<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K

                       FOR ANNUAL AND TRANSITION REPORTS
                    PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

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

     For the fiscal year ended December 31, 1999

                                       OR

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

     For the transition period from _______________ to _______________

                       Commission File Number:  0-29281

                          CYPRESS COMMUNICATIONS, INC.
             (Exact name of registrant as specified in its charter)



           Delaware                              58-2330270
 (State or other jurisdiction                (I.R.S. Employer
          of incorporation)                  Identification No.)


   Fifteen Piedmont Center, Suite 710           (404) 869-2500
        Atlanta, Georgia 30305           (Registrant's telephone number)
(Address of principal executive offices)

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

Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $.001 Par Value
                                (Title of Class)

                          Preferred Stock Purchase Rights
                                (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 [ ]  No [X]

     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 the 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.  [X]

     The aggregate market value of the common stock held by non-affiliates of
the registrant was $417,652,929 at March 2, 2000, based on the closing sale
price of $21.34 per share for the common stock on such date on the Nasdaq
National Market on such date. Shares of common stock held by each executive
officer and director and by each person who beneficially owns more than 5% of
the outstanding shares of common stock have been excluded in that such persons
may under certain circumstances be deemed to be affiliates.  This determination
of affiliate status is not necessarily a conclusive determination of affiliate
status for any other purpose.

     The number of shares of the registrant's common stock outstanding at March
2, 2000 was 47,302,202.

                      Documents Incorporated by Reference

     The following documents (or portions thereof) are incorporated by reference
into the Parts of this Form 10-K noted:  None.
<PAGE>

                          Cypress Communications, Inc.

                           ANNUAL REPORT ON FORM 10-K
                  For the Fiscal Year Ended December 31, 1999

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
Item                                                                                                      Page
Number                                                                                                   Number
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<S>                                                                                                       <C>
                                                PART I

1.  Business...................................................................................             2
2.  Properties.................................................................................            17
3.  Legal Proceedings..........................................................................            18
4.  Submission of Matters to a Vote of Security Holders........................................            18

                                                PART II

5.  Market for the Registrant's Common Equity and Related
      Stockholder Matters......................................................................
                                                                                                           19
6.  Selected Financial Data....................................................................            23
7.  Management's Discussion and Analysis of Financial Condition
      and Results of Operations................................................................            25
7A. Quantitative and Qualitative Disclosures about Market Risk.................................            41
8.  Financial Statements and Supplementary Data................................................            41
9.  Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure.................................................................            42

                                               PART III

10.  Directors and Executive Officers of the Registrant........................................            42
11.  Executive Compensation....................................................................            47
12.  Security Ownership of Certain Beneficial Owners and Management............................            51
13.  Certain Relationships and Related Transactions............................................            53

                                               PART IV

14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K...........................            55
</TABLE>
<PAGE>

Note:  All information in this report regarding shares of common stock and per
----   share amounts has been retroactively adjusted to reflect the 4.5-for-1
       stock split which occurred on February 8, 2000.

         SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

     This report contains forward-looking statements, including, in particular,
the statements about our plans, objectives, expectations and prospects under the
headings "Item 1. Business" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations." You can identify these forward-
looking statements by words such as "expect," "anticipate," "intend," "plan,"
"believe," "seek," "estimate" and similar expressions. Although we believe that
the plans, objectives, expectations and prospects reflected in, or suggested by,
our forward-looking statements are reasonable, those statements involve
uncertainties and risks, and we can give no assurances that our plans,
objectives, expectations and prospects will be achieved. We undertake no
obligation to publicly update these forward-looking statements to reflect events
or occurrences after the dates hereof or to reflect the occurrence of
unanticipated events. Important factors that could cause our actual results to
differ materially from the results expressed or implied by the forward-looking
statements are contained in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Risk Factors That May Affect
Future Results" and elsewhere in this report. All written or oral forward-
looking statements attributable to us are expressly qualified in their entirety
by these cautionary statements.

                                     PART I

Item 1.    Business

General

     We provide a full range of communications services to small and medium-
sized businesses located in multi-tenant office buildings.  These buildings are
located in major metropolitan markets throughout the United States. We offer our
customers a full range of communications services, including high speed,
dedicated Internet access and data services, local and long distance voice
services, feature rich digital telephone systems, digital satellite, business
television, voicemail, e-mail, website hosting, security/monitoring services and
other advanced communications services.  We deliver these services over state-
of-the-art fiber-optic, digital and broadband networks that we design,
construct, own and operate inside large and medium-sized office buildings. We
differentiate ourselves from other communications companies by providing a
single-source communications solution with a high degree of customer service and
responsiveness. Our customers are assigned a single dedicated on-site or near-
site support team to address their sales and service needs. Our customers also
benefit from the convenience and efficiency of receiving a single integrated
bill for all of their communications services.

     We began providing bundled communications services and operating in-
building networks in June 1996 in Atlanta. As of December 31, 1999, we were
operating our networks in 116 buildings representing approximately 30 million
rentable square feet in 12 major metropolitan areas, including Atlanta, Boston,
Chicago, Dallas, Denver, Houston, Los Angeles, Miami, New Orleans, Orange
County, San Diego and Washington, D.C. Overall, as of December 31, 1999, we had
license agreements with building owners and property managers, including AEW,
Boston Properties, Brookfield, Colonnade (formerly known as Taylor Simpson),
Cornerstone, Cousins, Lend Lease, Shorenstein, Tower Realty, Transwestern,
TrizecHahn, Vornado and Westbrook, giving us the right to install and operate
our networks in more than 730 buildings representing more than 229 million
rentable square feet in 50 major metropolitan areas.

                                       2
<PAGE>

Cypress's Corporate History

     We were formed as a limited liability company under the laws of Georgia on
August 16, 1995 under the name Cypress Communications, L.L.C. We completed a
reorganization on July 15, 1997 in which the operations of the predecessor
company were merged into Cypress Communications, Inc., a Delaware corporation.
In December 1998, we acquired certain of the assets and business of MTS
Communications, a provider of building-centric communications services in
California.  In addition, in November 1999, we entered into a binding letter of
intent to acquire approximately 18% of Site Connect, Inc., a Seattle based
provider of Internet access, Web hosting and other advanced data services, for
281,250 shares of our common stock.  In February 2000, we completed an initial
public offering of our common stock.

Our Market Opportunity

     Communications services continue to experience growth and expansion.  Data
services in particular are experiencing rapid growth as an important global
medium for communications and electronic business.  According to industry
sources, there are approximately 1.3 million small and medium-sized businesses
in the United States, which typically employ between 10 and 500 employees.
According to International Data Corporation, small and medium-sized businesses
spent over $47 billion in 1998 for voice communication services. While
Dataquest, another industry source, estimates that the demand for voice services
will grow at a modest pace to over $53 billion in 2002, the demand for data and
Internet services from this market segment is projected to grow at a
substantially greater pace. We believe, based on our industry sources, that
small and medium-sized businesses spent more than $14 billion for data and
Internet services during 1998 and that growth in data and Internet services will
increase at a compound annual growth rate of approximately 29% per year through
2002.

     We are targeting this growing market segment by constructing our fiber-
optic, digital and broadband networks in the office buildings in which many
small and medium-sized businesses are located. We estimate that there are more
than 8,100 office buildings with greater than 100,000 square feet representing
over 2.2 billion rentable square feet of office space located in the 50 major
metropolitan areas in which we currently operate or plan to operate in the
future.

     As the communications market has grown rapidly over the past five years,
businesses have become inundated with offerings of new products, services and
carriers. As a result, it has become increasingly difficult for small and
medium-sized businesses, most of which do not have a dedicated communications
staff, to evaluate the vast array of communications options that are available.
In addition, these businesses have had to contend with the cost and complexity
of retaining multiple vendors in order to procure the various communications
services they require.

     We believe there is a significant demand in the market for an integrated
communications provider who can offer the various communications services that
small and medium-sized businesses require. While most large enterprises build or
lease dedicated high speed networks and complex communications equipment, most
small and medium-sized businesses, due to cost and network infrastructure
constraints, are not able to enjoy the levels of service and functionality that
such facilities and equipment can provide. For example, the majority of small
and medium-sized businesses access the Internet through relatively slow dial-up
connections, often at speeds of 56,000 bits per second or less. We believe that
dedicated high speed connections to the Internet for small and medium-sized
businesses will grow significantly over the next two years, and that this will
create a significant opportunity for communications providers with the ability
to provide affordable high-speed Internet connectivity in addition to other
enhanced communications services.

                                       3
<PAGE>

The Cypress Solution

     We provide small and medium-sized businesses a broad range of
communications services over our own in-building state-of-the-art fiber-optic,
digital and broadband networks. Our solution offers these businesses a number of
important advantages, including:

 .  A comprehensive communications solution from a single source.   We
   with a "one stop shopping" solution. As a result, we greatly reduce the
   administrative burden typically associated with managing multiple
   communications vendors. Our comprehensive package of communications services
   typically includes providing high speed, dedicated Internet access and data
   services, local and long distance voice services, digital satellite business
   television, voicemail and e-mail. We also offer web site hosting, domain name
   registration, 24x7 remote systems monitoring, firewall, or data security,
   protection and many other advanced communications services. We offer our
   services at competitive prices and deliver a single bill for all services
   rendered. We are continually expanding and upgrading the products and
   services that we offer our customers, so that as their needs evolve, our
   products and services evolve with them.

 .  A reliable, feature-rich communications package typically available only to
   large corporations. In addition to offering a comprehensive package of
   communications services, we provide our small and medium-sized business
   customers features and performance levels that traditionally have been
   available only to large corporations. We provide voice services using state-
   of-the-art equipment from manufacturers such as Nortel Networks and Cisco
   Systems, which enables us to offer our customers a variety of enhanced
   services. We provide our customers affordable, high speed, dedicated Internet
   access at transmission speeds up to 3.0 million bits of data per second. We
   also have the ability to provide significantly greater speeds should our
   customers require such capacity in the future. Unlike traditional networks,
   our networks are designed to alleviate network congestion resulting in slow
   transmission speeds, a common problem which occurs when many customers within
   a multi-tenant commercial building attempt to use traditional limited
   capacity networks. In addition, to ensure reliable performance, we utilize
   multiple carriers, backup network components and emergency power supplies.

 .  Rapid installation and service expansion with minimal capital outlay by
   customers. Because we own and operate our in-building networks, we are able
   to deliver our comprehensive package of services to a new customer within a
   few days of receiving an order. In addition, we are often able to provide
   same day service for existing customers requesting new services or features,
   such as increased Internet speeds or additional lines. Additionally, because
   our customers typically rent their telephone systems and related premise
   equipment from us, they avoid significant capital outlays and substantially
   mitigate the risks of being constrained by network capacity or having their
   phone system become technologically obsolete.

 .  On-site or near-site customer service and support. Upon contracting for
   service, each of our customers is assigned a dedicated, experienced account
   team. This team is either on-site or near-site and is available on a 24x7
   basis to address customer inquiries. We believe that our high standard of
   customer service will continue to enhance our ability to acquire and retain
   customers.

Our Strategy

     Our objective is to be a leading provider of integrated communications
services to small and medium-sized businesses. To achieve this objective, we
have developed a business strategy designed to achieve

                                       4
<PAGE>

significant market penetration and deliver superior customer service while
maximizing operating margins. Key components of this strategy include the
following:

 .  Providing a broad range of communications services under long-term customer
   contracts. We intend to continually add to and upgrade our service offerings
   in order to attract new customers and further penetrate our existing customer
   base. We sell our services under contracts which are typically three years in
   length. We believe our ability to provide a "one-stop shopping" solution will
   enable us to continue to enter into long-term contracts with our customers.
   In addition, we believe that our broad product portfolio also contributes to
   our low customer defection, or churn rates. In short, our goal is to ensure
   that a customer or potential customer need never look beyond Cypress to
   fulfill any communications need.

 .  Providing superior customer service.  As part of our continuous effort to
   attract and retain customers, we are dedicated to providing the highest
   levels of customer service and satisfaction in the industry. We assign to
   each customer a dedicated team of customer service personnel that is either
   on-site or near-site. Consequently, we believe that the level of customer
   service and technical support we offer in terms of responsiveness and
   customer knowledge exceeds that offered by competitors who provide customer
   support on a regional or national basis.

 .  Controlling the critical "last few feet."  We own and manage the in-building
   infrastructure over which we provide services to our customers, including the
   actual physical connection between our customers and out-of-building
   networks. We believe this affords us important and sustainable competitive
   advantages and allows us to:

          -  strengthen our position as "gatekeeper" to our in-building
             customers;

          -  provision services more quickly and efficiently; and

          -  better control service quality.

 .  Leveraging our experience and first mover advantage to secure license
   agreements with building owners. As one of the first in-building providers of
   integrated communications services in the United States, we will continue to
   leverage our experience and first mover advantage to secure additional
   license agreements with building owners. Before a building owner will enter
   into a long-term contract with a communications provider, the building owner
   must be confident that the provider is capable of offering superior service
   to building tenants throughout the life of the license agreement and
   thereafter. We believe our experience, industry reputation and referenceable
   customer base give us a meaningful competitive advantage with respect to
   instilling this confidence. In addition, while we target all types of
   property owners and managers, we have developed significant expertise in
   establishing strategic relationships with owners of individual buildings or
   small groups of buildings. These owners represent one of the largest single
   types of ownership of office space in the country. We believe that over the
   long term this competitive advantage will be particularly important because
   many of the larger multi-market building owners will eventually sign license
   agreements with either ourselves or our competitors.

 .  Deploying cost effective, flexible networks. A substantial portion of our
   network related capital expenditures are made only after we have entered into
   a long-term license agreement with a property owner. The capital we deploy is
   highly success-based and modest on a per-building basis. For example, our
   initial capital expenditures in a typical building with approximately 335,000
   rentable square feet are usually less than $90,000, which includes the
   purchase and installation of our riser system and associated network
   equipment. Furthermore,

                                       5
<PAGE>

   our networks are designed using an open standard architecture which enables
   us to rapidly and cost effectively incorporate the latest technological
   developments. In addition, in order to minimize operating costs while
   maximizing transmission capacity and providing backup capacity, we deploy
   networks using a combination of fiber-optic, copper, coaxial and wireless
   transmission solutions.

 .  Opportunistically pursuing additional strategic acquisitions and
   relationships. We opportunistically pursue acquisitions and other strategic
   relationships which enable us to expand our customer base or geographic
   presence or provide us with additional management, sales or technical
   personnel. We intend to continue to seek such opportunities, both
   domestically and abroad.

Our Communications Services

     We use our state-of-the-art in-building networks to provide small and
medium-sized businesses with a full range of voice, data, video and other
enhanced communications services. We also provide paging and, in some markets,
wireless telephone services through agreements with various communications
carriers. Close contact with our customers by our direct sales force and
customer service personnel enables us to tailor our service offerings to meet
customers' needs and to creatively package our services to provide "one-stop
shopping" solutions for those customers. Services we offer are summarized as
follows:

                      Cypress Services Currently Available

<TABLE>
<CAPTION>
          Voice Services                       Data Services                          Video/Wireless/Other
----------------------------------  -----------------------------------  ----------------------------------------------
<S>                                 <C>                                  <C>
 Local Dialtone                     High Speed Internet Access           Business Television
 Long Distance                      Electronic Mail                      Wireless Voice
 Voice Mail                         Web Hosting                          Paging
 Telephone Equipment                Domain Name Services                 Installation & Cabling
 Audio Conferencing                 Firewall Services                    Move, Add & Change Services
 Toll Free Services                 SmartWatch
 Calling Cards                      SmartView
</TABLE>

     Voice services.  The majority of our voice services customers rent their
telephones from us. This ensures a compatible interface with our state-of-the-
art in-building communications equipment and provides customers with a number of
key benefits, including:

 .  access to an advanced, multi-function telephone system which few small
   businesses could afford to buy and support on their own;

 .  a significant reduction in up-front capital costs; and

 .  reduced risk of technological obsolescence.

     Our voice offerings include both traditional telephone services, such as
local and long distance services, as well as value-added services, such as
integrated voicemail, audio conferencing, calling cards and toll-free number
services. Additional enhanced features include call waiting, call forwarding,
dialback and caller ID.

     Data services.  One of our most popular services is high speed, dedicated
Internet access. We provide this service using our patent pending fiber-optic
infrastructure and network configuration. The key features of this service are:

                                       6
<PAGE>

 .  Dedicated connectivity. Our service is always on, providing instantaneous
   connections and the capability to receive or transmit information
   continuously.

 .  Range of speed options. Customers currently subscribe to delivery speeds
   between 64,000 bits of data per second and 3.0 million bits of data per
   second, but we have the capacity to provide up to 100.0 million bits of data
   per second in response to customer demand. In addition, using commercially
   available equipment, we can increase the transmission speed of our
   infrastructure to one billion bits of data per second.

 .  Flexibility. We can usually increase a customer's bandwidth speed within
   minutes of receiving a request. We can also deliver different speeds of
   service to specific computers or groups of computers within a customer's
   office.

 .  Security. Because each customer's Internet service is provided over dedicated
   fiber-optic strands, a customer's Internet traffic is secure from that of
   other customers in the building.

     In addition to our Internet access service, we offer other enhanced data
services such as web site hosting, e-mail, domain name registration and firewall
services. We also offer our customers SmartWatch services, in which we provide
24-hour monitoring of web and e-mail servers, and SmartView services, which
enables our customers to monitor their bandwidth usage via the Internet.

     Video, wireless and other services.  In many of our buildings, we offer our
customers a comprehensive package of business television services consisting of
news, business, sports and network programming. We deliver these services
directly to our customers over our in-building networks using a combination of
direct broadcast satellite programming and off-air local channels. Our customers
can elect to receive more or less programming depending on their needs. In
addition to voice, data and video services, we also offer our customers a
variety of other enhanced communications services, such as paging and, in some
markets, wireless telephones, which we are able to provide through agreements we
have with various communications carriers. We also provide on-site installation,
including installing telephone systems and configuring and connecting customer
computer equipment to our networks, as well as highly responsive move, add and
change services. We will continue to investigate, test and add, where
appropriate, complementary products and services to maintain our "one stop
shopping" strategy.

Network Architecture

     We design, install, own and operate our networks inside buildings which we
serve under long-term license agreements with building owners or operators. Our
in-building networks typically consist of the following:

 .  a state-of-the-art riser system utilizing fiber-optic cable, broadband
   coaxial cable and copper wire;

 .  communications equipment usually located in the building;

 .  high capacity leased facilities connecting our networks to the networks of
   selected local, long distance and Internet service providers; and

 .  for our data services, high capacity leased facilities to move data traffic
   to and from a central point that we establish in each market.

     Riser systems inside buildings.  Inside buildings, we design, install, own
and manage a vertical communications infrastructure, also known as the riser
system, that typically runs inside vertical utilities shafts from the building's
basement to the top floor. Our riser systems typically are comprised of high
capacity fiber-

                                       7
<PAGE>

optic cable, broadband coaxial cable and copper wire. These systems are designed
to carry a full range of voice, data and video traffic. We believe our riser
systems have the capacity to accommodate all of our customers' current and
anticipated broadband needs.

     Feeder systems inside buildings.  Inside buildings, we also design,
install, own and manage a horizontal communications infrastructure, known as the
feeder system, that typically runs from our riser systems into our customers'
premises. Our feeder systems typically utilize high capacity fiber-optic cable,
broadband coaxial cable and copper wire. These systems are installed only upon
our signing a service contract with a customer

     Communications equipment inside buildings.  Inside almost all of the
buildings we serve, we have routing and distribution equipment that connect our
riser systems to the networks of select local, long distance and Internet
service providers. This equipment includes data switches, routers and voice
switches, which direct incoming and outgoing data and voice traffic, and other
video and communications equipment purchased from Nortel Networks, Cisco Systems
and other manufacturers. In the case of a multi-building real estate complex, we
are usually able to provide our services in all buildings within that complex by
deploying this communications equipment in one building and connecting the other
buildings to that equipment. This results in significant cost savings and
reduced capital expenditures.

     Leased facilities outside buildings.  We connect the communications
equipment in our buildings to leased network facilities of selected local, long
distance and Internet service providers that provide the out-of-building
transport necessary to provide full service to our customers. In some instances,
as in the case of a multi-building complex, we may interconnect a number of
buildings using leased facilities known as "private line" or "point-to-point"
connections.

     In deploying our Internet services, we utilize a central market point of
presence, which allows us to aggregate and disseminate data traffic to and from
all of the buildings we serve in that market. We typically connect each building
to the central market point of presence using leased high capacity facilities,
on a carrier's fiber-optic network. These lines are leased from carriers that
have previously installed fiber in the local market. There are generally several
providers in each market who are able to provide us with connectivity for
traffic between buildings and the point of presence.

     At our point of presence, we install the electronic equipment necessary to
provide our data services in the metropolitan area. This equipment includes
network servers, traffic routers and other related communications equipment. We
connect each point of presence to more than one Internet service provider to
provide diverse Internet connectivity to our network. Most points of presence
are connected to at least one other point of presence in a different market over
a dedicated leased facility to provide a backup means of transmitting data in
case any of our network connections to the Internet should fail.

     Advantages of our Network Architecture.  The architecture of our network
provides us with significant competitive advantages, including the ability to:

 .  rapidly connect customers without the need to arrange local phone lines and
   circuits for each new line added;

 .  capitalize on advanced Internet-protocol-based technology to construct a more
   efficient and lower cost network;

 .  provide low cost, high performance services;

 .  offer always-on, secure data connections to our network and the Internet; and

                                       8
<PAGE>

 .  provide a flexible platform for bandwidth upgrades and new service offerings
   as communications technology and applications continue to develop.

     Network Management and Monitoring.  We recently implemented a state-of-the-
art automated alarm and control system to further enhance our network monitoring
capabilities. Our trained system engineering personnel use our control system to
monitor and control our networks on a 24x7 basis. This system enables fault
alarm monitoring, system control, environmental monitoring, remote system
diagnostics, physical security monitoring, backup control and usage statistics.
This Internet-enabled system allows our technicians to access and control our
systems over Internet, Intranet or local or wide area network configurations, as
well as through a dial-up connection in the unlikely event of loss of Internet-
based communications. Service affecting events are automatically detected and
immediately reported to both technical personnel located in our network
operations center and market-based field support engineers who address network
issues either remotely or directly on-site. Field engineering personnel in our
markets are equipped with a full set of parts and spares necessary to support
their routine service calls and we also maintain complete spare systems in the
unlikely event of a disaster.

     Our network operations center also supports a 24x7 hotline for help desk
support. We intend to supplement this center with a geographically diverse
backup network operations center to supplement day-to-day operations and act as
a disaster recovery site for the main network operations center.

Construction

     We have developed and implemented a cost-efficient, team-based approach to
constructing and expanding our in-building networks. We have formulated
implementation procedures which incorporate standardized construction drawings
and equipment configurations that allow us to maintain high quality construction
standards.  These procedures can be quickly and easily repeated for all of our
installations with minimal use of equipment space. As a result of the extensive
experience gained from having constructed over 150 in-building networks and our
standardized installation procedures, we can often begin serving customers
within 45 to 60 days from the date a property manager approves our network
design. As a result of our standardized construction process and our extensive
engineering capabilities, we are typically able to initially install our
networks for less than $90,000 per building. Thereafter, we are able to cost-
effectively deploy capital and expand our networks as needed to accommodate
customer demand.

Sales and Marketing

     We directly market our services to the tenants in buildings where we have
secured long-term license agreements with property owners or managers. We
leverage our relationships with property owners and managers as a first and
primary means of creating tenant awareness of our services. Upon our entering a
building, property owners or managers will typically send a letter to tenants on
their letterhead introducing Cypress, describing the nature and benefits of our
service offerings and highlighting the complete package of business
communications products that we are able to offer. Shortly thereafter, we will
conduct a promotional in-building event, typically in the building lobby, where
we will demonstrate our voice, Internet and video services to generate sales
leads. After our initial service launch we continue to work closely with the
building owner, property management and leasing representatives. Our typical
license agreements enable us to display our signage and marketing materials
within the leasing office and other high traffic locations within a building.
Our agreements also contain provisions whereby our building owners, management
and leasing representatives agree to advise tenants of the availability of our
services. In most cases, property owners or managers will also notify us as new
tenants enter the building.

     Our goal is to offer a comprehensive communications solution and in effect
to become our customers' outsourced communications department. As such, our
sales approach is highly consultative. In our initial sales meetings we work
closely with prospective customers to assess their particular communications
needs. We also carefully analyze the communication bills from their current
vendors to understand a potential customer's

                                       9
<PAGE>

usage patterns and current cost. We then present the potential customer with a
highly customized, comprehensive proposal which is typically more cost
effective, feature-rich and easier to administer than their current
communications package.

     We typically assign one dedicated account team for every five or six
buildings. The account team usually consists of one account executive, one
customer service representative and one on-site or near-site technician. Our
technicians and engineers provide our customers with customized technical
consulting regarding the use and availability of our services. This is generally
highly valued by small and medium-sized businesses that often have limited
information technology staffs and expertise. We believe that using dedicated
account teams enhances our ability to build and retain long-term customer
relationships and our ability to cross-sell and upgrade service offerings.

