AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 7, 2000

REGISTRATION NO.
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- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

COOPERATIVE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 4813 22-3713227
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)

------------------------
412-420 WASHINGTON AVENUE,
BELLEVILLE, NEW JERSEY 07109
(973) 759-8100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
LOUIS A. LOMBARDI, SR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COOPERATIVE HOLDINGS, INC.
412-420 WASHINGTON AVENUE
BELLEVILLE, NEW JERSEY 07109
(973)759-8100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:

DAVID J. SORIN
WILLIAM J. THOMAS
BUCHANAN INGERSOLL PROFESSIONAL CORPORATION
650 COLLEGE ROAD EAST
PRINCETON, NEW JERSEY 08540
(609) 987-6800
BARRY M. ABELSON
MICHAEL P. GALLAGHER
PEPPER HAMILTON LLP
EIGHTEENTH AND ARCH STREETS
3000 TWO LOGAN SQUARE
PHILADELPHIA, PENNSYLVANIA 19103-2799

(215) 981-4000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
------------------

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------

CALCULATION OF REGISTRATION FEE

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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
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Common Stock, $0.01 par value per share..................... $82,800,000 $21,859.20
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
2

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed. These
securities may not be sold nor may offers to buy be accepted prior to the
time the registration statement becomes effective. This prospectus shall
not constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any State in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.

SUBJECT TO COMPLETION, DATED APRIL 7, 2000

PROSPECTUS

[COOPERATIVE HOLDINGS, INC. LOGO]
COOPERATIVE HOLDINGS, INC.

COMMON STOCK

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

This is the initial public offering of common stock by Cooperative
Holdings, Inc. We are selling shares of our common stock and a selling
stockholder is selling shares of common stock for a total of
shares of common stock. We will not receive any of the proceeds from the sale of
shares by the selling stockholder.

There is currently no public market for our common stock. We currently
expect that the initial public offering price will be between $ and
$ per share, and have applied to have our common stock included for
quotation on the Nasdaq National Market under the symbol "CCII."

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

SEE "RISK FACTORS" BEGINNING ON PAGE 7 TO READ ABOUT RISKS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.

Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

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

PER SHARE TOTAL
--------- -------

Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds to Cooperative (before expenses)................... $ $
Proceeds to selling stockholder............................. $ $

The underwriters may also purchase up to additional shares of
common stock from the selling stockholder at the initial public offering price,
less the underwriting discount, to cover over-allotments.

Delivery of the shares will be made on or about , 2000.

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

PENNSYLVANIA MERCHANT GROUP ROTH CAPITAL PARTNERS, INC.

Prospectus dated , 2000
3

"QuikSpeed," "Much More than Dial Tone" and "New Jersey's own
Telecommunications Company" are our servicemarks. All other trademarks or
servicemarks appearing in this prospectus are the trademarks or service marks of
their respective companies.
4

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this
prospectus. The summary may not contain all the information that you should
consider before investing in our common stock. This prospectus includes
forward-looking statements which involve risks and uncertainties. You should
carefully read the entire prospectus, especially "Risk Factors" beginning on
page 7 and our combined financial statements and related notes before deciding
whether to invest in our common stock. All references to "we," "us," or "our,"
in this prospectus mean Cooperative Holdings, Inc. and its wholly-owned
subsidiaries Cooperative Communications, Inc., Eastern Computer Services,
L.L.C., CPV Communications, Inc. and KDR Communications, Inc.

OUR COMPANY

DSL technology has emerged as a commercially viable, cost-effective means
of providing high-speed data transmission using an existing telecommunications
network. Industry sources have projected the United States small business market
for DSL will reach $2.3 billion by 2003. Our DSL service offers high-speed data,
voice, Internet and video connectivity. We began offering QuikSpeed on a limited
basis in September 1999 and are preparing to broadly introduce the service in
April 2000. As of March 15, 2000, we had 137 orders for DSL service and we had
installed the necessary DSL equipment for 100 of these orders.

In marketing our DSL service, we believe we have several competitive
advantages over our current and potential competitors, particularly those who do
not currently offer local and long distance services. These include:

- our ability to offer one-stop services for voice, including local and
long distance, and data, all on a single bill;

- our ten years of providing superior customer service to small and
medium-sized businesses, as evidenced by our low customer turnover or
churn rate which has averaged 4.7% over the last three years;

- our in-depth knowledge of our geographic market, including our long-term
relationship with our customers;

- our ability to offer Virtual Private Network, or VPN, functionality for
voice and data transmission;

- our QuikSpeed DSL service permits voice over DSL, creating a lower cost
solution to our customers, and does not require our customers to have
their own Internet service provider, or ISP;

- our ability and willingness to offer customized application-oriented
solutions to our small and medium-sized business customers, including
700 directory assistance, sales tracking, specialized billing formats
and call blocking; and

- our interconnection agreement with Bell Atlantic for New Jersey.

Our Centrex voice service network currently interfaces with 70 Bell
Atlantic central offices in New Jersey. Where we do not have collocation
facilities, we will install DSLAMs, ATM switches and test
5

equipment in leased facilities which we will connect to the central office. In
March 2000, we entered into an interconnection agreement with Bell Atlantic
which allows us to collocate our networking equipment in Bell Atlantic central
offices in each local area in which we operate in New Jersey, providing a direct
connection between us and our customers. We expect to have approximately 20
collocations operational by December 31, 2000. This agreement further enables us
to provide fully operational local and toll service. We believe that pursuing a
"smart-build" strategy, whereby we own more of the network elements, while
continuing to lease transmission lines, will allow us to generate higher
operating margins, obtain origination and termination fees from other carriers
and maintain greater control over our network operations and service quality.

We believe that small and medium-sized businesses have significant and
increasing needs for advanced telecommunications services which have been
generally neglected by the incumbent local exchange carriers. We seek to meet
these needs by offering customized solutions, integrated telecommunications
services and our QuikSpeed DSL services all on a single bill. Many of our target
customers want customized solutions but do not have the internal expertise to
design, purchase and maintain these kinds of systems and services themselves.

We believe that superior customer service is critical to attracting and
retaining customers. We continually seek to enhance our service approach, which
utilizes a highly trained team of customer sales and service representatives to
coordinate customer installation, billing and service. Our information systems
provide integrated functionality for all aspects of our business. Our
experienced customer care representatives provide 24x7 customer support. Our
superior track record for customer service is evidenced by our low customer
churn rate, which has averaged 4.7% over the last three years.

We plan to be a leading one-stop provider of voice, data and Internet
telecommunications services in the Bell Atlantic footprint starting with New
Jersey, Pennsylvania, New York, Massachusetts and portions of Connecticut.
Elements of our strategy to meet this objective include:

- implementing a rapid DSL roll-out;

- offering our customers one-stop shopping;

- maximizing speed to market through our smart-build strategy;

- focusing on the small and medium-sized business market;

- building market share by focusing on direct sales; and

- providing superior customer service.

