restructuring plan, management determined the upgraded systems were
not required for the reduced number of personnel and network collocation facilities. Consequently, implementation of the upgrades was not completed and the Company reverted to legacy systems. Software
applications related to the upgrade were specifically identified, and the net book value, in the amount of $9,969, was recorded as an impairment charge.

In
connection with the closing of all outside sales offices and the consolidation of space at the Company's headquarters, the Company evaluated its computer equipment, furniture and
fixtures, and leasehold improvements for impairment. Certain of these assets will not be used for future operations were either sold at a loss or otherwise disposed. The remaining net book value of
these assets, in the amount of $1,304, $785, and $915, respectively, were recorded as an impairment charge.

In
November 2001, the Company completed an additional restructuring by terminating an additional 95 employees and impairing certain assets, mainly office and computer equipment
and furniture and fixtures, located at its corporate headquarters. The Company recorded an impairment charge of $1,259 and $955, respectively, based on the difference between the net carrying value
and the related salvage value of these assets no longer being used by the Company.

60

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A
summary of all impairment charges for the year ended December 31, 2001 is as follows:

Network place in service

$
11,880Office and computer equipment and software


12,532Furniture and fixtures and leasehold improvements


2,655Total

$
27,067


As
of December 31, 2000, network development in process is net of a reduction of assets of $23,700, which consists of an impairment of long-lived assets of $22,141 and
the sale of $1,600 of assets to SBC. The impairment of long-lived assets resulted from the Company discontinuing its expansion into the southeastern and western United States. The Company
does not expect that future undiscounted cash flows from its interests in the 397 central offices located primarily in the southeastern and western United States will be sufficient to recover the
costs incurred to procure these interests. Therefore, the Company has recorded an impairment loss of $22,141 (see Note 17).

8.    Accrued Expenses

Accrued expenses consisted of the following at December 31,

2001

2000Accrued telecom costs for network services

$
10,361

$
2,527Accrued co-location costs


10,216


10,605Accrued software implementation





3,607Accrued other


6,552


8,181Total

$
27,129

$
24,920


Accrued
telecom costs are comprised of monthly service fees for each copper line, rent and power for each collocation arrangement, access fees and monthly backbone charges for the fiber
optic network paid to competitive or traditional telephone companies. These costs also include data connections, engineering supplies, installation and other utility costs related to the network
operations.

Accrued
co-location costs are comprised of an estimate for fees that may be required to be paid to the incumbent local exchange carriers for build out of the
co-location facilities that were forfeited pursuant to the SBC agreements dated December 22, 2000, as amended on February 28, 2001 (See Note 13).

Accrued
software implementation related to the Company's conversion of its old general ledger software, SBT, to Oracle, upgrade of the Daleen Billplex billing and a customized order
processing system. The conversion was completed during the first quarter of 2001.

Accrued
other consists primarily of property taxes, interest, employee benefits, and restructuring.

9.    Restructuring

In May 2001, the Company implemented a restructuring plan to reduce expenses and streamline operations to achieve profitability. The plan included the
elimination of 140 employees, or 34% of the work force, and closure of all outside sales offices. The employee groups terminated included all functional areas within the Company. The employees
received two weeks of severance and one week of additional severance for each completed year of service. These severance costs were paid during the second and third quarters of 2001.

61

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On
November 16, 2001, in a second restructuring of our work force, the Company eliminated an additional 95 positions. The employee groups terminated included several functional
areas within the Company, but included a significant reduction in our sales force as the Company looked to focus on its existing customers and the integration and consolidation of acquired DSL
customers.

Total
restructuring charges for the year ended December 31, 2001 were $3,235, comprised of $1,161 for employee terminations, $1,446 for lease terminations, and $628 for other
related costs. These amounts are classified as restructuring on the statement of operations. As of December 31, 2001, the remaining restructuring liability is $1,352, and will be paid in early
2002.

10.    Notes Payable

Line of credit and notes payable consist of the following at December 31:

2001

2000Ascend line of credit

$
2,321

$
2,453SBC note payable


5,501


Covad note payable


1,509


GE IT note payable


446


Interconnx note payable


102


Total

$
9,879

$
2,453Less: current portion


(4,351
)

(532
)Total

$
5,528

$
1,921


On
October 16, 1998, the Company entered into a $10,000 line of credit agreement and a $30,000 equipment financing agreement with Ascend Communications, Inc. (Ascend). The
line of credit required annual interest at 8.25% subject to adjustment.

On
May 4, 1999, the Company amended its financing agreement with Ascend. The amendment reduced the line of credit from $10,000 to $5,000. In April 2001, the Company defaulted
under this line of credit agreement, which resulted in an increase in the interest rate from 8.25% to 10.25%.

On
September 28, 2001, the Company received a notice of acceleration from Lucent Technologies (Lucent), which acquired Ascend. Lucent demanded payment of principal ($2,321) and
interest which aggregated $2,469 related to the Ascend line of credit. The Company has classified the principle and interest as current liabilities at December 31, 2001. On October 4,
2001 the Company filed a Demand of Arbitration with the American Arbitration Association concerning various claims with Ascend / Lucent, Purchase and Sale Agreement (Lucent agreement). The
demand asserts breach of contract for failure to place equipment purchases on capital leases as required by the Lucent agreement. In addition, the demand asserts breach of contract for failure to
provide equipment that materially conforms to the specifications in the Lucent agreement. Finally, the demand asserts breach of contract for failure to correct accounts receivable records on credits
and returns, and requests accounting for certain invoices. The Company requested to be relieved of its obligations under the Lucent agreement, including accounts payable of $785 and the line of credit
and accrued interest of $2,469 and other related
damages to be proven in the arbitration. The arbitration proceedings are in discovery. There can be no assurance the Company will be successful in these proceedings.

In
connection with the December 22, 2000 agreement, as amended on February 28, 2001, signed with SBC, the Company entered into a senior note for $5,000 to finance a portion
of any potential obligation the Company might incur with the Incumbent Local Exchange Carriers related to the lease interests in central office collocation facilities. The senior note is due on
December 20, 2003 and carries an interest rate of 4.0% per year over the Federal Reserve Fund Prime Rate, which was 9.5% on the date that the agreement was entered into. As of
December 31, 2001, the Company had $5,501 in principal and interest outstanding under the senior note.

62

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In
connection with the Ardent acquisition on November 19, 2001, the Company signed a promissory note for $1,700 with Covad, with principal and interest to be paid in nine monthly
installments of $196 each, due and payable on the first day of each calendar month thereafter, provided however the last payment will be reduced to $133 if the Company has timely paid all monthly
installments. The note carries an interest rate of 10% per year. As of December 31, 2001, the Company had $1,509 outstanding related to this note.

On
December 21, 2001, the Company issued a promissory note for $446 to General Electric Capital Information Technology Solutions, Inc. (GE IT) in order to settle past due
accounts payable owed by the Company to GE IT. The promissory note bears interest at 14% per year and is repayable in twelve monthly installments of approximately $40 starting in January 2002.

On
April 13, 2001, pursuant to the settlement of its litigation with InterConnx, Inc., the Company issued a promissory note in the principal amount of $150. The note bears
interest at 9% per year and is payable in twenty-four monthly installments of approximately $7 beginning in May 2001. As of December 31, 2001, $102 was outstanding related to
this promissory note.

On
January 4, 2002, the Company issued a promissory note for $755 to MetaSolv Software, Inc. in order to settle past due accounts payable. The promissory note bears
interest at 18% per year and is payable in thirteen monthly installments of approximately $10 beginning in January 2002, and a final payment of $625 at the end of the term.

The
line of credit and notes payable as of December 31, 2001 are due and payable in 2002 and 2003, respectively, as follows: $4,351 and $5,528.