     Our sales efforts are supported by our marketing department which, in
addition to creating various "point of sales" promotional materials, works with
outside advertising and public relations firms to develop a targeted, highly
cost-effective marketing approach to build Cypress brand awareness.

Real Estate Selection and Marketing

Property Selection

     The criteria that our real estate professionals consider in targeting
buildings includes the buildings' location and size, the number of tenants, the
tenant mix, the proximity of the building to other buildings in which we hold
existing license agreements, and the expected time and cost involved in
installing our networks. In addition, we generally prefer buildings with some
tenant vacancy, or anticipated near-term tenant roll-over, because we believe
new tenants are particularly receptive to our single-source communications
solution. Once we have determined that a building or collection of buildings
meets our criteria, one of our real estate professionals contacts the property
owner or operator in an effort to negotiate a license agreement which will
provide us access to the buildings.

License Agreements and Arrangements with Property Owners and Operators

     We believe we present a compelling value proposition to property owners and
operators. In our negotiation with these property owners and operators, we
emphasize the following value-added benefits of doing business with Cypress:

 .  we enhance the marketability of the building to prospective tenants by
   providing a complete communications solution with advanced features that may
   not be available in other buildings;

 .  we install our network architecture at no cost to the property owner; and

 .  we pay property owners a fixed rental fee and/or a modest percentage of the
   revenue we receive from providing communications services to the tenants in
   their buildings.

     In the past, we have entered into license agreements with property owners
and operators on a per building basis in order to gain the right to install and
operate our networks in their buildings. Under these agreements, we pay the
property owners and operators either a base fee or a modest percentage of the
revenues we generated from their tenants, typically between 3% and 6%. The
typical term of these agreements is ten years.

     In November and December 1999, we entered into master license agreements
with several owners and operators of multiple office buildings, including AEW,
Boston Properties, Brookfield, Colonnade (formerly known as Taylor Simpson),
Cornerstone, Cousins, Lend Lease, Shorenstein, Tower Realty, Transwestern,
TrizecHahn, Vornado and Westbrook. Each master license agreement sets forth a
list of buildings owned or

                                       10
<PAGE>

managed by the owner or operator that is a party to that agreement. In
accordance with the terms of these agreements, we have begun to enter into
property-specific license agreements with respect to each listed building. In
some cases, the property owner or operator may need to obtain the consent from
third parties who may have an ownership interest in the building before we can
enter into a property-specific license agreement for that building. Under the
property-specific license agreements, we will be granted a license to install
and operate our networks in each such building in return for approximately 6% of
the revenues we receive from tenants in that building. The initial term of each
property-specific license agreement is generally five years, with an automatic
five year extension at the end of the initial term, absent any default under the
agreement. These master license agreements gave us the right to operate our
networks in more than 600 buildings representing more than 194 million rentable
square feet. Overall, as of December 31, 1999, we had license agreements giving
us the right to operate our networks in more than 730 buildings representing
more than 229 million rentable square feet.

     In connection with the execution of the master license agreements, we also
entered into stock warrant agreements with the same property owners and
operators. Under the terms of these agreements, we issued these owners and
operators warrants to purchase up to an aggregate of 11,163,990 shares of our
common stock at an exercise price of $4.22 per share. The exact number of shares
of common stock underlying these warrants, which is based on the gross leasable
area of the buildings set forth in the master license agreements, will be
determined upon the completion of due diligence and the finalization of the
building schedules, which is expected to be completed in April 2000. These
warrants are exercisable for periods of five to ten years, but cannot be
exercised until August 15, 2000.

     Generally, our license agreements are non-exclusive, which means the
property owners or operators may permit competitors to install their own in-
building networks in their buildings. Some competitors already have rights to
install networks in some of the buildings in which we have rights to install our
networks. While few in-building competitors are operating networks in buildings
in which we currently operate networks, this situation may change as we and our
competitors continue to expand operations.

     We continue to pursue license agreements with property owners and operators
and, in particular, target owners and operators of multiple office buildings.
We are currently considering the possibility of issuing additional warrants to
acquire shares of our common stock to owners and operators of multiple office
buildings in order to induce them to enter into master license agreements
similar to the license agreements we entered into in November and December of
1999.

Customer Service and Technical Support

     We believe that we maintain a higher standard of customer service than
other companies serving small and medium-sized businesses and that this is a key
factor in our low customer turnover rate. The key aspects of our service
include:

 .  Dedicated Support Teams for Timely Response.  We typically designate on-site
   or near-site teams of one account executive, one customer service
   representative and one technician to a territory which usually includes five
   or six buildings in close proximity to one another. These teams are closely
   supported by Internet sales engineers and technicians certified in Nortel,
   Cisco and Microsoft technologies. Customers benefit from this arrangement
   because our dedicated account teams, in addition to being physically located
   near our customers, are familiar with our customers' particular
   communications packages and, accordingly, are able to more efficiently
   respond to their needs. This dedicated team approach also further
   personalizes our customer relationships.

 .  Dial "H-E-L-P" for Service. In Atlanta, Chicago, Dallas, Houston and Los
   Angeles, a customer need only dial "H-E-L-P" (4357 on a telephone key pad)
   from any telephone that is part of our network to be connected to our
   customer service team. In most cases,

                                       11
<PAGE>

   our customer's name will appear on our customer service representatives
   telephone display, allowing us to answer the calling party using their name,
   further supporting the personalized relationship between Cypress and our
   customers. If a customer is not near a telephone connected to our network, we
   provide a regular ten digit contact number to reach our customer service
   representatives. We are implementing this system in our other markets as
   well.

 .  Remote System Monitoring and Service Modifications. Many elements of our
   networks can be controlled and modified remotely from a customer service
   office or our network operations center, allowing us to respond to customers
   more rapidly and with minimal disruption. For example, we can increase a
   customer's bandwidth allocation within minutes of being contacted or we can
   add additional lines and voice mail boxes to a customer's existing services
   without the need to make an on-site service call.

 .  Efficient On-Premises Service Modifications. Some move, add and change
   services require a visit to our customers' premises. For example, when a
   customer expands the number of employees in their office, we will send a
   customer service representative to manage this expansion and a technician to
   install additional cabling and telephones. Because our networks are modular
   even at the customer premises level, we can typically add the necessary
   services and equipment with minimal disruption to our customer's regular
   operations.

 .  Continuous Training.  Upon implementation of the Cypress solution for a new
   customer, the members of the dedicated support team consult with the end-
   users at the customer's premises and explain the functionality of the new
   equipment and services for which the customer has contracted. We provide
   further training when the customer expands its services or adds new
   employees. We believe our emphasis on training reduces calls to our customer
   service team and encourages quick adoption of and higher usage rates for
   installed services. We believe this approach generates increased demand for
   bandwidth upgrades and additional services.

Competition

     The market for communications services for small and medium-sized
businesses is very competitive. We face competition from many communications
providers with significantly greater financial resources, well-established brand
names, larger customer bases and diverse strategic plans and technologies. Any
of these competitors may focus on our market strategy and subject us to intense
competition for our services or for access to the office buildings in our target
markets. We expect significant competition from traditional and new
communications companies, including the following:

Other in-building communications providers

     Some competitors are attempting to gain access to office buildings in our
target markets. These companies include Advanced Radio Telecom, Allied Riser
Communications, Broadband Office, Intermedia, NEXTLINK, OnSite Access, RCN
Telecom Services, SiteLine, Teligent, Urban Media and Winstar. Some of these
competitors are seeking to develop exclusive relationships with building owners.
To the extent these competitors are successful, we may face difficulties in
building our networks and marketing our services within some of our target
buildings. Our agreements to use utility shaft space within buildings are
generally not exclusive. An owner of any of the buildings in which we do not
have exclusive rights to install a network could also give similar rights to one
of our competitors. Certain competitors already have rights to install networks
in some of the buildings in which we have rights to install our networks. It
will take a substantial amount of time to build networks in all the buildings in
which we intend to exercise our rights under our

                                       12
<PAGE>

license agreements and master license agreements. Each building in which we do
not build a network is particularly vulnerable to competitors. It is not clear
whether it will be profitable for two or more different companies to operate
networks within the same building. Therefore, it is critical that we build our
networks in additional buildings quickly. Once we have done so, if a competitor
installs a network in the same building, there will likely be substantial price
competition.

Local telephone companies

     Incumbent local telephone companies, including GTE and regional Bell
operating companies such as Bell Atlantic and BellSouth, have several
competitive strengths which may place us at a competitive disadvantage. These
competitive strengths include an established brand name and reputation and
significant capital to rapidly deploy or leverage existing communications
equipment and broadband networks. Competitive local telephone companies often
market their services to tenants of buildings within our target markets and
selectively construct in-building facilities. Additionally, the regional Bell
operating companies are now permitted to provide long distance services in
territories where they are not the dominant provider of local services. These
companies may also provide long distance services in the territories where they
are the dominant provider of local services if they satisfy a regulatory
checklist established by the Federal Communications Commission. In December
1999, the FCC ruled that Bell Atlantic has met these requirements in New York
and may provide long distance services in New York. If other regional Bell
operating companies are permitted to provide long distance services in
territories where we operate, we could face greater price competition.

Long distance companies

     Many of the leading long distance companies, such as AT&T, MCI WorldCom and
Sprint, could begin to build their own in-building voice and data networks. The
newer national long distance carriers, such as Level 3, Qwest and Williams
Communications, are building and managing high speed fiber-based national voice
and data networks, partnering with Internet service providers, and may extend
their networks by installing in-building facilities and equipment.

Fixed wireless service providers

     Fixed wireless service providers, such as Advanced Radio Telecom, MCI
WorldCom, NEXTLINK, Sprint, Teligent and Winstar, provide high speed
communications services to customers using microwave or other facilities or
satellite earth stations on building rooftops.

Internet service providers

     Internet service providers, such as Concentric Networks, EarthLink, GTE
Internetworking, Prodigy, PSINet, Sprint, the UUNET subsidiary of MCI WorldCom,
and Verio, provide traditional and high speed Internet access to residential and
business customers, generally using the existing communications infrastructure.
Providers, such as America Online, Microsoft Network, Prodigy and WebTV,
generally target the residential market and provide Internet connectivity, ease-
of-use and a stable environment for modem connections.

Digital subscriber line companies

     Digital subscriber line companies and/or their Internet service provider
customers, such as Covad, Network Access Solutions, Northpoint and Rhythms
NetConnections, provide high capacity Internet access using digital subscriber
line technology, which enables data traffic to be transmitted over standard
copper telephone lines at much higher speeds than these lines would normally
allow.

                                       13
<PAGE>

Cable-based service providers

     Cable-based service providers, such as Excite@Home and its @Work
subsidiary, High Speed Access, RCN Telecom Services and Road Runner, use cable
television distribution systems to provide high capacity Internet access.

Suppliers

     We must connect our in-building networks to local, long distance and
Internet service providers in order to serve our customers. In most of our
markets, to connect our networks to local, long-distance and Internet providers,
we connect our networks to and lease facilities from the local telephone
company, which is usually one of the regional Bell operating companies such as
BellSouth, Bell Atlantic, SBC-Ameritech and Pac Bell. Typically, we are able to
secure connections for local calling service within 30 days of requesting such
service, although additional delays of 15 to 30 days are not uncommon.

     We purchase long-distance transmission capacity from several long-distance
communications companies, such as ITC DeltaCom, Qwest and MCI WorldCom, on terms
customary for the industry. While we have entered into several long-distance
contracts with minimum purchase commitments, we believe that none of these
contracts are material and that in most cities in which we operate there are a
number of long distance carriers with whom we could arrange long-distance
services. Typically, we are able to secure connections for long-distance service
within 30 days of requesting such service.

     To provide Internet services to our customers, we purchase data
transmission capacity from Internet service providers such as MCI WorldCom,
Sprint, Verio and Savvis. We believe that our agreements for data transmission
capacity are on customary terms for the industry and that in most cities in
which we operate there are a number of data transmission capacity providers with
whom we could arrange data transmission services. Typically, we are able to
secure connections for data transmission capacity within 45 days of requesting
such service.

     Our in-building networks contain equipment such as data switches, routers,
voice switches, and other communications and video equipment that we purchase
from Nortel Networks, Cisco Systems and other manufacturers. We do not have any
minimum purchase commitments with any of our manufacturers and believe that
there are alternative vendors available to us for all the types of equipment
which we purchase.

Regulation

     Our provision of basic communications services is subject to regulation at
the federal, state and local level. Often, regulations do not specifically
address our operations and the application of these regulations is subject to
interpretation. Regulators may successfully assert that additional regulations
apply to our operations. Additionally, regulation of the communications industry
is evolving rapidly. The regulations that apply to us are subject to ongoing
administrative proceedings, litigation and legislation. The outcome of these
various proceedings, as well as any other regulatory initiatives, cannot be
predicted. Future regulatory changes may have a material adverse affect on our
business and operations.

Local Voice Services

     In the states where we currently provide local voice services, we believe
that we qualify as what most states refer to as a "shared tenant service
provider." Laws in these states vary as to the terms and conditions with which
we must comply to be classified as a shared tenant service provider. Some of
these terms and conditions include:

                                       14
<PAGE>

 .  We must maintain a switching system, or private branch exchange, in each
   building or set of contiguous buildings that we serve which allows calls to
   be routed directly to the individual instead of through a central number.

 .  The local telephone company must be permitted by the building owner to
   provide service to any tenant in the buildings in which we operate.

 .  In California, we may not charge our customers a higher rate for local voice
   services than we are charged by the local telephone company for those
   services.

 .  In Illinois, we must permit local telephone companies, upon payment of a fee,
   to use the communication equipment in our buildings.

 .  In some states, we must register as a shared tenant service provider and file
   reports. Registering as a shared tenant services provider usually involves
   filing the required application and, in some instances, may also involve the
   payment of a small fee.

 .  In some states, we must pay regulatory fees and universal service fees.
   Universal service fees are payments to funds established to, among other
   things, help subsidize the incumbent local telephone company's provision of
   telephone service to certain rural and other hard-to-reach areas.

     A jurisdiction's regulations or guidelines governing shared tenant service
providers may not specifically address our operations. While we believe that we
qualify as a shared tenant service provider in all the jurisdictions where we
currently provide local voice services, a regulator may successfully challenge
our position and conclude that we need to qualify as a competitive local
telephone company. Additionally, jurisdictions may modify their regulations to
reduce or eliminate their shared tenant service provider classification,
requiring us to comply with the regulation of competitive local telephone
companies. In fact, in some states in which we intend to provide local voice
services, we will have to qualify as a competitive local telephone company
because the regulations in such states effectively require us to do so in order
to perform our operations in the manner we propose.

     Competitive local telephone companies are typically subject to more
stringent state regulation than shared tenant service providers. Our cost of
regulatory compliance would increase if we were subject to regulation as a
competitive local telephone company, but not in such a way that would have a
material adverse effect on our business. Most states require that competitive
local telephone companies receive approval from the public service commission to
operate. Competitive local telephone companies generally must also file tariffs
setting forth the terms, conditions and prices for intrastate voice services. In
many states, competitive local telephone companies must also, among other
things, file accident reports, notifications of complaints and service
interruptions, and contribute to universal service support. In addition, under
federal law, including the Telecommunications Act of 1996, competitive local
telephone companies are subject to certain rights and obligations with respect
to their agreements with incumbent local telephone companies, including the duty
to interconnect with other carriers, to provide other carriers access to their
poles, ducts, conduits and rights-of-way, and to make their agreements with the
incumbent local telephone company available to other carriers on a non-
discriminatory basis. As a result of the Telecommunications Act, which removed
most of the significant legal barriers to entry into communications service,
including local telephone company service, there has been increased competition
in our target markets for the provisioning of local telephone services.

     While we are generally subject to less regulation as a shared tenant
services provider than we would be as a competitive local telephone company, we
have the added regulatory uncertainty that arises from the fact that many states
have little, if any, written regulations regarding shared tenant services. The
regulations that do exist are often unclear. In addition, some states rely on
the tariffs of the local telephone companies to determine what constitutes
permissible shared tenant services, and there are no assurances that such
tariffs will

                                       15
<PAGE>

not change in a manner that materially affects our ability to provide services
as a shared tenant services provider. In addition, as a shared tenant services
provider we have less flexibility with respect to the use of our switching
systems than competitive local telephone companies because we must maintain a
switching system, or private branch exchange, in each building or set of
contiguous buildings that we serve.

Long Distance Voice Services

     While the law on this issue is unclear, we believe that given the highly
customized interstate and international long distance services that we provide,
we are not required to make any material filing with, or seek the approval of,
the Federal Communications Commission. As with our local voice services, our
long distance services may be considered to be a common carrier service by the
Federal Communications Commission. If that occurs, we will be subject to common
carrier regulation under federal law and will need to file domestic and
international tariffs and seek FCC authorization to provide international
service. Our cost of regulatory compliance would increase if we were subject to
regulation as a common carrier. On the other hand, if we are deemed to be a
common carrier, we may find it easier to market our services to prospective
customers because we could simplify our agreements with them since many of the
protections we believe we need, such as limitation of liability, could be set
forth in the tariffs.

     Additionally, as a result of the Telecommunications Act of 1996, the
regional Bell operating companies are now permitted to provide long distance
services in territories where they are not the dominant provider of local
services. These companies may also provide long distance services in the
territories where they are the dominant provider of local services if they
satisfy a regulatory checklist established by the Federal Communications
Commission. In December 1999, the FCC ruled that Bell Atlantic has met these
requirements in New York and may provide long distance services in New York. If
other regional Bell operating companies are permitted to provide long distance
services in territories where we operate, we could face greater price
competition.

Data Services

     The Internet and data services that we provide generally are not subject to
federal, state or local regulation. Congress and some state legislatures have
considered imposing taxes and other burdens on Internet service providers and
regulating content provided over the Internet. Additionally, we may be affected
by statutes, regulations and court cases relating to the liability of Internet
service  providers and other on-line service providers for information carried
on or through their services or equipment, including in the areas of copyright,
indecency/obscenity, defamation and fraud. Future regulation may have a negative
impact on our ability to offer Internet services at competitive and profitable
rates.

Video and Wireless Services

     Our provision of video services is subject to some federal, state and/or
local regulations. We are, for example, required to obtain consent from local
broadcasters, and pay certain copyright fees, in order to provide their
programming, and we must also pay copyright fees to provide certain other
programming. We also are subject to some technical requirements with regard to
our provision of video services, such as requirements to ensure that our system
will not cause harmful interference with certain other communications systems.
Further, to the extent that we provide programming using wireless transmission,
we must obtain and maintain federal licenses.

     Our video services are regulated to a far lesser extent than the video
services of franchised cable operators, which are those video services providers
who have received franchises from the municipalities they serve and whose
facilities typically cross public streets and rights of way. For example, we are
not subject to any rate regulation, and we are not subject to the "must carry"
obligations placed upon franchised cable operators, which require those
operators to carry certain programming.

                                       16
<PAGE>

     Recent rulings of the Federal Communications Commission may impact our
video services. For example, the FCC recently ruled that owners of multiple unit
premises generally cannot forbid their tenants from installing some
communication devices, such as satellite dishes, on the tenant's balconies and
other areas controlled by the tenant.

     We do not have any cellular or similar types of licenses. Rather, we rent
or sell pagers and wireless phones and resell the services of wireless
providers. Consequently, while we do pay some regulatory fees, we generally are
not subject to federal regulation with respect to these services.

Mandatory Access Laws

     There have been proposals to require that commercial office buildings give
access to competitive providers of communications services, and some states,
such as California and Texas, already have mandatory access laws. These laws
generally prohibit a property owner from providing exclusive access to one
provider or from restricting another provider's access to the property. In
addition, the Federal Communications Commission is considering, among other
things, whether building owners offering access to any communications provider
should be required to make comparable access available to all such providers on
a nondiscriminatory basis. We do not know whether, or in what form, these
proposals will be adopted. If the FCC or many other states in which we operate
or intend to operate require commercial property owners to provide access to all
communications providers, such laws will facilitate our competitors' access to
buildings we serve. Such laws may, however, also enable us to obtain access to
buildings in which we otherwise may have been denied access.

Intellectual Property

     We regard certain aspects of our products, services and technology as
proprietary and attempt to protect them with patents, copyrights, trademarks,
trade secret laws, restrictions on disclosure and other methods. 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 currently have a patent application pending for our fiber-optic
infrastructure and network configuration. This patent may not be issued to us,
and if issued, it may not protect our intellectual property from competition
which could seek to design around or invalidate this product.

Employees

     As of March 15, 2000, we had 307 full-time employees. We are not party to
any collective bargaining agreements covering any of our employees, have never
experienced any material labor disruption and are unaware of any current efforts
or plans to organize our employees. We consider our relationships with our
employees to be good.

Item 2.    Properties.

     Our headquarters are located in facilities consisting of approximately
30,000 square feet in Atlanta, Georgia, which we occupy under leases which
expire in 2005 and 2007.  We also occupy approximately 3,000 square feet of
temporary space in Atlanta of leases of less than one year.  In addition, our
engineering personnel, network operating facilities and warehousing and
distribution functions, were relocated in February 2000 to a new facility
consisting of approximately 32,000 square feet in Norcross, Georgia under a
lease which expires in November 2006.  We also occupy offices in major U.S.
markets under leases of various terms.  As we expand into new markets we will
continue to add office space as needed.

                                       17
<PAGE>

Item 3.    Legal Proceedings.

     We are not currently involved in any pending legal proceedings that are
expected to have a material adverse effect on our business.

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

Note:  In addition to the 4.5-for-1 stock split, all information in this Item 4
----   regarding common shares has been retroactively adjusted to reflect the
       conversion of all outstanding preferred stock into common stock on
       February 15, 2000.

     On October 8, 1999, our stockholders approved the matters set forth below
by written consent in lieu of a special meeting. On the date of such consent
there were 16,586,931 shares of common stock outstanding, and stockholders
holding 16,586,931 shares of common stock executed such consent, representing
100% of the then outstanding shares of common stock.

 .  In connection with the issuance and sale of series C preferred stock, the
   stockholders approved (i) the entering into of the Series C Preferred Stock
   Purchase Agreement and the Third Amended and Restated Stockholders Agreement
   and (ii) the filing of the Second Certificate of Amendment to the Amended and
   Restated Certificate of Incorporation.

 .  The stockholders approved (i) the reservation of 9,000,000 shares of common
   stock for issuance pursuant to the 1997 Management Option Plan and (ii) the
   reservation of 5,400,000 shares of common stock for issuance pursuant to
   warrants to be granted in connection with our licensing agreements.

 .  The stockholders approved an amendment to our bylaws increasing the maximum
   number of directors to nine (9).

     On November 23, 1999, our stockholders approved the matters set forth below
by written consent in lieu of a special meeting. On the date of such consent
there were 29,276,331 shares of common stock outstanding, and stockholders
holding 27,660,648 shares of common stock executed such consent, representing in
excess of 94.4% of the then outstanding shares of common stock.

 .  In connection with the issuance and sale of additional series C preferred
   stock, the stockholders approved the filing of the Third Certificate of
   Amendment to the Amended and Restated Certificate of Incorporation.

     On November 23, 1999, our stockholders approved the matters set forth below
by written consent in lieu of a special meeting. On the date of such consent
there were 29,276,331 shares of common stock outstanding, and stockholders
holding 27,581,023 shares of common stock executed such consent, representing in
excess of 94.2% of the then outstanding shares of common stock.

 .  The stockholders ratified the continued election of R. Stanley Allen, Ward C.
   Bourdeaux, Jr., Jeffrey H. Schutz, William P. Egan and John C. Halsted as
   directors, and elected Laurence S. Grafstein and Randall A. Hack as
   directors.

     On December 1, 1999, our stockholders approved the matters set forth below
by written consent in lieu of a special meeting. On the date of such consent
there were 31,379,488 shares of common stock outstanding, and stockholders
holding 30,390,013 shares of common stock executed such consent, representing in
excess of 96.8% of the then outstanding shares of common stock.

                                       18
<PAGE>

 .  The stockholders approved (i) the reservation of 11,700,000 shares of common
   stock for issuance pursuant to the 1997 Management Option Plan, (ii) the
   reservation of 11,250,000 shares of common stock for issuance pursuant to
   warrants to be granted in connection with our licensing agreements and (iii)
   the filing of the Fourth Certificate of Amendment to the Amended and Restated
   Certificate of Incorporation.

     On December 23, 1999, our stockholders approved the matters set forth below
by written consent in lieu of a special meeting. On the date of such consent
there were 35,438,701 shares of common stock outstanding, and stockholders
holding 35,279,802 shares of common stock executed such consent, representing in
excess of 99.6% of the then outstanding shares of common stock.

 .  The stockholders elected P. Eric Yopes as a director.

 .  In connection with our initial public offering, the stockholders approved (i)
   the filing of the Fifth Certificate of Amendment to the Amended and Restated
   Certificate of Incorporation, (ii) the adoption of the Amended and Restated
   By-laws, (iii) the filing of the Second Amended and Restated Certificate of
   Incorporation and (iv) the declaration of a stock dividend in order to
   effectuate a stock split of the common stock.