2
6

THE OFFERING

Common Stock offered by
Cooperative......................... shares

Common Stock offered by the selling
stockholder....................... shares

Total............................... shares

Common Stock to be outstanding after
the offering........................ shares

Proposed Nasdaq National Market
symbol.............................. "CCII"

Use of proceeds..................... We intend to use the net proceeds from
this offering to fund:

- capital expenditures in connection
with our planned roll-out of DSL
service and planned expansion of
our network, including the
installation of DSL equipment in
central offices, the acquisition
of DSL modems to lease to
customers and the purchase of ATM
switches;

- the acquisition of rights for
collocation of our equipment with
Bell Atlantic and other service
providers;

- the enhancement of our network to
enable us to provide additional
value-added services;

- the hiring of direct sales
personnel and expansion of our
marketing efforts;

- the improvement of our network
management, billing and other back
office systems; and

- working capital and general
corporate purposes, including
possible future acquisitions or
strategic investments.

Risk factors........................ Investing in the common stock involves
certain risks. See "Risk Factors."

The number of shares of common stock to be outstanding after this offering
is based on the shares outstanding as of February 29, 2000 and does not
include:

- 3,540,000 shares of common stock authorized for issuance under our 2000
Stock Plan, 1,029,047 of which will be outstanding upon the consummation
of this offering at exercise prices equal to the initial public offering
price; and

- 30,000 shares of common stock issuable upon exercise of an outstanding
non-plan option as of the date of this prospectus at an exercise price of
$0.01 per share.

Unless otherwise noted, all information in this prospectus:

- assumes the underwriters will not exercise their option to purchase
additional shares of common stock to cover over-allotments, if any; and

- gives effect to the reorganization of Cooperative Communications, Inc.
and Eastern Computer Services, L.L.C. as wholly-owned subsidiaries of
Cooperative Holdings, Inc. in March 2000.

3
7

CORPORATE INFORMATION AND REORGANIZATION

In February 2000, Cooperative Holdings, Inc. was incorporated in Delaware
and in March 2000 each of the security holders of Cooperative Communications,
Inc. and Eastern Computer Services, L.L.C. exchanged or contributed all of their
outstanding securities for newly issued securities of Cooperative Holdings, Inc.
with equal rights and preferences. As a result of this reorganization,
Cooperative Communications, Inc. and Eastern Computer Services, L.L.C. became
wholly-owned subsidiaries of Cooperative Holdings, Inc. CPV Communications, Inc.
and KDR Communications, Inc. are wholly-owned subsidiaries of Cooperative
Communications, Inc. Cooperative Communications, Inc., the operating company,
was incorporated in New Jersey in 1990. Eastern Computer Services, L.L.C. was
organized in New Jersey in 1995.

Our principal offices are located at 412-420 Washington Avenue, Belleville,
New Jersey 07109, and our telephone number is (973) 759-8100. We maintain a
website at www.cooperativenet.com. Any references to our website do not
incorporate by reference the information contained at our website into this
prospectus, and the only information that you should rely on in making your
decision whether to invest in our common stock is the information contained in
this prospectus.

All of the historical financial information in this prospectus reflects the
combined operations of our wholly-owned subsidiaries, Cooperative
Communications, Inc. and Eastern Computer Services, L.L.C. Prior to the
formation of Cooperative Holdings, Inc. and the reorganization, all of our
operating activities were conducted through Cooperative Communications Inc. and
Eastern Computer Services L.L.C.

4
8

SUMMARY COMBINED FINANCIAL DATA

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

You should read the summary selected combined financial data together with
our combined financial statements and related notes and the sections of this
prospectus entitled "Capitalization" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

SIX MONTH PERIODS ENDED
YEAR ENDED MAY 31, NOVEMBER 30,
------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1998 1999
----------- ----------- ------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)

COMBINED STATEMENT OF OPERATIONS
DATA:
Revenue.............................. $12,573 $20,474 $28,718 $37,200 $40,598 $20,441 $19,827
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Costs of revenue (excluding
depreciation and amortization)... 9,383 16,314 22,468 29,073 31,725 16,418 16,382
Selling, general and administrative
expenses......................... 2,869 4,736 5,957 7,286 8,222 3,956 3,853
Depreciation and amortization...... 46 194 333 455 780 356 389
Stock based compensation........... -- -- 840 -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total operating expenses......... 12,298 21,244 29,598 36,814 40,727 20,730 20,624
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations.... 275 (770) (880) 386 (129) (289) (797)
Other income (expense), net.......... (27) (78) (61) 92 109 38 (269)
------- ------- ------- ------- ------- ------- -------
Income (loss) before income tax
expense.......................... 248 (848) (941) 478 (20) (251) (1,066)
Income tax expense (benefit)....... 100 (215) 128 195 98 98 --
------- ------- ------- ------- ------- ------- -------
Net income (loss)(1)............... $ 148 $ (633) $(1,069) $ 283 $ (118) $ (349) $(1,066)
======= ======= ======= ======= ======= ======= =======
Pro forma information:
Historical loss before income tax
expense (benefit)................ $ (20) $(1,066)
Pro forma income tax expense
(benefit) (unaudited)(2)......... 200 (350)
------- -------
Pro forma net loss (unaudited)..... $ (220) $ (716)
======= =======
Pro forma net loss per common share
(unaudited)(3):
Basic............................ $ $
Diluted.......................... $ $
======= =======
Pro forma weighted average common
shares outstanding
(unaudited)(4):
Basic............................
Diluted..........................
======= =======

(2) Pro forma income tax expense (benefit) gives effect to the change of Eastern
from a limited liability company to a tax paying entity as though this event
occurred as of June 1, 1998.

(3) Pro forma basic net loss per common share is computed by dividing pro forma
net loss by the pro forma weighted average common shares outstanding assuming
Cooperative Holdings, Inc. was formed on June 1, 1998. Pro forma diluted net
loss per common share is calculated in a manner consistent with pro forma basic
net loss per common share except that it also includes the dilutive effect of an
option granted in fiscal 1997 to acquire 30,000 shares of our common stock at a
nominal value.

(4) Pro forma weighted average common shares outstanding reflects all of our
issued and outstanding shares of common stock and gives effect to the
reorganization of Cooperative Communications, Inc. and the exchange of all of
its common stock for shares of our common stock. Diluted pro forma weighted
average common shares outstanding includes the option described in footnote 3
above.

5
9

The following table provides selected combined balance sheet data. The as
adjusted column reflects the sale by us of shares offered hereby,
assuming an initial public offering price of $ per share, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us.