11.    Commitments and Contingencies

The Company implemented a restructuring plan in May 2001. As part of this plan, the Company stopped paying rent and lease payments as of May 31,
2001. Since this date, the Company has been renegotiating most rent and capital lease obligations with its landlords and lessors. Various landlords and lessors have filed default notices and notices
of acceleration with the Company. There can be no assurance the Company will successfully renegotiate its rent and capital lease obligations. Included below is the status of these negotiations.



The Company leases or subleases office space in Maryland, Massachusetts, New York, Pennsylvania and Virginia and collocation space in central offices under the
terms of the interconnection agreements with Verizon and other vendors. The Company has outstanding a letter of credit with respect to its headquarters in Herndon, Virginia (See Note 3).

The
Company is currently in arbitration proceedings with respect to the branch office it closed in Malvern, Pennsylvania, and is defendant in legal proceedings with respect to the branch
offices closed in Woburn, Massachusetts, and in New York, New York. In addition, as of December 31, 2001, the Company was a defendant in a case filed related to its headquarters in Herndon,
Virginia. On February 14, 2002, the Company and the lessor entered into a settlement agreement and an amended lease, whereby the square footage under rent for the Company's headquarters was
reduced.

63

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Commitments
for minimum rental payments under noncancelable operating leases and subleases at December 31, 2001 are as follows:

Year ending December 31,

Amount2002

$
7482003


8942004


8422005


8502006


875Thereafter


1,971Total minimum rental payments

$
6,180


Rent
expense for the years ended December 31, 2001, 2000 and 1999 was $2,995, $5,600 and $1,580, respectively.



On October 23, 2001, the Company entered into forbearance agreements with General Electric Capital Corporation (GECC) and Fore Financial Services (FORE), a
division of GECC. The agreements stipulate the Company can delay payments relating to $25,789 in capital lease obligations. With respect to the GECC lease obligations, the Company will make payments
of $135 from September 2001 through March 2002 to be applied to payments in arrears. In addition, the Company will make payments of $34 to be applied to payments in arrears as well as
continue to make regularly scheduled payments from April 2002 through March 2003. With respect to the FORE lease obligations, the Company will make payments of $30 from
September 2001 through March 2002 to be applied to payments in arrears. In addition, the Company will make payments of $17 to be applied to payments in arrears as well as continue to
make regularly scheduled payments from April 2002 through March 2003. At that point, the Company will make payments in an amount equal to the greater of 1/18th of the
remaining balance or $100 per month until the obligation is relieved or the maturity of the original capital lease, whichever comes first. If a liability remains at the maturity of the original
capital lease, the remaining obligation will be paid at that time. Lastly, if the Company acquires additional lines between the period of January 1, 2002 and March 31, 2003, the Company
will pay $0.50 for every $1.00 spent to acquire additional lines. These payments would be applied to the lease obligation balances. As an additional covenant, the Company has granted an additional
lien and security interest in all present and future line accounts, accounts receivable and other rights to the payment of money to the Company.

In
connection with the forebearance agreements, the Company issued GECC a warrant to purchase 1,607,235 shares of common stock at $.18 per share. The warrant is exercisable in whole or
in part from time to time until April 30, 2005. The estimated fair value of the warrant of $338 was determined using a Black-Scholes pricing model with the following assumptions: 0% dividend
yield, weighted average risk-free interest rate of 3.34%, volatility of 166%, and an expected life of forty-two months. The estimated fair value of the warrant was accounted
for as an increase in interest expense and additional paid-in-capital.

In
July 2001, Wells Fargo Equipment Finance, Inc. (Wells Fargo) filed a lawsuit against the Company alleging that the Company failed to make capital lease payments and
failed to maintain certain minimum unrestricted cash pursuant to a rider to the loan agreement. Wells Fargo was seeking recovery of approximately $6,100 under the capital lease or the posting of a
letter of credit. On November 16, 2001, judgment in favor of Wells Fargo was awarded for $5,727, plus interest. The Company has no further rights of appeal. As of December 31, 2001, the
Company had paid $1,234 towards the settlement. On January 25, 2002, the Company paid to Wells Fargo $4,493, including interest, to satisfy and discharge in full the judgment.

64

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The
Company has an arrangement with Paradyne Credit Corporation (Paradyne) whereby the Company can finance equipment purchases of up to $8,000 subject to vendor approval. The Company
entered into sale/leaseback transactions with Paradyne in the amount of $5,503 and $530 during 2000 and 1999. The leaseback transactions were accounted for as capital leases. On February 8,
2002, pursuant to the terms of a settlement agreement with Paradyne, the Company took title to equipment that had previously been held under a capital lease. The Company paid Paradyne $1,175 in
settlement of $2,471 in capital lease and interest obligations.

On
February 25, 2002, the Company entered into an agreement with Cisco Systems Capital to forgive and cancel all capital lease obligations made with the Company in return for
payment of $1,550. The settlement relieves the Company of $3,745 in capital lease obligations.

The
present value of future minimum capital lease payments as of December 31, 2001, is as follows:

Year ending December 31,

Amount2002

$
18,3052003


18,8362004


3,8492005


7341,063Less amounts representing interest


(5,303
)Present value of net minimum lease payments


35,760Less current portion of capital lease obligations


(15,052
)Long-term portion of capital lease obligations

$
20,708




The Company has entered into an employment agreement with certain of its executive officers. Each agreement has an initial term of four years, subject to earlier
termination upon 30 days prior notice. These agreements are automatically extended for additional one year terms unless the Company or the employee elects to terminate the agreement within
30 days before the end of the current term. Under these agreements, these employees are eligible to receive an initial annual base salary that will be increased by at least 5% each year, based
upon performance objectives set by the Board of Directors. The employees are also eligible to receive an annual bonus of up to 20% of the executives' then current salary. The bonus is payable in cash,
stock or a combination of both at the election of the board of directors.



The Company is currently involved in a number of legal proceedings, some of which, as described below as well as described in the operating lease section above,
could have a material adverse effect on our business, financial position, results of operations or cash flows. Additionally, our present and possible future legal proceedings and claims, whether with
or without merit, could be expensive to
defend, divert management's attention, and consume our time and resources. There can be no assurance concerning the outcome of current or future legal proceedings or claims.

65

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The
Company was a defendant, along with two directors and a principal stockholder, and a counter-claimant, in a case filed in the United States District Court for the Eastern District of
Virginia in November 2000 by former officer Christopher J. Melnick. Mr. Melnick alleged several causes of action including breach of contract and securities fraud, and sought both
monetary damages in an amount to be proven at trial and a declaratory judgment. The Company filed an answer substantially denying Mr. Melnick's allegations and filed a counterclaim against
Mr. Melnick. The case was settled in May 2001 with the payment of $240 in costs, removal of the restrictive legend on 200,000 shares of common stock and the issuance of 1,063,533 shares
of common stock. As a result of the issuance of common stock, the Company recorded stock-based compensation expense in the amount of $637 for the year ended December 31, 2001.

In
April 2001, DMR Consulting Group, Inc. (DMR), initiated an action against the Company in the Circuit Court of the County of Fairfax, Virginia. DMR sought monetary
damages of approximately $1,087. The case was settled in September 2001 with the payment of $300.

In
July, 2001, a former employee commenced an action against the Company in the United States District Court for the District of Maryland seeking $1,000 in compensatory damages and $500
in punitive damages for sex discrimination and unlawful retaliation. This case was settled for an immaterial amount in November 2001.

In
November 2000, InterConnX Inc. (InterConnX) initiated an action against the Company in the United States District Court for the Eastern District of Virginia. InterConnX
alleged claims for breach of contract and sought monetary damages in the amount of approximately $955. The case was settled in April 2001 with the payment of $200 and the issuance of a $150, 9%
interest promissory note, payable over 24 months.