 .  In connection with the adoption of a shareholder rights plan, the
   stockholders approved the declaration of a rights dividend on the common and
   preferred stock.

 .  The stockholders approved (i) the adoption of the 2000 Stock Option and
   Incentive Plan and the reservation of up to an aggregate of 11,700,000 shares
   of common stock for issuance pursuant to the 2000 Stock Option and Incentive
   Plan and the 1997 Management Option Plan and (ii) the adoption of the
   Employee Stock Purchase Plan and the reservation of up to 900,000 shares of
   common stock for issuance pursuant to the Employee Stock Purchase Plan.

                                    PART II

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

Price Range of Common Stock

     Our common stock has traded on the Nasdaq National Market under the symbol
"CYCO" since our initial public offering on February 10, 2000.  Prior to this
date, there was no market for our common stock.  On March 2, 2000, the last
reported sales price of our common stock as reported on the Nasdaq National
Market was $21.34.  As of March 2, 2000, there were 87 holders of record of our
common stock.  We believe that the number of beneficial owners of our common
stock at that date was substantially greater.  The high and low sales prices for
our common stock as reported on the Nasdaq National Market for the period since
our initial public offering is set forth below.

<TABLE>
<CAPTION>
                Period                                                    High          Low
                ------                                                ------------  ------------
<S>                                                                   <C>           <C>
First Quarter (from February 10, 2000 through March 2, 2000)             $23.50        $20.38
</TABLE>

Dividend Policy

     We have not declared any cash dividends on our common stock since our
inception in 1997.  We currently intend to retain our earnings for future growth
and, therefore, do not anticipate paying cash dividends in the foreseeable
future.  Under Delaware law, we are permitted to pay dividends only out of our
surplus, or,

                                       19
<PAGE>

if there is no surplus, out of our net profits. We currently have no debt
obligations whose covenants restrict the payment of dividends. However, we may
in the future enter into debt obligations that would restrict our ability to pay
cash dividends.

Recent Sales of Unregistered Securities

     Set forth below in chronological order is information regarding equity
securities which we sold or issued during the period covered by this annual
report that were not registered under the Securities Act of 1933, as amended
(the "Securities Act"). No underwriters were used in connection with these sales
and issuances.

     (1)  On February 1, 1999, we issued an aggregate of 6,375 shares of series
          B preferred stock to Barry L. Boniface and George J. Cisler for an
          aggregate consideration of $51,000. The sale and issuance of these
          securities was exempt from registration under the Securities Act
          pursuant to Section 4(2) thereof, on the basis that the transaction
          did not involve a public offering.

     (2)  On October 8, 1999, we issued an aggregate of 2,819,868 shares of
          series C preferred stock to The Centennial Funds, Alta Communications,
          Beacon Capital Partners, Nassau Capital, Gramercy Communications
          Partners, Latona Cycom, AEW Partners, Vornado, R. Stanley Allen, Ward
          C. Bourdeaux, Jr., Mark A. Graves, Barry L. Boniface, Michael Moh and
          John L. Thompson for an aggregate consideration of $53,577,492. The
          sale and issuance of these securities was exempt from registration
          under the Securities Act pursuant to Section 4(2) thereof, on the
          basis that the transaction did not involve a public offering.

     (3)  On November 23, 1999, we issued an aggregate of 1,157,895 shares of
          series C preferred stock to Brookfield International, Boston
          Properties, Shorenstein and Cornerstone Properties for an aggregate
          consideration of $22,000,000. The sale and issuance of these
          securities was exempt from registration under the Securities Act
          pursuant to Section 4(2) thereof, on the basis that the transaction
          did not involve a public offering.

     (4)  On December 2, 1999, we issued 184,211 shares of series C preferred
          stock to Vornado for consideration of $3,500,000. The sale and
          issuance of these securities was exempt from registration under the
          Securities Act pursuant to Section 4(2) thereof, on the basis that the
          transaction did not involve a public offering.

     (5)  From January 1, 1999 to October 7, 1999, we issued stock options to
          purchase an aggregate of 1,620,000 shares of common stock to employees
          with an exercise price of $1.07 per share pursuant to stock option
          plans. The sales and issuances of these securities were exempt from
          registration under the Securities Act pursuant to Rule 701 promulgated
          thereunder, on the basis that these options were offered and sold
          pursuant to a written compensatory benefit plan.

     (6)  From October 11, 1999 to December 1, 1999, we issued stock options to
          purchase an aggregate of 1,811,030 shares of common stock to employees
          with an exercise price of $2.53 per share pursuant to stock option
          plans. The sales and issuances of these securities were exempt from
          registration under the Securities Act pursuant to Rule 701 promulgated
          thereunder, on the basis that these options were offered and sold
          pursuant to a written compensatory benefit plan.

     (7)  From December 6, 1999 to December 31, 1999, we issued stock options to
          purchase an aggregate of 90,000 shares of common stock to employees
          with an exercise price of $17.00 per share pursuant to stock option
          plans. The sales and issuances of these securities were

                                       20
<PAGE>

          exempt from registration under the Securities Act pursuant to Rule 701
          promulgated thereunder, on the basis that these options were offered
          and sold pursuant to a written compensatory benefit plan.

     (8)  On November 23, 1999, we issued warrants to purchase up to an
          aggregate of 2,745,321 shares of common stock to Aetna Life Insurance
          Company, AEW Partners III, L.P., Alaska State Pension Investment
          Board, Brookfield Properties, Inc., McCord Development, Inc., The
          Milwaukee Employees' Retirement System, Principal Office Investors,
          LLC, Tower Realty Management Corporation and Westbrook Fund III
          Acquisitions, L.L.C. with an exercise price of $4.22 per share
          pursuant to stock warrant agreements. The sale and issuance of these
          securities was exempt from registration under the Securities Act
          pursuant to Section 4(2) thereof, on the basis that the transaction
          did not involve a public offering.

     (9)  On November 30, 1999, we issued warrants to purchase up to an
          aggregate of 1,033,229 shares of common stock to Mezzanine Investors
          Partners, SJ Plaza, LLC, Transwestern Investment Company LLC,
          TrizecHahn Office Properties, Inc. and 101 Park, LLC with an exercise
          price of $4.22 per share pursuant to stock warrant agreements. The
          sale and issuance of these securities was exempt from registration
          under the Securities Act pursuant to Section 4(2) thereof, on the
          basis that the transaction did not involve a public offering.

     (10) On December 1, 1999, we issued warrants to purchase up to an aggregate
          of 4,074,576 shares of common stock to Lend Lease Real Estate
          Investments, Inc. and Vornado Communications, L.L.C. with an exercise
          price of $4.22 per share pursuant to stock warrant agreements. The
          sale and issuance of these securities was exempt from registration
          under the Securities Act pursuant to Section 4(2) thereof, on the
          basis that the transaction did not involve a public offering.

     (11) On December 2, 1999, we issued warrants to purchase up to an aggregate
          of 3,310,868 shares of common stock to Boston Properties Limited
          Partnership, Cornerstone Properties Limited Partnership, Cousins
          Properties Incorporated and Shorenstein Company, L.P. with an exercise
          price of $4.22 per share pursuant to stock warrant agreements. The
          sale and issuance of these securities was exempt from registration
          under the Securities Act pursuant to Section 4(2) thereof, on the
          basis that the transaction did not involve a public offering.

Use of Proceeds

     We completed our initial public offering in February 2000.  The initial
public offering was made pursuant to a Registration Statement on Form S-1,
originally filed with the Securities and Exchange Commission on December 3,
1999, as amended (Commission File No. 333-92011), which was declared effective
on February 9, 2000.  The initial public offering commenced on February 10, 2000
and terminated shortly thereafter, after the sale into the public market of all
of the registered shares of common stock.

     The shares of common stock sold in the initial public offering were offered
for sale by a syndicate of underwriters represented by Bear, Stearns & Co. Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation and J.C. Bradford & Co.

     We registered an aggregate of 11,500,000 shares of common stock (including
1,500,000 shares which were issued upon the exercise of the underwriters'
overallotment option) for sale in the initial public offering at a per share
price of $17.00, for an aggregate offering price of approximately $195.5
million.

                                       21
<PAGE>

     We incurred the following expenses in connection with the initial public
offering:

<TABLE>
<S>                                                                    <C>
Underwriting discounts and commissions of approximately:                       $13,685,000
Other expenses of approximately:                                               $ 2,415,000
                                                                     ---------------------


Total expenses of approximately:                                               $16,100,000
                                                                     =====================
</TABLE>

     No payments were made to (i) any of our directors, officers, general
partners or associates, (ii) any person(s) owning 10% or more of our common
stock, or (iii) any of our affiliates.

     After deducting the expenses set forth above, we received approximately
$179.4 million in net proceeds from the initial public offering.  We have not
yet used any of the net proceeds from the initial public offering.  The net
proceeds have been invested in cash, cash equivalents and short-term
investments.  Consistent with the description of the use of proceeds set forth
in the prospectus contained in the Registration Statement, we intend to use the
proceeds from the offering for working capital and general corporate purposes,
the construction of in-building networks and the purchase of communications
equipment.

                                       22
<PAGE>

Item 6.    Selected Financial Data

     The following selected financial data as of December 31, 1996, 1997, 1998,
and 1999 and for the years then ended have been derived from our audited
financial statements and the related notes.  The selected financial data as of
December 31, 1995 and for the period from August 16, 1995 (date of inception) to
December 31, 1995 have been derived from our unaudited financial statements.

     The following financial information should be read in conjunction with
"Item 7.  Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Item 1.  Business" and our financial statements and the
related notes, all of which appear elsewhere in this report.

<TABLE>
<CAPTION>


                                           Period from
                                            Inception
                                        (August 16, 1995)                   Year Ended December 31,
                                                to          ------------------------------------------------------------
                                        December 31, 1995      1996            1997            1998             1999
                                    ------------------------------------------------------------------------------------
<S>                                     <C>                 <C>            <C>             <C>              <C>
                                          (unaudited)
Statement of Operations
Data:
Revenue.............................      $      --         $   83,556     $   709,402      $ 2,417,816     $  7,437,496

Operating expenses:
   Cost of services.................             --            131,771         603,114        1,539,846        4,966,851
   Sales and marketing (1)..........             --             12,189         448,916        1,489,355        4,007,094
   General and administrative (2)...        117,086            640,704         900,595        2,534,566       11,232,045
   Depreciation and amortization....            694             53,808         196,415          576,659        2,197,831
                                    ------------------------------------------------------------------------------------

   Total operating expenses.........        117,780            838,472       2,149,040        6,140,426       22,403,821
                                    ------------------------------------------------------------------------------------
Operating loss......................       (117,780)          (754,916)     (1,439,638)      (3,722,610)     (14,966,385)

Interest income, net................             --             13,939         113,922          232,279          810,045
                                    ------------------------------------------------------------------------------------
Loss before income taxes............       (117,780)          (740,977)     (1,325,716)      (3,490,331)     (14,156,280)
Income tax benefit..................             --                 --              --               --               --
                                    ------------------------------------------------------------------------------------
Net loss............................       (117,780)          (740,977)     (1,325,716)      (3,490,331)     (14,156,280)
Beneficial conversion feature of
 preferred stock....................             --                 --              --               --      (79,077,500)
                                    ------------------------------------------------------------------------------------
Net loss available to common
 stockholders......................       $(117,780)        $ (740,977)    $(1,325,716)     $(3,490,331)    $(93,233,780)
                                    ====================================================================================
Net loss per share of common stock:
 Basic and diluted..................      $    (.13)        $    (0.29)    $     (0.41)     $     (1.32)    $     (35.22)
                                    ====================================================================================
Weighted  average shares of common
 stock outstanding:
 Basic and diluted..................        900,000          2,523,032       3,266,237        2,636,906        2,647,274
                                    ====================================================================================
</TABLE>

                                       23
<PAGE>

<TABLE>
<CAPTION>
                                                                                As of December 31
                                  -------------------------------------------------------------------------------------------------
                                         1995                 1996                1997               1998                 1999
                                  ----------------     -----------------  -----------------  -----------------   ------------------
<S>                                 <C>                  <C>                <C>                <C>                 <C>
                                    (unaudited)
Balance Sheet Data:
Cash and cash equivalents.........     $  3,096            $  447,726         $3,671,065        $11,057,696          $ 69,475,288
Property and equipment, net.......        5,630               597,716          1,609,791          6,291,413            27,028,102
Total assets......................       14,227             1,211,968          5,648,447         19,407,105           122,854,601
Total liabilities.................       37,607               183,212            612,578          2,404,191            15,869,191
Convertible redeemable preferred             --                    --          5,977,480         21,317,263           100,277,750
 stock............................
Stockholders' (deficit) equity....      (23,380)            1,028,756           (941,611)        (4,314,349)            6,707,660
</TABLE>

     (1)  Sales and marketing includes non-cash compensation expense of $0, $0,
$0, $19,248, and $321,492 in 1995, 1996, 1997, 1998 and 1999, respectively.

     (2)  General and administrative includes non-cash compensation expense of
$0, $0, $0, $98,345, and $1,403,796 in 1995, 1996, 1997, 1998 and 1999,
respectively.

     As used in the table below, adjusted EBITDA consists of net loss excluding
net interest, income taxes, depreciation and amortization, and non-cash
compensation expense.  We believe that because adjusted EBITDA is a measure of
financial performance it is useful to investors and analysts as an indicator of
a company's ability to fund its operations and to service or incur debt.
However, adjusted EBITDA is not a measure calculated under generally accepted
accounting principles.  Other companies may calculate EBITDA, adjusted EBITDA or
other similarly titled measures in a manner different from us; consequently, our
calculation of adjusted EBITDA may not be comparable to other companies'
calculations of EBITDA, adjusted EBITDA or other similarly titled measures.
Adjusted EBITDA is not an alternative to operating income as an indicator of
operating performance or an alternative to cash flows from operating activities
as a measure of liquidity, and investors should consider these measures as well.

     The table below provides selected key operational data:

<TABLE>
<CAPTION>
                                 Period
                             from Inception
                            (August 16, 1995)                        Year Ended December 31,
                             to December 31,       -----------------------------------------------------------
                                  1995                 1996            1997            1998             1999
                          -------------------------------------------------------------------------------------
                               (unaudited)
Other Operating Data:
<S>                         <C>                   <C>            <C>              <C>             <C>
Net cash used in                $ (84,980)        $ (638,707)    $  (891,519)     $(2,914,905)    $ (9,900,647)
 operating activities.....
Net cash used in
 investing activities.....         (6,324)          (638,638)     (1,190,723)      (4,991,641)     (10,145,722)
Net cash provided by
 (used in) financing
 activities...............         94,400          1,721,975       5,305,581       15,293,177       78,463,961
Adjusted EBITDA...........       (117,068)          (701,108)     (1,243,223)      (3,028,358)     (11,043,206)
Capital expenditures......         (6,324)          (518,638)     (1,190,723)      (2,887,243)     (10,365,122)
Markets served............             --                  1               2                4               12
Buildings served..........             --                 15              19               39              116
Rentable square feet in
 buildings served.........             --        2.4 million     3.6 million     11.0 million     30.0 million
</TABLE>

                                       24
<PAGE>

Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations

Overview

     We provide a full range of broadband communications services to small and
medium-sized businesses located in multi-tenant office buildings in major
metropolitan markets in the United States.  This comprehensive bundle of
services currently includes high speed dedicated Internet access, local and long
distance voice services, digital telephone systems, business television,
voicemail, e-mail, web hosting and other advanced services. Since the inception
of our predecessor company in August 1995, our principal activities have
included securing license agreements with building owners and real estate
managers that enable us to install our in-building fiber-optic, digital and
broadband networks, marketing our communications services to tenants and hiring
qualified personnel to support our rapid growth. We began operating in-building
networks in June 1996 and as of December 31, 1999, we were providing services in
116 buildings representing approximately 30 million rentable square feet.  As of
December 31, 1999, we had secured agreements giving us the right to operate our
networks in over 730 buildings representing more than 229 million rentable
square feet.

     Building and expanding our business will continue to require us to incur
significant capital expenditures. These expenditures will consist primarily of
purchases of communication equipment and construction costs associated with
building our in-building networks. We attempt to maximize the benefit of
deployed capital by investing in network assets only after entering into a long-
term license agreement with a property owner. In addition, capital is not
expended on a customer until we have a signed contract with that customer. As a
result, a large portion of our capital expenditures is success-based. In a
typical 335,000 square foot building, up-front capital investment is usually
less than $90,000 which includes the purchase and installation of our in-
building vertical communications infrastructure, commonly known as a riser
system, and associated network equipment. As we begin to successfully penetrate
a building, in order to provide additional network capacity and equipment for
our customers, capital deployment in that building may grow to over $335,000.

     We have experienced operating losses and generated negative adjusted
EBITDA, as defined in "Selected Financial Data," and expect to continue to
generate losses and negative adjusted EBITDA for the foreseeable future while we
continue to construct in-building networks, expand our customer base and build
our internal infrastructure.  As a result of our limited operating history,
prospective investors have limited operating and financial data upon which to
evaluate our performance.

Factors Affecting Future Operations

     Revenue.  We generate revenue from selling data, voice and other services
and from the rental of telephone systems and other equipment to tenants in the
buildings in which we own and operate networks. The majority of our revenue is
generated on a monthly recurring basis. The remainder of our revenue is derived
from non-recurring charges for installations and other one-time services. Our
customer contracts typically range between one and seven years in length and are
usually designed to coincide with our customers' office space leases. The
typical length of our customer contracts is three years.

     We believe that our ability to generate revenue in the future will be
affected primarily by the following factors, some of which we cannot control:

 .  our ability to enter into license agreements with building owners and install
   our in-building networks;

 .  our ability to obtain customers before our competitors do;

                                       25
<PAGE>

 .  the level of competition we face from other communications providers,
   including price competition, which has resulted in a trend of declining
   prices and margins for communications services over time;

 .  the demand for our services; and

 .  possible regulatory changes, including regulations requiring building owners
   to give access to competitive providers of communications services.

      Cost of services.  Cost of services consists primarily of leased transport
charges, which are lease payments to communications providers for the
transmission facilities used to connect our in-building networks to incumbent
local telephone companies' and other competitive local and long distance
carriers' networks. Other costs include per minute charges paid to long distance
providers for use of their networks, monthly fees paid to Internet providers,
equipment maintenance expenses, and labor costs associated with installing
equipment and changing customers' services. We expect these costs to increase in
aggregate dollar amount as we continue to grow our business but to decline as a
percentage of revenue due to economies of scale, expected improvements in
technology and price competition from an increased number of vendors from which
we can lease voice and data transport. However, in markets where there is only a
single carrier, or only a limited number of carriers, available to provide
sufficient transmission capacity, the cost of services may actually increase.

     Sales and marketing expenses. Sales and marketing expenses include
applicable employee salaries and commission payments and marketing, advertising
and promotional expenses. Sales and marketing expenses also include the
amortization of deferred compensation which is a result of our granting stock
options to sales and marketing employees with exercise prices per share treated
for accounting purposes as below the fair value of our common stock at the dates
of grant. We are amortizing the deferred compensation over the vesting period of
the applicable option, which is generally five years. We recognized amortization
of deferred compensation expense related to sales and marketing employees of
$19,248 and $321,492 for the years ended December 31, 1998 and 1999,
respectively (See Note 4 to our financial statements). Sales and marketing
expenses also include payments to building owners and operators under license
agreements, as described below.

     In November and December 1999, we entered into master license agreements
with several owners and operators of office buildings. Each master license
agreement sets forth a list of buildings owned or managed by the property owner
or operator that is a party to that agreement. In accordance with the terms of
these agreements, we have begun to enter into property-specific license
agreements with respect to each listed building. In some cases, the property
owner or operator may need to obtain consent from third parties who may have an
ownership interest in the building before we can enter into a property-specific
license agreement for that building. Under the property-specific license
agreements, the property owner or operator will grant us a license to install
and operate our networks in each building in return for approximately 6% of the
revenue we receive from tenants in that building. The initial term of each
property-specific license agreement is generally five years, with an automatic
five year extension at the end of the initial term, absent any default under the
agreement. These master license agreements gave us the right to operate our
networks in more than 600 buildings representing more than 194 million rentable
square feet.

     In addition to the master license agreements, we also have license
agreements with a number of other property owners and operators which were
previously executed on a per building basis. Under these agreements, we have
agreed to pay property owners either a base fee or a percentage fee of between
3% and 6% of our revenue in the building.  As of December 31, 1999, our
aggregate minimum obligation under these agreements was approximately $130,000
per year for the next seven years.

     We expect to incur significant sales and marketing expenses as we continue
to grow our business and build our brand.

                                       26
<PAGE>

     General and administrative expenses.  General and administrative expenses
include costs associated with the recruiting and compensation of corporate
administration, customer care and technical services personnel as well as costs
of travel and entertainment, back office systems, and legal, accounting and
other professional services.  These costs are expected to increase significantly
as we expand our operations, but decline over time as a percentage of revenue
due to economies of scale.  General and administrative expenses also include the
amortization of deferred compensation which is a result of our granting stock
options to general and administrative employees with exercise prices per share
treated for accounting purposes as below the fair value of our common stock at
the dates of grant.  We are amortizing the deferred compensation over the
vesting period of the applicable option, which is generally five years.  We
recognized amortization of deferred compensation expense related to general and
administrative employees of $98,345 and $1,403,796 for the years ended December
31, 1998 and 1999, respectively (See Note 4 to our financial statements).

     Depreciation and amortization.  Depreciation and amortization expenses
include depreciation of network related equipment, information systems,
furniture, fixtures, leasehold improvements and the amortization of goodwill and
acquired tenant contracts.

     In connection with the execution of master license agreements in November
and December 1999, we also entered into stock warrant agreements with the same
property owners and operators. Under the terms of these agreements, we issued
these owners and operators warrants to purchase an aggregate of 11,163,990
shares of our common stock at an exercise price of $4.22 per share.  The exact
number of shares of common stock underlying the warrants, which is based on the
gross leasable area of the buildings set forth in the master license agreements,
will be determined upon the completion of due diligence and the finalization of
the building construction schedules, which is expected to be completed in April
2000.  The measurement date for valuing the warrants will be the date(s) on
which the property owners or managers effectively complete their performance
requirements (see Note 4 to our financial statements).

     Based upon the current structure of the agreements governing the warrants,
we expect that the fair value of the warrants will approximate $170 million and
will be capitalized as license inducement expense and amortized over the
applicable terms of the license agreements with property owners and operators.
Such license terms are generally 10 years. Depending on the prevailing fair
market value of the warrants at the measurement date, the amount of license
inducement and related amortization may change and such change could be
material. In addition, we could incur additional cash or non-cash charges as
license inducements to current or future property owners, and such amounts may
be material.

     We expect depreciation and amortization expenses to increase significantly
as we enter into additional property license agreements and install our networks
in more buildings.

     Acquisition strategy.  We intend to opportunistically pursue acquisitions
or other strategic relationships to expand our customer base or geographic
presence. These activities could significantly impact our results of operations
and require us to raise additional capital earlier than expected.

     In November 1999 we entered into a binding letter of intent to acquire
approximately 18% of the common stock of SiteConnect, a Seattle-based in-
building communications service provider, in exchange for 281,250 shares of our
common stock. The agreement gives us a one-year option to purchase the remaining
outstanding shares of common stock of SiteConnect for approximately $5.0 million
of our common stock, valued at the initial public offering price, which would be
294,118 shares based on the initial public offering price of $17.00 per share.
Currently, SiteConnect provides data communications services to customers in ten
commercial office buildings in Seattle.

                                       27
<PAGE>

Results of Operations

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

     Revenues.  Revenues for the year ended December 31, 1999 increased 208% to
$7.4 million from $2.4 million for the same period in the prior year.  $3.2
million of the increase in revenues relates to the addition of new customers and
providing additional services to existing customers. $1.8 million of the
increase relates to the acquisition of the assets and customers of MTS
Communications Company in December 1998 (see Note 9 to our financial
statements).

     Cost of services.  Cost of services for the year ended December 31, 1999
increased 223% to $5.0 million from $1.5 million for the same period in the
prior year. The increase in cost of services was due to an increase in the
number of leased facilities connecting our licensed buildings to local, long
distance and Internet providers and the greater volume of voice and data
traffic. As of December 31, 1999, we had networks installed in 116 buildings
versus 39 buildings installed at December 31, 1998.

     Sales and marketing expenses.  Sales and marketing expenses for the year
ended December 31, 1999 increased 169% to $4.0 million from $1.5 million for the
same period in the prior year. $1.8 million of this increase in expenses was due
to an increase in the number of sales and marketing personnel and their related
compensation and expenses; $0.3 million of this increase was due to non-cash
compensation related to the issuance of stock options at exercise prices lower
than fair market value on their dates of grant (see Note 4 to our financial
statements); $0.2 million of this increase was due to increased revenue sharing
payments made to property owners with whom we have license agreements; and $0.2
million of this increase was due to increased promotion of our services via
direct marketing and advertising in our licensed buildings. The decrease in
sales and marketing expenses as a percentage of revenue related primarily to the
additional revenue attributable to the acquisition of the assets of MTS
Communications without a comparable increase in sales and marketing expenses.
We expect sales and marketing expenses to continue to grow as we hire additional
personnel and incur additional expenses to market our services to potential
customers.