NOVEMBER 30, 1999
MAY 31, ------------------------
1999 ACTUAL AS ADJUSTED
------- ------- -----------
(UNAUDITED)

COMBINED BALANCE SHEET DATA:
Cash and cash equivalents................................. $7,180 $ 2,327 $
Working capital (deficit)................................. 470 (1,516)
Total assets.............................................. 19,131 15,105
Stockholders' and members' deficit........................ (1,630) (2,696)

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements concerning our
operations, performance and financial condition, including our future economic
performance, plans and objectives and the likelihood of success in developing
and expanding our business. These statements are based upon a number of
assumptions and estimates which are subject to significant uncertainties, many
of which are beyond our control. The words "may," "would," "could," "will,"
"expect," "anticipate," "believe," "intend," "plan," "estimate" and similar
expressions are meant to identify such forward-looking statements. Actual
results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include, but are not limited to, those set forth in "Risk Factors."

Readers are cautioned not to place undue reliance on these forward-looking
statements which reflect our views only as of the date of this prospectus. We
undertake no obligation to update such statements or publicly release the result
of any revisions to these forward-looking statements which we may make to
reflect events or circumstances after the date of this prospectus or to reflect
the occurrence of unanticipated events.

6
10

RISK FACTORS

You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones we face. Additional risks and uncertainties not presently known to us
or that we currently consider immaterial may also impair our operations. If any
of the following risks or uncertainties actually occur, our business, financial
condition and/or results of operations could be materially adversely affected.
In this case, the trading price of the common stock could decline, and you may
lose all or part of your investment.

Risks Related to Growth and New Service Offerings

CUSTOMERS MAY NOT ACCEPT US AS THEIR PROVIDER OF INTEGRATED TELECOMMUNICATIONS
SERVICES.

Our continued success will depend upon the willingness of customers to
accept us as a provider of integrated telecommunications services -- local, long
distance and data services, as well as new services, such as DSL. Some of our
competitors, such as Bell Atlantic, Covad, AT&T and Sprint, have greater
resources, name recognition and existing relationships with customers which may
provide them with a competitive advantage over us. We cannot assure you that we
will be accepted by customers and the failure to be accepted would adversely
affect us.

OUR LIMITED HISTORY AS A PROVIDER OF INTEGRATED VOICE AND DATA SERVICES MAY NOT
BE A RELIABLE BASIS FOR EVALUATING US.

Although we began reselling long distance telecommunications services in
1990, we only began providing local exchange service in 1993 and DSL services in
September 1999. Because of our short operating history as a provider of
integrated voice and data telecommunication services, we have limited operating
and financial data which you can use to evaluate our performance and determine
whether you should invest in our common stock.

WE HAVE HAD A HISTORY OF OPERATING LOSSES AND CURRENTLY HAVE NEGATIVE WORKING
CAPITAL.

We incurred net losses of approximately $1.1 million and $118,000 in fiscal
1997 and fiscal 1999, respectively. We also incurred net losses of approximately
$349,000 and $1.1 million in the six month period ended November 30, 1998 and
1999, respectively. As of November 30, 1999, we had negative working capital of
$1.5 million. Although we had net income of $283,000 in fiscal 1998, we cannot
be certain that we will be able to achieve profitable levels of operations in
the future.

OUR FAILURE TO CONTINUE OUR EXPANSION WOULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION.

If we do not expand our business to achieve economies of scale and to
benefit from our infrastructure, it would adversely affect our business
prospects, financial condition and results of operations. Our planned expansion
could fail if we are not able to:

- access potential markets;

- obtain required governmental authorizations, franchises and permits;

- obtain interconnection and collocation arrangements with incumbent local
exchange carriers;

- develop a sufficient customer base;

- lease adequate transmission capacity from interexchange carriers,
incumbent local exchange carriers and other competitive local exchange
carriers; and

- purchase and install switches in additional markets.

7
11

WE MAY NOT BE ABLE TO MANAGE OUR PLANNED GROWTH, WHICH COULD ADVERSELY AFFECT
OUR BUSINESS.

Future expansion of our business, in particular our planned network
expansion, will place significant additional strains on our personnel, financial
and other resources. If we fail to effectively manage our growth, the quality of
our services, our business and our financial condition would be adversely
affected. Our ability to manage our planned geographic growth will be
particularly dependent on our ability to develop and retain an effective sales
force, customer service personnel and qualified technical personnel across
several different locations. The competition for qualified personnel in the
telecommunications industry is intense, and we may not be able to hire and
retain sufficient qualified personnel.

In addition, we may not be able to maintain the quality of our operations,
to control our costs, to maintain compliance with all applicable regulations,
and to expand our internal management, technical, information and accounting
systems in order to support our planned growth.

WE MAY NOT HAVE SUFFICIENT FUNDS AVAILABLE TO EXPAND OUR BUSINESS.

We will need to make significant capital expenditures in order to expand
and develop our current business and to enter new markets. We expect to fund
these expenditures through existing resources, internally generated funds, and
equity and debt financings. If we are unable to raise sufficient funds, we may
have to delay or abandon some of our expenditures or plans for future expansion.
This would result in underutilization of our established infrastructure and
reduced profitability and may negatively affect our ability to compete for and
satisfy the demands resulting from the growth and expansion of our customers.

If we are able to raise funds through the issuance of additional equity
securities, the percentage ownership of our then-current stockholders will be
reduced and the holders of new equity securities may have rights, preferences or
privileges senior to those of the holders of our common stock. If additional
funds are raised through a bank credit facility or the issuance of debt
securities, the holder of this indebtedness would have rights senior to the
rights of the holders of our common stock and the terms of this indebtedness
could impose restrictions on our operations.

WE MAY BE SUBJECT TO RISKS ASSOCIATED WITH FUTURE ACQUISITIONS.

We may acquire complementary businesses, although we have no definitive
agreements to do so at this time. An acquisition may not produce the revenue,
earnings or business synergies that we anticipate, and an acquired business
might not perform as we expect. If we pursue any acquisition, our management
could spend a significant amount of time and effort in identifying and
completing the acquisition and may be distracted from the operation of our
business. If we complete an acquisition, we would need to devote a significant
amount of management resources to integrating the acquired business with our
existing operations, and that integration may not be successful.

WE CANNOT PREDICT THE FUTURE GROWTH OF THE HIGH-SPEED DATA TELECOMMUNICATIONS
INDUSTRY.

The high-speed data telecommunications industry is only in the early stages
of development and is subject to rapid and significant technological change.
Because of this, we cannot accurately predict the rate at which the market for
our service will grow, if at all, or whether emerging technologies will render
our services less competitive or obsolete. If the market for our services fails
to develop or grows more slowly than anticipated, our business prospects,
financial condition and results of operations could be materially adversely
affected. Many providers of high-speed data telecommunication services are
testing products from numerous suppliers for various applications, and these
suppliers have not broadly adopted an industry standard. In addition, certain
industry groups are in the process of trying to establish standards which could
limit the types of technologies we could use. Certain critical issues concerning
commercial use of DSL technology for Internet access, including security,
reliability, ease and cost of access and quality of service, remain unresolved
and may impact the growth of these services.