In
November 2000, Vitria Technology, Inc. (Vitria) initiated an action against the Company in the Fairfax County Circuit Court, Virginia. Vitria alleged several causes of
action and sought monetary damages in the amount of approximately $540. The case was settled in April 2001 with the payment of $375.

Additionally,
the Company is subject to state telecommunications regulators, FCC and court decisions as they relate to the interpretation and implementation of the 1996 Telecom Act, the
Federal Communications Act of 1934, as amended, various state telecommunications statutes and regulations, the interpretation of competitive telecommunications company interconnection agreements in
general
and our interconnection agreements in particular. In some cases, the Company may be deemed to be bound by the results of ongoing proceedings of these bodies or the legal outcomes of other contested
interconnection agreements that are similar to our agreements. The results of any of these proceedings could have a material adverse effect on the Company's business, financial condition, results of
operations and cash flows.

12.    Income Taxes

The provision (benefit) for income taxes consists of the following:

For the years ended December 31,2001

2000

1999Current tax (benefit) provision

$


$
50

$
(71
)Deferred tax (benefit) provision








Total provision (benefit) for income taxes

$


$
50

$
(71
)


66

---

Deferred
tax assets (liabilities) consisted of the following as of December 31:

|                        |  |   |        
|----------------------- |  | - | -------
|
|Deferred compensation   |  | $ | 39     
|Accrued interest        |  |   | 258    
|Accrued other expense   |  |   | 4,360  
|Bad debt expense        |  |   | 1,611  
|Net operating loss      |  |   | 83,934 
|Depreciation expense    |  |   | 5,766  
|Valuation allowance     |  |   | (95,968
|                        |  |   |        
|Net deferred tax assets |  | $ |       
|                        |  |   |        

A
valuation allowance has been established against the Company's net deferred tax assets. This allowance reflects management's determination that such benefits will more than likely not
be realized. The increase in the valuation allowance of $39,155 in 2001 is primarily related to additional net operating losses in the U.S.

A
reconciliation between the provision for income taxes from operations computed using the federal statutory income tax rate and the Company's effective tax rate is as follows (there are
no material changes to the Company's effective tax rate for 2001):

Years ended December 31,2001

2000

1999Income tax provision at Federal statutory rate of 34%

34.0
%
34.0
%
34.0
%State income taxes, net of federal provision

4.3

4.6

4.6Change in valuation allowance

(36.3
)
(39.9
)
(30.4
)Business meals, entertainment, penalties and other

(0.3
)
(0.3
)
(1.1
)Amortization of deferred compensation on stock options disallowed for tax purposes

(1.7
)
1.5

(6.9
)Income tax provision

0.0
%
(0.1
)%
0.2
%


At
December 31, 2001, the Company had a U.S. net operating loss carryforward of approximately $217,300, which may be used to offset future taxable income. These carryforwards will
expire at varying dates through 2021.

67

---

13.    Mandatorily Redeemable Preferred Stock and Stockholders' Equity

On August 3, 1998, the Company was recapitalized with authorized capital stock that included 15,000,000 shares of preferred stock. As of
December 31, 2000, the Company had 3,500,000 shares of undesignated preferred stock, none of which was issued or outstanding.



On August 6, 1998, the Company issued 10,000,000 shares of Series A preferred stock and 22,050,000 shares of common stock for total proceeds of
$10,005 excluding direct issuance costs of $56. The Company had allocated $5,074 and $4,875 of the net proceeds to the Series A preferred stock and common stock, respectively, based on the
Company's estimate of fair value of the Series A preferred stock and common stock.

At
the time of the IPO, $5,000 of Series A preferred stock was converted into 416,667 shares of common stock at $12.00 per share, the public offering price, with the remaining
shares of Series A preferred stock and all accrued dividends and accretion, amounting to $1,238, canceled without additional payment to the holders of those shares.

On
March 7, 2000, the Company issued 1,500,000 shares of Series B preferred stock to SBC Communications, Inc. (SBC) and Telefonos de Mexico (Telmex) for total
proceeds of $150,000 excluding direct issuance costs of $209. The convertible Series B preferred stock is non-voting and pays a 7.0% dividend, which can be satisfied with either
additional stock or cash. Each $100.00 share of Series B preferred stock is convertible at any time at the election of the holder into 3.2258 shares of the Company's common stock, or a total of
4,838,700 common shares. The Series B preferred stock may be called by the Company for mandatory conversion into its common stock at any time between two and five years after the original issue
date, provided the Company's common stock is trading above $31 per share. On each anniversary of the issue date, beginning on the second anniversary and ending on the seventh anniversary, the holders
of the Series B preferred stock may request that the Company redeem the shares for a cash amount equal to $100 per share plus unpaid dividends. The Company may postpone such right until the
following year for all but the seventh year if its common stock share price is below $31 for a specified period preceding the anniversary date. The Series B preferred stockholders have the
right to maintain their percentage equity ownership interests in the Company's common stock
through a right of primary offer mechanism in the financing agreement. This right permits them to purchase, in any subsequent offering of the Company's stock, on the same terms and conditions as the
stock is offered to third parties, an amount of stock that will allow them to maintain their respective percentage ownership interests. Through a separate agreement with the Company's present
principal stockholders, Spectrum Equity Investors II, L.P. and Jonathon P. Aust, the Company's Chief Executive Officer, the Series B preferred stockholders also have a right of first offer to
purchase, in certain circumstances, any shares that these stockholders may wish to sell in the future.

On
December 22, 2000, the Company signed an agreement with SBC, a Series B preferred stockholder, to convert their shares of Series B preferred stock plus accrued
dividends which totaled $79,171, at $31 per share, the original conversion price, into 2,554,375 shares of common stock, when at the time, the Company's common stock was trading at approximately $.875
per share. The conversion was part of a series of agreements between the Company and SBC to convert their shares of Series B preferred stock into shares of common stock of the Company.

68

---

The
preferred stock activity is summarized as follows:

|                                              |  | Series A   |   | Series B |       
|--------------------------------------------- |  | ---------- | - | -------- | ------
|
|Balance, December 31, 1998                    |  | 10,000,000 |   | $        | 5,640 
|Accrued dividends                             |  |           |   |          | 340   
|Accretion to redemption price                 |  |           |   |          | 258   
|Conversion of preferred stock to common stock |  | (5,000,000 | ) |          | (5,000
|Cancellation of preferred stock               |  | (5,000,000 | ) |          | (1,238
|                                              |  |            |   |          |       
|Balance, December 31, 1999                    |  |           |   |          |      
|Issuance of shares                            |  |           |   |          |      
|Issuance costs                                |  |           |   |          |      
|Accrued dividends                             |  |           |   |          |      
|Accretion to redemption price                 |  |           |   |          |      
|Conversion of preferred stock to common stock |  |           |   |          |      
|                                              |  |            |   |          |       
|Balance, December 31, 2000                    |  |           |   |          |      
|Issuance of shares                            |  |           |   |          |      
|Issuance costs                                |  |           |   |          |      
|Accrued dividends                             |  |           |   |          |      
|Accretion to redemption price                 |  |           |   |          |      
|Conversion of preferred stock to common stock |  |           |   |          |      
|                                              |  |            |   |          |       
|Balance, December 31, 2001                    |  |           |   | $        |      
|                                              |  |            |   |          |       

14.    Stock-Based Compensation

On July 23, 1998, the Company adopted the 1998 Stock Incentive Plan (the Plan), under which incentive stock options, non-qualified stock
options, stock appreciation rights, restricted or unrestricted stock awards, phantom stock, performance awards or any combination thereof may be granted to the Company's employees and certain other
persons in accordance with the Plan. The Board of Directors, which administers the Plan, determines the number of options granted, the vesting period, and the exercise price. The Board of Directors
may terminate the Plan at any time. With respect to options granted before February 15, 2000, options granted under the Plan are exercisable into restricted shares of the Company's common stock
upon award and expire ten years after the date of grant. The restricted common stock generally vests over a three- or four-year period. Subsequent to exercise, unvested shares of
restricted common stock cannot be transferred until such shares have vested. Upon voluntary termination, the Company at the lower of fair value or the exercise price can repurchase unvested shares of
restricted common stock. Options granted subsequent to February 15, 2000, under the Company's "Year 2000 Program," vest and are exercisable cumulatively over a three-year period
commencing with the first anniversary of the date of grant, and expire ten years after the date of grant. At December 31, 1998, 9,000,000 shares were reserved for issuance under the Plan.
Effective November 1, 1999 (as approved by the Company's stockholders on September 6, 2000), the Board of Directors increased the number of shares of common stock reserved for issuance
under the Plan to 13,250,000.