     General and administrative expenses.  General and administrative expenses
for the year ended December 31, 1999 increased 343% to $11.2 million from $2.5
million for the same period in the prior year. The increase in general and
administrative expenses was due primarily to a $4.5 million increase in
salaries, benefits and recruiting expenses related to the hiring of additional
personnel, a $1.3 million increase in non-cash compensation related to the
issuance of stock options at exercise prices lower than fair value on their
dates of grant (see Note 4 to our financial statements), a $0.5 million increase
in travel and entertainment expenses primarily related to marketing to property
owners and operators and expenses associated with personnel traveling to oversee
and conduct the installation of our networks in additional buildings, a $0.6
million increase in accounting, consulting, legal and billing outsourcing fees,
and a $1.8 million increase in office space rent and other growth-driven
operating expenses.  We expect general and administrative expenses to continue
to grow as we hire additional personnel and incur additional expenses to support
the growth of our operations.

     Depreciation and amortization.  Depreciation and amortization for year
ended December 31, 1999 increased 281% to $2.2 million from $0.6 million for the
same period in the prior year. $1.0 million of this increase was due to
increased capital expenditures related to deploying our in-building networks and
related equipment; $0.4 million of this increase was attributable to the
acquisition of the assets of MTS Communications (see Note 9 to our financial
statements); $0.1 million of this increase was due to depreciation of computers
and other back-office equipment; and $0.1 million of this increase was due to
amortization of goodwill and tenant contracts related to the acquisition of MTS
Communications (see Note 9 to our financial statements).

     Interest income, net.  Interest income, net for the year ended December 31,
1999 increased to $810,045 from $232,279 for the same period in the prior year.
The increase in interest income, net was due to

                                       28
<PAGE>

increased investments in short-term interest bearing investments as a result of
investing the proceeds raised from our Series B preferred stock offering in
September 1998 and our Series C preferred stock offering in the third quarter of
1999 (see Note 5 to our financial statements). Interest expense was nominal in
both periods.

Year Ended December 31, 1998 compared to the Year Ended December 31, 1997

     Revenues.  Revenues for the year ended December 31, 1998 increased 241% to
$2.4 million from $0.7 million for the same period in the prior year.  $1.6
million of the increase was the result of the addition of new customers and the
provision of additional services to existing customers.  $89,805 of the increase
was attributable to the acquisition of the assets and customers of MTS
Communications in December 1998 (see Note 9 to our financial statements).

     Cost of services.  Cost of services for the year ended December 31, 1998
increased 155% to $1.5 million from $0.6 million for the same period in the
prior year. The growth in cost of services was the result of providing services
to an increased number of customers and an increase in the number of leased
facilities connecting our licensed buildings to local, long distance and
Internet providers.  As of December 31, 1998, we had networks installed in 39
buildings versus 19 buildings at December 31, 1997.

     Sales and marketing expenses.  Sales and marketing expenses for the year
ended December 31, 1998 increased 232% to $1.5 million from $448,916 for the
same period in the prior year. $0.9 million of this increase in expenses was due
to an increase in the number of sales and marketing personnel and their related
compensation and expenses; $80,429 of this increase was due to increased revenue
sharing payments made to property owners with whom we have license agreements;
and $40,720 of this increase was due to increased promotion of our services via
direct marketing and advertising in our licensed buildings.  We expect sales and
marketing expenses to continue to grow as we hire additional personnel and incur
additional expenses to market our services to potential customers.

     General and administrative expenses.  General and administrative expenses
for the year ended December 31, 1998 increased 181% to $2.5 million from $.9
million for the same period in the prior year. The increase in general and
administrative expenses was due primarily to a $1.0 million increase in
salaries, benefits and recruiting expenses related to the hiring of additional
personnel, a $0.1 million increase in non-cash compensation related to the
issuance of stock options at exercise prices lower than fair value on their
dates of grant (see Note 4 to our financial statements), a $0.1 million increase
in accounting, consulting, legal and billing outsourcing fees, and a $0.4
million increase in office space rent, travel and other growth-driven operating
expenses. We expect general and administrative expenses to continue to grow as
we hire additional personnel and incur additional expenses to support the growth
of our operations.

     Depreciation and amortization.  Depreciation and amortization for the year
ended December 31, 1998 increased 194% to $576,659 from $196,415 for the same
period in the prior year. $285,645 of this increase was due to increased capital
expenditures related to deploying our in-building networks and related
equipment; $32,766 of this increase was attributable to the acquisition of the
assets of MTS Communications (see Note 9 to our financial statements); $49,181
of this increase was due to depreciation of computers and other back-office
equipment; and $12,652 of this increase was due to amortization of goodwill and
tenant contracts related to the acquisition of MTS Communications (see Note 9 to
our financial statements).

     Interest income, net.  Interest income, net for the year ended December 31,
1998 increased 104% to $232,279 from $113,922 for the same period in the prior
year. The increase in interest income, net was due to increased investments in
short-term interest bearing investments as a result of investing the proceeds
raised from our series A preferred stock offering in July 1997 and our series B
preferred stock offering in September 1998 (see Note 5 to our financial
statements).  Interest expense was nominal in both periods.

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<PAGE>

Liquidity and Capital Resources

     The results of our operations have generated a net cash outflow due to the
rate at which we have grown. Cash flow from operations totaled $(891,519), $(2.9
million), and $(9.9 million) for the years ended, December 31, 1997, 1998, and
1999, respectively. The expansion of our operating and administrative personnel,
office space costs, and other operating expenses were the principal contributors
to the increases in the net cash outflow between the periods. As we continue to
expand our operations, these increases in period-over-period operating cash
outflows will continue.

     Cash used in investing activities was ($1.2 million), $(5.0 million), and
$(10.1 million) for the years ended December 31, 1997, 1998, and 1999,
respectively. Cash used in investing activities has primarily been used to
build-out our in-building networks. In 1998 we used $1.9 million to purchase the
assets of MTS Communications. As of December 31, 1999, we had made capital
expenditures of $15.0 million since inception. We expect that capital
expenditures will increase substantially in future periods as we construct our
networks and purchase more communications equipment. We will continue to seek
access to additional buildings. If we are successful in gaining access to
additional buildings, we will have substantial needs for additional capital for
an indefinite period. We also expect to have substantial and increasing negative
adjusted EBITDA and net losses.

     Cash provided by financing activities was $5.3 million, $15.3 million and
$78.5 million for the years ended December 31, 1997, 1998, and 1999,
respectively. Financing has primarily been obtained through the issuance of
convertible preferred stock to private investors (See Note 10 to our financial
statements). The proceeds from these equity issuances have been and will
continue to be used to fund cash outflows for operating and investing
activities.

     On December 8, 1998, we acquired certain assets of MTS Communications, a
provider of communications services in California, for total consideration of
$2,574,848 consisting of $1,904,398 in cash and the assumption of certain
capital lease obligations with a fair value of $670,450. In November 1999, we
signed a binding letter of intent to acquire 254,125 shares of common stock,
representing less than 20% common stock ownership, of SiteConnect, Inc., a
Seattle-based provider of communication services, for consideration of 281,250
shares of our common stock. The agreement contains an option to purchase the
remaining outstanding common stock of SiteConnect for approximately $5.0 million
of our common stock valued at the initial public offering price, which would be
294,118 shares based on the initial public offering price of $17.00 per share.

     In November and December 1999, we issued warrants to purchase an aggregate
of 11,163,990 shares of our common stock at an exercise price of $4.22 per share
to several property owners and operators who executed master license agreements.
The exact number of shares of common stock underlying the warrants, which is
based on the gross leasable area of the buildings set forth in the master
license agreements, will be determined upon the completion of due diligence and
the finalization of the building schedules, which is expected to be completed in
April 2000. These master license agreements gave us the right to operate our
networks in more than 600 buildings representing more than 194 million rentable
square feet. As noted above, on a typical 335,000 square foot building, the up
front capital investment is usually less than $90,000. As we begin to
successfully penetrate a building, our capital deployment may grow to over
$335,000.

     As of December 31, 1999, we had minimum payment obligations under existing
license agreements of approximately $130,000 per year for the next seven years.

     As of December 31, 1999, we had $577,677 in capital lease obligations
outstanding (including interest and taxes associated therewith). The majority of
these capital lease obligations were assumed through the acquisition of the
assets of MTS Communications. Our capital lease obligations contain no
provisions that would limit its future borrowing ability.

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<PAGE>

     We currently have contracts with several communications providers under
which we have minimum purchase obligations for leased transport. As of December
31, 1999, these minimum purchase obligations totaled approximately $1.6 million
through 2001.  We will have to pay those providers even if these services are
not utilized.

     On February 15, 2000, we completed our initial public offering of common
stock, raising net proceeds of approximately $179 million. We intend to use
approximately $100.0 million of the net proceeds from this offering for
construction of in-building networks and the purchase of communications
equipment and approximately $10.0 million for implementation and modification of
information support systems; however, we currently have no material purchase
commitments with respect to these planned expenditures. The remainder of the net
proceeds will be available for working capital and general corporate purposes.
We may also use a portion of the net proceeds to acquire or invest in
complementary businesses, technologies, services or products. However, we
currently have no material commitments or agreements with respect to any of
these types of transactions.

     We are currently operational in 17 markets, and plan to expand our presence
to approximately 27 markets by the end of 2000 and approximately 40 markets by
the end of 2001. We estimate that this expansion will require capital
expenditures of approximately $50.0 million in 2000 and approximately $90.0
million in 2001.

     We estimate that the net proceeds of this offering in addition to cash on
hand will be sufficient to fund operations and the projected deployment of our
network through mid-2001. We do, however, expect to continue our growth,
expansion and the further development of our network and services beyond that
point. Accordingly, we expect that we will eventually need to arrange for
additional sources of capital through the issuance of debt or equity or bank
borrowings. There are no commitments for any such additional financing, and we
cannot be sure that we will be able to obtain any such additional financing at
the times required and on acceptable terms and conditions. In such event, our
growth could slow and operations could be adversely affected.

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

 .  the timing of execution of license agreements;
 .  the ability to meet or exceed construction schedules;
 .  obtaining favorable prices for purchases of equipment;
 .  our ability to develop, acquire and integrate the necessary operational
   support systems;
 .  the cost of network development in each of our markets;
 .  demand for our services;
 .  the nature and penetration of new services that may be offered by the us;
 .  the timing and extent of future acquisitions or investments, if any, and our
   ability to integrate these acquisitions or investments;
 .  regulatory changes; and
 .  changes in technology and competitive developments beyond our control.

                                       31
<PAGE>

Recent Accounting Pronouncements

     The Securities and Exchange Commission has released SAB No. 101, "Revenue
Recognition in Financial Statements."  We are reviewing our policies with
respect to SAB No. 101 and do not anticipate the impact of adoption to be
material.

Year 2000 Compliance

     The Year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, certain
computer programs that have time-sensitive software may recognize a date ending
in "00" as the year 1900 rather than the year 2000. This could result in system
failure or miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.

     As of March 30, 2000, we have not experienced any material problems as a
result of the Year 2000 issue. Costs to ensure that our systems and networks are
Year 2000 compliant have not been, and are not expected to be, material.

                  RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

We expect our losses to continue to increase for the foreseeable future

     Since our formation we have generated increasing negative adjusted EBITDA,
as defined in "Selected Financial Data," and larger net losses each quarter. We
have not achieved profitability and expect to continue to incur increasing
negative adjusted EBITDA and larger net losses for the foreseeable future. For
1998, we had adjusted EBITDA of $(3,028,358) and a net loss of $(3,490,331) on
revenues of $2,417,816. For 1999, we had adjusted EBITDA of $(11,043,206) and a
net loss of $(14,156,280) (excluding a non-recurring charge related to the
beneficial conversion feature of the preferred stock) on revenues of $7,437,496.
In addition, we expect to continue to incur significant costs as we deploy
additional in-building networks and, as a result, we will need to generate
significant revenue to achieve profitability, which may not occur.

Our business has grown rapidly and our business model is still evolving, which
makes it difficult to evaluate our prospects

     We have grown our business rapidly and have experienced significant losses
in our efforts to penetrate our market. We will continue to make substantial
capital expenditures in deploying our networks before we know whether our
business plan can be successfully executed. As a result, there is a risk that
our business will fail. Additionally, our limited operating history makes it
difficult to evaluate the execution of our business model thus far. Furthermore,
because the market for services of in-building communications providers is not
well established, it is difficult for you to compare our company with our
competitors.

We are an early-stage company in an unproven industry and if we do not grow
rapidly or obtain additional capital we will not succeed

     We began operating our first in-building network in June 1996 and were
operating 116 in-building networks as of December 31, 1999. We must, however,
continue to grow rapidly in order to succeed. Because the communications
industry is capital intensive, rapidly evolving and subject to significant
economies of scale, as a relatively small organization we are at a competitive
disadvantage. The growth we must achieve to reduce that disadvantage will put a
significant strain on all of our resources. Our current capital resources,
including our cash on hand, will be sufficient to fund our operations and the
projected deployment of additional in-building networks only through mid-2001.
We will require substantial additional capital beyond

                                       32
<PAGE>

then to finance our future operations according to our current business plan. If
we fail to grow rapidly or obtain additional capital, we may not be able to
compete with larger, more well-established companies.

     Additionally, we are unaware of any industry studies which have
specifically addressed the market for services of in-building communications
providers. The demand for bundled services from in-building communications
providers is unproven and may grow less than the demand for communications
services generally, or not at all. Furthermore, our own growth rate may not
match the growth rate of the in-building communications market as a whole.

Our business plan cannot succeed unless we continue to obtain license agreements
with building owners and managers

     Our business depends upon our ability to install in-building networks. The
failure of building owners or managers to grant or renew access rights on
acceptable terms, or any deterioration in our existing relationships with
building owners or managers, could harm our marketing efforts and could
substantially reduce our potential customer base. Current federal and state
regulations do not require building owners to make space available to us, or to
do so on terms that are reasonable or nondiscriminatory. Building owners or
managers may decide not to permit us to install our networks in their buildings
or may elect not to renew our license agreements. Non-renewal of these
agreements would reduce our revenues and we might not recover all of our
infrastructure costs.

We must place our network infrastructures in additional buildings before our
competitors do or we will face a substantial competitive disadvantage

     Our success will depend upon our ability to quickly obtain license
agreements and install our in-building networks in many more buildings. This is
crucial in order to establish a first-mover advantage. We may not be able to
accomplish this. Each building in which we do not build a network is
particularly vulnerable to competitors. In addition, future expansions and
adaptations of our network infrastructures may be necessary to respond to growth
in the number of customers served, increased capacity demands and changes to our
services; otherwise other companies could be encouraged to compete in buildings
where we have installed networks.

     In addition, future expansion will require us to outsource a significant
portion of the installation of our in-building networks. Any delays in
obtaining, or interruption in, the services of these third party installers
could delay our plans to install in-building networks, impair our ability to
acquire or retain customers and harm our business generally.

We may not be able to efficiently manage our growth, which could harm our
business

     Future expansion will place significant additional strains on our
personnel, financial and other resources. The failure to efficiently manage our
growth could adversely affect the quality of our services, our business and our
financial condition. Our ability to manage our growth will be particularly
dependent on our ability to develop and retain an effective sales force and
qualified technical and managerial personnel. The competition for qualified
sales, technical and managerial personnel in the communications industry is
intense, and we may not be able to hire and retain sufficient qualified
personnel. In this regard, we note that we do not have employment contracts with
our key personnel. In addition, we may not be able to maintain the quality of
our operations, to control our costs, to maintain compliance with all applicable
regulations, and to expand our internal management, technical, information and
accounting systems in order to support our desired growth.

Our business will be harmed if our information support systems are not further
developed

     Sophisticated information processing systems, including billing, are vital
to our growth and our ability to achieve operating efficiencies. A failure of
these systems could substantially impair our ability to provide

                                       33
<PAGE>

services, send invoices and monitor our operations. Among the systems we have
identified as being presently inadequate to meet the increased demands of our
anticipated growth are work-flow and customer priority management, human
resources, sales and customer support and fixed asset management, and there may
be other systems we have not identified that are in need of improvement. We
estimate that modifying or replacing these systems will cost approximately $10
million in fiscal year 2000. Our plans for the development and implementation of
these systems rely largely upon acquiring products and services offered by
third-party vendors and integrating those products and services. We may be
unable to implement these systems on a timely basis or at all, and these systems
may not perform as expected. We may also be unable to maintain and upgrade our
operational support systems as necessary.

We operate in a highly competitive market, and we may not be able to compete
effectively against established competitors with greater financial resources and
diverse strategic plans

     We face competition from many communications providers with significantly
greater financial resources, well-established brand names, larger customer bases
and diverse strategic plans and technologies. Intense competition has led to
declining prices and margins for many communications services. We expect this
trend to continue as competition intensifies in the future. We expect
significant competition from traditional and new communications companies,
including local, long distance, cable modem, Internet, digital subscriber line,
fixed and mobile wireless and satellite data service providers, some of which
are described in more detail below. If these potential competitors successfully
focus on our market, we may face intense competition which could harm our
business. In addition, we may also face severe price competition for building
access rights, which could result in higher sales and marketing expenses and
lower profit margins.

     We face competition from other in-building communications providers

     Some competitors, such as Allied Riser Communications, Broadband Office and
OnSite Access, are attempting to gain access to office buildings in our target
markets. To the extent these competitors are successful, we may face
difficulties in building our networks and marketing our services within some of
our target buildings. Because our agreements to use utility shaft space within
buildings are generally not exclusive, owners of such buildings could also give
similar rights to our competitors. Certain competitors already have rights to
install networks in some of the buildings in which we have rights to install our
networks. It is not clear whether it will be profitable for two or more
different companies to operate networks within the same building. Therefore, it
is critical that we build our networks in our target buildings quickly, before
our competitors do so. If a competitor installs a network in a building in which
we operate, there will likely be substantial price competition.

     We face competition from local telephone companies

     Incumbent local telephone companies, including GTE and regional Bell
operating companies such as Bell Atlantic and BellSouth, have several
competitive advantages over us, including established brand names and
reputations and significant capital to rapidly deploy or leverage existing
communications equipment and broadband networks. They often market their
services to tenants of buildings within our target markets and selectively
construct in-building facilities. Additionally, the regional Bell operating
companies are now permitted to provide long distance services in territories
where they are not the dominant provider of local services. These companies may
also provide long distance services in the territories where they are the
dominant provider of local services if they satisfy a regulatory checklist
established by the Federal Communications Commission. In December 1999, the FCC
ruled that Bell Atlantic has met these requirements in New York and may provide
long distance services in New York. If other regional Bell operating companies
are permitted to provide long distance services in territories where we operate,
we could face greater price competition.

                                       34
<PAGE>

     We face competition from long distance companies

     We will face strong competition from long distance companies. Many of the
leading long distance carriers, including AT&T, MCI WorldCom and Sprint, could
begin to build their own in-building voice and data networks. The newer national
long distance carriers, such as Level 3, Qwest and Williams Communications, are
building and managing high speed fiber-based national voice and data networks,
partnering with Internet service providers, and may extend their networks by
installing in-building facilities and equipment.

     We face competition from fixed wireless service providers

     We may lose potential customers to fixed wireless service providers. Fixed
wireless service providers are communications companies who can provide high
speed communications services to customers using microwave or other facilities
or satellite earth stations on building rooftops. Some of these providers have
targeted small and medium-sized business customers and have a business strategy
that is similar to ours. These providers include Advanced Radio Telecom,
NEXTLINK and Winstar.

     We face competition from Internet service providers, digital subscriber
     line companies and cable-based service providers

     The services provided by Internet service providers, digital subscriber
line companies and cable-based service providers could be used by our potential
customers instead of our services. Internet service providers, such as
Concentric Networks, EarthLink and PSINet, provide Internet access to
residential and business customers, generally using the existing communications
infrastructure. Digital subscriber line companies and/or their Internet service
provider customers, such as Covad, NorthPoint and Rhythms NetConnections,
typically provide broadband Internet access using digital subscriber line
technology, which enables data traffic to be transmitted over standard copper
telephone lines at much higher speeds than these lines would normally allow.
Cable-based service providers, such as Excite@Home and its @Work subsidiary, RCN
Telecom Services and Road Runner, also provide broadband Internet access. These
various providers may also offer traditional or Internet-based voice services to
compete with us.

Competitors might use new or alternative technologies to offer better or less
expensive services than we can offer

     In addition to the fiber-optic technology that our networks employ, there
are other technologies that provide greater bandwidth than traditional copper
wire transmission technology and may be used instead of our voice and data
services. Furthermore, these technologies may be improved and other new
technologies may develop that provide greater bandwidth than the fiber-optic
based technology we utilize. Existing alternative technologies include:

 .  Digital Subscriber Line Technology. Digital subscriber line technology was
   developed to produce higher data transfer rates over the existing copper-
   based telephone network. The data transfer rates for digital subscriber lines
   are reported to range between 144,000 bits of data per second and six million
   bits of data per second.

 .  Cable Modems. Cable modems can allow users to send and receive data using
   cable television distribution systems. According to industry sources, cable
   modem users typically experience download speeds of 1.5 million bits of data
   per second.

 .  Wireless Technologies. Wireless technologies, such as satellite and microwave
   communications systems, can provide high speed data communications. Satellite
   systems, such as DirecPC, can offer high download speeds that are advertised
   at 400,000 bits of data per second or higher.

                                       35
<PAGE>

 .  Integrated Services Digital Networks. Integrated services digital networks
   have been offered by the incumbent local telephone companies over the
   existing copper-based telephone network for some time. These services offer
   data transfer speeds of 128,000 bits of data per second.

 .  Internet Telephony. Several competitors have deployed, and others are
   developing, Internet telephony, whereby voice calls may be made over the
   Internet. The sound quality of these services has improved since their
   introduction.

     The development of new technologies or the significant penetration of
alternative technologies into our target market may reduce the demand for our
services and harm our business.

Legislation and government regulation could adversely affect us

     Many of our services are subject to federal, state and/or local regulation.
As we continue to expand our operations geographically, we will become subject
to the regulation of additional jurisdictions. If we fail to comply with all
applicable regulations or experience delays in obtaining required approvals, our
business could be harmed. For example, we must make regular filings in some of
the states in which we operate and could be fined if we do not timely make these
filings. Additionally, compliance with these regulatory requirements may be
costly. Regulations governing communications services also change from time to
time in ways that are difficult to predict. Such changes may harm our business
by increasing competition, decreasing revenue, increasing costs or impairing our
ability to offer services. For example, the FCC could mandate that building
owners give access to competitive providers of communications services.

If our interpretation of regulations applicable to our operations is incorrect,
we may incur additional expenses or become subject to more stringent regulation

     Some of the jurisdictions where we provide services have little, if any,
written regulations regarding our operations. In addition, the written
regulations and guidelines that do exist in a jurisdiction may not specifically
address our operations. If our interpretations of these regulations and
guidelines is incorrect, we may incur additional expenses to comply with
additional regulations applicable to our operations.

Regulation of access to office buildings could negatively affect our business

     There have been proposals to require that commercial office buildings give
access to competitive providers of communications services, and some states,
such as California and Texas, already have similar laws. Regulatory or legal
requirements that mandate access rights to our target buildings or our networks
would facilitate our competitors' entry into buildings where we have access
rights. Our competitors' access to buildings in which we operate could diminish
the value of our access rights to that property and adversely affect our
competitive position. Increased access would be particularly detrimental in
buildings in which we currently have exclusive or semi-exclusive access rights.
Recently, the FCC initiated a regulatory proceeding relating to utility shaft
access in multiple tenant buildings, and a bill was introduced in Congress
regarding the same topic. Some of the issues being considered in these
developments include requiring building owners to provide utility shaft access
to communications carriers, and requiring some communications providers to
provide access to their wiring to other communications providers. We do not know
whether or in what form these proposals will be adopted.

We must purchase voice and data transmission capacity from third parties who may
be unable or unwilling to meet our requirements

     We rely upon other communications carriers, such as local telephone
companies, long distance companies and Internet service providers, to provide
transmission capacity from the buildings we serve. Our failure to obtain
adequate connections from other carriers on a timely basis could delay or impede
our ability to

                                       36
<PAGE>

provide services and generate revenue. We have experienced, and expect to
continue to experience, delays in obtaining transmission capacity. In addition,
in some of our target markets there is only one established carrier available to
provide the necessary connection. This increases our cost and makes it extremely
difficult, if not impossible, to obtain sufficient backup, or redundant,
connections. Sufficient capacity or redundant capacity may not be readily
available from third parties at commercially reasonable rates, if at all. Our
failure to obtain sufficient redundant connectivity could result in an inability
to provide service in certain buildings and service interruptions, which could
in time lead to loss of customers and damage to our reputation. Additionally,
many of the communications carriers we rely on for transmission capacity are
also our direct competitors. See "--We operate in a highly competitive market,
and we may not be able to compete effectively against established competitors
with greater financial resources and diverse strategic plans."