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12

Risks Related to Telecommunications Agreements

A FAILURE TO ESTABLISH AND MAINTAIN INTERCONNECTION AGREEMENTS ON FAVORABLE
TERMS WOULD ADVERSELY AFFECT OUR BUSINESS.

We must interconnect with incumbent local exchange carriers to lease
network facilities from the incumbent carrier and to enable our customers to
make and receive calls to and from customers of other carriers. Under the
Telecommunications Act of 1996, or Telecom Act, incumbent local exchange
carriers may be required to allow companies like ours to interconnect with their
networks, lease elements of their networks, and locate our equipment at their
facilities. However, the Telecom Act does not assure the time frame in which
those services will be offered to us or assure that we will be able to purchase
those services at rates and on terms and conditions that allow us to remain
competitive and profitable. Because we compete with incumbent local exchange
carriers in our markets, they may be reluctant to cooperate with us. They have
incentives to delay our entry into, and renewals of, interconnection or resale
agreements with them. Many new carriers have experienced difficulties in working
with incumbent local exchange carriers with respect to initiating,
interconnecting, and implementing telecommunications services and locating their
equipment in the offices of the incumbent local exchange carriers. If we have
difficulties obtaining high quality, reliable and reasonably priced services
from the incumbent local exchange carriers on a timely basis, our services will
be less attractive to customers and our business will be adversely affected.

To date, we have entered into only one interconnection agreement, which
governs our interconnection with Bell Atlantic in New Jersey. We will need to
establish and maintain interconnection agreements with Bell Atlantic and other
incumbent local exchange carriers for the other states where we plan to offer
local telecommunications services by means other than resale. At present, such
agreements typically are for terms of one or two years. Our initial agreement
with Bell Atlantic is for a term of two years. Our initial agreement with Bell
Atlantic requires Bell Atlantic to perform certain responsibilities -- for
example, providing collocation and access to unbundled network elements -- only
to the extent required by applicable laws, regulations and ordinances. Because
implementation of the Telecom Act is subject to numerous federal and state
policy rulemaking proceedings and judicial review, there is still uncertainty as
to the extent to which our agreement with Bell Atlantic will provide us with the
facilities and services we require.

Under the Telecom Act we must first attempt to negotiate the terms of
interconnection agreements with incumbent local exchange carriers. If
negotiations fail, then any disputed issues may be resolved by arbitration. We
cannot be certain that we will be able to enter into new or replacement
interconnection agreements on favorable terms. Whether reached by negotiation or
arbitration, interconnection agreements must be approved by state regulators and
are also subject to oversight by the FCC and the courts. These governmental
authorities may modify the terms or prices of our interconnection agreements in
ways that could adversely affect our ability to deliver service and our business
and results of operations.

OUR OFFERING OF SERVICES IS DEPENDENT UPON OUR ABILITY TO ESTABLISH AND MAINTAIN
EFFECTIVE RESALE AGREEMENTS.

As part of our one-stop shopping offering of bundled telecommunications
services to our customers, we offer a variety of services. We have relied and
will continue to rely on other long distance and local exchange carriers to
provide transmission and termination service for much of our traffic. Agreements
with long distance carriers typically provide for the resale of long distance
services on a timed basis and may contain minimum volume commitments. Agreements
with local carriers typically provide for maximum line limits. Negotiation of
these agreements involves estimates of future supply and demand for transmission
capacity as well as estimates of the calling pattern and traffic levels of our
future customers. If we fail to meet our minimum volume commitments, we may be
obligated to pay underutilization charges and if we underestimate our need for
transmission capacity, we may be required to obtain capacity through more
expensive means. In the past, we have had to obtain additional lines under
tariffs which

9
13

were more expensive than the rates under our agreements. We expect that we will
exceed our maximum line limits until we have migrated a sufficient number of
customers to our DSL service.

We also have entered into agreements with Bell Atlantic that allow us to
obtain at a discount Bell Atlantic's local retail services for resale to our
customers. We currently have agreements with Bell Atlantic in New Jersey and
Pennsylvania. Where tariffs are available from incumbent local exchange carriers
and there is no need to enter into resale agreements, we plan on obtaining local
services through tariffs. We have relied and will continue to rely on resale
agreements with Bell Atlantic or other incumbent local exchange carriers to
provide much of our local services including, in some instances, DSL services.
Resale agreements for local services must be negotiated or arbitrated and then
approved by state regulators. Resale agreements are also subject to oversight by
the FCC and the courts. These governmental authorities may modify the terms or
discount rates contained in our resale agreements in ways that could adversely
affect our ability to deliver service and our business and results of
operations. We cannot be certain that we will be able to enter into new or
replacement resale agreements on favorable terms.

We also rely on resale agreements to provide our customers with other
services, including cellular service, teleconferencing and Internet access. We
currently resell cellular services under a resale agreement with Bell Atlantic
Mobile, or BAM. BAM currently is required to permit unrestricted resale of its
cellular services under the FCC's rules. Those rules, however, are scheduled to
expire in November 2002. We cannot be assured that we will be able to resell
cellular services on acceptable terms, or at all, after November 2002. If we
were unable to resell BAM's cellular services for any reason, we may be unable
to obtain replacement services on acceptable terms or at all. Any of these
developments could adversely affect our ability to deliver service and could
materially and adversely impact our business and results of operations.

Risks Related to Equipment, Capacity and Facilities

OUR INABILITY TO OBTAIN SUFFICIENT LEASED TRANSMISSION CAPACITY COULD SERIOUSLY
LIMIT OUR OPERATIONS.

We depend heavily upon facilities-based carriers for telecommunications
transmission lines. We currently lease transmission capacity from various
third-party carriers to connect our switching equipment to the incumbent local
exchange carriers' networks. If we cannot lease sufficient transmission
capacity, our operations could be limited or we could be forced to make
additional unexpected up-front capital expenditures to install our own
transmission capacity. This could adversely affect our business prospects,
financial condition and results of operations.

WE DEPEND ON PORTIONS OF THE INCUMBENT LOCAL EXCHANGE CARRIERS' NETWORKS FOR DSL
TECHNOLOGY WHICH MAY NOT OPERATE AS EXPECTED ON INCUMBENT LOCAL CARRIER NETWORKS
AND MAY INTERFERE WITH OR BE AFFECTED BY OTHER TRANSPORT TECHNOLOGIES.

We depend significantly on the quality of the copper telephone lines we
obtain from Bell Atlantic, or other incumbent local exchange carriers providing
services in our target markets, and their maintenance of these lines to provide
DSL services. All transport technologies using copper telephone lines have the
potential to interfere with, or to be interfered with by, other traffic on
adjacent copper telephone lines. This interference could degrade the performance
of our services or make us unable to provide service on selected lines.

