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                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549

                                   FORM 10-K

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

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

For the fiscal year ended December 31, 1999       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               (I.R.S. Employer
    incorporation or organization)             Identification Number)

                 100 Carpenter Drive, Sterling, Virginia 20164
         (Address, including zip code, of principal executive offices)

      Registrant's telephone number, including area code: (703) 742-7700

       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 class)

  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

                                YES [X]  NO [_]

  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 March 15,
2000, as reported on The Nasdaq Stock Market, was $405,964,845.

  The number of shares outstanding of the registrant's Common Stock on March
15, 2000, was 46,760,750.


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                                     PART I

Item 1. Business.

  We are a major provider of broadband network solutions to business customers.
We provide our data communications services using digital subscriber line, or
DSL, technology and generally market those services directly through our own
sales force. DSL technology allows our customers to access their corporate
networks and the Internet through high-speed, "always on" connections over
traditional copper telephone lines at speeds up to 7 megabits per second,
substantially higher than common dial-up modems. We have branded our DSL
service CopperNet, which we commercially launched in the northeast and mid-
Atlantic regions of the United States in January 1999. We expect to
commercially launch CopperNet in the southeastern and western regions of the
United States in 2000.

  In seeking to solve the data communications needs of our business customers,
we offer them network services, telecommunications products and equipment made
by others and consulting services. Although nearly all of our revenue has
historically been derived from our product sales and consulting services, we
expect to continue to dedicate most of our financial and management resources
to further developing our network services business. Through this business,
which includes our CopperNet service offering, we provide MANs and WANs to our
customers. We also manage and monitor our customers' networks. Through our
product sales business, we sell telecommunications equipment that our customers
use to build, maintain and secure their networks. Through our consulting
services business, we design our customers' networks, install the related
equipment and provide services to help them secure their networks.

  We currently offer our DSL-based networking solutions 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. On February 8, 2000, in connection with the announcement of a
strategic summary operating agreement with SBC Telecom, Inc. and Telefonos de
Mexico, 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, have 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. We intend
to deploy our network in each of these markets in the second half of 2000.

  Since we began offering our DSL-based service we have made substantial
progress in implementing our broadband network service platform. In April 1997,
we entered into our first interconnection agreement with Bell Atlantic, which
allowed us to use their copper telephone lines and to collocate our equipment
in telephone company offices known as "central offices." Central offices serve
as the central connection point for all copper telephone lines in a local area
and form the basis for our network and a telephone company's network.

  As of December 31, 1999, we had installed our equipment in 362 central
offices within our northeast and mid-Atlantic markets, and we expect to have
installed our equipment in approximately 500 central offices by mid-2000, which
will essentially complete our current plans for the roll-out of our network in
these markets. We estimate that the central offices where we currently have
installed our equipment serve approximately 85% of the business users in these
areas. Upon the completion of our network deployment, we believe that the
central offices where we have installed our equipment will serve approximately
95% of the business users in these areas. As of December 31, 1999, we had
installed 2,910 lines in our northeast and mid-Atlantic regions.

  We expect to have installed our equipment in approximately 400 central
offices in our new southeastern and western regions by the end of 2000 and in
approximately 500 central offices by mid-2001. We have obtained competitive
carrier certification in eight of the 17 southeastern and western states in
which we expect to eventually offer services, and have applied for competitive
carrier certification in the remaining nine states in which these markets are
located. To date, we have signed interconnection agreements with BellSouth, U S
WEST

                                       2
<PAGE>

and GTE. Together, these three carriers serve as the traditional telephone
companies in substantially all of our 20 target markets in the southeastern and
western regions.

  We have designed our network to support our customers' changing data
networking needs. Our network supports newer, evolving technologies designed to
transmit both data and 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
asynchronous transfer mode, or ATM, and frame relay. This same 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 network, or backbone. This network design enables us to
provide our customers seamless connections to remote offices or employees in
other locations, including other cities. Our network provides dedicated
connections to our customers, enabling them to operate as if they were using
their own private network. These virtual private networks, or VPNs, have
capacity, speed, reliability and level of service designed to meet our
customers' needs.

Industry Overview

  We believe that a substantial business opportunity exists because of the
concurrence of several factors.

  Growing Demand for High-Speed Data Communications and Networking
Solutions. Many businesses and other organizations are finding it extremely
expensive and time-consuming to manage the complex elements of their networks.
Businesses are implementing internal networks using Internet technology, or
intranets, and remote local area networks, or LANs, to enable employees to work
from remote locations and from home, and to create private networks that
connect corporate networks in multiple locations. Gartner Group estimates that
the U.S. market for packet-based, VPN and Internet data services will grow from
$3.4 billion in 1997 to $14.5 billion in 2003, a compounded annual growth rate
of 34%. Business demand for Internet access, e-mail, video and audio services,
web and application hosting and e-commerce is also increasing.

  This demand in turn drives the need for high-speed, high-capacity
communications to support these applications. As businesses grow to take
advantage of the extended power presented by their networks and the Internet,
they will need extensive network management and security solutions designed to
protect their internal data. International Data Corporation, or IDC, estimates
that the U.S. market for network operations outsourcing services will more than
double from $4.0 billion in 1997 to $9.1 billion in 2002, a compounded annual
growth rate of 18%.

  High-speed data communications have become important to businesses in part
due to the dramatic increase in Internet usage. According to IDC, the number of
Internet users worldwide reached approximately 69 million in 1997 and is
forecasted to grow to approximately 320 million by 2002. IDC also estimates
that the value of goods and services sold worldwide through the Internet will
increase from $12 billion in 1997 to over $400 billion in 2002. To remain
competitive, businesses increasingly need high-speed connections to maintain
complex Web sites, access critical business information and communicate more
efficiently with employees, customers and business partners.

  Data communications is the fastest growing segment of the telecommunications
industry. Gartner Group forecasts data traffic to grow over five times faster
than voice traffic through 2002. Furthermore, Gartner Group projects an
increase in the number of DSL lines in use from 3,000 in 1997, providing over
$1.8 million in revenue, to over 7.1 million lines providing over $18 billion
in revenue, in 2003, representing a 373% compounded annual growth rate in the
number of lines and a 531% compounded annual growth rate in revenue.

                                       3
<PAGE>

  Increasing Network Congestion. The growing use of bandwidth-intensive
applications is creating a number of challenges for the existing copper lines
of the public telephone network, and for public data networks and private
networks. These challenges affect the structure of the existing network and
limit the ability of businesses to take full advantage of the benefits of new
information technologies. Networks are becoming increasingly congested due to
the rapid growth in data traffic and the imbalance in capacity between LANs and
WANs.

  High-speed local access technologies such as DSL will be deployed to help
solve the local access, or "last mile," bottleneck. The "last mile" is that
part of the network that runs from an end-user's location to the first central
office or nearest alternative service entry point into our network. Since the
break-up of AT&T, substantially all data services have been configured with a
local carrier, typically a regional Bell operating company like Bell Atlantic,
providing the last mile local access, and a long distance carrier like AT&T,
MCI WorldCom or Sprint providing the long distance portion. Although
competition in the long distance market has evolved, stimulating technological
development and causing price reductions, the local access markets have not
similarly developed. As a result, the traditional local access market remains
technologically behind the long distance market, with last mile access to major
public networks like the Internet and data networks remaining either very slow
or very expensive. In addition, expertise and networking solutions still will
be needed to remedy bottlenecks, other than the last-mile bottlenecks that
subsist throughout existing networks.

  Commercial Availability of Low-Cost DSL Technology. The full potential of
Internet and remote LAN applications cannot be realized without removing the
performance bottlenecks of the local telephone networks. DSL technology is
designed to remove this performance bottleneck by increasing the data carrying
capacity of copper telephone lines from the 56 kilobits per second speeds
available with common dial-up modems and 128 kilobits per second speeds
available on integrated services digital network, or ISDN, lines to DSL speeds
of up to 7 megabits per second. Because DSL technology reuses existing copper
telephone lines, DSL requires a lower initial fixed investment than that needed
for existing alternative technologies, such as cable modems, fiber, wireless
and satellite communications systems. As a result, after the build-out of a
central office, subsequent investments in DSL technology for customers within
the area served by that central office are directly related to the number of
paying customers.

  Needs of Small- and Medium-Sized Businesses. A significant number of small-
and medium-sized businesses have no practical alternative to low performance
dial-up or ISDN lines and lack the financial resources to afford traditional
high-cost alternatives, such as T-1 or T-3 lines. As a result, their employees
suffer productivity limitations associated with slow transmission speeds. In
addition, there is an increasing need by these businesses for integrated,
value-added applications and services, such as web and application hosting or
computer system back-up, that require an increasing amount of bandwidth
capacity.

  Needs of Large Businesses to Improve Remote Worker Productivity. Many large
companies are supporting increasing numbers of remote offices and workers as a
means of dealing with transportation infrastructure constraints, skilled worker
unavailability and other workplace issues. These companies face the challenge
of finding a cost-effective way to make their remote workers as productive as
those who have access to all of the high performance communications and
networking resources available to workers located at corporate headquarters. A
high-speed network solution that encompasses access to the corporate LAN, the
corporate telephone system, the Internet, the corporate video conferencing
system, customers, suppliers, and partners permits a substantial increase in
remote office and worker productivity.

  Significant and Growing Demand for Network-Enabled Broadband Applications and
Services. As applications become more advanced and necessary to conduct day-to-
day business, we expect that the demand for broadband capacity will rise
accordingly. Many companies lack the resources to develop, implement, manage
and continually enhance their business' hosting and information technology
applications needs. As a result, not only should the demand for bandwidth
capacity rise, but there should be strong demand for outsourcing many of these
applications so that companies are able to focus on their core competencies.

                                       4
<PAGE>

  Impact of the Telecommunications Act of 1996. The Telecommunications Act of
1996 (including its related regulations), which we refer to as the 1996 Telecom
Act, allows competitive telecommunications companies like us to take advantage
of traditional telephone companies' existing copper telephone line networks
rather than constructing a competing infrastructure at significant cost. The
1996 Telecom Act requires traditional telephone companies:

  .  to allow competitive telecommunications companies to lease copper lines
     on a line by line basis;

  .  to permit competitive telecommunications companies to collocate their
     equipment, including DSL equipment, in traditional telephone companies'
     central offices, which enables competitive telecommunications companies
     to access end-users through existing telephone line connections;

  .  to provide competitive telecommunications companies with the operations
     support services necessary for competitive telecommunications companies
     to compete; and

  .  to permit competitive telecommunications companies to share access to
     and provide service over traditional telephone companies' existing
     copper telephone lines.

  The 1996 Telecom Act creates an incentive for some traditional telephone
companies, including Bell Atlantic, to cooperate with competitive
telecommunications companies because the incumbent carriers cannot provide
long-distance service in the regions where they provide local exchange service
until the FCC determines that the traditional telephone company has satisfied
specific statutory criteria for opening its local markets to competition.

Our Solution

  We provide a full range of broadband network solutions to allow businesses to
outsource their Internet access, data transport, and other telecommunications
or data communications needs effectively. 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 technology to convert standard copper
     telephone lines into high-speed data connections. Our network is capable
     of delivering data at speeds ranging incrementally from 128 kilobits per
     second to 2 megabits per second symmetrically, where data travels at the
     same speed to and from the customer, and up to 7 megabits per second
     asymmetrically, where data travels faster to the customer than from the
     customer. The highest CopperNet speeds allow our customers to transfer
     data at rates faster than standard high-speed data connections, like T-1
     lines and frame relay circuits. We provide packet-based connections like
     other DSL providers, but because many of today's existing networks use
     channelized technology, we also provide channelized connections, which
     we believe no other major DSL provider currently offers. 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 can also accommodate other technologies
     based on IP, which is the set of standards that enables Internet
     communications.

  .  Adaptable Network Design. The design of 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, video conferencing, multimedia, e-mail, video
     and audio transmission, web and

                                       5
<PAGE>

     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 an entire city-wide, or metropolitan,
     area. 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 region in our
     northeast and mid-Atlantic regions. This WAN provides high-capacity,
     secure and reliable connections between geographically dispersed
     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 to our customers with the capacity, speed,
     reliability and level of service that they require. With our newly
     announced network expansion and through the definitive operating
     agreements we expect to sign with SBC and Telmex, we expect to be able
     to offer a significantly expanded WAN solution, over either our own or
     our partners' networks, to our customers.

  .  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.
     For example, we currently provide remote online control, monitoring and
     management of our customers' networks. In addition, we develop and
     implement sophisticated network security solutions to protect our
     customers' networks and vital data, including VPNs, encryption and
     access authentication, risk assessment and audits, design consulting,
     security testing through attempted breaches of security and analysis of
     and response to breaches of security. In the future, we intend to offer
     additional services that may include e-commerce, voice-over technology
     (including IP, frame relay and ATM), web and application hosting, video
     conferencing and server back-up services.

  .  SBC and Telmex Products and Services. Upon completion of a definitive
     sales agreement with SBC and Telmex, we expect to be able to offer our
     customers various SBC and Telmex data and voice telecommunications
     services, which we expect to bundle with our other product offerings,
     providing integrated communications solutions to our customers.

Our Strategy

  Our goal is to be the premier provider of broadband network solutions in our
traditional and future markets. To achieve our goal, and to take advantage of
our market opportunity, we plan to implement a strategy consisting of the
following principal elements:

  .  Provide in-depth coverage in our traditional markets. Because DSL can
     only be provided to each individual end-user from the central office or
     alternative service entry point closest to that end-user, we must
     collocate our equipment in many central offices in order to provide a
     wide area of coverage of our markets. Thus, we have pursued a strategy
     of providing services in a substantial majority of the central offices
     in each of our target markets. Furthermore, our traditional focus on the
     northeast and mid-Atlantic regions has enabled us to deploy our network
     with speed and depth. We believe that

                                       6
<PAGE>

     our coverage within our traditional target markets is much deeper than
     that of other providers of DSL-based broadband access, enabling us to
     better serve our customers by providing them with access for
     substantially all of their end-users.

  .  Expand our network coverage area. We have announced a significant
     expansion of our network coverage area, which we will begin building out
     in mid-2000. We expect to be able to initially deploy our network in all
     20 southeastern and western markets in the second half of 2000. We
     believe that the skills, processes and certain other resources that we
     used to build out, provide service and obtain customers in our
     traditional nine markets are directly transferable to developing these
     additional 20 markets. We believe that by expanding our network coverage
     area, and through our planned relationships with SBC and Telmex, we will
     be able to offer our customers a seamless, integrated broadband
     communications solution throughout a significant portion of the United
     States.

  .  Focus on small- and medium-sized business customers. We believe that
     many small- and medium-sized businesses currently do not have a cost-
     effective and integrated solution to their Internet access and data
     transport needs. Many small- and medium-sized businesses want to provide
     high-speed Internet access to their employees and connect multiple
     branch offices in the same city or multiple cities through MAN or WAN
     connections, but traditional data communications services are cost-
     prohibitive for these businesses. Because our CopperNet solution is more
     cost-effective than current solutions offered by traditional telephone
     companies, such as T-1 or ISDN connections, we intend to focus on this
     natural market for our services. In addition, we believe that our
     marketing approach enables us to provide these customers with a more
     effective and integrated solution to their data communications needs.

  .  Focus on selected large enterprise customers. We believe that many large
     enterprise customers are unable to efficiently provide cost-effective
     high-speed access to their remote workers. Many large businesses have
     remote offices and workers that are not able to take advantage of the
     full array of communications and networking resources available to
     workers at the main office. Our extensive network coverage within our
     traditional markets allows us to provide service to most remote workers
     or office locations within those markets, and we expect to be able to
     provide a similar level of service in our southeastern and western
     markets by mid-2001. In addition, we believe that our planned expansion
     into an additional 20 markets and our planned relationships with SBC and
     Telmex will allow us to more effectively service large enterprise
     customers with employees in many geographic locations.

  .  Enhance and expand our network to meet the broadest array of business
     requirements. Our network design and technology is designed to provide
     our customers with adaptable networking solutions that take advantage of
     many technologies. Our network supports a broad array of business
     requirements, such as corporate networks, VPNs, office-to-office
     connectivity, telecommuting solutions, collaborative computing of users
     in different areas, Internet/intranet access, video conferencing and
     multimedia, e-mail, video and audio transmission, web and application
     hosting and e-commerce. Our network provides solutions that can be
     adapted to meet the needs of our customers and integrate technological
     innovations as they are developed.

  .  Expand network-enabled features and applications. We seek to have our
     network become a platform that facilitates the delivery of productivity-
     enhancing features and applications to businesses and their employees.
     We intend to either directly offer or jointly provide these services. We
     expect that our planned relationships with SBC and Telmex, along with
     Prodigy, an affiliate of both companies, will allow us to provide
     additional services, such as enhanced Internet services and local and
     long distance voice services, to our customers. One of our objectives in
     providing these enhanced features and applications is to strengthen
     customer loyalty and increase revenue per customer.

                                       7
<PAGE>

  .  Provide superior customer care. We emphasize a comprehensive service
     solution for our customers by developing a complete project
     implementation plan for each installation and for the on-going
     maintenance of their service. This is to ensure that each customer
     receives the service for which it has contracted according to our
     service level agreements. We manage all aspects of our customers'
     connections to our network, including the design and installation of the
     end-user's connection, equipment configuration and network monitoring on
     a 24 hour a day, seven day a week basis. By providing our customers
     regular reports on the performance of their services, we are able to
     demonstrate to our customers our performance relative to our commitments
     and how customers may benefit by acquiring additional networking
     services from us.

  .  Deliver our products and services through different types of
     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 Internet
     service providers, or ISPs, long distance and local carriers and other
     networking service companies. Our sales force is supported by sales
     engineers who are trained, certified experts in all our vendor-partners'
     products and technologies, including Lucent Technologies, Inc. (through
     its acquisition of Ascend), Cisco Systems, Inc., and Paradyne
     Corporation. We intend to leverage our existing customer base through
     selling them additional products and services. Some of our sales
     partners include Verio, Inc., Intermedia Communications, Inc. and
     Comcast Telecommunications, Inc. In addition, we expect that our planned
     relationships with SBC and Telmex will offer us additional sales
     channels through which we expect to be able to distribute our products
     and services in both our traditional and future markets.

  .  Capitalize on economics of DSL. DSL technology requires a lower initial
     fixed investment than that needed for existing alternative technologies
     because DSL uses existing copper telephone lines. Thus, we are able to
     offer businesses services comparable to traditional WAN technologies,
     like high-speed T-1 lines and frame relay circuits, at approximately 30%
     to 70% of the cost of such services. After we build out a central
     office, our subsequent investments in DSL technology for the customers
     within the area served by that central office are directly related to
     the number of paying customers, making a significant portion of our
     capital expenditures success-based.

  .  Accelerate growth through strategic acquisitions or relationships. As
     part of our growth strategy, we intend to evaluate and consider
     opportunities to pursue strategic acquisitions, investments and
     relationships on an ongoing basis. We expect to focus our efforts on
     companies with complementary service capabilities, talented personnel
     with skills compatible with our business technologies that will permit
     us to enhance or expand our business and/or additional applications that
     will enable us to expand our network services. In addition, we may
     selectively acquire or partner with companies that permit us to increase
     our customer base.

  .  Leverage our relationships with SBC and Telmex. We have executed a
     summary operating agreement, and we expect to enter into several
     definitive agreements, with SBC and Telmex that will govern our joint
     sales and marketing, network operations, systems integration and product
     development efforts. By closely aligning our network architecture and
     integrating our information systems with those of SBC and Telmex, we
     expect to create a national broadband network. This offers us a time-to-
     market advantage, as we anticipate that the combined networks will be
     deployed in more locations, with greater coverage, more quickly, and
     less expensively than if we were to build a nationwide network
     ourselves. We intend, working with SBC and Telmex, and possibly with
     other third parties, to provide DSL, certain other broadband services,
     and traditional voice services on a nationwide basis to business and
     residential customers. We intend to continue to market directly to our
     traditional customer base, but will also jointly market products and
     services with SBC and Telmex to both our traditional and non-traditional
     customers, such as Fortune 50 and residential customers. In addition, we
     believe that SBC could become a significant distribution channel for us
     as it fulfills its out-of-region strategy of offering data and
     communications services in additional markets.

                                       8
<PAGE>

Our Service and Product Offerings

Network Services

  CopperNet. In January 1999, we began commercially offering our CopperNet
services. CopperNet uses DSL technology to provide high-speed continuously
connected packet-based and channelized communications services. CopperNet
connects business users to our MANs and WAN using ATM, frame relay and DSL
technologies over traditional copper telephone lines. CopperNet customers are
able to connect to our regional networks to obtain high-capacity, secure and
reliable connections among geographically distant locations. Because our
customers are served end-to-end on our CopperNet network, we are better able to
deliver a true wide area VPN with the capacity, speed, reliability and level of
service that they require.

  The chart below shows the service, speed, retail price (which includes
equipment installed at the customer's location), range and performance of our
CopperNet services, as of March 1, 2000:

<TABLE>
<CAPTION>
                Speed    Speed                 Retail List
                  to      from    Retail List   Price for
                 End      End      Price for     Monthly
 Service(1)    User(2)  User(2)  Activation(3) Service(3)           Market/Usage
 ----------    -------  -------  ------------- -----------          ------------
<S>            <C>      <C>      <C>           <C>         <C>
Symmetrical:
CopperNet 128  128 Kbps 128 Kbps     $270         $129     Integrated services digital
                                                           network replacement for
                                                           telecommuters.
CopperNet 256  256 Kbps 256 Kbps     $270         $146     Small businesses with standard
                                                           e-mail and web usage.
CopperNet 384  384 Kbps 384 Kbps     $270         $162     Higher bandwidth solution for
                                                           small- to medium-sized
                                                           businesses running moderately
                                                           visited web sites.
CopperNet 512  512 Kbps 512 Kbps     $270         $185     Allows small- and medium-sized
                                                           businesses to meet most network
                                                           video and Internet needs.
CopperNet 768  768 Kbps 768 Kbps     $270         $217     Supports high bandwidth
                                                           intensive applications such as
                                                           e-commerce, video conferencing,
                                                           frame relay and voice over
                                                           frame relay.
CopperNet 1.0  1.0 Mbps 1.0 Mbps     $270         $239     Close to full T-1 for medium-
                                                           to-large sized businesses.
CopperNet 1.5  1.5 Mbps 1.5 Mbps     $270         $294     Standard for large
                                                           organizations that require
                                                           high-capacity connections.
                                                           Applications include the
                                                           ability to integrate voice,
                                                           data and Internet services over
                                                           a single connection.
CopperNet 2.0  2.0 Mbps 2.0 Mbps     $270         $348     Full motion video and
                                                           multimedia applications for
                                                           large businesses.
Asymmetrical:
CopperNet 1.5  1.5 Mbps 384 Kbps     $270         $239     High-speed web access, e-mail
                                                           and file distribution.
CopperNet 4.0  4.0 Mbps 1.0 Mbps     $270         $429     Very high-speed web access, e-
                                                           mail and file distribution.
CopperNet 7.0  7.0 Mbps 2.0 Mbps     $270         $729     Bandwidth and capacity
                                                           sufficient to meet most
                                                           asymmetrical data communication
                                                           requirements.
</TABLE>
--------
(1) In each case, the range from the central office is 18,000 feet. However,
    through our symmetrical CopperNet 128 application, there is no limitation
    on range.
(2) "Kbps" means kilobits per second. "Mbps" means megabits per second.
(3) Represents price per line. Wholesale and volume discount prices are
    available for network service providers.

                                       9
<PAGE>

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

  CopperNet Internet. CopperNet Internet is a suite of Internet services and
connectivity options designed specifically for business applications. Our
customers choose their DSL connectivity speed, ranging from 128 Kbps to 2 Mbps,
and we provide the necessary hardware, register our customers' chosen domain
name and configure and maintain our customers' e-mail service.

  VPN Service. Our VPN service is a fully managed offering for organizations
with a remote or mobile workforce that needs 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.

  VPOP Service. Our virtual point of presence, or VPOP, service provides
network service providers access to our entire CopperNet network. With VPOP, a
network service provider can offer services throughout the entire CopperNet
network without additional investment in network communications infrastructure.
This service offers wholesale customers the opportunity to sell DSL circuits in
cities outside of the local service area in which they physically connect to
the CopperNet network. Wholesale and volume discount prices are available for
network service providers.