69

---

The
following table summarizes the Company's stock option activity:

Stock
Options

Weighted
Average
Exercise PriceOutstanding, December 31, 1998

7,093,550

$
0.09Granted

4,691,200

$
4.52Exercised

(531,996
)
$
3.29Canceled

(268,295
)
$
4.59Outstanding, December 31, 1999

10,984,459

$
1.71Granted

5,161,300

$
8.45Exercised

(3,187,102
)
$
0.29Canceled

(2,504,329
)
$
9.54Outstanding, December 31, 2000

10,454,328

$
3.60Granted

2,439,800

$
0.65Exercised

(2,508,200
)
$
0.66Canceled

(7,542,351
)
$
4.41Outstanding, December 31, 2001

2,843,577

$
1.92Exercisable, December 31, 1999

10,984,459

$
1.71Exercisable, December 31, 2000

6,452,678

$
1.79Exercisable, December 31, 2001

813,286

$
3.56


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

|                |  | Options Outstanding |  | Options Exercisable
|--------------- |  | ------------------- |  | -------------------
|
|$  0.09   1.41 |  | 2,162,466           |  | 9.0                
|$  1.42   3.52 |  | 458,776             |  | 8.8                
|$  3.53   8.79 |  | 42,663              |  | 7.6                
|$  8.80  21.97 |  | 113,688             |  | 8.1                
|$21.98  34.50  |  | 65,984              |  | 8.1                
|                |  |                     |  |                    
|                |  | 2,843,577           |  | 8.9                
|                |  |                     |  |                    

In
certain instances, the Company has determined the fair value of the underlying common stock on the date of grant was in excess of the exercise price of the options. This amount is
recorded as an increase to deferred compensation on stock options and additional paid-in capital. The deferred compensation on stock options is amortized as a charge to operations over the
vesting periods, which range from three to four years, of the underlying restricted common stock. Upon subsequent cancellation of such options, a decrease to deferred compensation on stock options and
additional paid-in capital is recorded for the unvested amount. As a result, the Company recorded a reduction to deferred compensation of $14,285 for the year ended December 31,
2001 and recorded deferred compensation of $7,013 and $23,092 for the years ended December 31, 2000 and 1999, respectively. The Company recognized stock compensation expense of $2,816, $7,509
and $8,165 for the years ended December 31, 2001, 2000 and 1999, respectively.

70

---

SFAS
No. 123,Accounting for Stock-Based Compensation, encourages adoption of a fair value-based method for valuing the cost of
stock-based compensation. However, it allows companies to continue to use the intrinsic value method for options granted to employees and disclose pro forma net loss applicable to common stockholders
and net loss per common share applicable to common stockholders. Had compensation cost for the Company's stock-based compensation plans been determined consistent with SFAS No. 123, the
Company's net loss and loss per common share would have been as follows:

|                                                                                            |  | For the Years ended December 31, |        
|------------------------------------------------------------------------------------------- |  | -------------------------------- | -------
|
|Net loss applicable to common stockholders, as reported                                     |  | $                                | 113,648
|Pro forma net loss applicable to common stockholders                                        |  |                                  | 114,482
|Net loss per common share applicable to common stockholders, as reported, basic and diluted |  |                                  | (2.14  
|Pro forma net loss per common share applicable to common stockholders, basic and diluted    |  |                                  | (2.16  

The
weighted average fair value of options granted for the years ended December 31, 2001, 2000 and 1999 was approximately $0.65, $9.09 and $7.23, respectively, based on the
Black-Scholes option-pricing model. Upon termination, the Company may repurchase unvested shares of restricted stock at the lower of the exercise price or fair market value.

The
fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants during the
years ended December 31, 2001, 2000 and 1999: Dividend yield of 0%; expected volatility of 0% to 169%; risk-free interest rates of 3.75% to 6.74%; and expected term of five years.

15.    Employee Benefit Plans

Profit Sharing Plan and Trust.On September 16, 1998, the Company adopted the Network Access Solution, Inc.
401(k) Profit Sharing Plan and Trust (the Plan). As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary deductions for eligible
employees. Participants must be at least 21 years of age and may make voluntary contributions to the Plan of up to 15% of their compensation not to exceed the federally determined maximum
allowable contribution.
The Company is not obligated to make contributions or to match participant contributions. Participants incrementally vest in Company contributions on a straight-line basis over their first
three years of employment. The Company did not make contributions to the Plan during 1998. For the years ended December 31, 2001, 2000 and 1999, the Company contributed $385, $616 and $404
respectively, to the Plan.

Employee Stock Purchase Plan.On March 1, 2000, the Company adopted the 2000 Employee Stock Purchase Plan (ESPP). The
ESPP, which is intended to qualify under Section 423 of the IRS Code, is implemented by a series of overlapping offering periods of 12 months' duration (other than the first offering
period), with new offering periods (other than the first offering period) commencing on January 1 and July 1 of each year. The purchase price per share at which shares will be sold in an
offering under the ESPP will be the lower of 85% of the fair market value of a share of the Company's common stock on the first or last day of an offering period. The fair market value of the
Company's common stock on a given date will be equal to the closing price of the Company's common stock on such date as reported on the Over-The-Counter Exchange. Eligible
employees, or participants, may elect to set aside, through payroll deductions, up to 15% of their compensation to purchase common stock of the Company, although no participant may accrue payroll
deductions exceeding $10 during any offering period. In January 2001, participants purchased 123,571 shares at a price of $0.53, related to the offering period ended December 31, 2000.
In June 2001 and December 2001, participants purchased 3,299 and 34,908 shares at a price of $0.2635 and $0.1615 respectively relating to the 2001 offering periods. The Company has
reserved 500,000 shares of common stock for the ESPP, of which 338,222 were available for future issuance as of December 31, 2001.