In addition, incumbent carriers may claim that the potential for
interference by DSL technology permits them under the FCC's rules to restrict or
delay our deployment of DSL services. The telecommunications industry and
regulatory agencies are still developing procedures to resolve interference
issues between competitive carriers and incumbent carriers, and these procedures
may not be effective. We may be unable to successfully negotiate interference
resolution procedures with incumbent carriers. Interference, or claims of
interference, if widespread, would adversely affect our speed of deployment,
reputation, brand image, service quality and client retention and satisfaction
and may have a material adverse effect on our business prospects, financial
condition and results of operations.
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WE DEPEND ON INCUMBENT LOCAL EXCHANGE CARRIERS SUCH AS BELL ATLANTIC FOR
LOCATING OUR EQUIPMENT AND FOR NECESSARY TRANSMISSION FACILITIES.

We must use telephone lines controlled by the traditional telephone
companies such as Bell Atlantic to provide connections to our customers. We also
depend on the traditional carriers for locating certain critical equipment at or
near their premises, known as collocation, and for a substantial portion of the
transmission facilities we use to connect our equipment in the traditional
carriers' central offices to our network. We purchase these services from the
incumbent carriers such as Bell Atlantic pursuant to an applicable tariff and/or
our interconnection agreement. In addition, we depend on the traditional
carriers to test and maintain the quality of the lines that we use. We have not
established a history of obtaining access to collocation and transmission
facilities from traditional carriers in large volumes. The traditional carriers
may also experience a shortage of collocation space or transmission capacity,
and there is no guarantee that we will be able to secure space in the future. In
addition, because we compete with traditional carriers in our markets, they may
be reluctant to cooperate with us. The increasing number of other competitive
telecommunications companies that request collocation space from the traditional
phone companies will also affect the availability of space and transmission
capacity.

In connection with our planned DSL roll-out, we intend to have 20
collocations operational by December 31, 2000. However, we have experienced, and
expect to experience in the future, lengthy periods between our request for and
the actual provision of the collocation space and telephone lines. In many
cases, we may be unable to obtain access to collocation and transmission
facilities from the traditional carriers, or to gain access at acceptable rates,
terms and conditions, including timeliness. If we are unable to obtain adequate
and timely access to collocation space or transmission facilities on acceptable
terms and conditions from traditional carriers, we may not have alternate means
of connecting all of the facilities necessary to provide service to our
customers, which could result in delays, additional costs or our inability to
provide services in certain locations. Any such delays, additional costs or
failure of services could materially and adversely impact our business.

ALTHOUGH WE CURRENTLY LEASE OR RESELL THE TRUNKING CAPACITY WE NEED, IF WE MUST
INSTALL OUR OWN CAPACITY IN THE FUTURE WE WOULD HAVE TO OBTAIN PERMITS OR
RIGHTS-OF-WAY WHICH MAY AFFECT OUR ABILITY TO DEVELOP OUR NETWORKS.

Thus far, we have leased from Bell Atlantic and other carriers the local
fiber trunking capacity required to connect our switching equipment to
particular central offices of Bell Atlantic. We intend to continue obtaining the
capacity we need by leasing it from other carriers. In the future, however, we
may seek to replace this leased trunk capacity with our own fiber if warranted
by traffic volume growth. We cannot assure you that all required trunking
capacity will be available to us on a timely basis or on favorable terms. The
failure to obtain leased fiber could delay our ability to penetrate some of our
markets or require us to make additional unexpected up-front capital
expenditures to install our own fiber and could have a material adverse effect
on our business, financial condition and results of operations. If and when we
seek to install our own fiber, we must obtain local franchises and other
permits, as well as rights-of-way to utilize underground conduit and aerial pole
space and other rights-of-way from entities such as incumbent local exchange
carriers and other utilities, railroads, long distance companies, state highway
authorities, local governments and transit authorities. We cannot assure you
that we will be able to obtain and maintain the franchises, permits and rights
needed to implement our planned network expansion on favorable terms. Our
failure to enter into and maintain any such required arrangements for a
particular network may affect our ability to develop that network and may have a
material adverse effect on our business prospects, financial condition and
results of operations.

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Risks Related to Technology and System Failures

THE TECHNOLOGIES THAT WE USE MAY BECOME OBSOLETE, WHICH WOULD LIMIT OUR ABILITY
TO COMPETE EFFECTIVELY.

The telecommunications industry is subject to rapid and significant changes
in technology. If we do not replace or upgrade our technology and our equipment
becomes obsolete, we will not be able to compete effectively because we will not
be able to meet customer expectations. Further, if we attempt to incorporate new
technologies or products into our systems, those new technologies and products
may not be compatible with our existing technologies and services. We may not be
able to obtain timely access to new technology on satisfactory terms or
incorporate new technology into our systems in a cost effective manner or at
all.

A SYSTEM FAILURE, INCLUDING A FAILURE WHICH IS BEYOND OUR CONTROL, COULD DELAY
OR INTERRUPT OUR SERVICES.

Our operations are dependent upon our ability to support our highly complex
network infrastructure. Many of our customers are particularly dependent on an
uninterrupted supply of services. Any damage or failure that causes
interruptions in our operations could result in the loss of these customers and
could have a material adverse effect on our business and our financial
condition. We also depend on the incumbent local exchange carriers to provide
and maintain their transmission lines and the transmission lines between our
network and our customers' premises. The occurrence of a natural disaster,
operational disruption, breach of security or other unanticipated problem could
cause interruptions in the services we provide and could jeopardize the security
of confidential information being transmitted by our customers. Additionally,
the failure of a major supplier to provide the transmission capacity we require
as a result of a natural disaster, operational disruption, breach of security or
any other reason, could cause interruptions in the service we provide, impact
our ability to acquire, manage or service our customers and adversely affect our
business prospects, financial condition and results of operations.

Risks Related To Competition

OUR STRATEGY ALSO DEPENDS ON OTHER CARRIERS WHO ARE OUR COMPETITORS.

In addition to interconnecting with Bell Atlantic's network to provide our
services, we also rely on the telecommunications services of Bell Atlantic,
Sprint, Cable & Wireless and Qwest, among others. Each of these companies
competes with us in the sale of certain telecommunications services.
Consequently, these companies have certain incentives to delay and obstruct:

- our entry into, and renewals of, interconnection or resale agreements
with them;

- our access to their central offices to install our equipment and provide
our services;

- our access to acceptable transmission lines and copper telephone lines;
and

- our introduction and expansion of our services.

Any such delays would negatively impact our ability to implement our business
plan and harm our competitive position and adversely affect our business
prospects, financial condition and results of operations.

In June 1998, we informally settled an ongoing dispute with one of our
major suppliers. The settlement was formalized by written agreement in June
1999.

WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST BELL ATLANTIC AND OTHER
CARRIERS IN PROVIDING LOCAL EXCHANGE SERVICE.