  ROC Services. We offer remote online control, or ROC, services to meet our
customers' outsourced network requirements. From our network operations center
in Sterling, Virginia, we continuously monitor the integrity of our customers'
MANs and WANs, evaluate their network utilization, implement problem resolution
systems, provide network health and status monitoring and other customized
management solutions. We proactively monitor the performance of our customers'
network devices and perform trouble resolution to address network problems,
often before our customers' end-users become aware of them.

  SOC Services. We offer secure online control, or SOC, services to meet our
customers' outsourced network security requirements. We provide proactive
network monitoring, intrusion detection and management of these network
security solutions on a 24 hour a day, seven day a week basis. We provide a
variety of security solutions including barriers, or firewalls, between
internal corporate networks and external networks like the Internet, VPN
service, encryption and access authentication solutions for customers looking
for the highest level of security on any network on which data is transported.

  Value-Added Products and Services. We offer an array of network and broadband
enabled applications and features that take advantage of DSL's high-speed
connectivity. These applications extend the capabilities of small- and medium-
sized businesses and provide them access to expanded markets, resources, and
functionality.

  Network Management Services. We provide our customers the opportunity to
outsource network management services that are difficult or costly for them to
manage internally. For example, we provide a single point of contact for vendor
management/coordination, including vendors for equipment on the customers'
premises, long distance carriers and traditional telephone companies, a help
desk for network administrators, monitoring and coordinated maintenance of
network services, analysis of network performance and capacity planning and
network monitoring.

  We provide a wide variety of network management solutions customizable to any
network configuration in order to meet our customers' unique network management
requirements. We believe our strategy of providing these services will allow us
to address a larger market opportunity than that represented by CopperNet
alone.

                                       10
<PAGE>

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 such as:

  .  Risk assessments and audits. We work in conjunction with a customer's
     engineering staff to determine if a network's critical components work
     together, provide for overlapping network protection features and
     adequate firewall security at the perimeter of a network. We also
     determine whether an optimal defensive strategy exists and if it is
     adhered to. We assess the effectiveness of a customer's reporting and
     response mechanisms and determine vulnerabilities and other critical
     issues.

  .  Network security architecture consulting. We provide expertise in
     designing, implementing, modifying and protecting data networks of all
     sizes.

  .  Controlled security breaches. We will conduct organized security
     breaches with software tools and techniques designed to expose
     unauthorized information security breaches. These controlled
     penetrations are tailored to customer requirements. Following a security
     breach, our engineers will interpret the outcome and present results to
     both senior executives and lead engineers. We also take steps to ensure
     that knowledge gained from a controlled security breach is not lost
     during subsequent implementation and maintenance phases.

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 primarily provide equipment manufactured by Lucent, Cisco
and Paradyne. 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

  As of December 31, 1999, we had more than 1,492 customers. AT&T accounted for
50.4% and 30.7%, and AstraZeneca PLC (formerly Zeneca Group PLC), accounted for
8.0% and 9.2%, of our revenue for the years ended December 31, 1998 and 1999,
respectively.

  Network services, which includes our CopperNet service, represented 2.6% and
10.4% of our revenue for the years ended December 31, 1998 and 1999,
respectively.

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, and, subject to entering into definitive
agreements with SBC and Telmex, we expect to sell indirectly through SBC,
Telmex and Prodigy.

  Direct Sales. We market our full complement of products and services,
including our network services, consulting services and product sales, through
a sales force of 133 people at December 31, 1999. Our direct sales force is
supported by sales engineers who also seek to sell our consulting services and
network services. Our sales representatives focus on selling CopperNet
connectivity to small- and medium-sized businesses and our account executives
focus on selling CopperNet connectivity and consulting services and network
services to medium- and large-sized businesses. We target businesses that have
at least one of the following requirements: Internet connectivity, remote LAN
access, traditional voice and data applications or MAN or WAN frame relay.

                                       11
<PAGE>

We also generate lead referrals for our direct sales forces through
telemarketing efforts. We intend to increase the size of our sales and
technical support force to sell and support our services as we expand our
business. By the end of 2000, we expect to have a sales force of approximately
400 people. We also seek to coordinate our direct sales and marketing efforts
with our vendor partners, including Lucent, Cisco and Paradyne. Our direct
sales process generally ranges from 30 to 60 days for small- and medium-sized
businesses, which generally require simple connectivity and networking
solutions. Larger businesses with more complex networking requirements often
require customized solutions. The large business sales process may take up to
six months and may involve:

  .  a significant technical evaluation;

  .  an initial trial rollout of our services; and

  .  a commitment of capital and other resources by the customer.

  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 address these
markets through sales and marketing personnel dedicated to this channel. We
intend to augment our CopperNet sales through partnerships with other service
providers which offer complementary services and can offer CopperNet as part of
a complete business solution. We also leverage our equipment vendors'
partnerships as sources for sales opportunities by offering joint technology
seminars, implementing marketing campaigns and sharing cross-selling
opportunities.

  SBC and Telmex Sales. In connection with our recently announced summary
operating agreement with SBC and Telmex, we expect to enter into definitive
operating agreements with SBC and Telmex covering several areas of our
operations, including sales and marketing. We intend to continue to market
directly to our traditional customer base, but will also jointly market
products and services with SBC and Telmex to both our traditional and non-
traditional customers, such as Fortune 50 and residential customers. In
addition, we believe that SBC could become a significant distribution channel
for us as it fulfills its out-of-region strategy of offering data and
communications services in additional markets.

Preferred Stock Issuance and SBC and Telmex Agreement

  On February 8, 2000, we announced strategic financing agreements with SBC and
Telmex in which those companies agreed to purchase a total of $150 million, $75
million each, of our Series B preferred stock for $100 per share. On March 7,
2000, we issued 1,500,000 shares of our Series B preferred stock to SBC and
Telmex. Our Series B preferred stock is non-voting and pays a 7.0% cumulative
dividend, which can be satisfied with either additional stock or cash. Each
share of Series B preferred stock is convertible at any time into 3.2258 shares
of our common stock, or a total of 4,838,700 common shares.

  In conjunction with the financing agreements, we executed a summary operating
agreement with both SBC and Telmex, and we intend to execute several definitive
agreements with SBC and Telmex covering distinct operating areas in the first
half of 2000. In connection with the financing agreements, we announced that we
would be expanding our network into 20 additional markets in the southeastern
and western regions of the United States. We will use the proceeds from the
Series B preferred stock issuance to fund part of this expansion.

  Pursuant to the financing agreements, we granted to each of SBC and Telmex a
right of first offer to purchase a percentage of any new securities we offer to
sell to any third parties. That percentage is equal to the percentage ownership
by each of SBC and Telmex in our common stock on a fully diluted basis prior to
the sale of the stock subject to the right of first offer.

                                       12
<PAGE>

  In connection with the financing agreements, each of Jonathan P. Aust, our
Chief Executive Officer, and Spectrum Equity Investors II, L.P., or Spectrum,
granted each of SBC and Telmex a right of first offer to purchase any shares
that either of the stockholders proposes to sell to any third party.

  The summary operating agreement is designed to align and integrate certain
aspects of our, SBC's and Telmex's sales and marketing efforts, networks and
operations, systems and new product development and collocation. We expect to
execute definitive operating agreements which will further detail the scope and
nature of the relationships among the parties in these various operational
areas. The summary operating agreement is binding on the parties for one year.
The summary operating agreement provides that the term of each definitive
operating agreement will be five years from the date of execution, except that
any of these agreements may be terminated by SBC or Telmex within specified
periods if we are acquired by a third party or otherwise undergo a change in
control.

Other Key Strategic and Commercial Relationships

  In addition to our relationships with SBC and Telmex, we have entered into,
are continuing to explore, and expect to enter into additional strategic and
commercial relationships. We believe that these relationships are valuable
because they provide additional marketing and distribution, network resources,
technology and geographic expansion opportunities. In some cases, these
relationships involve capital investment, product development or targeted
numbers of new lines or customers.

   Lucent. Since 1995 we have sold data communications products and equipment
made by Ascend (which recently became a wholly owned subsidiary of Lucent).
Ascend has provided us with a capital lease facility and a credit facility for
working capital. In addition, we are continuing to explore opportunities to
participate in product development and the distribution of products and
services for their network of sales partners.

   Cisco. In November 1999, we were awarded Cisco Powered Network, or CPN,
certification. The CPN certification represents our next step towards
introducing an enhanced business-class Internet access service that includes
Cisco routers as the customer premises equipment.

   Paradyne. Since 1995 we have sold data communications products and equipment
made by Paradyne. In addition, we are continuing to explore opportunities to
participate in product development and the distribution of products and
services for their network of sales partners.

   Turnstone. In December 1999, we entered into an agreement with Turnstone to
use their cross-connect hardware systems in our collocated central offices. The
agreement calls for Turnstone to be our exclusive loop management vendor.

   Verio. In August 1999, we were named as Verio's preferred provider of DSL
service in Richmond, Virginia.

   Intermedia. In August 1999, we entered into a reseller agreement to sell
frame relay services out of region. This allows us to expand our frame relay
service via a network-to-network interface, or NNI, which provides nationwide
frame relay coverage.

   Comcast. In May 1999, we entered into a master service agreement with
Comcast to provide their business customers with CopperNet services across our
northeast service territory.

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

                                       13
<PAGE>

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:

  .  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 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.

  .  Network Monitoring. We monitor our network from our network operations
     center on a continuous end-to-end basis, which often enables us to
     correct potential network problems before service to a customer or end-
     user is affected. We also provide direct monitoring access of end-users
     to our network service providers and enterprise customers.

  .  Customer Reporting. We communicate regularly with our customers about
     the status of their service. We provide web-based tools to allow
     individual network service providers and communications managers to
     monitor their end-users directly, to place orders for new end-users, to
     enter work orders on end-user lines and to communicate with us on an
     ongoing basis.

  .  Customer Service and Technical Support. We provide service and technical
     support 24 hours a day, 7 days a week to all our customers. We serve as
     the sole contact for customers to whom we make direct sales. We also
     provide the 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.

  .  Operating Support Systems. We have designed an integrated group of
     customized applications around our current and planned business
     processes. By customizing and integrating products from vendors such as
     Daleen Technologies, Inc. for billing, Eftia OSS Solutions Inc. for
     operating support systems and Hewlett-Packard Company for network
     management, we believe we have designed a system that will facilitate
     rapid service responsiveness and reduce the cost of customer support.
     Upon execution of definitive agreements with SBC and Telmex, we expect
     to upgrade our platform to provide integrated operating support systems.

Network Structure and Technology

   Overview. 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

                                       14
<PAGE>

has positioned us to deliver the high level of data communications services,
including Internet access, VPNs, video conferencing and a broad array of
multimedia services, increasingly demanded by businesses. We have planned for
growth by ensuring that our network is scalable, flexible and secure. We intend
to make seamless connections between our network and systems and those of SBC
and Telmex in order to provide our customers with integrated national
connectivity.

  .  Scalable. Our adaptable, hierarchical network structure allows us to
     provide both channelized and packet-based services reliably and
     incrementally, which enables us to match investment with demand. As new
     CopperNet end-users are added to our network, our Traffic Management
     group monitors network utilization, and installs more equipment and
     network transmission circuits as necessary so that reliable performance
     is maintained for all users as our network grows.

  .  Flexible. From our network operations center, we constantly monitor our
     network, the network service providers' networks and our customers'
     connections, and also perform network diagnostics and equipment
     surveillance, and initialize our end-users' connections. Because our
     network is centrally managed, we can identify and dynamically enhance
     network quality, service and performance and address network problems
     promptly, often without our end-users' becoming aware of the repairs.
     This capability also allows us to control costs associated with on-site
     network configuration and repair.

  .  Secure. With dedicated, direct access to our private network, our end-
     users and businesses generally experience fewer network security risks
     than users of common dial-up modems, ISDN lines or dedicated access to
     the Internet because there is less risk of unauthorized access. Our
     network is designed to ensure secure availability of all internal
     applications and information for all end-users, whether they are within
     the corporate headquarters or telecommuting from remote locations. Our
     network provides a direct connection between discrete locations, which
     reduces the possibility of unauthorized access and allows our customers
     to safely perform their required tasks.

  Components. Our components are integrated into networks across local,
metropolitan and wide areas that combine speed and balanced capacity in a
manner designed to deliver a high performance networking experience for our
customers.

  .  Customer Endpoint. We currently offer channelized and packet-based DSL
     connections in our network. We provide our customers with a DSL modem as
     part of our complete service offering, the cost of which is included in
     the list price of the service. We configure and install these modems
     with the end-user's computer and network equipment along with any
     required on-site wiring needed to connect the modem and the telephone
     line. Under FCC policies, a customer also is free to obtain compatible
     modems from sources other than us.

  .  Copper Telephone Lines. We lease copper telephone lines, known as
     unbundled network elements, which run from our network access points in
     central offices to the customer endpoint under terms specified in
     telecommunications regulations and our interconnection agreements. We
     have worked closely with Bell Atlantic to define specifications that
     provide for the quality of the copper telephone lines we receive,
     thereby ensuring the transmission speed of end-user connections. We
     expect to have the same working relationship with BellSouth and U S
     WEST.

  .  Central Office Collocation Spaces. Through FCC and state
     telecommunications regulatory policies as well as our interconnection
     agreements, we secure collocation space in central offices from which we
     desire to offer CopperNet. These collocation spaces are designed to
     offer the same high reliability and availability standards as the
     telephone companies' other central office spaces. At present, our
     collocation spaces are either physical, SCOPE or virtual. With physical
     collocation, we install and maintain our equipment in central offices
     and have complete access to the space. With SCOPE collocation, we
     install and maintain our equipment in central offices, but our access to
     the space is non-exclusive. With virtual collocation, the telephone
     company installs and maintains the equipment on our behalf, but we have
     no access to the space. Approximately 98% of our central office
     collocations are physical or SCOPE, and we expect over time to eliminate
     virtual collocation.

                                       15
<PAGE>

  .  Metropolitan Area Backbone. Our metropolitan area backbone is a private,
     leased, high-speed, fiber optic network that connects our network access
     points in central offices, node sites, and selected customer locations.
     To date, we have leased fiber optic circuits capable of speeds of up to
     45 megabits per second from Bell Atlantic, Level 3 Communications and
     other providers for metropolitan area backbone services. We continue to
     review alternative providers in an effort to reduce costs. We do not
     have long-term lease agreements for these fiber optic circuits.

  .  Node Sites. A node site is a physical location where we connect
     businesses and network service providers with our central offices within
     a particular MAN. The node site houses our equipment to switch and
     interconnect customer traffic to central offices within a region or
     across our entire network. Our node sites are housed in a secured
     facility in each of the nine metropolitan areas in which our network
     currently operates.

  .  Wide Area Backbone. Our wide area backbone is a private, leased, high-
     speed, fiber optic network that interconnects our node sites in various
     metropolitan areas. To date, we have leased fiber optic circuits capable
     of speeds of up to 155 megabits per second from Level 3 Communications,
     Virginia Electric and Power Company and other providers. We do not have
     long-term lease agreements for these fiber optic circuits. We intend to
     upgrade our wide area backbone to higher capacities as necessary to
     deliver the quality of service that our customers demand. We continue to
     evaluate alternative providers of capacity in order to reduce costs.

  .  Network Operations Center. We manage our network from our network
     operations center located in our corporate headquarters in Sterling,
     Virginia. We provide end-to-end network management to our customers
     using advanced network management tools on a 24 hour a day, seven day a
     week basis. This enhances our ability to address performance or
     connectivity issues before they affect the end-user experience. From our
     network operations center, we can monitor our network, including the
     equipment and circuits in our MANs and central offices, and our
     customers' networks, including individual end-user lines and DSL modems.
     Assuming execution of definitive agreements with SBC and Telmex, we
     expect to be able to monitor our customers' connections to the networks
     of SBC and Telmex in addition to our own network.

Competition

  In each of our businesses, we face competition from many companies with
significantly greater financial resources, well-established brand names and
large, existing installed customer bases. We expect the level of competition to
intensify in the future. Some of the competitive factors we face in each of our
business segments include:

  .  reliability of service;

  .  diversity of product and service offerings;

  .  breadth of network coverage;

  .  price/performance;

  .  network security;

  .  infrastructure scaleability;

  .  ease of access and use;

  .  service bundling;

  .  sales relationships;

                                       16
<PAGE>

  .  customer support;

  .  strategic relationships; and

  .  operating experience.

  We believe that each potential customer presents a unique opportunity for
competition and presents competitive challenges specific to that customer. The
significance of the different competitive factors we face will vary with each
customer depending on the needs of the particular customer and the particular
competitor we face. For example, if we are competing for a customer against
another provider of product sales and consulting services, we expect to compare
favorably as to diversity of product and service offerings and operating
experience, but perhaps less favorably as to brand recognition and financial
resources. If we are competing for a customer against a traditional telephone
company, we expect to compare favorably as to client support, transmission
speed and price/performance, but perhaps less favorably as to operating
experience, brand recognition and access to capital. If we are competing for a
customer against another provider of DSL, we expect to compare favorably as to
diversity of service offerings, sales relationships and operating experience,
but perhaps less favorably as to the geographic breadth of network coverage. We
expect to improve our competitive position relative to other DSL providers by
expanding the geographic breadth of our network through opportunistic growth of
our network and, in part, through strategic alliances like our new
relationships with SBC and Telmex.

  We believe that our most direct competition for product sales and consulting
services will come from Bell Atlantic's network integration services division
and from other providers of network integration services like Tech Data
Corporation. Historically, these companies have been our principal competitors.

  By focusing our business on broadband network solutions, we encounter a
different set of competitors for our network services. We believe that our most
direct competition for broadband network solutions will come from Bell Atlantic
and other traditional telephone companies and carriers operating in our target
markets. However, we also anticipate competition from service providers using
other technologies.

  Bell Atlantic and Other Traditional Telephone Companies. Bell Atlantic and
the other traditional telephone companies present in our target markets are
conducting technical and/or market trials or 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 and a reputation
for high quality in their service areas, possess sufficient capital to deploy
DSL equipment rapidly, have their own copper lines and can bundle digital data
services with their existing analog voice services to achieve economies of
scale in serving 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
Bell Atlantic, BellSouth, U S WEST or the other traditional telephone
companies, and any failure to do so would materially and adversely affect our
business, operating results and financial condition.

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

                                       17
<PAGE>

  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 DSL offerings. These technologies include T-1,
ISDN, satellite, cable modems and analog modems and could be provided by the
following:

  .  Cable Modem Service Providers. Cable modem service providers, like
     MediaOne, Excite@Home, through its @Home service offering, and their
     cable partners, are offering or preparing to offer high-speed Internet
     access over fiber and cable networks to consumers. At Home, through its
     @Work service offering, has positioned itself to do the same for
     businesses. Where deployed, these networks provide local access
     services, in some cases at higher speeds than our CopperNet. They
     typically offer these services at lower prices than our services, in
     part by sharing the capacity available on their cable networks among
     multiple end users.

  .  Traditional Long Distance Carriers. Many of the leading traditional long
     distance carriers, like AT&T, Sprint and MCI WorldCom, are expanding
     their capabilities to support high-speed, end-to-end networking
     services. Increasingly, their services include high-speed local access
     combined with MANs and WANs, and a full range of Internet services and
     applications. We expect them to offer combined data, voice and video
     services over these networks. These carriers have deployed large scale
     networks, have large numbers of existing business and residential
     customers and enjoy strong brand recognition, and, as a result,
     represent significant competition. For instance, they have extensive
     fiber networks in many metropolitan areas that primarily provide high-
     speed data and voice communications to large companies. They could
     deploy DSL services in combination with their current fiber networks.
     They also have interconnection agreements with many of the traditional
     telephone companies and have secured collocation spaces from which they
     could begin to offer competitive DSL services.

  .  New Long Distance Carriers. New long distance carriers, such as Williams
     Communications, Qwest Communications International Inc. and Level 3
     Communications, are building and managing high bandwidth, nationwide
     packet-based technology networks for the WAN. These same providers are
     acquiring or partnering with ISPs to offer services directly to business
     customers. These companies could extend their existing networks to
     include fiber optic networks within metropolitan areas and high-speed
     services using DSL technology, either alone, or in partnership with
     others.

  .  Internet Service Providers. ISPs provide Internet access to business and
     residential customers. These companies generally provide Internet access
     over the traditional telephone company's networks at ISDN speeds or
     below. Some ISPs have begun offering DSL-based access using DSL services
     offered by the traditional telephone company or other DSL-based
     competitive telecommunications companies. Some Internet service
     providers such as Concentric Network Corporation, Earthlink, Inc.,
     PSINet and Verio, Inc. have significant and even nationwide marketing
     presences and combine these with strategic or commercial alliances with
     DSL-based competitive telecommunications companies.

  .  Wireless and Satellite Data Service Providers. Several new companies are
     emerging as wireless and satellite-based data service providers over a
     variety of frequency bands. Companies such as Teligent, Inc., Advanced
     Radio Telecom Corp. and WinStar Communications, Inc., hold point-to-
     point microwave licenses to provide fixed wireless services such as
     voice, data and videoconferencing. We also may face competition from
     satellite-based systems such as Motorola Satellite Systems, Inc., Hughes
     Space Communications, Globalstar Telecommunications Ltd. and others that
     are planning or are in the process of building global satellite networks
     that can be used to provide broadband voice and data services.

Relationship with Bell Atlantic and Other Traditional Telephone Companies

  Our relationship with Bell Atlantic is critical to our current business. We
depend on Bell Atlantic for collocation facilities, copper telephone lines,
support services and some of the fiber optic transport that we use for
CopperNet in our traditional markets. Our interconnection agreements with Bell
Atlantic govern much of

                                       18
<PAGE>

this critical relationship. We have signed interconnection agreements with Bell
Atlantic in each of the states covering our initial target markets. These
agreements cover a number of aspects, including:

  .  the price and terms to lease access to Bell Atlantic's copper lines;

  .  the special conditioning Bell Atlantic provides to enable the
     transmission of DSL signals on these lines;

  .  the price and terms for collocation of our equipment in Bell Atlantic's
     central offices;

  .  the price and terms to access Bell Atlantic's transport facilities;

  .  the terms to access conduits and other rights of way Bell Atlantic has
     constructed for its own network facilities;

  .  the operational support systems and interfaces that we use to place
     orders and trouble reports and monitor Bell Atlantic's response to our
     requests;

  .  the dispute resolution process we and Bell Atlantic use to resolve
     disagreements relating to the terms of the interconnection agreement;
     and

  .  the term of the interconnection agreement, its transferability to
     successors, its liability limits and other general aspects of our
     relationship with Bell Atlantic.

  Our interconnection agreements with Bell Atlantic for Delaware, Maryland, New
Jersey, Pennsylvania, Virginia and Washington, D.C. terminate upon 90 days
written notice by either party. We are presently negotiating new agreements
with Bell Atlantic for these areas. We expect the new agreements to have a two-
year term. Although we expect to arrive at new agreements, there is no
assurance that they will provide us with the same or more favorable terms. Our
interconnection agreements with Bell Atlantic for Massachusetts and New York
expire in January 2001. We plan to initiate negotiations with Bell Atlantic to
renew these agreements within the next several weeks. If an agreement expires,
our service arrangements will continue without interruption under:

  .  terms of a new agreement;

  .  terms imposed by a state commission;

  .  tariff terms generally applicable to competitive carriers and other
     carriers; or

  .  if none of these are available, on a month-to-month basis under the
     terms of the expired agreement.

   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 us and Bell Atlantic. 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.

