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================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   ----------

                                    FORM 10-K
(Mark One)

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

                  FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2001

                                       OR

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

                 FOR THE TRANSITION PERIOD FROM _____ TO _____.

                         COMMISSION FILE NUMBER 0-29255

                                   ----------

                               FASTNET CORPORATION
                               -------------------
             (Exact Name of Registrant as Specified in Its Charter)

                PENNSYLVANIA                                     23-2767197
                ------------                                     ----------
       (State or other jurisdiction of                        (I.R.S. Employer
       incorporation or organization)                        Identification No.)

       TWO COURTNEY PLACE, SUITE 130,                               18017
     3864 COURTNEY STREET, BETHLEHEM, PA                         (Zip Code)
  (Address of principal executive offices)

       Registrant's telephone number, including area code: (610) 266-6700
                                                           --------------

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

  TITLE OF EACH CLASS                               NAME OF EACH EXCHANGE
         None                                        ON WHICH REGISTERED

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

                           Common Stock, no par value
                                (Title of class)

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

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

<PAGE>

         The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the closing price of the Common stock on March 28,
2002 as reported on the Nasdaq National Market, was approximately $10,663,375
million. Shares of Common stock held by each officer and director and by each
person who owns 5% or more of the outstanding Common stock have been excluded
from this computation in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.

         As of March 28, 2002, the Registrant had outstanding 21,487,854 shares
of Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.       Portions of the Registrant's Proxy Statement for the Annual Meeting of
         Shareholders are incorporated by reference into Part III of this Form
         10-K Report, which Proxy Statement is to be filed within 120 days after
         the end of the Registrant's fiscal year ended December 31, 2001.

================================================================================

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<TABLE>
INDEX FASTNET CORPORATION
<CAPTION>

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<S>           <C>                                                                                                  <C>
PART I.

Item 1.       Business............................................................................................. 1
Item 2.       Properties...........................................................................................19
Item 3.       Legal Proceedings....................................................................................19
Item 4.       Submission of Matters to a Vote of Security Holders..................................................20

PART II.

Item 5.       Market for the Registrant's Securities and Related Stockholder Matters...............................20
Item 6.       Selected Financial Data..............................................................................21
Item 7.       Management's Discussion and Analysis of Financial Condition and Results of Operations................23
Item 7a.      Qualitative and Quantitative Disclosure about Market Risk............................................33
Item 8.       Financial Statements and Supplementary Data..........................................................33
Item 9.       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................34

PART III.

Item 10.      Directors and Executive Officers of the Registrant...................................................34
Item 11.      Executive Compensation...............................................................................34
Item 12.      Security Ownership of Certain Beneficial Owners and Management.......................................34
Item 13.      Certain Relationships and Related Transactions.......................................................34

PART IV.

Item 14.      Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................34

SIGNATURES    .....................................................................................................35

EXHIBIT INDEX .....................................................................................................36
</TABLE>

                                     PART I.

FORWARD LOOKING STATEMENTS

         From time to time, FASTNET may report, through its press releases
and/or Securities and Exchange Commission filings, certain matters that would be
characterized as forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act") that are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected. Certain of these risks and uncertainties are beyond
management's control. The forward-looking statements in this report include
statements relating to our ability to: successfully integrate recently acquired
companies, such as NetReach Inc. and SuperNet Inc., to recognize the synergies
expected from the successful integration of these acquisitions, have additional
market opportunities to sell fixed broadband wireless Internet access services;
expand into our idled market-based facilities in New York State as a result of
the acquisition of the assets of Cybertech Wireless, Inc.; use our consultative
field selling approach in our target markets to allow us to capitalize on our
competitive advantages and strong brand; expand into nearby markets through
acquisitions; use our technical expertise in deploying and tailoring fixed
broadband wireless access; add to and modify existing product and service
offerings to our existing customers; increase our gross margin due to a
reduction in expenses; fund operations into 2003 and into the future without
raising additional cash; cause Internet access and enhanced product revenues to
increase as a percentage of our total revenues; expand our customer base;
generate future revenue primarily from our dedicated Internet access and web
hosting product lines; utilize Cybertech's network deployment knowledge to build
out wireless networks in selected existing FASTNET markets. Readers are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those in the forward-looking statements as a result of
various factors. The information contained in this report identifies certain
important factors that could cause such differences, beginning on page 11 below
and elsewhere in this report.

<PAGE>

ITEM 1.  BUSINESS.

OVERVIEW

         We have been providing Internet access services to our customers since
our incorporation in 1994. We initially attracted and continue to attract many
of our customers by providing them Internet access. We differentiate ourselves
from our competition by providing prospective customers with a consultative
problem solving approach to harnessing the power of the Internet for their
specific needs. We further differentiate ourselves by combining dedicated
customer support with technical expertise. We are a full service provider
supplementing our dedicated Internet access services by offering enhanced
products and services that are designed to meet the expanding needs of our
customers and increase our revenue per customer. The services we provide
include:

o        Internet access services;

o        Total Managed Security;

o        Colocation;

o        Web hosting services;

o        eSolutions including web design and development;

o        Professional network and software design services; and

o        Virtual private networks.

         We classify our revenue into these major categories: revenues from the
sale of enterprise level Internet access and enhanced products and services,
Internet access which includes revenues from the sale of Internet access to
small office, home office ("SOHO's"), and includes revenue from the sale of
wholesale dialup access to customers that use our Dialplex Virtual Private
Network (VPN or wholesale Internet access services) to provide service to their
subscribers, revenue from hosting services which includes shared web hosting
services, dedicated hosting services and colocation services and finally
revenues from eSolutions, web design and development services. Our Internet
access and enhanced products and services revenue is made up of revenue from
high speed Internet access, professional and consulting services. SOHO revenue
is generated from customers that are connected to FASTNET's network using dialup
modems, integrated services digital network ("ISDN") circuits or residential
speed digital subscriber line ("DSL"). Our Dialplex service revenue is generated
from customers using our network to provide connectivity and Internet access to
their subscribers.

RESTRUCTURING

         On October 10, 2000, we announced a change to our strategic business
plan. We modified our plan in an attempt to continue operations without the need
for additional funding.

         The strategy of the restructuring plan included: continuing to grow
revenue through concentrating sales and marketing efforts in fewer markets,
revising the current telemarketing sales approach to a consultative, customer
centric approach, modifying our network architecture to produce improved gross
margins, while still maintaining a high level of reliability, and reducing our
head count and associated SG&A expenses to reduce cash consumption. We continued
this strategy throughout all of 2001.

         We took the following actions as part of our new plan: halted the
planned build out of new markets, revised the current sales approach to be
consultative with a customer centric focus, suspended field sales efforts in all
but target markets located in Pennsylvania and New Jersey, redesigned our
network to improve gross margins, while still maintaining a high level of
reliability, and terminated 44 employees.

         Throughout 2001, the Company has continually reviewed the reserves that
were established in October 2000 as part of its 2000 restructuring plan. In the
fourth quarter of 2001, the Company recorded an additional $1.3 million
restructuring charge related to its excess and idle data centers and
administrative offices. This charge assumes certain assumptions regarding the
Company's ability to sublet or dispose of these facilities. This decision was
made in the fourth quarter of 2001 as we experienced significant difficulties in
attempting to dispose of or sublet these facilities due to an overall slowdown
in the economy and, in particular, the commercial real estate market. We are
continuing our efforts to dispose of or sublet these facilities. The total
amount of lease payments relating to these excess or idle facilities is
approximately $4.6 million through 2010. Actual results could differ materially
for this estimate.

                                       1
<PAGE>

RECENT DEVELOPMENTS

         On March 14, 2001, we acquired all the assets and substantially all the
liabilities of Cybertech Wireless, Inc. ("Cybertech"), a provider of wireless
high speed Internet access, web hosting and small office, home office ("SOHO")
access with headquarters in Rochester, New York. Cybertech has deployed a
wireless network in Rochester, Albany, Syracuse and Buffalo, New York. As a
result of this acquisition and its integration, we believe we will be able to
offer our customers in the New York region the full suite of products and
services offered to customers in our Pennsylvania and New Jersey markets. We
have also utilized Cybertech's network deployment knowledge to build out
wireless networks in selected existing FASTNET markets.

         In September and November 2001, the Company sold a total of 3,296,704
shares of Series A Preferred Convertible stock to two investors. The shares were
sold for $0.91 per share and the sale included warrants to purchase up to
824,176 shares of Common stock, with an exercise price of $1.27 per share. The
$3.0 million raised from this sale will be used for general corporate purposes,
as well as to aid the Company in its plans to grow through selected
acquisitions.

         On November 1, 2001, the Company acquired all the assets, outstanding
Common stock and substantially all of the liabilities of NetReach Inc.
("NetReach"), a web application, web design and web hosting company
headquartered in Ambler, Pennsylvania. NetReach will become the eSolutions
division of FASTNET once the integration is complete. As a result of this
acquisition, we believe we will be able to cross-sell both companies existing
customer bases, as well as increase total consolidated revenue by offering a
more complete suite of products and services to the combined customer base. The
merger agreement contains a contingent earn out provision for the issuance of up
to an additional 690,900 unregistered shares of the Company's Common stock. The
earn out provision runs for five consecutive quarters beginning October 1, 2001
and is measured using revenue and margin targets.

         During August and December of 2001, the Company was able to negotiate
settlements of its capital lease obligations with two different vendors on
favorable terms. These settlements resulted in the transfer of title for the
related equipment and payments of $2.0 million in August of 2001 and $1.6
million in January 2002, along with the issuance of a warrant to a vendor to
purchase up to 750,000 shares of Common stock, with an exercise price of $0.45
per share in December 2001. As a result of these settlements, the Company
recorded an extraordinary gain in the amount of $5.6 million in the year ended
December 31, 2001.

         On December 28, 2001, the Company entered into a $2.3 million secured
loan agreement with First Union National Bank. This loan was acquired to provide
funds to pay the settlement that was reached with a vendor relating to capital
lease obligations to purchase network equipment. The term of the loan is 24
months and the loan bears interest at a rate of LIBOR plus 1.5%. The loan
agreement includes certain restrictive covenants, which require, among other
things, that the Company maintain a minimum cash balance of $5.0 million and
that the Company will not assume or become liable for any additional
indebtedness, whether contingent or direct, in excess of $500,000, unless First
Union otherwise consents to such actions; provided, however, in connection with
acquisitions, the Company may incur indebtedness in excess of $500,000. As
collateral for the loan, the Company has granted First Union a security interest
in essentially all of the assets of the Company.

         On January 31, 2002, the Company acquired all the assets, outstanding
Common stock and substantially all of the liabilities of SuperNet Inc.
("SuperNet"), an ISP headquartered in East Brunswick, New Jersey. SuperNet
provides Internet access to businesses and residential customers, as well as web
hosting and colocation services to customers located in the central New Jersey
region. This is a region with a high density of enterprise customers, which
represents the focus of FASTNET's strategic business plan.

OUR MARKET OPPORTUNITY

         OVERVIEW. The Internet has become an important global medium enabling
millions of people to obtain and share information and conduct business
electronically. Its expanded use has made the Internet a critical tool for
information and communications for many users. Internet access and enhanced
Internet services, including data center servers and electronic commerce
services, represent two of the fastest growing segments of the
telecommunications services market. The availability of Internet access,
advancements in technologies required to navigate the Internet, and the
proliferation of content and applications available over the Internet have
attracted a rapidly growing number of Internet users.

                                       2
<PAGE>

         OUR TARGET MARKET. We are targeting businesses and enterprises located
in secondary markets that can benefit from access to the Internet, including
hospitals, educational institutions, and state and local agencies. The customers
we target usually have one or more of these attributes in common: they have 100
or more employees; they have $5 million or more in sales; they are located in
secondary markets outside of major metropolitan areas; and usually they need at
least some level of technical assistance in developing a plan on how best to
gain access to the Internet cost effectively. While our target customers usually
have one or more of these attributes, we have attracted and seek to continue to
attract a number of larger customers that exceed such employee and/or sales
volume parameters. We believe that we have attracted these customers in the past
because of our strong technical capabilities in solving Internet access problems
and our ability to install enhanced services. We believe that we will continue
to attract these customers in the future. We expect to have additional market
opportunities in New York State as result of the acquisition of Cybertech .
These opportunities include continuing to sell fixed broadband wireless access
services in the markets previously served by Cybertech, as well as selling
FASTNET's access services, enhanced products and services, and colocation
services in markets being served by Cybertech. Our acquisition of NetReach in
November of 2001, gives FASTNET a strong brand name for eSolutions services in
the greater Philadelphia market. Our acquisition of SuperNet in January 2002,
will allow us to leverage SuperNet's brand recognition in central New Jersey.

         Our target customers often concentrate in secondary markets to avoid
the higher costs associated with locating in a metropolitan area. We define a
secondary market as typically smaller than the 100 most populated U.S.
metropolitan markets. National ISPs have historically placed their largest
points of presence only in or around densely populated major cities, and
customers that are located within a few miles from these points of presence
often receive cost savings on their access pricing. As a result, we believe
customers located in secondary markets that are located outside of these points
of presence are underserved by the national ISPs or have been charged higher
prices for Internet access services. In addition, national ISPs typically lack
the local presence to provide rapid customer support. On the other hand,
regional or local ISPs in these secondary markets often lack the requisite scale
and resources to provide a full range of services at acceptable quality and
price levels.

         OTHER MARKET OPPORTUNITIES. While we do not actively target SOHO
customers with our sales and advertising programs, we have and expect to
continue to have, a significant number of SOHO customers. We had approximately
25,900 of these customers at December 31, 2001. We will continue to service this
segment of the access market because it complements the utilization of our
network during off peak hours when our network has excess capacity because of
lower utilization by our business customers.

OUR SOLUTION

         We believe that we offer our customers a comprehensive solution to
their Internet access and enhanced products and services needs. Key aspects of
our solution include:

         TECHNOLOGY PLATFORM. Our network architecture is designed to provide
our customers with reliable redundant connections to the Internet. We monitor
our network from our network operations center around the clock which allows our
staff to be immediately alerted and responsive to problems if they arise.
Control of our network infrastructure from a central location also allows us to
improve the quality of service by minimizing network downtime. We have
structured our network so that we can deliver competitively priced Internet
access to our customers located in secondary markets.

         INTERNET ACCESS. We believe that we must be "access independent" in
connecting customers to FASTNET's network. Accordingly, we offer our customers a
wide range of conventional last mile solutions including telecommunications
circuits and fixed broadband wireless services at varying speeds to permit them
to tailor a cost effective solution to their Internet access needs.

         COMPREHENSIVE SUITE OF SERVICES. We seek to provide enterprises with a
complete solution for their Internet service needs. Our comprehensive suite of
services enables our customers to easily and more cost-effectively address their
Internet needs without developing solutions internally or assembling services
from multiple vendors, including resellers, other ISPs and information
technology service providers. We offer our services in customized bundles
through a single network connection and provide our customers with technical
support and management expertise.

         HIGH QUALITY CUSTOMER SUPPORT AND SERVICE. We focus on providing our
customers with quality support and service in order to maintain customer loyalty
and maximize retention. Our market-focused sales approach coupled with our
tailored solutions to the technical aspects of Internet access enables us to
provide the personalized service and attention that enterprises often require.
In addition, we believe that customer satisfaction is critical to our success in

                                       3
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selling our enhanced products and services. We provide around-the-clock customer
support, real-time monitoring, trouble ticket escalation and high quality
customer service.

         PLUG AND PLAY EASE OF INSTALLATION. In order to simplify what is
sometimes a technically challenging installation, we have designed and continue
to enhance our products and services to provide our customers with plug and play
installation. We ship pre-configured equipment to our customers that, in most
cases, is ready for installation. During the sales process we use a Customer
Configuration Questionnaire to thoroughly profile the needs of the prospective
customer, thereby enabling us to configure a solution for the customer before we
begin the installation or conversion. In the event that a customer requires
assistance, the customer can contact our provisioning engineers, at which time
the customer is guided through the installation process.

         COST SAVINGS TO OUR CUSTOMERS. We believe our Internet solutions are
more cost-effective for our customers than developing their own in-house
Internet solutions. In order to match the level of performance and reliability
that we provide to our customers, many customers would need to make significant
expenditures for equipment, personnel and dedicated bandwidth.

OUR BUSINESS STRATEGY

         Our strategy is to be an Internet solutions provider that customers
rely on for their data and Internet needs. We concentrate our consultative field
selling approach in markets in Pennsylvania, New Jersey and New York where we
believe we can capitalize on our competitive advantages and our strong brand. As
we prove our business strategy in these markets, we will look to expand into
other nearby markets, through carefully chosen acquisitions.

o        UTILIZE TECHNICAL EXPERTISE. Deciding on the proper method to access
         the Internet still remains a technical exercise that often exceeds the
         in-house expertise of many organizations. We believe that our in-house
         technical expertise and ability to guide customers through what can be
         a complex process are valued by prospective customers and
         differentiates us from our competition. We are initially concentrating
         on markets that are within driving distance from our headquarters so
         that we can leverage the support of our Bethlehem, Pennsylvania
         technical team. In addition, we expect that as our relationship with
         our access customers strengthens over time, we will be able to further
         leverage the customer's reliance and trust in our technical team to
         help them install and support a full array of our value added
         solutions.

o        EXPANDING EXISTING CUSTOMER RELATIONSHIPS TO MARKET ENHANCED PRODUCTS
         AND SERVICES. We offer a portfolio of enhanced products and services to
         meet the expanding needs and complexity of our customers' Internet
         operations. As our customers begin to rely more heavily on the Internet
         to conduct their business and back office operations, we believe they
         will require higher levels of security, assistance in back-up and
         recovery, and a program to aid with disaster recovery. These are all
         potential higher margin revenue opportunities for FASTNET because our
         goal is to build a strong consultative long-term relationship with our
         customers.

o        RELIABLE AND REDUNDANT NETWORK. We have designed our network
         architecture to provide our customers with the reliability they require
         to conduct their business. We provide this reliability using redundant
         connections to Internet backbone providers. Our market-based facilities
         are monitored 24 hours-a-day 7 days- a- week from our central network
         operations center in Bethlehem, Pennsylvania. In addition, we offer
         strong service level agreements based on our use of Internet backbone
         providers and leading network equipment providers.

o        CONSULTATIVE CUSTOMER RELATIONS. Our target customers usually do not
         have the resources either in capital or personnel necessary to cost
         effectively evaluate, design and implement solutions to fully utilize
         the power of the Internet for their business. We have trained our sales
         professionals to use a consultative selling approach. We do not offer
         just one solution that must work for every customer, but rather our
         sales professionals and sales engineers interact with prospective
         customers until we uncover those factors that are necessary for us to
         tailor a cost-effective solution that fits the customer's current needs
         and provides a platform from which they can scale their Internet access
         in bandwidth and add enhanced products and services as their business
         grows.

SALES AND MARKETING

         We currently focus our field sales and marketing efforts in markets
located in Pennsylvania, New Jersey, and New York through a consultative,
customer centric selling approach. Our sales representatives provide a local
presence in each market that can easily and quickly be supported, in person, by
our centrally based customer and technical support team. Our focus is on
developing long-term relationships with our customers that usually begin with
Internet access, and expand through enhanced products and services as their
business needs change and grow. We focus our marketing and advertising campaigns

                                       4
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on businesses that we consider to be our target customers in each of our
markets. Our marketing campaigns are comprised of direct mail, targeted print
media, and in-market community based activities. We also leverage both resellers
and referral partners as additional sales channels.

PRODUCTS AND SERVICES

         We offer a comprehensive suite of Internet solutions to our customers,
which include dedicated Internet access, as well as enhanced products and
services. Our dedicated Internet access offering is available at speeds that
range from 56 kilobits per second (Kbps) to 155 megabits per second (Mbps).
Dedicated Internet access can be delivered through standard telephony circuits,
such as T-1 through OC-3 digital circuits, digital subscriber line technology
(DSL), or fixed broadband wireless connections with scalable service from 256
Kbps to 155 Mbps. We offer our customers DSL service through an agreement with
Covad Communications Company.

         In addition to Internet access, we offer a suite of enhanced products
and services to our customers. As the needs of our customers evolve, we will
modify and add to our existing product and service offerings to meet their
needs. Our current enhanced services include:

o        COLOCATION SERVICES. We expanded our Managed and Unmanaged Colocation
         offerings concurrently with the opening of our 7,500 square foot Class
         "A" Internet Data Center in Bethlehem, Pennsylvania in December of
         2000. This data center allows us to offer a vast array of hosting
         environments for any sized business from single-server colocation, half
         cabinets, and full cabinets, to custom-designed private caged
         colocation suites. Additional offerings of managed services include
         backup and recovery, systems monitoring, hardware and software
         provisioning, event tracking, notification and resolution, and a full
         suite of design, consultation and development services. The high
         reliability of our environmental, power, and Internet connectivity
         systems offer our customers a perfect environment to off load the risk,
         and much of the expense, that they would incur by locating their
         servers elsewhere. We also offer facilities in our other markets for
         customers who wish to have local access to their equipment

o        TOTAL MANAGED SECURITY SERVICES. We address our customers' concerns
         about the security of data transmitted over the Internet by offering
         various levels of protection through our Total Managed Security
         services. These services provide security to a company's network,
         including local area networks and wide area networks, from unauthorized
         access by external sources. In addition, our network operations center
         personnel provide 24 hours-a-day, seven days-a-week monitoring and
         threat response. We incorporate third-party products into our security
         solution and we continually evaluate additional products to meet the
         future needs of our customers. These products include web content
         filtering, mail filtering, and detailed log file generation.

o        WEB HOSTING SERVICES. We provide a wide range of content hosting
         services, including shared and dedicated hosting on our servers.
         Entry-level shared server web hosting provides our customers with a
         managed and pre-configured system at a reasonable cost. The customer
         simply adds their content through an interface such as FTP (file
         transfer protocol) or, in a growing number of cases, through
         Microsoft's FrontPage extensions.

o        WEB SERVICES. The growth of the Internet has made a strong web presence
         increasingly important for many enterprises, therefore our web services
         work in conjunction with our web hosting offerings to provide our
         customers with a comprehensive web presence. We provide web site
         design, application development, database management, and customized
         solutions to assist customers in utilizing the Internet as an effective
         means of conducting business.

o        VIRTUAL PRIVATE NETWORK SERVICES. When an enterprise wants to enable
         remote or off-site access to its network, they commonly use a form of a
         virtual private network connection (VPN). A VPN provides a convenient
         and secure computer connection from a remote location back to the
         company's main network. Our VPN product enables customers to control
         many aspects of their configuration, such as user profile changes and
         security functions, through a private web-based interface.

o        DIALPLEX/WHOLESALE ISP SERVICES. This service allows companies to
         connect their users to the Internet by seamlessly using FASTNET's
         infrastructure as a gateway. It provides companies with a cost
         effective means of expanding their services and customer base, while
         limiting expenditures necessary to offer this service.

         Our product and service agreements are typically for a one-year term
that automatically convert to a monthly term upon expiration. The agreement
remains on a monthly term until it is either terminated upon 30 days notice, or
renewed for another one-year term. We bill our customers on a monthly basis and
in some circumstances we offer discounts for prepayment. We offer each of our

                                       5
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services individually or as part of a bundled solution. Our customers receive
additional discounts if they purchase more than one service.

NETWORK ARCHITECTURE AND INFRASTRUCTURE

         Our network architecture is primarily designed to provide customers
with reliable, high speed Internet access, with secondary capabilities to
support our comprehensive suite of enhanced products and services. The key
components of our network are:

         CORE INFRASTRUCTURE: We utilize cost effective, carriers throughout the
region to create a resilient SONET protected core network infrastructure. We
routinely augment the core network with new technology and increased capacity as
needed. We have undertaken several initiatives to create even more resiliency by
interconnecting various network endpoints together to form a series of
overlapping rings at the routing level. This allows us an additional layer of
protection, above the physical level offered by our carrier partner, and
eliminates potential single points of failure that could affect connectivity to
our customers.

         INTERNET CONNECTIVITY: We have interconnect agreements with a number of
Tier 1 national backbone providers. This provides our customers with all the
connectivity and national bandwidth that each national carrier offers, without
the cost and complexity of maintaining numerous connections themselves. We
geographically spread out our interconnects to give full protection to our
customers, allowing the problems affecting one national backbone provider to
have minimal, if any, effect on others. We have the following agreements with
national backbone providers:

         o        We have an agreement with AT&T for Internet transit across
                  their national backbone.

         o        We have an agreement with Qwest Communications for Internet
                  transit across their national backbone.

         o        We have an agreement with MCI Worldcom (UUNET) for Internet
                  transit across their national backbone.

         o        We have an agreement with Sprint Communications for Internet
                  transit across their national backbone

         o        We have an agreement with Cogent Communications for Internet
                  transit across their peering network

          CUSTOMER CONNECTIONS: We utilize various regional Rural, Incumbent,
and Competitive Local Exchange Carriers (RLEC/ILEC/CLEC), and Carrier Access
Providers (CAP) to interconnect our customers to our core network. Our typical
connection facilities include Point-To-Point, Frame Relay, ATM, and DSL. We also
utilize digital PRI circuits from many of the same CLECs to offer V.90 modem
service and ISDN across our marketing region. Our major LEC/CLEC partners
include Verizon, Focal Communications, Adelphia Business Systems, Paetec, AT&T
Local Systems, Covad, and Frontier.

         NETWORK OPERATIONS CENTER: Each of our network segments and systems,
including connections to customers, is monitored around the clock at our Network
Operations Center. The Network Operations Center staff is trained to quickly
isolate any problems and rapidly respond to minimize any service impact to the
customer. The Network Operations Staff maintains customer contact throughout any
service affecting events, and serves as the intermediary between carriers and
end users.

         DATA CENTER. In December 2000, FASTNET opened a 7,500 square foot
Class-A data center in Bethlehem, Pennsylvania. The Data center can support 300
full cabinets and is directly integrated into FASTNET's network, thereby
providing managed and unmanaged colocation customers optimal bandwidth
availability for maximum performance and scalability. The center offers multiple
levels of security, has a fully-redundant environmental system, FM-200 fire
suppression systems, backed up by a dry-pipe sprinkler system, and a back-up
continuous duty diesel generator.