71

---

16.    Segment Information

The Company discloses certain segment information. The financial results of the Company's segments are presented on an accrual basis. The Company evaluates the
performance of its segments and allocates resources to them based on gross profit. There are no intersegment revenues. The table below presents information about the reported gross profit (loss) of
the Company's reportable segments for the years ended December 31, 2001, 2000 and 1999. Asset information is not reported for the product sales and consulting services segments, as the Company,
in making its decisions regarding operating matters, does not consider this data.

|                                                |  | Network
Services |         | Product
Sales and
Consulting
Services |   | Reconciling
Items |  | Total |       
|----------------------------------------------- |  | ---------------- | ------- | ------------------------------------- | - | ----------------- |  | ----- | ------
|As of and for the year ended December 31, 2001: |  |                  |         |                                       |   |                   |  |       |       
|Revenue                                         |  | $                | 25,637  |                                       | $ | 7,335             |  | $     |      
|                                                |  |                  |         |                                       |   |                   |  |       |       
|Gross profit (loss)(1)                          |  | $                | (4,179  | )                                     | $ | 750               |  | $     |      
|                                                |  |                  |         |                                       |   |                   |  |       |       
|Property and equipment, net                     |  | $                | 35,871  |                                       | $ |                  |  | $     | 4,322 
|                                                |  |                  |         |                                       |   |                   |  |       |       
|As of and for the year ended December 31, 2000: |  |                  |         |                                       |   |                   |  |       |       
|Revenue                                         |  | $                | 10,703  |                                       | $ | 19,914            |  | $     |      
|                                                |  |                  |         |                                       |   |                   |  |       |       
|Gross profit (loss)(1)                          |  | $                | (11,938 | )                                     | $ | 1,662             |  | $     |      
|                                                |  |                  |         |                                       |   |                   |  |       |       
|Property and equipment, net                     |  | $                | 61,245  |                                       | $ |                  |  | $     | 29,211
|                                                |  |                  |         |                                       |   |                   |  |       |       
|As of and for the year ended December 31, 1999: |  |                  |         |                                       |   |                   |  |       |       
|Revenue                                         |  | $                | 1,820   |                                       | $ | 15,619            |  | $     |      
|                                                |  |                  |         |                                       |   |                   |  |       |       
|Gross profit (loss)(1)                          |  | $                | (2,992  | )                                     | $ | 2,591             |  | $     |      
|                                                |  |                  |         |                                       |   |                   |  |       |       
|Property and equipment, net                     |  | $                | 49,240  |                                       | $ |                  |  | $     | 5,858 
|                                                |  |                  |         |                                       |   |                   |  |       |       

---

|                                                                                 |                                        | For the years ended December 31, |         
|-------------------------------------------------------------------------------- | -------------------------------------- | -------------------------------- | --------
|
|
|Gross profit (loss) (exclusive of depreciation and amortization presented below) |                                        | $                                | (3,429  
|Operating expenses:                                                              |                                        |                                  |         
|                                                                                 | Selling, general and administrative.   |                                  |         
|                                                                                 | Amortization of deferred compensation. |                                  |         
|                                                                                 | Depreciation and amortization          |                                  |         
|                                                                                 | Restructuring                          |                                  |         
|                                                                                 | Impairment of long-lived assets        |                                  |         
|                                                                                 |                                        |                                  |         
|Loss from operations                                                             |                                        |                                  | (105,474
|                                                                                 | Interest (expense) income              |                                  |         
|Follow-on offering costs                                                         |                                        |                                  |        
|                                                                                 |                                        |                                  |         
|Loss before income taxes                                                         |                                        | $                                | (108,344
|                                                                                 |                                        |                                  |         

72

---

17.    Restatement

On December 22, 2000, the Company signed agreements with SBC and Telmex to cease the expansion of a DSL network in the southeastern and western regions of
the United States in exchange for SBC converting 750,000 shares of Series B preferred stock to common stock. Collectively, these agreements provided for (i) the transfer of property,
plant and equipment comprised of 397 central office sites with a carrying value of $22,141 to SBC, (ii) the sale of 19 central office sites for $1,600 in cash to SBC, (iii) the purchase
by SBC from the Company of certain third-party network equipment for $2,181, (iv) the provision of a $5,000 senior note to finance costs associated with the potential transfer of the central
offices, (v) the assumption of certain of the Company's rights and obligations or alternatively, subletting of the fourth and fifth floors of the Company's headquarters facility in Herndon,
Virginia, and (vi) reimbursement for $300 of future leasehold improvements or moving expenses. The obligation to transfer the central office sites in exchange for SBC's conversion of preferred
stock to common stock was viewed as a preferred stock inducement.

On
February 28, 2001, the agreements signed by SBC and Telmex on December 22, 2000 were amended, which resulted in the Company having the election to either
(i) transfer to SBC the Company's lease interests in certain traditional telephone company central offices with a carrying value of $22,141, (ii) forfeit the Company's lease interests in
the these central offices back to the incumbent local exchange carriers, or (iii) assign these lease interests in the central offices to another telecommunications provider. In the 2000
financial statements, the Company accounted for the preferred stock inducement by reducing property, plant and equipment and additional paid-in capital by $22,141. In addition, the
preferred stock inducement was presented as an adjustment to increase the net loss available to common stockholders on the statement of operations and other comprehensive loss. The February 28,
2001 amendment eliminated the Company's obligation to transfer to SBC the Company's lease interests in the central offices, thereby eliminating the inducement for the conversion of preferred stock to
common stock. As a result of the amendment and management's belief the recoverability of the net carrying value of the 397 central offices was in question, the Company impaired the entire net carrying
value of the central offices as of December 31, 2000.

As
a request, the Company's 2000 financial statements have been restated to eliminate the preferred stock conversion inducement of $22,141 and has recorded an impairment of
long-lived assets of $22,141. The effect of this restatement is to increase loss from operations, net loss, additional paid-in capital, and
accumulated deficit by $22,141. The restatement has no effect on net loss applicable to common stockholders, net loss per common share applicable to common stockholders, total assets, total
liabilities and total stockholders' (deficit) equity as of, and for the year ended December 31, 2000.

73

---



REPORT OF INDEPENDENT ACCOUNTANTS ON  FINANCIAL STATEMENT SCHEDULE

To
the Board of Directors of
Network Access Solutions Corporation:

Our
audits of the financial statements referred to in our report dated April 5, 2002, appearing in this Form 10-K also included an audit of the financial
statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related financial statements.



McLean, Virginia
April 5, 2002

74

---



SCHEDULE II        VALUATION AND QUALIFYING ACCOUNTS

|                                            |                              | Balance at
Beginning
of Period |   | Charged to
Costs and
Expenses |  | Deductions |            | Balance at
End of Period
|------------------------------------------- | ---------------------------- | ------------------------------ | - | ----------------------------- |  | ---------- | ---------- | ------------------------
|
|Tax valuation allowance:                    |                              |                                |   |                               |  |            |            |                         
|                                            | Year ended December 31, 2001 |                                | $ | 56,812,621                    |  | $          | 39,154,634 |                         
|                                            | Year ended December 31, 2000 |                                | $ | 12,928,552                    |  | $          | 43,884,069 |                         
|                                            | Year ended December 31, 1999 |                                | $ | 709,662                       |  | $          | 12,218,890 |                         
|Allowance for doubtful accounts receivable: |                              |                                |   |                               |  |            |            |                         
|                                            | Year ended December 31, 2001 |                                | $ | 1,450,866                     |  | $          | 855,083    |                         
|                                            | Year ended December 31, 2000 |                                | $ | 376,399                       |  | $          | 1,325,384  |                         
|                                            | Year ended December 31, 1999 |                                | $ | 51,958                        |  | $          | 324,441    |                         

75

---



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

None.

PART III

Item 10. Directors and Executive Officers of the Registrant.

The information required by this Item is incorporated by reference to the sections of the Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on June 11, 2002, entitled "Election of DirectorsBoard of Directors and Nominees for Election as Directors," "Directors and Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance," to be filed with the Commission.

Item 11. Executive Compensation.

The information required by this Item is incorporated by reference to the sections of the Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on June 11, 2002, entitled "Directors and Executive OfficersDirectors' Compensation" and "Executive Compensation," to be filed with the Commission.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

The information required by this Item is incorporated by reference to the section of the Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on June 11, 2002, entitled
"Security OwnershipSecurity Ownership of Directors, Executive Officers and Certain Beneficial Owners," to be filed with the Commission.

Item 13. Certain Relationships and Related Transactions.

The information required by this Item is incorporated by reference to the sections of the Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on June 11, 2002, entitled "Election of DirectorsBoard of Directors and Nominees for Election as Directors" and "Directors and Executive
OfficersCompensation Committee Interlocks and Insider Participation," to be filed with the Commission.