  As we expand into other regions that are served by traditional telephone
companies other than Bell Atlantic, we will need interconnection agreements
with those incumbent carriers. We have entered into an interconnection
agreement with BellSouth with an initial term that expires December 1, 2000.
This agreement has been approved by the state public utility commissions in
Alabama, Florida, Georgia, Kentucky, Louisiana and South Carolina. We plan to
submit the agreement for approval to state public utility commissions in North
Carolina and Tennessee as well. More recently, we have entered into an
interconnection agreement with U S WEST covering the States of Arizona,
Colorado, Iowa, Minnesota, New Mexico, Oregon, Utah and Washington. Each of the
agreements must be approved by the public utility commission of the state to
which it applies. We also have interconnection agreements with GTE (covering
the States of Alabama, Florida, Kentucky, North Carolina, Oregon, Pennsylvania,
South Carolina, Virginia and Washington) and with Sprint Corporation (covering
New Jersey). Similar to our relationship with Bell Atlantic, we expect that our
relationship with BellSouth and U S WEST and the services they provide to us
will become critical to our business.

                                       19
<PAGE>

  As we expand our existing SBC and Telmex relationships through negotiation
and execution of the definitive operating and related agreements, these
relationships could become critical to our business.

Government Regulation

  The following summary of regulatory developments and legislation describes
material telecommunications regulations and legislation directly affecting our
industry.

  The facilities and services that we obtain from Bell Atlantic and other
traditional telephone companies in order to provide CopperNet are regulated
extensively by the FCC and state telecommunications regulatory agencies. To a
lesser extent, the FCC and state telecommunications regulators exercise direct
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. The FCC and state 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, we
cannot assure you 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
legislation in the telecommunications industry 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 incumbent carriers and preempts, after notice and an opportunity
to comment, laws restricting competition in those markets. Among other things,
the 1996 Telecom Act also greatly expands the interconnection requirements
applicable to traditional telephone companies. It requires the traditional
telephone companies to:

  .  provide collocation, which allows competitive telecommunications
     companies to install and maintain their own network termination
     equipment in telephone company central offices;

  .  unbundle and provide access to components of their service networks to
     other providers of telecommunications services;

  .  establish "wholesale" rates for the services they offer at retail to
     promote resale by competitive telecommunications companies; and

  .  provide nondiscriminatory access to telephone poles, ducts, conduits and
     rights of way.

  Traditional telephone companies also are required by the 1996 Telecom Act to
negotiate an interconnection agreement in good faith with 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 state telecommunications regulatory agency.

  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 Telecom Act. 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.

  In July 1997, the United States Court of Appeals for the Eighth Circuit
overruled some of the rules initially adopted by the FCC to implement the 1996
Telecom Act, including rules:

  .  providing the detailed standard that state telecommunication regulators
     must use in prescribing the price that traditional telephone companies
     charge for collocation and for the copper telephone lines

                                       20
<PAGE>

     and other network elements that competitive telecommunications companies
     must obtain from traditional telephone companies in order to provide
     service; and

  .  giving competitive telecommunications companies the right to "pick-and-
     choose" interconnection provisions by requiring that a traditional
     telephone company enter into an interconnection agreement with the
     competitive telecommunications companies that combines provisions from a
     variety of interconnection agreements between that traditional telephone
     company and other competitive telecommunications companies.

  The FCC and others appealed this decision to the U.S. Supreme Court. In
January 1999, the U.S. Supreme Court reversed much of the Eighth Circuit's
decision, finding that the FCC has broad authority to interpret the 1996
Telecom Act and issue rules for its implementation, including authority to
establish the methodology that state telecommunication regulators must use in
setting the price that incumbent carriers charge competitive telecommunications
companies for collocation, copper telephone lines and other network elements.
The Supreme Court also reversed the Eighth Circuit's holding invalidating the
FCC's "pick-and-choose" rule. However, the Supreme Court found that the FCC had
violated the 1996 Telecom Act in defining the individual network elements
incumbent carriers must make available to competitive telecommunications
companies, and required the FCC to reconsider its delineation of these
elements. It sent the matter back to the FCC with instructions to consider
further the question of which parts of a traditional telephone company's
network must be provided to competitors. The FCC released an order on November
5, 1999 that sought to follow the Supreme Court's instructions in delineating
the particular network elements that traditional telephone companies must make
available to competitors. The FCC's November decision reaffirms its earlier
holding that traditional telephone companies must make available the particular
inputs that we need 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). In
addition, the FCC's November order requires, upon the request of competitive
telecommunications companies like us, that traditional telephone companies
provide competitive carriers with certain other inputs (such as "subloops" and
in some cases packet switching) that may prove useful as we expand our
CopperNet service, especially into more suburban areas.

  The Supreme Court's determination in its January 1999 order that the FCC
rather than state telecommunications regulators has jurisdiction to determine
pricing methodology also could be beneficial to us since the FCC has adopted a
pricing standard that appears to be more beneficial to competitive
telecommunications companies in some respects than the pricing standards that
some state telecommunications regulators have employed. However, it remains
unclear whether the particular pricing methodology prescribed by the FCC will
go into effect because some parties have challenged the lawfulness of that
methodology in the U.S. Court of Appeals for the Eighth Circuit, and that
litigation is still pending.

  In an order released March 31, 1999, the FCC adopted new regulations that are
designed to clarify the obligations of a traditional telephone company in
providing space inside its offices to competitors like us so that they can
access the telephone company's copper telephone lines and connect those lines
to the competitor's electronic equipment located inside that telephone company
office. Another rule adopted in that order is intended to help ensure that the
customers of companies who provide services like CopperNet do not receive
harmful interference from other users of the traditional telephone company
network on which the service is provided. Several traditional telephone
companies appealed the FCC order adopting these rules to the U.S. Court of
Appeals for the District of Columbia Circuit, and on March 17, 2000, the Court
vacated limited portions of the order on grounds that it contained certain
definitions that are impermissibly broad. The Court remanded those aspects of
the order to the FCC for further consideration. The FCC will be instituting
proceedings to comply with the Court's mandate. The impact of the Court's
decision on our company is unclear since we have no way to determine what
action the FCC will take in response to the Court's mandate.

  An FCC order released on December 9, 1999 is designed to make it easier for
companies like us to market high-speed data services like CopperNet to
residential customers for accessing the Internet. Under this "line-sharing"
order, traditional telephone companies are required to let a competitor use the
same copper

                                       21
<PAGE>

telephone line for providing the customer with data service that the telephone
company uses for providing the same customer with local telephone service. At
present, the traditional telephone companies provide residential customers with
local phone service and high-speed Internet access service over a single phone
line, but the traditional telephone companies require competitors like us to
lease a separate phone line to provide high-speed Internet access to any
residential customer when that customer obtains local phone service from the
traditional local telephone company. The FCC's December 9, 1999 order requires
that a traditional telephone company permit companies like us to provide high-
speed Internet access service to a customer over the same line that the
telephone company uses to provide local phone service to that customer. One
goal of the order is to make it easier for companies like us to compete with
the traditional local telephone companies in the residential high-speed
Internet access market by permitting competitors to reduce significantly their
costs to serve this market. However, it is not yet clear that the FCC's order
will achieve its intended objective since the traditional local telephone
companies have not yet put in place the policies and procedures necessary to
implement the order. Moreover, some traditional telephone companies have
appealed the order, and we have no way of determining whether the FCC's
requirements will be affirmed.

  The FCC made another potentially favorable ruling for our industry in another
recent case. That case involved the question of whether a telecommunications
service like CopperNet that provides high-speed dedicated access to the
Internet is an interstate service or an intrastate service. An interstate
service must be provided subject to FCC regulatory controls, whereas an
intrastate service must be provided subject to regulatory controls of the
telecommunications regulatory agency of the state where the service is offered.
In its decision, the FCC held that such services are jurisdictionally
interstate and therefore must be provided on terms and conditions set by the
FCC rather than state telecommunications regulators. This ruling is potentially
advantageous to us because it reduces the number of telecommunications
regulatory agencies that control the terms under which we provide CopperNet. It
also is potentially advantageous because FCC regulatory controls in many
respects are less burdensome than state regulatory controls. For example, the
1996 Telecom Act authorizes the FCC to forbear from regulating the terms under
which carriers classified as "non-dominant" provide interstate
telecommunications service. The FCC has exercised its forbearance authority by
exempting non-dominant carriers like us from filing a tariff setting forth the
terms under which they provide any interstate access service. Since we believe
CopperNet is interstate special access, we provide the service to existing
customers pursuant to contract rather than tariff.

  On May 8, 1997, in compliance with the requirements of the 1996 Telecom Act,
the FCC released an order establishing a new federal universal service support
fund, which provides subsidies to carriers that provide service to underserved
individuals and customers in high-cost or low-income areas, and to companies
that provide telecommunications services for schools and libraries and to rural
health care providers. We are required to contribute to the universal service
fund and are also required to contribute to state universal service funds. The
new universal service rules are administered jointly by the FCC, the fund
administrator, and state regulatory authorities, many of which are still in the
process of establishing their administrative rules. We cannot determine the net
revenue effect of these regulations at this time.

  On November 2, 1999, the FCC held that a statute requiring that traditional
local telephone companies offer their retail services at a wholesale price to
competitors like us does not apply when these telephone companies provide a
discounted DSL service directed to ISPs. In that case, while competitors may
purchase the traditional telephone companies' ISP-directed DSL offering on the
same terms as the ISPs, the FCC ruled that competitors have no legal right to a
wholesale discount off the price paid by ISPs. This ruling could adversely
affect us if it gives ISPs an economic incentive to meet all of their DSL needs
by subscribing to the traditional telephone companies' ISP-directed discounted
DSL offerings rather than by subscribing to DSL services offered by competitors
like us.

  In response to petitions by several traditional telephone companies
requesting that the FCC substantially deregulate the retail price they charge
for various types of telecommunications services, including high-speed data
services like CopperNet, the FCC recently issued a decision that establishes a
procedure by

                                       22
<PAGE>

which traditional telephone companies may apply for certain pricing
flexibility. We cannot yet determine the extent to which traditional telephone
companies will use this procedure or the impact of any pricing flexibility that
the FCC awards to any given company under this new procedure. The ultimate
impact of the FCC's order also is uncertain because the order has been appealed
to the U.S. Court of Appeals. If the FCC were to substantially eliminate price
regulation of the high-speed data services that traditional telephone companies
provide in competition with CopperNet, our business could be adversely
affected.

  Late last December, the FCC approved Bell Atlantic's application for
authority to provide long distance telephone service to customers in New York.
The agency based its decision to grant this application on its finding that
Bell Atlantic is providing services and facilities to competitors like us on
terms that comply with the 1996 Telecom Act and the FCC's rules. The agency
made this finding even though many Bell Atlantic competitors, including us, had
urged the FCC to find that Bell Atlantic is not yet complying with these
requirements. Although not certain, the FCC's finding that Bell Atlantic
provides facilities and service to competitors in compliance with existing
regulatory requirements could reduce Bell Atlantic's incentive to improve its
provisioning of services and facilities to competitors.

  The FCC's December order approving Bell Atlantic's application to provide
long distance telephone service in New York contains one feature that is
designed to help ensure that Bell Atlantic provides competitors with facilities
and services they need to provide advanced services like CopperNet on fair
terms. More specifically, the order accepted Bell Atlantic's commitment to
provide advanced services through an affiliate rather than through Bell
Atlantic's New York telephone company and to provide advanced service
competitors with facilities and services on the same terms that it provides
such facilities and services to its advanced services affiliate. Even more
recently, Bell Atlantic has told the FCC that, in return for FCC approval of
Bell Atlantic's pending application for authority to merge with GTE, it would
be willing to provide advanced services in all states through an advanced
services affiliate subject to the same non-discriminatory treatment that it
committed to as part of its application for authority to provide long distance
telephone service in New York. It remains to be seen whether Bell Atlantic's
provision of advanced services through an advanced services affiliate will help
ensure that the Bell Atlantic telephone companies provide needed facilities and
services to competitors on non-discriminatory terms.

  Apart from Bell Atlantic's voluntary offer to provide advanced services
through an advanced services affiliate rather than through its telephone
companies, the FCC has also proposed to permit all other traditional telephone
companies to provide advanced services like CopperNet through separate
affiliates on a deregulated basis. However, the agency has not yet implemented
its proposal in this regard. Under the FCC's proposal, the affiliates would
provide advanced services free of the requirements relating to interconnection,
unbundling, resale and collocation imposed by the 1996 Telecom Act.

  In addition to regulatory policies set by the FCC, a variety of bills have
been introduced in Congress that, if enacted, could affect competition in the
advanced services market. Of most significance are several bills sponsored by
key members of the House and Senate that would make it easier for the regional
Bell operating companies to discriminate against their competitors in the
advanced services market. It is unclear whether any of these bills will become
law.

  State Regulation. While it is clear from the January 1999 Supreme Court
decision that the FCC has broad authority to implement provisions in the 1996
Telecom Act that are intended to open all telecommunications markets to
competition, state telecommunications regulators also have substantial
authority in this area. For example, although the Supreme Court's decision
validated the FCC's 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. Many 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. Other states

                                       23
<PAGE>

have begun proceedings to set new permanent prices based on more current data.
The results of these proceedings will 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, traditional telephone
companies have a statutory duty to negotiate in good faith with us for
agreements for interconnection and access to unbundled network elements. A
separate agreement is signed for each of the states in which we operate. During
these negotiations 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.

  In addition, CopperNet may, as to some future customers, be classified as
intrastate service subject to state regulation. All of the states in which we
operate, or will operate, require some degree of state regulatory commission
approval to provide certain intrastate services. We have obtained non-expiring
state authorizations to provide intrastate services from the state regulatory
agency in all states where we currently provide CopperNet service. We also have
obtained non-expiring certificates to provide intrastate service in many of the
states where we may provide CopperNet service in the future (Alabama, Colorado,
Florida, Georgia, Iowa, Kentucky, South Carolina and Washington). Our
applications for certificates to provide intrastate services are pending in
several other states (Arizona, Connecticut, Louisiana, Minnesota, Nebraska, New
Mexico, North Carolina, Oregon, Tennessee and Utah). In most states, intrastate
tariffs are also required for various intrastate services, although non-
dominant carriers like us are not typically subject to price or rate of return
regulation for tariffed intrastate services. The statutes of three states where
we provide CopperNet service--Delaware, New Jersey and New York--require that
we obtain approval from the public utility commission in those states to issue
new securities.

  It is possible that laws and regulations could be adopted that address other
matters that affect our business. We are unable to predict what laws or
regulations 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

                                       24
<PAGE>

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 and COPPERNET for
use with "communications services, namely, high-speed electronic data
transmission services." We also have pending applications for the mark CU
COPPERNET. 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. We intend to prepare applications and to seek
patent protection for our systems and services to the extent possible. There is
no assurance that we will obtain any patents or that any such patents would
protect our intellectual property from competition that could seek to design
around or invalidate such patents. 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.

Employees

  As of December 31, 1999, we employed 383 individuals in engineering, sales,
marketing, customer support and related activities and general and
administrative functions. None of these employees is 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.
Competition for qualified personnel is intense, particularly in software
development, network engineering and product management, and we may be unable
to identify, attract and retain such personnel in the future.


                                       25
<PAGE>

Item 2. Properties.

  Our headquarters are in Sterling, Virginia in facilities consisting of
approximately 15,000 square feet under a lease that will expire in August 2001
and approximately 62,000 square feet under a lease that will expire in 2004.
In addition, we have established branch offices in Wilmington, Delaware;
Columbia and Monkton, Maryland; Boston and Woburn, Massachusetts; East
Brunswick and Morristown, New Jersey; New York and Uniondale, New York;
Malvern and Pittsburgh, Pennsylvania; and Richmond and Virginia Beach,
Virginia.

  On October 27, 1999, we executed a lease for approximately 113,000 square
feet in Herndon, Virginia. We have begun to move our headquarters to this
location, and we expect to complete the move in May 2000.

  We also lease collocation space in central offices from Bell Atlantic where
we operate or plan to operate under the terms of our interconnection
agreements with Bell Atlantic 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 that have initial terms that expire in
2000 and 2001. We will increase our collocation space as we expand our
network.

Item 3. Legal Proceedings.

  We are not currently involved in any legal proceedings that we believe could
have a material adverse effect on our business, financial position, results of
operations or cash flows. We are, however, 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 telecommuni-cations 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.

  Inapplicable.

                                      26
<PAGE>

                                    PART II

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

  Stock Data. Our common stock trades on The Nasdaq Stock MarketSM under the
symbol "NASC." As of March 15, 2000, there were 91 record holders and
approximately 7,020 beneficial holders of our common stock. The following
table sets forth, for the periods indicated, the high and low closing prices
for our common stock:

<TABLE>
<CAPTION>
                                               1999
                                           -------------
            Quarter                         High   Low
            -------                        ------ ------
            <S>                            <C>    <C>
            Second........................ $13.94 $ 8.63
            Third......................... $18.00 $10.00
            Fourth........................ $36.50 $12.25
</TABLE>

  On March 23, 2000, the last reported sales price of our common stock on The
Nasdaq Stock Market was $30.00.

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

  Additional Investor Relations Information. All of our current required
filings with the Securities and Exchange Commission, as well as press releases
and other investor relations information, may be found at http://www.nas-
corp.com on the Internet's world wide web. For those without Internet access,
the same information may be obtained without charge by request to us addressed
to: Investor Relations, Network Access Solutions Corporation, 100 Carpenter
Drive, Suite 206, Sterling, VA 20164.

  Transfer Agent. Our transfer agent is American Stock Transfer & Trust
Company, 40 Wall Street, New York, NY 10005, telephone (808) 937-5449.

  Annual Meeting. Our next Annual Meeting of Stockholders is scheduled to be
held at 9:00 a.m. on Tuesday, June 6, 2000, at our new headquarters facility,
located at Three Dulles Tech Center, 13650 Dulles Technology Drive, 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.


  As of December 31, 1999, we have used approximately $37.3 million of these
net proceeds. Of this amount, approximately $21.0 million was used to finance
capital expenditures for central office installation and collocation fees,
approximately $11.0 million was used to finance operating losses and
approximately $4.1 million was used to finance capital expenditures for
property and equipment. We have invested the remaining net proceeds from our
initial public offering in short- and long-term investments in order to meet
anticipated cash needs for future working capital. We invested our available
cash principally in high-quality corporate issuers and in debt instruments of
the U.S. Government and its agencies.

                                      27
<PAGE>

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, 1999 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 year ended December 31, 1996
have been derived from audited financial statements that were included in our
prior public filings. The summary balance sheet data as of December 31, 1998
and 1999 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,
1996 and 1997 has been derived from audited financial statements that were
included in our prior public filings. PricewaterhouseCoopers LLP has audited
the financial statements as of and for each of these years. The summary
financial data as of and for the year ended December 31, 1995 have been derived
from our unaudited financial statements that are not included in this Form 10-
K. The unaudited financial statements include, in the opinion of our
management, all adjustments, consisting of normal, recurring adjustments,
necessary for a fair presentation of the information set forth.

<TABLE>
<CAPTION>
                                          Year ended December 31,
                               ------------------------------------------------
                                  1995      1996     1997     1998      1999
                               ----------- -------  ------  --------  ---------
                               (unaudited)
                                   (in thousands, except per share data)
<S>                            <C>         <C>      <C>     <C>       <C>
Statement of Operations Data:
Revenue:
  Product sales..............    $1,891    $14,368  $8,150  $  9,900  $  13,025
  Consulting services........        36        114     791     1,428      2,593
  Network services...........       --         --        4       311      1,821
                                 ------    -------  ------  --------  ---------
    Total revenue............     1,927     14,482   8,945    11,639     17,439
                                 ------    -------  ------  --------  ---------
Cost of revenue:
  Product sales..............     1,475     11,975   7,180     8,639     11,334
  Consulting services........        15         91     231       761      1,693
  Network services...........       --         --        2        41      4,813
                                 ------    -------  ------  --------  ---------
    Total cost of revenue....     1,490     12,066   7,413     9,441     17,840
                                 ------    -------  ------  --------  ---------
Gross profit (loss)..........       437      2,416   1,532     2,198       (401)
                                 ------    -------  ------  --------  ---------
Operating expenses:
  Selling, general and
   administrative............       299      2,255   1,437     4,017     27,670
  Amortization of deferred
   compensation on
   stock options.............       --         --      --        219      8,165
  Depreciation and
   amortization..............         9          7      12       130      5,195
                                 ------    -------  ------  --------  ---------
    Total operating
     expenses................       308      2,262   1,449     4,366     41,030
                                 ------    -------  ------  --------  ---------
Income (loss) from
 operations..................       129        154      83    (2,168)   (41,431)
Interest income (expense),
 net.........................       --          (1)     (5)       64      1,072
                                 ------    -------  ------  --------  ---------
Income (loss) before income
 taxes.......................       129        153      78    (2,104)   (40,359)
Provision (benefit) for
 income taxes................        39         63      36       (28)       (71)
                                 ------    -------  ------  --------  ---------
Net income (loss)............        90         90      42    (2,076)   (40,288)
Preferred stock dividends and
 accretion...................       --         --      --        567        597
                                 ------    -------  ------  --------  ---------
Net income (loss) applicable
 to common stockholders .....    $   90    $    90  $   42  $ (2,643) $ (40,885)
                                 ======    =======  ======  ========  =========
Net income (loss) per common
 share applicable to common
 stockholders (basic and
 diluted)....................    $ 0.00    $  0.00  $ 0.00  $  (0.10) $   (0.99)
                                 ======    =======  ======  ========  =========
Weighted average common
 shares outstanding (basic
 and diluted)................    21,915     21,915  21,915    27,302     41,259
                                 ======    =======  ======  ========  =========
</TABLE>

                                       28
<PAGE>

<TABLE>
<CAPTION>
                                           Year ended December 31,
                                   ------------------------------------------
                                      1995     1996  1997    1998      1999
                                   ----------- ----  -----  -------  --------
                                   (unaudited)
                                               (in thousands)
<S>                                <C>         <C>   <C>    <C>      <C>
Other Data:
EBITDA(1).........................    $138     $161  $  95  $(1,819) $(28,071)
Capital expenditures..............      18       30    122    5,021    55,262
Net cash provided by (used in)
 operating activities.............       3      (27)   805   (2,810)  (20,184)
Net cash used in investing
 activities.......................     (18)     (30)  (122)  (1,341)  (61,435)
Net cash provided by financing
 activities.......................      42       55      9    8,956    94,341
</TABLE>
--------
(1) EBITDA consists of net income (loss) excluding net interest, taxes,
    depreciation and amortization (including amortization of deferred
    compensation). EBITDA is provided because it is a measure of financial
    performance commonly used in the telecommunications industry. We have
    presented EBITDA to enhance your understanding of our operating results.
    You should not construe it as an alternative to operating income as an
    indicator of our operating performance or as an alternative to cash flows
    from operating activities as a measure of liquidity determined in
    accordance with generally accepted accounting principles. We may calculate
    EBITDA differently than other companies. For further information, see our
    financial statements and related notes elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                 As of December 31,
                                     ------------------------------------------
                                        1995      1996   1997   1998     1999
                                     ----------- ------ ------ ------- --------
                                     (unaudited)
                                                   (in thousands)
<S>                                  <C>         <C>    <C>    <C>     <C>
Balance Sheet Data:
Cash, cash equivalents and short-
 term investments..................     $ 24     $   22 $  713 $ 5,518 $ 42,816
Property and equipment, net........        8         31    140   5,031   55,098
Total assets.......................      458      5,352  1,865  12,928  104,620
Total debt (including capital lease
 obligations)......................       30         84     93   2,513   23,814
Mandatorily redeemable preferred
 stock.............................      --         --     --    5,641      --
Total stockholders' equity (2) ....      118        208    250     932   68,009
</TABLE>
--------
(2) Excludes 11,014,379 shares of our common stock issuable upon exercise of
    stock options outstanding on December 31, 1999.

                                       29
<PAGE>

Quarterly Results of Operations

  The following table presents our quarterly results of operations data and the
components of net income (loss) for 1998 and 1999. 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.