         EQUIPMENT. We purchase our equipment from a number of vendors, taking
full advantage of beneficial pricing and improvements in technology and
performance. We use core routers from Cisco Systems, Inc., such as the 7500
series, that are equipped with redundant components including route switching
processors and power supplies for added reliability. We sell customer premise
equipment from a variety of vendors, but typically favor equipment from Cisco
Systems, Inc. Our dial-up Internet access, as well as our narrow band virtual
private network services for 56K analog and 128K ISDN, use Lucent Technologies
TNT remote access servers. Our networks also utilize and rely on switches, hubs
and other connection devices, which we purchase from a number of different
manufacturers. Our enhanced products and services are supported by Sun
Microsystems, Inc., UNIX-based and Microsoft Windows NT-based servers located at
our market-based facilities.

                                       6
<PAGE>

ACQUISITIONS

         During 2001, we invested in the expansion and growth of our business
through acquisitions. Our intention was to acquire entities that enhanced our
market presence in our current markets and created market presence in new
markets, and, once integrated into our core operations, generated economies of
scale.

         FASTNET's strategic business plan for 2002 has as one of its objectives
sustainable organic growth from current and new customers in its existing
geographic foot print of the Mid-Atlantic region coupled with strategic
acquisitions. Strategic acquisition targets are those companies that can
generate increased revenue, are located in or adjacent to FASTNET's existing
foot print, and that if successfully integrated will contribute to FASTNET's
goals for EBITDA and cash flow positive results for 2002.

         During 2001 and January of 2002, the Company completed three
acquisitions. The first acquisition was Cybertech in Rochester, New York. The
acquisition of Cybertech provided FASTNET the opportunity to acquire a wireless
delivery technology base that it currently did not have in house. The
acquisition provided a brand name in New York State and enabled FASTNET to
provide its customers located in Pennsylvania and New Jersey with an alternative
form of broadband access instead of wire line service.

         In November of 2001, we acquired NetReach. NetReach is located in
Ambler, Pennsylvania. This acquisition provided us with a strong brand name in
the greater Philadelphia region. NetReach has a reputation as being among the
area leaders in eSolutions services. This acquisition also gave both companies
the opportunity to cross-sell products and services to their combined customer
base.

         The acquisition of SuperNet in January of 2002 provided FASTNET with
access to the concentration of businesses and enterprises located in central New
Jersey. SuperNet existing customer base contained a high concentration of
business customers that are the focus of FASTNET's strategic business plan.
SuperNet's strong brand in central New Jersey provides the ability to more
rapidly penetrate this market.

CUSTOMERS

         Our customer base consists primarily of enterprises and SOHO customers
located in secondary markets. As of December 31, 2001, we provided Internet
access and enhanced services to approximately 1,630 enterprise customers, and
approximately 25,900 SOHO customers. We also provided web hosting services to
approximately 5,700 customers throughout the world. While we have not
concentrated our sales and marketing efforts on Fortune 500 companies, we
provide our Internet solutions to a number of large enterprises. Microsoft's
WebTV Networks, Inc. accounted for 8%, 20% and 21% of total revenues for the
years ended December 31, 2001, 2000 and 1999, respectively. Our four-year
arrangement with Microsoft's WebTV Networks was terminated in September of 2001.
As we enter 2002, no customer represents a significant portion of our revenues,
however, it is possible that we could begin deriving a significant portion of
our revenues from one or a limited number of customers in the future.

CUSTOMER AND TECHNICAL SUPPORT

         We believe superior customer and technical support is critical to our
ability to retain existing customers and attract new customers. Our customers
depend on the speed and reliability of our network and our ability to keep them
connected to the Internet at all times. The knowledge and service orientation of
our local customers and technical support personnel are key elements in our
ability to assist our customers in quickly resolving their problems.

         To address individual customer problems, we provide customer technical
support 24 hours-a-day, 7 days-a-week. Our customers also have the ability to
reach our customer support representatives by e-mail or to schedule a telephone
appointment at a time that is convenient to them. In addition, our customer care
representatives are available to respond to individual customer needs and
provide direct customer support.

                                       7
<PAGE>

COMPETITION

         The Internet services market is extremely competitive and highly
fragmented. We face competition from numerous types of ISPs, including national
ISPs, and anticipate that competition will only intensify in the future as the
ISP industry goes through consolidation and attrition, which may for a period of
time increase downward pressure on prices as companies struggle to retain market
share. We believe that the primary competitive factors in the Internet services
market include:

o        pricing;

o        quality and breadth of products and services;

o        ease of use;

o        personal customer support and service;

o        brand awareness; and

o        financial stability.

We believe that we have competed favorably based on these factors, particularly
due to our:

o        market focused operating strategy;

o        superior customer support and service; and

o        high reliability.

         Our current competitors include many large companies that have
substantially greater market presence, brand-name recognition and financial
resources. Some of our local or regional competitors may also enjoy greater
recognition within a particular community. We currently compete, or expect to
compete, with the following types of companies. Although some of the companies
listed below are in various states of financial difficulties it may be possible
for some of them to emerge from their current financial difficulties as strong
competitors again:

o        national ISPs, such as PSINet, Inc. and Concentric Network Corporation;

o        providers of web hosting, colocation and other Internet-based business
         services, such as Verio, Inc.;

o        numerous regional and local Internet service providers, some of which
         have significant market share in their particular market area;

o        established on-line service providers, such as America Online, Inc.;

o        computer hardware and other technology companies that provide Internet
         connectivity with their own or other products, including the
         International Business Machines Corporation and Microsoft Corporation;

o        national long distance carriers such as AT&T Corporation, MCI WorldCom,
         Inc., Qwest Communications International Inc. and Sprint Communications
         Company, L.P.;

o        regional Bell operating companies and local telephone companies;

o        cable operators or their affiliates, including At Home Corporation and
         Time Warner Entertainment Company, L.P.;

o        terrestrial wireless and satellite Internet service providers; and

o        nonprofit or educational ISPs.

                                       8
<PAGE>

         Many of the major cable companies and some other Internet access
providers have begun to offer or are exploring the possibility of offering
Internet connectivity through the use of cable modems. Cable companies, however,
are faced with large-scale upgrades of their existing plant, equipment and
infrastructure in order to support connections to the Internet backbone via
high-speed cable access devices. We believe that there is a trend toward
horizontal integration through acquisitions or joint ventures between cable
companies and telecommunications carriers. Other alternative service companies
have also announced plans to enter the Internet connectivity market with various
wireless terrestrial and satellite-based service technologies. In addition,
several competitive local exchange carriers and other Internet access providers
have launched national or regional digital subscriber line programs providing
high speed Internet access using the existing copper wire telephone
infrastructure. Several of these competitive local exchange carriers have
announced strategic alliances with local, regional and national service
providers to provide broadband Internet access. These developments could
substantially increase competition in the ISP market.

GOVERNMENT REGULATION

         We provide Internet access, in part through transmissions over public
telephone lines. These transmissions are governed by regulations and policies
establishing charges, terms and conditions for communications. As an Internet
provider, we are not currently regulated directly by the Federal Communications
Commission or any other agency, other than regulations applicable to businesses
generally. We could, however, become subject to regulation by the Federal
Communications Commission and/or other regulatory agencies if we become
classified as a provider of basic telecommunications services. These regulations
could affect the charges that we pay to connect to the local telephone network
or for other purposes. For example, Internet access providers, unlike long
distance telephone companies, currently are not required to pay carrier access
charges. Access charges are assessed by local telephone companies on
long-distance companies for the use of the local telephone network when the
local telephone company originates and terminates long-distance calls, generally
on a per-minute basis. The payment of access charges has been a matter of
continuing dispute, with long-distance companies complaining that the charges
are substantially in excess of actual costs and local telephone companies
arguing that access charges are justified to subsidize lower local rates for end
users and other purposes. In May 1997, the Federal Communications Commission
reaffirmed its decision that Internet access providers should not be required to
pay access charges. Subsequent statements issued by the Federal Communications
Commission have not altered this conclusion. Indeed, the Commission has adopted
a series of inquiries in recent months designed to ensure that broadband
Internet access services are subject to minimal regulation. A change in the
Commission's current regulatory scheme to require that we pay access charges
could have a significant impact on our costs of providing service. Pending
legislation in Congress that has passed the House of Representatives also would
exempt high-speed Internet access services from most regulation. Neither the
Commission nor states and localities would be permitted to regulate rates, terms
or conditions or charges for high-speed data services, Internet backbone
services or Internet end-user services.

         The Federal Communications Commission also has concluded that Internet
access providers should not be required to contribute to the universal service
fund established to replace current local rate subsidies and to meet other
public policy objectives, such as providing access to enhanced communications
systems for schools, libraries and health care providers. As a result, unlike
other telecommunications providers, Internet access providers do not have to
contribute a percentage of their revenues to the federal universal service fund
and are not expected nor required to contribute to similar funds being
established at the state level. However, the Commission recently re-opened the
question of universal service fund treatment of high speed Internet access
providers that use wireline telephone lines. The access charge issue also is the
subject of Federal Communications Commission proceedings and could change.
Telephone companies are actively seeking reconsideration or reversal of the
relevant Federal Communications Commission decisions concerning carrier access
charges and universal service, and their arguments are gaining support as
Internet-based telephony begins to compete with conventional telecommunications
services. The Commission will consider these companies' arguments in the
recently-opened proceedings. We cannot predict how these matters will be
resolved but we could be adversely affected if, in the future, Internet service
providers are required to pay access charges or contribute to universal service
support.

         Under current regulation, to the extent that an end user's call to an
Internet access provider is considered local rather than long distance, the
local telephone company that serves the Internet service provider may be
entitled to reciprocal compensation from the calling party's local telephone
company. Reciprocal compensation is a reimbursement mechanism between telephone
companies whereby the carrier that terminates a call is eligible for payment
from the carrier serving the calling party. This payment of reciprocal
compensation reduces the local telephone company's costs and ultimately reduces
the internet service provider's costs. However, the Federal Communications
Commission recently determined that most, but not all, traffic to an Internet
access provider is interstate rather than local in nature, and consequently is
in the process of gradually eliminating the payment of reciprocal compensation
to the local telephone companies that serve us. If the Federal Communications
Commission completes its elimination of reciprocal compensation payments, our

                                       9
<PAGE>

costs may increase. There is a pending proceeding at the Commission to determine
appropriate compensation mechanisms for such calls to Internet service
providers. The Federal Communications Commission has ruled that state
commissions, in the interim, may determine under what circumstances reciprocal
compensation should be paid. To date, most states considering the issue have
upheld reciprocal compensation for calls placed to Internet service providers.
If the new compensation mechanisms increase the costs to carriers that terminate
calls to Internet service providers or if states eliminate reciprocal
compensation payments for calls to Internet service providers, the affected
carriers could increase the price of service to Internet service providers to
compensate themselves which could have a material adverse effect on our
business, financial condition and results of operation.

         The Federal Communications Commission recently initiated a broad
inquiry designed to promote widespread access to high-speed Internet access
service. This proceeding will consider the Commission's tentative conclusion
that high-speed Internet access service provided over telephone lines should be
regulated as "information services," rather than as basic telecommunications
service. Further, the Commission will consider whether Internet access
transmissions over telephone lines are "telecommunications," rather than
telecommunications services. Should the Commission adopt these classifications,
independent Internet access providers may no longer have a right to separate,
nondiscriminatory access to the telephone lines owned by incumbent local
telephone companies that have been upgraded to permit use for broadband
services. Pending legislation in Congress that has passed the House of
Representatives also would limit the network-sharing requirements applicable to
telephone lines upgraded to permit use for broadband services. However, the
legislation also would require incumbent telephone companies to upgrade their
facilities to permit high-speed Internet service within five years and permit
end-users to select their choice of Internet service providers without also
having to pay for the incumbent's Internet service. Although we cannot predict
the outcome of the Federal Communications Commission's proceeding or legislation
pending in Congress, if adopted these initiatives could have an adverse effect
on our business, financial condition and results of operation.

         The Federal Communications Commission is continuing the pursuit of
measures that could stimulate the development of high-speed telecommunications
facilities and make it easier for operators of these facilities to obtain access
to customers by requiring incumbent telephone companies to provide access to
their rights-of-way and wiring located within multiple tenant environments
(MTEs). The Federal Communications Commission has prohibited telecommunications
carriers from entering into contracts to service commercial MTEs that restrict a
property owner's ability to permit entry by other service providers. The
Commission is also considering requiring owners of residential MTEs to provide
competing service providers nondiscriminatory access to their buildings. Such
regulatory measures could enhance the competitive viability of Internet service
providers that are affiliated with the providers of these high-speed facilities.

         Finally, the Federal Communications Commission recently adopted an
order governing Internet service provider access to the infrastructure deployed
by cable television operators. The Commission held that use of cable
infrastructure for Internet access services ("cable modem services") is not
subject to regulation as a basic telecommunications service or cable service.
This classification is expected to largely immunize cable modem service
providers from regulation, including regulations that require competitors be
afforded open access to the cable infrastructure. The Commission's decision
could foreclose Internet service provider access rights to the cable television
infrastructure. However, the near-term effect of the Commission's ruling is
unclear. Several municipal franchising authorities have required franchised
cable companies to provide competing Internet service providers open access to
their cable infrastructure. Cable companies have appealed these decisions and
the courts have taken different regulatory approaches in deciding whether to
require open access. In addition, certain cable operators have agreed to
voluntarily provide access to competing service providers. Consumer groups and
others already have appealed the Commission's decision in court. Local
governments also have stated that they plan to appeal the Commission's decision.
The Commission also has initiated an inquiry into whether the FCC may prevent
state and local franchising authorities from regulating cable modem services.
The Commission has tentatively decided that local authorities should not have
authority to regulate cable modem services, which could further decrease our
potential access to the cable television infrastructure. The Commission's
inquiry also considers whether cable modem service providers should be required
to provide access to multiple Internet service providers. Such a requirement
would allow us to enter nondiscriminatory agreements with cable modem service
providers to provide Internet access services.

         The law relating to the liability of Internet service providers and
online service providers due to information disseminated through their networks
is not completely settled. While the U.S. Supreme Court has held that content
transmitted over the Internet is entitled to the highest level of protection
under the U.S. Constitution, there are federal and state laws regarding the
distribution of obscene, indecent, defamatory or otherwise illegal material, as
well as materials that infringe on intellectual property rights, that may
subject us to liability. In particular, a recently-adopted Pennsylvania statute
subjects Internet service providers to fines and potential imprisonment and
felony charges for failing to disable access to child pornography within five
days of notification by the state Attorney General's office. Two federal laws
mitigate these risks. In 1996, Congress immunized Internet service providers and

                                       10
<PAGE>

online service providers from liability for defamation and similar claims
arising from materials the Internet service providers and online service
providers did not create, but merely distributed without knowing or having had
reason to know of their defamatory nature. Likewise, in 1998, Congress created a
safe harbor from copyright infringement liability for Internet service providers
and online service providers arising from materials placed on the Internet
service provider's or online service provider's network by third parties, so
long as basic requirements are satisfied.

         Due to the increasing popularity and use of the Internet, it is
possible that additional laws and regulations may be adopted covering issues
such as the sale of alcohol and firearms, gambling, unsolicited email, content,
user privacy, pricing and trademark or copyright infringement. Laws and
regulations potentially affecting us have been adopted, and may be adopted in
the future, by federal and state governments, as well as by foreign governments.
We cannot predict the impact, if any, that recent and future legislative or
regulatory changes or developments may have on our business, financial condition
and results of operations. Changes in the regulatory environment relating to the
Internet access industry, including regulatory changes that directly affect
telecommunications costs or increase the likelihood or scope of competition from
regional telephone or other companies, such as open access to cable
infrastructure, could have a material adverse effect on our business.

INTELLECTUAL PROPERTY

         We have proprietary rights to trade secrets relating to technical and
business aspects of our operations. We have sought and will continue to seek
federal, state and local protection for these proprietary rights. We rely on a
combination of copyright, trademark and trade secret laws to protect our
proprietary rights, particularly those related to our names and logos. We
require each of our employees to enter into an inventions agreement, pursuant to
which each agrees that any intellectual property rights developed while in our
employment belong to us. We believe that we were the first to adopt the service
mark FASTNET and the associated logo in connection with Internet service
business, and have received federal registrations for them. In addition, we have
received federal registrations for FAST.NET, 1-888-321-FAST, GET@YES, TOTAL
MANAGED SECURITY, TMS, CUSTOMER NETWORK FACILITY, CUSTOMER CONTROLLED VIRTUAL
PRIVATE NETWORK, CC/VPN, ALLEVIATE, ALLEVI@TE, CNF, 123HOSTME!, HOSTME!,
SUPERLINK, NETREACH and YOU'RE HUMAN, SO ARE WE. We also have pending federal
applications for the following other names and marks: 123HOSTME.COM and INTERNET
UNLIMITED. We currently believe that these names and marks are not material to
our business.

         In connection with the delivery of some of our services, we bundle
third party software in our products for customers using personal computers
operating on the Microsoft Windows or Macintosh platforms. While some of the
applications included in our start-up kit for access services subscribers are
shareware that we have obtained permission to distribute or that are otherwise
in the public domain and freely distributable, other applications included in
the start-up kit have been licensed where necessary. We currently intend to
maintain or negotiate renewals of all existing software licenses and
authorization as necessary, although we cannot be certain that such renewals
will be available to us on acceptable terms, if at all. We may also enter into
additional licensing agreements in the future for other applications.

EMPLOYEES

         As of December 31, 2001, we had a total of 108 employees, including 106
full-time employees and 2 part-time employees. Of these employees, 22 were in
engineering, 72 were in general and administrative positions, including
executives, customer care and accounting, and 14 were in sales and marketing.

         We are not a 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.


                   FACTORS AFFECTING FUTURE OPERATING RESULTS

WE ONLY BEGAN TO IMPLEMENT OUR REVISED STRATEGIC BUSINESS PLAN IN OCTOBER 2000.
AS A RESULT, YOU MAY NOT BE ABLE TO EVALUATE OUR BUSINESS PROSPECTS BASED ON OUR
HISTORICAL RESULTS.

         In October 2000, we announced our revised business plan and strategy in
response to changes in market conditions, the low probability of obtaining
additional financing for the existing business plan, and competitive factors.

                                       11
<PAGE>

Consequently, the evaluation of our future business prospects is difficult
because our historical results for the time that we were implementing our
revised strategy is limited to 15 months. Our success will depend upon:

o        our continued ability to attract and sell additional products and
         services to our target customers;

o        our continued ability to enter into selected product or service
         partnerships; and

o        our continued ability to open new markets through acquisition of
         financially sound ISPs within these new markets.

         Our ability to successfully implement our business strategy, and the
expected benefits to be obtained from our strategy, may be adversely affected by
a number of factors, such as unforeseen costs and expenses, technological
change, economic downturns, changes in capital markets, competitive factors or
other events beyond our control.

IF WE ARE UNABLE TO SUSTAIN THE COST SAVINGS AND REDUCTION IN CASH CONSUMPTION
UNDER OUR REVISED BUSINESS PLAN THROUGHOUT 2002 WE MAY HAVE TO FURTHER MODIFY
OUR BUSINESS PLAN AND OUR BUSINESS COULD BE HARMED.

         If we do not continue to achieve the cost savings and reduction in cash
consumption under this plan throughout 2002, then we will need to seek
additional capital from public or private equity or debt sources to fund our
business plan. Given the existing capital market conditions, it may be difficult
or impossible to raise additional capital in the public market in the future. In
addition, we cannot be certain that we will be able to raise additional capital
through debt or private financing at all or on terms acceptable to us. Raising
additional equity capital and issuing shares of Common stock for acquisitions
likely will dilute outstanding and current shareholders. If alternative sources
of financing are insufficient or unavailable, we may be required to further
modify our growth and operating plans in accordance with the extent of available
financing.

IF WE ARE UNABLE TO INTEGRATE THE OPERATIONS WE HAVE ACQUIRED WITH FASTNET, WE
MAY NOT REALIZE OUR PLANNED COST SAVINGS.

         A key element of our business strategy is to grow through acquisitions,
and we must be able to integrate the networks of FASTNET and these acquired
operations to gain the efficiencies we hope to achieve. We also must be able to
retain and manage key personnel, integrate the back-office operations of these
acquired operations into the back-office operations of FASTNET, and expand our
consolidated company product portfolio across our increased customer base from
these acquired operations or we may not be able to achieve the operating
efficiencies we anticipate.

To integrate our newly acquired operations successfully, we must:

o        install and standardize adequate operational and control systems;
o        deploy standard equipment and telecommunications facilities;
o        employ qualified personnel to provide technical and marketing support
         in new as well as existing locations;
o        eliminate redundancies in overlapping network systems and personnel;
o        incorporate acquired technology and products into our existing service
         offerings;
o        implement and maintain uniform standards, procedures and policies;
o        standardize marketing and sales efforts under the common FASTNET brand,
         and, where applicable, maintain the brand name integrity of products
         and services that continue to be marketed and sold under the brand
         names utilized by the acquired operations; and
o        continue the expansion of our managerial, operational, technical and
         financial resources.

         The process of consolidating and integrating acquired operations takes
a significant period of time, places a significant strain on our managerial,
operating and financial resources, and could prove to be even more expensive and
time-consuming than we have predicted. We may increase expenditures in order to
accelerate the integration and consolidation process with the goal of achieving
longer-term cost savings and improved profitability.

The key integration challenges we face in connection with our acquisitions
include:

o        acquired operations, facilities, equipment, service offerings,
         networks, technologies, brand names and sales, marketing and service
         development efforts may not be effectively integrated with our existing
         operations;
o        anticipated cost savings and operational benefits may not be realized;

                                       12
<PAGE>

o        in the course of integrating an acquired operation, we may discover
         facts or circumstances that we did not know at the time of the
         acquisition that adversely impact our business or operations, or make
         the integration more difficult or expensive;
o        integration efforts may divert our resources from our existing
         business;
o        standards, controls, procedures and policies may not be maintained;
o        employees who are key to the acquired operations may choose to leave;
         and we may experience unforeseen delays and expenses.

WE FACE RISKS ASSOCIATED WITH ACQUISITIONS GENERALLY

         We expect to continue our targeted acquisition and expansion strategy.
Future acquisitions could materially adversely affect our operating results as a
result of dilutive issuances of equity securities and the incurrence of
additional debt. In addition to the equity securities that we have issued to
date in connection with our completed acquisitions, we may also be obligated to
issue additional equity securities based on earn-out provisions set forth in the
acquisition agreements. In addition, the purchase price for many of these
acquired businesses likely will significantly exceed the current fair value of
the net identifiable assets of the acquired businesses. As a result, material
goodwill and other intangible assets would be required to be recorded which
would result in significant amortization charges in future periods. These
charges, in addition to the financial impact of such acquisitions, could have a
material adverse effect on our business, financial condition and results of
operations.

         We recorded all business acquisitions in 2001 under the purchase method
of accounting. The Cybertech and NetReach acquisitions resulted in goodwill of
$600,000 and $4,308,784. The Company acquired SuperNet in January 2002 and will
record the acquisition in 2002 using the purchase method of accounting. The
excess of the purchase price over the fair value of the net assets acquired was
preliminary determined to be $1,762,550. The Company is the process of obtaining
a valuation from an independent valuation consultant and thus, the allocation
for the purchase price has not yet been finalized. Effective January 1, 2002 the
Company will no longer amortize goodwill and certain intangibles pursuant to
Statement of Financial Accounting Standards No.142 "Goodwill and Other
Intangible Assets". We cannot assure you of the number, timing or size of future
acquisitions, or the effect that any such acquisitions might have on our
operating or financial results.

THE FINANCIAL INFORMATION CONCERNING BUSINESSES WE ACQUIRE MAY BE INACCURATE

         A number of the Internet businesses we have acquired did not have
audited financial statements, and this may be true for subsequent acquisitions
as well. These companies often have varying degrees of internal controls and
detailed financial information, and the financial information we are able to
provide for recently completed acquisitions may not be audited. Our subsequent
audits of those acquired companies may reveal significant issues with respect to
revenues, expenses and liabilities, contingent or otherwise.

WE ARE SUBJECT TO RESTRICTIVE COVENANTS THAT LIMIT OUR FLEXIBILITY

         Our loan agreement with First Union National Bank contains customary
covenants limiting our flexibility, including covenants limiting our ability to
incur additional debt, make liens, make investments, consolidate, merge or
acquire other businesses and sell assets, pay dividends and other distributions,
make capital expenditures and enter into transactions with affiliates. Failure
to comply with the terms of the loan would entitle the bank to foreclose on
certain of our assets, including the capital stock of our subsidiaries. The bank
would be repaid from the proceeds of the liquidation of those assets before the
assets would be available for distribution to other creditors and, lastly, to
the holders of FASTNET's capital stock.

         In addition, the terms and agreements relating to the sale of our
Series A Convertible A Preferred stock contain customary covenants limiting our
flexibility, including covenants limiting our ability to incur additional debt,
create or issue any shares of capital stock with rights senior to the holders of
the Series A Convertible Preferred stock, make distributions or declare
dividends, consolidate, merge or acquire other businesses and sell assets, pay
dividends and other distributions, effect stock splits, and issue additional
equity securities. Such covenants may make it difficult for us to pursue our
business strategies.

                                       13
<PAGE>

         Such restrictive covenants may make it difficult for us to pursue our
business strategies without the consent of parties to these agreements, which we
may not be able to obtain. Our ability to satisfy the financial and other
restrictive covenants may be affected by events beyond our control.

WE MAY BECOME DEPENDENT UPON REVENUES FROM A LIMITED NUMBER OF CUSTOMERS IF WE
ARE UNABLE TO CAPTURE MARKET SHARE AMONG LARGE NUMBERS OF CUSTOMERS UNDER OUR
REVISED BUSINESS PLAN.