In each of our target markets, we will be competing principally with Bell
Atlantic, the incumbent local exchange carrier serving those markets. As our
markets expand, we will also compete with other incumbent local exchange
carriers. The incumbent local exchange carriers, including Bell Atlantic, are

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well-established providers of local telephone services serving most of the
telephone subscribers within their respective service areas. In addition,
incumbent local exchange carriers have long-standing relationships with
regulatory authorities at the federal and state levels. We depend significantly
on the quality of the transmission lines we obtain from Bell Atlantic, or other
incumbent local exchange carriers providing services in our target markets, and
their maintenance of these lines to provide our services. We may be unable to
obtain the transmission lines and the services we require from these incumbent
local exchange carriers on a timely basis or at quality levels, prices, terms
and conditions satisfactory to us. Further, there can be no assurance that such
incumbent local exchange carriers will maintain the lines in a satisfactory
manner. We may not be able to overcome these advantages and other advantages
that incumbent local exchange carriers such as Bell Atlantic enjoy in competing
with us.

We face additional competition from long distance carriers, such as AT&T,
MCI WorldCom and Sprint, seeking to enter, reenter or expand entry into the
local exchange marketplace. In addition, we face competition from other
competitive local exchange carriers, resellers, cable television companies,
electric utilities, microwave carriers, wireless telephone system operators and
private networks built by large end-users. This places downward pressure on
prices, which may make it difficult for us to provide these services profitably,
and we may not be able to compete effectively with these companies.

WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN PROVIDING LONG DISTANCE SERVICE.

We face intense competition from long distance carriers in the provision of
long distance services, which places downward pressure on prices for long
distance service and may make it difficult for us to provide these services
profitably. Although the long distance market is dominated by three major
competitors, AT&T, MCI WorldCom and Sprint, hundreds of other companies also
compete in the long distance marketplace. We may not be able to effectively
compete with these industry participants.

The regional Bell operating companies, created by the break-up of AT&T, are
prohibited from providing most types of long distance telecommunications
services originating within their home service areas. However, the Telecom Act
established a procedure in which such a company could lift this restriction upon
a showing that it had taken sufficient steps to open its local
telecommunications network to competitors. On December 22, 1999, the FCC
approved Bell Atlantic's application for authority to provide all forms of
originating long distance service in New York State. This decision, which has
been appealed to the United States Court of Appeals for the District of Columbia
Circuit, could adversely affect our business. Previously, competitive carriers
such as us enjoyed a competitive advantage because we could offer one-stop
shopping for local and long distance service while the regional Bell operating
companies could not. This advantage no longer exists in New York, one of our
target markets where Bell Atlantic has already started to offer long distance
service.

Bell Atlantic is in various stages of applying for this same authority in
other states within our target geographic region. In Pennsylvania, the public
utility commission has approved a proposal requiring Bell Atlantic to establish
separate affiliates for the provision of wholesale and retail services. The
commission's decision has been appealed and an alternative proposal under which
a separate affiliate would be required only for advanced services has been
submitted to the appellate court. Any resulting requirement for Bell Atlantic to
provide certain services through a separate affiliate could facilitate Bell
Atlantic's ability to obtain FCC authority to provide all forms of long
originating long distance in Pennsylvania. We believe other regional Bell
operating companies will seek permission to provide long distance services
during the next one to two years.

We are unable to predict the outcome of the appeal of the Bell Atlantic-New
York decision, the Pennsylvania separate affiliate proceeding or of subsequent
applications by the regional Bell operating companies for long distance
authority. If other regional Bell operating companies obtain FCC approval to
enter the long distance market, our business could be further adversely
affected. In addition, both proposed and recently completed mergers involving
regional Bell operating companies, including Bell Atlantic's proposed merger
with GTE, SBC's merger with Ameritech and Qwest's proposed acquisition of US
West as well as MCI WorldCom's proposed acquisition of Sprint, could facilitate
such a combined entity's

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ability to provide many of the services offered by us, thereby making it more
difficult to compete against them.

WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN PROVIDING DSL SERVICE.

We face intense competition from other providers of DSL service such as
Covad and Northpoint. This competition places downward pressure on prices for
DSL service and may make it difficult for us to provide these services
profitably.

OUR FAILURE TO SUSTAIN DESIRED PRICING LEVELS COULD IMPAIR OUR ABILITY TO
ACHIEVE PROFITABILITY OR POSITIVE CASH FLOW.

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

OUR COMPETITION HAS SUPERIOR RESOURCES, PLACING US AT A COST AND PRICE
DISADVANTAGE.

Many of our current and potential competitors have substantially greater
financial, personnel and other resources, including brand name recognition and
relationships with existing customers. As a result, some of our competitors can
raise capital at a lower cost than we can. Also, our competitors' greater name
recognition may provide them with a competitive advantage in marketing their
services. In addition, our competitors' costs advantages give them the ability
to reduce their prices for an extended period of time if they so choose. We may
not be able to compete effectively with these companies.

Risks Related to Government Regulations

OUR SERVICES ARE SUBJECT TO EVOLVING FEDERAL, STATE AND LOCAL LAWS AND
REGULATIONS, AND CHANGES IN LAWS OR REGULATIONS COULD ADVERSELY AFFECT THE WAY
WE OPERATE OUR BUSINESS.

Federal Laws and Regulations. Our provisioning of telecommunications
services is heavily regulated at the federal, state, and local levels.
Compliance with these regulations imposes substantial costs on us and restricts
our ability to conduct our business.

The Telecom Act opens the local services market by requiring incumbent
local exchange carriers such as Bell Atlantic to permit interconnection to their
networks and establishing incumbent local exchange carrier's obligations with
respect to network elements, resale of incumbent local exchange carrier retail
services, number portability, dialing parity, access to rights of way and other
services that must be made available to competitors such as us.

Incumbent local exchange carriers are required to negotiate in good faith
with carriers which request any or all of the above arrangements. Under the
Telecom Act, if we cannot reach agreement within a prescribed time, either
carrier may request binding arbitration of the disputed issues by the state
regulatory commission. Even when an agreement has not been reached, incumbent
local exchange carriers remain subject to interconnection obligations
established by the FCC and state telecommunications regulatory commissions. We
may not be able to obtain interconnection and reciprocal compensation on
satisfactory terms without extensive delays and expense. Further, because
implementation of the Telecom Act is subject to numerous federal and state
policy rulemaking proceedings and judicial review, there is still uncertainty as
to what impact it will have on us.

In 1996, the FCC established interconnection rules implementing the above
requirements and providing guidelines for review of interconnection agreements
by state public utility commissions. These rules have been the subject of
litigation in the federal courts including the United States Supreme Court.
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This litigation continues to cause uncertainty about the rules governing the
pricing, terms and conditions of interconnection agreements and other aspects of
competition between companies like us and incumbent local exchange carriers such
as Bell Atlantic. Although state public utilities commissions have continued to
conduct arbitrations, and to implement and enforce interconnection agreements
during the pendency of the litigation in federal courts, this litigation may
affect the scope of state commissions' authority to conduct such proceedings or
to implement or enforce interconnection agreements and could also result in new
or additional rules being promulgated by the FCC. Given the general uncertainty
surrounding these rules, we may not be able to continue to obtain or enforce
interconnection terms that are acceptable to us or that are consistent with our
business plans. Even our initial interconnection agreement with Bell Atlantic
does not insulate us from these ongoing regulatory and court proceedings,
because the agreement requires Bell Atlantic to perform certain
responsibilities -- for example, providing collocation and access to unbundled
network elements -- only to the extent required by applicable laws, regulations
and ordinances. The outcome of these ongoing regulatory and court proceedings
could adversely affect our ability to compete against Bell Atlantic and other
telecommunications companies in our target markets.