<TABLE>
<CAPTION>
                          Mar. 31, June 30, Sept. 30, Dec. 31,  Mar. 31,  June 30,  Sept. 30,  Dec. 31,
                            1998     1998     1998      1998      1999      1999      1999       1999
                          -------- -------- --------- --------  --------  --------  ---------  --------
<S>                       <C>      <C>      <C>       <C>       <C>       <C>       <C>        <C>
                                                  (in thousands, unaudited)
Revenue:
 Product sales..........   $2,194   $2,297   $2,902   $ 2,507   $ 3,955   $  2,913  $  3,113   $  3,044
 Consulting services....      317      462      274       375       702        665       526        700
 Network services.......       41       82       87       101       119        166       529      1,007
                           ------   ------   ------   -------   -------   --------  --------   --------
 Total revenue..........    2,552    2,841    3,263     2,983     4,776      3,744     4,168      4,751
                           ------   ------   ------   -------   -------   --------  --------   --------
Cost of revenue:
 Product sales..........    1,858    1,947    2,549     2,285     3,535      2,488     2,683      2,628
 Consulting services....      160      285      152       164       299        476       402        516
 Network services.......        1        7        7        26       171        612     1,359      2,671
                           ------   ------   ------   -------   -------   --------  --------   --------
 Total cost of revenue..    2,019    2,239    2,708     2,475     4,005      3,576     4,444      5,815
                           ------   ------   ------   -------   -------   --------  --------   --------
Gross profit (loss).....      533      602      555       508       771        168      (276)    (1,064)
Operating expenses:
 Selling, general and
  administrative........      538      509    1,357     1,613     2,533      5,385     8,809     10,943
 Amortization of
  deferred compensation
  on stock options......      --       --        47       172       540      4,728     1,431      1,466
 Depreciation and
  amortization..........        4        9       48        69       187        698     1,612      2,698
                           ------   ------   ------   -------   -------   --------  --------   --------
 Total operating
  expenses..............      542      518    1,452     1,854     3,260     10,811    11,852     15,107
                           ------   ------   ------   -------   -------   --------  --------   --------
Income (loss) from
 operations.............       (9)      84     (897)   (1,346)   (2,489)   (10,643)  (12,128)   (16,171)
Interest income
 (expense), net.........      (12)     (14)      25        65        (9)       202       559        320
                           ------   ------   ------   -------   -------   --------  --------   --------
Income (loss) before
 taxes..................      (21)      70     (872)   (1,281)   (2,498)   (10,441)  (11,569)   (15,851)
Provision (benefit) for
 income taxes...........       (8)      27      (47)      --        --         (72)        1        --
                           ------   ------   ------   -------   -------   --------  --------   --------
Net income (loss).......   $  (13)  $   43   $ (825)  $(1,281)  $(2,498)  $(10,369) $(11,570)  $(15,851)
                           ======   ======   ======   =======   =======   ========  ========   ========
</TABLE>

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 began operations in 1995 by selling data communications products made by
others and providing consulting services for WANs. Shortly thereafter, we began
offering a wide range of networking solutions for the data communications needs
of businesses. We provide network integration services, where we design our
customers' networks and sell and install related network equipment. We also
manage our customers' networks, ensure the security of their networks and
provide related professional services. From 1995 through 1998, our revenue was
derived primarily from product sales and consulting services. Historically, we
have primarily depended on AT&T and AstraZeneca for revenue from our product
sales and consulting services operations. AT&T accounted for 30.7% and 50.4% of
total revenue for the years ended December 31, 1999 and 1998, respectively,
while AstraZeneca accounted for 8.0% and 9.2% of total revenue for the years
ended December 31, 1999 and 1998, respectively.

                                       30
<PAGE>

  In 1996, we began to pursue deployment of a series of city-wide networks that
enable DSL services. In February 1997, we began developing technical standards
for delivery of DSL-based services within our target markets through a joint
effort with Bell Atlantic. In April 1997, we entered into our first
interconnection agreement with Bell Atlantic, which allowed us to use their
copper telephone lines and to collocate our equipment in telephone company
offices known as "central offices." Central offices serve as the central
connection point for all copper telephone lines in a local area and form the
basis for our network and a telephone company's network. We began CopperNet
service trials in November 1997 and began commercially offering our CopperNet
service in Philadelphia and Washington, D.C. in January 1999.

  We currently offer our DSL-based networking solutions 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. On February 8, 2000, in connection with the announcement of a
$150 million Series B preferred stock investment by, and a strategic summary
operating agreement with SBC and Telmex, we announced that we would be
extending our network deployment into the southeastern and western regions of
the United States. We, along with SBC and Telmex, have 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. We intend
to deploy our network in each of these markets in the second half of 2000.

  As of December 31, 1999, we had installed our equipment in 362 central
offices within our northeast and mid-Atlantic markets, and we expect to have
installed our equipment in approximately 500 central offices by mid-2000, which
will essentially complete our current plans for the roll-out of our network in
these markets. We estimate that the central offices where we currently have
installed our equipment serve approximately 85% of the business users in these
areas. Upon the completion of our network deployment, we believe that the
central offices where we have installed our equipment will serve approximately
95% of the business users in these areas. As of December 31, 1999, we had
installed 2,910 lines in our northeast and mid-Atlantic regions.

  We expect to have installed our equipment in approximately 400 central
offices in our new southeastern and western regions by the end of 2000 and in
approximately 500 central offices by mid-2001. We have obtained competitive
carrier certification in eight of the 17 southeastern and western states in
which we expect to eventually offer services, and have applied for competitive
carrier certification in the remaining nine states in which these markets are
located. To date, we have signed interconnection agreements with BellSouth, U S
WEST and GTE. Together, these three carriers serve as the traditional telephone
companies in substantially all of our 20 target markets in the southeastern and
western regions.

  Since February 1997, we have invested increasing amounts in the development
and deployment of 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 recently received from
a sale of preferred stock to SBC and Telmex. We intend to increase our
operating expenses and capital expenditures substantially in an effort to
rapidly expand our equipment and human resource-related infrastructure and DSL-
based network services. We expect to incur substantial operating losses, net
losses and negative cash flow during the build-out of our network and our
initial penetration of each new market we enter. Although in the short term we
expect to derive the majority of our revenue from our product sales and related
consulting services, we expect that over time revenue from network services,
which includes our CopperNet services, will constitute the more significant
portion of our total revenue.

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.

                                       31
<PAGE>

       Some of these services are delivered to customers using resources
       from third-party providers under contract to us.

    .  Consulting services. We bill our customers for network design and
       integration, on-site network management, staging, installation,
       maintenance and warranty services, network security and professional
       services based on time and materials for contracted services. In
       addition, we derive revenue from the maintenance and installation of
       equipment. Some of these services may be provided through third-party
       providers under contract to us.

    .  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 sell, install
       and configure selected equipment from our manufacturing partners. Our
       engineers select product solutions to improve our customers'
       operations and network efficiencies. Our engineers refer to a
       standard network design that they seek to customize to fit the needs
       of each customer.

Cost of Revenue

  Cost of revenue consists of:

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

     .  CopperNet service fees. We pay a monthly service fee for each
        copper line and for each collocation arrangement, as well as usage
        fees for the support services we obtain from the traditional
        telephone companies we work with in order to serve our CopperNet
        customers. Sometimes, we must pay these companies to perform
        special work, such as preparing a telephone line to use DSL
        technology, when such work is required in order to serve a
        particular client.

     .  Other access costs and levied line expense. We pay installation
        charges and monthly fees to competitive telecommunications
        companies or traditional telephone companies for other types of
        access, other than through our CopperNet network, which we provide
        to customers as part of our network services.

     .  Backbone connectivity charges. We incur charges for our fiber
        optic network, or backbone, within a metropolitan area, typically
        from a competitive telecommunications company or a traditional
        telephone company, and for the backbone interconnecting our
        networks in different metropolitan areas from a long distance
        carrier. We pay these carriers a one-time installation and
        activation fee and a monthly service fee for these leased network
        connections.

     .  Network operations expenses. We incur various recurring costs at
        our network operations center. These costs include data
        connections, engineering supplies and certain utility costs.

     .  Equipment operating lease expenses. In the future, we may decide
        to enter into operating leases for some or all of the equipment we
        use in our network, including the DSL equipment we use in the
        traditional telephone company's central office locations and
        equipment installed on the customer's premises. Currently, we
        generally use capital leases to finance the acquisition of
        substantially all of this equipment, which we depreciate over a
        range of two to five years.

  Consulting services. Consulting services cost of revenue consists of charges
for hardware maintenance, installation and certain contract services that we
purchase from third parties.

  Product sales. We purchase equipment from various vendors whose technology
and hardware solutions we recommend to our customers. We do not manufacture any
of this equipment.

Operating Expenses

 Selling, general and administrative expenses

  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

                                       32
<PAGE>

collections, general management and overhead and administrative functions. We
expect that headcount in functional areas, such as sales, customer service and
operations will increase significantly as we expand our network and as the
number of customers increases.

    .  Sales and marketing expenses. We distribute our products and services
       through direct and indirect sales efforts, agents and telemarketing.
       Our direct sales force focuses on selling CopperNet connectivity to
       small- and medium-sized businesses and consulting services and
       network services to medium- and large-sized businesses. We indirectly
       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. Our sales and marketing
       expenses have increased, and will continue to increase, as we develop
       our CopperNet services.

    .  General and administrative expenses. As we expand our network, we
       expect the number of employees located in specific markets to grow.
       Certain functions, such as customer service, network operations,
       finance, billing and administrative services, are likely to remain
       centralized in order to achieve economies of scale. We pay licensing
       fees for standard systems to support our business processes, such as
       billing systems.

 Amortization of deferred compensation on stock options

  We had outstanding stock options to purchase a total of 7,090,875 and
11,014,379 shares of common stock as of December 31, 1998 and 1999,
respectively, at weighted average exercise prices of $0.09 and $1.73 per share,
respectively. At December 31, 1999, all of these options were exercisable into
restricted shares of our common stock that generally vest over a three- to
four-year period. In certain instances, we determined the fair value of the
underlying common stock on the date of grant was in excess of the exercise
price of the options. As a result, we recorded deferred compensation of $3.7
million and $23.1 million for the years ended December 31, 1998 and 1999,
respectively. We recorded this amount as a reduction to stockholders' equity
that is amortized as a charge to operations over the vesting periods. For the
years ended December 31, 1998 and 1999, we recognized $219,000 and $8.2 million
of stock compensation expense, respectively, related to these options.

  On April 1, 1999, we entered into a stock option agreement that granted to
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.

 Depreciation and amortization

  Depreciation expense arising from our network and equipment purchases for our
customers' premises will be significant and will increase as we deploy our
network. Collocation fees, build-out costs, including one-time installation and
activation fees, and other DSL-based equipment costs are capitalized and
amortized over a range of 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. As our capital expenditures increase, we anticipate that
our interest expense associated with our capital leases will increase.

Results of Operations

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

                                       33
<PAGE>

<TABLE>
<CAPTION>
                                          For the years ended December 31,
                                          -----------------------------------
                                            1997        1998         1999
                                          ---------- ----------   -----------
                                                   (in thousands)
<S>                                       <C>        <C>          <C>
Revenue:
  Product sales.......................... $   8,150  $    9,900   $    13,025
  Consulting services....................       791       1,428         2,593
  Network services.......................         4         311         1,821
                                          ---------  ----------   -----------
    Total revenue........................     8,945      11,639        17,439
                                          ---------  ----------   -----------
Cost of revenue:
  Product sales..........................     7,180       8,639        11,334
  Consulting services....................       231         761         1,693
  Network services.......................         2          41         4,813
                                          ---------  ----------   -----------
    Total cost of revenue................     7,413       9,441        17,840
                                          ---------  ----------   -----------
    Gross profit (loss)..................     1,532       2,198          (401)
                                          ---------  ----------   -----------
Operating expenses:
  Selling, general and administrative....     1,437       4,017        27,670
  Amortization of deferred compensation
   on stock options......................       --          219         8,165
  Depreciation and amortization..........        12         130         5,195
                                          ---------  ----------   -----------
    Total operating expenses.............     1,449       4,366        41,030
                                          ---------  ----------   -----------
Income (loss) from operations............        83      (2,168)      (41,431)
Interest income (expense), net...........        (5)         64         1,072
                                          ---------  ----------   -----------
Income (loss) before income taxes........        78      (2,104)      (40,359)
Provision (benefit) for income taxes.....        36         (28)          (71)
                                          ---------  ----------   -----------
Net income (loss)........................ $      42  $   (2,076)  $   (40,288)
                                          =========  ==========   ===========
<CAPTION>
                                          For the years ended December 31,
                                          -----------------------------------
                                            1997        1998         1999
                                          ---------- ----------   -----------
                                              (percentage of revenue)
<S>                                       <C>        <C>          <C>
Revenue:
  Product sales..........................      91.1%       85.1%         74.7%
  Consulting services....................       8.8        12.3          14.9
  Network services.......................       0.1         2.6          10.4
                                          ---------  ----------   -----------
    Total revenue........................     100.0%      100.0%        100.0%
                                          ---------  ----------   -----------
Cost of revenue:
  Product sales..........................      80.3        74.2          65.0
  Consulting services....................       2.6         6.5           9.7
  Network services.......................       --          0.4          27.6
                                          ---------  ----------   -----------
    Total cost of revenue................      82.9        81.1         102.3
                                          ---------  ----------   -----------
    Gross profit (loss)..................      17.1        18.9          (2.3)
                                          ---------  ----------   -----------
Operating expenses:
  Selling, general and administrative....      16.1        34.5         158.7
  Amortization of deferred compensation
   on stock options......................       --          1.9          46.8
  Depreciation and amortization..........       0.1         1.1          29.8
                                          ---------  ----------   -----------
    Total operating expenses.............      16.2        37.5         235.3
                                          ---------  ----------   -----------
Income (loss) from operations............       0.9       (18.6)       (237.6)
Interest income (expense), net...........       --          0.6           6.2
                                          ---------  ----------   -----------
Income (loss) before income taxes........       0.9       (18.0)       (231.4)
Provision (benefit) for income taxes.....       0.4        (0.2)         (0.4)
                                          ---------  ----------   -----------
Net income (loss)........................       0.5%      (17.8)%      (231.0)%
                                          =========  ==========   ===========
</TABLE>

                                       34
<PAGE>

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

  Revenue. We recognized $17.4 million in revenue for the year ended December
31, 1999, as compared to $11.6 million for the year ended December 31, 1998, an
increase of $5.8 million. This increase was principally attributable to a $3.1
million increase in product sales, primarily from one of our largest customers,
AT&T. Network services revenue increased by $1.5 million as a result of the
introduction of our DSL-enabled network service offerings in early 1999.
Consulting services increased by $1.2 million, which was attributable to
increases in maintenance and consulting contracts.

Cost of revenue. Cost of revenue was $17.8 million for the year ended December
31, 1999, as compared to $9.4 million for the year ended December 31, 1998, an
increase of $8.4 million. The increase was principally attributable to growth
in cost of network services of $4.8 million associated with expenses incurred
to continue to develop and operate our CopperNet and other networking services
and an increase in our product sales of $2.7 million. These were accompanied by
a growth in cost related to additional consulting services of $932,000.

  Gross profit (loss). Gross loss was $401,000 and 2.3% of revenue for the year
ended December 31, 1999, as compared to gross profit of $2.2 million and 18.9%
of revenue for the year ended December 31, 1998, a decrease of $2.6 million.
This loss was primarily a result of increased network services costs related to
the continued expansion of our network. As a result of the expansion of our
network, expenses have exceeded our revenue realized from our customer base.

  Selling, general and administrative expenses. Selling, general and
administrative expenses were $27.7 million and 158.7% of revenue for the year
ended December 31, 1999, as compared to $4.0 million and 34.5% of revenue for
the year ended December 31, 1998, an increase of $23.7 million. This increase
as a percentage of revenue was primarily due to increased staffing and other
expenses incurred to develop, operate and sell our CopperNet network and other
networking solutions.

  Amortization of deferred compensation on stock options. Amortization of
deferred compensation was $8.2 million for the year ended December 31, 1999, as
compared to $219,000 for the year ended December 31, 1998, an increase of $8.0
million. This increase is attributable to the increase in the unamortized
deferred compensation from $3.5 million to $18.4 million as of December 31,
1998 and 1999, respectively, which is principally due to the granting of stock
options to key employees, and the related amortization of this balance over the
remaining vesting period for these options.

  Depreciation and amortization expense. Depreciation and amortization expense
was $5.2 million and 29.8% of revenue for the year ended December 31, 1999, as
compared to $130,000 and 1.1% of revenue for the year ended December 31, 1998,
an increase of $5.1 million. This increase was primarily due to investments in
our CopperNet network, computer equipment and software, office furnishings and
leasehold improvements.

  Loss from operations. Our loss from operations was $41.4 million for the year
ended December 31, 1999, as compared to $2.2 million for the year ended
December 31, 1998, an increase of $39.2 million. The increased loss for the
year ended December 31, 1999 was primarily due to increased staffing,
amortization of deferred compensation and other operating expenses we incurred
in connection with the expansion and support of our CopperNet network.

  Interest income (expense), net. 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. For the year ended
December 31, 1998 we recorded net interest income of $64,000, consisting of
interest income of $145,000 and interest expense of $(81,000). The increase in
interest income was primarily attributable to interest earned from the net
proceeds of $81.8 million from our initial public offering in June 1999. The
increase in interest expense is primarily due to interest on notes payable and
capital leases that commenced during 1999.

  Benefit for income taxes. We had a benefit for income taxes of $71,000 for
the year ended December 31, 1999, as compared to a benefit of $28,000 for the
year ended December 31, 1998.

                                       35
<PAGE>

  Net loss. For the foregoing reasons, our net loss was $40.3 million for the
year ended December 31, 1999, as compared to a net loss of $2.1 million for the
year ended December 31, 1998, an increase of $38.2 million.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

  Revenue. We recognized $11.6 million in revenue for the year ended December
31, 1998, as compared to $8.9 million for the year ended December 31, 1997, an
increase of $2.7 million. Revenue increased as a result of a $1.8 million
increase in product sales, primarily from one of our largest customers, AT&T,
from an increase in consulting services of $0.6 million attributable to
increases in maintenance and consulting contracts, and from growth in network
services revenue of $0.3 million arising from the introduction of broader
network service offerings in late 1997.

  Cost of revenue. Cost of revenue was $9.4 million for the year ended December
31, 1998, as compared to $7.4 million for the year ended December 31, 1997, an
increase of $2.0 million. The increase was attributable to growth in cost
related to an increase in product sales of $1.5 million, growth in cost related
to additional consulting services of $0.5 million and from growth in the cost
of network services of $39,000 attributable to expenses incurred to develop and
operate our CopperNet and other networking services.

  Gross profit. Gross profit was $2.2 million and 18.9% of revenue for the year
ended December 31, 1998, as compared to $1.5 million and 17.1% of revenue for
the year ended December 31, 1997, an increase of $0.7 million. The increase in
gross profit as a percentage of revenue was attributable to the costs
associated with higher product sales and consulting services and the
introduction of broader network service offerings in late 1997.

  Selling, general and administrative expenses. Selling, general and
administrative expenses were $4.0 million and 34.5% of revenue for the year
ended December 31, 1998, as compared to $1.4 million and 16.1% of revenue for
the year ended December 31, 1997, an increase of $2.6 million. This increase as
a percentage of revenue was primarily due to increased staffing and other
expenses incurred to develop our CopperNet network and other networking
solutions.

  Amortization of deferred compensation on stock options. Amortization of
deferred compensation was $219,000 for the year ended December 31, 1998, which
was primarily attributable to the granting of stock options to key employees
and the amortization of the resulting deferred compensation over the remaining
vesting period of these options. We had no amortization of deferred
compensation for the year ended December 31, 1997.

  Depreciation and amortization expense. Depreciation and amortization expense
was $130,000 and 1.1% of revenue for the year ended December 31, 1998, as
compared to $12,000 and less than 1% of revenue for the year ended December 31,
1997, an increase of $118,000. This increase was primarily due to investments
in computer equipment and software, office furnishings and leasehold
improvements.

  Income (loss) from operations. Our loss from operations was $2.2 million for
the year ended December 31, 1998, as compared to income from operations of
$83,000 for the year ended December 31, 1997, a decrease of $2.3 million. The
loss in 1998 was primarily due to increased staffing and other operating
expenses we incurred in support of our CopperNet network and other networking
solutions.

  Interest income (expense), net. For the year ended December 31, 1998, we
recorded net interest income of $64,000, consisting of interest income of
$145,000, which was primarily attributable to interest income earned from the
proceeds of our issuance of $10.0 million of preferred and common stock in
August 1998, interest expense of $81,000, compared to $5,000 of interest
expense in 1997. The increase in interest expense is primarily due to interest
on deferred compensation liabilities and notes payable.

  Provision (benefit) for income taxes. We had a benefit for income taxes of
$28,000 for the year ended December 31, 1998, as compared to a provision for
income taxes of $36,000 for the year ended December 31, 1997.

  Net income (loss). For the foregoing reasons, our net loss was $2.1 million
for the year ended December 31, 1998, as compared to net income of $42,000 for
the year ended December 31, 1997.

                                       36
<PAGE>

Liquidity and Capital Resources

   Although we do not require significant capital expenditures for our product
sales and consulting services segments, the development and expansion of our
CopperNet network requires significant capital expenditures. The principal
capital expenditures that we expect to incur during our CopperNet rollout
include the procurement, design and construction of our collocation spaces and
the deployment of DSL-based equipment in central offices and connection sites.
Capital expenditures were $5.0 million and $55.3 million for the years ended
1998 and 1999, respectively. During the year 2000 and for future periods, we
expect our capital expenditures to increase substantially primarily due to:

 .  continued collocation construction in the Bell Atlantic and new collocation
   construction in the U S WEST and Bell South regions;

 .  procurement of software systems; and

 .  the purchase of telecommunications equipment for expansion of our network.

  Our capital expenditures will depend in part upon obtaining adequate demand
for our services from our CopperNet customers. We anticipate capital
expenditures during 2000 to range from $110.0 million to $125.0 million for
the expansion of our network from 362 central offices at December 31, 1999 to
approximately 900 central offices by the end of 2000.

   Initial Public Offering. The net proceeds from our initial public offering,
completed in June 1999, were approximately $81.8 million. As of December 31,
1999, we have used approximately $37.3 million of these net proceeds. Of this
amount, approximately $21.0 million was used to finance capital expenditures
for central office installation and collocation fees, approximately $11.0
million was used to finance operating losses and approximately $4.1 million
was used to finance capital expenditures for property and equipment. We expect
to use approximately one half of the remaining net proceeds to finance
operating losses that we expect to incur as we expand our customer base and
network. We expect to use the remaining net proceeds from our initial public
offering to finance additional capital expenditures for central office
installation and collocation fees and to make payments under lease commitments
and for general corporate purposes.

   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 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
Series B preferred stock sale on March 7, 2000. The net proceeds from our sale
of Series B preferred stock in March 2000 were approximately $149.0 million.
Of this amount, approximately one half will be used to finance capital
expenditures for central office installation and collocation fees, software
systems, other capital equipment and certain operating costs related to
expansion of our network into new regions beyond our original target markets.
We expect to use the remaining net proceeds from our sale of Series B
preferred stock to finance operating losses that we expect to incur as we
expand our customer base and network, to make payments under lease commitments
and for general corporate purposes.

  Following-On Offering. In December 1999, we filed a registration statement
with the SEC to register shares of common stock for sale in an underwritten
public offering. We currently expect to sell 4,800,177 shares in the public
offering, subject to adjustment if additional stockholders decide to sell in
the offering. In addition, we expect to grant to the underwriters the option
to purchase up to an additional 750,000 shares from us to cover over-
allotments. We expect to use the net proceeds from our sale of common stock to
finance capital expenditures, to finance operating losses that we expect to
incur as we expand our customer base and network, to finance any strategic
acquisitions we decide to make and for general corporate purposes.

   Operating Activities. Net cash used in operating activities was $2.8
million in 1998 and $20.2 million in 1999. Net cash provided by operating
activities was $805,000 in 1997. The increase in cash used in operating
activities of $17.4 million from 1998 to 1999 was primarily the result of an
increase in operating losses of $38.2 million attributable to the expansion of
our network and the development of our CopperNet services, but also the result
of increases in accounts receivable and other current assets. These increases
were offset by increases in non-cash expenses for amortization of deferred
compensation of $8.0 million and depreciation of

                                      37
<PAGE>

$5.1 million accompanied by increases in accounts payable and accrued
liabilities. The change in operating cash flow from 1997 to 1998 was primarily
the result of operating losses attributable to the expansion of our historic
business and the development of our CopperNet services, but also the result of
an increase in accounts receivable accompanied by a decrease in accounts
payable.