         Although our primary business strategy is to focus on selling Internet
access solutions and enhanced products and services to businesses through a
consultative approach, we have derived, and may derive in the future a
significant portion of our revenue from a limited number of customers that are
not the focus of our business plan. For example, our agreement with Microsoft's
WebTV Networks, Inc., which was terminated in September 2001, accounted for 8%
of revenues for the fiscal year ended December 31, 2001, 20% of total revenues
for the fiscal year ended December 31, 2000, and 21% of total revenues for the
fiscal year ended December 31, 1999. If we are unable to continue to implement
our revised business strategy of capturing market share among a large number of
business customers by differentiating FASTNET from competitors through a
consultative problem solving sales approach, then we will continue to be
substantially dependent upon revenues from a few of our larger customers. We
expect revenues from large customers to vary from year to year. In the future,
the loss of any of our significant customers or a significant decrease in
revenues from these customers could harm our results of operations if we are
unable to continue to increase the size of our overall customer base to off-set
the possible future loss of revenues that are derived from a single or few
significant customers.

WE HAVE A HISTORY OF LOSSES AND ARE UNABLE AT THIS TIME TO PREDICT WHEN WE WILL
BE ABLE TO TURN PROFITABLE.

         We have incurred net losses since our inception. For the years ended
December 31, 2001, 2000 and 1999 we had net losses of $8.5 million , $31.1
million, and $5.6 million respectively.

         In order to achieve profitability, we must develop and market products
and services that gain broad commercial acceptance by our target customers in
our target markets. We cannot give any assurances that our products and services
will ever achieve broad commercial acceptance among our customers. Although our
revenues have increased each year since we began operations, we cannot give any
assurances that this growth in annual revenues will continue or lead to our
profitability in the future. Moreover, our revised business plan may not enable
us to reduce expenses or increase revenues sufficiently to permit us to turn
profitable. Therefore, we cannot predict with certainty whether we will be able
to obtain or sustain positive operating cash flow or that our revised business
plan will allow us to generate positive cash flow into the future.

IT IS UNLIKELY THAT INVESTORS WILL RECEIVE A RETURN ON OUR COMMON STOCK THROUGH
THE PAYMENT OF CASH DIVIDENDS.

         We have never declared or paid cash dividends on our Common stock and
have no intention of doing so in the foreseeable future. We have had a history
of losses and expect to operate at a net loss for the next several years. These
net losses will reduce our stockholders' equity. For the year ended December 31,
2001, we had a net loss of $8.5 million. We cannot predict what the value of our
assets or the amount of our liabilities will be in the future.

OUR OPERATING RESULTS FLUCTUATE DUE TO A VARIETY OF FACTORS AND ARE NOT A
MEANINGFUL INDICATOR OF FUTURE PERFORMANCE.

         Our operating results have fluctuated in the past and may fluctuate
significantly in the future, depending upon a variety of factors, including:

o        the timing of the introduction of new products and services;

o        changes in pricing policies and product offerings by us or our
         competitors;

o        fluctuations in demand for Internet access and enhanced products and
         services; and

o        potential customers perception of the financial soundness of the
         Company.

         Therefore, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful and cannot be relied upon as
indicators of future performance. If our operating results in any future period
fall below the expectations of analysts and investors, the market price of our
Common stock would likely decline.

                                       14
<PAGE>

THE MARKET PRICE AND TRADING VOLUME OF OUR COMMON STOCK ARE VOLATILE.

         The market price of our Common stock has fluctuated significantly in
the past, and is likely to continue to be highly volatile. In addition, the
trading volume in our Common stock has fluctuated, and significant price
variations can occur as a result. We cannot assure you that the market price of
our Common stock will not fluctuate or continue to decline significantly in the
future. In addition, the U.S. equity markets have from time to time experienced
significant price and volume fluctuations that have particularly affected the
market prices for the stocks of technology and telecommunications companies.
These broad market fluctuations may materially adversely affect the market price
of our Common stock in the future. Such variations may be the result of changes
in our business, operations or prospects, announcements of technological
innovations and new products by competitors, new contractual relationships with
strategic partners by us or our competitors, proposed acquisitions by us or our
competitors, financial results that fail to meet public market analyst
expectations, regulatory considerations and domestic and international market
and economic conditions.

WE MAY BE UNABLE TO MAINTAIN THE STANDARDS FOR LISTING ON THE NASDAQ NATIONAL
MARKET, WHICH COULD MAKE IT MORE DIFFICULT FOR INVESTORS TO DISPOSE OF OUR
COMMON STOCK AND COULD SUBJECT OUR COMMON STOCK TO THE "PENNY STOCK" RULES.

         Our Common stock is listed on the Nasdaq National Market. Nasdaq
requires listed companies to maintain standards for continued listing, including
either a minimum bid price for shares of a company's stock or a minimum tangible
net worth. For example, Nasdaq requires listed companies to maintain a minimum
bid price of at least $1.00. Since February 7, 2000, the date of our Initial
Public Offering, our stock price has risen and fallen and has traded below a
$1.00 for varying lengths of time. We cannot provide assurances that we will be
able to continue to meet these continued listing requirements. If we are unable
to maintain these standards, our Common stock could be delisted from the Nasdaq
National Market, where our Common stock currently trades. Trading in our stock
would then be conducted on the Nasdaq SmallCap Market unless we are unable to
meet the requirements for inclusion. If we were unable to meet the requirements
for inclusion in the SmallCap Market, our Common stock would be traded on an
electronic bulletin board established for securities that do not meet the Nasdaq
listing requirements or in quotations published by the National Quotation
Bureau, Inc. that are commonly referred to as the "pink sheets". As a result, it
could be more difficult to sell, or obtain an accurate quotation as to the price
of our Common stock.

         In addition, if our Common stock were delisted, it would be subject to
the so-called penny stock rules. The SEC has adopted regulations that define a
"penny stock" to be any equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules impose additional sales practice
requirements on broker-dealers subject to certain exceptions.

         For transactions covered by the penny stock rules, a broker-dealer must
make a special suitability determination for the purchaser and must have
received the purchaser's written consent to the transaction prior to the sale.
The penny stock rules also require broker-dealers to deliver monthly statements
to penny stock investors disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks. Prior
to the transaction, a broker-dealer must provide a disclosure schedule relating
to the penny stock market. In addition, the broker-dealer must disclose the
following:

o        commissions payable to the broker-dealer and the registered
         representative; and

o        current quotations for the security as mandated by the applicable
         regulations.

         If our Common stock were delisted and determined to be a "penny stock,"
a broker-dealer may find it to be more difficult to trade our Common stock, and
an investor may find it more difficult to acquire or dispose of our Common stock
in the secondary market.

FUTURE SALES OF OUR COMMON STOCK COULD REDUCE THE PRICE OF OUR STOCK AND OUR
ABILITY TO RAISE CASH IN FUTURE EQUITY OFFERINGS.

         No prediction can be made as to the effect, if any, that future sales
of shares of Common stock or the availability for future sale of shares of
Common stock or securities convertible into or exercisable for our Common stock
will have on the market price of our Common stock. Sale, or the availability for
sale, of substantial amounts of Common stock by existing shareholders under Rule
144, through the exercise of registration rights or the issuance of shares of
Common stock upon the exercise of stock options or warrants, or the perception
that such sales or issuances could occur, could adversely affect prevailing

                                       15
<PAGE>

market prices for our Common stock and could materially impair our future
ability to raise capital through an offering of equity securities.

IN THE FUTURE, WE MAY BE UNABLE TO EXPAND OUR SALES, TECHNICAL SUPPORT AND
CUSTOMER SUPPORT INFRASTRUCTURE, WHICH MAY HINDER OUR ABILITY TO GROW AND MEET
CUSTOMER DEMANDS.

         On October 10, 2000, we terminated 44 employees across all departments
of the Company. This involuntary termination may make it more difficult to
attract and retain employees. If, in the future, we are unable to expand our
sales force and our technical support and customer support staff, our business
could be harmed since this more limited staff could limit our ability to obtain
new customers, sell products and services and provide existing customers with a
high level of technical support.

WE FACE SIGNIFICANT AND INCREASING COMPETITION IN OUR INDUSTRY, WHICH COULD
CAUSE US TO LOWER PRICES RESULTING IN REDUCED REVENUES.

         The growth of the Internet access and related services market and the
absence of substantial barriers to entry have attracted many start-ups as well
as existing businesses from the telecommunications, cable, and technology
industries. As a result, the market for Internet access and related services is
very competitive. We anticipate that competition will continue to intensify as
the use of the Internet grows. Current and prospective competitors include:

o        national Internet service providers and regional and local Internet
         service providers, including any remaining viable providers of free
         dial-up Internet access;

o        national and regional long distance and local telecommunications
         carriers;

o        cable operators and their affiliates;

o        providers of web hosting, colocation and other Internet-based business
         services;

o        computer hardware and other technology companies that bundle Internet
         connections with their products; and

o        terrestrial wireless and satellite Internet service providers.

         We believe that the number of competitors we face is significant and is
constantly changing. As a result, it is extremely difficult for us to accurately
identify and quantify our competitors. In addition, because of the constantly
evolving competitive environment, it is extremely difficult for us to determine
our relative competitive position at any given time.

         As a result of vertical and horizontal integration in the industry, we
currently face and expect to continue to face significant pricing pressure and
other competition in the future. Advances in technology and changes in the
marketplace and the regulatory environment will continue, and we cannot predict
the effect that ongoing or future developments may have on us or the pricing of
our products and services.

         Many of our competitors have significantly greater market presence,
brand-name recognition, and financial resources than we do. In addition, all of
the major long distance telephone companies, also known as interexchange
carriers, offer Internet access services. The recent reforms in the federal
regulation of the telecommunications industry have created greater opportunities
for local exchange carriers, including incumbent local exchange carriers and
competitive local exchange carriers, to enter the Internet access market. In
order to address the Internet access requirements of the current business
customers of long distance and local carriers, many carriers are integrating
horizontally through acquisitions of or joint ventures with Internet service
providers, or by wholesale purchase of Internet access from Internet service
providers. In addition, many of the major cable companies and other alternative
service providers, such as those companies utilizing wireless and satellite-
based service technologies, have announced their plans to offer Internet access
and related services. Accordingly, we may experience increased competition from
traditional and emerging telecommunications providers. Many of these companies,
in addition to their substantially greater network coverage, market presence,
and financial, technical and personnel resources, also already provide
telecommunications and other services to many of our target customers.
Furthermore, they may have the ability to bundle Internet access with basic
local and long distance telecommunications services, which we do not currently
offer. This bundling of services may harm our ability to compete effectively
with them and may result in pricing pressure on us that would reduce our
earnings.

                                       16
<PAGE>

OUR GROWTH DEPENDS ON THE CONTINUED ACCEPTANCE BY OUR TARGET CUSTOMERS OF THE
INTERNET FOR COMMERCE AND COMMUNICATION.

         If the use of the Internet by businesses and enterprises for commerce
and communication does not continue to grow, our business and results of
operations will be harmed. Our products and services are designed primarily for
the rapidly growing number of business users of the Internet. Commercial use of
the Internet by small and medium sized enterprises is still in its early stages.
Despite growing interest in the commercial uses of the Internet, many businesses
have not purchased Internet access and related services for several reasons,
including:

o        lack of inexpensive, high-speed connection options;

o        a limited number of reliable local access points for business users;

o        lack of affordable electronic commerce solutions;

o        limited internal resources and technical expertise;

o        inconsistent quality of service; and

o        difficulty in integrating hardware and software related to Internet
         based business applications.

         In addition, we believe that many Internet users lack confidence in the
security of transmitting their data over the Internet, which has hindered
commercial use of the Internet. Technologies that adequately address these
security concerns may not be developed.

         The adoption of the Internet for commerce and communication
applications, particularly by those enterprises that have historically relied
upon alternative means, generally requires the understanding and acceptance of a
new way of conducting business and exchanging information. In particular,
enterprises that have already invested substantial resources in other means of
conducting commerce and exchanging information may be reluctant or slow to adopt
a new strategy that may make their existing personnel and infrastructure
obsolete.

OUR SUCCESS DEPENDS ON THE CONTINUED DEVELOPMENT OF INTERNET INFRASTRUCTURE.

         The recent growth in the use of the Internet has caused periods of
performance degradation, requiring the upgrade by providers and other
organizations with links to the Internet of routers and switches,
telecommunications links and other components forming the infrastructure of the
Internet. We believe that capacity constraints caused by rapid growth in the use
of the Internet may impede further development of the Internet to the extent
that users experience increased delays in transmission or reception of data or
transmission errors that may corrupt data. Any degradation in the performance of
the Internet as a whole could impair the quality of our products and services.
As a consequence, our future success will be dependent upon the reliability and
continued expansion of the Internet.

WE RELY ON A LIMITED NUMBER OF VENDORS AND SERVICE PROVIDERS, SOME OF WHICH ARE
OUR COMPETITORS. THIS MAY ADVERSELY AFFECT THE FUTURE TERMS OF OUR
RELATIONSHIPS.

         We rely on other companies to supply key components of our network
infrastructure, which are available only from limited sources. For example, we
currently rely on routers, switches and remote access devices from Lucent
Technologies, Inc., Cisco Systems, Inc. and Nortel Networks Corporation. We
could be adversely affected if any of these products were no longer available on
commercially reasonable terms, or at all. From time to time, we experience
delays in the delivery and installation of these products and services, which
can lead to the loss of existing or potential customers. We do not know that we
will be able to obtain such products in the future cost-effectively and in a
timely manner. Moreover, we depend upon a limited number of companies as our
primary backbone providers. These companies also sell products and services that
compete with ours. Our agreements with our primary backbone providers are fixed
price contracts with terms ranging from one to three years. Our backbone
providers operate national or international networks that provide data and
Internet connectivity and enable our customers to transmit and receive data over
the Internet. Our relationship with these backbone providers could be adversely
affected as a result of our direct competition with them. Failure to renew these
relationships when they expire or enter into new relationships for such services
on commercially reasonable terms or at all could harm our business, financial
condition and results of operations.

                                       17
<PAGE>

WE NEED TO RECRUIT AND RETAIN QUALIFIED PERSONNEL OR OUR BUSINESS COULD BE
HARMED.

         Competition for highly qualified employees in the Internet service
industry is intense because there are a limited number of people with an
adequate knowledge of and significant experience in our industry. Our success
depends largely upon our ability to attract, train and retain highly skilled
management, technical, marketing and sales personnel and upon the continued
contributions of such people. Since it is difficult and time consuming to
identify and hire highly qualified employees, we cannot assure you of our
ability to do so. Our failure to attract additional highly qualified personnel
could impair our ability to grow our operations and services to our customers.

WE COULD EXPERIENCE SYSTEM FAILURES AND CAPACITY CONSTRAINTS, WHICH COULD RESULT
IN THE LOSS OF OUR CUSTOMERS OR LIABILITY TO OUR CUSTOMERS.

         The continued operation of our network infrastructure depends upon our
ability to protect against:

o        downtime due to malfunction or failure of hardware or software;

o        overload conditions;

o        power loss or telecommunications failures;

o        human error;

o        natural disasters; and

o        sabotage or other intentional acts of vandalism.

         Any of these occurrences could result in interruptions in the services
we provide to our customers and require us to spend substantial amounts of money
repairing and replacing equipment. In addition, we have finite capacity to
provide service to our customers under our current infrastructure. Because
utilization of our network is constantly changing depending upon customer use at
any given time, we maintain a level of capacity that we believe to be adequate
to support our current customer base. If we obtain additional customers in the
future, we will need to increase our capacity to maintain the quality of service
that we currently provide our customers. If customer usage exceeds our capacity
and we are unable to increase our capacity in a timely manner, our customers may
experience interruptions in or decreases in quality of the services we provide.
As a result, we may lose current customers or incur significant liability to our
customers for any damages they suffer due to any system downtime as well as the
possible loss of customers.

OUR NETWORK MAY EXPERIENCE SECURITY BREACHES, WHICH COULD DISRUPT OUR SERVICES.

         Our network infrastructure may be vulnerable to computer viruses,
break-ins and similar disruptive problems caused by our customers or other
Internet users. Computer viruses, break-ins or other problems caused by third
parties could lead to interruptions, delays or cessation in service to our
customers. There currently is no existing technology that provides absolute
security, and the cost of minimizing these security breaches could be
prohibitively expensive. We may face liability to customers for such security
breaches. Furthermore, such incidents could deter potential customers and
adversely affect existing customer relationships.

WE FACE POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH OUR NETWORK.

         It is possible that claims could be made against Internet service
providers in connection with the nature and content of the materials
disseminated through their networks. The law relating to the liability of
Internet service providers due to information carried or disseminated through
their networks is not completely settled. While the U.S. Supreme Court has held
that content transmitted over the Internet is entitled to the highest level of
protection under the U.S. Constitution, there are federal and state laws
regarding the distribution of obscene, indecent, or otherwise illegal material,
as well as material that violates intellectual property rights which may subject
us to liability. Several private lawsuits have been brought in the past and are
currently pending against other entities which seek to impose liability upon
Internet service providers as a result of the nature and content of materials
disseminated over the Internet. If any of these actions succeed, we might be
required to respond by investing substantial resources or discontinuing some of
our service or product offerings, which could harm our business.

                                       18
<PAGE>

NEW LAWS AND REGULATIONS GOVERNING OUR INDUSTRY COULD HARM OUR BUSINESS.

         We are subject to a variety of risks that could materially affect our
business due to the rapidly changing legal and regulatory landscape governing
Internet access providers. For example, the Federal Communications Commission
currently exempts Internet access providers from having to pay per-minute access
charges that long-distance telecommunications providers pay local telephone
companies for the use of the local telephone network. In addition, Internet
access providers are currently exempt from having to pay a percentage of their
gross revenues as a contribution to the federal universal service fund. Should
the Federal Communications Commission eliminate these exemptions and impose such
charges on Internet access providers, this would increase our costs of providing
dial-up Internet access service and could have a material adverse effect on our
business, financial condition and results of operations.

         We face risks due to possible changes in the way our suppliers are
regulated which could have an adverse effect on our business. For example, most
states require local exchange carriers to pay reciprocal compensation to
competing local exchange carriers for the transport and termination of Internet
traffic. However, the Federal Communications Commission has concluded that at
least a substantial portion of dial-up Internet traffic is jurisdictionally
interstate, and has adopted plans for gradually eliminating the reciprocal
compensation payment requirement for Internet traffic. If the FCC completes its
planned elimination of reciprocal compensation payments, telephone carriers
might no longer be entitled to receive payment from the originating carrier to
terminate traffic delivered to us. The Federal Communications Commission has
launched an inquiry to determine an alternative mechanism for covering the costs
of terminating calls to Internet service providers. In the interim, state
commissions will determine whether carriers will receive compensation for such
calls. If the new compensation mechanism adopted by the Federal Communications
Commission increases the costs to our telephone carriers for terminating traffic
to us, or if states eliminate reciprocal compensation payments, our telephone
carriers may increase the price of service to us in order to recover such costs.
This could have a material adverse effect on our business, financial condition
and results of operations.

         Although the U.S. Supreme Court has held that content transmitted over
the Internet is entitled to the highest level of protection under the U.S.
Constitution, a recently-adopted Pennsylvania statute subjects Internet service
providers to fines and potential imprisonment and felony charges for failing to
disable access to child pornography within five days of notification by the
state Attorney General's office. We could be subject to this law after it goes
into effect on April 20, 2002. Although it is not possible for us to predict the
outcome, it is possible that this law could be ruled unconstitutional.

ITEM 2.  PROPERTIES.

         Our corporate offices are located in Bethlehem, Pennsylvania where we
lease approximately 72,881 square feet of space for our Network Operations
Center. Our lease agreements for this space, which commenced on June 1, 1999 and
September 1, 1999, respectively, have six-year terms. We also entered into a
lease on January 6, 2000 for 34,580 square feet of space for our principal
executive offices with a lease term of six years. We also lease space for our
market-based infrastructure, ranging from 600 to 4,000 square feet, in
Pennsylvania, New Jersey and New York. In December of 2001, we recorded a $1.3
million restructuring charge for excess data centers and excess office spaces
that we have been unable to use, sublet or exit. Given the current state of the
real estate market we believe, that if needed, we will continue to be able to
obtain additional suitable space on commercially reasonable terms.

ITEM 3.  LEGAL PROCEEDINGS.

         We are not involved currently in any legal proceedings that either
individually or taken as a whole, will have a material adverse effect on our
business, financial condition and results of operations.

                                       19
<PAGE>

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         We held a special meeting of the Stockholders on October 19, 2001.
Following is a description of the matter voted on and the results of such
meeting:

         Approve the Issuance and sale of up to 5,494,505 shares of the
Company's Series A Convertible Preferred stock (the "Series A Preferred Stock")
and warrants to purchase an aggregate of 1,373,627 shares of the Company's
Common stock (the "Warrant"), and other securities that may become issuable
pursuant to the respective rights, preferences and privileges of the Series A
Preferred and Warrants in a private financing and a sale of up to 1,000,000
shares of Common stock owned by a director of the Company, on the terms and
subject to the conditions described in the Proxy Statement.

         VOTES                   VOTES               VOTES             BROKER
          FOR                   AGAINST             WITHHELD          NON-VOTES
         ----                   -------             --------          ---------
         15,236,330             229,573              14,511               --


                                    PART II.

ITEM 5.  MARKET FOR THE REGISTRANT'S SECURITIES AND RELATED SHAREHOLDER MATTERS.

         Our Common stock has traded on the Nasdaq National Market (Nasdaq
Symbol: FSST) since the completion of our initial public offering ("IPO") on
February 7, 2000. Prior to that date, there was no public market for our Common
stock. The following table sets forth the high and low prices for our Common
stock for the periods indicated as reported by the Nasdaq National Market:

                                                 COMMON STOCK PRICE
                                                 ------------------
                                            2001                      2000
                                       HIGH       LOW           HIGH        LOW
                                       ----       ---           ----        ---
First Quarter ...................     $1.88      $0.47         $22.03     $11.75
Second Quarter...................      1.12       0.70          12.13       3.56
Third Quarter....................      2.00       0.75           4.02       1.63
Fourth Quarter...................      1.17       0.86           2.50       0.28

         On March 28, 2002, the closing price of our Common stock as reported on
the Nasdaq National Market was $1.03 per share. As of March 28, 2002, there were
approximately 21,487,854 shareholders of our Common stock.

         We have never declared or paid any cash dividends on our Common stock
and do not expect to pay dividends in the foreseeable future. Our current policy
is to retain all of our earnings to finance future growth and working capital
needs.

         Our initial public offering, or IPO, was effected through a
Registration Statement on Form S-1 (File No. 333-85465) that was declared
effective by the SEC on February 7, 2000 and pursuant to which we sold an
aggregate of 4,000,000 shares of our Common stock at $12.00 per share. On March
7, 2000, the managing underwriters of our IPO, ING Barings LLC, Wit SoundView
Technology Group, Inc., FAC/Equities, a division of First Albany Corporation and
DLJ direct, Inc., exercised the over-allotment option selling an additional
600,000 shares of our Common stock. Total aggregate proceeds were $55.2 million.
Proceeds net of offering costs were $49.6 million.

         In the preceding three years, we have issued the following securities
that were not registered under the Securities Act of 1933:

         In December 2000, we sold 1,000,000 shares of restricted Common stock
to the Chief Executive Officer of the Company in a private placement for
$437,500. This sale was made under the exemption from registration provided
under Section 4(2) of the Securities Act.

         On March 14, 2001, we issued 2,000,000 shares of our Common stock to
Cybertech Wireless, Inc. in connection with the purchase of all the assets and
substantially all the liabilities of Cybertech. This sale was made under the
exemption from registration provided under Section 4(2) of the Securities Act.


                                       20
<PAGE>

         On September 5, 2001, we sold 2,506,421 shares of our Series A
Preferred stock to Edison Venture Fund IV, L.P. and Strattech Partners I, L.P.
The sale included warrants to purchase up to 626,605 shares of Common stock of
the Company, with an exercise price of $1.27 per share. These shares of Series A
Preferred stock are convertible into shares of Common stock by the holder at any
time after the first to occur of (i) August 30, 2002 or (ii) such date that the
Company is required to give notice to the holders of Series A Convertible
Preferred stock regarding (i) the issuance of certain dividend and
distribution payments on the Common stock, (ii) the offering of pro rata
subscription rights to purchase securities of the Company to holders of the
Common stock, (iii) the recapitalization or reclassification of the Company's
capital stock, consolidation or merger of the Company into another entity, or
sale or transfer of substantially all of the Company's assets, or (iv) the
voluntary or involuntary dissolution, liquidation or winding up of the company.
In general, each share of Series A Preferred stock is convertible into one share
of the Company's Common stock subject to adjustments, for stock splits, stock
dividends, or other reclassifications or similar events affect the Common stock.

         On November 1, 2001, we issued 2,400,000 shares of our Common stock to
NetReach, Inc. in connection with the merger of FASTNET Exchange Corporation, a
wholly owned subsidiary of the Company, and NetReach Inc. The merger agreement
contains a contingent earn out provision for the issuance of up to 600,900
unregistered shares of the Company's Common stock. This sale was made under
exemption from registration provided under Section 4(2) of the Securities Act.

         On November 14, 2001, we sold 790,283 shares of our Series A Preferred
stock to Edison Venture Fund IV, L.P. and Strattech Partners I., L.P. The sale
included warrants to purchase up to 197,571 shares of Common stock of the
Company, with an exercise price of $1.27. This sale was made under exemption
from registration provided under Section 4(2) of the Securities Act. These
shares of Series A Preferred stock are convertible into shares of Common stock
by the holder at any time after the first to occur of (i) August 30, 2002 or
(ii) such date that the Company is required to give notice to the holders of
Series A Convertible Preferred stock regarding (i) the issuance of certain
dividend and distribution payments on the Common stock, (ii) the offering of pro
rata subscription rights to purchase securities of the Company to holders of the
Common stock, (iii) the recapitalization or reclassification of the Company's
capital stock, consolidation or merger of the Company into another entity, or
sale or transfer of substantially all of the Company's assets, or (iv) the
voluntary or involuntary dissolution, liquidation or winding up of the company.
In general, each share of Series A Preferred stock is convertible into one share
of the Company's Common stock subject to adjustments, for stock splits, stock
dividends, or other reclassifications or similar events affect the Common stock.