     We rely on local telephone companies for transmission capacity

     As noted above, we rely on local telephone companies for transmission
capacity. The rates we pay to the local telephone companies are generally
approved by the regulatory agency with jurisdiction over that carrier. Local
telephone companies may try to modify the terms under which they provide us
services to make it more difficult or more costly for us to provide services to
our tenants. Changes to the rates that local telephone companies charge us may
prevent us from providing services to our tenants at rates that are competitive
and profitable. Further, local telephone companies may not provide us access to
their network facilities in a prompt and efficient manner.

     We rely on long distance providers for transmission capacity

     We also rely on long distance providers for transmission capacity. The
rates that we pay these providers have generally been decreasing over time.
These rates may, however, rise in the future as a result of changes in
regulation or otherwise. Further, the rates we pay some long distance providers
are contingent upon our meeting minimum volume commitments. If we fail to meet
these volume requirements, our rates may rise. Increases in the rates we pay for
long distance service may make it more costly for us to provide these services
to our tenants. Further, long distance providers may not provide us with access
to their network facilities in a prompt and efficient manner.

     We rely on Internet service providers for transmission capacity

     With respect to Internet connectivity, we obtain the Internet access we
provide to our tenants from Internet service providers at negotiated rates. In
some instances, we must meet minimum volume commitments to receive the
negotiated rates. If we fail to meet the minimum volume commitments, our rates
and costs may rise. Further, Internet service providers may not provide us with
access to their network facilities in a prompt and efficient manner.

     We have commitments to pay third parties for transmission capacity,
     regardless of whether we use their services

     As of December 31, 1999, we have committed to pay approximately $1.6
million for services from other communications carriers through 2001. We will
have to pay those carriers even if we do not use their services.

Our business could suffer from a reduction or interruption from our equipment
suppliers

     We purchase our equipment from various vendors. Any reduction in or
interruption of deliveries from our major equipment suppliers, such as Nortel
Networks or Cisco Systems, could delay our plans to install in-building
networks, impair our ability to acquire or retain customers and harm our
business generally. In addition, the price of the equipment we purchase may
substantially increase over time, increasing the costs we

                                       37
<PAGE>

pay in the future. It could take a significant period of time to establish
relationships with alternative suppliers for each of our technologies and
substitute their technologies into our networks.

We must make capital expenditures before generating revenues, which may prove
insufficient to justify those expenditures

     We typically install an in-building network before we have any customers in
that building. Since we generally do not solicit customers within a building
until our network is in place we may not be able to recoup all of our
expenditures within any building. Prior to generating revenues in a building, we
must incur initial capital expenditures that are usually less than $90,000 on a
typical 335,000 square foot building. In November and December 1999, we entered
into a number of master license agreements, the aggregate effect of which is
likely to increase the average size of the buildings we serve and therefore
increase our average initial capital expenditures for network installation. Our
expenditures will also vary depending on the size of the building and whether we
encounter any construction-related difficulties. After initial installation of
our network, our capital expenditures continue to grow based on the extent to
which we add customers within a building.

Any acquisitions or investments we make could disrupt our business and be
dilutive to our existing stockholders

     We intend to consider acquisitions of, or investments in, complementary
businesses, technologies, services or products. Acquisitions and investments
involve numerous risks, including:

 .  the diversion of management attention;
 .  difficulties in assimilating the acquired business;
 .  potential loss of key employees, particularly those of the acquired business;
 .  difficulties in transitioning key customer relationships;
 .  risks associated with entering markets in which we have no or limited prior
   experience; and
 .  unanticipated costs.

 In addition, these acquisitions or investments may result in:

 .  dilutive issuances of equity securities;
 .  the incurrence of debt;
 .  the assumption of liabilities;
 .  large one-time expenses; and
 .  the creation of goodwill or other intangible assets that result in
   significant amortization expense.

     Any of these factors could materially harm our business or our operating
results.

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<PAGE>

Our networks may be vulnerable to unauthorized access which could interfere with
the provision of our services

     Our networks may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Remediating the effects of computer viruses and
alleviating other security problems may require interruptions, incurrence of
costs and delays or cessation of service to our customers. Unauthorized access
could jeopardize the security of confidential information stored in our computer
systems or those of our customers, for which we could possibly be held liable.

As an Internet access provider, we may incur liability for information
disseminated through our network

     The law relating to the liability of Internet access providers and on-line
services companies for information carried on or disseminated through their
networks is unsettled. As the law in this area develops, the potential
imposition of liability upon us for information carried on and disseminated
through our network could require us to implement measures to reduce our
exposure to such liability, which may require the expenditure of substantial
resources or the discontinuation of certain products or service offerings. Any
costs that are incurred as a result of such measures or the imposition of
liability could harm our business.

Year 2000 problems could disrupt our business

     During this calendar year, many software programs may not recognize
calendar dates beginning in the Year 2000. This problem could cause computers or
machines that utilize date dependent software to either shut down or provide
incorrect information. If we, or any of our key suppliers, customers or service
providers, fail to mitigate internal and external Year 2000 risks, we may
temporarily be unable to provide services or engage in any other business
activities, including customer billing, which could harm our business.

Our affiliates own approximately 58.6% of the outstanding common stock, and thus
control all matters requiring a stockholder vote and, as a result, could prevent
or delay a change of control

     Our existing directors, executive officers and greater-than-five-percent
stockholders and their affiliates beneficially own, in the aggregate,
approximately 58.6% of the outstanding shares of common stock.  If all of these
stockholders were to vote together as a group, they would have the ability to
exert significant influence over our board of directors and its policies. For
instance, these stockholders would be able to control the outcome of all
stockholders' votes, including votes concerning director elections, charter and
by-law amendments and possible mergers, corporate control contests and other
significant corporate transactions. This concentration of stock ownership could
have the effect of preventing or delaying a change of control or otherwise
discouraging a potential acquirer from attempting to obtain control of us, which
in turn could harm the market price of our common stock or prevent our
stockholders from realizing a takeover premium over the market price for their
shares of common stock.

Provisions in our certificate of incorporation and bylaws may discourage
takeover attempts

     Provisions in our certificate of incorporation and bylaws may have the
effect of preventing or delaying a change of control or changes in our
management. These provisions include:

 .  the right of the board of directors, without stockholder approval, to issue
   shares of preferred stock and to establish the voting rights, preferences,
   and other terms of any preferred stock;

 .  the right of the board of directors to elect a director to fill a vacancy
   created by the expansion of the board of directors;

 .  the ability of the board of directors to alter our bylaws without prior
   stockholder approval;

                                       39
<PAGE>

 .  the election of three classes of directors to each serve three year staggered
   terms;

 .  the elimination of stockholder voting by consent;

 .  the removal of directors only for cause;

 .  the vesting of exclusive authority in the board of directors and specified
   officers (except as otherwise required by law) to call special meetings of
   stockholders; and

 .  advance notice requirements for stockholder proposals and nominations for
   election to the board of directors.

     These provisions may have the effect of preventing or delaying a change of
control or impeding a merger, consolidation, takeover or other business
combination, which in turn could preclude our stockholders from recognizing a
premium over the prevailing market price of the common stock.

     We have a shareholder rights plan that entitles our stockholders to rights
to acquire additional shares of our common stock when a third party acquires 15%
of our common stock or commences or announces its intent to commence a tender
offer for at least 15% of our common stock. This plan could delay, deter or
prevent a change of control.

Future sales and issuances of our common stock could adversely affect our stock
price

     Substantial sales of our common stock in the public market, or the
perception by the market that such sales could occur, could lower our stock
price or make it difficult for us to raise additional equity capital in the
future. As of March 2, 2000, we had 47,302,202 shares of common stock
outstanding. Of these shares, 11,511,100 are freely tradeable. Substantially all
of the remaining 35,791,102 shares are subject to 180-day lock-up agreements. Of
these shares, up to 17,004,632 shares may be available for sale in the public
market on August 15, 2000, subject to compliance with Rule 144, and the balance
will be available for sale at various times thereafter, also subject to
compliance with Rule 144. In addition, we have also registered 11,577,100 shares
of common stock for issuance under our stock option plans and 900,000 shares of
common stock under our employee stock purchase plan. As of December 31, 1999,
options to purchase 5,820,975 shares of common stock were issued and
outstanding, of which options to purchase 1,049,091 shares have vested.
Additionally, up to 11,163,990 common shares are issuable upon the exercise of
warrants that were issued to several property owners and operators pursuant to
stock warrant agreements and master license agreements executed in November and
December 1999. These warrants are exercisable for periods of five to ten years,
but cannot be exercised until August 15, 2000. We cannot predict if future sales
or issuances of our common stock, or the availability of our common stock for
sale, will harm the market price for our common stock or our ability to raise
capital by offering equity securities.

Members of our board serve on the boards of our potential competitors, which may
create conflicts of interest

     Some members of our board of directors may serve as directors of other
communications or Internet services companies which might compete with us. To
the extent that any of these companies presently offer, or at some future point
begin to offer, integrated communications services similar to the services that
we provide, there may be conflicts of interest between the fiduciary duties owed
by these individuals to us and the duties owed to these other companies. We have
not adopted specific policy guidelines to address these potential conflicts of
interest, and if these conflicts of interest arise they may be resolved on terms
that are not in the best interests of all of our stockholders.

                                       40
<PAGE>

Impairment of our intellectual property rights could harm our business

     We regard certain aspects of our products, services and technology as
proprietary and attempt to protect them with patents, copyrights, trademarks,
trade secret laws, restrictions on disclosure and other methods. 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 currently have a patent application pending for our fiber-optic
infrastructure and network configuration. This patent may not be issued to us,
and if issued, it may not protect our intellectual property from competition
which could seek to design around or invalidate this patent.

     We are aware of several other companies in our and other industries which
use the word "Cypress" in their corporate names. We are in the process of
attempting to secure a trademark for the name "Cypress Communications." Even if
we are able to secure this trademark, other companies could challenge our use of
the word "Cypress."  If such a challenge were successful, we could be required
to change our name and lose the goodwill associated with the Cypress
Communications name in our markets.

We may have a contingent liability arising out of a possible violation of
Section 5 of the Securities Act of 1933 in connection with the previous
existence of a hyperlink on our website

     On or about December 20, 1999, one of our employees established an
unauthorized hyperlink on our website to an audio announcement regarding our
initial public offering contained on an independent, unaffiliated website. The
audio announcement consisted solely of a person orally announcing limited
factual information regarding Cypress and the offering. This hyperlink was on
our website for approximately 17 days, and was removed on January 6, 2000. This
announcement may have constituted a prospectus that did not meet the
requirements of the Securities Act, in which case the existence of the hyperlink
may have caused us to violate Section 5 of the Securities Act.

     If the existence of this hyperlink caused a violation of Section 5 of the
Securities Act, we believe that only purchasers in the offering who heard this
announcement through the hyperlink would have the right, for a period of one
year from the date of their purchase of the common stock, to bring an action for
rescission or for damages resulting from their purchase of common stock. We
cannot assure you, however, that if such a violation occurred this right would
be limited to those purchasers. We do not believe that the existence of this
hyperlink caused a violation of Section 5, and if any such claim were asserted,
we would contest the matter vigorously. Accordingly, we do not believe that our
exposure, if any, resulting from the existence of this hyperlink would be
material to our results of operations or financial condition.

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

     Our exposure to financial market risk, including changes in interest rates
and marketable equity security prices, relates primarily to our investment
portfolio. We typically do not attempt to reduce or hedge the market exposure on
our investment securities because a substantial majority of our investments are
in fixed-rate, short-term securities. We do not have any derivative instruments.
The fair value of our investment portfolio or related income would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the fixed-rate, short-term nature of the
substantial majority of our investment portfolio. As of December 31, 1999, we
had no debt outstanding, other than capital leases.

Item 8.    Financial Statements and Supplementary Data.

     The financial statements and supplementary data are listed under Item 14(a)
and have been filed as part of this report on the pages indicated.

                                       41
<PAGE>

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

     Not applicable.

                                    PART III

Item 10.    Directors and Executive Officers of the Registrant.

     The following table sets forth the names and ages of our executive
officers, key employees and directors, as of December 31, 1999.

<TABLE>
<CAPTION>
    Name                          Age              Position
<S>                               <C>  <C>
R. Stanley Allen.................. 42  Chief Executive Officer and Director
Ward C. Bourdeaux, Jr............. 41  Executive Vice President and Director
Mark A. Graves.................... 40  President, Chief Operating Officer and Secretary
Barry L. Boniface................. 37  Chief Financial Officer, Vice President and Treasurer
C. Timothy Allaway................ 41  Vice President of Customer Service
Eugene H. Kreeft.................. 50  Vice President of Engineering
Robert W. McCarthy................ 37  Vice President, General Counsel and Assistant Secretary
James W. McClintock............... 44  Vice President of International
Raymond F. Potts.................. 36  Vice President of Marketing and Sales
Claire S. Schenk.................. 50  Vice President of Human Resources
Alistair Sloan.................... 35  Vice President of Internet Services
William P. Egan................... 54  Director
Laurence S. Grafstein ............ 39  Director
Randall A. Hack................... 52  Director
John C. Halsted................... 35  Director
Jeffrey H. Schutz................. 48  Director
P. Eric Yopes .................... 47  Director
</TABLE>

     R. Stanley Allen is a co-founder of the Company and has served as our Chief
Executive Officer and a director since August 1995. From August 1995 until
September 1998, he also served as our President. From March 1994 to May 1996,
Mr. Allen was President and Chief Executive Officer of Applied Video
Technologies, Inc., a wireless cable and communications investment and
development company. From 1991 to 1994, Mr. Allen was President of American
Quality Cable Corporation, a wireless cable television operator. Mr. Allen has
also held positions as Manager-Real Estate Consulting for Coopers & Lybrand and
Analyst for Wellington Real Estate, an affiliate of Boston-based Wellington
Management Company. Mr. Allen was a Director for Wireless Cable of Atlanta
before its acquisition by BellSouth in 1997 and was also a Director for the
Wireless Cable Association. Mr. Allen received a Bachelor of Arts degree in
Economics and a Master of Business Administration degree from the University of
Virginia.

     Ward C. Bourdeaux, Jr. is a co-founder of the Company and has served as our
Executive Vice President and a director since August 1995. From January 1993 to
April 1995, Mr. Bourdeaux served as Director of Development for RealCom Office
Communications, where he was responsible for identifying new building and market
opportunities and entering into new license agreements on a national basis, and
for the renewal of existing agreements nationally. Prior to that, he spent over
nine years in the commercial real estate industry with Cushman & Wakefield and
Carter & Associates. Mr. Bourdeaux received a Bachelor of Arts degree in
Communications from the University of Alabama.

     Mark A. Graves has served as our President since September 1998 and our
Chief Operating Officer and Secretary since September 1997. From September 1997
until September 1998, he also served as our Chief

                                       42
<PAGE>

Financial Officer. From March 1994 to September 1997, Mr. Graves was Executive
Director of Corporate Development for BellSouth Corporation, where he was
involved in mergers, acquisitions and other strategic transactions. Mr. Graves'
activities principally involved BellSouth Corporation's telephone services,
Internet services unit and wireless data partnerships. From May 1989 to February
1994, Mr. Graves was a Principal at Sterling Payot Company, a private investment
firm in San Francisco, where he provided advisory services in strategy and
finance predominantly to media and telecommunications companies, including
Pacific Telesis in its spin-off of PacTel Corp., which was renamed AirTouch
Communications. Prior to joining Sterling Payot Company, Mr. Graves held
positions at The First Boston Corporation and United Technologies Corporation.
Mr. Graves received a Bachelor of Arts degree in Economics and a Master of
Business Administration degree from Harvard University.

     Barry L. Boniface has served as our Chief Financial Officer since October
1998. From September 1994 to October 1998, Mr. Boniface was Executive Director
of Corporate Development for BellSouth Corporation, where he was responsible for
domestic and international mergers, acquisitions, divestitures and other
strategic transactions. Mr. Boniface's activities principally involved
BellSouth's domestic and international wireless telephone services and
competitive local telephone activities. Prior to that, Mr. Boniface was a
principal in Berkshire Partners, Inc., a merchant banking firm based in Dallas,
Texas. He has also held the positions of Chief Operating Officer for Global
Business Acceleration, Inc., an early stage software development company, and
Vice President in the Corporate Finance Department at Principal Financial
Securities, Inc., an investment banking firm. Mr. Boniface received a Bachelor
of Business Administration degree in Management Information Systems from
Southern Methodist University and a Master of Business Administration degree
from the Goizueta Business School at Emory University.

     C. Timothy Allaway has served as our Vice President of Customer Service
since December 1999. From June 1996 to December 1999, Mr. Allaway was Director,
Customer Services for IBM, North America supporting the full line of hardware
and software offerings. From September 1994 to June 1996, Mr. Allaway was
Director, Small Business Sales and Partnerships for MCI. From 1986 to September
1994, Mr. Allaway held various sales and service management positions for MCI.
Prior to that, Mr. Allaway spent five years with Xerox Corporation. Mr. Allaway
received a Bachelor of Science degree in Management from Jacksonville State
University and a Master of Business Administration degree from Auburn
University.

     Eugene H. Kreeft has served as our Vice President of Engineering since
February 1999. From 1991 until February 1999, Mr. Kreeft was an Executive Vice
President of Preferred Networks Inc., an outsourcing services provider to the
wireless industry which he founded in 1991. From 1989 to 1991, Mr. Kreeft served
as Director of Technical Support, U.S. Operations, for Glenayre Technologies, a
developer and provider of personal telecommunications systems. Prior to that,
Mr. Kreeft was employed by BBL Industries, Inc., a paging equipment
manufacturer, where he served as both Vice President of Engineering and
Manufacturing and Vice President of Applications/New Product Development. Mr.
Kreeft has also held management and engineering positions with Motorola, RAM
Broadcasting, AT&T, Western Union Microwave Systems, Highland Telephone Company
and Delaware Telephone Company.

     Robert W. McCarthy has served as our Vice President, General Counsel and
Assistant Secretary since December 1999. From August 1996 until December 1999,
Mr. McCarthy was a General Attorney at BellSouth Corporation, where he
specialized in domestic and international mergers and acquisitions and joint
venture transactions. Prior to that, he was a partner in the Atlanta offices of
Hunton & Williams, where he specialized in mergers and acquisitions, joint
ventures and venture capital transactions. Mr. McCarthy received a Bachelor of
Arts degree in Political Science and a Juris Doctor degree from the University
of North Carolina at Chapel Hill.

     James W. McClintock has served as our Vice President of International since
December 1999. From March 1999 until December 1999, Mr. McClintock was Vice
President of Data Services for BellSouth International (BSI), where he led the
development of BSI's Internet and data strategy and associated business
development activities, focusing principally on Latin America and Europe. Prior
to that, Mr. McClintock was

                                       43
<PAGE>

Executive Director of Corporate Development for BellSouth Corporation, where he
worked primarily with BellSouth Entertainment and BellSouth.net, managing a
number of significant merger, acquisition and alliance activities involving
these two business units. Prior to joining BellSouth in 1993, Mr. McClintock had
fourteen years of experience managing, investing in and financing
entrepreneurial ventures of all types and scale, including positions in banking
with Citicorp and in venture capital with Equity Group Investments. Mr.
McClintock received a Bachelor of Arts degree in Economics from Washington and
Lee University and a Master of Business Administration degree in Finance from
the University of North Carolina.

     Raymond F. Potts has served as our Vice President of Marketing and Sales
since October 1999. From September 1997 to October 1999, Mr. Potts was Regional
Vice President for Sales, Operations and Marketing for the midwest territory of
Teligent, Inc., a wireless telecommunications company. From 1996 to September
1997, Mr. Potts served as Vice President of Sales for the midwest region of
Cable & Wireless, Inc., a wireless telecommunications company. Prior to that,
Mr. Potts spent in excess of ten years in various senior-level sales and service
management positions for Midcom Communications, Sprint, LCI and TFN
Communications. Mr. Potts received a Bachelor of Business Administration degree
from St. Joseph's College in Rensselaer, Indiana.

     Claire S. Schenk has served as our Director of Human Resources since June
1999. From June 1996 until May 1999, Ms. Schenk was Vice President for Human
Resources for Trism, Inc., a national specialized transportation company
headquartered in Atlanta. From December 1989 until June 1996, Ms. Schenk was
Vice President, Senior Business Partner for two national mortgage companies. Ms.
Schenk also has ten years of human resources management experience with Sheraton
Corporation and Six Flags Corporation. Ms. Schenk received a Bachelor of Arts
degree in Psychology from Emory University.

     Alistair Sloan has served as our Vice President of Internet Services since
September 1999. From January 1998 until September 1999, Mr. Sloan was our
Manager of Internet Services. Prior to joining Cypress, Mr. Sloan was Project
Manager at Systems Atlanta, where he consulted with clients on Internet and Wide
Area Networking design and security. Prior to that, Mr. Sloan was a manager of
Internet Connect, a division of Systems Atlanta specializing in dedicated
business Internet connectivity. Mr. Sloan has also held positions with Ingram
Micro, Inc. and has been an independent consultant in the field of local area
networking. Mr. Sloan received a Bachelor of Arts degree in Political Science
from the University of Bridgeport.

     William P. Egan has served as a director since February 1997 and a member
of the Compensation Committee of the Board of Directors since November 1999. Mr.
Egan is a founding partner of Burr, Egan, Deleage & Co. and Alta Communications,
an affiliated firm. For over twenty years, Mr. Egan has invested in a wide
variety of companies in the information technology, life sciences and
communications industries. He is a past President and Chairman of the National
Venture Capital Association. Mr. Egan received a Bachelor of Arts degree from
Fairfield University and a Master of Business Administration degree from the
University of Pennsylvania. He serves as a director of Cephalon, Inc.

     Laurence S. Grafstein has served as a director and a member of the Audit
Committee of the Board of Directors since November 1999. Mr. Grafstein is
Managing Director and co-founder of Gramercy Communications Partners, Inc., a
private equity firm specializing in telecommunications investments. From
February 1996 to May 1999, Mr. Grafstein was a Managing Director and head of the
global telecommunications investment banking practice at Credit Suisse First
Boston, a global investment bank. From February 1994 to February 1996, Mr.
Grafstein was a Managing Director of Wasserstein Perella & Co., a global
investment bank. Mr. Grafstein received a Bachelor of Arts degree from Harvard
University, a Master of Philosophy degree from Balliol College of Oxford
University, where he was a Rhodes Scholar and president of the Oxford Union
Society, and an LLB from the University of Toronto Law School. Mr. Grafstein is
a director of Z-Tel Technologies, Inc.

     Randall A. Hack has served as a director and a member of the Audit
Committee of the Board of Directors since November 1999. He is a Senior Managing
Director of Nassau Capital. From 1990 to 1994, Mr. Hack served as President and
Chief Executive Officer of the Princeton University Investment Company, where

                                       44
<PAGE>

he had overall management responsibility for Princeton's multi billion-dollar
endowment of publicly traded securities and private investments. From 1979 to
1988, he was President and Chief Executive Officer of Matrix Development Group,
a commercial and industrial real estate development firm, which he founded. Mr.
Hack received a Bachelor of Arts degree from Princeton University and a Master
of Business Administration degree from Harvard University. He serves as a
director of OmniCell.com, Inc., Cornerstone Properties, Acacia Capital Corp.,
KMC Telecom, Inc. and Crown Castle International Corp.

     John C. Halsted has served as a director since October 1998 and as a member
of the Compensation Committee and Audit Committee of the Board of Directors
since November 1999. Mr. Halsted serves as Senior Vice President of Beacon
Capital Partners, Inc. and Chief Investment Officer of Beacon Venture Partners,
Beacon Capital's venture capital subsidiary. From 1993 to 1997, Mr. Halsted was
Vice President at Harvard Private Capital Group. From 1991 to 1993, Mr. Halsted
was an Associate with Simmons & Company, an investment banking firm in Houston,
Texas. Mr. Halsted received a Master of Business Administration degree from The
Harvard Business School and a Bachelor of Arts degree in Economics from The
University of California at Berkeley.

     Jeffrey H. Schutz has served as a director since November 1996 and as a
member of the Compensation Committee of the Board of Directors since November
1999. Mr. Schutz is a general partner of The Centennial Funds, a venture capital
firm based in Denver, Colorado that focuses on electronic communications
companies. Since 1981, Centennial has invested more than $700 million in
pioneering entrepreneurial ventures in communications networks, services and
technologies. Mr. Schutz received an AB in Economics from Middlebury College and
a Master of Business Administration degree from the Colgate Darden Graduate
School of Business Administration at the University of Virginia. Mr. Schutz is a
director of Crown Castle International Corp., Enhance Media, Inc. and Point-To-
Point, Inc.