   Investing Activities. Net cash used in investing activities was $122,000 in
1997, $1.3 million in 1998 and $61.4 million in 1999. The increase in cash used
for investing activities during 1999 of $60.1 million was primarily due to an
increase in the deployment of equipment for our CopperNet services of $27.7
million and an increase in purchases of property and equipment of $6.3 million.
These were accompanied by a net increase
in the purchase of short-term investments of $24.6 million. The increase in
cash used for investing activities during 1998 of $1.2 million was primarily
due to an increase in the deployment of equipment for our CopperNet services of
$641,000 accompanied by an increase in purchases of property and equipment of
$394,000.

   Financing Activities. Net cash provided by financing activities was $9,000
in 1997, $9.0 million in 1998 and $94.3 million in 1999. The increase in cash
provided by financing activities of $85.3 million during 1999 was primarily the
result our initial public offering of $83.7 million partially offset by
issuance costs paid of $1.9 million and borrowings on notes payable of $12.0
million. The increase in cash provided by financing activities of $9.0 million
during 1998 was primarily the result of preferred and common stock financing of
$9.9 million offset by the repurchase of common stock from existing
shareholders of $1.9 million.

   Debt and Capital Lease Arrangements. We currently have debt and capital
lease facilities available to us of approximately $125.0 million. Of this
amount, Lucent (through its acquisition of Ascend) has provided us with a $95.0
million capital lease facility to fund acquisitions of certain Lucent
equipment, under which $9.7 million was outstanding as of December 31, 1999.
The terms of our capital leases range from three to four years. These leases
require monthly lease payments and have an interest rate of 9.5%. Lucent has
the right to withdraw or suspend further advances to us if our interconnection
agreements with Bell Atlantic are not renewed or are terminated, or if certain
key employees terminate their employment with us without competent replacement
in the reasonable commercial judgment of Lucent.

   In addition, we have arrangements with other vendors that permit us to
finance up to $25.0 million of equipment and other assets and $5.0 million of
working capital. An aggregate of $23.8 million was outstanding under these
arrangements as of December 31, 1999.

   Liquidity Requirements. We believe that our existing cash and cash
equivalents, including the net proceeds of approximately $149.0 million we
received from SBC and Telmex, existing equipment lease financings and
anticipated future revenue generated from operations will be sufficient to
complete the current planned build-out of our network in the northeast area
mid-Atlantic regions and to begin expansion into the BellSouth and U S WEST
territories during 2000 and to fund our operating losses, capital expenditures,
lease payments and working capital requirements into the first quarter of 2001.
Taking into account our estimated net proceeds from our contemplated offering,
we believe that we will have sufficient financing to fund our operations into
the third quarter of 2001.

   We expect our operating losses and capital expenditures to increase
substantially primarily due to our network expansion into new markets. We
expect that additional financing will be required for us to complete our
planned network roll-out in the BellSouth & U S WEST regions. We may seek to
finance such future operations through a combination of commercial bank
borrowings, leasing, vendor financing or the private or public sale of equity
or debt securities. If we were to leverage our business by incurring
significant debt, we may be required to devote a substantial portion of our
cash flow to service that indebtedness. This cash flow would otherwise be
available to finance the deployment of our network. If we are forced to use our
cash flow in this manner, we may be forced to delay the capital expenditures
necessary to complete our network. Equity or debt financing may not be
available to us on favorable terms or at all. Any delay in the deployment of
our network could have a material adverse effect on our business.

                                       38
<PAGE>

   Our capital requirements may vary based upon the timing and success of our
CopperNet roll-out, as a result of regulatory, technological and competitive
developments or if:

    .  demand for our services or cash flow from operations is more or less
       than expected;

    .  our development plans or projections change or prove to be
       inaccurate;

    .  we accelerate deployment of our network or otherwise alter the
       schedule or targets of our CopperNet roll-out plan; or

    .  we engage in any strategic acquisitions or relationships.

Impact of the Year 2000 Issue

  During 1999, we completed any required modifications to our critical systems
and applications relating to year 2000 issues. We also completed our survey of
our significant third-party service and product partners to assess our
vulnerability if these companies were to fail to remediate their year 2000
issues. The responses received indicated that our third-party service and
product partners were aware of the year 2000 issue and were implementing all
necessary changes prior to the end of calendar year 1999. We also formulated
contingency plans to ensure that business-critical processes were protected
from disruption and will continue to function during and after the year 2000
and to ensure that our ability to produce an acceptable level of products and
services is safeguarded in the event of failures of external systems and
services. During 1999, we did not incur any material costs in connection with
identifying, evaluating or remediating year 2000 issues.

  Our business and operations experienced no material adverse effects from the
calendar change to the year 2000 or from the leap year that occurred in 2000,
and we have not been notified of any disruptions to or failures in the systems
of any of our suppliers.

  We will continue to monitor our information technology and non-information
technology systems and those of third parties with whom we conduct business
throughout the year 2000 to ensure that any latent year 2000 issues that may
arise are addressed promptly. Although we do not anticipate any additional
expenditures relating to year 2000 compliance, we cannot provide any assurance
as to the magnitude of any future costs until significant time has passed.

Recent Accounting Pronouncements

  In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
which delays the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will be effective for our fiscal
year 2001. This statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments imbedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. We believe the adoption of
SFAS No. 133 and SFAS No. 137 will not have a material impact on the financial
statements.

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:

  .  our CopperNet deployment plans and strategies;

  .  development and management of our business;

  .  our planned relationships with SBC and Telmex;

  .  our ability to attract, retain and motivate qualified personnel;

  .  our ability to attract and retain customers;

  .  the extent of acceptance of our services;

  .  the market opportunity and trends in the markets for our services;

  .  our ability to upgrade our technologies;

                                      39
<PAGE>

  .  prices of telecommunication services;

  .  the nature of regulatory requirements that apply to us;

  .  our ability to obtain and maintain any required governmental
     authorizations;

  .  our future capital expenditures and needs;

  .  our ability to obtain and maintain financing on commercially reasonable
     terms; and

  .  the extent and nature of competition.

  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. However, our actual results could differ materially from those
anticipated in these forward-looking statements as a result of risks facing us
or faulty assumptions on our part. These include, but are not limited to:

  .  the nature of our ongoing relationship with Bell Atlantic;

  .  our success in maintaining the continuity of our interconnection
     agreements;

  .  our ability to keep pace with technological innovations within the
     telecommunications industry;

  .  our ability to hire and retain key personnel;

  .  our ability to protect our proprietary rights;

  .  our ability to successfully market our services to current and new
     customers;

  .  our ability to generate customer demand for our services in our target
     markets;

  .  market pricing for our services and for competing services;

  .  the extent of increasing competition;

  .  our ability to acquire funds to expand our network;

  .  the ability of our equipment and service suppliers to meet our needs;

  .  trends in regulatory, legislative and judicial developments; and

  .  our ability to manage growth of our operations.

  In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this Form 10-K may not occur.

                                      40
<PAGE>

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

   We are exposed to certain financial market risks, the most predominant
being fluctuations in interest rates. We monitor interest rate fluctuations as
an integral part of our overall risk management program, which recognizes the
unpredictability of financial markets and seeks to reduce the potentially
adverse effect on our results of operations. We do not believe that we are
currently exposed to material financial market risks.

Item 8. Financial Statements and Supplementary Data.

Index to Financial Statements

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Financial Statements:

  Report of Independent Accountants.......................................  42
  Balance Sheets as of December 31, 1998 and 1999.........................  43
  Statements of Operations and Other Comprehensive Income (Loss) for the
   years ended December 31, 1997, 1998 and 1999...........................  44
  Statements of Changes in Stockholders' Equity for the years ended
   December 31, 1997, 1998 and 1999.......................................  45
  Statements of Cash Flows for the years ended December 31, 1997, 1998 and
   1999...................................................................  46
  Notes to Financial Statements...........................................  47

Schedule:

  Report of Independent Accountants on Financial Statement Schedule ......  60
</TABLE>

<TABLE>
<S>                                                                          <C>
  Schedule II--Valuation and Qualifying Accounts............................ 61
</TABLE>

  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.

                                      41
<PAGE>

                       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 income (loss), changes in stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Network Access Solutions Corporation (the Company) at December 31,
1998 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States. 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 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 expressed above.

                                          /s/ PricewaterhouseCoopers LLP

McLean, Virginia
March 7, 2000

                                       42
<PAGE>

                      NETWORK ACCESS SOLUTIONS CORPORATION
                                 BALANCE SHEETS
<TABLE>
<CAPTION>
                                                        As of December 31,
                                                     -------------------------
                                                        1998          1999
                                                     -----------  ------------
<S>                                                  <C>          <C>
ASSETS
Current assets:
  Cash and cash equivalents......................... $ 5,518,117  $ 18,240,096
  Short-term investments............................         --     24,575,893
  Accounts receivable, net of allowance for doubtful
   accounts of $51,959 and $376,399 as of December
   31, 1998 and 1999, respectively..................   1,806,791     3,257,204
  Inventory.........................................      59,233       440,770
  Prepaid and other current assets..................     105,693       927,218
                                                     -----------  ------------
    Total current assets............................   7,489,834    47,441,181
Property and equipment, net.........................   5,030,793    55,097,670
Restricted cash.....................................         --      1,600,000
Deferred offering costs.............................         --        259,272
Deposit.............................................     185,000        72,554
Income tax receivable...............................     100,865        27,600
Deferred tax asset..................................     121,586       121,586
                                                     -----------  ------------
    Total assets.................................... $12,928,078  $104,619,863
                                                     ===========  ============
LIABILITIES, PREFERRED STOCK, AND STOCKHOLDERS'
 EQUITY
Current liabilities:
  Accounts payable.................................. $ 2,525,102  $  8,221,681
  Accrued expenses..................................     750,308     4,118,746
  Current portion of deferred compensation
   liability........................................     333,333       166,667
  Current portion of capital lease obligations......     328,982     5,630,429
  Current portion of note payable...................         --        478,925
  Other current liabilities.........................      67,201       247,678
  Deferred revenue..................................         --         42,788
                                                     -----------  ------------
    Total current liabilities.......................   4,004,926    18,906,914
Long term portion of capital lease obligations......   1,184,156    15,251,100
Long-term portion of note payable...................   1,000,000     2,453,211
Long term portion of deferred compensation
 liability..........................................     166,667           --
                                                     -----------  ------------
    Total liabilities...............................   6,355,749    36,611,225
                                                     -----------  ------------
Commitments and contingencies
Series A mandatorily redeemable preferred stock.....   5,640,651           --
                                                     -----------  ------------
Stockholders' equity:
  Common stock, $.001 par value, 150,000,000 shares
   authorized, 44,550,000 and 53,831,997 shares
   issued and outstanding as of December 31, 1998
   and 1999, respectively...........................      44,550        53,832
  Additional paid-in capital........................   8,097,566   130,431,898
  Accumulated other comprehensive loss..............         --        (51,960)
  Deferred compensation on stock options............  (3,462,753)  (18,389,540)
  Retained earnings (deficit).......................  (1,847,685)  (42,135,592)
  Less treasury stock, at cost, 8,550,000 shares as
   of December 31, 1999 and 1998, respectively......  (1,900,000)   (1,900,000)
                                                     -----------  ------------
    Total stockholders' equity......................     931,678    68,008,638
                                                     -----------  ------------
    Total liabilities, preferred stock and
     stockholders' equity........................... $12,928,078  $104,619,863
                                                     ===========  ============
</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                       43
<PAGE>

                      NETWORK ACCESS SOLUTIONS CORPORATION

         STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)

<TABLE>
<CAPTION>
                                          For the years ended December 31,
                                        --------------------------------------
                                           1997         1998          1999
                                        -----------  -----------  ------------
<S>                                     <C>          <C>          <C>
Revenue:
  Product sales........................ $ 8,149,680  $ 9,899,623  $ 13,025,582
  Consulting services..................     791,280    1,428,531     2,593,028
  Network services.....................       3,856      310,921     1,820,519
                                        -----------  -----------  ------------
    Total revenue......................   8,944,816   11,639,075    17,439,129
                                        -----------  -----------  ------------
Cost of revenue:
  Product sales........................   7,180,064    8,639,337    11,334,352
  Consulting services..................     230,565      761,315     1,693,209
  Network services.....................       2,406       40,738     4,812,522
                                        -----------  -----------  ------------
    Total cost of revenue..............   7,413,035    9,441,390    17,840,083
                                        -----------  -----------  ------------
Gross profit (loss)....................   1,531,781    2,197,685      (400,954)
Operating expenses:
  Selling, general and administrative..   1,436,513    4,017,057    27,669,535
  Amortization of deferred compensation
   on stock options....................         --       218,997     8,165,293
  Depreciation and amortization........      12,298      130,004     5,195,282
                                        -----------  -----------  ------------
Income (loss) from operations..........      82,970   (2,168,373)  (41,431,064)
Interest income........................         --       145,468     2,094,719
Interest expense.......................      (5,144)     (81,006)   (1,022,854)
                                        -----------  -----------  ------------
Income (loss) before income taxes......      77,826   (2,103,911)  (40,359,199)
Provision (benefit) for income taxes...      35,674      (27,973)      (71,292)
                                        -----------  -----------  ------------
Net income (loss)......................      42,152   (2,075,938)  (40,287,907)
Preferred stock dividends..............         --       322,192       339,726
Preferred stock accretion..............         --       244,417       257,719
                                        -----------  -----------  ------------
  Net income (loss) applicable to
   common stockholders................. $    42,152  $(2,642,547) $(40,885,352)
                                        ===========  ===========  ============
  Net income (loss) per common share
   applicable to common stockholders
   (basic and diluted)................. $      0.00  $     (0.10) $      (0.99)
                                        ===========  ===========  ============
Weighted average common shares
 outstanding (basic and diluted).......  21,915,000   27,302,144    41,258,618
                                        ===========  ===========  ============
Comprehensive income (loss):
Net income (loss)...................... $    42,152  $(2,075,938) $(40,287,907)
Other comprehensive loss:
  Unrealized loss on securities
   available for sale..................         --           --        (51,960)
                                        -----------  -----------  ------------
Total comprehensive income (loss)...... $    42,152  $(2,075,938) $(40,339,867)
                                        ===========  ===========  ============
</TABLE>

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

                                       44
<PAGE>

                      NETWORK ACCESS SOLUTIONS CORPORATION

                 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              For the years ended December 31, 1997, 1998 and 1999

<TABLE>
<CAPTION>
                                                    Other      Deferred
                     Common Stock     Additional   Compre-   Compensation    Retained       Treasury Stock
                  ------------------   Paid-in     hensive     on Stock      Earnings    ---------------------
                    Shares   Amount    Capital       loss       Options     (Deficit)     Shares     Amount        Total
                  ---------- ------- ------------  --------  ------------  ------------  --------- -----------  -----------
<S>               <C>        <C>     <C>           <C>       <C>           <C>           <C>       <C>          <C>
Balance,
 December 31,
 1997...........  21,915,000 $21,915 $        --   $    --   $        --   $    228,253        --  $       --   $   250,168
Sale of common
 stock, net of
 direct issuance
 costs of
 $27,341........  22,050,000  22,050    4,853,010       --            --            --         --          --     4,875,060
Purchase of
 treasury stock
 at cost........         --      --           --        --            --            --   8,550,000  (1,900,000)  (1,900,000)
Shares issued to
 employee for
 service........     585,000     585      129,415       --            --            --         --          --       130,000
Accrual of
 preferred stock
 dividends......         --      --      (322,192)      --            --            --         --          --      (322,192)
Accretion of
 preferred
 stock..........         --      --      (244,417)      --            --            --         --          --      (244,417)
Deferred
 compensation...         --      --     3,681,750       --     (3,681,750)          --         --          --           --
Amortization of
 deferred
 compensation...         --      --           --        --        218,997           --         --          --       218,997
Net loss........         --      --           --        --            --     (2,075,938)       --          --    (2,075,938)
                  ---------- ------- ------------  --------  ------------  ------------  --------- -----------  -----------
Balance,
 December 31,
 1998...........  44,550,000  44,550    8,097,566       --     (3,462,753)   (1,847,685) 8,550,000  (1,900,000)     931,678
Sale of common
 stock, net of
 direct issuance
 costs of
 $1,846,100.....   7,500,000   7,500   81,846,400       --            --            --         --          --    81,853,900
Conversion of
 convertible
 notes payable..     833,334     833    9,999,167       --            --            --         --          --    10,000,000
Conversion of
 preferred
 stock..........     416,667     417    4,999,583       --            --            --         --          --     5,000,000
Cancellation of
 preferred
 stock..........         --      --     1,238,096       --            --            --         --          --     1,238,096
Exercise of
 stock options..     531,996     532    1,756,451       --            --            --         --          --     1,756,983
Accrual of
 preferred stock
 dividends......         --      --      (339,726)      --            --            --         --          --      (339,726)
Accretion of
 preferred
 stock..........         --      --      (257,719)      --            --            --         --          --      (257,719)
Deferred
 compensation...         --      --    23,092,080       --    (23,092,080)          --         --          --           --
Amortization of
 deferred
 compensation...         --      --           --        --      8,165,293           --         --          --     8,165,293
Net unrealized
 loss on short-
 term
 investments
 available for
 sale...........         --      --           --    (51,960)          --            --         --          --       (51,960)
Net loss........         --      --           --        --            --    (40,287,907)       --          --   (40,287,907)
                  ---------- ------- ------------  --------  ------------  ------------  --------- -----------  -----------
Balance,
 December 31,
 1999...........  53,831,997 $53,832 $130,431,898  $(51,960) $(18,389,540) $(42,135,592) 8,550,000 $(1,900,000) $68,008,638
                  ========== ======= ============  ========  ============  ============  ========= ===========  ===========
</TABLE>

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

                                       45
<PAGE>

                      NETWORK ACCESS SOLUTIONS CORPORATION

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                           For the years ended December 31,
                                         --------------------------------------
                                            1997         1998          1999
                                         -----------  -----------  ------------
<S>                                      <C>          <C>          <C>
Cash flows from operating activities:
 Net income (loss).....................  $    42,152  $(2,075,938) $(40,287,907)
 Adjustment to reconcile net income
  (loss) to net cash provided by (used
  in) operating activities:
 Depreciation and amortization
  expense..............................       12,298      130,004     5,195,282
 Provision for doubtful accounts
  receivable...........................       23,826       28,133       324,441
 Deferred income taxes.................     (118,274)      77,146           --
 Shares issued to employee for
  services.............................          --       130,000           --
 Amortization of deferred compensation
  on stock options.....................          --       218,997     8,165,293
 Net changes in assets and
  liabilities:
  Accounts receivable..................    4,072,345   (1,069,599)   (1,774,854)
  Inventory............................      300,678      (11,686)     (381,537)
  Income tax receivable................          --      (127,073)       73,265
  Prepaid and other current assets.....       10,000     (105,693)     (821,525)
  Deposits.............................          --           --        112,445
  Deferred tax asset...................          --        26,208           --
  Accounts payable.....................   (3,612,797)    (139,113)    6,153,050
  Accrued expenses.....................     (148,752)     173,795     3,168,438
  Deferred compensation................      291,667          --       (333,333)
  Income tax payable...................          --      (132,064)          --
  Deferred revenue.....................          --           --         42,788
  Other current liabilities............      (68,195)      67,201       180,478
                                         -----------  -----------  ------------
   Net cash provided by(used in)
    operating activities...............      804,948   (2,809,682)  (20,183,676)
                                         -----------  -----------  ------------
Cash flows from investing activities:
 Purchases of short-term investments...          --           --    (24,627,853)
 Expenditures for network under
  development..........................          --      (640,511)  (28,384,550)
 Purchases of property and equipment...     (121,915)    (515,690)   (6,822,909)
 Restricted cash.......................          --           --     (1,600,000)
 Deposit for software and services.....          --      (185,000)          --
                                         -----------  -----------  ------------
   Net cash used in investing
    activities.........................     (121,915)  (1,341,201)  (61,435,312)
                                         -----------  -----------  ------------
Cash flows from financing activities:
 Borrowings on notes payable...........    1,500,000    2,406,652    12,000,000
 Borrowings on sale/leaseback..........          --           --        530,000
 Repayments of notes payable...........   (1,491,291)  (1,500,000)      (67,864)
 Principal payments on capital leases..          --           --     (1,672,781)
 Issuance of common stock..............          --     4,902,401    83,700,000
 Issuance of redeemable preferred
  stock................................          --     5,102,499           --
 Issuance costs related to preferred
  and common stock offerings...........          --       (55,798)   (1,905,371)
 Exercise of stock options.............          --           --      1,756,983
 Treasury stock acquired...............          --    (1,900,000)          --
                                         -----------  -----------  ------------
   Net cash provided by financing
    activities.........................        8,709    8,955,754    94,340,967
                                         -----------  -----------  ------------
Net increase in cash and cash
 equivalents...........................      691,742    4,804,871    12,721,979
Cash and cash equivalents at the
 beginning of the period...............       21,504      713,246     5,518,117
                                         -----------  -----------  ------------
Cash and cash equivalents at the end of
 the period............................  $   713,246  $ 5,518,117  $ 18,240,096
                                         ===========  ===========  ============
Supplemental disclosure of cash flow
 information:
 Cash paid during the period for:
 Interest..............................  $     5,142  $    27,948  $  1,027,452
 Income taxes..........................      222,143      153,343           --
 Non-cash investing and financing
  activities:
 Capital leases........................          --     1,513,138    20,511,172
 Preferred stock dividends.............          --       322,192       339,726
 Preferred stock accretion.............          --       244,417       257,719
 Shares issued to employee for
  services.............................          --       130,000           --
 Expenditures for network included in
  accounts payable.....................          --     2,351,281     1,894,810
 Expenditures for deferred offering
  costs included in accrued expenses...          --           --        200,000
 Conversion of notes payable into
  common stock.........................          --           --     10,000,000
 Conversion of redeemable preferred
  stock into common stock..............          --           --      6,238,096
</TABLE>

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

                                       46
<PAGE>

                      NETWORK ACCESS SOLUTIONS CORPORATION

                         NOTES TO FINANCIAL STATEMENTS

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. Prior to the
reincorporation, the Company had authorized 10,000 shares of common stock, of
which 7,803 shares were issued and outstanding. As of August 3, 1998, the
Company was recapitalized with authorized capital stock of 15,000,000 shares of
common stock, $.001 par value per share and 10,000,000 shares of preferred
stock, $.001 par value per share. On March 18, 1999, the Company increased the
authorized common stock to 50,000,000 shares with a par value of $.001 per
share. In conjunction with this reincorporation and recapitalization, the
Company changed from a July 31 year-end to a calendar year-end. On March 18,
1999, the Company and its Board of Directors declared a two for one stock
split, effected as a stock dividend, of its common stock. On May 7, 1999, the
Company and its Board of Directors declared a 2.25 for one stock split,
effected as a stock dividend, of its common stock. All share information has
been retroactively adjusted for all periods presented to reflect the new
capital structure and stock splits.

  The Company, which is a major 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 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. The Company also intends to expand
its geographical coverage to the southeastern and western U.S. markets.

2. Summary of Significant Accounting Policies

 Use of Estimates

  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.

 Revenue Recognition

  The Company's revenue is derived from product sales, consulting services and
network services. 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 support 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.

  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. Revenue on fixed rate service contracts
is recognized as costs are incurred over the related contract period, which
generally does

                                       47
<PAGE>

not exceed one year. 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 are recognized to
the extent of direct costs incurred. Any excess installation and activation
fees over direct costs are deferred and amortized over the service contract.
Such revenue is not expected to significantly exceed the direct costs. In
certain situations, the Company will waive non-recurring installation and
activation fees in order to obtain a sale. The Company will expense the related
direct costs as incurred.