         On November 14, 2001, we issued 109,589 shares of the Company's Series
A Preferred stock and a warrant to purchase up to 27,397 shares of the Company
Common stock to a provider of professional services. This issuance was made
under exemption from registration provided under Section 4(2) of the Securities
Act. These shares of Series A Preferred stock are convertible into shares of
Common stock by the holder at any time after the first to occur of (i) August
30, 2002 or (ii) such date that the Company is required to give notice to the
holders of Series A Convertible Preferred stock regarding (i) the issuance of
certain dividend and distribution payments on the Common stock, (ii) the
offering of pro rata subscription rights to purchase securities of the Company
to holders of the Common stock, (iii) the recapitalization or reclassification
of the Company's capital stock, consolidation or merger of the Company into
another entity, or sale or transfer of substantially all of the Company's
assets, or (iv) the voluntary or involuntary dissolution, liquidation or winding
up of the company. In general, each share of Series A Preferred stock is
convertible into one share of the Company's Common stock subject to adjustments,
for stock splits, stock dividends, or other reclassifications or similar events
affect the Common stock.

ITEM 6.  SELECTED FINANCIAL DATA.

         The following table summarizes selected financial data for the five
years in the period ended December 31, 2001. Our historical data for the Company
is derived from, and is qualified by reference to, our Financial Statements,
which are included elsewhere in this Annual Report on Form 10-K. These Financial
Statements have been audited by Arthur Andersen LLP, independent public
accountants, to the extent indicated in their reports. This data should be read
in conjunction with our Consolidated Financial Statements and related Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Annual Report on Form 10-K.

                                       21
<PAGE>
<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                                   2001            2000            1999            1998            1997
                                               -------------   -------------   -------------   -------------   -------------
<S>                                            <C>             <C>             <C>             <C>             <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues ...................................   $ 15,293,611    $ 12,660,248    $  8,392,362    $  5,527,979    $  3,670,614
Operating expenses:
   Cost of services ........................      9,825,712      13,325,733       5,671,948       3,241,741       2,333,919
   Selling, general and administrative .....     10,466,419      17,946,471       6,362,729       3,067,740       1,445,224
   Depreciation and amortization ...........      7,801,078       5,038,811       1,600,058         346,568         177,375
   Restructuring charge ....................      1,335,790(3)    5,159,503(1)           --              --              --
   Asset impairment ........................             --       3,233,753(2)           --              --              --
                                               -------------   -------------   -------------   -------------   -------------
       Total operating expenses ............     29,428,999      44,704,271      13,634,735       6,656,049       3,956,518

Operating loss .............................    (14,135,388)    (32,044,023)     (5,242,373)     (1,128,070)       (285,904)
Other income (expense), net ................        (41,152)        903,103        (358,698)       (146,220)        (36,162)
                                               -------------   -------------   -------------   -------------   -------------

LOSS BEFORE EXTRAORDINARY ITEM .............   $(14,176,540)   $(31,140,920)   $ (5,601,071)   $ (1,274,290)   $   (322,066)
                                               =============   =============   =============   =============   =============

Extraordinary Gain on Early Extinguishment
   of Debt .................................      5,636,377              --              --              --              --
                                               -------------   -------------   -------------   -------------   -------------

NET LOSS ...................................     (8,540,163)    (31,140,920)     (5,601,071)     (1,274,290)       (322,066)
                                               =============   =============   =============   =============   =============

Deemed Dividend - Beneficial Conversion
   Feature .................................       (389,405)             --              --              --              --
                                               -------------   -------------   -------------   -------------   -------------

NET LOSS APPLICABLE TO COMMON SHAREHOLDERS..   $ (8,929,568)   $(31,140,920)   $ (5,601,071) $   (1,274,290)   $   (322,066)
                                               =============   =============   =============   =============   =============

BASIC AND DILUTED NET LOSS PER COMMON SHARE
Loss before Extraordinary Item after
   Deemed Dividend-Beneficial
     Conversion Feature ....................   $      (0.83)   $      (2.20)   $      (0.77)   $      (0.14)   $      (0.03)

Extraordinary Item .........................           0.32              --              --              --              --
                                               -------------   -------------   -------------   -------------   -------------

NET LOSS APPLICABLE TO COMMON SHAREHOLDERS..   $      (0.51)   $      (2.20)   $      (0.77)   $      (0.14)   $      (0.03)
                                               =============   =============   =============   =============   =============


SHARES USED IN COMPUTING BASIC AND DILUTED
   NET LOSS PER COMMON SHARE ...............     17,398,833      14,177,302       7,229,284       8,880,833      11,575,000
                                               =============   =============   =============   =============   =============

                                                                               DECEMBER 31,
                                                   2001            2000            1999            1998            1997
                                               -------------   -------------   -------------   -------------   -------------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ..................   $ 10,271,755    $  5,051,901    $    953,840    $    256,782    $     88,981
Marketable securities ......................      2,300,100      18,455,543              --              --              --
Property and equipment, net ................     16,397,900      19,631,011       7,363,848       1,741,635       1,047,402
Total assets ...............................     39,195,845      48,977,374      15,839,576       3,226,841       1,683,345
Working capital (deficit) ..................      1,875,112       8,360,113      (3,238,257)     (4,356,637)     (1,447,138)
Debt and capital lease obligations .........      5,283,389      11,834,746       7,305,778       3,277,706         655,626
Shareholders' equity (deficit) .............     23,036,851      23,524,577       1,363,811      (2,564,068)       (532,256)
</TABLE>

--------------------
(1)      In October 2000, the Company recorded a charge related to exit and
         closing costs for certain markets.

(2)      In connection with the restructuring, the Company recorded an asset
         impairment charge to reduce the carrying value of certain assets to
         fair market value.

(3)      In December 2001, the Company recorded a charge related to excess and
         idle data centers and administrative offices.


                                       22
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH OUR
FINANCIAL STATEMENTS AND THE RELATED NOTES TO THE FINANCIAL STATEMENTS APPEARING
ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. THE FOLLOWING INCLUDES A NUMBER OF
FORWARD-LOOKING STATEMENTS THAT REFLECT OUR CURRENT VIEWS WITH RESPECT TO FUTURE
EVENTS AND FINANCIAL PERFORMANCE. WE USE WORDS SUCH AS ANTICIPATE, BELIEVES,
EXPECTS, FUTURE, INTENDS, AND SIMILAR EXPRESSIONS TO IDENTIFY FORWARD-LOOKING
STATEMENTS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH APPLY ONLY AS OF THE DATE OF THIS ANNUAL REPORT ON FORM 10-K.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR OUR
PREDICTIONS.

OVERVIEW

         We are an Internet solutions provider offering broadband data
communication services and enhanced products and services to businesses in
second-tier markets in the Northeastern United States. Our services include
high-speed data and Internet services, data center services, including web
hosting and managed and unmanaged colocation services, small office home office
(SOHO) Internet access, wholesale ISP services, and various professional
services including eSolutions, web design and development. We focus our sales
and marketing efforts on businesses in the markets we serve using the value
proposition of leveraging our technical expertise with dedicated customer care.
We approach our customers from an access independent position, providing
connectivity over a variety of available technologies. These include classic
Telco provided point-to-point, ISDN, SMDS, ATM, and DSL. We also offer FASTNET
controlled last mile Internet access utilizing wireless transport.

         On March 14, 2001, we acquired all the assets and substantially all the
liabilities of Cybertech Wireless, Inc., a provider of wireless high speed
Internet access, web hosting and SOHO access headquartered in Rochester, New
York. Cybertech has deployed wireless networks in Rochester, Syracuse, Albany
and Buffalo, New York. As a result of this acquisition, we believe we will be
able to offer our customers in the New York region the full suite of products
and services offered to customers in our Pennsylvania and New Jersey markets. We
will also utilize Cybertech's network deployment knowledge to build out wireless
networks in selected existing FASTNET markets.

         In September and November 2001, the Company sold a total of 3,296,704
shares of Series A Preferred stock to two investors. The shares were sold for
$0.91 per share and the sale included warrants to purchase 824,176 shares of
Common stock with an exercise price of $1.27 per share. The $3.0 million raised
from this sale will be used for general corporate purposes, as well as to aid
the Company in its plans to grow through selected acquisitions.

         On November 1, 2001, the Company acquired all the assets, outstanding
Common stock and substantially all of the liabilities of NetReach, Inc. a web
application, web design and web hosting company headquartered in Ambler,
Pennsylvania. NetReach will become the eSolutions division of FASTNET once the
integration is complete. As a result of this acquisition, we believe we will be
able to cross-sell both companies existing customer base, as well as increase
total consolidated revenue by offering a more complete suite of products and
services to the combined customer base.

         On January 31, 2002, the Company acquired all the assets, outstanding
Common stock and substantially all of the liabilities of SuperNet Inc., an ISP
headquartered in East Brunswick, New Jersey. SuperNet provides Internet access
to businesses and residential customers, as well as web hosting and colocation
services to customers located in the central New Jersey region. This is a region
with a high density of enterprise customers which represents the focus of
FASTNET's strategic business plan. The initial integration of SuperNet was
completed by the end of February 2002. FASTNET expects that it will be able to
leverage the name recognition and customer satisfaction that SuperNet developed
to increase sales to SuperNet's existing customer base, as well as providing a
springboard for FASTNET's further penetration of this region.

         As of December 31, 2001, we provided Internet access and enhanced
services to 1,630 enterprise customers, 25,900 SOHO customers, and 5,700
customers using our shared and dedicated web hosting, and colocation services.

OUR HISTORY OF OPERATING LOSSES

         We have incurred operating losses in each year since our inception and
expect our losses to continue through December 31, 2002 as we seek to execute
our revised business plan. Our operating losses were $14,135,638, $32,044,023
and, $5,242,373 for the years ended December 31, 2001, 2000 and 1999,
respectively.

                                       23
<PAGE>

MODIFICATION OF OUR STRATEGIC PLAN IN OCTOBER OF 2000

         On October 10, 2000, we modified our strategic plan. This modified plan
called for the suspension of selling and marketing efforts in 12 of the 20
markets that were operational as of September 30, 2000. Under this modified plan
our selling and marketing strategy is focused on markets located in
Pennsylvania, New Jersey and New York.

         The Company also changed its sales model to a consultative,
face-to-face approach rather than the centralized telemarketing approach we
previously utilized. We believe our increased focus on a smaller number of
markets which are located closer to our headquarters, in conjunction with the
consultative sales approach, will enable us to engage more customers in our
target markets and retain customers for longer periods of time. We are also
building a customer-centric culture highlighted by dedicated customer care and
technical support departments. We expect this increased focus on customer care
will help us build and maintain long-term relationships with our customers. We
modified our value proposition from being a low-cost provider to focusing on
building a reputation of being an authority on Internet-enabled solutions with
exceptional customer care.

         Our modified plan included taking the steps during 2001 to redesign our
network architecture, thereby accomplishing an overall reduction in
telecommunication expenses. In October of 2000, we began eliminating the
outbound bandwidth in the 12 markets where field sales efforts were suspended.
The market-based infrastructure in the remaining operational markets was
reconfigured to reduce costs while still achieving reliability and redundancy of
the network by maintaining multiple connections to the worldwide Internet
backbone providers. These changes had a favorable impact on our gross margins
during 2001.

         As part of the restructuring plan, 44 employees were terminated on
October 10, 2000 throughout all departments of the Company. This payroll and
related expense reduction resulted in reduced selling, general, and
administrative expenses, thereby reducing the Company's cash burn-rate.

         In addition to these cost containment actions, we reduced the planned
capital expenditures for 2001 and 2002. We believe that the equipment that would
have been deployed in new markets will provide the company with much of the
networking equipment it will need into 2003. As a result of our modified
strategic plan, we believe that the cash and investments we have available will
be sufficient to fund operations into 2003 without requiring us to raise any
additional cash.

         Simultaneous with the modification of our strategic plan in 2000, we
recorded a restructuring charge of $5.2 million primarily related to network and
telecommunication optimization and cost reduction, facility exit costs,
realigned marketing strategy, and involuntary employee terminations (see Note 7
in Notes to Consolidated Financial Statements). During the fourth quarter of
2000, based upon a review of the Company's long-lived assets, the Company
recorded a non-cash charge of $3.2 million primarily related to the write-down
of a portion of the asset values of the components of several of the Company's
customer network facilities. The Company idled operations in these facilities
upon adoption of the Company's revised business plan. An impairment was
recognized as the future undiscounted cash flows of each facility were estimated
to be insufficient to recover their related carrying values. As such, the
carrying values of these assets were written down to the Company's estimates of
their fair value.

         Throughout 2001, the Company has continually reviewed the reserves that
were established in October 2000 as part of its 2000 restructuring plan. In the
fourth quarter of 2001, the Company recorded an additional $1.3 million
restructuring charge related to its excess and idle data centers and
administrative offices. This charge assumes certain assumptions regarding the
Company's ability to sublet or dispose of these facilities. This decision was
made in the fourth quarter of 2001 as we experienced significant difficulties in
attempting to dispose of or sublet these facilities due to an overall slowdown
in the economy and, in particular, the commercial real estate market. We are
continuing our efforts to dispose of or sublet these facilities. The total
amount of lease payments relating to these excess or idle facilities is
approximately $4.6 million through 2010. Actual results could differ materially
for this estimate.

                                       24
<PAGE>

         The activity in the restructuring charge accrual during 2001 is
summarized in the table below:

<TABLE>
<CAPTION>
                                                   ACCRUED                                           ACCRUED
                                                RESTRUCTURING                         CASH        RESTRUCTURING
                                                    AS OF            2001           PAYMENTS          AS OF
                                                 DECEMBER 31,    RESTRUCTURING       DURING        DECEMBER 31,
                                                     2000           CHARGE            2001             2001
                                                 ------------    ------------     ------------     ------------
<S>                                              <C>             <C>              <C>              <C>
Telecommunications exit and termination fees     $ 2,552,472     $        --      $(2,318,492)     $   233,980
Leasehold termination costs                          708,818              --         (593,275)         115,543
Termination payments to employees                         --              --               --               --
Sales and marketing contract terminations            522,520              --         (470,199)          52,321
Facility exit costs                                  261,833       1,335,790         (227,350)       1,370,273
                                                 ------------    ------------     ------------     ------------

                                                 $ 4,045,643     $ 1,335,790      $(3,609,316)     $ 1,772,117
                                                 ============    ============     ============     ============
</TABLE>

RESULTS OF OPERATIONS

REVENUES

         We classify our revenue into these major categories: revenues from the
sale of enterprise level Internet access and enhanced products and services,
SOHO Internet access which includes revenues from the sale of Internet access to
SOHOs and includes revenue from the sale of wholesale dialup access to customers
that use our Dialplex Virtual Private Network (VPN or wholesale Internet access
services) to provide service to their subscribers, revenue from hosting services
which includes shared web hosting services, dedicated hosting services and
colocation services and finally revenues from e-Solutions, web design and
development services. We target our Internet access and enhanced services to
businesses located within our active markets. FASTNET offers a broad range of
dedicated access solutions including T-1, T-3, Frame Relay, SMDS, enterprise
class DSL services and fixed broadband wireless. Our enhanced services are
complementary to dedicated Internet access and include Total Managed Security
and the sale of third party hardware and software. Our business plan focuses on
the core service offering of Internet access coupled with add-on sales of
enhanced products and services as our customers' Internet needs expand. Internet
access and enhanced product revenues are recognized as services are provided. We
expect our Internet access and enhanced product revenues to increase as a
percentage of our total revenues as we continue to focus additional resources on
marketing and promoting these services.

         The market for data and related services is becoming increasingly
competitive. We seek to continue to expand our customer base by both increasing
market penetration in our existing markets and by increasing average revenue per
customer by selling additional enhanced products and services. We have had a
historically low churn rate with our dedicated Internet customers. We believe as
the industry consolidates that we will have opportunities to migrate customers
from our competitors as their customers become dissatisfied with the level of
service provided by the consolidated organizations. In addition, the recent
economic challenges have caused other providers to either cease operations or
terminate certain product offerings. We seek to grow our revenues by capturing
market share from other providers.

         Our SOHO revenues consist of dial-up Internet access to both
residential and small office business customers, and revenue from the sale of
wholesale dialup access to customers that use our Dialplex Virtual Private
Network (VPN or wholesale Internet access services) to provide service to their
subscribers, SOHO DSL Internet access, and ISDN Internet access. Customers using
our SOHO services generally sign service contracts for one to two years. We
typically bill these services in advance of providing services. As a result,
revenues are deferred until such time as services are rendered. In the future as
we execute our business plan, we expect SOHO revenues to decrease as a
percentage of total revenues. We have reduced selling and marketing efforts
targeted to this customer base in response to increased competition from both
free Internet service providers and other providers.

         We also offer our customers virtual private network solutions. VPN's
allow business customers secure, remote access to their internal networks
through a connection to FASTNET's network. The cost of these services varies
with the scope of the services provided.

                                       25
<PAGE>

COST OF REVENUES

         Our cost of revenues primarily consists of our Internet connectivity
charges and network charges. These are our costs of directly connecting to
multiple Internet backbones and maintaining our network. Cost of revenues also
includes engineering payroll, creative and programming staff payrolls for web
design and development, the cost of third party hardware and software that we
sell to our customers, facility rental expense for network infrastructure, and
rental expense on network equipment financed under operating leases.

         The following table sets forth statement of operations data as a
percentage of revenues for the periods indicated:

<TABLE>
<CAPTION>
                                                              FOR THE YEAR ENDED DECEMBER 31,
                                                               2001        2000        1999
                                                            ---------   ---------   ---------
<S>                                                           <C>         <C>         <C>
         Revenues .....................................       100.0%      100.0%      100.0%

         Operating expenses:
              Cost of revenues (excluding depreciation)        64.3       105.2        67.6
              Selling, general and administrative
                 (excluding depreciation) .............        68.4       141.8        75.8
              Depreciation and amortization ...........        51.0        39.8        19.1
              Restructuring charge ....................         8.7        40.8          --
              Asset impairment ........................          --        25.5          --
                                                            ---------   ---------   ---------
                                                              192.4       353.1       162.5

              Operating loss ..........................       (92.4)     (253.1)      (62.5)
         Other income (expense), net ..................        (0.3)        7.1        (4.3)
                                                            ---------   ---------   ---------
         Loss before extraordinary item ...............       (92.7)     (246.0)      (66.8)
                                                            ---------   ---------   ---------
         Extraordinary gain ...........................        36.9          --          --
                                                            ---------   ---------   ---------
         Net loss .....................................       (55.8)%    (246.0)%     (66.8)%
                                                            =========   =========   =========
</TABLE>

YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000

         REVENUES. Revenues increased by $2.6 million or 21% to $15.3 million
for the year ended December 31, 2001 compared to $12.7 million for the year
ended December 31, 2000. This increase in revenues is primarily a result of an
increase in business customers using our dedicated Internet access. Our
dedicated Internet access customer base grew by 89% from 860 as of December 31,
2000 to 1,628 as of December 31, 2001. Colocation revenues also contributed to
the overall increase in revenues. Colocation revenues increased by $546,000 or
164% from $334,000 in 2000 to $880,000 in 2001 as a result of our increased
focus on this customer base and our new colocation facilities opened in December
2000. Revenues also increased due to the acquisitions of Cybertech in March 2001
and NetReach in November 2001. Our revenue growth was offset by the loss of
Microsoft WebTV. The revenues from Microsoft WebTV declined by $1.3 million for
the year ended December 31, 2001. Our contract with Microsoft's WebTV was
terminated in September 2001. Our revenue growth was also offset by a decrease
in the average revenue per customer in 2001 as a result of additional enterprise
DSL customers and wireless access customers. As we move into 2002, we expect
future revenue growth to primarily be generated from our dedicated Internet
access and enhanced products and services and have made growing this customer
base the continued focus of our strategic business plan.

         COST OF REVENUES. Cost of revenues decreased by $3.5 million or 26% to
$9.8 million for the year ended December 31, 2001 as compared to $13.3 million
for the year ended December 31, 2000. Gross margin increased from (5)% for the
year ended December 31, 2000 to 36% for the year ended December 31, 2001. This
decrease in cost of revenues and the improvement in gross margin was primarily
due to the reduction in the size and improvement in the efficiency of our
network along with the reduced pricing on network elements. The decision to
discontinue service to Microsoft's WebTV also contributed to the reduction in
the cost of revenues and the increase in gross margin. Additionally, the Company
reflected credits resulting from telecommunication providers' billing errors and
service level disputes of $797,000 during the year ended December 31, 2001. If
these credits had not been included, gross margin would have been 31%.
Offsetting the decrease in cost of revenues, was the additional cost-of-revenues
associated with the acquisitions of Cybertech and NetReach. The cost structure
of our network is scalable, therefore we believe that we will be able

                                       26
<PAGE>

to continue to add revenue in 2002 without having to add significantly more
network capacity, thus allowing us to continue to generate gross margin of
approximately 50%.

         SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general and
administrative expenses decreased by $7.5 million or 42% from $17.9 million for
the year ended December 31, 2000 to $10.5 million for the year ended December
31, 2001. This decrease is primarily attributable to reduction in head count of
selling, general and administrative personnel from 91 at December 31, 2000 to 86
at December 31, 2001. We also reduced the Company's selling, marketing and
advertising expenditures from $5.7 million for the year ended December 31, 2000
to $2.3 million for the year ended December 31, 2001. This decrease resulted
from the reduction of advertising expenses and sales personnel in markets where
we discontinued our direct sales efforts. The remaining decline in selling,
general and administrative expenses relates to the Company's general cost
containment efforts in the year ended December 31, 2001.

         DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
by $2.8 million or 55% from $5.0 million for the year ended December 31, 2000 to
$7.8 million for the year ended December 31, 2001. This increase relates to
additional depreciation related to networking equipment acquired during 2000 and
2001 and the additional depreciation on assets acquired from Cybertech and
NetReach. Additionally, amortization expense increased due to the Cybertech and
NetReach acquisitions. Amortization expense related to the Cybertech and
NetReach intangibles was $208,000 in the year ended December 31, 2001.

         RESTRUCTURING CHARGE. We recorded a restructuring charge of $1.3
million in the year ended December 31, 2000 related to our excess and idle data
centers and administrative offices (see Note 7 to Consolidated Financial
Statements).

         OTHER INCOME/EXPENSE. Interest income decreased by $1.4 million or 68%
from $2.1 million for the year ended December 31, 2000 to $669,000 for the year
ended December 31, 2001. This decrease in interest income resulted from the sale
of our investments to fund operations during 2001 and lower interest rates.
Interest expense decreased by $448,000 or 39% from $1.1 million for year ended
December 31, 2000 to $702,000 for the year ended December 31, 2001. This
decrease was a result of the early extinguishment of $10.1 million of capital
lease obligations in the year ended December 31, 2001. We expect interest
expense to decrease throughout 2002 as a result of the significant decrease in
our capital lease obligations.

         EXTRAORDINARY GAIN. A gain on the early extinguishment of debt in the
amount of $5.6 million was recorded in the year ended December 31, 2001 as a
result of the settlements of approximately $10.0 million of capital lease
obligations with two equipment vendors. No taxes have been recorded on the
extraordinary gain as the Company provides for a full valuation allowance on
deferred tax assets (see Note 11 to Consolidated Financial Statements).

YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999

         REVENUES. Revenues increased by $4.3 million or 51% to $12.7 million
for the year ended December 31, 2000, compared to $8.4 million for the year
ended December 31, 1999. This increase in revenues was primarily a result of an
increase in business customers using our dedicated Internet access and web
hosting services. Our dedicated Internet access customer base grew by 181% from
300 as of December 31, 1999 to 860 as of December 31, 2000. Partially offsetting
this increase in customers was a decrease in the average revenue per customer
during 2000 as compared to 1999. This was the result of the addition of
Enterprise DSL customers into our dedicated Internet access customer base.

         For the year ended December 31, 2000, we derived $2.6 million or 20% of
our revenues from Microsoft's WebTV Networks Inc., as compared to $1.7 million
or 21% of our revenues for the year ended December 31, 1999. During 2000, we
began offering our Dialplex network coverage in additional markets that resulted
in increased revenue from WebTV. However, in September 2000, we reduced the
price we charge WebTV for our wholesale Dialplex services. Our contract with
Microsoft's WebTV Networks Inc. terminated in 2001.

         COST OF REVENUES. Cost of revenues increased by $7.7 million, or 135%,
to $13.3 million for the year ended December 31, 2000 as compared to $5.7
million for the year ended December 31, 1999. This increase was primarily
attributable to the increases in our network coverage areas, as well as
increases in the capacity of our network including capacity we suspended in
October of 2000. During 2000, we added additional connectivity at our network
operations center.

                                       27
<PAGE>

         Gross margin decreased from 32% for the year ended December 31, 1999 to
(5)% for the year ended December 31, 2000. This decrease in gross margin was a
result of installation of telecommunication circuits in new markets before we
generated any revenues in those new markets and an increase in engineering
personnel. During the fourth quarter of 2000, we reduced network costs by
re-designing the network to take advantage of cost saving opportunities while
providing greater capacity than was previously available.

         SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general and
administrative expenses increased by $11.6 million or 182% from $6.4 million for
the year ended December 31, 1999 to $17.9 million for the year ended December
31, 2000. This increase was primarily attributable to an increase in selling,
general and administrative personnel from 72 at December 31, 1999 to a high of
134 at September 30, 2000. As a result of the restructuring, selling, general
and administrative personnel decreased to 91 at December 31, 2000. Also
contributing to this increase was marketing and advertising expense incurred to
gain brand awareness in 20 markets. During the fourth quarter of 2000, we
changed our marketing approach to targeted direct advertising in an effort to
reduce expenses. In addition, the reduction in operational markets from 20 as of
September 30, 2000 to eight at December 31, 2000 resulted in lower selling,
general, and administrative expenses.

         DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
by $3.4 million or 215% from $1.6 million for the year ended December 31, 1999
to $5.0 million for the year ended December 31, 2000. This increase was
comprised of depreciation on the 20 market-based network facilities and
networking equipment located in those facilities. Also contributing to the
increase was $1.5 million of amortization expense for the year ended December
31, 2000 that related to the intangible assets recorded in the purchase
accounting of Internet Unlimited as compared to the $625,000 of amortization
expense recorded during the last six months of 1999.

         RESTRUCTURING CHARGE. We recorded a restructuring charge of $5.2
million for the year ended December 31, 2000 related to our 2000 restructuring
plan (see Note 7 to Consolidated Financial Statements).

         ASSET IMPAIRMENT. We recorded an asset impairment charge of $3.2
million for the year ended December 31, 2000 related to the write-down of a
portion of the asset values of the components of several of the Company's
customer network facilities (see Note 2 to Consolidated Financial Statements).

         OTHER INCOME/EXPENSE. Interest income increased by $2.0 million from
$52,000 for the year ended December 31, 1999 to $2.1 million for the year ended
December 31, 2000. This increase in interest income was generated from the
investment of the proceeds from our initial public offering on February 7, 2000.
Interest expense increased by $744,000 from $406,000 for year ended December 31,
1999 to $1.1 million for the year ended December 31, 2000, as we financed
equipment needed for our market expansion under capital lease arrangements.

CASH FLOWS ANALYSIS

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                                             -----------------------
                                                                    2001               2000              1999
                                                                -------------     -------------     -------------
<S>                                                             <C>               <C>               <C>
         Other Financial Data:
             Cash flows used in operating activities ......     $(12,142,431)     $(15,637,784)     $   (467,622)
             Cash flows provided by (used in)
                investing activities ......................       15,573,429       (27,764,962)       (2,280,717)
             Cash flows provided by financing activities ..        1,788,856        47,500,807         3,445,397
                                                                -------------     -------------     -------------
             Net increase in cash and cash equivalents ....     $  5,219,854      $  4,098,061      $    697,058
                                                                =============     =============     =============
</TABLE>

         Cash flows used in operating activities decreased by $3.5 million from
cash used of $15.6 million in the year ended December 31, 2000 to cash used of
$12.1 million for the year ended December 31, 2001. This decrease is primarily
the result of a $22.6 million decrease in our net loss from $31.1 million for
the year ended December 31, 2000 to $8.5 million in the year ended December 31,
2001. The decrease in net loss was offset by a decrease in accounts payable and
accrued expenses, and the extraordinary gain on the extinguishment of capital
lease obligations that was recorded in the year ended December 31, 2001.

         Cash flows provided by investing activities increased $43.3 million
from cash used of $27.8 million in the year ended December 31, 2000 to cash
provided by investing activities of $15.6 million in the year ended December 31,
2001. This increase in cash flows is a result of the Company's sale of
investments in 2001 to fund operations and a decrease in the purchases of
property and equipment. The Company believes it will need to continue to sell
investments to fund operations.

         Cash flows provided by financing activities decreased by $45.7 million
from cash provided of $47.5 million during the year ended December 31, 2000 to
$1.8 million of cash provided in the year ended December 31, 2001. The decrease
in cash flows from financing activities relates to the proceeds received in 2000
from our initial public offering and exercise of the underwriters' over
allotment partially offset by the repayments of capital lease and debt
obligations in 2000. In 2001, the Company received proceeds of $3.0 million from
sale of its Series A Preferred stock and $2.3 million from term debt proceeds.
These proceeds were offset by the repayment of capital lease obligations.

                                       28
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         The business plan we implemented at the time of our initial public
offering in February 2000 required substantial capital to fund operations,
capital expenditures, expansion of sales and marketing capabilities, and
acquisitions. We modified our business strategy in October 2000 (see "Recent
Developments") to allow us to maintain operations without any or limited
additional funding into 2003. Simultaneous with the modification of our
strategic plan, we recorded a non-recurring charge primarily related to network
and telecommunication optimization and cost reduction, facility exit costs,
realigned marketing strategy, and involuntary employee terminations. In December
of 2001 the Company recorded an additional charge for facility exit costs. We
expect these actions will continue to reduce our cash consumption rate in the
future, but may result in early termination payments for certain contractual
obligations that exist. As of December 31, 2001, we had $12.6 million in cash
and marketable securities. Of these balances we were obligated to pay amounts
totaling $2,050,000 in the first two weeks of January 2002 as a result of
various contract settlements. We believe that the cash, cash equivalents and
marketable securities we have available after the payments in January will be
sufficient to fund operations into 2003.

         During the fourth quarter of 2000, the Company recorded a charge for
$5,159,503. Of this restructuring charge, $436,327 has not been paid as of
December 31, 2001 and is, accordingly, classified as accrued restructuring. The
Company anticipates that the remaining accrued amount will be paid in 2002. The
restructuring charges were determined based on formal plans approved by the
Company's management and Board of Directors using the information available at
the time. Management of the Company believes this provision will be adequate to
cover any future costs incurred relating to the restructuring.

         Throughout 2001, the Company continually reviewed the reserves that
were established in October 2000 as part of its 2000 restructuring plan. In the
fourth quarter of 2001, the Company recorded an additional $1.3 million
restructuring charge related to its excess and idle data centers and
administrative offices. The amount of the charge was determined using
assumptions regarding the Company's ability to sublet or dispose of these
facilities. This decision was made in the fourth quarter of 2001 as we
experienced significant difficulties in attempting to dispose of or sublet these
facilities due to an overall slowdown in the economy and, in particular, the
commercial real estate market. We are continuing our efforts to dispose of or
sublet these facilities. The total amount of lease payments relating to these
excess or idle facilities is approximately $4.6 million through 2010. Actual
results could differ materially from this estimate.

         Prior to our initial public offering, we satisfied our cash
requirements primarily through debt and equity financings.

         On September 5, 2001 and November 14, 2001, we sold 2,506,421 and
790,283 shares of Series A Preferred stock, respectively to several investors
for gross proceeds of $3.0 million.

         On December 28, 2001, the Company entered into a secured Loan Agreement
with a bank and issued the bank a note payable for $2.3 million. We entered into
this Loan Agreement to fund our capital lease obligations settlement of $1.6
million. The term of the note is 24 months and the note bears interest at LIBOR
plus 1.5%. The Loan Agreement requires that the Company maintain a minimum cash
balance of $5.0 million and that the Company will not assume or become liable
for any additional indebtedness, whether contingent or direct, in excess of
$500,000; provided, however, in connection with acquisitions, the Company may
incur indebtedness in excess of $500,000. As collateral for the loan, the
Company has granted the lender a security interest in essentially all of the
assets of the Company.

         The Company's future liquidity and capital requirements will depend on
numerous factors including, but not limited to, risks from competition, new
products and technological changes, price and margin pressures and dependence on
key personnel. If additional financing is needed, the Company may seek to raise
funds through the sale of securities, bank borrowings or otherwise. There can be
no assurance that financing will be available to the Company, if at all. The
Company believes that its existing cash, cash equivalents and short-term
investments will be sufficient to meet its working capital and capital
expenditure requirements into 2003.

                                       29
<PAGE>

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS:

         The following table sets forth the Company's approximate aggregate
obligations at December 31, 2001, for future payments under contracts and other
contingent commitments, for the years 2002 and beyond.

<TABLE>
<CAPTION>
                                           2002           2003           2004           2005        THEREAFTER
                                        -----------    -----------    -----------    -----------    -----------
<S>                                     <C>            <C>            <C>            <C>            <C>
CONTRACTUAL OBLIGATIONS
Long-term debt ....................     $1,160,205     $1,595,141     $  528,782     $       --     $       --
Capital lease obligations .........      1,966,741(1)      32,520             --             --             --
Operating leases ..................      1,808,933      1,473,183      1,499,028      1,177,935      1,641,457
Employment agreements .............             --             --             --             --             --
Capital expenditures ..............             --             --             --             --             --
Minimum commitments under contracts        450,000(2)          --             --             --             --
                                        -----------    -----------    -----------    -----------    -----------
Total contractual obligations .....     $5,385,879     $3,100,844     $2,027,810     $1,177,935     $1,641,457
                                        -----------    -----------    -----------    -----------    -----------
</TABLE>
----------
(1)  Includes $1,600,000 capital lease buyout payment due in January 2002.
(2)  Includes payments due to vendors in January 2002 to settle contract
     disputes.

CRITICAL ACCOUNTING POLICIES:

         In December 2001, the SEC requested that all registrants list their
three to five most "critical accounting policies" in MD&A. The SEC indicated
that a "critical accounting policy" is one which is both important to the
portrayal of the Company's financial condition and results and requires
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.

         The Company's significant accounting policies are described in Note 2
to the consolidated financial statements included in Item 14 of this Report.
Management considers the following policies to be most critical in understanding
the more complex judgments that are involved in preparing the Company's
financial statements and the uncertainties that could impact its results of
operations, financial condition and cash flows.

REVENUE RECOGNITION:

         Revenues include one-time and ongoing charges to customers for
accessing the Internet. One-time charges relating to hardware and other
provisioning services are recognized as revenue over the life of the customer
contract. The Company recognizes ongoing access revenue over the period the
services are provided. The Company offers contracts for Internet access that are
generally paid for in advance by customers. The Company has deferred revenue
recognition on these advance payments and recognizes this revenue ratably over
the service period.

         Revenues are also derived from the resale of products, including
hardware and software, and web hosting services. The Company recognizes product
sales revenue when the equipment is shipped to the customer. The Company sells
its web hosting and related services for contractual periods ranging from one to
twelve months. These contracts generally are cancelable by either party without
penalty. Revenues from these contracts are recognized ratably over the
contractual period as services are provided. Incremental fees for excess
bandwidth usage and data storage are billed and recognized as revenues in the
period in which customers utilize such services. Revenues include network
installation, maintenance and consulting services. These services are provided
on a time-and-material basis and revenues are recognized based upon time (at
established rates) and other direct costs as incurred.

         Revenues also include consulting and web design related projects.
Revenues from consulting services are generally recognized as the services are
provided. The Company generally recognizes project revenue using the
percentage-of-completion method. The percentage-of-completion method is used
over a period of time that commences with an execution of the project agreement
and ends when the project is complete and the customer has accepted. Any
anticipated losses on contracts are recorded to earnings when identified.
Amounts received or billed in excess of revenue recognized to date are
classified as deferred revenues, whereas revenue recognized in excess of amounts
billed are classified as unbilled accounts receivable.

ACCOUNTS RECEIVABLE RESERVE:

         Accounts receivable are reduced by an estimated allowance for amounts
that may become uncollectible in the future. We continuously monitor collections
and payments from our customers and maintain a provision for estimated credit
losses based upon our historical experience and any specific customer collection
issues that we have identified. While we believe that we currently have an
adequate reserve for uncollectable accounts, we cannot guarantee that we will

                                       30
<PAGE>

continue to experience the same credit loss rates that we have in the past.
Since our accounts receivable are distributed over a large customer base
management does not believe that a significant change in the liquidity or
financial position of any one of our customers would have a material adverse
impact on the collectability of our accounts receivables and our future
operating results.

IMPAIRMENT OF FIXED ASSETS AND INTANGIBLES:

We assess the impairment of identifiable intangibles, long-lived assets and
related goodwill and enterprise level goodwill whenever events or changes in
circumstances indicate that the carrying value may be recoverable. Factors
we consider important which could trigger an impairment review include the
following:

o        significant underperformance relative to expected historical or
         projected future operating results;

o        significant changes in the manner of our use of the acquired assets or
         the strategy for our overall business; and

o        significant negative industry or economic trends.

         When we determine that the carrying value of intangibles, long-lived
assets and related goodwill and enterprise level goodwill may not be recoverable
based upon the existence of one or more of the above indicators of impairment,
we measure any impairment based on a projected discounted cash flow method using
a discount rate determined by our management to be commensurate with the risk
inherent in our current business model. Net intangible assets, long-lived
assets, and goodwill amounted to $23.5 million as of December 31, 2001.

         In 2002, Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" became effective. In lieu of
amortization, we are required to perform an initial impairment review of our
goodwill in 2002 and an annual impairment review thereafter. We expect to
complete our initial review during the second quarter of 2002.

         We currently do not expect to record an impairment charge upon
completion of the initial impairment review. However, there can be no assurance
that at the time the review is completed a material impairment charge will not
be recorded.

RESTRUCTURING CHARGES:

         In October 2000, the Company adopted a plan to reduce the number of
markets the Company had in operations from 20 to 8, and terminate 44 employees.

         The Company ceased all sales and marketing activities in the 12 closed
markets and is negotiating the exit of the facilities, where practicable.
Telecommunication exit and termination costs relate to contractual obligations
the Company is unable to cancel for network and related cost in the markets
being closed. These costs consist of both Internet backbone connectivity cost,
as well as network and access costs. These services are no longer required in
the closed markets. Carrying costs and rent expense for leased facilities
located in non-operational markets are included in Leasehold termination
payments. The Company is actively pursuing both sublease opportunities as well
as full lease terminations.

         The Company recorded $5,159,503 of restructuring charge in the fourth
quarter of 2000. During 2000, $1,113,860 was paid to settle these obligations.
During fiscal 2001 $3,609,316 was paid to settle these obligations. While the
Company had planned to pay the entire $5,159,503 by the end of 2001, as of
December 31, 2001. $436,327 of the original charge remained unpaid. The Company
believes that the remaining $436,327 will be paid during 2002.

         Throughout 2001, the Company has continually reviewed the reserves that
were established in October 2000 as part of its 2000 restructuring plan. In the
fourth quarter of 2001, the Company recorded an additional $1.3 million
restructuring charge related to its excess and idle data centers and
administrative offices. The amount of the charge was determined using
assumptions regarding the Company's ability to sublet or dispose of these
facilities. This decision was made in the fourth quarter of 2001 as we
experienced significant difficulties in attempting to dispose of or sublet these
facilities due to an overall slowdown in the economy and, in particular, the
commercial real estate market. We are continuing our efforts to dispose of or
sublet these facilities. The total amount of lease payments relating to these
excess or idle facilities is approximately $4.6 million through 2010. Actual
results could differ materially from this estimate.

                                       31
<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         In June 1999, the Company entered into a financial arrangement, as
amended, with (the Financial Advisor), who is an affiliate of a significant
shareholder. This agreement provided for a payment of $320,000 due to the
Financial Advisor on February 1, 2001 related to the private placement of
securities, and a $500,000 payment due upon the earlier of the consummation of
an initial public offering or February 1, 2001. This $500,000 payment is related
to general strategic and advisory services rendered during the three months
ended September 30, 1999. The $500,000 was repaid in March 2000.

         In January 2000, the Company received a $1,000,000 promissory note from
the Financial Advisor. This promissory note was repaid upon the consummation of
the initial public offering (see Notes 8 and 9).

         In October 2000, the Company issued a $250,000 convertible note and a
warrant to purchase 120,000 shares of Common stock to an advisor who is an
affiliate of a significant shareholder for professional services rendered.

         In November 2001, the Company issued 109,589 shares of 2001 Series A
Preferred and 27,397 warrants to purchase Common stock to a legal firm used by
the Company in exchange for $100,000 of professional services rendered. The
Company paid the firm approximately $398,000 in the year ended December 31,
2001.

         During 2001, the Company paid $35,000 to "A Meeting Place" for
professional services related to marketing, advertising and special events. The
owner of "A Meeting Place" is the wife of the CEO and President of the Company.

         The Company has $395,000 of NetReach Notes due to the Landlord of one
of the Company's facilities. The Company paid the landlord an immaterial amount
in the period from the date of the NetReach acquisition to December 31, 2001.
Additionally, the Landlord has warrants to purchase 18,420 shares of Common
stock at exercise prices of $7.57 and $3.78.

         In the year ended December 31, 2001, the Company advanced $202,000 in
funds to several executives of the Company. All of the executives signed
promissory notes bearing interest at 3.75%. The promissory notes may be repaid
in full or though monthly payments to begin in April 2002. The executives repaid
$58,000 of the promissory notes in the year ended December 31, 2001.

RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133, as amended by FASB No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of Effective Date of FASB Statement No. 133-an
Amendment of FASB Statement No. 133" which was adopted by the Company on January
1, 2001, provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. As the Company does not
currently hold derivative instruments or engage in hedging activities, the
adoption of this pronouncement did not have any impact on the Company's
financial position or results of operations.

         In June 2001, the FASB issued SFAS No. 141, "Business Combinations."
Statement No. 141 addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, "Business Combinations" and FASB
Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises." Statement No. 141 is effective for all business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interest method of
accounting for business combinations except for qualifying business combinations
that were initiated prior to July 1, 2001. Statement No. 141 also changes the
criteria to recognize intangible assets apart from goodwill. The Company adopted
this Statement on July 1, 2001. The Company has historically used the purchase
method to account for all business combinations and the Company does not believe
adoption of this Statement will materially impact the Company's financial
position, cash flows or results of operations.

         In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" that requires that goodwill and certain intangibles will not
be amortized. Instead, these assets will be reviewed annually for impairment and
written down and charged to results of operations only in the periods in which
the recorded value of goodwill and certain intangibles is more than its fair
value. This Statement applies to goodwill and certain intangible assets acquired
prior to June 30, 2001 and will be adopted by the Company on January 1, 2002. We
expect that adoption of this accounting standard will have the impact of
reducing the Company's non-cash amortization expense for goodwill and will have
a material impact on the Company's financial statements as the amount previously
recorded for the amortization of goodwill is significant. For the years ended

                                       32
<PAGE>

December 31, 2001, 2000 and 1999, the amounts of amortization expense for
goodwill were approximately $912,000, $821,000 and $341,000, respectively. The
required impairment tests of goodwill may result in future period write-downs.
In order to complete the transitional assessment of goodwill and non-amortizing
intangible assets impairment, the Company will need to: (1) identify the
reporting units; (2) determine the carrying value of each reporting unit; and
(3) determine the fair value of each reporting unit. The Company will have up to
six months from the date of adoption to determine the fair value of each
reporting unit and compare it to the reporting unit's carrying amount. To the
extent a reporting unit's carrying amount exceeds its fair value, an indication
exists that the reporting unit's goodwill and non-amortizing intangible assets
may be impaired and the Company must perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied fair
value of the reporting unit's goodwill, determined by allocating the reporting
unit's fair value to all of its assets and liabilities in a manner similar to a
purchase price allocation in accordance with SFAS No. 141, to its carrying
amount, both of which would be measured as of the date of adoption. This second
step is required to be completed as soon as possible, but no later than the end
of the year of adoption. Any transitional impairment loss will be recognized as
the cumulative effect of a change in accounting principle in the Company's
consolidated statement of operations. As of the date of adoption, the Company
has net unamortized goodwill in the amount of approximately $5,290,000. The
Company has not yet determined what the effect of the impairment tests will be
on the Company's financial position, cash flows or results of operations.

         In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" that addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. While SFAS
No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" it removes goodwill from its
scope and retains the requirements of SFAS No. 121 regarding the recognition of
impairment losses on long-lived assets held for use. SFAS No. 144 also
supercedes the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" for the disposal of a segment of a business. However,
it retains the requirement in Opinion 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years.
The Company is in the process of evaluating the impact that adoption of SFAS No.
144 will not have any impact on the Company's financial position or results of
operations.

ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK.

         Our financial instruments primarily consist of debt. All of our debt
instruments bear interest at fixed rates. Therefore, a change in interest rates
would not affect the interest incurred or cash flows related to our debt. A
change in interest rates would, however, affect the fair value of the debt. The
following sensitivity analysis assumes an instantaneous 100 basis point move in
interest rates from levels at December 31, 2001 with all other factors held
constant. A 100 basis point increase or decrease in market interest rates would
result in a change in the value of our debt of less than $50,000 at December 31,
2001. Because our debt is neither publicly traded nor redeemable at our option,
it is unlikely that such a change would impact our financial statements or
results of operations.

         All of our transactions are conducted using the United States dollar.
Therefore, we are not exposed to any significant market risk relating to
currency rates.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Index to Financial Statements:

         Report of Independent Public Accountants

         Consolidated Balance Sheets - December 31, 2001 and 2000

         Consolidated Statements of Operations - For the years ended December
         31, 2001, 2000 and 1999

         Consolidated Statements of Shareholders' Equity (Deficit) - For the
         years ended December 31, 2001, 2000 and 1999

         Consolidated Statements of Cash Flows - For the years ended December
         31, 2001, 2000 and 1999

         Notes to Consolidated Financial Statements

         Schedule II - Valuation and Qualifying Accounts

                                       33
<PAGE>

         The Consolidated Financial Statements and the Report of the Independent
Public Accountants appears in Part IV of this Annual Report on Form 10-K
beginning on page F-1.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         None.

                                    PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Information required by this item is incorporated herein by reference
from our Proxy Statement to the 2002 annual meeting of shareholders to be filed
shortly hereafter.

ITEM 11. EXECUTIVE COMPENSATION.

         Information required by this item is incorporated herein by reference
from our Proxy Statement to the 2002 annual meeting of shareholders to be filed
shortly hereafter.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         Information required by this item is incorporated herein by reference
from our Proxy Statement to the 2002 annual meeting of shareholders to be filed
shortly hereafter.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Information required by this item is incorporated herein by reference
from our Proxy Statement to the 2002 annual meeting of shareholders to be filed
shortly hereafter and is contained in the Company's financial statements
included in item 14 of this Annual Report on Form 10-K


                                    PART IV.

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

         (a)      List of documents filed as part of this report:

                  1.Consolidated Financial Statements and Financial Statement
         Schedule beginning on page F-1 are filed as part of this Annual Report
         on 10-K.

                  2. Financial statement schedule. None

                  3. Exhibits: See Exhibit index filed as part of this Annual
         Report on Form 10-K.

         (b)      Reports on Form 8-K

         (c)      Exhibits. See Exhibit index filed as part of this Annual
                  Report on form 10-K.

         (d)      Financial Statements. See Financial Statements beginning on
                  page F-1 of this Annual Report on form 10-K.

                                       34
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


TO FASTNET CORPORATION:

We have audited the accompanying consolidated balance sheets of FASTNET
Corporation (a Pennsylvania corporation) and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 2001. These financial statements and schedule referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule 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 FASTNET Corporation and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

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
Financial Statements is presented for purposes of complying with the Securities
and Exchange Commissions 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
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.