Our cost of providing long distance services, as well as our revenues from
providing local services, will be affected by changes in the access charge rates
imposed by incumbent local exchange carriers on long distance carriers for
origination and termination of calls over local facilities. The FCC has made
major changes in the interstate access charge structure pursuant to the Telecom
Act, including recently granting greater pricing flexibility for incumbent local
exchange carriers and deregulation of some access services. The FCC has also
initiated a rulemaking to consider measures that would further deregulate access
services provided by incumbent local exchange carriers and to determine whether
it should regulate the access charges of competitive local exchange carriers. If
the increased pricing flexibility for incumbent local exchange carriers and
other deregulatory measures are not effectively monitored by federal regulators,
it could have a material adverse effect on our ability to price our interstate
access services competitively.

The FCC has significantly expanded the federal universal service subsidy
regime. Providers of interstate telecommunications service, such as us, as well
as certain other entities, must pay for the programs funded by this regime. Our
contribution to these universal service funds is based on our telecommunications
service end-user revenues. We offset the contribution to the federal universal
service subsidy by passing on our cost of the contribution to our customers as
permitted by FCC regulations. We are currently unable to quantify the amount of
future subsidy payments that we will be required to make and the effect that
these required payments will have on our financial condition because of
uncertainties in the outcome of ongoing FCC, state PUC, and court proceedings or
Congressional action. We cannot be assured that universal service contribution
requirements will not have a material adverse affect on our business prospects,
financial condition or results of operations.

We cannot predict the outcome of the proceedings, litigation and
legislation described above or other proceedings, litigation and legislation
that may affect us. Any changes in the existing regulatory framework may
increase our legal, administrative or operating costs, or may otherwise limit or
constrain our activities, any of which could have a material adverse effect on
our business prospects, financial condition, or results of operations.

State and Local Regulation. Our business and operations are also subject
to state regulators who determine whether and on what terms we will be
authorized to operate as a competitive local exchange carrier in their state. In
addition, local municipalities may require us to obtain various permits which
could increase the cost of services or delay development of our network. For
example, in each state in which we desire to offer our services, we must obtain
prior authorization from the appropriate state authorities. Our business and our
financial condition could be adversely affected if the state PUCs impose fines,
revocation, or other penalties on us for failure to comply with regulatory
requirements. Many states require prior approvals or notifications for certain
transfers of assets, customers or ownership or reorganization of certificated
carriers, and for the issuance of equity securities, notes or indebtedness and
related transactions. We are filing several applications which seek permission,
retroactively as necessary, for our reorganization into a holding company
structure. We have no assurances whether these applications or applications we
may file for future transactions will be granted. Such notice and approval
requirements
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could prevent or delay our completion of any of these transactions and could
prevent another company from acquiring us. In addition, state and local
regulatory requirements may change with little notice, which could adversely
affect our business prospects, financial condition and results of operations.

ONGOING REGULATORY AND COURT PROCEEDINGS COULD ADVERSELY AFFECT OUR ABILITY TO
PROVIDE DSL SERVICES AND TO COMPETE IN THE DSL MARKET.

We offer DSL services in competition with incumbent local exchange carriers
such as Bell Atlantic and other competing DSL providers. To provide DSL services
we will lease necessary network elements from incumbent local exchange carriers
such as Bell Atlantic or resell the DSL services that they offer to their retail
customers. The FCC has adopted or is considering several regulations that affect
our ability to provide DSL services to our customers. These rulings require
further implementation by state PUCs, and some of the rulings are subject to
appeals in court. For example, in August 1998 the FCC adopted requirements for
incumbent local exchange carriers such as Bell Atlantic to offer to competitive
local exchange carriers such as us the necessary unbundled network elements to
provide advanced data transmission services. An appeal of the FCC's decision on
this issue is pending before the United States Court of Appeals for the District
of Columbia Circuit. Also, the FCC recently ruled that incumbent local exchange
carriers are required to provide line sharing, which will allow competitive
local exchange carriers such as us to offer data services over the same copper
line the consumer uses for voice services without the competitive local exchange
carriers being required to offer the voice services. The FCC's order could
result in lower costs for competitive local exchange carriers to provide some
types of DSL services. The FCC's order, however, has been appealed and, even if
upheld, could be subject to further litigation over the applicable rates and
other implementation issues at the state level. We cannot predict the outcome of
these proceedings and cannot be assured that they will not adversely affect our
ability to offer DSL services.

The FCC also concluded in its August 1998 order that incumbent local
exchange carriers must offer their retail DSL services at a discount to
competitive local exchange carriers for resale. However, in November 1999 the
FCC clarified that DSL services provided to ISPs would not be subject to resale
at a discount. Accordingly, incumbent local exchange carriers may enter into
volume and term discounts for the provisioning of DSL services for ISPs without
having to make such arrangements available to other requesting competitive local
exchange carriers at discounted rates. For example, the FCC has allowed Bell
Atlantic to sell its DSL services at a discounted price to ISPs who commit to
buying Bell Atlantic's DSL service in bulk over a multi-year period for resale
to consumers. This FCC decision could adversely affect us if it gives ISPs,
particularly large ISPs such as America Online, an economic incentive to use
Bell Atlantic to meet all of their DSL needs in order to qualify for the bulk
discount pricing that Bell Atlantic now offers. There is no guarantee that we
would be able to offer rates that would be competitive with the incumbent
carriers' discounted rates or the rates offered by the ISPs that purchase lines
under a bulk discount.

In various proceedings, the FCC has considered whether incumbent local
exchange carriers such as Bell Atlantic may or should provide advanced data
services through a separate affiliate. For example, in the proceeding in which
the FCC recently granted Bell Atlantic authority to provide long distance
services in New York, Bell Atlantic agreed to provide DSL services in New York
through a separate affiliate. As discussed above, a proposal for a similar
separation is pending in Pennsylvania. At present we cannot predict how Bell
Atlantic's, or other incumbent local exchange carriers', use of a separate
affiliate to provide DSL services will affect us. Under the FCC's rules,
competitive DSL providers such as us are entitled to obtain wholesale services
from an incumbent local exchange carrier at the same rates, terms and conditions
that it provides to its separate affiliate. However, by offering their DSL
services through a separate affiliate that would be largely unregulated,
incumbent local exchange carriers such as Bell Atlantic may gain some degree of
competitive advantage which could make it more difficult for us to compete for
these services.