PART IV

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

(a) (1) Financial Statements



(2) Financial Statement Schedules



(3) Exhibits

|3.1 |  | Amended and Restated Certificate of Incorporation of the Company(2)                                                                                                                                                           
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2 |  | Amended and Restated By-Laws of the Company(2)                                                                                                                                                                                
|3.3 |  | Certificate of the Designations, Voting Powers, Preferences and Relative, Participating, Optional or Other Special Rights of Preferred Stock and Qualifications, Limitations or Restrictions Thereof dated February 4, 2000(4)
|    |  |                                                                                                                                                                                                                               

76

---

|4.1    |  | Specimen stock certificate for shares of Common Stock of the Company(2)                                                                           
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|4.2    |  | Specimen stock certificate for shares of Series B Preferred Stock of the Company(4)                                                               
|10.1   |  | Master Equipment Lease Agreement dated November 17, 1998, by and between the Company and Paradyne Credit Corporation(2,3)                         
|10.2   |  | Purchase and Sale Agreement dated as of October 16, 1998, by and between the Company and Ascend Communications, Inc., as amended(2,3)             
|10.3   |  | Master Lease Agreement dated October 9, 1998, by and between the Company and Ascend Credit Corporation(2)                                         
|10.4   |  | Promissory Note dated October 16, 1998, by and between the Company and Ascend Communications, Inc., as amended(2)                                 
|10.5   |  | Commercial Lease dated February 24, 1997, by and between the Company, Sterling/Gunston Limited Partnership and Bernstein Management Corporation(2)
|10.5.1 |  | First Lease Amendment dated June 26, 1998, by and between the Company and Sterling/Gunston LLC(2)                                                 
|10.5.2 |  | Third Lease Amendment dated February 1, 1999, by and between the Company and Sterling/Gunston LLC(2)                                              
|10.6   |  | Sublease dated August 31, 1998, by and between the Company and U.S. Interactive, Inc.(2)                                                          
|10.7   |  | Letter of Intent dated March 2, 1999 by and between the Company and Trans Dulles Center, Inc.(2)                                                  
|10.8   |  | Employment Agreement dated as of August 16, 1998, by and between the Company and Jonathan P. Aust(2)                                              
|10.9   |  | Employment Agreement dated as of July 13, 1998, by and between the Company and Christopher J. Melnick(2)                                          
|10.10  |  | Employment Agreement dated as of July 13, 1998, by and between the Company and Scott G. Yancey, Jr.(2)                                            
|10.11  |  | Employment Agreement dated as of August 18, 1998, by and between the Company and James A. Aust(2)                                                 
|10.12  |  | Employment Agreement dated as of March 1, 1999, by and between the Company and John J. Hackett(2)                                                 
|10.13  |  | 1998 Stock Incentive Plan, as amended(2)                                                                                                          
|10.14  |  | Incentive Stock Option Grant Agreement dated July 23, 1998, by and between the Company and Scott G. Yancey, Jr., as amended(2)                    
|10.15  |  | Incentive Stock Option Grant Agreement dated July 23, 1998, by and between the Company and Christopher J. Melnick, as amended(2)                  
|10.16  |  | Incentive Stock Option Grant Agreement dated November 1, 1998, by and between the Company and James A. Aust(2)                                    
|10.17  |  | Incentive Stock Option Grant Agreement dated March 30, 1999, by and between the Company and John J. Hackett(2)                                    
|       |  |                                                                                                                                                   

77

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|10.18 |  | Deferred Compensation Agreement dated June 1, 1997, by and between the Company and Jonathan P. Aust(2)                                                                                                                   
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.19 |  | Deferred Compensation Agreement dated June 1, 1997, by and between the Company and James A. Aust(2)                                                                                                                      
|10.20 |  | Repurchase Agreement dated August 6, 1998, by and between the Company and Longma M. Aust, Jonathan P. Aust, James A. Aust and Stephen L. Aust(2)                                                                         
|10.21 |  | Investor Rights Agreement dated August 6, 1998, by and between the Company, Spectrum Equity Investors II, L.P., SEA 1998 II, L.P., FBR Technology Venture Partners L.P. and W2 Venture Partners, LLC, as amended(2)      
|10.22 |  | Series A Preferred Stock Purchase Agreement dated August 6, 1998, by and between the Company, Spectrum Equity Investors II, L.P., SEA 1998 II, L.P., FBR Technology Venture Partners L.P. and W2 Venture Partners, LLC(2)
|10.23 |  | Amended and Restated Note Purchase Agreement dated as of March 31, 1999 and amended as of May 11, 1999, by and between the Company, Spectrum Equity Investors II, L.P. and FBR Technology Venture Partners L.P.(2)       
|10.24 |  | Amended and Restated Convertible Note dated as of March 31, 1999, by and between the Company and Spectrum Equity Investors II, L.P.(2)                                                                                   
|10.25 |  | Amended and Restated Convertible Note dated as of March 31, 1999, by and between the Company and FBR Technology Venture Partners L.P.(2)                                                                                 
|10.26 |  | Nonqualified Stock Option Grant Agreement dated April 1, 1999, by and between the Company and Dennis R. Patrick(2)                                                                                                       
|10.27 |  | Deed of Lease dated April 8, 1999, by and between the Company and TransDulles Center, Inc.(2)                                                                                                                            
|10.28 |  | Letter Agreement dated May 6, 1999, by and between the Company and SBC Communications Inc.(2)                                                                                                                            
|10.29 |  | Letter Agreement dated May 7, 1999, by and between the Company and Teléfonos de México, S.A. de C.V.(2)                                                                                                                  
|10.30 |  | Letter Agreement dated May 10, 1999, by and between the Company and DSL Solutions, Inc. d/b/a DSL Networks(2)                                                                                                            
|10.31 |  | Employment Agreement dated as of September 13, 1999 by and between the Company and Worth D. MacMurray(3)                                                                                                                 
|10.32 |  | Nonqualified Stock Option Grant Agreement dated August 9, 1999 by and between the Company and Worth D. MacMurray(3)                                                                                                      
|10.33 |  | Lease Agreement by and between Dulles Tech, Inc. and the Company dated October 27, 1999(4)                                                                                                                               
|10.34 |  | Stock Purchase Agreement dated February 4, 2000 by and between the Company and SBC Communications Inc.(4)                                                                                                                
|10.35 |  | Stock Purchase Agreement dated February 4, 2000 by and between the Company and Teléfonos de México, S.A. de C.V.(4)                                                                                                      
|10.36 |  | Summary of Operating Agreement dated February 4, 2000 by and between the Company and each of SBC Telecom, Inc. and Teléfonos de México, S.A. de C.V.(4)                                                                  
|      |  |                                                                                                                                                                                                                          