/s/ Arthur Andersen LLP

Philadelphia, Pennsylvania
March 1, 2002

                                      F-1
<PAGE>

<TABLE>
                                   FASTNET CORPORATION AND SUBSIDIARIES

                                       CONSOLIDATED BALANCE SHEETS
<CAPTION>

                                                                                    DECEMBER 31,
                                                                                2001            2000
                                                                            -------------   -------------
<S>                                                                         <C>             <C>
                                 ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...............................................   $ 10,271,755    $  5,051,901
Marketable securities ...................................................      2,300,100      18,455,543
Accounts receivable, net of allowance of $1,135,398 and $776,977 ........      2,663,800       2,570,154
Other current assets ....................................................        500,795         521,781
                                                                            -------------   -------------
Total current assets ....................................................     15,736,450      26,599,379

PROPERTY AND EQUIPMENT, net .............................................     16,397,900      19,631,011
INTANGIBLES, net of accumulated amortization of $3,799,001 and $2,107,297      6,766,044       2,350,274
OTHER ASSETS ............................................................        295,451         396,710
                                                                            -------------   -------------
                                                                            $ 39,195,845    $ 48,977,374
                                                                            =============   =============

                  LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt .......................................   $  1,160,205    $     17,541
Current portion of capital lease obligations ............................        366,741       4,681,781
Capital lease buyout ....................................................      1,600,000              --
Accounts payable ........................................................      2,819,073       3,736,957
Accrued expenses ........................................................      2,696,348       2,644,023
Deferred revenues .......................................................      3,446,854       3,113,321
Accrued restructuring ...................................................      1,772,117       4,045,643
                                                                            -------------   -------------
     Total current liabilities ..........................................     13,861,338      18,239,266

LONG-TERM DEBT ..........................................................      2,123,923          29,746
CAPITAL LEASE OBLIGATIONS ...............................................         32,520       7,105,678
OTHER LIABILITIES .......................................................        141,213          78,107

COMMITMENTS AND CONTINGENCIES (NOTE 11)
SHAREHOLDERS' EQUITY
Preferred stock (Note 9) ................................................      1,266,247              --
Common stock (Note 9) ...................................................     71,194,396      64,414,205
Deferred compensation ...................................................       (357,937)       (797,354)
Note receivable .........................................................       (463,750)       (437,500)
Accumulated other comprehensive income ..................................             --          17,763
Accumulated deficit .....................................................    (47,602,105)    (38,672,537)
Less - Treasury stock, at cost ..........................................     (1,000,000)     (1,000,000)
                                                                            -------------   -------------
     Total shareholders' equity .........................................     23,036,851      23,524,577
                                                                            -------------   -------------
                                                                            $ 39,195,845    $ 48,977,374
                                                                            =============   =============

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

                                                   F-2
</TABLE>
<PAGE>

<TABLE>
                                    FASTNET CORPORATION AND SUBSIDIARIES

                                    CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>

                                                                          YEAR ENDED DECEMBER 31,
                                                                          -----------------------
                                                                   2001             2000            1999
                                                               -------------   -------------   -------------
<S>                                                            <C>             <C>             <C>
REVENUES ...................................................   $ 15,293,611    $ 12,660,248    $  8,392,362

OPERATING EXPENSES:
Cost of revenues (excluding depreciation) ..................      9,825,712      13,325,733       5,671,948
Selling, general and administrative (excluding depreciation)     10,466,419      17,946,471       6,362,729
Depreciation and amortization ..............................      7,801,078       5,038,811       1,600,058
Restructuring charge .......................................      1,335,790       5,159,503              --
Asset impairment ...........................................             --       3,233,753              --
                                                               -------------   -------------   -------------
                                                                (29,428,999)     44,704,271      13,634,735
                                                               -------------   -------------   -------------

Operating loss .............................................    (14,135,388)    (32,044,023)     (5,242,373)

OTHER INCOME (EXPENSE):
Interest income ............................................        668,721       2,098,575          51,642
Interest expense ...........................................       (701,585)     (1,149,968)       (405,549)
Other ......................................................         (8,288)        (45,504)         (4,791)
                                                               -------------   -------------   -------------
                                                                    (41,152)        903,103        (358,698)
                                                               -------------   -------------   -------------

LOSS BEFORE EXTRAORDINARY ITEM .............................    (14,176,540)    (31,140,920)     (5,601,071)
                                                               -------------   -------------   -------------

Extraordinary Gain on Early Extinguishment of Debt .........      5,636,377              --              --
NET LOSS ...................................................     (8,540,163)    (31,140,920)     (5,601,071)
                                                               -------------   -------------   -------------

Deemed Dividend - Beneficial Conversion Feature ............       (389,405)             --              --
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS .................   $ (8,929,568)   $(31,140,920)   $ (5,601,071)
                                                               =============   =============   =============

BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Loss before Extraordinary Item after Deemed
      Dividend - Beneficial Conversion Feature .............   $      (0.83)   $      (2.20)   $      (0.77)
Extraordinary item .........................................           0.32              --              --
                                                               -------------   -------------   -------------

NET LOSS APPLICABLE TO COMMON SHAREHOLDERS .................   $      (0.51)   $      (2.20)   $      (0.77)
                                                               =============   =============   =============

SHARES USED IN COMPUTING BASIC AND DILUTED
NET LOSS PER COMMON SHARE ..................................     17,398,833      14,177,302       7,229,284
                                                               =============   =============   =============

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

                                                    F-3
</TABLE>
<PAGE>

<TABLE>
                                              FASTNET CORPORATION AND SUBSIDIARIES

                                    CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<CAPTION>

                                                              SERIES A
                                                           PREFERRED STOCK                 COMMON STOCK
                                                    -----------------------------   ---------------------------      DEFERRED
                                                       SHARES          AMOUNT          SHARES         AMOUNT       COMPENSATION
                                                    -------------   -------------   -------------  -------------   -------------
<S>                                                    <C>          <C>               <C>          <C>             <C>
BALANCE, DECEMBER 31, 1998 ......................             --    $         --       7,000,000   $    366,478    $         --
Issuance of Common stock
     options below fair value ...................             --              --              --        532,450        (532,450)
Amortization of deferred compensation ...........             --              --              --             --         168,301
Issuance of Common stock for
     acquisition (see Note 3) ...................             --              --         546,984      3,899,996              --
Sale of Preferred stock, net
     of transaction costs (see Note 9) ..........        666,198       4,445,108              --             --              --
Conversion of note payable ......................        142,431       1,015,545              --             --              --
Net loss ........................................             --              --              --             --              --
                                                    -------------   -------------   -------------  -------------   -------------

BALANCE, DECEMBER 31, 1999 ......................        808,629       5,460,653       7,546,984      4,798,924        (364,149)
Conversion of Convertible note ..................             --              --       2,033,334      3,050,000              --
Conversion of Preferred stock
     to Common stock ............................       (808,629)     (5,460,653)        808,629      5,460,653              --
Issuance of common stock in initial
     public offering, net .......................             --              --       4,600,000     49,643,878              --
Issuance of Common stock options
     below fair value ...........................             --              --              --        992,733        (992,733)
Amortization of deferred compensation ...........             --              --              --             --         331,243
Issuance of Common stock warrant
     in connection with debt ....................             --              --              --        255,802              --
Exercise of Common stock options ................             --              --           2,000          3,000              --
Unrealized gain on marketable securities ........             --              --              --             --              --
Issuance of restricted common stock .............             --              --       1,000,000        437,500              --
Reduction of deferred compensation
     for terminated employees ...................             --              --              --       (228,285)        228,285
Net loss ........................................             --              --              --             --              --
                                                    -------------   -------------   -------------  -------------   -------------

BALANCE, DECEMBER 31, 2000 ......................             --              --      15,990,947     64,414,205        (797,354)
Issuance of Series A Preferred stock and Common
     stock warrants, net ........................      3,406,293       2,253,871              --        772,377              --
Beneficial conversion feature recorded in
     conjunction with issuance of Series A
     Preferred stock and Common stock warrants ..             --      (1,377,029)             --      1,377,029              --
Beneficial conversion feature treated as dividend             --         389,405              --             --              --
Issuance of Common stock for acquisitions .......             --              --       4,400,000      4,107,000              --
Issuance of Common stock warrants to
     financial advisor ..........................             --              --              --        107,673              --
Debt discount recorded in conjunction with
     convertible notes ..........................             --              --              --         29,581              --
Issuance of Common stock warrants to lender .....             --              --              --        543,641              --
Issuance of options to consultants ..............             --              --              --        136,962              --
Amortization of deferred compensation ...........             --              --              --             --         145,345
Reversal of deferred compensation ...............             --              --              --       (294,072)        294,072
Accrued interest on notes receivable ............             --              --              --             --              --
Unrealized loss on investments ..................             --              --              --             --              --
Net loss ........................................             --              --              --             --              --
                                                    -------------   -------------   -------------  -------------   -------------

BALANCE, DECEMBER 31, 2001 ......................      3,406,293    $  1,266,247      20,390,947   $ 71,194,396    $   (357,937)
                                                    =============   =============   =============  =============   =============

                                                           (continued)

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

                                                              F-4
</TABLE>
<PAGE>

<TABLE>
                                              FASTNET CORPORATION AND SUBSIDIARIES

                                   CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                                          (CONTINUED)
<CAPTION>

                                                                   ACCUMULATED
                                                                      OTHER
                                                      NOTE        COMPREHENSIVE    ACCUMULATED      TREASURY
                                                   RECEIVABLE         INCOME         DEFICIT          STOCK           TOTAL
                                                  -------------   -------------   -------------   -------------   -------------
<S>                                               <C>             <C>             <C>             <C>             <C>
BALANCE, DECEMBER 31, 1998 ....................   $         --    $         --    $ (1,930,546)   $ (1,000,000)   $ (2,564,068)
Issuance of Common stock options
     below fair value .........................             --              --              --              --              --
Amortization of deferred compensation .........             --              --              --              --         168,301
Issuance of Common stock for
     acquisition (see Note 3) .................             --              --              --              --       3,899,996
Sale of Preferred stock, net of transaction
     costs (see Note 9) .......................             --              --              --              --       4,445,108
Conversion of note payable ....................             --              --              --              --       1,015,545
Net loss ......................................             --              --      (5,601,071)             --      (5,601,071)
                                                  -------------   -------------   -------------   -------------   -------------

BALANCE, DECEMBER 31, 1999 ....................             --              --      (7,531,617)     (1,000,000)      1,363,811
Conversion of Convertible note ................             --              --              --              --       3,050,000
Conversion of Preferred stock to
     Common stock .............................             --              --              --              --              --
Issuance of Common stock in initial
     public offering, net .....................             --              --              --              --      49,643,878
Issuance of Common stock
     options below fair value .................             --              --              --              --              --
Amortization of deferred compensation .........             --              --              --              --         331,243
Issuance of Common stock warrant
     in connection with debt ..................             --              --              --              --         255,802
Exercise of Common stock options ..............             --              --              --              --           3,000
Unrealized gain on marketable securities ......             --          17,763              --              --          17,763
Issuance of restricted common stock ...........       (437,500)             --              --              --              --
Reduction of deferred compensation
     for terminated employees .................             --              --              --              --              --
Net loss ......................................             --              --     (31,140,920)             --     (31,140,920)
                                                  -------------   -------------   -------------   -------------   -------------

BALANCE, DECEMBER 31, 2000 ....................       (437,500)         17,763     (38,672,537)     (1,000,000)     23,524,577
Issuance of Series A Preferred stock and Common
     stock warrants, net ......................             --              --              --              --       3,026,248
Beneficial conversion feature recorded in
     conjunction with issuance of Series A
     Preferred stock and Common stock warrants              --              --              --              --              --
Beneficial Conversion feature treated as
     dividend .................................             --              --        (389,405)             --              --
Issuance of Common stock for acquisitions .....             --              --              --              --       4,107,000
Issuance of Common stock warrants to
     financial advisor ........................             --              --              --              --         107,673
Debt discount recorded in conjunction with
     Convertible notes ........................             --              --              --              --          29,581
Issuance of Common stock warrants to vender ...             --              --              --              --         543,641
Issuance of option to consultants .............             --              --              --              --         136,962
Amortization of deferred compensation .........             --              --              --              --         145,345
Reversal of deferred compensation .............             --              --              --              --              --
Accrued interest on notes receivable ..........        (26,250)             --              --              --         (26,250)
Unrealized loss on investments ................             --         (17,763)             --              --         (17,763)
Net loss ......................................             --              --      (8,540,163)             --      (8,540,163)
                                                  -------------   -------------   -------------   -------------   -------------

BALANCE, DECEMBER 31, 2001 ....................   $   (463,750)   $         --    $(47,602,105)   $ (1,000,000)   $ 23,036,851
                                                  =============   =============   =============   =============   =============

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

                                                              F-5
</TABLE>
<PAGE>

<TABLE>
                                      FASTNET CORPORATION AND SUBSIDIARIES

                                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>

                                                                              YEAR ENDED DECEMBER 31,
                                                                              -----------------------
                                                                        2001            2000            1999
                                                                   -------------   -------------   -------------
<S>                                                                <C>             <C>             <C>
OPERATING ACTIVITIES:
Net loss .......................................................   $ (8,540,163)   $(31,140,920)   $ (5,601,071)
Adjustments to reconcile net loss to net cash used in
    operating activities:
     Depreciation and amortization .............................      7,801,078       5,038,811       1,600,058
     Non-cash portion of restructuring charge ..................      1,335,790       4,045,643              --
     Charge for impairment of long-lived assets ................             --       3,233,753              --
     Stock-based compensation expense ..........................         43,966              --              --
     Amortization of deferred compensation .....................        145,345         331,243         168,301
     Provision for doubtful accounts ...........................        293,151         727,589          41,591
     Amortization of debt discount .............................             --         255,802              --
     Extraordinary item ........................................     (5,636,378)             --              --
     Changes in operating assets and liabilities:
         Decrease (increase) in assets:
             Accounts receivable ...............................        122,663      (1,506,321)       (859,419)
             Other assets ......................................        325,703        (362,410)       (176,481)
         Increase (decrease) in liabilities:
             Accounts payable and accrued expenses .............     (7,983,246)      3,371,897       2,310,112
             Deferred revenues .................................        (99,632)        782,063       1,238,961
             Other liabilities .................................         49,292        (414,934)        810,322
                                                                   -------------   -------------   -------------
             Net cash used in operating activities .............    (12,142,431)    (15,637,784)       (467,622)
                                                                   -------------   -------------   -------------

INVESTING ACTIVITIES:
Purchases of property and equipment ............................       (755,991)     (9,327,182)     (1,880,518)
Purchase of marketable securities, net .........................     16,137,680     (18,437,780)             --
Cash paid for business acquisition .............................        191,740              --        (400,199)
                                                                   -------------   -------------   -------------
             Net cash provided by (used in) investing activities     15,573,429     (27,764,962)     (2,280,717)
                                                                   -------------   -------------   -------------

FINANCING ACTIVITIES:
Proceeds from debt .............................................      2,300,000       1,027,944       1,000,000
Repayments of debt .............................................        (43,578)     (1,025,276)       (166,034)
Repayments of capital lease obligations ........................     (3,386,946)     (2,148,739)       (497,072)
Proceeds from sale of Common stock, net ........................             --      49,646,878              --
Proceeds from sale of Preferred stock, net .....................      2,919,380              --       4,445,108
Increase in deferred offering costs ............................             --              --      (1,336,605)
                                                                   -------------   -------------   -------------
             Net cash provided by financing activities .........      1,788,856      47,500,807       3,445,397
                                                                   -------------   -------------   -------------

NET INCREASE IN CASH AND CASH EQUIVALENTS ......................      5,219,854       4,098,061         697,058
CASH AND CASH EQUIVALENTS, beginning of year ...................      5,051,901         953,840         256,782
                                                                   -------------   -------------   -------------
CASH AND CASH EQUIVALENTS, end of year .........................   $ 10,271,755    $  5,051,901    $    953,840
                                                                   =============   =============   =============

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

                                                      F-6
</TABLE>
<PAGE>

                      FASTNET CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       THE COMPANY:

BACKGROUND

         FASTNET Corporation and its subsidiaries ("FASTNET" or the "Company"),
have been providing Internet access and enhanced products and services to its
customers since 1994. The Company is an Internet services provider to businesses
in selected secondary markets. The Company complements its Internet access
services by delivering a wide range of enhanced products and services that are
designed to meet the needs of its target customer base.

LIQUIDITY

         The Company's business plan has required substantial capital to fund
operations, capital expenditures, expansion of sales and marketing capabilities,
and acquisitions. The Company modified its business strategy in October 2000, to
allow it to maintain operations without any additional funding or very limited
funding in the foreseeable future. Simultaneous with the modification of its
strategic plan, the Company recorded a charge primarily related to network and
telecommunication optimization and cost reduction, facility exit costs,
realigned marketing strategy, and involuntary employee terminations. These
actions have reduced the Company's cash consumption. In December 2001, the
Company recorded an additional charge related to excess data center facilities
and office space that the Company cannot use, sublet or terminate (see Note 7).

         The Company has incurred losses since inception and expects to continue
to incur losses in 2002. As of December 31, 2001, the Company's accumulated
deficit was $47,602,105. As of December 31, 2001, cash and cash equivalents and
marketable securities were $12,571,755. The Company believes that its existing
cash and cash equivalents and marketable securities will be sufficient to meet
its working capital and capital expenditure requirements into 2003. However, the
Company may be required or desire to seek additional sources of financing. If
additional funds are raised through the issuance of equity securities, existing
shareholders may experience significant dilution. Furthermore, additional
financing may not be available when needed or, if available, such financing may
not be on terms favorable to the Company. If such sources of financing are
insufficient or unavailable, or if the Company experiences shortfalls in
anticipated revenue or increases in anticipated expenses, the Company may need
to idle additional markets and make further reductions in head count. Any of
these events could harm the Company's business, financial condition or results
of operations.

         The Company is subject to the risks associated with companies in the
telecommunications industry. The Company's future results of operations involve
a number of risks and uncertainties. Factors that could affect the Company's
future operating results and cause actual results to vary materially from
expectations include, but are not limited to, risks from competition, new
products and technological change, price and margin pressures, capital
availablitiy and dependence on key personnel.


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

         The accompanying consolidated financial statements include the accounts
of FASTNET and its wholly owned subsidiaries. All material intercompany balances
and transactions have been eliminated in consolidation.

USE OF ESTIMATES

         The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

                                      F-7
<PAGE>

CASH AND CASH EQUIVALENTS

         FASTNET considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.

MARKETABLE SECURITIES

         Management determines the appropriate classification of its investments
in debt and equity securities at the time of purchase and reevaluates such
determinations at each balance sheet date. As of December 31, 2001, all of the
Company's investments are classified as available for sale and are included in
marketable securities in the accompanying consolidated balance sheets.

         The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and
accretion, as well as interest are included in interest income. Realized gains
and losses are included in other income in the accompanying consolidated
statements of operations. The cost of securities sold is based on the specific
identification method. Unrealized gains and losses are reported as a separate
component of shareholders' equity (deficit). As of December 31, 2001, there were
no unrealized gains or losses. As of December 31, 2000, the Company had $17,763
of unrealized gains.

         The Company's investments in debt and equity securities are diversified
among high-credit quality securities in accordance with the Company's investment
policy.

PROPERTY AND EQUIPMENT

         Property and equipment are recorded at cost. Depreciation and
amortization are provided on the straight-line basis over the estimated useful
lives of the respective assets, which range from 3 to 7 years. Maintenance,
repairs and minor replacements are charged to expense as incurred.

         Effective July 1, 1999, the Company changed its method of depreciation
for property and equipment from mid-year convention to mid-month convention.
This change was applied on a prospective basis (as a change in accounting
estimate) to assets acquired after that date. The Company changed its method of
depreciation based upon management's belief that the mid-month convention
provides a better matching of costs and revenues and the fact that the mid-month
convention is the predominant method in practice. The effect of the change on
the net loss for the year ended December 31, 1999, was to decrease net loss by
approximately $390,000 or $0.05 per share.

FAIR VALUE OF FINANCIAL INSTRUMENTS

         Carrying amounts of financial instruments held by the Company, which
include cash equivalents, accounts receivable, other current assets, accounts
payable, accrued expenses and deferred revenues, are reflected in the
accompanying consolidated financial statements at fair value due to the
short-term nature of those instruments. The carrying amount of long-term debt
approximates its fair value.

IMPAIRMENT OF LONG-LIVED ASSETS

         The Company accounts for its long-lived assets in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
The Company reviews its long-lived assets, including property and equipment,
goodwill and customer list, for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be fully
recoverable. To determine recoverability of its long-lived assets, the Company
evaluates the probability that future undiscounted net cash flows will be less
than the carrying amount of the assets. Impairment is measured at fair value. As
of December 31, 2001, based on management's evaluation of future undiscounted
net cash flows, no write-down of long-lived assets is necessary.

         In accordance with SFAS No. 121, during the fourth quarter of the year
ended December 31, 2000, based upon a review of the Company's long-lived assets,
the Company recorded a non-cash charge of $3,233,753 related to the write-down
of a portion of the asset values of the components of several of the Company's
customer network facilities. The Company ceased operations in these facilities
upon adoption of the Company's revised business plan, which was approved by the
Board of Directors in October 2000 (see Note 7). An impairment was recognized as
the future undiscounted cash flows of each facility were estimated to be
insufficient to recover their related carrying values. As such, the carrying
values of these assets were written down to the Company's estimates of their
fair value. Fair value was based on current appraisal values or other estimates
of fair value.

                                      F-8
<PAGE>

COMPREHENSIVE INCOME

         The Company follows SFAS No. 130, "Reporting Comprehensive Income" SFAS
No. 130 requires companies to classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from the shareholders' equity section of
the balance sheet. For the years ended December 31, 2001, 2000 and 1999
comprehensive loss was as follows:

<TABLE>
<CAPTION>
                                            YEAR ENDED      YEAR ENDED      YEAR ENDED
                                            DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                                2001            2000            1999
                                           -------------   -------------   -------------
<S>                                        <C>             <C>             <C>
Net loss                                   $ (8,540,163)   $(31,140,920)   $ (5,601,071)
Unrealized gain on marketable securities             --          17,763              --
                                           -------------   -------------   -------------
Comprehensive loss                         $ (8,540,163)   $(31,123,157)   $ (5,601,071)
                                           =============   =============   =============
</TABLE>

REVENUE RECOGNITION

         Revenues include one-time and ongoing charges to customers for
accessing the Internet. One-time charges primarily relate to the initial
connection fees and are recognized as revenue over the life of the customer
contract. The Company recognizes ongoing access revenue over the period the
services are provided. The Company offers contracts for Internet access that are
generally paid for in advance by customers. These advance payments and
recognizes are recognized as deferred revenues this revenue ratably over the
service period.

         Revenues are also derived from the resale of products, including
hardware and software, and web hosting services. The Company sells its web
hosting and related services for contractual periods ranging from one to twelve
months. These contracts generally are cancelable by either party without
penalty. Revenues from these contracts are recognized ratably over the
contractual period as services are provided. Incremental fees for excess
bandwidth usage and data storage are billed and recognized as revenues in the
period in which customers utilize such services.

         Revenues also include consulting and web design related projects.
Revenues from consulting services are generally recognized as the services are
provided. The Company generally recognizes project revenue using the
percentage-of-completion method. The percentage-of-completion method is used
over a period of time that commences with an execution of the project agreement
and ends when the project is complete. Any anticipated loses on contracts are
recorded to earnings when identified. Amounts received or billed in excess of
revenue recognized to date are classified as deferred revenues, whereas revenue
recognized in excess of amounts billed are classified as unbilled accounts
receivable.

COST OF REVENUES

         Cost of revenues include telecommunications charges and other charges
incurred in the delivery and support of services, including personnel costs in
the Company's operations support function, as well as equipment costs related to
hardware and software revenues. Depreciation and amortization on the property
and equipment used by the Company to deliver and support services are excluded
from the cost of revenues and are included as a separate line item on the
accompanying consolidated statements of operations. The telecommunications
component of cost of revenues was $7,375,254, $10,420,599 and $4,528,908 for the
years ended December 31, 2001, 2000 and 1999, respectively. In the year ended
December 31, 2001, the Company recognized credits in the amount of $797,000
resulting from billing errors and service level disputes with its
telecommunications providers. These credits have been reflected as a reduction
of cost of revenues.

ADVERTISING

         All advertising costs are expensed as incurred at the first time the
advertising is placed. Advertising expense for the years ended December 31,
2001, 2000 and 1999 was $521,452, $2,925,970, and $1,046,181 respectively.

                                      F-9
<PAGE>

INCOME TAXES

         The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities and are measured using enacted tax rates
that are expected to be in effect when the differences reverse.

STOCK-BASED COMPENSATION

         The Company accounts for stock-based compensation to employees and
directors using the intrinsic value method in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. The Company accounts for stock-based
compensation to nonemployees using the fair value method in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation" and Emerging Issues Task
Force Issue No. 96-18, "Accounting for Equity Instruments That are Issued to
Other Than Employees for Acquiring or in Conjunction with Selling, Goods or
Services.

NET LOSS PER COMMON SHARE

         The Company has presented net loss per common share pursuant to SFAS
No. 128, "Earnings per Share." Basic net loss per Common share was computed by
dividing net loss available to common shareholders by the weighted average
number of shares of Common stock outstanding during the period. Diluted net loss
per Common share reflects the potential dilution from the exercise or conversion
of securities into Common stock, such as stock options. Outstanding Common stock
options and warrants are excluded from the diluted net loss per Common share
calculations as the impact on the net loss per Common share using the treasury
stock method is antidilutive due to the Company's losses.

MAJOR CUSTOMERS

         The Company derived revenues of approximately 8%, 20% and 21% for the
years ended December 31, 2001, 2000 and 1999, respectively, from one customer.
As of December 31, 2001 and 2000, the customer had outstanding accounts
receivable balances of zero and $325,900, respectively. The contract with this
customer was terminated in September 2001.

CONCENTRATION OF CREDIT RISK

         Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash balances and trade
receivables. The Company invests its excess cash with federally insured banks.
The Company does not require collateral from its customers.

SUPPLEMENTAL CASH FLOW INFORMATION

         For the years ended December 31, 2001, 2000 and 1999, the Company paid
interest of $303,769, $769,251 and $317,443 respectively. For the years ended
December 31, 2001, 2000 and 1999, the Company paid income taxes of $1,676,
$2,222 and $75, respectively. The Company incurred capital lease obligations of
$54,982, $9,725,039 and $4,524,670 for the years ended December 31, 2001, 2000
and 1999, respectively.

         For the year ended December 31, 2001, the Company issued 150,000
options to consultants with a value of $92,996 based on the Black-Scholes option
pricing model. The value of these options was recorded as transaction costs
related to a 2001 acquisition.

                                      F-10
<PAGE>

The following table lists noncash assets that were acquired and liabilities that
were assumed as part of the Cybertech Wireless, Inc. acquisition discussed in
Note 3.

         Noncash assets:
              Accounts receivable ...................      $    76,827
              Other current assets ..................          101,638
              Property and equipment ................        1,953,682
              Intangibles ...........................        1,298,690
                                                           ------------
                                                           $ 3,430,837
                                                           ------------

         Assumed liabilities:
              Accounts payable ......................      $ 1,013,626
              Accrued expenses ......................          306,135
              Deferred revenues .....................          181,083
              Debt ..................................          250,000
              Other liabilities .....................           13,814
                                                           ------------
                                                             1,764,658
                                                           ------------
              Net noncash assets acquired ...........        1,666,179
         Purchase price paid in stock ...............       (1,875,000)
                                                           ------------
         Cash paid ..................................      $  (208,821)
                                                           ============

The following table lists noncash assets that were acquired and liabilities that
were assumed as part of the NetReach, Inc. acquisition discussed in Note 3.

         Noncash assets:
              Accounts receivable ...................      $   222,846
              Unbilled accounts receivable ..........          209,787
              Other current assets ..................            8,301
              Property and equipment ................          232,630
              Intangibles ...........................        4,808,784
              Other assets ..........................           20,323
                                                           ------------
                                                           $ 5,502,671

         Assumed liabilities:
              Accounts payable ......................      $ 1,375,713
              Accrued expenses ......................          748,094
              Deferred revenues .....................          252,082
              Debt ..................................          760,000
              Capital lease obligations .............          117,701
                                                           ------------
                                                             3,253,590
                                                           ------------
              Net noncash assets acquired ...........        2,249,081
         Purchase price paid in stock ...............       (2,232,000)
                                                           ------------
         Cash acquired ..............................      $    17,081
                                                           ============

                                      F-11
<PAGE>

NEW ACCOUNTING PRONOUNCEMENTS

         In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations." Statement No. 141 addresses financial
accounting and reporting for business combinations and supersedes APB Opinion
No. 16, "Business Combinations" and FASB Statement No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises." Statement No. 141 is
effective for all business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interest method of accounting for business
combinations except for qualifying business combinations that were initiated
prior to July 1, 2001. Statement No. 141 also changes the criteria to recognize
intangible assets apart from goodwill. The Company adopted this Statement on
July 1, 2001. The Company has historically used the purchase method to account
for all business combinations and the Company does not believe adoption of this
Statement will materially impact the Company's financial position, cash flows or
results of operations.