 Concentration of Credit Risk

  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
experienced 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, 1999, AstraZeneca, PLC comprised 12% of
accounts receivable. As of December 31, 1998, AT&T, Corp. (AT&T) comprised 47%
of accounts receivable. The customers with concentrations of revenue greater
than 10% of total revenue are as follows:

<TABLE>
<CAPTION>
                                               For the years ended December 31,
                                               --------------------------------
                                                  1997       1998       1999
                                               ---------- ---------- ----------
   <S>                                         <C>        <C>        <C>
   AT&T....................................... $3,421,878 $5,869,907 $5,358,165
   AstraZeneca, PLC...........................    921,356    933,556        --
   Network Monitoring and Repair, Inc.........  1,301,440        --         --
                                               ---------- ---------- ----------
                                               $5,644,674 $6,803,463 $5,358,165
                                               ========== ========== ==========
</TABLE>

 Cash and Cash Equivalents

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

 Restricted Cash

  Restricted cash is composed of amounts held in escrow to collateralize the
Company's operating lease commitments for its new headquarters in Herndon,
Virginia.

 Short-term Investments

  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 aggregate fair value based
generally on quoted market prices. Gains and losses are determined based on the
specific identification method. 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.

 Inventory

  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

  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

                                       48
<PAGE>

leases, and equipment installation. These assets are stated at cost. The
Company leases certain of its equipment under capital lease agreements. The
capital lease 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.

 Income Taxes

  The Company accounts for income taxes by utilizing the 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.

 Fair Value Information

  The Company believes the carrying amount of certain of its financial
instruments, which include cash equivalents, accounts payable, capital leases
and notes payable, approximate fair value.

 Impairment of Long-Lived Assets

  The Company periodically evaluates the recoverability of its long-lived
assets. 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 future discounted cash flows.
No impairment losses have been recognized to date.

 Net Income (Loss) Per Share

  The Company presents basic and diluted net income (loss) per share. Basic net
income (loss) per share is computed based on the weighted average number of
outstanding shares of common stock. Diluted net income (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 year ended December 31, 1999,
is the same as basic loss per share because the effects of such items were
anti-dilutive.

 Stock-Based Compensation

  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 estimated 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.

 Segment Reporting

  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:

                                       49
<PAGE>

network services, product sales and consulting services. 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 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
Company's business is currently conducted principally in the eastern United
States. There are no foreign operations.

 Recent Accounting Pronouncements

  In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
which delays the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will be effective for the Company's
fiscal year 2001. This statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments imbedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. The Company believes the
adoption of SFAS No. 133 and SFAS No. 137 will not have a material impact on
the financial statements.

3. Initial and Secondary Public Offerings

  In June 1999, the Company completed an initial public offering (IPO) of
7,500,000 shares of common stock. Total proceeds to the Company were
$81,853,900, net of underwriting discounts and commissions of approximately
$5,500,000 and offering costs of $1,846,100. Concurrent with the IPO,
$5,000,000 of the Company's Series A Mandatorily Redeemable Preferred Stock
(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 Preferred
Stock and all accrued dividends and accretion amounting to $1,238,096 cancelled
without additional payment to the holders of those shares. In addition,
$10,000,000 of the Company's 8% convertible notes (see Note 6) were converted
into 833,334 shares of common stock at $12.00 per share, the public offering
price.

  On December 22, 1999, the Company filed a registration statement on Form S-1
for the sale of shares of their common stock in a secondary public offering
that has not been completed. In connection with the preparation and filing of
this registration statement the Company incurred costs of $259,272, of which
$59,272 has been paid as of December 31, 1999. These offering costs have been
deferred on the balance sheet and will be offset against the proceeds and
reported as a reduction to stockholders' equity when the secondary offering
occurs.

4. Short-term Investments

  As of December 31, 1999, the Company had invested in marketable securities
with original maturity dates exceeding 90 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 aggregate amortized cost of
these marketable securities was $24,627,853 at December 31, 1999. Given the
rise in interest rates from the purchase date of these securities the Company
has recorded an unrealized loss of $51,960 for the year ended December 31, 1999
to reduce the carrying value of these securities to fair value of $24,575,893
as of December 31, 1999. These net unrealized losses are reported as a part of
accumulated other comprehensive income (loss). Realized gains or losses from
the sale of marketable securities are based on the specific identification
method. There were no gross realized gains and gross realized losses on sales
of available for sale securities during the year ended December 31, 1999.

                                       50
<PAGE>

5. Property and Equipment

  Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                          As of December 31,
                                                        -----------------------
                                                           1998        1999
                                                        ----------  -----------
     <S>                                                <C>         <C>
     Network placed in service......................... $      --   $40,291,575
     Network development in process....................  4,657,975   12,790,617
     Office and computer equipment.....................    355,962    5,925,278
     Furniture and fixtures............................    159,728    1,428,356
     Less accumulated depreciation.....................   (142,872)  (5,338,156)
                                                        ----------  -----------
     Property and equipment, net....................... $5,030,793  $55,097,670
                                                        ==========  ===========
</TABLE>

  The Company's 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, 1998 and 1999, the recorded cost of the network
equipment under capital leases was $1,513,138 and $22,939,012, respectively.
Accumulated amortization for this equipment under capital leases was $20,739
and $2,998,446 as of December 31, 1998 and 1999, respectively.

6. Note Payable

  On October 16, 1998, the Company entered into a $10,000,000 line of credit
agreement and a $30,000,000 equipment financing agreement (see Note 8) with
Ascend Communications, Inc. (Ascend). Under the terms of the line of credit,
the Company could draw on the line of credit in $1,000,000 increments up to a
maximum of $5,000,000. The Company could draw the remaining $5,000,000, also in
$1,000,000 increments, upon (i) completing the purchase or lease of equipment
in excess of $15,000,000 from Ascend and (ii) demonstrating that at least 70%
of such equipment is being used by the Company to generate revenue. The Company
was required to make interest only payments at an annual rate of 8.25% on the
amounts advanced for the first nine months from the date of the advance. For
the next thirty-three months the Company was required to make principal and
interest payments in accordance with a sixty-month amortization schedule using
an interest rate of 8.25% for the first eighteen months at a rate equal to the
prevailing high yield bond index for the next fifteen months. The remaining
unpaid interest was due forty-two months after the related advance. The credit
agreement required immediate repayment in the event of an initial public
offering or debt offering in excess of $40,000,000 or a change in control, as
defined. At December 31, 1998, $1,000,000 was outstanding under this agreement.

  On May 4, 1999, the Company amended its financing agreement with Ascend. The
amendment reduced the line of credit available for working capital loans from
$10,000,000 to $5,000,000 and relieved the Company's obligation to repay these
loans upon the Company's IPO. As of December 31, 1999, the Company's total
obligation under this agreement for working capital was $2,932,136.

  Principal payments due under this note payable as of December 31, 1999 are as
follows:

<TABLE>
<CAPTION>
     Year ending December 31,                                           Amount
     ------------------------                                         ----------
     <S>                                                              <C>
       2000.......................................................... $  478,925
       2001..........................................................    579,584
       2002..........................................................  1,873,627
                                                                      ----------
                                                                      $2,932,136
                                                                      ==========
</TABLE>


                                       51
<PAGE>

  The Company had a $1,500,000 line of credit agreement with a bank which
matured on November 30, 1998, was repaid and not renewed. Interest on
outstanding borrowings accrued at the bank's prime rate of interest plus three-
quarters of a percent (9.25% during 1998).

  On March 31, 1999, the Company entered into a financing agreement whereby
certain holders of its preferred stock agreed to invest an additional
$10,000,000 in the Company. Under the agreement, the Company received
$5,000,000 on April 1, 1999 and an additional $5,000,000 on May 11, 1999 by
issuing 8% convertible notes. Concurrent with the IPO, these notes, including
principal and accrued interest, were converted into 833,334 shares of common
stock.

7. Deferred Compensation Liability

  The Company has an unfunded deferred compensation plan for certain key
executives. Under the plan, executives deferred a portion of their compensation
by electing future payments in three equal installments in June 1999, December
1999 and June 2000. At December 31, 1998 and 1999, the deferred compensation
liability was $500,000 and $166,667, respectively. Interest accrues on deferred
amounts on a quarterly basis at a rate determined by management which is
currently 6% based on the rate of interest for three-year Federal treasury
notes. Accrued interest related to these amounts was $47,500 and $25,833 at
December 31, 1998 and 1999, respectively.

8. Commitments and Contingencies

 Leases

  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 Bell Atlantic and other
vendors. On October 27, 1999, the Company executed a lease for space in
Herndon, Virginia. The Company entered into a Letter of Credit agreement, in
the amount of $1,600,000 with a financial institution, that will serve as
collateral for this lease. The Company has begun to move its headquarters to
this location in phases beginning in March 2000 and expects to complete the
move in May 2000. Commitments for minimum rental payments under noncancelable
leases and subleases at December 31, 1999 are as follows:

<TABLE>
<CAPTION>
       Year ending December 31,                                       Amount
       ------------------------                                     -----------
       <S>                                                          <C>
         2000...................................................... $ 3,802,796
         2001......................................................   4,455,402
         2002......................................................   4,305,924
         2003......................................................   4,332,981
         2004......................................................   4,062,804
         Thereafter................................................  17,412,974
                                                                    -----------
       Total minimum rental payments............................... $38,372,881
                                                                    ===========
</TABLE>

  Rent expense for the years ended December 31, 1997, 1998 and 1999 was
$80,103, $113,600 and $1,580,211, respectively.

  During 1998 and 1999, the Company entered into capital leases related to the
acquisition of equipment for the development of the DSL network. Initially, the
Company entered into a master lease agreement with Ascend to finance purchases
of up to $30,000,000 through capital lease agreements. During 1999, this
agreement was amended and increased to $95,000,000. In addition, the Company
has an arrangement with Paradyne Corporation whereby the Company can finance
DSL equipment purchases of up to $8,000,000 subject

                                       52
<PAGE>

to vendor approval. During 1999, the Company entered into two sales leaseback
transactions with a vendor totaling $530,000. The leaseback transactions were
accounted for as capital leases. The present value of future minimum capital
lease payments as of December 31, 1999, is as follows:

<TABLE>
<CAPTION>
       Year ending December 31,                                       Amount
       ------------------------                                     -----------
       <S>                                                          <C>
         2000...................................................... $ 7,290,275
         2001......................................................   7,289,787
         2002......................................................   7,101,517
         2003......................................................   2,653,710
                                                                    -----------
                                                                     24,335,289
       Less amounts representing interest..........................   3,453,760
                                                                    -----------
       Present value of net minimum lease payments.................  20,881,529
       Less current portion of capital lease obligations...........   5,630,429
                                                                    -----------
       Long-term portion of capital lease obligations.............. $15,251,100
                                                                    ===========
</TABLE>

 Purchase commitments

  On November 24, 1998, the Company entered into an agreement with a software
and service provider to support its DSL services. The Company's single largest
shareholder is also a shareholder of this software and service provider. Under
the terms of the agreement, software licensing and service fees were $1,023,700
which were payable through a $185,000 deposit which was made upon signing the
agreement, $402,700 due upon project completion, and $436,000 payable within
twenty-four months of project completion. Amounts not paid within 30 days of
project completion accrue interest at a rate of 10%. The Company commenced
implementing the software and support service in 1999. As of December 31, 1999,
all fees under this agreement had been paid.

 Employment agreements

  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 will 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 will also
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.

9. Income Taxes

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

<TABLE>
<CAPTION>
                                                          For the
                                                  years ended December 31,
                                                ------------------------------
                                                  1997       1998       1999
                                                ---------  ---------  --------
   <S>                                          <C>        <C>        <C>
   Current tax (benefit) provision............. $ 153,948  $(105,119) $(71,292)
   Deferred tax provision (benefit)............  (118,274)    77,146       --
                                                ---------  ---------  --------
     Total (benefit) provision for income
      taxes.................................... $  35,674  $ (27,973) $(71,292)
                                                =========  =========  ========
</TABLE>


                                       53
<PAGE>

  Deferred tax assets consist of the following:

<TABLE>
<CAPTION>
                                                    As of December 31,
                                              --------------------------------
                                                1997     1998         1999
                                              -------- ---------  ------------
   <S>                                        <C>      <C>        <C>
   Deferred compensation..................... $193,100 $ 349,956  $     64,367
   Accrued interest..........................    5,632    19,149        15,139
   Accrued other expenses....................      --        --         69,712
   Bad debt expense..........................      --     20,066       145,365
   Depreciation expense......................      --     (2,083)   (2,691,163)
   Net operating loss........................      --    444,160    15,446,718
   Valuation allowance.......................      --   (709,662)  (12,928,552)
                                              -------- ---------  ------------
     Net deferred tax asset.................. $198,732 $ 121,586  $    121,586
                                              ======== =========  ============
</TABLE>

  As of December 31, 1999, a valuation allowance was established to reduce
total deferred tax assets to an amount that management believes will more
likely than not be realized, based on income taxes paid in the loss carry-back
period net of refundable taxes.

  A reconciliation between 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
1999):

<TABLE>
<CAPTION>
                                                            For the years
                                                                ended
                                                             December 31,
                                                           -------------------
                                                           1997  1998    1999
                                                           ----  -----   -----
   <S>                                                     <C>   <C>     <C>
   Federal statutory rate................................  34.0% (34.0)%  34.0%
   State income taxes, net of federal provision
    (benefit)............................................   5.4   (2.7)    4.6
   Increase to valuation allowance.......................   --    33.7   (30.4)
   Business meals, entertainment, penalties and other....   6.4    1.5    (1.1)
   Amortization of deferred compensation on stock options
    disallowed for tax purposes..........................   --     --     (6.9)
                                                           ----  -----   -----
                                                           45.8%  (1.5)%   0.2%
                                                           ====  =====   =====
</TABLE>

10. Mandatorily Redeemable Preferred Stock and Stockholders' Equity

 Mandatorily Redeemable Preferred Stock

  On August 6, 1998, the Company issued 10,000,000 shares of Series A
mandatorily redeemable preferred stock (Preferred Stock) and 22,050,000 shares
of common stock for total proceeds of $10,004,900, excluding direct issuance
costs of $55,798. The Company had allocated $5,074,042 and $4,875,060 of the
net proceeds to the Preferred Stock and common stock, respectively, based on
the Company's estimate of fair value of the Preferred Stock and common stock.

  Concurrently with the IPO, $5,000,000 of the Company's Series A Mandatorily
Redeemable Preferred Stock (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 Preferred Stock and all accrued dividends and accretion,
amounting to $1,238,096, cancelled without additional payment to the holders of
those shares.

                                       54
<PAGE>

  The Preferred Stock activity is summarized as follows:

<TABLE>
<CAPTION>
                                                         Shares       Amount
                                                       -----------  -----------
   <S>                                                 <C>          <C>
   Balance, December 31, 1997......................... $       --   $       --
   Issuance of shares.................................  10,000,000    5,102,499
   Issuance costs.....................................         --       (28,457)
   Accrued dividends..................................         --       322,192
   Accretion to redemption price......................         --       244,417
                                                       -----------  -----------
   Balance, December 31, 1998.........................  10,000,000    5,640,651
   Accrued dividends..................................         --       339,726
   Accretion to redemption price......................         --       257,719
   Conversion of preferred stock to common stock......  (5,000,000)  (5,000,000)
   Cancellation of preferred stock....................  (5,000,000)  (1,238,096)
                                                       -----------  -----------
   Balance, December 31, 1999......................... $       --   $       --
                                                       ===========  ===========
</TABLE>

 Stock Repurchase

  On August 6, 1998, the Company repurchased 8,550,000 shares of common stock
for $1,900,000 from certain founders of the Company. This treasury stock
transaction was accounted for at cost.

11. Stock-Based Compensation

  On July 23, 1998, the Company adopted the 1998 Incentive Stock 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. Options granted under the Plan
are fully 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 stock cannot be transferred while vested shares
are subject to a right of first refusal by the Company to repurchase the shares
at fair value. Upon voluntary termination, unvested shares of restricted stock
can be repurchased by the Company at the lower of fair value or the exercise
price. At December 31, 1998, 9,000,000 shares were reserved for issuance under
the Plan. Effective November 1, 1999, the Company increased the number of
shares of common stock reserved for issuance under the Plan to 13,250,000.

  On April 1, 1999, the Company entered into a stock option agreement, which
granted a board of director member an option to purchase 250,000 shares of the
Company's common stock at an exercise price of $6.67 per share. On June 3,
1999, the board member exercised the stock option by paying $1,667,500 to the
Company. In addition, the agreement stipulated the board of director member was
issued an additional option to purchase 407,500 shares of common stock at an
exercise price of $3.00 per share and is unexercised as of December 31, 1999.
These options immediately vested upon the Company's IPO. As a result, the
Company recognized $3,504,375 of compensation expense during the year ended
December 31, 1999.

                                       55
<PAGE>

  As of December 31, 1998 and 1999, a total of 7,090,875 and 11,014,379,
respectively, of stock options which were immediately exercisable as of those
dates had been granted at exercise prices ranging from $.09 to $32.00 per
share. Stock option activity was as follows:

<TABLE>
<CAPTION>
                                                                       Weighted
                                              Incentive     Range of   Average
                                                Stock       Exercise   Exercise
                                               Options       Prices     Price
                                              ----------  ------------ --------
<S>                                           <C>         <C>          <C>
Options outstanding, December 31, 1997.......        --   $        --   $   --
Options granted, July 1998...................  5,400,000  $       0.09  $ 0.09
Options granted, August 1998.................    225,000  $       0.09  $ 0.09
Options granted, November 1998...............  1,465,875  $       0.09  $ 0.09
                                              ----------  ------------  ------
Options outstanding, December 31, 1998.......  7,090,875  $       0.09  $ 0.09
Options granted, January 1999................    559,575  $       0.09  $ 0.09
Options granted, March 1999..................  1,350,000  $       0.09  $ 0.09
Options granted, April 1999..................    437,875  $ 0.09- 6.67  $ 3.84
Options granted, May 1999....................    479,900  $ 3.00- 6.00  $ 5.78
Options granted, June 1999...................    733,850  $ 3.00-13.94  $ 4.55
Options granted, July 1999...................    139,650  $ 6.00-16.25  $10.60
Options granted, August 1999.................    395,050  $ 5.13-12.75  $ 6.43
Options granted, September 1999..............     26,200  $13.00-13.75  $13.61
Options granted, October 1999................    196,900  $12.63-12.81  $12.63
Options granted, November 1999...............    280,600  $12.25-16.19  $14.58
Options granted, December 1999...............    120,500  $20.63-32.00  $23.28
Options exercised............................   (531,996) $ 0.09- 6.67  $ 3.29
Options cancelled............................   (264,600) $ 0.09-20.63  $ 4.78
                                              ----------  ------------  ------
Options outstanding, December 31, 1999....... 11,014,379  $ 0.09-32.00  $ 1.73
                                              ==========  ============  ======
</TABLE>

  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. As a result, the Company recorded deferred compensation
of $3,681,750 and $23,092,080 for the years ended December 31, 1998 and 1999,
respectively. This amount was recorded as a reduction to additional paid-in
capital and is being amortized as a charge to operations over the vesting
periods which range from three to four years of the underlying restricted
common stock. The Company recognized stock compensation expense related to
those options of $218,997, and $8,165,293 for the years ended December 31, 1998
and 1999, respectively.

  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 and loss per
share. 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 share would have been as follows:

<TABLE>
<CAPTION>
                                                      For the years ended
                                                          December 31,
                                                    -------------------------
                                                       1998          1999
                                                    -----------  ------------
   <S>                                              <C>          <C>
   Net loss as reported............................ $(2,075,938) $(40,287,907)
   Pro forma net loss..............................  (2,100,700)  (41,630,526)
   Net loss per share as reported, basic and
    diluted........................................       (0.08)        (0.98)
   Pro forma net loss per share, basic and
    diluted........................................       (0.08)        (1.01)
</TABLE>

  The weighted-average fair value of options granted during the years ended
December 31, 1998 and 1999 was approximately $1.04 and $7.23, respectively,
based on the Black-Scholes option pricing model. Upon termination, unvested
shares of restricted stock are repurchased by the Company at the lower of the
exercise price or fair market value.

                                       56
<PAGE>

  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, 1998 and 1999:
Dividend yield of 0%; expected volatility of 0% to 92%; risk-free interest
rates of 5.21% to 6.48%; and expected term of 5 years.

  As of December 31, 1998 and 1999, the weighted average remaining contractual
life of the options is 9.8 and 8.8 years, respectively.

12. Employee Benefit Plan

  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.
During 1999 the Company contributed $403,726 to the Plan.

13. Segment Information

  In accordance with SFAS No. 131, 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,
1997, 1998 and 1999. Asset information is not reported for the product sales
and consulting services segments, as this data is not considered by the Company
in making its decisions regarding operating matters.

<TABLE>
<CAPTION>
                              Product Consulting Network   Reconciling
                               Sales   Services  Services     Items     Total
                              ------- ---------- --------  ----------- -------
                                     (unaudited; dollars in thousands)
<S>                           <C>     <C>        <C>       <C>         <C>
As of and for the year ended
 December 31, 1997:
  Revenue...................  $ 8,150   $  791   $     4     $  --     $ 8,945
                              =======   ======   =======     ======    =======
  Gross Profit (1)..........  $   970   $  561   $     1     $  --     $ 1,532
                              =======   ======   =======     ======    =======
As of and for the year ended
 December 31, 1998:
  Revenue...................  $ 9,900   $1,428   $   311     $  --     $11,639
                              =======   ======   =======     ======    =======
  Gross profit (1)..........  $ 1,260   $  668   $   270     $  --     $ 2,198
                              =======   ======   =======     ======    =======
Property and equipment,
 net........................  $   --    $  --    $ 4,652     $  379    $ 5,031
                              =======   ======   =======     ======    =======
As of and for the year ended
 December 31, 1999:
  Revenue...................  $13,026   $2,593   $ 1,820     $  --     $17,439
                              =======   ======   =======     ======    =======
  Gross profit (loss) (1)...  $ 1,692   $  900   $(2,993)    $  --     $  (401)
                              =======   ======   =======     ======    =======
Property and equipment,
 net........................  $   --    $  --    $48,903     $6,195    $55,098
                              =======   ======   =======     ======    =======
</TABLE>
--------
(1) Adjustments that are made to the total of the segments gross profit in
    order to arrive at income (loss) before income taxes are as follows:

                                       57
<PAGE>


<TABLE>
<CAPTION>
                                          For the years ended December 31,
                                         -------------------------------------
                                            1997        1998          1999
                                         ----------- -----------  ------------
                                          (unaudited; dollars in thousands)
<S>                                      <C>         <C>          <C>
Gross profit (loss)..................... $    1,532  $     2,198  $       (401)
Operating expenses:
  Selling, general and administrative...      1,437        4,017        27,670
  Amortization of deferred
   compensation.........................        --           219         8,165
  Depreciation and amortization.........         12          130         5,195
                                         ----------  -----------  ------------
Income (loss) from operations...........         83       (2,168)      (41,431)
  Interest income.......................        --           145         2,095
  Interest expense......................         (5)         (81)       (1,023)
                                         ----------  -----------  ------------
Income (loss) before income taxes....... $       78  $    (2,104) $    (40,359)
                                         ==========  ===========  ============
</TABLE>

14. Subsequent Events

  On February 8, 2000, the Company announced a strategic financing agreement
with SBC Communications, Inc. (SBC) and Telefonos de Mexico, S.A. de C.V.
(Telmex), in which both companies agreed to purchase a total of $150 million
($75 million each), of the Company's convertible preferred stock for $100 per
share.

  Due to the Company's need to obtain regulatory approvals, the Company was not
able to consummate the preferred stock sale upon execution of the strategic
financing agreement. In order to provide the Company with financing to begin
its strategic plan, SBC and Telmex loaned the Company a total of $30 million
($15 million each) until it received the necessary regulatory approvals to
complete the preferred stock sale. The loans bore interest at a rate of prime
plus 2% during the time they were outstanding. Upon obtaining the regulatory
approval, the Company exchanged the loans for preferred stock and received the
remaining proceeds upon the consummation of the preferred stock sale on March
7, 2000, net of the principal and accrued interest on these interim borrowings.
In conjunction with the financing agreement, the Company executed a summary
operating agreement with both SBC and Telmex, and intends to execute several
definitive agreements with SBC and Telmex covering distinct operating areas
during April 2000. In connection with the financing agreement, the Company also
announced that it would be expanding its network into 20 additional markets in
the southeastern and western regions of the United States. The proceeds from
the preferred stock issuance will, in part, fund this expansion.