     P. Eric Yopes has served as a director since December 1999. Mr. Yopes is
the Vice Chairman-Investments of Shorenstein Management, Inc. Mr. Yopes joined
Shorenstein in 1984 and his responsibilities have encompassed all aspects of
real estate investment, development, acquisitions/sales, finance, operations and
leasing. He has served as Senior Operating Executive and Chief Financial Officer
of Shorenstein. His current responsibilities include strategy and investment
management, portfolio management, and investor and lender relations. Mr. Yopes
received a Bachelor of Arts degree from Yale University and a Juris Doctor
degree from the University of Chicago.

Board Composition

     In connection with the sale of our series C preferred stock, all of our
then existing stockholders entered into a stockholders agreement. This agreement
provided for, among other things, the nomination of and voting for a total of
nine directors of Cypress, as follows:

 . two management representatives designated by the founding stockholders - -
  these representatives are Messrs. Allen and Bourdeaux;

 . one representative designated by The Centennial Funds -- this representative
  is Mr. Schutz;

 . one representative designated by Alta Communications -- this representative
  is Mr. Egan;

 . one representative designated by Beacon Capital Partners -- this
  representative is Mr. Halsted;

 . one representative designated by Nassau Capital -- this representative is Mr.
  Hack;

 . one representative designated by Gramercy Communications Partners -- this
  representative is Mr. Grafstein;

                                       45
<PAGE>

 . one representative designated by Boston Properties, Cornerstone and
  Shorenstein, voting together as a group -- this representative is Mr. Yopes;
  and

 . one outside representative designated jointly by: (1) The Centennial Funds,
  Alta Communications, Beacon Capital Partners, Nassau Capital and Gramercy
  Communications Partners, voting together as a class; and (2) R. Stanley Allen,
  Ward C. Bourdeaux, Jr., Mark A. Graves, Barry L. Boniface and George J.
  Cisler, voting together as a class. This last directorship was never filled.

     The provisions of the stockholders agreement regarding the nomination and
election of directors terminated upon the closing of our initial public
offering.

     The Board of Directors is divided into three classes, each of whose
members serve for a staggered three-year term.  Messrs. Bourdeaux, Egan and
Schutz serve as Class I directors whose terms expire at the annual meeting of
stockholders to be held in 2000.  Messrs. Grafstein, Hack and Yopes serve as
Class II directors whose terms expire at the annual meeting of stockholders to
be held in 2001.  Messrs Allen and Halsted serve as Class III directors whose
terms expire at the annual meeting of stockholders to be held in 2002.

Committees of the Board of Directors

     Audit Committee.  The Audit Committee is responsible for recommending to
the Board of Directors the engagement of our outside auditors and reviewing our
accounting controls and the results and scope of audits and other services
provided by our auditors. The members of the Audit Committee are Messrs. Hack,
Halsted and Grafstein.

     Compensation Committee.  The Compensation Committee is responsible for
reviewing and approving the amount and type of consideration to be paid to
senior management. The members of the Compensation Committee are Messrs. Egan,
Halsted and Schutz.

     Other Committees.  The Board of Directors may establish from time to time,
other committees to facilitate the management of our business.

                                       46
<PAGE>

Item 11.    Executive Compensation.

     The following table sets forth in summary form the compensation that was
paid to our Chief Executive Officer and the other most highly compensated
executive officers whose aggregate compensation exceeded $100,000 in the year
ended December 31, 1999.

                           Summary Compensation Table

<TABLE>
<CAPTION>

                                                                                   Annual                Long-term
                                                                                Compensation           Compensation
                                                                       --------------------------     --------------
                                                                                                        Securities
                                                                                                        Underlying
Name and Principal Position                                                 Salary         Bonus          Options
------------------------------------------------------------------------- ----------    ---------      ------------
<S>                                                                        <C>           <C>            <C>
R. Stanley Allen ........................................................  $165,000      $ 88,500          243,000
  Chief Executive Officer

Mark A. Graves  .........................................................   155,000        82,969          306,000
  President, Chief Operating Officer and Secretary

Ward C. Bourdeaux, Jr. ..................................................   135,000       195,954          369,000
  Executive Vice President

Barry L. Boniface .......................................................   145,000       105,000          297,000
  Vice President, Chief Financial Officer and Treasurer
</TABLE>

Option Grants in Last Fiscal Year

     The following table sets forth information related to stock options granted
to our named executive officers during the year ended December 31, 1999.

                      Option Grants in Last Fiscal Year(1)

<TABLE>
<CAPTION>
                                                                     Individual Grants
                                    -----------------------------------------------------------   ------------------------
                                                    Percent of                                     Potential Realizable
                                     Number of        Total                                          Value at Assumed
                                    Securities       Options                                       Annual Rates of Stock
                                    underlying      Granted to   Exercise                         Price Appreciation For
                                      Options       Employees     Price     Public                    Option Terms(2)
                                       Grant        in Fiscal      Per     Offering  Expiration   -----------------------
   Name                                (#)          Year(%)       Share     Price       Date         5%           10%
---------------------------------   -----------   ------------  --------- ---------  ----------   ---------  ------------
<S>                                 <C>              <C>          <C>       <C>       <C>        <C>          <C>
R. Stanley Allen ................    180,000         5.14%        $1.07     $17.00    04/07/09   $  983,136    $1,679,563
                                      63,000         1.80          2.53      17.00    11/29/09    1,379,915     2,291,697

Mark A. Graves ..................    180,000         5.14          1.07      17.00    04/07/09      983,136     1,679,563
                                     126,000         3.60          2.53      17.00    11/29/09    2,759,831     4,583,393

Ward C. Bourdeaux, Jr............    180,000         5.14          1.07      17.00    04/07/09      983,136     1,679,563
                                     189,000         5.40          2.53      17.00    11/29/09    4,139,746     6,875,090

Barry L. Boniface................     45,000         1.29          1.07      17.00    04/07/09      245,784       419,891
                                     252,000         7.20          2.53      17.00    11/29/09    5,519,662     9,166,786
</TABLE>

_____________

                                       47
<PAGE>

(1)  The number of options granted in the year ended December 31, 1999 was
     3,526,655. The options expire ten years after the date of the grant and
     vest 20% upon the first anniversary of the date of grant and 5% each
     subsequent quarter measured from the first anniversary of the date of
     grant. The options fully vest upon a change of control. The exercise price
     of the options is adjusted appropriately in the event of a subdivision or
     combination of the outstanding common stock or in the event of a payment of
     a stock dividend in shares of common stock to the holders of common stock.
     In the event of a merger, consolidation or other reorganization, the
     Compensation Committee may make any adjustments to the option that it deems
     necessary.

(2)  Potential realizable value is based on the assumption that our common stock
     appreciates at the annual rate shown, compounded annually, from the date of
     grant until expiration of the ten-year term. These numbers are calculated
     based on SEC requirements and do not reflect our projection or estimate of
     future stock price growth. Potential realizable values are computed by
     multiplying the number of shares of common stock subject to a given option
     by the fair market value of the common stock on the date of grant,
     determined to be $4.01 as of April 7, 1999 and $15.00 as of November 29,
     1999, and assuming that the aggregate stock value derived from that
     calculation compounds at the annual 5% or 10% rate shown in the table for
     the entire ten-year term of the option and subtracting from that result the
     aggregate option exercise price. Actual realizable value, if any, will be
     dependent on the future price of the common stock on the actual date of
     exercise, which may be earlier than the stated expiration date.

Fiscal Year-End Option Values

     The following table sets forth the number of shares covered by both
exercisable and unexercisable options as of December 31, 1999 and the year-end
value of exercisable and unexercisable options as of December 31, 1999 for the
named executive officers.


<TABLE>
<CAPTION>
                                 Number of Securities Underlying  Value of Unexercised In-the-Money
                                     Unexercised Options at                  Options at
                                        December 31, 1999               December 31, 1999(1)
                                 -------------------------------  ---------------------------------
Name                              Exercisable     Unexercisable     Exercisable     Unexercisable
----------------------------------------------  ----------------  ---------------  ----------------
<S>                               <C>             <C>               <C>             <C>
R. Stanley Allen ................   248,452          491,663        $4,058,045        $7,840,900
Mark A. Graves ..................   214,702          588,413         3,502,295         9,290,050
Ward C. Bourdeaux, Jr. ..........   248,452          617,663         4,058,045         9,663,700
Barry L. Boniface................    51,075          501,300           813,795         7,617,780
</TABLE>

_____________
(1)  The value of the unexercised in-the-money options at December 31, 1999 was
     calculated using an initial public offering price of $17.00 per share as
     the estimated fair value per common share at that date.

Stock Plans

1997 Management Option Plan


     Our 1997 management option plan was initially adopted by our Board of
Directors and approved by our stockholders on July 15, 1997. The 1997 option
plan is administered by our Compensation Committee. We established this plan to
provide officers, directors, key employees and consultants the ability to
acquire an ownership interest in Cypress. The options generally vest 20% per
year and expire ten years after issuance. As of March 2, 2000, there were
options to purchase a total of 6,209,732 shares of common stock outstanding
under this plan, of which options to purchase 895,360 shares had vested.
Although no further options will be granted under this plan, the unvested
options will continue to vest in accordance with this plan.

2000 Stock Option and Incentive Plan

     Our 2000 stock option plan was adopted by our Board of Directors on
December 21, 1999 and was subsequently approved by our stockholders on December
23, 1999. The 2000 stock option plan permits us to make grants of:

                                       48
<PAGE>

 .  incentive stock options;
 .  non-qualified stock options;
 .  restricted stock;
 .  deferred stock awards;
 .  unrestricted stock; and
 .  performance share awards.

     Under the 2000 stock option plan, the aggregate number of shares available
for grants of awards is 5,367,368 shares of common stock, subject to adjustment
in the event of a stock split, stock dividend or other change in capitalization.
Any shares forfeited from awards under the 2000 stock option plan or the 1997
management option plan will also be available for future awards under the 2000
stock option plan. At March 2, 2000, there were options to purchase a total of
33,500 shares of common stock granted under this plan, of which no options are
vested.  The options generally vest 25% per year and expire 10 years after
issuance.

     2000 Stock Option Plan Administration.  The 2000 stock option plan provides
for administration by either the Board of Directors or the Compensation
Committee, which consists of non-employee directors. The Committee has full
power to select, from among the individuals eligible for awards, the
participants to whom awards will be granted, to make any combination of awards
to participants, and to determine the specific terms and conditions of each
award, subject to the provisions of the 2000 stock option plan.

     Eligibility and Limitations on Grants.  All officers, employees, directors
and key persons (including consultants and prospective employees) are eligible
to participate in the 2000 stock option plan, subject to the discretion of the
Committee. From and after the date awards made under the 2000 stock option plan
become subject to Section 162(m) of the Internal Revenue Code, no participant
may receive options to purchase more than 1,500,000 shares of common stock
(subject to adjustment for stock splits, stock dividends and other change in
capitalization) during any one calendar year period, as stated above.

     Option Terms.  The Committee has authority to determine the terms of
options granted under the 2000 stock option plan. However, incentive stock
options will have an exercise price that is not less than 100% of the fair
market value of the shares of common stock on the date of the option grant and
non-qualified stock options, other than those granted in lieu of a participant's
cash compensation at the participant's election with the consent of the
Committee, will have an exercise price that is not less than 85% of the fair
market value of the shares of common stock on the date of the option grant.

     At the discretion of the Committee, stock options granted under the 2000
stock option plan may include a "re-load" feature pursuant to which an optionee
exercising an option by the delivery of shares of common stock would
automatically be granted an additional stock option (with an exercise price
equal to the fair market value of the common stock on the date the additional
stock option is granted) to purchase that number of shares of common stock equal
to the number delivered to exercise the original stock option. The purpose of
this feature is to enable participants to maintain their equity interest without
dilution.

     Acceleration Upon a Merger, Sale or Change of Control of Cypress.  Upon the
occurrence of any of the following events, unless otherwise provided in the
award agreements, all outstanding awards granted pursuant to the 2000 stock
option plan shall become fully exercisable or fully vested and nonforfeitable:

 .  the dissolution or liquidation of Cypress;
 .  the sale of all or substantially all of the assets of Cypress;

                                       49
<PAGE>

 .  a merger, reorganization or consolidation of Cypress;
 .  the sale of all of the stock of Cypress; or
 .  a change of control of Cypress.

     In the event of certain transactions, such as a merger, consolidation,
dissolution or liquidation, the committee in its discretion may provide for
appropriate substitutions or adjustments of outstanding stock options;
alternatively, outstanding stock options will terminate and the holder will
receive a cash payment equal to the excess of the fair market value per share
over the applicable exercise price, multiplied by the number of shares of common
stock covered by the stock option.

     Amendments and Termination.  The Board of Directors may at any time amend
or discontinue the 2000 stock option plan and the Committee may at any time
amend or cancel any outstanding award for the purpose of satisfying changes in
law or for any other lawful purpose, but no such action shall adversely affect
the rights under any outstanding awards without the holder's consent. To the
extent required by the Internal Revenue Code to ensure that options granted
under the 2000 stock option plan qualify as incentive stock options, plan
amendments shall be subject to approval by our stockholders.

Employee Stock Purchase Plan

     Our employee stock purchase plan was adopted by our Board of Directors on
December 21, 1999 and was subsequently approved by our stockholders on December
23, 1999. Up to 900,000 shares of common stock may be issued under the employee
stock purchase plan.

     The first offering under the employee stock purchase plan began on February
10, 2000, the effective date of our initial public offering, and ends on October
31, 2000. Subsequent offerings will commence on each November 1 and May 1
thereafter and will have a duration of six months. Generally, all employees who
are customarily employed for more than 20 hours per week as of the first day of
the applicable offering period will be eligible to participate in the employee
stock purchase plan. An employee who owns or is deemed to own shares of stock
representing in excess of 5% of the combined voting power of all classes of our
stock will not be able to participate in the employee stock purchase plan.

     During each offering, an employee may purchase shares under the employee
stock purchase plan by authorizing payroll deductions of up to 10% of his or her
cash compensation during the offering period. The maximum number of shares that
may be purchased by any participating employee during any six-month offering
period is limited to the number of whole shares which is less than or equal to
$12,500 divided by the closing price per share on the first day of the
applicable offering period. Unless the employee has previously withdrawn from
the offering, his or her accumulated payroll deductions will be used to purchase
common stock on the last business day of the period at a price equal to 85% of
the fair market value of the common stock on the first or last day of the
offering period, whichever is lower. For purposes of the initial offering
period, the fair market value of common stock on the first day of the offering
period was $17 per share, the offering price to the public pursuant to our
initial public offering. Under applicable tax rules, an employee may purchase no
more than $25,000 worth of common stock in any calendar year. No common stock
has been issued to date under the employee stock purchase plan.

Directors Compensation

     Directors who are employees receive no additional compensation for their
services as directors.  Non-employee directors are compensated as follows:
$5,000 annual fee, $1,000 for each board meeting attended in person and $500 for
each committee meeting and for each board meeting attended by telephone.  Non-
employee directors are also eligible to participate in our 2000 stock option
plan at the discretion of the full Board of Directors.

                                       50
<PAGE>

Severance Plan

     We intend to adopt a severance plan which will cover Messrs. Allen,
Bourdeaux, Graves and Boniface.  This plan will provide severance benefits to
these executive officers if they are terminated without "cause" or they
terminate with "good reason" within a one-year period following a change of
control of Cypress.  Upon a qualifying termination, the executive officer will
be entitled to a lump sum payment equal to one and one-half times his base
annual salary.

Compensation Committee Interlocks and Inside Participation

     The members of the Compensation Committee are Messrs. Egan, Halsted and
Schutz.  Mr. Egan is a general partner of Alta Communications, which purchased
263,158 shares of Series C preferred stock from Cypress on October 8, 1999 for
$5.0 million.  These shares were automatically converted into 1,184,210 shares
of our common stock in connection with our initial public offering in February
2000.  Mr. Halsted is an executive officer of Beacon Capital Partners, which
purchased 342,105 shares of Series C preferred stock from Cypress on October 8,
1999 for $6.5 million.  These shares were automatically converted into 1,539,473
shares of our common stock in connection with our initial public offering.  Mr.
Schutz is a general partner of The Centennial Funds, which purchased 263,158
shares of Series C preferred stock from Cypress on October 8, 1999 for $5.0
million.  These shares were automatically converted into 1,184,210 shares of our
common stock in connection with our initial public offering.  Prior to 1999,
these same investors purchased additional shares of our convertible preferred
stock.  See "Certain Relationships and Related Transactions" under Item 13.

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

     The following table sets forth information regarding beneficial ownership
of our common stock as of March 2, 2000. The percentage of beneficial ownership
is based on 47,302,202 shares of our common stock outstanding as of such date.
The table sets forth such information with respect to:

 .  each stockholder who is known by us to beneficially own 5% or more of the
   common stock;
 .  each of our directors;
 .  each of the executive officers named in the "Summary Compensation Table"
   under Item 11; and
 .  all of our executive officers and directors as a group.

     Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares of common stock beneficially owned
by such stockholder.

     The number of shares beneficially owned by each stockholder is determined
under rules issued by the Securities and Exchange Commission. The information is
not necessarily indicative of beneficial ownership for any other purpose. Under
these rules, beneficial ownership includes any shares as to which the individual
or entity has sole or shared voting power or investment power and any shares as
to which the individual or entity has the right to acquire beneficial ownership
within 60 days after March 2, 2000, through the exercise of any stock option or
other right.

                                       51
<PAGE>

<TABLE>
<CAPTION>
                                                                    Number of
                                                               Shares Beneficially          Percent Beneficially
Name of Beneficial Owner(1)                                           Owned                         Owned
--------------------------------------------------------- ------------------------------- ---------------------------
<S>                                                            <C>                          <C>

Centennial Holdings V, L.P.(2)...........................            8,240,153                       17.4%
Alta Communications, Inc.(3).............................            6,118,697                       12.9
Beacon Capital Partners, Inc.(4).........................            4,351,972                        9.2
Nassau Capital L.L.C.(5).................................            2,960,525                        6.3
Gramercy Communications Partners, Inc.(6)................            2,960,526                        6.3
R. Stanley Allen(7)......................................            1,022,740                        2.2
Ward C. Bourdeaux, Jr.(8)................................              740,082                        1.6
Jeffrey H. Schutz(2).....................................            8,240,153                       17.4
William P. Egan(3).......................................            6,118,697                       12.9
John C. Halsted(4).......................................            4,351,972                        9.2
Randall A. Hack(5).......................................            2,960,525                        6.3
Laurence S. Grafstein(6).................................            2,960,526                        6.3
P. Eric Yopes(9).........................................              828,947                        1.8
Mark A. Graves(10).......................................              347,246                         *
Barry L. Boniface(11)....................................              110,599                         *
All directors and executive officers as a group
 (12 persons)(12)........................................           27,730,837                       58.6%
</TABLE>
_______________
*    Represents less than 1% of the outstanding shares of common stock.

(1)  The address of Centennial Holdings V, L.P. and Mr. Schutz is 1428 15th
     Street, Denver, CO 80202. The address of Alta Communications, Inc. and Mr.
     Egan is One Post Office Square, Suite 3800, Boston, MA 02109. The address
     of Beacon Capital Partners, Inc. and Mr. Halsted is One Federal Street,
     26th Floor, Boston, MA 02110. The address of Nassau Capital L.L.C. and Mr.
     Hack is 22 Chambers Street, Princeton, NJ 08542. The address of Gramercy
     Communications Partners, Inc. and Mr. Grafstein is 712 Fifth Avenue, 43rd
     Floor, New York, NY 10019. The address of P. Eric Yopes is c/o Shorenstein
     Management, Inc., 555 California Street, 49th Floor, San Francisco, CA
     94104. The address of all other listed stockholders is c/o Cypress
     Communications, Inc., Fifteen Piedmont Center, Suite 710, Atlanta, GA
     30305.

(2)  Represents shares of common stock beneficially owned by investment funds
     affiliated with Centennial Holdings V, L.P., of which Mr. Schutz is a
     general partner, including 8,028,428 shares of common stock beneficially
     owned by Centennial Fund V, L.P. and 211,725 shares of common stock
     beneficially owned by Centennial Entrepreneurs Fund V, L.P. Mr. Schutz
     disclaims beneficial ownership of the shares of common stock held by these
     funds, except to the extent of his proportionate pecuniary interest in such
     funds.

(3)  Represents shares of common stock beneficially owned by investment funds
     affiliated with Alta Communications, Inc., of which Mr. Egan is a general
     partner, including 5,981,903 shares of common stock beneficially owned by
     Alta Communications VI, L.P. and 136,794 shares of common stock
     beneficially owned by Alta Comm S by S, LLC. Mr. Egan disclaims beneficial
     ownership of the shares of common stock held by these funds, except to the
     extent of his proportionate pecuniary interest in such funds.

(4)  Represents shares of common stock beneficially owned by entities affiliated
     with Beacon Capital Partners, Inc., of which Mr. Halsted is an executive
     officer, including 204,241 shares of common stock beneficially owned by
     Tenant Communications, Inc., 4,029,310 shares of common stock beneficially
     owned by Building Communications, LLC and 118,421 shares of common stock
     beneficially owned by Investor Communications LLC. Mr. Halsted disclaims
     beneficial ownership of the shares of common stock held by these funds,
     except to the extent of his proportionate pecuniary

                                       52
<PAGE>

     interest in such funds. On January 3, 2000, the shares of common stock
     owned by Tenant Communications, Inc. and Building Communications, LLC were
     transferred to an affiliated voting trust.

(5)  Represents shares of common stock beneficially owned by investment funds
     affiliated with Nassau Capital L.L.C., of which Mr. Hack is a member,
     including 2,914,145 shares of common stock beneficially owned by Nassau
     Capital Partners III L.P. and 46,380 shares of common stock beneficially
     owned by NAS Capital Partners I L.L.C. Mr. Hack disclaims beneficial
     ownership of the shares of common stock held by these funds, except to the
     extent of his proportionate pecuniary interest in such funds.

(6)  Represents shares of common stock beneficially owned by Gramercy Cypress
     LLC, an investment fund affiliated with Gramercy Communications Partners,
     Inc., of which Mr. Grafstein is a Managing Director. Mr. Grafstein
     disclaims beneficial ownership of the shares of common stock held by this
     fund, except to the extent of his proportionate pecuniary interest in such
     fund.

(7)  Includes 313,913 shares of common stock held by Mr. Allen subject to
     options exercisable as of March 2, 2000 or within 60 days thereafter.

(8)  Includes 313,913 shares of common stock held by Mr. Bourdeaux subject to
     options exercisable as of March 2, 2000 or within 60 days thereafter.

(9)  Represents shares of common stock beneficially owned by DWS Capital LLC, an
     investment fund affiliated with Shorenstein Management, Inc., of which Mr.
     Yopes is an executive officer. Mr. Yopes disclaims beneficial ownership of
     the shares of common stock held by this fund, except to the extent of his
     proportionate pecuniary interest in such fund.

(10) Includes 174,308 shares of common stock held by Mr. Graves subject to
     options exercisable as of March 2, 2000 or within 60 days thereafter.

(11) Includes 34,538 shares of common stock held by Mr. Boniface subject to
     options exercisable as of March 2, 2000 or within 60 days thereafter.

(12) Includes 878,522 shares of common stock held by all directors and executive
     officers as a group subject to options exercisable as of March 2, 2000 or
     within 60 days thereafter.

Item 13.  Certain Relationships and Related Transactions.

     We were formed as a limited liability company under the laws of Georgia on
August 16, 1995 as Cypress Communications, L.L.C. We completed a reorganization
on July 15, 1997 in which the operations of the predecessor company were merged
into Cypress Communications, Inc., a Delaware corporation.

     In connection with our reorganization on July 15, 1997, we issued an
aggregate of 2,636,906 shares of our common stock to nine persons, including
Messrs. Allen and Bourdeaux, Centennial Holdings V, L.P. and Alta
Communications, in exchange for membership interests in our predecessor company.
On that date, we also issued an aggregate of 1,200,140 shares of our series A
preferred stock for $5 per share to eight investors, including Messrs. Allen,
Bourdeaux and Graves, Centennial Holdings V, L.P. and Alta Communications. On
March 9, 1998, we issued 11,000 shares of our series A preferred stock to Mr.
Graves for $5 per share.

     On September 30, 1998, we issued an aggregate of 1,333,200 shares of our
series B preferred stock to investors, including Messrs. Allen, Bourdeaux and
Graves, Centennial Holdings V, L.P., Alta Communications and Beacon Capital
Partners for $8 per share. On that same date, we also issued 579,613 shares of
our series B-1 preferred stock to Beacon Capital Partners for $8 per share. On
February 1, 1999 we issued an aggregate of 6,375 shares of our series B
preferred stock to Mr. Boniface and another employee for $8 per share.

     In the fourth quarter of 1999, we issued an aggregate of 4,161,974 shares
of our series C preferred stock to investors, including Messrs. Allen,
Bourdeaux, Graves and Boniface, Centennial Holdings V, L.P.,

                                       53
<PAGE>

Alta Communications, Beacon Capital Partners, Nassau Capital and Gramercy
Communications Partners for $19 per share.