         In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" that requires that goodwill and certain intangibles will not
be amortized. Instead, these assets will be reviewed annually for impairment and
written down and charged to results of operations only in the periods in which
the recorded value of goodwill and certain intangibles is more than its fair
value. This Statement applies to goodwill and certain intangible assets acquired
prior to June 30, 2001 and will be adopted by the Company on January 1, 2002. We
expect that adoption of this accounting standard will have the impact of
reducing the Company's non-cash amortization expense for goodwill and will have
a material impact on the Company's financial statements as the amount previously
recorded for the amortization of goodwill is significant. For the years ended
December 31, 2001, 2000 and 1999, the amounts of amortization expense for
goodwill were approximately $912,000, $821,000 and $341,000, respectively. The
required impairment tests of goodwill may result in future period write-downs.
In order to complete the transitional assessment of goodwill and non-amortizing
intangible assets impairment, the Company will need to: (1) identify the
reporting units; (2) determine the carrying value of each reporting unit; and
(3) determine the fair value of each reporting unit. The Company will have up to
six months from the date of adoption to determine the fair value of each
reporting unit and compare it to the reporting unit's carrying amount. To the
extent a reporting unit's carrying amount exceeds its fair value, an indication
exists that the reporting unit's goodwill and non-amortizing intangible assets
may be impaired and the Company must perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied fair
value of the reporting unit's goodwill, determined by allocating the reporting
unit's fair value to all of its assets and liabilities in a manner similar to a
purchase price allocation in accordance with SFAS No. 141, to its carrying
amount, both of which would be measured as of the date of adoption. This second
step is required to be completed as soon as possible, but no later than the end
of the year of adoption. Any transitional impairment loss will be recognized as
the cumulative effect of a change in accounting principle in the Company's
consolidated statement of operations. As of the date of adoption, the Company
has net unamortized goodwill in the amount of approximately $5,390,000. The
Company has not yet determined what the effect of the impairment tests will be
on the Company's financial position, cash flows or results of operations.

         In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" that addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. While SFAS
No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" it removes goodwill from its
scope and retains the requirements of SFAS No. 121 regarding the recognition of
impairment losses on long-lived assets held for use. SFAS No. 144 also
supercedes the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" for the disposal of a segment of a business. However,
it retains the requirement in Opinion 30 to report separately discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal years.
The Company is in the process of evaluating the impact of SFAS No. 144; the
company does not believe that it will have any impact on the Company's financial
position or results of operations.

                                      F-12
<PAGE>

RECLASSIFICATIONS

         Certain reclassifications have been made to the prior years financial
statements to conform to the current year presentation.

3.       ACQUISITIONS:

         On March 14, 2001, the Company acquired all the assets and assumed
substantially all the liabilities of Cybertech Wireless, Inc., ("Cybertech") a
provider of fixed wireless Internet services headquartered in Rochester, NY, for
2,000,000 shares of common stock valued at $1,875,000. The results of operations
from Cybertech have been included in the consolidated financial statements from
the date of acquisition. The Company recorded the acquisition using the purchase
method of accounting pursuant to APB Opinion No. 16, "Business Combinations."
The excess of the purchase price over the fair value of net assets acquired was
determined to be $1,298,690. Based on a valuation by an independent valuation
consultant, $600,000 of the excess purchase price was allocated to developed
technology and the remaining $698,690 was allocated to goodwill, which is
expected to be deductible for tax purposes. The developed technology is being
amortized on a straight-line basis over a five-year period. The goodwill was
being amortized over a five year period in 2001, however, in accordance with
SFAS No. 142, the goodwill will no longer be amortized beginning January 1,
2002. Amortization expense for the year ended December 31, 2001, was $191,503.
The pro forma information is not presented, as information for Cybertech is
immaterial.

         The following table lists noncash assets that were acquired and
liabilities that were assumed as a result of the acquisition:

              Net assets acquired ....................       $  576,310

         Intangible assets:
              Developed technology ...................          600,000
              Goodwil ................................          698,690
                                                             -----------

         Total purchase price allocation .............       $1,875,000
                                                             ===========

         On November 1, the Company acquired all the assets, and assumed
substantially all the liabilities of NetReach, Inc., ("NetReach") a web hosting,
web design and web application development company headquartered in Ambler,
Pennsylvania for 2,400,000 shares of Common stock valued at $2,232,000. The
former NetReach shareholders are entitled to receive up to an additional 690,900
shares of Common stock of the Company contingent upon the achievement of certain
revenues and margin targets, as defined, for each of the five consecutive
calendar quarters beginning October 1, 2001. The targets related to the
contingent consideration were not met in the quarter ended December 31, 2001.

         The results of operations from NetReach have been included in the
consolidated financial statements from the date of acquisition. The Company
recorded the acquisition using the purchase method of accounting pursuant to APB
No. 16, "Business Combinations." The excess of the purchase price over the fair
value of the net assets acquired was determined to be $4,808,784. Based on a
valuation performed by an independent valuation consultant, $500,000 of the
excess purchase price was allocated to customer relationships and the remaining
$4,308,784 was allocated to goodwill, none of which is deductible for tax
purposes. The customer relationships are being amortized on a straight-line
basis over a five-year period. The following table lists noncash assets that
were acquired and liabilities that were assumed as a result of the acquisition:

              Net liabilities assumed ................      $(2,576,784)

         Intangible assets:
              Customer relationships .................      $   500,000
              Goodwill ...............................        4,308,784
                                                            ------------
         Total purchase price allocation .............      $ 2,232,000
                                                            ============

                                      F-13
<PAGE>

         If the acquisition of NetReach had occurred in January 1, 1999, the
unaudited pro forma information would have been as follows:

<TABLE>
<CAPTION>
                                                                         FOR THE YEAR ENDED DECEMBER 31,
                                                                         -------------------------------
                                                                       2001            2000            1999
                                                                  -------------   -------------   -------------
<S>                                                               <C>             <C>             <C>
Unaudited pro forma revenues                                      $ 18,854,000    $ 17,100,000    $ 10,437,000
Unaudited pro forma operating loss                                $(15,311,000)   $(34,516,000)   $ (5,971,000)
Unaudited pro forma net loss                                      $(10,200,000)   $(33,624,000)   $ (6,383,000)
Unaudited pro forma basic and diluted net loss per Common share   $      (0.52)   $      (2.07)   $      (0.86)
</TABLE>

         On January 31, 2002, the Company acquired the assets, and assumed
substantially all the liabilities of SuperNet, Inc, a provider of Internet
access, web hosting and colocation services located in East Brunswick, New
Jersey for $386,000 in cash and 1,096,907 shares of common stock valued at
$1,064,000. The Company will record the acquisition in 2002 using the purchase
method of accounting pursuant to SFAS No. 141. The excess of the purchase price
over the fair value of the net assets acquired was preliminarily determined to
be $1,762,550. The Company is in the process of obtaining a valuation from an
independent valuation consultant and thus, the allocation for the purchase price
has not yet been finalized

4.       CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES:

         The Company considers all highly liquid investments purchased with an
original maturity of ninety days or less to be cash equivalents. As of December
31, 2001 and 2000 cash and cash equivalents and marketable securities consisted
of the following:

                                                          DECEMBER 31,
                                                       2001          2000
                                                   ------------  ------------
         Cash and cash equivalents .............   $10,271,755   $ 5,051,901
         Marketable securities (at market value)
           Commercial paper ....................            --     7,950,262
           Corporate notes .....................            --     8,502,881
           US government agency notes ..........            --     2,002,400
           Certificate of deposit ..............     2,300,100            --
                                                   ------------  ------------
                                                   $ 2,300,100   $18,455,543
                                                   ============  ============

         The cash and cash equivalents balance as of December 31, 2001 includes
$200,000 of restricted funds that are in escrow for a settlement with a vendor.
The funds were released to the vendor in January 2002.

         The contractual maturities of the marketable securities at December 31,
2000 were all less than one year.


5.       PROPERTY AND EQUIPMENT:

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                               -----------------------
                                                                 2001           2000
                                                            -------------   -------------
<S>                                                         <C>             <C>
         Equipment ......................................   $ 19,837,983    $ 17,811,184
         Computer equipment .............................      2,182,562       1,815,519
         Computer software ..............................      1,761,833       1,584,685
         Furniture and fixtures .........................        670,620         609,661
         Leasehold improvements .........................      3,205,532       2,961,217
                                                            -------------   -------------
                                                              27,658,530      24,782,266
         Less - Accumulated depreciation and amortization    (11,260,630)     (5,151,255)
                                                            -------------   -------------
                                                            $ 16,397,900    $ 19,631,011
                                                            =============   =============
</TABLE>

                                      F-14
<PAGE>

         Depreciation and amortization expense for the years ended December 31,
2001, 2000 and 1999, was $7,801,078, $3,551,305, and $980,267, respectively. The
net carrying value of property and equipment under capital leases obligations
was $1,035,501 and $11,604,918 at December 31, 2001 and 2000, respectively.


6.       ACCRUED EXPENSES:

                                                    DECEMBER 31,
                                                    ------------
                                                 2001            2000
                                             -----------     -----------

         Vendor settlement ............      $  200,000      $       --
         Professional fees ............          96,000         817,268
         Accrued compensation .........         475,810         330,336
         Other ........................       1,924,538       1,496,419
                                             -----------     -----------
                                             $2,696,348      $2,644,023
                                             ===========     ===========


7.       RESTRUCTURING CHARGE:

         On October 10, 2000, the Company announced a restructuring to its
business operations and this restructuring plan provided for the suspension of
selling and marketing efforts in 12 of the 20 markets that were operational as
of September 30, 2000 (the "Restructuring Plan"). Selling and marketing efforts
are now focused on targeted markets located in Pennsylvania and New Jersey. The
Restructuring Plan includes redesigning the network architecture intended to
achieve an overall reduction in telecommunication expenses. In conjunction with
the Restructuring Plan, the Company terminated 44 employees.

         The Company has ceased all sales and marketing activities in the 12
closed markets and is negotiating the exit of the facilities, where practicable.
Telecommunication exit and termination costs relate to contractual obligations
the Company is unable to cancel for network and related cost in the markets
being closed. These costs consist of both Internet backbone connectivity cost,
as well as network and access costs. These services are no longer required in
the closed markets. Leasehold termination payments includes carrying costs and
rent expense for leased facilities located in non-operational markets. The
Company is actively pursuing both sublease opportunities as well as full lease
terminations. (see discussion below regarding additional restructuring charge
recorded in December 2001).

         During the fourth quarter of 2000, the Company recorded a charge for
$5,159,503. Of this restructuring charge, $436,327 has not been paid as of
December 31, 2001 and is, accordingly, classified as accrued restructuring. The
restructuring charges were determined based on formal plans approved by the
Company's management and Board of Directors using the information available at
the time. Management of the Company believes this provision will be adequate to
cover any future costs incurred relating to the restructuring. In addition in
2000, the Company recorded a $3,233,753 asset impairment charge as a result of
the Restructuring Plan (see Note 2 " Impairment of Long-Lived Assets").

         Throughout 2001, the Company has continually reviewed the reserves that
were established in October 2000 as part of its 2000 restructuring plan. In the
fourth quarter of 2001, the Company recorded an additional $1.3 million
restructuring charge related to its excess and idle data centers and
administrative offices. The amount of the charge was determined using
assumptions regarding the Company's ability to sublet or dispose of these
facilities. This decision was made in the fourth quarter of 2001 as we
experienced significant difficulties in attempting to dispose of or sublet these
facilities due to an overall slowdown in the economy and, in particular, the
commercial real estate market. We are continuing our efforts to dispose of or
sublet these facilities. The total amount of lease payments relating to these
excess or idle facilities is approximately $4.6 million through 2010. Actual
results could differ materially for estimate.

                                      F-15
<PAGE>

         The activity in the restructuring charge accrual during 2001 is
summarized in the table below:

<TABLE>
<CAPTION>
                                                   ACCRUED                                           ACCRUED
                                                RESTRUCTURING                        CASH         RESTRUCTURING
                                                    AS OF            2001           PAYMENTS          AS OF
                                                 DECEMBER 31,    RESTRUCTURING       DURING        DECEMBER 31,
                                                     2000           CHARGE            2001             2001
                                                 ------------    ------------     ------------     ------------
<S>                                              <C>             <C>              <C>              <C>
Telecommunications exit and termination fees     $ 2,552,472     $        --      $(2,318,492)     $   233,980
Leasehold termination costs                          708,818              --         (593,275)         115,543
Termination payments to employees                         --              --               --               --
Sales and marketing contract terminations            522,520              --         (470,199)          52,321
Facility exit costs                                  261,833       1,335,790         (227,350)       1,370,273
                                                 ------------    ------------     ------------     ------------

                                                 $ 4,045,643     $ 1,335,790      $(3,609,316)     $ 1,772,117
                                                 ============    ============     ============     ============
</TABLE>


8.      DEBT:
                                                  DECEMBER 31,
                                                  ------------
                                              2001             2000
                                          ------------     ------------
         Term note ..................     $ 2,300,000      $        --
         Notes payable ..............         732,278               --
         Other ......................         251,850           47,287
                                          ------------     ------------
                                            3,284,128           47,287
         Less - Current portion .....      (1,160,205)         (17,541)
                                          ------------     ------------
                                          $ 2,123,923      $    29,746
                                          ============     ============

TERM NOTE

In December 2001, the Company entered into a loan agreement with a bank and
issued a $2,300,000 promissory note to the bank (the "Bank Note"). The proceeds
from the Bank Note will be used for general corporate purposes. The Bank Note
bears interest at LIBOR plus 1.5%. The Bank Note is payable in consecutive
monthly payments of $95,833 principal and interest with all principle and all
interest due in December 2003. The Bank Note is secured by substantially all
of the assets of the Company. There are certain financial and non-financial
covenants related to the Bank Note including the maintenance of a cash balance
of at least $5,000,000. There was no interest expense related to the Bank Note
in 2001. Future maturities on the Bank Note as of December 31, 2001 are
$1,149,996 in 2002 and $1,150,004 in 2003.

NOTES PAYABLE

         In conjunction with the NetReach acquisition, the Company acquired
various notes payable in the aggregate of $760,000 (the "NetReach Notes"). Of
the $760,000 total notes payable, $525,000 are convertible notes that convert
into the Company's Common stock at a conversion price of $2.00 per share.
Additionally, if the closing price of the Company's Common stock is at least
$3.00 per share for any consecutive 30 calendar days, the Company shall have the
right to convert all of the outstanding principal due under the convertible
notes into unregistered shares of the Company's Common stock at a conversion
price equal to $2.00 per share. The convertible notes bear interest at rates of
eight percent and prime plus four percent and mature at various dates in 2003
and 2004. Additionally, several of the convertible notes were issued with
warrants to purchase a total of 52,140 shares of the Company's Common stock at
exercise prices ranging from $1.89 to $7.57. The warrants expire from February
9, 2008 through October 17, 2008. The Company valued the warrants using the
Black-Scholes option pricing model and recorded a debt discount of $29,581
related to the warrants. The discount will be expensed over the terms of the
convertible notes.

         The remaining balance of $235,000 of the NetReach Notes are term notes.
The term notes bear interest at eight percent and mature in 2003.

         Interest expense on the NetReach Notes was $13,640 including the
amortization of the debt discount of $1,859. Future maturities on the NetReach
Notes are $425,000 in 2002 and $335,000 in 2003.

                                      F-16
<PAGE>

OTHER

         On October 25, 2000, the Company entered into an agreement with an
investor to provide the Company with financial advisory services. The agreement
was amended on February 12, 2001 and expired on June 30, 2001. In exchange for
these services, the Company issued a convertible note for $250,000. This note is
due on October 24, 2003 and is convertible into 221,239 shares of Common stock.
No interest or dividends are payable on this note. Accordingly, a discount was
recorded on the note and will be amortized over the term of the note. As of
December 31, 2001, the recorded balance of the note was $221,774.

         Long-term debt maturities as of December 31, 2001 are as follows:

                       2002              $1,160,205
                       2003               1,595,141
                       2004                 528,782
                                         -----------
                                         $3,284,128
                                         ===========

PRIOR DEBT ACTITITY

         On January 19, 2000, the Company issued a $1,000,000 bridge financing
note to an investor with a warrant to purchase 30,000 shares of Common stock.
The note bore interest at 7% per annum and matured upon the completion of the
initial public offering. The warrant is exercisable at $12 per share and expires
on January 18, 2007. The warrant was valued at $255,802 using the Black Scholes
Option pricing model and was recorded as a debt discount. This debt discount was
amortized to interest expense over the term of the note. The note was repaid
with the proceeds from the Company's initial public offering (see Note 9).

         On May 14, 1999, the Company issued a $1,000,000 convertible note to an
investor (the "May 14 Convertible Note"). The May 14 Convertible Note bore
interest at 7%, and both principal and accrued interest were convertible at the
option of the holder at any time prior to maturity at rates, subject to
adjustment, based on the future sales price of the Company's Common stock. In
August 1999, the May 14 Convertible Note, together with accrued and unpaid
interest totaling $1,015,545 was converted into 142,431 shares of Series A
Preferred stock (see Note 9). The shares of Series A Preferred stock converted
into Common stock upon the consummation of the Company's initial public offering
(see Note 9).

         On May 28, 1998, the Company issued a $3,050,000 convertible note (the
"Convertible Note") and a warrant to purchase 1,000,000 shares of Common stock
at an exercise price of $1.50 per share to an investor. The investor also
purchased 1,000,000 shares of Common stock (see Note 9). The Black-Scholes
Option pricing model calculated a minimal value for the warrant; therefore, no
proceeds were assigned to the warrant. The Convertible Note bore interest at 7%
and was convertible into Common stock at the option of the investor at any time
prior to maturity at $1.50 per share subject to adjustment, as defined. The
Convertible Note was secured by substantially all of the assets of the Company.
The Convertible Note originally matured on November 30, 1999. On August 9, 1999,
the investor agreed to extend the maturity of the Convertible Note to January
31, 2001. The investor also agreed to convert the Convertible Note into
2,033,334 shares of Common stock immediately prior to the consummation of the
Company's initial public offering (see Note 9). The Convertible Note was
converted to 2,033,334 shares of Common stock upon the consummation of the
initial public offering (see Note 9).


9.       SHAREHOLDERS' EQUITY:

PREFERRED STOCK

         As of December 31, 2001 and 2000, the Company had authorized 10,000,000
shares of no par value Preferred stock. In August 1999, the Company designated
and issued 808,629 shares as Series A Convertible Preferred stock ("1999 Series
A Preferred"). The 1999 Series A Preferred was convertible at any time into
Common stock of the Company at a one-for-one conversion ratio. The holders of
the 1999 Series A Preferred had a liquidation preference of $7.13 per share. In
August 1999, the Company sold 666,198 shares of 1999 Series A Preferred to
certain investors at $7.13 per share. The net proceeds from the sale of the 1999
Series A Preferred were $4,445,108. The 1999 Series A Preferred converted into
Common Stock immediately prior to the consummation of the Company's initial
public offering.

                                      F-17
<PAGE>

         In August 2001, the Company authorized the issuance of up to 5,494,505
shares of a newly designated Series A Convertible Preferred stock ("2001 Series
A Preferred").

         On September 5, 2001, the Company sold 2,506,421 shares of 2001 Series
A Preferred, no par value, at a purchase price of $0.91 per share to several
investors for gross proceeds of $2,287,109 ("First Closing"). In conjunction
with the sale of the 2001 Series A Preferred at the First Closing, the Company
issued warrants to purchase 626,605 shares of Common stock at $1.27 per share.
The warrants expire in five years. Additionally, a founder of the Company sold
456,169 shares of Common stock to one of the 2001 Series A Preferred investors
for $0.50 per share for proceeds to the founder of $228,085.

         On November 12, 2001, the Company sold an additional 790,283 shares of
2001 Series A Preferred at a purchase price of $0.91 per share for gross
proceeds of $712,891 and issued additional warrants to purchase 197,571 shares
of Common stock at $1.27 per share to the same investors involved in the First
Closing ("Second Closing"). The same founder noted above sold an additional
143,831 shares of Common stock to the same 2001 Series A Preferred investors for
$0.50 per share for proceeds to the founder of $71,916. Additionally, the
Company issued 109,589 shares of 2001 Series A Preferred to a law firm utilized
by the Company in exchange for $100,000 of professional services rendered, the
fair value of the equity issued.

         Each share of 2001 Series A Preferred is convertible into the Company's
Common stock any time after the earlier of August 30, 2002 or a mandatory
conversion event, as defined. In the event a mandatory conversion does not
occur, the 2001 Series A Preferred is convertible at the option of the holder
any time on or after August 30, 2002. The holders of the 2001 Series A Preferred
are entitled to receive dividends at the same rate as dividends are paid with
respect to Common stock shares. In the event of any liquidation, dissolution or
winding-up of the Company, the holders of 2001 Series A Preferred are entitled
to the greater of (i) $0.91 per share plus all dividends declared but unpaid or
(ii) such amount per share as would have been payable had each share been
converted to Common stock immediately prior the event. As of December 31, 2001,
the 2001 Series A Preferred had a liquidation preference of $3,099,727.

         The 2001 Series A Preferred stockholders vote together with all other
classes and series of stock as a single class. The 2001 Series A Preferred
stockholders are entitled to the number of votes equal to the number of whole
shares of Common stock into which the shares of 2001 Series A Preferred are
convertible. The 2001 Series A Preferred stockholders, as a separate series, are
entitled to elect two directors of the Company.

         The Company allocated the proceeds from the first closing to the 2001
Series A Preferred, warrants to purchase Common stock, and Common stock sold by
a founder based on the relative fair values of each instrument. The fair value
of the warrants issued in the first closing was determined based on the
Black-Scholes option-pricing model using a life of five years, a volatility of
100% and a risk-free interest rate of 4.529%. Accordingly, approximately
$1,802,000 of the 2001 Series A Preferred proceeds was allocated to the 2001
Series A Preferred, $338,000 was allocated to the warrants and $148,000 was
allocated to the shares of Common stock sold by the founder. The fair values of
the warrants and the Common stock have been recorded as Common stock on the
accompanying consolidated balance sheet as of December 31, 2001. After
considering the allocation of the proceeds based on the relative fair values, it
was determined that the 2001 Series A Preferred has a beneficial conversion
feature ("BCF") in accordance with Emerging Issues Task Force ("EITF") Issue No.
98-5, "Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios." The Company recorded the BCF
related to the first closing of approximately $980,000 as a discount to the 2001
Series A Preferred in the year ended December 31, 2001. The value of the BCF
will be recorded in a manner similar to a deemed dividend over the period from
the date of issuance to the earliest known date of conversion, August 30, 2002.
The Company allocated the proceeds from the second closing in the same manner as
discussed above. The fair value of the warrants issued in the second closing was
determined based on the Black-Scholes option pricing model using a life of five
years, a volatility of 100% and a risk free interest rate of 3.957%.
Approximately, $517,000 of the 2001 Series A Preferred proceeds from the second
closing was allocated to the 2001 Series A Preferred, $264,000 was allocated to
the warrants and $41,000 was allocated to the shares of Common stock sold by the
founder. The Company recorded a BCF related to the Second Closing of
approximately $397,000 as a discount to the 2001 Series A Preferred in the year
ended December 31, 2001. The value of the BCF will be recorded in a manner
similar to a deemed dividend over the period from the dates of issuance to the
earliest date of conversion, August 30, 2002. The Company recorded a deemed
dividend - BCF of $389,405 in the year ended December 31, 2001.

COMMON STOCK

         The Company has 50,000,000 authorized shares of no par value Common
stock. The Company had 7,546,984 shares outstanding as of December 31, 1999 and
15,990,947 shares outstanding as of December 31, 2000 and 20,390,947 shares
outstanding as of December 31, 2001.

                                      F-18
<PAGE>

         On November 1, 2001, the Company acquired all of the assets and assumed
substantially all the liabilities of NetReach Inc., a web hosting , web design
and web application development company headquartered in Ambler, Pennsylvania.
for 2,400,000 shares of the Company's Common stock valued at approximately
$2,232,000 (see Note 3).

         On March 14, 2001, the Company acquired Cybertech Wireless, Inc.
("Cybertech"), a provider of wireless broadband Internet services based in
Rochester, New York for 2,000,000 shares of the Company's Common stock valued at
approximately $1,800,000 (see Note 3).

         On February 7, 2000, the Company completed its initial public offering
of 4,000,000 shares of Common stock at a price of $12.00 per share raising net
proceeds of $42,947,878. Additionally, on March 7, 2000, the underwriters
exercised their over-allotment option for the purchase of an additional 600,000
shares at a price of $12.00 per share. The Company received net cash proceeds of
$6,696,000 from the exercise of the underwriter's over-allotment option.

         In May 1998, the Company purchased 5,787,610 shares of Common stock
from certain employee shareholders (the "Sellers") of the Company. Subsequently
in May 1998, the Company sold 1,000,000 shares to an investor. The Company
recorded the purchase from the Sellers as a purchase of treasury stock. Also, in
May 1998, the investor purchased a $3,050,000 note from the Company and received
a warrant to purchase 1,000,000 shares of Common stock and the Company issued
212,390 shares of Common stock to certain employees.

RESTRICTED COMMON STOCK

         In December 2000, the Company sold 1,000,000 shares of Common stock to
the Chief Executive officer of the Company (the "Holder") for $437,500, which
represented the fair market value of the shares on the sale date, in exchange
for a note receivable (the "Note"). The Note bears interest at 6% per year. The
Note and accrued interest are due on December 1, 2005. The Note is secured by a
pledge of the Company's Common stock sold by the Company and held by the Holder
for $328,125 of the Note amount and the balance of $109,375 is secured by the
Holder's personal assets. The Note is reflected in shareholders' equity on the
accompanying consolidated balance sheets as a Note receivable on Common stock.