  The convertible preferred stock is non-voting pays a 7.0% dividend, which can
be satisfied with either additional stock or cash. Each $100.00 share of
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 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 stock is trading above $31.00
per share. On each anniversary of the issue date, beginning on the second
anniversary and ending on the seventh anniversary, the holders of the 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 $31.00 for a specified period preceding the anniversary date. The
Company has agreed to use 50% of the proceeds from the preferred stock to more
closely align its network and business operations with the future network and
business operations of both SBC and Telmex. If SBC and Telmex convert their
preferred stock positions into the Company's common stock, SBC will own
approximately 4.8% and Telmex will own approximately 4.5% of the Company's
equity on a fully diluted basis. SBC and Telmex 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 by the Company, 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

                                       58
<PAGE>

with the Company's present principal stockholders, Spectrum Equity Investors
II, L.P. and Jonathan P. Aust, the Company's Chief Executive Officer, SBC and
Telmex 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 March 1, 2000, the Company adopted an Employee Stock Purchase Plan (ESPP).
A total of 500,000 shares of common stock are initially available for issuance
under the ESPP.

  The ESPP, which is intended to qualify under Section 423 of the IRS Code,
will be implemented by a series of overlapping offering periods of 12 months'
duration, with new offering periods, other than the first offering period,
commencing on January 1 and July 1 of each year. Participants may not accrue
payroll deductions exceeding $10,000 during any offering period.

  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 day of an offering period or 85% of the
fair market value of a share of the Company's common stock on the 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 on The Nasdaq Stock Market, as reported in The Wall Street Journal.


                                       59
<PAGE>

                      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 March
7, 2000, 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.

                                          /s/ PricewaterhouseCoopers LLP

McLean, Virginia
March 7, 2000

                                       60
<PAGE>

                                  SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)

<TABLE>
<CAPTION>
                                   Balance
                                     at     Charged to             Balance at
                                  Beginning  Costs and               End of
                                  of Period  Expenses   Deductions   Period
                                  --------- ----------- ---------- -----------
<S>                               <C>       <C>         <C>        <C>
Tax valuation allowance:
  Year ended December 31, 1997... $     --  $       --    $  --    $       --
  Year ended December 31, 1998... $     --  $   709,662   $  --    $   709,662
  Year ended December 31, 1999... $ 709,662 $12,218,890   $  --    $12,928,552
Allowance for doubtful accounts
receivable:
  Year ended December 31, 1997... $     --  $       --    $  --    $       --
  Year ended December 31, 1998... $     --  $    51,959   $  --    $    51,959
  Year ended December 31, 1999... $  51,959 $   324,440   $  --    $   376,399
</TABLE>

  All other schedules are omitted because they are not required, are not
applicable, or the information is included in the financial statements or notes
thereto.



                                       61
<PAGE>

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

  Inapplicable.

                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

  The following table shows information about our directors and executive
officers as of March 15, 2000:

<TABLE>
<CAPTION>
   Name                   Age                              Position
   ----                   ---                              --------
<S>                       <C> <C>
Jonathan P. Aust........   42 Chief Executive Officer and Chairman of the Board of Directors
Nicholas J. Williams....   52 President and Chief Operating Officer
Christopher J. Melnick..   34 Senior Vice President, Sales Development and Marketing and Director
Scott G. Yancey, Jr.....   47 Chief Financial Officer and Director
John J. Hackett.........   46 Senior Vice President, Sales and Marketing
Lester M. Lichter.......   53 Chief Information Officer
Worth D. MacMurray......   46 Vice President, Legal and Strategic Projects
Brian D. Roberts........   40 Vice President, Engineering and Operations
Brion B. Applegate......   46 Director
Dennis R. Patrick.......   48 Director
</TABLE>

  Jonathan P. Aust has been our Chief Executive Officer since founding Network
Access Solutions, with his wife Longma, in December 1994. In August 1998, Mr.
Aust also became our President and Chairman of the Board of Directors, and
served as our President until February 2000. Mr. Aust was the National Account
Manager for AT&T Paradyne responsible for the Federal Reserve System from
October 1987 to December 1994. From June 1982 to October 1987, Mr. Aust held
numerous engineer and sales positions at Paradyne Corporation, a manufacturer
of data communications equipment.

  Nicholas J. Williams has been our President and Chief Operating Officer since
joining us in February 2000. Prior to joining us, Mr. Williams served as Chief
Executive Officer and a member of the Board of Directors from July 1998, and as
President from April 1997, of Premisys Communications, Inc., a manufacturer of
integrated multiple access communications servers, until its acquisition by
Zhone Technologies, Inc. in November 1999. Mr. Williams also served as Chief
Operating Officer of Premisys between April 1997 and July 1998. From 1993 until
his move to Premisys, Mr. Williams was Vice President and General Manager,
International, of Tellabs, Inc., a telecommunications company, where he
contributed to the growth of multiple product lines, including the DXX and
wireless products.

  Christopher J. Melnick was our Chief Operating Officer from July 1998 to
February 2000 when he became our Senior Vice President, Sales Development and
Marketing, and has been a Director since August 1998. Mr. Melnick was the Vice
President and General Manager for the Southeast Region of Level 3
Communications from March 1998 to July 1998. Mr. Melnick was a Vice President
of Sales for Worldcom, and formerly, MFS Telcom, from September 1995 to March
1998. From June 1994 to September 1995, Mr. Melnick was a member of sales
management at MFS Telcom.

  Scott G. Yancey, Jr. has been our Chief Financial Officer since joining us in
July 1998 and a Director since August 1998. Mr. Yancey was the Chief Financial
Officer and General Manager of the data division of Cable & Wireless USA, a
telecommunications service provider, from July 1982 to May 1998.

  John J. Hackett has been our Senior Vice President, Sales and Marketing since
joining us in February 1999. Mr. Hackett was the Division President of MCI
WorldCom and MFS Telcom from September 1993 to February 1999 responsible for
Sales and Customer Support.

                                       62
<PAGE>

  Lester M. Lichter has been our Chief Information Officer since October 1999.
Prior to joining us, Mr. Lichter was Executive Vice President and Chief
Information Officer of Excel Communications from November 1997 to February
1999, where he was responsible for developing information services solutions to
support the company's business development activities. Mr. Lichter was Chief
Information Officer of Cable & Wireless USA from June 1996 to November 1997.
Before joining Cable & Wireless USA, Mr. Lichter was Vice President and Chief
Information Officer of AT&T's Business Communications Systems group from
December 1993 to May 1996.

  Worth D. MacMurray has been our Vice President, Legal and Strategic Projects,
since joining us in September, 1999. Prior to joining us, Mr. MacMurray served
as Vice President, Legal & Administration from November 1998 to August 1999 at
Landmark Systems Corporation, a performance management software company. Prior
to joining Landmark, Mr. MacMurray served as Vice President and General Counsel
of Intersolv, Inc., a software tools company, from October 1997 to October
1998. From February 1988 to September 1997, Mr. MacMurray served in various
legal capacities for GTSI, an information technology reseller, including as
General Counsel.

  Brian D. Roberts has been our Vice President for Engineering and Operations
since August 1999. Prior to joining us, Mr. Roberts was Managing Partner for
Network Solutions in the Mid-Atlantic Region for USWeb/CKS from February 1998
to August 1999. Mr. Roberts was Vice President for Engineering and Operations
for ACSI Advanced Data Systems Division (now e.spire Communications, Inc.) from
November 1997 to February 1999. Before joining ACSI, Mr. Roberts was Vice
President for Operations and Data Services at MFS Communications (now MCI
WorldCom) from August 1992 to April 1997.

  Brion B. Applegate has been a Director of Network Access Solutions since
August 1998. Mr. Applegate is a co-founder and has been a Managing General
Partner of Spectrum, a private equity fund, since March 1993. Mr. Applegate is
a director of Tut Systems, Inc., a provider of broadband access services to
multi-tenant buildings.

  Dennis R. Patrick has been a Director of Network Access Solutions since April
1999. Since February 2000, Mr. Patrick has been the President of AOL Wireless
(a division of AOL Online, Inc.), a deliverer of AOL content and services to
wireless devices. In addition, Mr. Patrick is and has been the President and
Chief Executive Officer of Patrick Communications Inc. and Doeg Hill Ventures
LLC since November 1997. Patrick Communications provides analysis of investment
opportunities in the telecommunications and media industries to a select group
of clients. Doeg Hill Ventures is a closely held venture capital enterprise
focusing on early stage investments in the telecommunications industry. Mr.
Patrick was the founder and Chief Executive Officer of Milliwave LP, a local
exchange telephone company using digital radio frequencies to transmit data,
from June 1995 to January 1997. Milliwave was acquired by Winstar
Communications in January 1997, and Mr. Patrick served on the board of
directors of the combined entity until September 1997. From February 1990 to
December 1995, Mr. Patrick served as Chief Executive Officer of Time Warner
Telecommunications, a division of Time Warner Entertainment. From November 1983
to August 1989, Mr. Patrick was a Commissioner and then Chairman of the FCC.

  Our executive officers are elected by our board of directors and serve at its
discretion. There are no family relationships among our executive officers and
directors.

  Our certificate of incorporation and bylaws provide for a classified board of
directors consisting of three classes of directors, each serving three-year
terms. As a result, a portion of our board of directors will be elected each
year. Prior to consummation of our initial public offering on June 3, 1999, two
of the nominees to the board were elected to a one-year term, two were elected
to two-year terms and one was elected to a three-year term. Thereafter,
directors will be elected for three-year terms. Messrs. Yancey and Melnick are
Class I directors with terms expiring at the 2000 annual meeting of
stockholders, Messrs. Applegate and Patrick are Class II directors, with terms
expiring at the 2001 annual meeting of stockholders, and Mr. Aust is Class III
director, with a term expiring at the 2002 annual meeting of stockholders.

                                       63
<PAGE>

Board Committees

  Our board of directors established an audit committee in April 1999. The
audit committee consists of Messrs. Applegate and Patrick. The
responsibilities of the audit committee include:

     .  recommending to our board of directors the independent public
        accountants to conduct the annual audit of our books and records;

     .  reviewing the proposed scope of the audit;

     .  approving the audit fees to be paid;

     .  reviewing accounting and financial controls with the independent
        public accountants and our financial and accounting staff; and

     .  reviewing and approving transactions between us and our directors,
        officers and affiliates.

  Our board of directors established a compensation committee in August 1998.
The compensation committee consists of Messrs. Aust, Applegate and Patrick.
The compensation committee determines the compensation of our executive
officers and administers our stock plans and generally reviews our
compensation plans to ensure that they meet our objectives. Mr. Aust does not
participate in decisions regarding his own compensation.

Compensation Committee Interlocks and Insider Participation

  During 1999, members of our compensation committee were Messrs. Aust and
Applegate. None of our executive officers has served as a member of the
compensation committee or other committee serving an equivalent function of
any other entity, whose executive officers served as a director of or member
of our compensation committee. Mr. Aust is our Chief Executive Officer. Mr.
Applegate is the Managing General Partner of Spectrum, which is a holder of
approximately 42.2% of our common stock. See "Related Transactions and
Relationships" for a description of transactions between our company and Mr.
Aust, and between our company and Spectrum.

Directors' Compensation

  Our directors have received no compensation for serving as directors. We
reimburse our directors for reasonable expenses they incur to attend board and
committee meetings. Our non-employee directors are eligible to receive grants
of options to acquire our common stock under our stock incentive plan. In
April 1999, we granted an option to acquire 250,000 shares of our common stock
at a price of $6.67 per share to Mr. Patrick. On June 3, 1999, Mr. Patrick
received an option to purchase an additional 407,500 shares of common stock at
an exercise price equal to $3.00 per share. Mr. Patrick exercised the option
to acquire 250,000 shares of our common stock on June 3, 1999. The options
granted to Mr. Patrick vested immediately upon the completion of our initial
public offering on June 3, 1999.

Section 16(a) Beneficial Ownership Reporting Compliance

  Section 16(a) of the Securities Exchange Act of 1934 requires our directors
and officers, and persons who own more than 10% of a registered class of our
equity securities, to file with the SEC reports concerning their beneficial
ownership of our equity securities. Pursuant to Item 405 of Regulation S-K, we
have an affirmative duty to provide disclosure of "insiders" who do not timely
file such reports. To our knowledge, based solely on our review of the copies
of such forms received by us from its directors, officers and greater than 10%
beneficial owners, Messrs. MacMurray, Melnick, Yancey and Williams each filed
on an untimely timely basis one report, each containing one transaction
relating to common stock beneficially owned by them.


                                      64
<PAGE>

Item 11. Executive Compensation.

Executive Compensation

  Summary Compensation Table. The following table summarizes the compensation
paid to our chief executive officer and the three other executive officers
whose total salary and bonus exceeded $100,000 during 1999, whom we identify as
"named executive officers":

<TABLE>
<CAPTION>
                                                                         Long-Term
                                         Annual Compensation            Compensation
                                 -------------------------------------- ------------
                                                           Other Annual  Securities
                                       Salary      Bonus   Compensation  Underlying   All Other
  Name and Principal Position    Year   (1)         (2)        (3)        Options    Compensation
  ---------------------------    ---- --------    -------- ------------ ------------ ------------
<S>                              <C>  <C>         <C>      <C>          <C>          <C>
Jonathan P. Aust...............  1999 $362,500    $274,867     --              --        --
 Chief Executive Officer and     1998  122,922     135,000     --              --        --
 Chairman of the Board of Di-    1997   54,000     139,650     --              --        --
 rectors
Christopher J. Melnick.........  1999  200,000      20,000     --              --        --
 Senior Vice President,          1998  101,624(4)      --      --        3,150,000       --
 Sales Department and Marketing  1997      --          --      --              --        --
Scott G. Yancey, Jr............  1999  191,667      15,000     --              --        --
 Chief Financial Officer         1998   75,000(4)      --      --        2,250,000       --
                                 1997      --          --      --              --        --
John J. Hackett................  1999  145,833(4)      --      --        1,350,000       --
 Senior Vice President,          1998      --          --      --              --        --
 Sales and Marketing             1997      --          --      --              --        --
</TABLE>
--------
(1) Includes amounts, if any, deferred by the named executive officer pursuant
    to our 401(k) plan.
(2) Bonuses are based on corporate and individual performance.
(3) Pursuant to SEC rules, perquisites not exceeding the lesser of $50,000 or
    10% of a named executive officer's combined salary and bonus are not
    required to be reported.
(4) Represents compensation for that portion of the year in which the officer
    commenced employment with us.

  Options Grants in 1999. The following table shows information about our
grants of options to purchase our common stock made to the named executive
officers during 1999:

<TABLE>
<CAPTION>
                                                                            Potential Realizable
                                                                           Value at Assumed Annual
                                                                               Rates of Stock
                                                                           Price Appreciation for
                                         Individual Grants                     Option Term(5)
                          ------------------------------------------------ -----------------------
                          Number of
                          Securities  Percent of
                          Underlying Total Options   Exercise
                           Options    Granted to     or Base
                           Granted     Employees      Price     Expiration
                             (1)      in 1999(2)   ($/share)(3)  Date(4)       5%          10%
                          ---------- ------------- ------------ ---------- ----------- -----------
<S>                       <C>        <C>           <C>          <C>        <C>         <C>
Jonathan P. Aust........        --        --             --          --            --          --
Christopher J. Melnick..        --        --             --          --            --          --
Scott G. Yancey, Jr.....        --        --             --          --            --          --
John J. Hackett.........  1,350,000      28.6%        $12.00      3/1/09   $10,192,500 $25,812,000
</TABLE>
--------
(1) All options were granted under our 1998 stock incentive plan. All options
    were incentive stock options that vest over time. Generally, these options
    vest in quarterly installments over 36 to 48 months. All of these options
    immediately vest in the event of a change in control of our company. If a
    majority of our stockholders elect to sell all or part of our company, then
    the option holder is required to sell an equivalent percentage of the
    shares underlying the option.

                                       65
<PAGE>

(2) Based on options to purchase 4,720,100 shares of our common stock granted
    to employees in 1999.
(3) Based on our initial public offering price, in accordance with SEC guidance
    on treatment of options granted prior to our initial public offering.
(4) The options have ten-year terms, subject to earlier termination upon death,
    disability or termination of employment.
(5) We recommend caution in interpreting the financial significance of the
    figures representing the potential realizable value of the stock options.
    They are calculated by multiplying the number of options granted by the
    difference between a future hypothetical stock price and the option
    exercise price and are shown pursuant to rules of the SEC. They assume the
    fair value of common stock appreciates 5% or 10% each year, compounded
    annually, for ten years (the term of each option). They are not intended to
    forecast possible future appreciation, if any, of our stock price or to
    establish a present value of options. Also, if appreciation does occur at
    the 5% or 10% per year rate, the amounts shown would not be realized by the
    recipients until the year 2009. Depending on inflation rates, these amounts
    may be worth significantly less in 2009, in real terms, than their value
    today.

  Aggregated Option Exercises in 1999 and Option Values at December 31,
1999. The following table sets forth information with respect to the named
executive officers concerning the exercise of options during the year ended,
and unexercised options held as of, December 31, 1999:
<TABLE>
<CAPTION>
                                                 Number of Securities    Value of Unexercised In-
                                                Underlying Unexercised     the-Money Options at
                                                  Options at 12/31/99           12/31/99(2)
                                               ------------------------- -------------------------
                           Shares
                           Acquired   Value
                             on      Realized
          Name            Exercise      (1)    Exercisable Unexercisable Exercisable Unexercisable
          ----            --------- ---------- ----------- ------------- ----------- -------------
<S>                       <C>       <C>        <C>         <C>           <C>         <C>
Jonathan P. Aust........        --          --         --           --            --           --
Christopher M. Melnick..   100,000  $1,438,010  1,212,500    1,837,500   $40,012,500  $60,637,500
Scott G. Yancey, Jr.....    30,000     327,333    907,500    1,312,500    29,947,500   43,312,500
John J. Hackett.........        --          --    253,125    1,096,875     8,353,125   36,196,875
</TABLE>
--------
(1) Represents the excess of the market value of the shares acquired upon
    exercise of such options over the exercise price of such options.

(2) Represents the excess of the market value of the shares subject to such
    options over the exercise price of such options.

  No compensation intended to serve as incentive for performance to occur over
a period longer than one year was paid pursuant to a long-term incentive plan
during the last year to any of the named executive officers.

  Employment Arrangements. We have entered into employment agreements with each
of the named executive officers. Each of these agreements has an initial term
of four years, subject to earlier termination upon 30 days prior notice. The
term of each agreement is automatically extended for additional one-year terms
unless we or the executive elects to terminate the agreement within 30 days
before the end of the current term. Under these agreements, these executives
receive an initial annual base salary that will be increased by at least 5%
each year, based upon performance objectives set by our board of directors.
These executives also receive an annual bonus of up to 20% of the executive's
then current salary. The bonus is payable in cash, stock or a combination of
both at the election of our board of directors. The executives have received
options to acquire shares of our common stock that vest in quarterly
installments over either three or four years from the date of grant. The
following table shows information about the current compensation arrangements
we have with our named executive officers:
<TABLE>
<CAPTION>
                                    Current Annual   Maximum    Options Granted
                                     Base Salary   Annual Bonus    (Shares)
                                    -------------- ------------ ---------------
<S>                                 <C>            <C>          <C>
Jonathan P. Aust...................    $450,000         20%              --
Christopher J. Melnick.............     200,000         20         3,150,000
Scott G. Yancey, Jr. ..............     200,000         20         2,250,000
John J. Hackett....................     175,000         20         1,350,000
</TABLE>



                                       66
<PAGE>

  The annual bonus and any salary increase for Mr. Aust are determined by our
compensation committee on an annual basis, and Mr. Aust does not participate
in decisions regarding his own compensation.

  If, during the term of one of these employment agreements, we terminate the
executive's employment without cause or the executive terminates his
employment for good reason, then the executive will be entitled to receive his
base salary, bonus and all employee benefits for a period of one year from the
date of the termination of employment.

  Under the terms of these agreements, these executives have agreed to
preserve the confidentiality and the proprietary nature of all information
relating to our business during the term of the agreement and after the
agreement ends indefinitely. In addition, each of these executives has agreed
to non-competition and non-solicitation provisions that will be in effect
during the term of his agreement and for one year after the agreement ends.

  We require all of our employees to sign agreements that prohibit the
employee from directly or indirectly competing with us while they are employed
by us and generally for a period of one year thereafter. We require all of our
employees to sign agreements that prohibit the disclosure of our confidential
or proprietary information.

1998 Stock Incentive Plan. Our stock incentive plan authorizes the grant of:

     .  stock options;

     .  stock appreciation rights;

     .  stock awards;

     .  phantom stock; and

     .  performance awards.

  The compensation committee of our board of directors administers our stock
incentive plan. The committee has sole power and authority, consistent with
the provisions of our stock incentive plan, to determine which eligible
participants will receive awards, the form of the awards and the number of
shares of our common stock covered by each award. The committee may impose
terms, limits, restrictions and conditions upon awards, and may modify, amend,
extend or renew awards, to accelerate or change the exercise timing of awards
or to waive any restrictions or conditions to an award.

  The maximum number of shares available for issuance under our stock
incentive plan is 13,250,000. As of March 15, 2000, we had 10,645,005 shares
of common stock subject to outstanding options at a weighted average exercise
price of $4.23 per share.

  Stock Options. Our stock incentive plan permits the granting of options to
purchase shares of our common stock intended to qualify as incentive stock
options under the Internal Revenue Code and stock options that do not qualify
as incentive options. The option exercise price of each option will be
determined by the committee. The term of each option will be fixed by the
committee. The committee will determine at what time or times each option may
be exercised and the period of time, if any, after retirement, death,
disability or termination of employment during which options may be exercised.

  Stock Appreciation Rights. The committee may grant a right to receive a
number of shares or, in the discretion of the committee, an amount in cash or
a combination of shares and cash, based on the increase in the fair market
value of the shares underlying the right during a stated period specified by
the committee.

                                      67
<PAGE>

  Stock Awards. The committee may award shares of our common stock to
participants at no cost or for a purchase price. These stock awards may be
subject to restrictions or may be free from any restrictions under our stock
incentive plan. The committee shall determine the applicable restrictions. The
purchase price of the shares of our common stock will be determined by the
committee.

  Phantom Stock. The committee may grant stock equivalent rights, or phantom
stock, which entitle the recipient to receive credits that are ultimately
payable in the form of cash, shares of our common stock or a combination of
both. Phantom stock does not entitle the holder to any rights as a
stockholder.

  Performance Awards. The committee may grant performance awards to
participants entitling the participants to receive cash, shares of our common
stock, or a combination of both, upon the achievement of performance goals and
other conditions determined by the committee. The performance goals may be
based on our operating income, or on one or more other business criteria
selected by the committee.

  Employee Stock Purchase Plan. On March 1, 2000, we adopted an Employee Stock
Purchase Plan, or ESPP. A total of 500,000 shares of common stock are
initially reserved for issuance under the ESPP.

  The ESPP, which is intended to qualify under Section 423 of the IRS Code,
will be implemented by a series of overlapping offering periods of 12 months'
duration each. New offering periods, other than the first offering period,
will commence on January 1 and July 1 of each year. Participants will not be
permitted to accumulate payroll deductions that exceed $10,000 during any
offering period.

  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
our common stock on the first day of an offering period or 85% of the fair
market value of a share of our common stock on the last day of an offering
period. The fair market value of our common stock on a given date will be
equal to the closing price of our common stock on such date on the Nasdaq
National Market, as reported in The Wall Street Journal.

  Implementation of the ESPP will require approval of a majority of our
shareholders, a vote of whom will be taken at our scheduled June 6, 2000
annual meeting.


                                      68
<PAGE>

  The following performance graph shall not be deemed incorporated by
reference by any general statement incorporating by reference this Form 10-K
into any filing under the Securities Act of 1933 or under the Securities
Exchange Act of 1934, except to the extent that we specifically incorporate
this information by reference, and shall not otherwise be deemed filed under
such Acts.