     Under the conversion rate set forth in the terms of the preferred stock,
the preferred stock was originally convertible into common stock on a one-for-
one basis. However, as a result of the 4.5-for-1 stock split which occurred on
February 8, 2000, the conversion rate automatically adjusted such that each
share of preferred stock was convertible into 4.5 shares of common stock. The
preferred stock automatically converted into common stock upon the completion of
our initial public offering on February 15, 2000.

     Certain of our directors are affiliated with certain of our principal
stockholders. Mr. Schutz is a general partner of Centennial Holdings V, L.P. Mr.
Egan is a general partner of Alta Communications. Mr. Halsted is an executive
officer of Beacon Capital Partners. Mr. Hack is a member of Nassau Capital. Mr.
Grafstein is a Managing Director of Gramercy Communications Partners.

     One of our directors, Mr. Yopes, is an executive officer of Shorenstein
Management, Inc. In December 1999, we issued 184,211 shares of our series C
preferred stock to an investment fund affiliated with Shorenstein for $19 per
share. In addition, as part of our November/December master license agreement
program, we entered into a master license agreement with Shorenstein under which
we have obtained the right to install and operate our networks in up to 21
buildings representing more than 15 million rentable square feet. Upon the
execution of property-specific license agreements with respect to these
buildings, we will be required to pay Shorenstein, or the appropriate property
owner, approximately 6% of the revenues generated from tenants in those
buildings. In connection with the execution of this master license agreement, we
also issued Shorenstein warrants to acquire up to 815,108 shares of our common
stock at an exercise price of $4.22 per share. The exact number of shares of
common stock underlying the warrants, which is based on the gross leasable area
of the buildings set forth in the master license agreement, will not be
determined until the completion of due diligence and the finalization of the
building schedules, which is currently in process. The warrants are exercisable
for a period of ten years, but cannot be exercised until six months following
the completion of this offering.

     During 1999, we entered into a consulting arrangement with William Zierden,
an investor in The Centennial Funds. In accordance with this arrangement, Mr.
Zierden provided consulting services to us and had received fees totaling
approximately $92,868 in fiscal 1999. In addition, in December 1999 we issued
options to purchase 3,947 shares of common stock to Mr. Zierden in connection
with this arrangement.

     We believe that each of the transactions described above was entered into
on terms no less favorable to Cypress than could be obtained with non-affiliated
parties. For all future transactions, we have adopted a conflict of interest
policy whereby our Audit Committee will review the fairness of all material
transactions between Cypress and our officers, directors and other affiliates
and will make recommendations after such review to the entire Board of
Directors.

Third Amended and Restated Stockholders Agreement

     In connection with the sale of our series C preferred stock, all of our
then existing stockholders entered into a stockholders agreement.  Except for
the registration rights provisions described below, all other provisions of the
stockholders agreement terminated upon the completion of our initial public
offering in February 2000.

     The provisions of the stockholders agreement relating to the registration
rights provide that groups of stockholders may require us to register all or any
portion of their shares by filing one registration statement utilizing a Form S-
1 and multiple registration statements utilizing a Form S-3. The parties will
also be entitled to unlimited piggyback registration rights in connection with
any registration by us of securities for our own account or the account of other
stockholders. The registration rights available under these provisions of the
stockholders agreement generally will terminate when all shares owned by the
parties to the agreement may be

                                       54
<PAGE>

immediately sold under Rule 144 and our stock is listed on a national securities
market or traded in the Nasdaq Stock Market.

                                    PART IV

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

(a) 1. Financial Statements

     Our financial statements listed below have been filed as part of this
report on the pages indicated:

<TABLE>
<CAPTION>
                                                                                         Page
                                                                                         ----
<S>                                                                                      <C>
     Report of Independent Public Accountants..........................................    58
     Balance Sheets as of December 31, 1998 and December 31, 1999......................    59
     Statements of Operations for the years ended December 31, 1997, 1998 and 1999.....    60
     Statements of Members' or Stockholders' Deficit for the years ended December 31,
     1997, 1998 and 1999...............................................................    61
     Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999.....    62
     Notes to Financial Statements.....................................................    63
</TABLE>
(a) 2. Financial Statement Schedules

    Our schedules listed below have been filed as part of this report on the
pages indicated:

<TABLE>
<CAPTION>
                                                                                          Page
                                                                                          ----
<S>                                                                                       <C>
     Report of Independent Public Accountants as to Schedules..........................    74
     Schedules.........................................................................    75
</TABLE>
(a) 3. Exhibits

     The following exhibits either (i) are filed with this report or (ii) have
previously been filed with the Securities and Exchange Commission and are
incorporated in Item 14 by reference to the filing in the corresponding numbered
footnote.

<TABLE>
<CAPTION>
   No.                                                   Description
----------                                             ----------------

<C>         <S>
  3.1 *     Second Amended and Restated Certificate of Incorporation.
  3.2 *     Amended and Restated Bylaws.
  4.1       Specimen certificate of shares of common stock, $.001 par value per share. (1)
  4.2 *     Shareholder Rights Agreement.
 10.1       1997 Management Option Plan. (1)
 10.2 *     2000 Stock Option and Incentive Plan.
 10.3 *     Employee Stock Purchase Plan.
 10.4       Third Amended and Restated Stockholders Agreement. (1)
 10.5       First Amendment to the Third Amended and Restated Stockholders Agreement. (1)
 10.6       Second Amendment to the Third Amended and Restated Stockholders Agreement. (1)
 10.7       Form of Master Communications License Transaction Agreement entered into in November and December
            1999. (1)
 10.8       Form of Stock Warrant Agreement entered into in November and December 1999. (1)
 10.9       Series A Preferred Stock Purchase Agreement, by and among Cypress Communications, Inc. and the
            purchasers thereto, dated as of July 15, 1997. (1)
</TABLE>

                                       55
<PAGE>

<TABLE>
<CAPTION>
<S>          <C>
10.10       Series B and B-1 Preferred Stock Purchase Agreement, by and among Cypress Communications, Inc. and
            the purchasers thereto, dated as of September 30, 1998. (1)
10.11       Series C and C-1 Preferred Stock Purchase Agreement, by and among Cypress Communications, Inc. and
            the purchasers thereto, dated as of October 8, 1999. (1)
10.12       Series C Preferred Stock Purchase Agreement, by and among Cypress Communications, Inc. and the
            purchasers thereto, dated as of November 23, 1999. (1)
10.13       Series C Preferred Stock Purchase Agreement, by and among Cypress Communications, Inc. and
            purchasers thereto, dated as of December 1, 1999. (1)
10.14       Series C Preferred Stock Purchase Agreement, by and among Cypress Communications, Inc. and the
            purchasers thereto, dated as of December 2, 1999. (1)
10.15       Binding Summary of Terms of Stock Purchase Agreement dated November 23, 1999, by and among Cypress
            Communications, Inc., SiteConnect, Inc. and the shareholders of SiteConnect, Inc., and the
            amendments thereto. (1)
10.16       Form of Indemnification Agreement for Directors and Executive Officers. (1)
10.17       Form of Executive Officer Severance Plan. (1)
23.1   *    Consent of Arthur Andersen LLP.
27.1   *    Financial Data Schedule.
</TABLE>

_______________
*    Filed herewith.
(1)  Incorporated by reference to Cypress Communications, Inc.'s Registration
     Statement on Form S-1 (Commission File No. 333-92011), as amended.

(b)  Reports on Form 8-K
     Not applicable.

(c)  See Item 14(a)(3) above.

(d)  See Item 14(a)(2) above.

                                       56
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 30, 2000.

                                    CYPRESS COMMUNICATIONS, INC.

                                    By: /s/ R. Stanley Allen
                                       ----------------------
                                       R. Stanley Allen
                                       Chief Executive Officer

     Pursuant to the requirements of Section 13 or 15(d) 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 indicated on March 30, 2000.

<TABLE>
<CAPTION>
                      Signature                                                   Title
-----------------------------------------------------           -----------------------------------------
<S>                                                             <C>

/s/ R. Stanley Allen                                                Chief Executive Officer and Director
-----------------------------------------------------
R. Stanley Allen

/s/ Ward C. Bourdeaux, Jr.                                          Executive Vice President and Director
-----------------------------------------------------
Ward C. Bourdeaux, Jr.

/s/ Mark A. Graves                                                  President, Chief Operating Officer and
-----------------------------------------------------               Secretary
Mark A. Graves

/s/ Barry L. Boniface                                               Vice President, Chief Financial Officer
-----------------------------------------------------               and Treasurer
Barry L. Boniface

/s/ William P. Egan                                                 Director
-----------------------------------------------------
William P. Egan

/s/ Laurence S. Grafstein                                           Director
-----------------------------------------------------
Laurence S. Grafstein

/s/ Randall A. Hack                                                 Director
-----------------------------------------------------
Randall A. Hack

/s/ John C. Halsted                                                 Director
-----------------------------------------------------
John C. Halsted

/s/ Jeffrey H. Schutz                                               Director
-----------------------------------------------------
Jeffrey H. Schutz

/s/ P. Eric Yopes                                                   Director
-----------------------------------------------------
P. Eric Yopes
</TABLE>

                                       57
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Cypress Communications, Inc.:

     We have audited the accompanying balance sheets of CYPRESS COMMUNICATIONS,
INC. (a Delaware corporation and successor to Cypress Communications, L.L.C.) as
of December 31, 1998 and 1999 and the related statements of operations, changes
in members' or stockholders' deficit, and cash flows for the three years ending
December 31, 1999.  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 in accordance with auditing standards generally
accepted in the United States.  Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.  We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cypress Communications, Inc.
as of December 31, 1998 and 1999 and the results of its operations and its cash
flows for the three years ending December 31, 1999 in conformity with accounting
principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Atlanta, Georgia
February 21, 2000

                                       58
<PAGE>

                          CYPRESS COMMUNICATIONS, INC.
                                 BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1999

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                           1998                       1999
                                                                                  -------------------       ---------------------

CURRENT ASSETS:
<S>                                                                                 <C>                       <C>
 Cash and cash equivalents                                                                $11,057,696                $ 69,475,288
 Accounts receivable, net of allowance for doubtful
  accounts of $79,520, and $367,805
  in 1998 and 1999, respectively                                                            1,119,784                   1,665,203
 Note receivable                                                                              200,000                           0
 Prepaid expenses and other                                                                    26,238                     320,516
                                                                                  -------------------       ---------------------
        Total current assets                                                               12,403,718                  71,461,007
                                                                                  -------------------       ---------------------
PROPERTY AND EQUIPMENT, net                                                                 6,291,413                  27,028,102
                                                                                  -------------------       ---------------------

OTHER ASSETS:
 Cost in excess of net assets acquired, net of
  accumulated amortization of $7,071 and                                                       84,141                      75,656
  $15,556 in 1998 and 1999, respectively
 Tenant contracts, net of accumulated amortization
   of $119,444 and $262,778 in 1998                                                           418,056                     274,722
  and 1999, respectively
 License agreements                                                                                 0                  23,398,094
 Other                                                                                        209,777                     617,020
                                                                                  -------------------       ---------------------
        Total other assets                                                                    711,974                  24,365,492
                                                                                  -------------------       ---------------------
        Total assets                                                                      $19,407,105                $122,854,601
                                                                                  ===================       =====================


LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
 Accounts payable                                                                         $   381,032                $ 12,672,121
 Accrued expenses                                                                           1,307,941                   2,696,133
 Current portion of capital lease obligations                                                 192,635                     217,468
                                                                                     ----------------       ---------------------

        Total current liabilities                                                           1,881,608                  15,585,722

LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS                                                522,583                     283,469
                                                                                     ----------------       ---------------------

        Total liabilities                                                                   2,404,191                  15,869,191
CONVERTIBLE REDEEMABLE PREFERRED STOCK (Note 5):
 $.001 par value; 1,211,140 shares designated Series A
   in 1998 and 1999; 1,211,140, shares issued and outstanding in 1998 and 1999,
   entitled to redemption value of $5 per share                                             6,036,670                   6,040,856
 $.001 par value; 1,912,813 and 1,919,188 shares designated Series B in 1998 and
   1999, respectively; 1,333,200 and 1,339,575 shares issued and outstanding in 1998
   and 1999, respectively, entitled to redemption value of $8 per share                    10,650,328                  10,705,636
 $.001 par value; 579,613 shares designated Series B-1 in 1998 and 1999; 579,613
   shares issued and outstanding in 1998 and 1999, entitled to redemption value of $8
   per share                                                                                4,630,265                   4,632,137
 $.001 par value; 0 and 4,210,526 shares designated Series C in 1998 and 1999,
   respectively; 0 and 4,161,974 shares issued and outstanding in 1998 and 1999,
   respectively, entitled to redemption value of $19 per share                                      0                  78,899,121
                                                                                     ----------------       ---------------------
        Total preferred stock                                                              21,317,263                 100,277,750
                                                                                     ----------------       ---------------------

COMMITMENTS AND CONTINGENCIES (Note 7)

STOCKHOLDERS' (DEFICIT) EQUITY:
 Common stock, $.001 par value; 20,594,088 and 58,620,758 shares authorized in 1998
  and 1999, respectively; 2,636,906 and 2,759,806 shares issued and outstanding in
  1998 and 1999, respectively                                                                   2,637                       2,760
 Additional paid-in capital                                                                 3,536,863                 109,339,640
 Warrants outstanding                                                                               0                  23,398,094
 Deferred compensation                                                                     (2,179,045)                (27,124,250)
 Accumulated deficit                                                                       (5,674,804)                (98,908,584)
                                                                                     ----------------       ---------------------
        Total stockholders' (deficit) equity                                               (4,314,349)                  6,707,660
                                                                                     ----------------       ---------------------
        Total liabilities and stockholders' deficit                                       $19,407,105                $122,854,601
                                                                                     ================       =====================
</TABLE>

      The accompanying notes are an integral part of these balance sheets.

                                       59
<PAGE>

                          CYPRESS COMMUNICATIONS, INC.

                            STATEMENTS OF OPERATIONS

             For the years ended December 31, 1997, 1998, and 1999

<TABLE>
<CAPTION>
                                                                 1997                    1998                    1999
                                                         ------------------      ------------------      ------------------
<S>                                                        <C>                     <C>                     <C>
REVENUES                                                        $   709,402             $ 2,417,816            $  7,437,496
                                                         ------------------      ------------------      ------------------
OPERATING EXPENSES:
 Cost of services                                                   603,114               1,539,846               4,966,851
 Sales and marketing, including noncash compensation                448,916               1,489,355               4,007,094
  expense of $0, $19,248, and $321,492 in 1997, 1998,
  and 1999, respectively
 General and administrative, including noncash                      900,595               2,534,566              11,232,045
  compensation expense of $0, $98,345, and $1,403,796 in
  1997, 1998, and 1999, respectively
 Depreciation and amortization                                      196,415                 576,659               2,197,831
                                                         ------------------      ------------------      ------------------
        Total operating expenses                                  2,149,040               6,140,426              22,403,821
                                                         ------------------      ------------------      ------------------
OPERATING LOSS                                                   (1,439,638)             (3,722,610)            (14,966,325)

INTEREST INCOME, net                                                113,922                 232,279                 810,045
                                                         ------------------      ------------------      ------------------
LOSS BEFORE INCOME TAXES                                         (1,325,716)             (3,490,331)            (14,156,280)

INCOME TAX BENEFIT                                                        0                       0                       0
                                                         ------------------      ------------------      ------------------
NET LOSS                                                         (1,325,716)             (3,490,331)            (14,156,280)

BENEFICIAL CONVERSION FEATURE OF PREFERRED STOCK (Note 5)                 0                       0             (79,077,500)
                                                         ------------------      ------------------      ------------------


NET LOSS AVAILABLE TO COMMON STOCKHOLDERS                       $(1,325,716)            $(3,490,331)           $(93,233,780)

NET LOSS PER COMMON SHARE:
 Basic and diluted                                              $     (0.41)            $     (1.32)           $     (35.22)
                                                         ==================      ==================      ==================


WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
 Basic and diluted                                                3,266,237               2,636,906               2,647,274
                                                         ==================      ==================      ==================
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       60
<PAGE>

                          CYPRESS COMMUNICATIONS, INC.

                STATEMENTS OF MEMBERS' OR STOCKHOLDERS' DEFICIT

             FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999

<TABLE>
<CAPTION>




                                     Members' Shares
                                     or Common Stock      Contributed or
                                  --------------------     Additional        Deferred     Warrants      Accumulated
                                    Shares      Amount   Paid-In  Capital  Compensation  Outstanding      Deficit       Total
                                  ------------------------------------------------------------------------------------------------

<S>                                     <C>          <C>        <C>                <C>                   <C>                 <C>
BALANCE, December 31, 1996          400,431     $    0    $  1,887,513     $          0  $         0  $   (858,757)    $  1,028,756

 Issuance of member shares           41,667          0         250,000                0            0             0          250,000
 Repurchase of member shares       (149,109)         0        (894,651)               0            0             0         (894,651)
 Conversion to a C corporation    2,343,917      2,637          (2,637)               0            0             0                0
 Net loss                                 0          0               0                0            0    (1,325,716)      (1,325,716)

BALANCE, December 31, 1997        2,636,906      2,637       1,240,225                0            0    (2,184,473)        (941,611)

 Deferred compensation                    0          0       2,296,638       (2,296,638)           0             0                0
 Amortization of
  deferred compensation                   0          0               0          117,593            0             0          117,593
 Net loss                                 0          0               0                0            0    (3,490,331)      (3,490,331)

BALANCE, December 31, 1998        2,636,906      2,637       3,536,863       (2,179,045)           0    (5,674,804)      (4,314,349)

 Issuance of common stock           122,900        123         395,127                0            0             0          395,250
 Deferred compensation                    0          0      26,330,150      (26,330,150)           0             0                0
 Amortization of
   deferred compensation                  0          0               0        1,384,945            0             0        1,384,945
 Issuance of warrants                     0          0               0                0   23,398,094             0       23,398,094
 Beneficial conversion feature of         0          0      79,077,500                0            0   (79,077,500)               0
  preferred stock
   (Note 5)
 Net loss                                 0          0               0                0            0   (14,156,280)     (14,156,280)
BALANCE, December 31, 1999        2,759,806     $2,760    $109,339,640     $(27,124,250) $23,398,094  $(98,908,584)    $  6,707,660
                                  =================================================================================================

The accompanying notes are an integral part of these statements
</TABLE>

                                       61
<PAGE>

                          CYPRESS COMMUNICATIONS, INC.

                            STATEMENTS OF CASH FLOWS

             FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999

<TABLE>
<CAPTION>
                                                                                    1997             1998              1999
                                                                                 -----------      ----------        -----------
<S>                                                                              <C>             <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net loss                                                                        $(1,325,716)    $(3,490,331)      $(14,156,280)
 Adjustments to reconcile net loss to net cash used in operating
   activities:
   Depreciation and amortization                                                     196,415         576,659          2,197,831
   Amortization of deferred compensation                                                   0         117,593          1,384,945
   Other                                                                               1,920           5,737             14,544
   Noncash consulting expense                                                              0               0            340,343
   Changes in operating assets and liabilities:
     Accounts receivable, net                                                       (168,919)       (916,616)          (545,419)
     Prepaid expenses and other current assets                                       (32,146)         18,185           (294,278)
     Other assets                                                                          0         (89,777)          (196,286)
     Accounts payable and accrued expenses                                           436,927         863,645          1,353,953
                                                                           ----------------------------------------------------
     Net cash used in operating activities                                          (891,519)     (2,914,905)        (9,900,647)
                                                                           ----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment                                             (1,190,723)     (2,887,243)       (10,365,122)
  Purchase of assets of MTS Communications                                                 0      (1,904,398)                 0
  (Advance to) repayment from MTS Communications                                           0        (200,000)           200,000
  Other                                                                                    0               0             19,400
                                                                           ----------------------------------------------------
      Net cash used in investing activities                                       (1,190,723)     (4,991,641)       (10,145,722)
                                                                           ----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of Series A preferred stock, net of offering              5,975,560          55,000                  0
    expenses
  Proceeds from issuance of Series B and B-1 preferred stock, net of                       0      15,279,046             51,000
    offering expenses
 Proceeds from issuance of Series C preferred stock, net of offering                       0               0         78,894,943
    expenses
 Proceeds from sale of member shares                                                 250,000               0                  0
 Proceeds from exercise of stock options                                                   0               0             54,907
 Principal payments on capital lease obligations                                     (25,328)        (40,869)          (214,281)
 Borrowings under line of credit                                                           0         500,000                  0
 Repayments of line of credit                                                              0        (500,000)                 0
 Acquisition of member interest                                                     (894,651)              0                  0
 Payment of offering costs                                                                 0               0           (322,608)
                                                                           ----------------------------------------------------
     Net cash provided by financing activities                                     5,305,581      15,293,177         78,463,961
                                                                           ----------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS                                              3,223,339       7,386,631         58,417,592

CASH AND CASH EQUIVALENTS, beginning of year                                         447,726       3,671,065         11,057,696
                                                                           ----------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year                                           $ 3,671,065     $11,057,696        $69,475,288
                                                                           ====================================================

SUPPLEMENTAL DISCLOSURES:
 Cash paid for interest                                                          $     2,031     $    12,563       $     13,151
                                                                           ====================================================

 Assets acquired under capital leases                                            $         0     $   670,450       $          0
                                                                           ====================================================
</TABLE>


        The accompanying notes are an integral part of these statements.

                                       62
<PAGE>

                          CYPRESS COMMUNICATIONS, INC.

                         NOTES TO FINANCIAL STATEMENTS

                       DECEMBER 31, 1997, 1998, and 1999

1.  Organization And Nature Of Business

     Cypress Communications, Inc. (the "Company") was incorporated July 15, 1997
under the laws of Delaware.  The Company was formed to effect the conversion of
Cypress Communications, L.L.C. (the "Predecessor Company") to a C corporation.
To effect this change in legal entity status, on July 15, 1997, the Predecessor
Company was acquired by the Company and ceased to exist as a legal entity.  The
accompanying financial statements reflect this as a reorganization (the
"Reorganization").

     The Predecessor Company was incorporated August 16, 1995 as a limited
liability company under the laws of Georgia.  All references to the Company
refer to both the Company and the Predecessor Company unless otherwise noted.

     The Company provides a full range of communications services to small- and
medium-sized businesses located in multi-tenant office buildings in major
metropolitan markets in the United States.  Since the inception of our
Predecessor Company in August 1995, our principal activities have included
securing license agreements with building owners and real estate managers that
enable us to install our in-building fiber-optic, digital, and broadband
networks, marketing our services to tenants, and hiring qualified personnel to
support our rapid growth.

     The Company has experienced operating losses since its inception.  The
Company expects to continue to focus on increasing its customer base and
expanding its operations.  Accordingly, the Company expects that its operating
expenses and capital expenditures will continue to increase significantly, which
will have a negative impact on short-term operating results and will require
significant capital.  Accordingly, the Company may be required to raise
additional funds through public or private financing or other arrangements, or
it may have to slow its rate of expansion.  There can be no assurance that any
required additional funding, if needed, will be available on terms attractive to
the Company or at all, which could have a material adverse effect on the
Company's business, financial condition, cash flows, and results of operations.

Other Risk Factors

     The Company faces certain other risk factors including the following:
growth and expansion may strain the Company's resources, dependence on key
personnel, dependence on third-party suppliers of equipment and communications
services, dependence on relationships with certain property owners or operators,
competition from other providers of communications services, and potential
disruption of services due to system failures.

2.  Summary Of Significant Accounting Policies

Basis of Presentation

     The accompanying financial statements are presented on the accrual basis of
accounting using accounting principals generally accepted in the United States.

                                       63
<PAGE>

Accounting 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 and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods.  Actual amounts could differ from these estimates and such
differences could be material.

Revenue Recognition

     The Company's revenues include recurring charges for local access, long-
distance, equipment rental, Internet, voicemail, inbound 800 charges, and other
enhanced voice and data services as well as nonrecurring revenues for
installations and moves, adds, and changes charges, all of which are recognized
as services are provided.  To date, nonrecurring revenues have not exceeded the
related direct costs of installation in any significant amounts.  All expenses
related to services provided are recognized as incurred.

     The Securities and Exchange Commission has released Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements."  The
Company is reviewing its policies with respect to SAB No. 101 and does not
expect the impact of adoption to be material.

Cash and Cash Equivalents

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

Property and Equipment

     Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets
(generally three to seven years).  Leasehold improvements are depreciated over
the lesser of the average lease term (or the term of the related license
agreement) or the assets' useful lives.  Depreciation expense was $112,431,
$546,521, and $1,953,761 for the years ended December 31, 1997, 1998, and 1999,
respectively.  Maintenance and repairs are charged to expense as incurred.
Gains or losses on disposal of property and equipment are recognized in
operations in the year of disposition.  There were no significant gains or
losses in any periods presented.

Income Taxes

     The Predecessor Company was a limited liability company for federal and
state income tax purposes.  The Internal Revenue Code and applicable state
statutes provide that income and expenses are not separately taxable to the
limited liability company but rather accrue directly to the members.  Subsequent
to the Reorganization, income taxes have been provided for using the liability
method in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," (Note 8).