         The shares issued to the Holder are restricted and vest as follows: 25%
vest upon the date of issuance and the remaining shares vest pro rata as of the
last day of each calendar month over the 36-month period commencing on the date
of the Note. In the event the Holder's employment with the Company is terminated
for any reason, the Holder shall offer to sell all unvested shares to the
Company for the amount paid by the Holder for the shares plus accrued interest
(as defined) in the Note agreement. In the event of a change in control, as
defined, 50% of the holder's unvested shares shall become vested.

COMMON STOCK OPTIONS

         In March 1999, the Company approved the 1999 Equity Compensation Plan
(the "1999" Plan). The 1999 Plan provides for the issuance of up to 1,000,000
shares of Common stock for incentive stock options ("ISOs"), nonqualified stock
options ("NQSO's") and restricted shares. ISOs are granted with exercise prices
at or above fair value as determined by the Board of Directors. NQSOs are
granted with exercise prices determined by the Board of Directors. Each option
expires on such date as the Board of Directors may determine, generally ten
years. In June 2000, the Company's shareholders approved an amendment to the
1999 Plan to change the name of the 1999 Plan to the Equity Compensation Plan
("the Plan") and increase the number of shares available for issuance under the
Plan to 3,000,000 shares of Common stock. In June 2001, the Company's
shareholders approved an amendment to the Plan to increase the number of shares
available for issuance under the Plan to 4,000,000 shares of Common stock.

         The Company applies APB Opinion No. 25 and the related interpretations
in accounting for options issued to employees and directors under the Plan.
Accordingly, compensation expense is recognized for the intrinsic value (the
difference between the exercise price and the fair value of the Company's Common
stock) on the date of grant. Compensation, if any, is deferred and charged to
expense over the respective vesting period. In May and June 1999, the Company
issued options to purchase 110,000 and 3,000 shares of Common stock,
respectively for $2.50 per share. At that time the fair value of the Company's
Common stock was deemed $7.13 per share. These options vest over periods ranging
from one to five years. In connection with these option grants, the Company
recorded deferred compensation of $532,450.

         On February 28, 2000, certain members of the Company's Board of
Directors were granted a total of 220,000 options to purchase Common stock. Of
these options, 20,000 vested immediately and the remaining 200,000 will vest
quarterly over a period of five years. The exercise price of these options was
$9.25 per share and the fair value of the Company's Common stock on the date of

                                      F-19
<PAGE>

grant was $12.44 per share. Accordingly, the Company recorded deferred
compensation of $701,800. Additionally, during February 2000, the Company
granted 53,491 options to purchase Common stock to certain employees at an
exercise price of $9.25 per share and the fair value of the Common stock on the
date of grant was $14.69 per share. Accordingly, the Company recorded deferred
compensation of $290,993. These options generally vest over a five-year term.

         Compensation expense recorded from the amortization of the deferred
compensation was $145,345, $331,243 and $168,301 for the years ended December
31, 2001, 2000 and 1999, respectively. As a result of the termination of
employees, $294,072 and $228,285 of the unamortized balance of deferred
compensation was reversed in the years ended December 31, 2001 and 2000.

         Under SFAS No. 123 compensation cost related to stock options granted
to employees is computed based on the fair value of the stock option at the date
of grant using an option valuation methodology, typically the Black-Scholes
option pricing model. SFAS No. 123 can be applied either by recording the fair
value of the options or by continuing to record the APB No. 25 value and
disclosing the SFAS No. 123 impact on a pro forma basis. The Company has elected
the disclosure method of SFAS No. 123. Had compensation cost of the Plan been
determined based upon the fair value of the options at the date of grant, as
prescribed under SFAS No. 123, the Company's net loss and net loss per Common
share for the years ended December 31, 2001, 2000 and 1999 would have increased
as follows:

<TABLE>
<CAPTION>
                                                                     FOR THE YEAR ENDED DECEMBER 31,
                                                                     -------------------------------
                                                                 2001            2000             1999
                                                                 ----            ----             ----
<S>                                                         <C>             <C>             <C>
Net loss to applicable common shareholders - as reported    $ (8,929,568)   $(31,140,920)   $  (5,601,071)
Net loss - pro forma                                        $ (9,542,501)   $(32,232,934)   $  (5,897,935)
Basic and diluted net loss per Common share - as reported   $      (0.51)   $      (2.20)   $       (0.77)
Basic and diluted net loss per Common share- pro forma      $      (0.55)   $      (2.27)   $       (0.82)
</TABLE>

         The weighted average fair value of options granted during 2001, 2000
and 1999 is estimated at $0.64, $1.51 and $2.11 per share, respectively. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:

                                              FOR THE YEAR ENDED DECEMBER 31,
                                              -------------------------------
                                              2001           2000         1999
                                              ----           ----         ----
Expected life                              6.0 years      6.0 years    6.0 years
Risk-free interest rate                      4.95%          6.48%        5.55%
Volatility                                 100.0 %        100.0 %       70.0 %
Dividend rate                                  0 %            0 %          0 %

         Information with respect to outstanding options under the Plan is as
follows:

                                                       AGGREGATE     PRICE PER
                                          SHARES         PRICE         SHARE
                                       ------------   ------------  ------------

       Plan inception, March 1, 1999            --    $        --   $        --
            Granted .................      585,000      1,105,100    1.50-7.13
                                       ------------   ------------  ------------
       Outstanding, December 31, 1999      585,000      1,105,100    1.50-7.13
            Granted .................    1,397,750      4,204,208    0.56-13.58
            Exercised ...............       (2,000)        (3,000)        1.50
            Cancelled ...............      (10,000)       (23,000)   1.50-2.50
                                       ------------   ------------  ------------

       Outstanding, December 31, 2000    1,970,750      5,283,308    0.56-$13.58
            Granted .................    1,128,800        918,200    0.75-0.97
            Cancelled ...............     (839,550)    (1,604,743)   0.75-13.58
                                       ------------   ------------  ------------

       Outstanding, December 31, 2001  $ 2,260,000    $ 4,596,765    $ 0.56-9.25
                                       ============   ============  ============

                                      F-20
<PAGE>

         As of December 31, 2001, there were 1,738,000 options available for
grant under the plan.

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

<TABLE>
<CAPTION>
                                                         OPTIONS OUTSTANDING                OPTIONS EXERCISABLE
                                                  ---------------------------------  ---------------------------------
                                                     WEIGHTED           WEIGHTED                          WEIGHTED
                                                     AVERAGE            AVERAGE                           AVERAGE
              RANGE OF EXERCISE       NUMBER         REMAINING          EXERCISE          NUMBER          EXERCISE
                   PRICES          OUTSTANDING         LIFE              PRICE         EXERCISABLE          PRICE
              -----------------   --------------  ---------------  ----------------  ---------------  ----------------
<S>                                   <C>                  <C>     <C>                       <C>      <C>
                $0.56 - $0.75           793,500            9.17    $          0.69           75,000   $          0.56
                $0.82 - $0.97           288,000            9.84               0.87          150,000              0.84
                $1.13 - $1.50           833,500            8.03               1.31          571,000              1.40
                        $2.50            12,000            7.43               2.50            4,800              2.50
                        $4.75            80,000            8.31               4.75           16,000              4.75
                        $5.81             1,500            8.38               5.81              300              5.81
                        $7.13            20,000            7.64               7.13           20,000              7.13
                        $9.25           231,500            8.18               9.25           92,300              9.25
                                  --------------  ---------------  ----------------  ---------------  ----------------
                                      2,260,000            8.68    $          2.03          929,400   $          2.21
                                  ==============  ===============  ================  ===============  ================
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN

         In June 2001, the Company's shareholders approved the adoption of the
2001 Employee Stock Option Purchase Plan ("2001 ESPP"). The 2001 ESPP covers a
maximum of 400,000 shares of Common stock for subscription over established
offering periods. The purchase price for stock purchased under the 2001 ESPP for
each subscription period is the lesser of 85% of the fair market value of a
share of Common stock at the commencement of the subscription period or 85% of
the fair market value of a share of Common stock at the close of the
subscription period. As of December 31, 2001, 2.944 shares of Common stock were
subscribed through one offering. These shares may be purchased over 6 months at
an initial subscription price of $0.81 per share.

WARRANTS

         In May 1998, the Company issued a warrant to an investor to purchase
1,000,000 shares of Common stock at an exercise price of $1.50 per share. This
warrant is currently exercisable and expires in May 2005.

         In October 2000, the Company issued a warrant to purchase 120,000
shares of Common stock to the Financial Advisor for professional services
rendered at an excise price of $1.625 per share. This warrant is currently
exercisable and expires on October 23, 2003.

         In January 2000, the Company issued a warrant to purchase 30,000 shares
of Common stock at an exercise price of $12.00 per share in conjunction with the
bridge financing (see Note 8). The warrant is currently exercisable and expires
in January 2007.

         In September and November 2001, the Company issued warrants to purchase
a total of 626,605 and 224,968 shares of the Company's Common stock,
respectively at an exercise price of $1.27 in conjunction with the sale of 2001
Series A Preferred to two investors and the issuance of 2001 Series A Preferred
in exchange for professional services rendered (see Note 9). The warrants
expired in 2006.

         In conjunction with the NetReach Notes, there are warrants to purchase
a total of $52,140 shares of Common stock outstanding at December 31, 2001 with
exercise prices ranging from $1.89 to $7.57.

         In December 2001, the Company issued a warrant to purchase 750,000
shares of the Company's Common stock at an exercise price of $0.45 per share in
conjunction with the settlement of several capital lease obligations (see Note
10). The value of the warrant was determined to be approximately $544,000 using
the Black-Scholes option pricing model with the following assumptions: expected
life of 3 years, a risk free interest rate of 3.784%, volatility of 100% and a
dividend rate of 0%. The warrant expires in January 2005.

                                      F-21
<PAGE>

10.  INCOME TAXES:

         At December 31, 2001, the Company had a net operating loss carry
forward for federal income tax purposes of approximately $39.3 million. The net
operating loss carryforward will begin to expire in 2010. The Company's
utilization of its loss carry forward could be limited pursuant to the Tax
Reform Act of 1986, due to cumulative changes in ownership in excess of 50%.

         The Company has a net deferred tax asset primarily related to the net
operating loss carryforward and temporary differences between the financial
reporting and tax accounting treatment of certain expenses. Due to the Company's
history of operating losses, the realization of the deferred tax asset is
uncertain. Therefore, the Company has provided a full valuation allowance
against the net deferred tax asset as of December 31, 2001.

         The tax effect of temporary differences as established in accordance
with SFAS No. 109 that give rise to deferred income taxes are as follows:

<TABLE>
<CAPTION>
                                                                       December 31,
                                                                       ------------
                                                                   2001            2000
                                                               -------------   -------------
<S>                                                            <C>             <C>
         Deferred tax assets:
              Net operating loss carryforwards .............   $ 15,574,000    $ 12,995,000
              Stock based compensation .....................        219,000         170,000
              Accruals and reserves currently not deductible      1,437,000       1,822,000
              Intangibles ..................................         47,000           8,000
                                                               -------------   -------------
                                                               $ 17,277,000    $ 14,995,000
         Deferred tax liability:
              Fixed assets .................................       (311,000)     (1,084,000)
         Net deferred tax asset ............................     16,966,000      13,911,000
         Valuation allowance ...............................    (16,966,000)    (13,911,000)
                                                               -------------   -------------
                                                               $         --              --
                                                               =============   =============
</TABLE>

11.      COMMITMENTS AND CONTINGENCIES:

LEASE ARRANGEMENT SETTLEMENTS

         During the first quarter of 2000, the Company received a credit line of
$3,000,000 from a vendor to purchase equipment. In April 2000, the same vendor
added a second credit facility of $5,000,000 to the original credit facility.
These credit facilities are used to secure computer-related equipment under
three-year capital leases. In December of 2001, the Company entered into a
settlement agreement with the vendor to transfer the title of all equipment
financed under the capital lease obligations to the Company and to settle the
entire principal balance of the capital lease obligations for a payment of
$1,600,000 in January 2002 and a warrant to purchase 750,000 shares of the
Company's Common stock. An extraordinary gain on the extinguishment of debt, net
of related costs in the amount of $4,006,049 was recorded in the year ended
December 31, 2001.

         In June 1999, the Company entered into a $20,000,000 master equipment
lease agreement with an equipment vendor. Leases under the agreement are payable
in three monthly installments of 0.83% of the value of the equipment leased and
33 monthly installments of 0.0345% of the value of the equipment leased. Capital
lease obligations related to the credit facilities as of June 30, 2001 totaled
$4.1 million. In August 2001, the Company signed an agreement with the lender to
settle the capital lease obligations. Pursuant to the agreement, the Company
made a $2,000,000 payment in August 2001 to the vendor to settle the entire
principal balance of capital lease obligations under the credit facilities.
Additionally, the vendor transferred title of the equipment leased under the
capital lease obligations to the Company. An extraordinary gain on the
extinguishment of debt, net of related costs, in the amount of $1,630,328 was
recorded in the year ended December 31, 2001.

         The Company leases office space, telecommunications services and
equipment under capital and operating leases expiring through 2010. Rent expense
under the operating leases was $1,697,370, $1,766,647, and $1,027,502 and during
the years ended December 31, 2001, 2000 and 1999, respectively. The interest
rates implicit in the capital leases range from 10.5% to 22.2%. Future minimum
lease payments as of December 31, 2001, are as follows:

                                      F-22
<PAGE>

                                                     CAPITAL       OPERATING
                                                     LEASES          LEASES
                                                 --------------  --------------
         2002 ...............................        1,966,741       1,808,933
         2003 ...............................           32,520       1,473,183
         2004 ...............................               --       1,499,028
         2005 ...............................               --       1,177,935
         2006................................               --         341,014
         Thereafter .........................               --       1,300,443
                                                 --------------  --------------
         Total minimum lease payments .......        1,999,261   $   7,600,652
                                                 ==============  ==============
         Less - Current portion .............        1,966,741
                                                 --------------
                                                 $      32,520
                                                 ==============

         From time-to-time, the Company is involved in certain legal actions
arising in the ordinary course of business. In management's opinion, based on
the advice of counsel, the outcome of such actions is not expected to have a
material adverse effect on the Company's future financial position or results of
operations.

12.      RELATED PARTY TRANSACTIONS

         In June 1999, the Company entered into a financial arrangement, as
amended, with the Financial Advisor, who is an affiliate of a significant
shareholder. This agreement provided for a payment of $320,000 due to the
Financial Advisor on February 1, 2001 related to the private placement of
securities, and a $500,000 payment due upon the earlier of the consummation of
an initial public offering or February 1, 2001. This $500,000 payment is related
to general strategic and advisory services rendered during the three months
ended September 30, 1999. The $500,000 was repaid in March 2000. The $320,000
remains unpaid as of December 31, 2001.

         In January 2000, the Company received a $1,000,000 promissory note from
the Financial Advisor. This promissory note was repaid upon the consummation of
the initial public offering (see Notes 8 and 9).

         In October 2000, the Company issued a $250,000 convertible note and a
warrant to purchase 120,000 shares of Common stock an advisor who is an
affiliate of a significant shareholder (the "Financial Advisor") for
professional services rendered.

         In November 2001, the Company issued 109,589 shares of 2001 Series A
Preferred and 27,397 warrants to purchase Common stock to a legal firm used by
the Company in exchange for $100,000 of professional services rendered. The
Company paid the firm approximately $398,000 in the year ended December 31,
2001.

         During 2001, the Company paid $35,000 to "A Meeting Place" for
professional services related to marketing, advertising and special events. The
owner of "A Meeting Place" is the wife of the CEO and President of the Company.

         The Company has $395,000 of NetReach Notes due to the Landlord of one
of the Company's facilities. The Company paid the landlord an immaterial amount
in the period from the date of the NetReach acquisition to December 31, 2001.
Additionally, the Landlord has warrants to purchase 18,420 shares of Common
stock at exercise prices of $7.57 and $3.78.

         In the year ended December 31, 2001, the Company advanced $202,000
funds to several executives of the Company. All of the executives signed
promissory notes bearing interest at 3.75 percent. The promissory notes may be
repaid in full or though 18 monthly payments to begin in April 2002. The
executives repaid $58,000 of the promissory notes in the year ended December 31,
2001.

                                      F-23
<PAGE>

13.      RETIREMENT SAVINGS PLAN:

         In 1999, the Company established a defined contribution 401(k)
retirement savings plan, which covers substantially all employees. Employees
become eligible to participate in the plan upon completion of three months of
employment. Employees may elect to contribute up to 15% of their annual
compensation up to the maximum allowable under the Internal Revenue Code. The
Company matches $0.50 on every $1.00 up to the first 6% of the employee
contributions. The Company made contributions of $87,885, $92,823 and $72,036 in
2001, 2000 and 1999, respectively.

14.      UNAUDITED SELECTED QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER
         SHARE DATA):

<TABLE>
<CAPTION>
                                             2001                                           2000
                        ---------------------------------------------   ---------------------------------------------
                           1ST         2ND         3RD         4TH         1ST         2ND         3RD         4TH
                         QUARTER     QUARTER     QUARTER     QUARTER     QUARTER     QUARTER     QUARTER     QUARTER
                        ---------   ---------   ---------   ---------   ---------   ---------   ---------   ---------
<S>                     <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
Revenues ............   $  3,660    $  4,043    $  3,630    $  3,961    $  3,030    $  3,169    $  3,225    $  3,236
Operating expenses ..      7,675       7,876       6,676       7,202       7,180       9,305      11,465      16,754
Operating loss ......     (4,015)     (3,833)     (3,046)     (3,241)     (4,150)     (6,136)     (8,240)    (13,518)
Other income
    (expense) .......         49         (72)        (11)         (7)        (73)        560         354          62
Net income (loss)  ..     (3,966)     (3,905)     (1,516)        457      (4,223)     (5,576)     (7,886)    (13,456)
Basic and diluted net
     income (loss)
     per Common share      (0.25)      (0.23)      (0.09)       0.06       (0.36)      (0.37)      (0.53)      (0.90)
</TABLE>

                                                         F-24
<PAGE>

<TABLE>
                       FASTNET CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING
                        ACCOUNTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2001
<CAPTION>

                                                                    ADDITIONS
                                                          ------------------------------
                                           BALANCE AT      CHARGED TO       CHARGED TO
                                          BEGINNING OF       COSTS            OTHER                          BALANCE AT
DESCRIPTION                                   YEAR        AND EXPENSES       ACCOUNTS        DEDUCTIONS      END OF YEAR
-----------                               ------------    ------------    --------------    ------------     ------------
<S>                                       <C>             <C>             <C>               <C>              <C>
For the year ended December 31, 1999:
     Allowance for doubtful accounts      $    17,187     $    41,591     $          --     $    (9,390)     $    49,388
                                          ============    ============    ==============    ============     ============

For the year ended December 31, 2000:
     Allowance for doubtful accounts      $    49,388     $   727,589     $          --     $        --      $   776,977
                                          ============    ============    ==============    ============     ============

        Restructuring Reserve .......     $        --     $ 5,159,503     $          --     $(1,113,860)     $ 4,045,643
                                          ------------    ------------    --------------    ------------     ------------
For the year ended December 31, 2001:
     Allowance for doubtful accounts      $   776,997     $   293,151     $     338,474     $  (273,224)     $ 1,135,398
                                          ============    ============    ==============    ============     ============
     Restructuring reserve ..........     $ 4,045,643     $ 1,335,790     $          --     $(3,609,316)     $ 1,772,117
                                          ============    ============    ==============    ============     ============
</TABLE>

                                                          F-25
<PAGE>

                                   SIGNATURES

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

FASTNET Corporation

Date: April, 1, 2002                     By:  /s/ Stephen A. Hurly
                                              ----------------------------------
                                              Stephen A. Hurly
                                              Chief Executive Officer

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

Each person whose signature appears below in so signing also makes, constitutes
and appoints Stephen A. Hurly his true and lawful attorney-in-fact, in his name,
place and stead to execute and cause to be filed with the Securities and
Exchange commission any and all amendments to this report.

Date:  April 1, 2002        By:  /s/ Stephen A. Hurly
                                 ----------------------------------------------
                                 Stephen A. Hurly
                                 Chief Executive Officer, President and Director
                                 (Principal Executive Officer)

Date:  April 1, 2002        By:  /s/ Stanley F. Bielicki
                                 ----------------------------------------------
                                 Stanley F. Bielicki
                                 Chief Financial Officer
                                 (Principal Financial & Accounting Officer)

Date:  April 1, 2002        By:  /s/ Bruce H. Luehrs
                                 ----------------------------------------------
                                 Bruce H. Luehrs
                                 Director

Date:  April 1, 2002        By:  /s/ Sonny C. Hunt
                                 ----------------------------------------------
                                 Sonny C. Hunt
                                 Director

Date:  April 1, 2002        By:  /s/ Douglas L. Michels
                                 ----------------------------------------------
                                 Douglas L. Michels
                                 Director

Date:  April 1, 2002        By:  /s/ Britton H. Murdoch
                                 ----------------------------------------------
                                 Britton H. Murdoch
                                 Director

Date:  April 1, 2002        By:  /s/ R. Barry Borden
                                 ----------------------------------------------
                                 R. Barry Borden
                                 Director

Date:  April 1, 2002        By:  /s/ Alan S. Kessman
                                 ----------------------------------------------
                                 Alan S. Kessman
                                 Director

                                       35
<PAGE>

EXHIBIT
NUMBER                            DESCRIPTION
------                            -----------

3.1*     Amended and Restated Articles of Incorporation of the Registrant.

3.2+     Third Amended and Restated Bylaws of the Registrant.

3.3@     Statement with respect to shares fixing rights Preferences and Terms of
         the Series A Convertible Preferred Stock of FASTNET Corporation

10.1**   Equity Compensation Plan of the Registrant.

10.2*    Investor Rights Agreement between the Registrant and the investors
         listed on Exhibit A thereto, dated August 3, 1999.

10.5*    Agreement between UUNET Technologies, Inc. and the Registrant, dated
         August 11, 1999.

10.7*    Colocation License by and between Switch and Data Facilities Site Two,
         L.P. and the Registrant, dated January 1, 1999.

10.8*    Commercial Lease Agreement by and between RB Associates and the
         Registrant, dated July 22, 1998.

10.9*    Lease Agreement between Holland Center, L.L.C. and the Registrant,
         dated June 15, 1999.

10.11*   Master Lease Agreement between Sunrise Leasing Corporation (Cisco
         Systems, Inc.) and the Registrant, dated October 23, 1997.

10.13*   Master Lease Agreement between Sun Microsystems, Inc. and the
         Registrant, dated February 21, 1997.

10.15*   Service Agreement between Service Electric Cable TV, Inc. and the
         Registrant, dated as of May 12, 1999.

10.16*   Agreement between NEXTLINK Pennsylvania, Inc. and the Registrant, dated
         June 25, 1999.

10.17*   Service Agreement between Hyperion Communications of New Jersey, LLC
         and the Registrant, dated May 12, 1999.

10.20*   Form of Agreement between Focal Communications Corporation and the
         Registrant.

10.22*   Common Stock Warrant Purchase Agreement by and among the Registrant and
         H&Q You Tools Investment Holding, L.P., dated May 28, 1998.

10.24*   Master Lease Agreement between Sunrise Leasing Corporation (Cisco
         Systems, Inc.) and the Registrant, dated November 3, 1999.

10.25*   Agreement between Hambrecht & Quist LLC and the Registrant, dated June
         29, 1999 and an amendment dated December 7, 1999.

10.26*   Agreement between Covad Communications Company and the Registrant,
         dated December 3, 1999.

10.27*   Lease Agreement between 65 Public Square Associates and the Registrant,
         dated November 15, 1999.

10.28*   Agreement between UUNET Technologies, Inc. and the Registrant, dated
         December 14, 1999.

10.29*   Agreement between NEXTLINK Pennsylvania, Inc. and the Registrant, dated
         December 7, 1999.

10.30*   Agreement between NEXTLINK Pennsylvania, Inc. and the Registrant, dated
         October 19, 1999.

10.31*   Agreement between the ISK Magnetics, Inc. and the Registrant, dated
         January 6, 2000.

10.32*   Agreement between The Santa Cruz Operation Inc. and the Registrant,
         dated December 30, 1999.

10.33#   Employment Agreement between the Registrant and Stephen A. Hurly, dated
         December 15, 2000.

10.34#   Promissory Note and Restricted Stock Agreement executed by Stephen A.
         Hurly, dated as of December 15, 2000.

                                       36
<PAGE>

10.35**  Employee Stock Purchase Plan.

10.36    Loan Agreement and related Security Agreement and Promissory Note
         between the Registrant and First Union National Bank.

10.37    Investor Rights Agreement, dated September 5, 2001, by and among the
         Registrant and the holders of Series A Convertible Preferred Stock as
         signatories thereto.

10.38    Shareholders Agreement, dated September 5, 2001, by and among the
         Registrant and the holders of Series A Convertible Preferred Stock as
         signatories thereto.

21.1     Subsidiaries of the Registrant.

23.2     Consent of Arthur Andersen LLP (Independent Public Accountants).

24.1     Power of Attorney (Contained on the signature page of this Annual
         Report on Form 10-K).

99.1     Letter responsive to Temporary Note 3T to Article 3 of Regulation S-X.

--------------------
*        Incorporated by reference from the Registration Statement on Forms S-1
         of the Registrant (Registration No. 333-85465) filed with the
         commission on August 18, 1999, as amended.

#        Incorporated by reference from the Current Report on Form 8-K dated
         December 15, 2001.

+        Incorporated by reference from the Registration Statement on Form S-8
         of the Registrant (Registration No. 333-43088) filed with the
         Commission on August 4, 2000.

**       Incorporated by reference from the Registrants 2001 Proxy Statement
         filed with the Commission on April 30, 2001

+        Incorporated by reference from the Registrants Form 10-K for the year
         ended December 31, 2000 filed with the Commission on April 2, 2001.

@        Incorporated by reference from the Registrants proxy statement filed
         with the Commission on October 18, 2001.

The Company filed a current report on Form 8-K dated January 31, 2001 and
September 5, 2001

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