                               PERFORMANCE GRAPH

  The following graph compares the annual percentage change in the cumulative
total return on our common stock with the cumulative total return of the
Nasdaq Composite Index and a Peer Index of companies with the same four-digit
standard industrial classification (SIC) code as the Company (SIC Code 4813 --
Telephone Communications Except Radiotelephone) for the period commencing June
4, 1999 (the date of our initial public offering) and ending December 31,
1999. The stock price performance shown on the graph below assumes: (i) $100
invested on June 4, 1999 in our common stock and in the stocks of the
companies comprising the Nasdaq Composite Index and the Peer Group Index; and
(ii) immediate reinvestment of all dividends. This stock price performance is
not necessarily indicative of future price performance.

<TABLE>
<CAPTION>
                           6/4/99 6/30/99 7/31/99 8/30/99 9/30/99 10/29/99 11/30/99 12/31/99
--------------------------------------------------------------------------------------------
  <S>                      <C>    <C>     <C>     <C>     <C>     <C>      <C>      <C>
  NASC.................    100.00 110.36  113.47  118.13  109.84   107.25   173.06   273.58
--------------------------------------------------------------------------------------------
  Peer Group Index.......  100.00 109.07  103.89   96.68   97.77   107.92   120.08   132.63
--------------------------------------------------------------------------------------------
  Nasdaq Index...........  100.00 108.54  106.61  110.27  110.43   118.97   133.06   162.68
</TABLE>





                                      69
<PAGE>

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

  The following shows the number and percentage of outstanding shares of our
common stock that were owned as of March 15, 2000 by:

     .  all persons known to us to beneficially own more that 5% of our
        common stock;

     .  each director and named executive officer; and

     .  all directors and executive officers as a group.

  An asterisk indicates ownership of less than 1%.

  As of March 15, 2000, there were 46,760,750 shares of our common stock
outstanding.

<TABLE>
<CAPTION>
                                                             Shares
                                                          Beneficially
Name of Beneficial Owner(1)                                 Owned(2)   Percent
---------------------------                               ------------ -------
<S>                                                       <C>          <C>
Brion B. Applegate / Spectrum Equity Investors II,         19,737,601   42.2%
 L.P.(3).................................................
 245 Lytton Avenue
 Palo Alto, CA 94301
Jonathan P. Aust(4)......................................   9,387,000   20.1
FBR Technology Venture Partners, LP......................   3,495,000    7.5
 1001 19th Street
 Arlington, VA 22209
SBC Communications Inc.(5)...............................   2,956,984    6.0
 175 E. Houston Street
 San Antonio, TX 78205
Telefonos de Mexico, S.A. de C.V.(6).....................   2,777,773    5.6
 Parque Via 198
 Oficina 701
 Col Cuauhtemoc
 Mexico City DF 06599
 Mexico
Christopher J. Melnick(7)................................   1,837,499    3.9
Scott G. Yancey, Jr.(8)..................................   1,312,500    2.7
Dennis R. Patrick(9).....................................     657,500    1.4
John J. Hackett(10)......................................     337,500      *
All executive officers and directors as a group                         67.2
 (10 persons)(11)........................................  33,325,849
</TABLE>
--------
 (1) The address of Messrs. Aust, Hackett, Melnick, Patrick and Yancey is 100
     Carpenter Drive, Sterling, Virginia 20164.
 (2) The number of shares beneficially owned by each person includes
     outstanding shares of our common stock and shares of our common stock
     issuable upon conversion of our Series B preferred stock and exercise of
     stock options exercisable within 60 days of March 15, 2000.
 (3) Spectrum Equity Investors II, L.P. is under common control with SEA 1998
     II, L.P., or SEA, and, therefore, beneficial ownership of the shares of
     our common stock owned by SEA is attributed to Spectrum Equity Investors.
     Mr. Applegate is a Managing General Partner of Spectrum Equity Investors
     and, therefore, beneficial ownership of the shares of our common stock
     owned by Spectrum Equity Investors is attributed to Mr. Applegate.
 (4) Includes 374,999 shares held by the Jonathan P. Aust Grantor Retained
     Annuity Trust, 5,962,660 shares held by Longma M. Aust, Mr. Aust's wife,
     and 375,001 shares held by the Longma M. Aust Grantor Retained Annuity
     Trust.
 (5) Includes shares issuable upon conversion of 750,000 shares of our Series B
     preferred stock. As reported in the Schedule 13-D dated March 8, 2000,
     filed by SBC Communications Inc.

                                       70
<PAGE>

 (6) Includes shares issuable upon conversion of 750,000 shares of our Series B
     preferred stock. As reported in the Schedule 13-G dated March 17, filed by
     Carlos Slim Helu, Telefonos de Mexico, S.A. de C.V., or Telmex Parent, is
     the beneficial owner of 2,777,773 shares. Of such 2,777,773 shares, Telmex
     Communications, LLC is the beneficial owner of 2,419,350 shares, which it
     has the right to acquire upon conversion of 750,000 shares of our Series B
     preferred stock owned by it. The shares beneficially owned by Telmex
     Parent are owned indirectly through Telmex Communications, L.L.C. and
     Inmobiliaria Aztlan, S.A. de C.V., each a wholly-owned subsidiary of
     Telmex Parent. Carso Global Telecom, S.A. de C.V. , or CGT, is the
     beneficial owner of the 2,777,773 shares. Each of Carlos Slim Helu, Carlos
     Slim Domit, Marco Antonio Slim Domit, Patrick Slim Domit, Maria Soumaya
     Slim Domit, Vanessa Paolo Slim Domit and Johanna Monique Slim Domit, which
     we collectively refer to as the Slim Family, as majority owners of CGT,
     are the beneficial owners of 2,777,773 shares, and has shared power to
     dispose of such shares. CGT may be deemed to control Telmex Parent through
     the regular voting shares of Telmex Parent that it owns directly, as well
     as through its interest in a trust, which we refer to as the Control
     Trust, that owns all of the outstanding Series AA shares of Telmex Parent,
     or AA Shares. The principal beneficiaries of the Control Trust are CGT,
     which owns a 45.0% economic and voting interest in the trust, SBC, which
     owns a 24.5% economic and voting interest in the trust, and France
     Telecom, which owns a 24.5% economic and voting interest in the trust.
     Under the terms of the Control Trust, the trustee must vote all shares
     held in the Control Trust as instructed by a simple majority of the
     members of a technical committee appointed by the trust's beneficiaries
     (except in the case of certain significant corporate matters). The Control
     Trust entitles CGT to appoint a majority of the members of such technical
     committee; therefore, CGT may be deemed to control the Control Trust.
     Through its ownership of all the outstanding AA Shares, the Control Trust
     owns a majority of Telmex Parent's outstanding regular voting equity
     securities. Therefore, through the Control Trust, CGT may be deemed to
     control Telmex Parent. All information presented in this footnote relating
     to Telmex Parent, Telmex Communications, LLC, Inmobiliaria Aztlan, S.A. de
     C.V., CGT and the Slim Family is based solely on the Schedule 13-G filed
     by Carlos Slim Helu.
 (7) Includes 712,502 shares issuable upon exercise of options to acquire our
     common stock.
 (8) Includes 1,282,500 shares issuable upon exercise of options to acquire our
     common stock.
 (9) Includes 407,500 shares issuable upon exercise of options to acquire our
     common stock.
(10) Includes 337,500 shares issuable upon exercise of options to acquire our
     common stock.
(11) Includes 2,796,251 shares issuable upon exercise of options to acquire our
     common stock that are held by Messrs. Hackett, Lichter, MacMurray,
     Melnick, Patrick, Roberts and Yancey.

                                       71
<PAGE>

Item 13. Certain Relationships and Related Transactions.

  In August 1998, we entered into a Series A Preferred Stock Purchase Agreement
with Spectrum, FBR Technology Venture Partners, LLC, or FBR, and other
investors and issued a total of 10,000,000 shares of mandatorily redeemable
preferred stock and 22,050,000 shares of common stock in exchange for
$10,004,900. Pursuant to this agreement, we issued to Spectrum and its
affiliates 8,470,000 shares of our Series A preferred stock and 18,676,350
shares of our common stock in exchange for an aggregate purchase price of
$8,474,150. As of March 15, 2000, Spectrum beneficially owned 42.2% of our
common stock. Brion B. Applegate, a Managing General Partner of Spectrum, is a
member of our board of directors. We also issued to FBR 1,500,000 shares of our
Series A preferred stock and 3,307,500 shares of our common stock in exchange
for an aggregate purchase price of $1,500,735. As of March 15, 2000, FBR owned
7.5% of our common stock.

  In March 1999, we entered into a note purchase agreement with Spectrum and
FBR. Pursuant to this agreement, Spectrum purchased a convertible note in the
principal amount of $4,250,000, and FBR purchased a convertible note in the
principal amount of $750,000. The principal of and interest on the notes were
converted into 416,667 shares of our common stock upon the closing of our
initial public offering. Pursuant to our amended note purchase agreement,
Spectrum purchased an additional convertible note in the principal amount of
$4,250,000 and FBR purchased an additional convertible note in the principal
amount of $750,000 on May 17, 1999. Those notes converted into an aggregate of
416,667 shares of our common stock upon the closing of the initial public
offering on June 3, 1999.

  In March 1999, we amended our certificate of incorporation to modify the
terms of our then outstanding Series A preferred stock. Upon completion of our
initial public offering on June 3, 1999, 50% of our Series A redeemable
preferred stock was cancelled and ceased to exist without compensation or
recourse, and the remaining shares of Series A preferred stock were converted
into 416,667 shares of our common stock.

  Following the sale of our Series A preferred stock in August 1998, we
repurchased some of the shares of our common stock held by James A. Aust,
Jonathan P. Aust, Longma M. Aust and Stephen C. Aust. We repurchased 1,350,000
shares of our common stock for an aggregate purchase price of $300,000 from
James A. Aust. We repurchased 1,953,950 shares of our common stock for an
aggregate purchase price of $434,211 from Jonathan P. Aust. We repurchased
3,986,051 shares of our common stock for an aggregate purchase price of
$885,789 from Longma M. Aust. We repurchased 1,260,000 shares of our common
stock for an aggregate purchase price of $280,000 from Stephen C. Aust.
Jonathan P. Aust and Longma M. Aust are husband and wife. James A. Aust,
Jonathan P. Aust and Stephen C. Aust are brothers.

  In March 1999, we issued an option to purchase 1,350,000 shares of our common
stock at an exercise price of $0.09 per share to Mr. Hackett, our Vice
President, Sales and Marketing. In August 1999, we issued options to purchase
125,000 shares of common stock at an exercise price of $5.12 to both Mr.
MacMurray, our Vice President, Legal and Strategic Projects, and Mr. Roberts,
our Vice President, Engineering and Operations. In October 1999, we issued an
option to purchase 75,000 shares of our common stock at an exercise price of
$12.62 to Mr. Lichter, our Chief Information Officer. We have also granted
options to acquire shares of our common stock to Messrs. Patrick, James A. Aust
and Melnick that are described under "Item 10--Directors and Executive Officers
of the Registrant--Directors' Compensation" and "Management--Executive
Compensation." We have entered into employment agreements with each of the
named executive officers. For details of these agreements, see "Item 11--
Executive Compensation."

  In November 1998, we entered into an agreement with a software and service
provider to support its DSL services. Spectrum, our single largest shareholder,
is also a shareholder of this software and service provider. Under the terms of
the agreement, software licensing and service fees were $1,023,700 which were
payable through a $185,000 deposit which was made upon signing the agreement,
$402,700 due upon project completion, and $436,000 payable within twenty-four
months of project completion. Amounts not paid within

                                       72
<PAGE>

30 days of project completion accrue interest at a rate of 10%. We commenced
implementing the software and support service in 1999. As of December 31, 1999,
all fees under this agreement had been paid.

  We believe that the transactions discussed above were made on terms no less
favorable to us than would have been obtained from unaffiliated third parties.
We have adopted a policy that requires all future transactions between us and
our officers, directors and affiliates to be on terms no less favorable than
could be obtained from unrelated third parties. These transactions must be
approved by a majority of the disinterested members of our board of directors.

                                       73
<PAGE>

                                    PART IV

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

(a) (1) Financial Statements

  See the Index included in Item 8 on Page 41 of this Form 10-K.

  (2) Financial Statement Schedules

  See the Index included in Item 8 on page 41 of this Form 10-K.

  (3) Exhibits

<TABLE>
<CAPTION>
 Exhibit No. Description
 ----------- -----------
 <C>         <S>
  3.1/2/     Amended and Restated Certificate of Incorporation of the Company
  3.2/2/     Amended and Restated By-Laws of the Company
  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
  4.1/2/     Specimen stock certificate for shares of Common Stock of the
             Company
  4.2        Specimen stock certificate for shares of Series B Preferred Stock
             of the Company
 10.1/2/,/3/ Master Equipment Lease Agreement dated November 17, 1998, by and
             between the Company and Paradyne Credit Corporation
 10.2/2/,/3/ Purchase and Sale Agreement dated as of October 16, 1998, by and
             between the Company and Ascend Communications, Inc., as amended
 10.3/2/     Master Lease Agreement dated October 9, 1998, by and between the
             Company and Ascend Credit Corporation
 10.4/2/     Promissory Note dated October 16, 1998, by and between the Company
             and Ascend Communications, Inc., as amended
 10.5/2/     Commercial Lease dated February 24, 1997, by and between the
             Company, Sterling/Gunston Limited Partnership and Bernstein
             Management Corporation
 10.5.1/2/   First Lease Amendment dated June 26, 1998, by and between the
             Company and Sterling/Gunston LLC
 10.5.2/2/   Third Lease Amendment dated February 1, 1999, by and between the
             Company and Sterling/Gunston LLC
 10.6/2/     Sublease dated August 31, 1998, by and between the Company and
             U.S. Interactive, Inc.
 10.7/2/     Letter of Intent dated March 2, 1999 by and between the Company
             and Trans Dulles Center, Inc.
 10.8/2/     Employment Agreement dated as of August 16, 1998, by and between
             the Company and Jonathan P. Aust
 10.9/2/     Employment Agreement dated as of July 13, 1998, by and between the
             Company and Christopher J. Melnick
 10.10/2/    Employment Agreement dated as of July 13, 1998, by and between the
             Company and Scott G. Yancey, Jr.
 10.11/2/    Employment Agreement dated as of August 18, 1998, by and between
             the Company and James A. Aust
 10.12/2/    Employment Agreement dated as of March 1, 1999, by and between the
             Company and John J. Hackett
 10.13/2/    1998 Stock Incentive Plan, as amended
 10.14/2/    Incentive Stock Option Grant Agreement dated July 23, 1998, by and
             between the Company and Scott G. Yancey, Jr., as amended
 10.15/2/    Incentive Stock Option Grant Agreement dated July 23, 1998, by and
             between the Company and Christopher J. Melnick, as amended
</TABLE>

                                       74
<PAGE>

<TABLE>
<CAPTION>
 Exhibit No. Description
 ----------- -----------
 <C>         <S>
 10.16/2/    Incentive Stock Option Grant Agreement dated November 1, 1998, by
             and between the Company and James A. Aust
 10.17/2/    Incentive Stock Option Grant Agreement dated March 30, 1999, by
             and between the Company and John J. Hackett
 10.18/2/    Deferred Compensation Agreement dated June 1, 1997, by and between
             the Company and Jonathan P. Aust
 10.19/2/    Deferred Compensation Agreement dated June 1, 1997, by and between
             the Company and James A. Aust
 10.20/2/    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
 10.21/2/    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
 10.22/2/    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
 10.23/2/    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.
 10.24/2/    Amended and Restated Convertible Note dated as of March 31, 1999,
             by and between the Company and Spectrum Equity Investors II, L.P.
 10.25/2/    Amended and Restated Convertible Note dated as of March 31, 1999,
             by and between the Company and FBR Technology Venture Partners
             L.P.
 10.26/2/    Nonqualified Stock Option Grant Agreement dated April 1, 1999, by
             and between the Company and Dennis R. Patrick
 10.27/2/    Deed of Lease dated April 8, 1999, by and between the Company and
             TransDulles Center, Inc.
 10.28/2/    Letter Agreement dated May 6, 1999, by and between the Company and
             SBC Communications Inc.
 10.29/2/    Letter Agreement dated May 7, 1999, by and between the Company and
             Telefonos de Mexico, S.A. de C.V.
 10.30/2/    Letter Agreement dated May 10, 1999, by and between the Company
             and DSL Solutions, Inc. d/b/a DSL Networks
 10.31/1/    Employment Agreement dated as of September 13, 1999 by and between
             the Company and Worth D. MacMurray
 10.32/1/    Nonqualified Stock Option Grant Agreement dated August 9, 1999 by
             and between the Company and Worth D. MacMurray
 10.33       Lease Agreement by and between Dulles Tech, Inc. and the Company
             dated October 27, 1999
 10.34       Stock Purchase Agreement dated February 4, 2000 by and between the
             Company and SBC Communications Inc.
 10.35       Stock Purchase Agreement dated February 4, 2000 by and between the
             Company and Telefonos de Mexico, S.A. de C.V.
 10.36       Summary of Operating Agreement dated February 4, 2000 by and
             between the Company and each of SBC Telecom, Inc. and Telefonos de
             Mexico, S.A. de C.V.
 10.37       Employee Stock Purchase Plan
 23.1        Consent of PricewaterhouseCoopers, LLP
 27          Financial Data Schedule
</TABLE>
--------
/1 /Incorporated by reference to the Company's Registration Statement on Form
   S-1 (No. 333-93455).
/2 /Incorporated by reference to the Company's Registration Statement on Form
   S-1 (No. 333-74679).
/3 /Confidential portions omitted and supplied separately to the Securities and
   Exchange Commission.


                                       75
<PAGE>

(b) Reports on Form 8-K

  None.

(c) Exhibits

  See the list of Exhibits in Item 14(a)(3) beginning on Page 74 of this Form
10-K.

(d) Financial Statement Schedules

  See the Index included in Item 8 on page 41 of this Form 10-K.

                                       76
<PAGE>

                                  SIGNATURES

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

                                          Network Access Solutions Corporation

Dated: March 27, 2000                              /s/ Jonathan P. Aust
                                          By: _________________________________
                                                     Jonathan P. Aust,
                                               Chairman and Chief Executive
                                                          Officer

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

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----
<S>                                    <C>                        <C>
       /s/ Jonathan P. Aust            Chairman and Chief           March 27, 2000
______________________________________  Executive Officer
           Jonathan P. Aust             (Principal Executive
                                        Officer) and a Director
     /s/ Scott G. Yancey, Jr.          Chief Financial Officer      March 27, 2000
______________________________________  (Principal Financial and
         Scott G. Yancey, Jr.           Accounting Officer)
                                        and a Director
      /s/ Brion B. Applegate           Director                     March 27, 2000
______________________________________
          Brion B. Applegate
    /s/ Christopher J. Melnick         Director                     March 27, 2000
______________________________________
        Christopher J. Melnick
      /s/ Dennis R. Patrick            Director                     March 27, 2000
______________________________________
          Dennis R. Patrick
</TABLE>

                                      77
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Exhibit No. Description
 ----------- -----------
 <C>         <S>
  3.1/2/     Amended and Restated Certificate of Incorporation of the Company
  3.2/2/     Amended and Restated By-Laws of the Company
  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
  4.1/2/     Specimen stock certificate for shares of Common Stock of the
             Company
  4.2        Specimen stock certificate for shares of Series B Preferred Stock
             of the Company
 10.1/2/,/3/ Master Equipment Lease Agreement dated November 17, 1998, by and
             between the Company and Paradyne Credit Corporation
 10.2/2/,/3/ Purchase and Sale Agreement dated as of October 16, 1998, by and
             between the Company and Ascend Communications, Inc., as amended
 10.3/2/     Master Lease Agreement dated October 9, 1998, by and between the
             Company and Ascend Credit Corporation
 10.4/2/     Promissory Note dated October 16, 1998, by and between the Company
             and Ascend Communications, Inc., as amended
 10.5/2/     Commercial Lease dated February 24, 1997, by and between the
             Company, Sterling/Gunston Limited Partnership and Bernstein
             Management Corporation
 10.5.1/2/   First Lease Amendment dated June 26, 1998, by and between the
             Company and Sterling/Gunston LLC
 10.5.2/2/   Third Lease Amendment dated February 1, 1999, by and between the
             Company and Sterling/Gunston LLC
 10.6/2/     Sublease dated August 31, 1998, by and between the Company and
             U.S. Interactive, Inc.
 10.7/2/     Letter of Intent dated March 2, 1999 by and between the Company
             and Trans Dulles Center, Inc.
 10.8/2/     Employment Agreement dated as of August 16, 1998, by and between
             the Company and Jonathan P. Aust
 10.9/2/     Employment Agreement dated as of July 13, 1998, by and between the
             Company and Christopher J. Melnick
 10.10/2/    Employment Agreement dated as of July 13, 1998, by and between the
             Company and Scott G. Yancey, Jr.
 10.11/2/    Employment Agreement dated as of August 18, 1998, by and between
             the Company and James A. Aust
 10.12/2/    Employment Agreement dated as of March 1, 1999, by and between the
             Company and John J. Hackett
 10.13/2/    1998 Stock Incentive Plan, as amended
 10.14/2/    Incentive Stock Option Grant Agreement dated July 23, 1998, by and
             between the Company and Scott G. Yancey, Jr., as amended
 10.15/2/    Incentive Stock Option Grant Agreement dated July 23, 1998, by and
             between the Company and Christopher J. Melnick, as amended
 10.16/2/    Incentive Stock Option Grant Agreement dated November 1, 1998, by
             and between the Company and James A. Aust
 10.17/2/    Incentive Stock Option Grant Agreement dated March 30, 1999, by
             and between the Company and John J. Hackett
 10.18/2/    Deferred Compensation Agreement dated June 1, 1997, by and between
             the Company and Jonathan P. Aust
 10.19/2/    Deferred Compensation Agreement dated June 1, 1997, by and between
             the Company and James A. Aust
 10.20/2/    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
</TABLE>

                                       78
<PAGE>

<TABLE>
<CAPTION>
 Exhibit No. Description
 ----------- -----------
 <C>         <S>
 10.21/2/    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
 10.22/2/    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
 10.23/2/    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.
 10.24/2/    Amended and Restated Convertible Note dated as of March 31, 1999,
             by and between the Company and Spectrum Equity Investors II, L.P.
 10.25/2/    Amended and Restated Convertible Note dated as of March 31, 1999,
             by and between the Company and FBR Technology Venture Partners
             L.P.
 10.26/2/    Nonqualified Stock Option Grant Agreement dated April 1, 1999, by
             and between the Company and Dennis R. Patrick
 10.27/2/    Deed of Lease dated April 8, 1999, by and between the Company and
             TransDulles Center, Inc.
 10.28/2/    Letter Agreement dated May 6, 1999, by and between the Company and
             SBC Communications, Inc.
 10.29/2/    Letter Agreement dated May 7, 1999, by and between the Company and
             Telefonos de Mexico, S.A. de C.V.
 10.30/2/    Letter Agreement dated May 10, 1999, by and between the Company
             and DSL Solutions, Inc. d/b/a DSL Networks
 10.31/1/    Employment Agreement dated as of September 13, 1999 by and between
             the Company and Worth D. MacMurray
 10.32/1/    Nonqualified Stock Option Grant Agreement dated August 9, 1999 by
             and between the Company and Worth D. MacMurray
 10.33       Lease Agreement by and between Dulles Tech, Inc. and the Company
             dated October 27, 1999
 10.34       Stock Purchase Agreement dated February 4, 2000 by and between the
             Company and SBC Communications Inc.
 10.35       Stock Purchase Agreement dated February 4, 2000 by and between the
             Company and Telefonos de Mexico, S.A. de C.V.
 10.36       Summary of Operating Agreement dated February 4, 2000 by and
             between the Company and each of SBC Telecom, Inc. and Telefonos de
             Mexico, S.A. de C.V.
 10.37       Employee Stock Purchase Plan
 23.1        Consent of PricewaterhouseCoopers, LLP
 27          Financial Data Schedule
</TABLE>
--------
/1 /Incorporated by reference to the Company's Registration Statement on Form
   S-1 (No. 333-93455).
/2 /Incorporated by reference to the Company's Registration Statement on Form
   S-1 (No. 333-74679).
/3 /Confidential portions omitted and supplied separately to the Securities and
   Exchange Commission.


                                       79