78

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|10.37 |  | 2000 Employee Stock Purchase Plan(4)                                                                                                                                                                                                         
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.38 |  | Settlement Agreement and Mutual General Release dated December 22, 2000 by and between the Company and SBC Communications Inc.(5)                                                                                                            
|10.39 |  | Settlement Agreement and Mutual General Release dated December 22, 2000 by and between the Company and Teléfonos de México, S.A. de C.V.(5)                                                                                                  
|10.40 |  | First Amendment to Stock Purchase Agreement dated December 22, 2000 by and between the Company and SBC Communications Inc.(5)                                                                                                                
|10.41 |  | Notice of Conversion letter dated December 21, 2000 to the Company from SBC Communications Inc. exercising its right to convert its Series B preferred stock to common stock of the Company(5)                                               
|10.42 |  | Equipment Purchase Agreement dated December 22, 2000 by and between the Company and SBC Telecom, Inc.(5)                                                                                                                                     
|10.43 |  | Procurement Spend Agreement dated December 22, 2000 by and between the Company and SBC Communications Inc.(5)                                                                                                                                
|10.44 |  | Master Collocation Agreement dated December 22, 2000 by and between the Company and SBC Communications Inc.(5)                                                                                                                               
|10.45 |  | Senior Note dated December 22, 2000 from the Company to SBC Communications Inc.(5)                                                                                                                                                           
|10.46 |  | Lease Termination and Assumption Agreement dated December 22, 2000 by and between the Company and SBC Asset Management Inc.(5)                                                                                                               
|10.47 |  | Assignment and Assumption Agreement dated December 22, 2000 by and between the Company and SBC Telecom Inc. concerning certain GTE Corporation, d/b/a Verizon Communications, central offices.(5)                                            
|10.48 |  | Assignment and Assumption Agreement dated December 22, 2000 by and between the Company and SBC Telecom Inc. concerning certain BellSouth Telecommunications, Inc. central offices.(5)                                                        
|10.49 |  | Assignment and Assumption Agreement dated December 22, 2000 by and between the Company and SBC Telecom Inc. concerning certain Qwest Communications central offices.(5)                                                                      
|10.50 |  | First Amendment dated February 28, 2001, to Master Collocation Agreement dated December 22, 2000 by and between the Company and SBC Communications Inc.(5)                                                                                   
|10.51 |  | First Amendment dated February 28, 2001, to Assignment and Assumption Agreement dated December 22, 2000 by and between the Company and SBC Telecom Inc. concerning certain GTE Corporation, d/b/a Verizon Communications, central
offices.(5)
|10.52 |  | First Amendment dated February 28, 2001, to Assignment and Assumption Agreement dated December 22, 2000 by and between the Company and SBC Telecom Inc. concerning certain BellSouth Telecommunications, Inc. central offices.(5)            
|10.53 |  | First Amendment dated February 28, 2001, to Assignment and Assumption Agreement dated December 22, 2000 by and between the Company and SBC Telecom Inc. concerning certain Qwest Communications central offices.(5)                          
|      |  |                                                                                                                                                                                                                                              

79

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|10.54 |  | Asset Purchase Agreement, dated as of October 25, 2001, by and among the Company, Ardent Communications, Inc. and Ardent, Inc.                                                       
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.55 |  | Assumption, Assignment and Restatement Agreement, dated as of November 16, 2001, by and among the Company, Covad Communications Company, Ardent Communications, Inc. and Ardent, Inc.
|10.56 |  | Second Amendment of Lease dated February 14, 2002, between Dulles Tech, Inc. and the Company.                                                                                        
|10.57 |  | Asset Purchase Agreement, dated as of August 31, 2001, by and between the Company and CapuNet, LLC.                                                                                  
|10.58 |  | Settlement, Amendment and Migration Agreement, dated as of August 31, 2001, by and among the Company, Covad Communications Company and CapuNet, LLC.                                 
|21.1  |  | Subsidiaries of the Registrant                                                                                                                                                       
|23.1  |  | Consent of PricewaterhouseCoopers, LLP                                                                                                                                               



|(1) |  | Confidential portions omitted and supplied separately to the Securities and Exchange Commission.           
|--- |  | -----------------------------------------------------------------------------------------------------------
|(2) |  | Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 333-74679).             
|(3) |  | Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 333-93455).             
|(4) |  | Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
|(5) |  | Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2000.

(b) Reports on Form 8-K



(c) Exhibits



(d) Financial Statement Schedules



80

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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, in the City of Herndon, Commonwealth of Virginia.

|                      |  | NETWORK ACCESS SOLUTIONS CORPORATION
|--------------------- |  | ------------------------------------
|Dated: April 16, 2002 |  | By:                                 

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.

|Signature                                 |  | Title                                                                                |  | Date          
|----------------------------------------- |  | ------------------------------------------------------------------------------------ |  | --------------
|                                          |  |                                                                                      |  |               
|/s/JONATHAN P. AUSTJonathan P. Aust       |  | Chairman and Chief Executive Officer (Principal Executive Officer) and a Director    |  | April 16, 2002
|/s/STEPHEN C. AUSTStephen C. Aust         |  | Chief Operating Officer and a Director                                               |  | April 16, 2002
|/s/WILLIAM R. SMEDBERGWilliam R. Smedberg |  | Executive Vice President (Principal Financial and Accounting Officer) and a Director |  | April 16, 2002
|/s/BRION B. APPLEGATEBrion B. Applegate   |  | Director                                                                             |  | April 16, 2002
|/s/NED S. SCHERERNed S. Scherer           |  | Director                                                                             |  | April 16, 2002
|/s/LOU MERCATANTILou Mercatanti           |  | Director                                                                             |  | April 16, 2002

81

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EXHIBIT INDEX

|Exhibit No. |  | Description                                                                                                                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Amended and Restated Certificate of Incorporation of the Company(2)                                                                                                                                                           
|3.2         |  | Amended and Restated By-Laws of the Company(2)                                                                                                                                                                                
|3.3         |  | Certificate of the Designations, Voting Powers, Preferences and Relative, Participating, Optional or Other Special Rights of Preferred Stock and Qualifications, Limitations or Restrictions Thereof dated February 4, 2000(4)
|4.1         |  | Specimen stock certificate for shares of Common Stock of the Company(2)                                                                                                                                                       
|4.2         |  | Specimen stock certificate for shares of Series B Preferred Stock of the Company(4)                                                                                                                                           
|10.1        |  | Master Equipment Lease Agreement dated November 17, 1998, by and between the Company and Paradyne Credit Corporation(1,2)                                                                                                     
|10.2        |  | Purchase and Sale Agreement dated as of October 16, 1998, by and between the Company and Ascend Communications, Inc., as amended(1,2)                                                                                         
|10.3        |  | Master Lease Agreement dated October 9, 1998, by and between the Company and Ascend Credit Corporation(2)                                                                                                                     
|10.4        |  | Promissory Note dated October 16, 1998, by and between the Company and Ascend Communications, Inc., as amended(2)                                                                                                             
|10.5        |  | Commercial Lease dated February 24, 1997, by and between the Company, Sterling/Gunston Limited Partnership and Bernstein Management Corporation(2)                                                                            
|10.5.1      |  | First Lease Amendment dated June 26, 1998, by and between the Company and Sterling/Gunston LLC(2)                                                                                                                             
|10.5.2      |  | Third Lease Amendment dated February 1, 1999, by and between the Company and Sterling/Gunston LLC(2)                                                                                                                          
|10.6        |  | Sublease dated August 31, 1998, by and between the Company and U.S. Interactive, Inc.(2)                                                                                                                                      
|10.7        |  | Letter of Intent dated March 2, 1999 by and between the Company and Trans Dulles Center, Inc.(2)                                                                                                                              
|10.8        |  | Employment Agreement dated as of August 16, 1998, by and between the Company and Jonathan P. Aust(2)                                                                                                                          
|10.9        |  | Employment Agreement dated as of July 13, 1998, by and between the Company and Christopher J. Melnick(2)                                                                                                                      
|10.10       |  | Employment Agreement dated as of July 13, 1998, by and between the Company and Scott G. Yancey, Jr.(2)                                                                                                                        
|10.11       |  | Employment Agreement dated as of August 18, 1998, by and between the Company and James A. Aust(2)                                                                                                                             
|10.12       |  | Employment Agreement dated as of March 1, 1999, by and between the Company and John J. Hackett(2)                                                                                                                             
|10.13       |  | 1998 Stock Incentive Plan, as amended(2)                                                                                                                                                                                      
|10.14       |  | Incentive Stock Option Grant Agreement dated July 23, 1998, by and between the Company and Scott G. Yancey, Jr., as amended(2)                                                                                                
|            |  |                                                                                                                                                                                                                               