Intangibles

     The cost over the fair values of net assets acquired was recorded in
connection with the Company's purchase of substantially all of the assets of MTS
Communications Company, Inc. ("MTS Communications") (Note 9).  These costs are
being amortized using the straight-line method over ten years.  Tenant contracts
were acquired in the MTS Communications acquisition and are being amortized
using the straight-line method over three years.

                                       64
<PAGE>

Impairment of Long-Lived Assets

     The Company reviews its long-lived assets, including property and equipment
and intangibles, for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset should be assessed.  An impairment
will be recognized when the undiscounted future net cash flows estimated to be
generated by the asset are insufficient to recover the current carrying value of
the asset.  Estimates of future cash flows are based on many factors, including
current operating results, expected market trends, and competitive influences.
Management believes that the long-lived assets in the accompanying financial
statements are appropriately valued.

Fair Value of Financial Instruments

     The carrying amounts reported in the balance sheets approximate the fair
values for cash and capital lease obligations.

     In accordance with SFAS No. 107, "Disclosures about Fair Values of
Financial Instruments," the Company has estimated the fair value of the Series
A preferred stock as approximately $5.8 million and $81.8 million at December
31, 1998 and 1999, respectively.  The Company has estimated the fair value of
the Series B and Series B-1 preferred stock as $6.4 million and $2.8 million,
respectively, at December 31, 1998 and approximately $90.4 million and $39.1
million, respectively, at December 31, 1999.  The Series C preferred stock has
an estimated fair value of approximately $281 million at December 31, 1999.  The
fair value of the preferred stock is based on the estimated fair value of the
Company's common stock and the number of shares of common stock upon conversion.

Segment Reporting

     The Company reports one segment, communication services, and provides an
integrated package of communication products to small- and medium-sized
businesses.

Accrued Expenses

     Accrued expenses relate to the following at December 31:

<TABLE>
<CAPTION>
                                                                              1998                   1999
                                                                      ------------------     -------------------
<S>                                                                     <C>                    <C>
Property and equipment additions                                              $  280,900              $   16,969
Compensation                                                                     257,838               1,116,873
Taxes                                                                            171,118                 453,578
Network costs                                                                    221,912                 422,366
Other                                                                            376,173                 686,347
                                                                      ------------------     -------------------
                                                                              $1,307,941              $2,696,133
                                                                      ==================     ===================
</TABLE>

Net Loss Per Common Share


     Basic and diluted net loss per share is computed using the weighted average
number of shares of common stock outstanding during the year.  Potential common
stock equivalents are excluded from the calculation of diluted net loss per
share, as their effect is antidilutive.  Convertible redeemable preferred stock
was outstanding at December 31, 1997, 1998, and 1999.  These securities were not
considered in the computation of net loss per share as the conversion is
dependent upon a qualifying public offering, as defined in the preferred stock
sale agreements (Note 10).

                                       65
<PAGE>

3.  Property And Equipment

     Property and equipment consist of the following at December 31:

<TABLE>
<CAPTION>
                                                                           1998                       1999
                                                                    ----------------          -----------------
<S>                                                                   <C>                       <C>
System infrastructure                                                     $4,771,675                $10,714,590
System equipment                                                           1,583,018                  4,136,654
Computer and office equipment                                                495,737                  2,087,051
Leasehold improvements                                                       220,655                    989,075
Assets under construction                                                          0                 11,834,175
                                                                    ----------------          -----------------
                                                                           7,071,085                 29,761,545
Less accumulated depreciation and amortization                              (779,672)                (2,733,443)
                                                                    ----------------          -----------------
                                                                          $6,291,413                $27,028,102
                                                                    ================          =================
</TABLE>

4.    Capital Transactions

Stock Option Plans

     In February 1996, the Predecessor Company adopted the 1996 Share Incentive
Plan (the "Predecessor Plan").  The Predecessor Plan was intended to provide
incentives to officers and key employees of the Predecessor Company.

     In July 1997, the 1997 Management Option Plan (the "1997 Option Plan") was
adopted by the Company.  The 1997 Option Plan provides for the granting of
either incentive stock options or nonqualified stock options to purchase shares
of the Company's common stock to officers, directors, and key employees
responsible for the direction and management of the Company.  The options expire
ten years after the date of grant and vest 20% upon the first anniversary of the
date of grant and 5% each subsequent quarter measured from the first anniversary
of the date of grant.

     On December 21, 1999, the Company's board of directors adopted the 2000
Stock Option Plan (the "2000 Plan") which was approved subsequently by the
stockholders on December 23, 1999.  All officers, directors, and key persons are
eligible to participate in the plan, subject to the discretion of a committee
appointed by the board of directors.  The board of directors reserved a combined
11.7 million shares for issuance under the 1997 Option Plan and the 2000 Plan.

                                       66
<PAGE>

Statement of Financial Accounting Standards No. 123

     A summary of the activity related to the option plans is as follows:

<TABLE>
<CAPTION>
                                                                                                Weighted Average
                                                       Weighted Average Shares                   Exercise Price
                                                       -----------------------                  ---------------
<S>                                                   <C>                                      <C>
Balance at December 31, 1996                                    225,000                              $0.60
 Forfeited                                                      (45,000)                              0.56
 Granted                                                      1,536,345                               0.67
                                                    -------------------
Balance at December 31, 1997                                  1,716,345                               0.66
 Granted                                                      1,087,875                               1.00
 Forfeited                                                      (76,500)                              1.07
                                                    -------------------
Balance at December 31, 1998                                  2,727,720                               0.78
 Granted                                                      3,526,655                               2.29
 Forfeited                                                     (310,500)                              1.15
 Exercised                                                     (122,900)                              0.94
                                                    -------------------
Balance at December 31, 1999                                  5,820,975                               1.64
                                                    ===================
</TABLE>

     In December 1999, the Company granted 25,655 options to purchase common
stock, with an exercise price of $2.53 per share, to consultants for prior
services.  The options vested immediately and the consultants exercised these
options prior to December 31, 1999.  The Company recorded an expense of
approximately $340,000 related to this grant.

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

<TABLE>
<CAPTION>
                    Number of Options           Weighted Average                           Exercisable as
                     Outstanding at                Remaining           Weighted Average     of December
   Exercise Price    December 31, 1999           Contractual Life      Exercise Price           1999
   --------------   ------------------          -----------------      ----------------     -------------
<S>                  <C>                         <C>                    <C>                <C>
        $ 0.67          1,808,100                      7.66                $ 0.67                876,132
        $ 1.07          2,149,875                      9.20                  1.07                172,959
        $ 2.53          1,773,000                      9.90                  2.53                      0
        $17.00             90,000                      9.95                 17.00                      0
                    ------------------                                                     -----------------
  $0.67-$17.00          5,820,975                      8.95                  1.64              1,049,091
                    ==================                                                     =================
</TABLE>

     The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its option plans.  The Company recorded
deferred compensation of approximately $2.3 million in 1998 and $26.3 million in
1999 which represents the difference between the exercise price per option and
the fair value of the Company's common stock at the dates of grant.  Deferred
compensation is amortized over the vesting period of the stock options which is
generally five years.

     Had compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net loss would have been
the pro forma amounts indicated below.  The pro forma net loss is calculated
using the Black-Scholes option pricing model, with the following assumptions:
risk-free interest rates from 5.82% to 6.19% for 1997, 5.28% for 1998, and 6.05%
for 1999, expected life of 6 years for 1997 and 1998, and 3 1/2 years for 1999,
dividend yield of 0%, and expected volatility of 0% for all periods prior to the
Company's filing for an initial public offering and 65% for

                                       67
<PAGE>

December 4, 1999 through December 31, 1999. The weighted average fair value of
options granted during the years ended December 31, 1997, 1998, and 1999 was
$.18, $3.22, and $40.80 per option, respectively.

<TABLE>
<CAPTION>
                                                                          Year Ended December 31
                                                  --------------------------------------------------------------------
                                                          1997                    1998                     1999
                                                  ------------------      ------------------      --------------------
<S>                                                      <C>                     <C>                      <C>
Net loss, as reported                                    $(1,325,716)            $(3,490,331)             $(93,233,780)
Net loss, pro forma                                       (1,375,439)             (3,538,833)              (93,354,915)
Net loss per common share, as reported                   $     (0.41)            $     (1.32)             $     (35.22)
Net loss per common share, pro forma                           (0.42)                  (1.34)                   (35.26)
</TABLE>

Shareholder Rights Plan

     In December 1999, the Company approved a stockholder rights plan.  This
plan entitles the stockholders to rights to acquire additional shares of the
Company's common stock when a third party acquires 15% of the Company's common
stock or commences or announces its intent to commence a tender offer for at
least 15% of the Company's common stock.  This plan could delay, deter, or
prevent a change of control.

Employee Stock Purchase Plan

     In December 1999, the board of directors and stockholders approved an
employee stock purchase plan.  Up to 900,000 shares of common stock may be
issued under this plan.

Amendment to Certificate of Incorporation

     In September 1998, the Company amended and restated its certificate of
incorporation (the "Certificate") to, among other things, increase the total
number of authorized common stock and preferred stock to 20,594,088 and
3,703,566, respectively.  Additionally, the Certificate amended the terms of the
existing Series A preferred stock and increased the number of shares of
preferred stock designated as Series A to 1,211,140.

     In October 1999, the Company increased the authorized number of shares of
its common stock and preferred stock to 49,023,324 and 7,687,704, respectively.
In October 1999, the Company designated an additional 6,375 shares as Series B
preferred stock and designated 3,977,763 shares as Series C preferred stock.  In
December 1999, the Company increased the authorized number of its common stock
and preferred stock to 58,620,758 and 7,920,467, respectively, and designated an
additional 232,763 shares as Series C preferred stock.

Stock Split

     In May 1998, the Company's board of directors and the majority stockholders
approved a 2-for-1 stock split (the "Split") with respect to each outstanding
share of common stock and Series A preferred stock.  The Split was effected in
the form of a stock dividend that was paid in September 1998.  All references to
common stock and Series A share amounts have been restated to reflect the Split
on a retroactive basis.  See Note 10 regarding a stock split in February 2000.

Warrants

     In November and December 1999, the Company entered into master license
agreements and stock warrant agreements with several property owners and
operators.  Under the terms of these agreements, the Company issued warrants to
purchase up to an aggregate of approximately 11 million shares of the Company's
common stock at an exercise price of $4.22 per share.  These warrants are
exercisable for periods of five to ten

                                       68
<PAGE>

years. The exact number of shares of common stock underlying the warrants, which
is based on the gross leaseable area of the building set forth in the master
license agreements, will be determined upon the completion of a due diligence
period and the finalization of the building schedules, which is expected to be
complete in April 2000. The measurement date for valuing the warrants will be
the date(s) upon which the property owners or operators effectively complete
their performance requirements. Such amounts will be recorded as deferred
license inducement expense, and will be amortized over the terms of the related
license agreements, which are expected to be ten years.

5.  Convertible Redeemable Preferred Stock

Sales of Preferred Stock

     On July 15, 1997, the Company issued 1,200,140 shares of its Series A
preferred stock for $5 per share.  On September 30, 1998, the Company issued
1,333,200 and 579,613 shares of its Series B and Series B-1 preferred stock,
respectively, for $8 per share.  In October 1999, in connection with the second
amended and restated stockholders' agreement, certain terms of the Series A,
Series B, and Series B-1 preferred stock were changed.

     In February 1999, the Company issued 6,375 shares of its Series B preferred
stock to two employees of the Company for $8 per share for total proceeds of
$51,000.

     In October 1999, the Company issued 2,819,868 shares of its Series C
preferred stock to existing and new third-party investors for $19 per share for
total proceeds of approximately $53.6 million.

     In November 1999 and December 1999, the Company issued 1,157,895 and
184,211 shares, respectively, of its Series C preferred stock to certain
property owners and operators for $19 per share for total proceeds of $25.5
million.

Terms of Preferred Stock

     The Series A, Series B and B-1, and Series C preferred stock (the
"Preferred Stock") have a redemption price of $5, $8, and $19 per share,
respectively, together with accrued and unpaid dividends thereon.  Redemption is
mandatory beginning October 8, 2005, at which time up to one-third of the
outstanding shares may be redeemed on October 8, 2005, October 8, 2006, and
October 8, 2007.  In the event of any liquidation, dissolution, or winding up of
the affairs of the Company, holders of Series C preferred stock shall be paid
the redemption price, plus all accrued dividends, before any payment to other
stockholders.  Holders of Series B and Series B-1 preferred stock shall be paid
the redemption price, plus all accrued dividends, before any payment to other
stockholders, exclusive of any payments to be made to the holders of the Series
C preferred stock.  Holders of Series A preferred stock shall be paid the
redemption price, plus all accrued dividends, before any payment to other
stockholders, exclusive of any payments to be made to holders of Series B and
Series B-1 and Series C preferred stock.  The Preferred Stock is convertible
into common stock at the discretion of the holder and automatically converts
into common stock upon the completion of an initial public offering of the
Company's common stock with proceeds in excess of $50,000,000 and an adjusted
per share price of at least $8.44.  These shares are entitled to 4.5 votes per
share on all matters upon which common stockholders are entitled to vote, except
for the Series B-1 shares which do not have any voting rights.  Under these
conversion terms, the Preferred Stock converts 4.5 for 1 into common stock.  The
holders of the Preferred Stock are entitled to receive dividends, out of the
unreserved and unrestricted surplus or net profits of the Company, as declared
by the board of directors.  No such dividends have been declared as of December
31, 1999 (Note 10) for discussion of the conversion of the outstanding preferred
stock subsequent to year-end.

     The Company is accreting the issuance costs of the Preferred Stock, which
is the difference between the redemption price and the face value of the shares,
over the period from the date of sale to the initial

                                       69
<PAGE>

redemption date. Such amount was $1,920, $5,737, and $14,544 for the years ended
December 31, 1997, 1998, and 1999, respectively, and is included in interest
income in the accompanying statements of operations.

Beneficial Conversion Charge

     In accordance with EITF 98-5, the Company recorded a charge in the quarter
ending December 31, 1999 of approximately $79.1 million to reflect the
beneficial conversion feature related to the shares of its Series C preferred
stock.

6.  Related-Party Transactions

     A portion of the proceeds from the Predecessor Company's sale of member
shares was received from officers, directors, or other parties related to the
Predecessor Company.  A portion of the cost of the Predecessor Company's
purchase of member shares was paid to officers, directors, or other parties
related to the Predecessor Company.

     A portion of the proceeds from the Company's sales of the Preferred Stock
was received from officers, directors, or other parties related to the Company.
The sales were conducted concurrently with, and on the same terms as, those
entered into with unrelated parties.

7.  Commitments And Contingencies

Leases

     The Company is obligated under several operating and capital lease
agreements, primarily for office space and equipment.  Future annual minimum
rental payments under these leases as of December 31, 1999 are as follows:

                          Operating                 Capital
                    -------------------       ------------------
2000                        $ 2,299,014                 $261,784
2001                          2,300,184                  181,345
2002                          2,143,020                  109,003
2003                          1,684,661                   25,545
2004                          1,290,964                        0
Thereafter                    2,038,189                        0
                    -------------------       ------------------
                            $11,756,032                  577,677
                    ===================


Less amount representing interest and taxes               76,740
                                              ------------------


Present value of future minimum capital
lease payments                                           500,937
Less current portion                                     217,468
                                              ------------------
Long-term portion                                       $283,469
                                              ==================

     Rental expense was $54,904, $159,236, and $629,030 for the years ended
December 31, 1997, 1998, 1999, respectively.

Commission Obligation


     The Company has entered into license agreements with property owners and/or
operators of several office buildings whereby the Company has the right to
provide communications services in these buildings.  Under the terms of the
agreements, the Company is generally obligated to pay a commission based on the

                                       70
<PAGE>

greater of a base fee or a percentage of revenue earned in the related building
or development.  At December 31, 1999, the Company's aggregate minimum
obligation under these agreements is approximately $130,000 per year for the
next seven years.

Purchase Obligation

     At December 31, 1999, the Company has contracts with several communications
providers with purchase commitments totaling approximately $1.6 million of which
approximately $1.1 million and $500,000 are payable in 2000 and 2001,
respectively.

Line of Credit

     The Company entered into an agreement with Silicon Valley Bank ("Silicon")
on September 1, 1998 for a credit line totaling $500,000 bearing interest at
Silicon's prime rate plus 1.25%.  The total amount was borrowed and subsequently
repaid prior to December 31, 1998.  The agreement expired on April 22, 1999.
Borrowings were secured by a security interest in certain of the Company's
assets.

Employee Benefit Plan

     In 1997, the Company adopted a 401(k) defined contribution plan.
Participants may elect to defer 15% of compensation up to a maximum amount
determined annually pursuant to Internal Revenue Service regulations.  The
Company may provide matching contributions under this plan, but has not done so
in the periods presented.

Legal Proceedings

     The Company is subject to legal proceedings and claims that arise in the
ordinary course of business.  There are no pending legal proceedings to which
the Company is a party that management believes will have a material adverse
effect on the financial position, results of operations, or cash flows of the
Company (Note 10).

8.  Income Taxes

     On July 15, 1997, the Company recorded a deferred tax liability in the
amount of $73,487 which represents the Predecessor Company's tax consequences of
temporary differences in reporting items for financial statement and income tax
purposes at the time of the Reorganization (Note 1).

     The income tax effects of temporary differences between the carrying
amounts of assets and liabilities in the financial statements and their
respective income tax bases, which give rise to deferred tax assets and
liabilities, as of December 31 are as follows:

<TABLE>
<CAPTION>
                                                                1998                       1999
                                                       -------------------        -------------------
Deferred income tax assets:
<S>                                                      <C>                        <C>
 Net operating loss carryforwards                              $ 1,737,863                $ 7,198,975
 Allowance for doubtful accounts                                    30,218                     90,268
 Other                                                              14,358                     29,119
                                                       -------------------        -------------------
        Total deferred income tax assets                         1,782,439                  7,318,362
Deferred income tax liabilities:
 Depreciation                                                     (191,419)                  (940,989)
 Valuation allowance                                            (1,591,020)                (6,377,373)
                                                       -------------------        -------------------
Net deferred income taxes                                      $         0                $         0
                                                       ===================        ===================
</TABLE>

                                       71
<PAGE>

     The Company has provided a valuation allowance against its net deferred tax
assets, as management has concluded that it is not likely that such assets will
be realized in their entirety.  The Company had approximately $19 million of
federal and state net operating loss carryforwards at December 31, 1999.  The
net operating loss carryforwards begin to expire in the year 2017 if not
previously utilized.  Utilization of existing net operating loss carryforwards
may be limited in future years if significant ownership changes occur.

     The components of the provision for income taxes for the years ended
December 31, 1997, 1998, and 1999 are as follows:

<TABLE>
<CAPTION>
                                                        1997                     1998                       1999
                                                  --------------           ---------------             --------------
<S>                                                <C>                      <C>                        <C>
Current                                              $       0                $         0                $         0
Deferred                                              (310,766)                (1,280,254)                (4,786,353)
Increase in valuation allowance                        310,766                  1,280,254                  4,786,353
                                                 -------------             --------------             --------------
        Total income tax benefit                     $       0                $         0                $         0
                                                 =============             ==============             ==============
</TABLE>

     The differences between the federal statutory income tax rate and the
Company's effective rate for the years ended December 31, 1997, 1998, and 1999
are as follows:

<TABLE>
<CAPTION>
                                                              1997                   1998                    1999
                                                      -----------------       ----------------       -----------------
<S>                                                     <C>                     <C>                    <C>
Federal statutory rate                                       (34)%                  (34)%                   (34)%
State income taxes, net of federal benefit                     (4)                    (4)                     (4)
Permanent differences                                           0                      0                       4
Increase in valuation allowance                                38                     38                      34
                                                      -----------              ---------              ----------
Effective rate                                                  0%                     0%                      0%
                                                      ===========              =========              ==========
</TABLE>

9.  Acquisition

     On December 8, 1998, the Company acquired substantially all of the assets
of MTS Communications (the "MTS Acquisition"), a provider of communications
services in California, for total consideration of $2,574,848 consisting of
$1,904,398 in cash and the assumption of certain capital lease obligations with
a fair value of $670,450.  The MTS Acquisition was accounted for as a purchase
and the results of operations of MTS Communications have been included since the
date of acquisition in the accompanying statements of operations.  The purchase
price was allocated as follows:

     Property and equipment                                       $2,060,000
     Tenant contracts                                                430,000
     Cost in excess of net assets acquired                            84,848
                                                              --------------
                                                                  $2,574,848
                                                              ==============

     Prior to the MTS Acquisition, the Company advanced $200,000 to MTS
Communications in the form of a secured 8% promissory note to fund working
capital requirements of MTS Communications.  The note was due March 8, 1999 and
was repaid in full.

     The following unaudited pro forma results of operations for the years ended
December 31, 1997 and 1998 assumes that the MTS Acquisition occurred on January
1, 1997.  The pro forma information is presented for informational purposes only
and may not be indicative of the actual results had the acquisition occurred on
the assumed date, nor is the information necessarily indicative of future
results of operations.

                                       72
<PAGE>

                                        1997                      1998
                               -------------------       --------------------
Revenues                               $ 2,325,428                $ 4,485,236
Net loss                                (2,006,128)                (3,874,625)
Net loss per common share              $     (0.76)               $     (1.47)

Investment in SiteConnect, Inc.


     In November 1999, the Company signed a letter of intent (the "Agreement")
to acquire 254,125 shares of common stock, representing less than 20% common
stock ownership, of SiteConnect, Inc. ("SiteConnect"), a Seattle-based
provider of communications services, for consideration of 281,250 shares of the
Company's common stock.  The Agreement contains an option for the Company to
purchase the remaining outstanding common stock of SiteConnect for approximately
$5 million.  The option is exercisable at any time prior to the first
anniversary of the closing date of the initial investment.  The option is
payable in approximately 294,118 shares of the Company's common stock.

10.  Events Subsequent To Year-End

Stock Split

     In February 2000, a committee appointed by the Company's board of directors
approved a 4.5-for-1 stock split with respect to its outstanding common stock.
All shares of common stock and per share amounts in the accompanying financial
statements have been retroactively adjusted to reflect this split.

Initial Public Offering

     On February 15, 2000, the Company completed the sale to the public of
11,500,000 shares of its common stock at a per share price of $17 for net
proceeds of approximately $179 million (the "IPO").  The Company may have a
contingent liability arising from a possible violation of Section 5 of the
Securities Act of 1933 in connection with the existence of a hyperlink on its
Web site to an audio announcement regarding the IPO.  The Company does not
believe that the existence of this hyperlink caused a violation of the
Securities Act, and if any such claim is asserted, the Company intends to
contest the matter vigorously.  Accordingly, the Company does not believe that
its exposure, if any, resulting from the existence of this hyperlink would be
material to its results of operations or financial condition.

Conversion of Preferred Stock

     Simultaneous with the closing of the Company's initial public offering and
pursuant to the contractual agreements with the preferred stockholders, all
shares of the Company's Preferred Stock converted into 32,815,359 shares of
common stock.  Pro forma stockholders' equity at December 31, 1999, after giving
effect to this conversion, would be $83.6 million (unaudited).  Had the
conversion of the Preferred Stock occurred at the dates of its sales, net loss
per share would have been $(4.64) (unaudited) for the year ended December 31,
1999.

                                       73
<PAGE>

            REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES

     We have audited, in accordance with auditing standards generally accepted
in the United States, the financial statements of CYPRESS COMMUNICATIONS, INC.
included in this Form 10-K and have issued our report thereon dated February 21,
2000. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

ARTHUR ANDERSEN LLP

Atlanta, Georgia

February 21, 2000

                                       74
<PAGE>

                          CYPRESS COMMUNICATIONS, INC.
                                   SCHEDULES

Allowance for Doubtful Accounts:

<TABLE>
<CAPTION>

                                                            Charged to           (Writeoffs)/
                                    Beg. Balance             Expense              Recoveries            Ending Balance
<S>                             -------------------    ------------------    ------------------     --------------------
For the Year Ended December 31,   <C>                    <C>                   <C>                    <C>
 1997...........................     $     0                $  9,945              $       0                 $  9,945
For the Year Ended December 31,
 1998...........................     $ 9,945                $ 69,575              $       0                 $ 79,520
For the Year Ended December 31,
 1999...........................     $79,520                $395,618              $(107,333)                $367,805
</TABLE>

     Deferred Tax Asset Valuation Allowance:

<TABLE>
<CAPTION>

                                                            Charged to
                                    Beg. Balance             Expense              Reversals            Ending Balance
                                -------------------    ------------------    ------------------    --------------------
<S>
For the 5 1/2 ended December 31   <C>                    <C>                   <C>                   <C>
 1997...........................    $        0              $  310,766                $0                  $  310,766
For the Year Ended December 31,
 1998...........................    $  310,766              $1,280,254                $0                  $1,591,020
For the Year Ended December 31,
 1999...........................    $1,591,202              $4,786,171                $0                  $6,377,373
</TABLE>

                                       75