82

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|10.15 |  | Incentive Stock Option Grant Agreement dated July 23, 1998, by and between the Company and Christopher J. Melnick, as amended(2)                                                                                         
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.16 |  | Incentive Stock Option Grant Agreement dated November 1, 1998, by and between the Company and James A. Aust(2)                                                                                                           
|10.17 |  | Incentive Stock Option Grant Agreement dated March 30, 1999, by and between the Company and John J. Hackett(2)                                                                                                           
|10.18 |  | Deferred Compensation Agreement dated June 1, 1997, by and between the Company and Jonathan P. Aust(2)                                                                                                                   
|10.19 |  | Deferred Compensation Agreement dated June 1, 1997, by and between the Company and James A. Aust(2)                                                                                                                      
|10.20 |  | Repurchase Agreement dated August 6, 1998, by and between the Company and Longma M. Aust, Jonathan P. Aust, James A. Aust and Stephen L. Aust(2)                                                                         
|10.21 |  | Investor Rights Agreement dated August 6, 1998, by and between the Company, Spectrum Equity Investors II, L.P., SEA 1998 II, L.P., FBR Technology Venture Partners L.P. and W2 Venture Partners, LLC, as amended(2)      
|10.22 |  | Series A Preferred Stock Purchase Agreement dated August 6, 1998, by and between the Company, Spectrum Equity Investors II, L.P., SEA 1998 II, L.P., FBR Technology Venture Partners L.P. and W2 Venture Partners, LLC(2)
|10.23 |  | Amended and Restated Note Purchase Agreement dated as of March 31, 1999 and amended as of May 11, 1999, by and between the Company, Spectrum Equity Investors II, L.P. and FBR Technology Venture Partners L.P.(2)       
|10.24 |  | Amended and Restated Convertible Note dated as of March 31, 1999, by and between the Company and Spectrum Equity Investors II, L.P.(2)                                                                                   
|10.25 |  | Amended and Restated Convertible Note dated as of March 31, 1999, by and between the Company and FBR Technology Venture Partners L.P.(2)                                                                                 
|10.26 |  | Nonqualified Stock Option Grant Agreement dated April 1, 1999, by and between the Company and Dennis R. Patrick(2)                                                                                                       
|10.27 |  | Deed of Lease dated April 8, 1999, by and between the Company and TransDulles Center, Inc.(2)                                                                                                                            
|10.28 |  | Letter Agreement dated May 6, 1999, by and between the Company and SBC Communications Inc.(2)                                                                                                                            
|10.29 |  | Letter Agreement dated May 7, 1999, by and between the Company and Teléfonos de México, S.A. de C.V.(2)                                                                                                                  
|10.30 |  | Letter Agreement dated May 10, 1999, by and between the Company and DSL Solutions, Inc. d/b/a DSL Networks(2)                                                                                                            
|10.31 |  | Employment Agreement dated as of September 13, 1999 by and between the Company and Worth D. MacMurray(3)                                                                                                                 
|10.32 |  | Nonqualified Stock Option Grant Agreement dated August 9, 1999 by and between the Company and Worth D. MacMurray(3)                                                                                                      
|10.33 |  | Lease Agreement by and between Dulles Tech, Inc. and the Company dated October 27, 1999(4)                                                                                                                               
|      |  |                                                                                                                                                                                                                          

83

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|10.34 |  | Stock Purchase Agreement dated February 4, 2000 by and between the Company and SBC Communications Inc.(4)                                                                                                                                    
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.35 |  | Stock Purchase Agreement dated February 4, 2000 by and between the Company and Teléfonos de México, S.A. de C.V.(4)                                                                                                                          
|10.36 |  | Summary of Operating Agreement dated February 4, 2000 by and between the Company and each of SBC Telecom, Inc. and Teléfonos de México, S.A. de C.V.(4)                                                                                      
|10.37 |  | 2000 Employee Stock Purchase Plan(4)                                                                                                                                                                                                         
|10.38 |  | Settlement Agreement and Mutual General Release dated December 22, 2000 by and between the Company and SBC Communications Inc.(5)                                                                                                            
|10.39 |  | Settlement Agreement and Mutual General Release dated December 22, 2000 by and between the Company and Teléfonos de México, S.A. de C.V.(5)                                                                                                  
|10.40 |  | First Amendment to Stock Purchase Agreement dated December 22, 2000 by and between the Company and SBC Communications Inc.(5)                                                                                                                
|10.41 |  | Notice of Conversion letter dated December 21, 2000 to the Company from SBC Communications Inc. exercising its right to convert its Series B preferred stock to common stock of the Company(5)                                               
|10.42 |  | Equipment Purchase Agreement dated December 22, 2000 by and between the Company and SBC Telecom, Inc.(5)                                                                                                                                     
|10.43 |  | Procurement Spend Agreement dated December 22, 2000 by and between the Company and SBC Communications Inc.(5)                                                                                                                                
|10.44 |  | Master Collocation Agreement dated December 22, 2000 by and between the Company and SBC Communications Inc.(5)                                                                                                                               
|10.45 |  | Senior Note dated December 22, 2000 from the Company to SBC Communications Inc.(5)                                                                                                                                                           
|10.46 |  | Lease Termination and Assumption Agreement dated December 22, 2000 by and between the Company and SBC Asset Management Inc.(5)                                                                                                               
|10.47 |  | Assignment and Assumption Agreement dated December 22, 2000 by and between the Company and SBC Telecom Inc. concerning certain GTE Corporation, d/b/a Verizon Communications, central offices.(5)                                            
|10.48 |  | Assignment and Assumption Agreement dated December 22, 2000 by and between the Company and SBC Telecom Inc. concerning certain BellSouth Telecommunications, Inc. central offices.(5)                                                        
|10.49 |  | Assignment and Assumption Agreement dated December 22, 2000 by and between the Company and SBC Telecom Inc. concerning certain Qwest Communications central offices.(5)                                                                      
|10.50 |  | First Amendment dated February 28, 2001, to Master Collocation Agreement dated December 22, 2000 by and between the Company and SBC Communications Inc.(5)                                                                                   
|10.51 |  | First Amendment dated February 28, 2001, to Assignment and Assumption Agreement dated December 22, 2000 by and between the Company and SBC Telecom Inc. concerning certain GTE Corporation, d/b/a Verizon Communications, central offices.(5)
|      |  |                                                                                                                                                                                                                                              

84

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|10.52 |  | First Amendment dated February 28, 2001, to Assignment and Assumption Agreement dated December 22, 2000 by and between the Company and SBC Telecom Inc. concerning certain BellSouth Telecommunications, Inc. central offices.(5)
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.53 |  | First Amendment dated February 28, 2001, to Assignment and Assumption Agreement dated December 22, 2000 by and between the Company and SBC Telecom Inc. concerning certain Qwest Communications central offices.(5)              
|10.54 |  | Asset Purchase Agreement, dated as of October 25, 2001, by and among the Company, Ardent Communications, Inc. and Ardent, Inc.                                                                                                   
|10.55 |  | Assumption, Assignment and Restatement Agreement, dated as of November 16, 2001, by and among the Company, Covad Communications Company, Ardent Communications, Inc. and Ardent, Inc.                                            
|10.56 |  | Second Amendment of Lease dated February 14, 2002, between Dulles Tech, Inc. and the Company.                                                                                                                                    
|10.57 |  | Asset Purchase Agreement, dated as of August 31, 2001, by and between the Company and CapuNet, LLC.                                                                                                                              
|10.58 |  | Settlement, Amendment and Migration Agreement, dated as of August 31, 2001, by and among the Company, Covad Communications Company and CapuNet, LLC.                                                                             
|21.1  |  | Subsidiaries of the Registrant                                                                                                                                                                                                   
|23.1  |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                            

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85

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