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Risks Related to Market Performance

VARIABILITY OF QUARTERLY OPERATING RESULTS COULD RESULT IN FLUCTUATIONS IN THE
TRADING PRICE OF THE COMMON STOCK.

Our quarterly operating results have fluctuated, and will continue to
fluctuate, significantly from period to period depending upon factors including:

- the success of our efforts to expand our customer base;

- changes in and the timing of expenditures relating to the continued
expansion of our network;

- the development of new services;

- the success of our sales and marketing efforts;

- changes in pricing policies by us and by our competitors; and

- factors relating to acquisitions.

As a result, it is likely that in some future quarters our operating
results will be below the expectations of investors and securities analysts. If
this happens, the trading price of the common stock could decline.

OUR STOCK PRICE MAY BE VOLATILE.

We expect that the market price of our common stock will fluctuate as a
result of variations in our quarterly operating results. These fluctuations may
be exaggerated if the trading volume of our common stock is low. In addition,
due to the technology intensive and evolving nature of our business, the market
price of our common stock may rise and fall in response to a variety of factors,
including:

- announcements of technological or competitive developments;

- acquisitions or strategic alliances by us or our competitors;

- the operating and stock price performance of comparable companies;

- changes in estimates of our financial performance or changes in
recommendations by securities analysts regarding us or our industry;

- general market or economic conditions; or

- rulings made by the FCC or state regulatory authorities which affect our
competitors or us.

In addition, the stock market in general has experienced dramatic price and
volume fluctuations from time to time. These fluctuations may or may not be
based upon any business or operating results. Our common stock may experience
similar or even more dramatic price and volume fluctuations which may continue
indefinitely.

IT IS DIFFICULT TO PREDICT WHETHER A MARKET FOR OUR COMMON STOCK WILL DEVELOP.

We cannot predict the extent to which investor interest in our common stock
will lead to the development of a trading market or how liquid that market might
become.

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WE HAVE ANTI-TAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION WHICH
YOU MIGHT FAVOR AND COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.

Provisions of our Certificate of Incorporation and Bylaws and provisions of
Delaware law could delay, defer or prevent an acquisition or change of control
on terms you find attractive or otherwise adversely affect the price of our
common stock. For example, our Certificate of Incorporation:

- authorizes 5,000,000 shares of undesignated preferred stock which our
board of directors can designate and issue without further action by our
stockholders;

- establishes a classified board of directors;

- eliminates the rights of stockholders to call a special meeting of
stockholders; and

- eliminates the ability of stockholders to take action by written consent.

In addition to delaying or preventing an acquisition, the issuance of a
substantial number of preferred shares could adversely affect the price of the
common stock.

Risks Related to Management and Personnel

THE LOMBARDI FAMILY WILL CONTINUE TO CONTROL US AND MAY MAKE DECISIONS ADVERSE
TO YOUR INTERESTS.

Upon completion of this offering, The Louis A. Lombardi 1996 Family Limited
Partnership, The Patrick C. Lombardi 1996 Family Limited Partnership and Louis
A. Lombardi, Jr. will own, in the aggregate, approximately % of our
outstanding common stock. Accordingly, these stockholders collectively will be
able to control our management policy, decide all fundamental corporate actions,
including mergers, substantial acquisitions and dispositions and elect our board
of directors. These stockholders may ultimately make decisions that are adverse
to your interests as minority stockholders. This concentration of ownership may
also have the effect of delaying or preventing a change in control of our
company on terms you might find attractive, which could negatively affect our
stock price.

OUR SUCCESS DEPENDS ON A LIMITED NUMBER OF KEY PERSONNEL WHO WOULD BE DIFFICULT
TO REPLACE.

We depend on a limited number of key management, sales, marketing and
development personnel to manage and operate our business, most notably Louis A.
Lombardi, Sr. and Louis A. Lombardi, Jr. We believe that our success depends to
a significant degree upon our ability to attract and retain highly skilled
personnel, including our engineering and technical staff. If we are unable to
attract and retain our key employees, the value of your investment could suffer.
The competition for qualified personnel in the telecommunications industry is
intense. For this reason, we cannot assure you that we will be able to hire or
retain necessary personnel in the future.

Risks Related to this Offering

UPON COMPLETION OF THIS OFFERING, YOU WILL EXPERIENCE IMMEDIATE SUBSTANTIAL
DILUTION.

The initial public offering price is substantially higher than the book
value of our common stock. At the initial offering price of $ per share, the
book value of the common stock after the offering will be $ per share. This
represents an immediate and substantial dilution per share of the common stock.
The dilution per share represents the difference between the amount per share
paid by the purchasers of shares of common stock in this offering and the net
tangible book value per share of common stock immediately after the completion
of this offering. In addition, to the extent outstanding options are exercised,
there will be further dilution to new investors.

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WE EXPECT ABOUT SHARES OF COMMON STOCK TO BECOME AVAILABLE FOR SALE 180
DAYS FROM THE DATE OF THIS PROSPECTUS, AND SALES OF THESE SHARES MAY DEPRESS OUR
SHARE PRICE.

After this offering, we will have outstanding shares of common
stock. Sales of a substantial number of our shares of common stock in the public
market following this offering -- or the expectation of such sales -- could
cause the market price of our common stock to drop. All shares sold in
this offering will be freely tradable. The remaining shares outstanding
after this offering will be available for sale in the public markets 180 days
after the date of this prospectus, subject to limitations on the number of
shares that can be sold in any three-month period.

In addition, we intend to file a registration statement to register all
3,540,000 shares of common stock that we may issue under our 2000 Stock Plan and
the 30,000 shares of common stock issuable and underlying outstanding non-plan
options. After this registration statement is effective, shares issued upon
exercise of stock options will be eligible for resale in the public market
without restriction. Upon the consummation of this offering, we will have
options to purchase an aggregate of 1,059,047 shares of common stock issued and
outstanding.

WE WILL RETAIN BROAD DISCRETION IN USING THE NET PROCEEDS TO US FROM THIS
OFFERING AND MAY SPEND A SUBSTANTIAL PORTION IN WAYS IN WHICH YOU DO NOT AGREE.

We will retain a significant amount of discretion over the application of
the net proceeds to us from this offering as well as over the timing of our
expenditures. Because of the number and variability of factors that may
determine our use of the net proceeds to us from the offering, we may apply the
net proceeds to us from this offering in ways with which you disagree.

ABSENCE OF DIVIDENDS.

We have never paid, and do not anticipate paying in the foreseeable future,
any dividends on our common stock.

Risks Regarding Forward-Looking Statements

FORWARD-LOOKING STATEMENTS MAY PROVE TO BE INACCURATE.

Some of the statements contained in this prospectus are forward-looking.
The words "believe," "expect," "intend," "anticipate," "estimate," "plan,"
"future," and other similar expressions generally identify forward-looking
statements. They include statements concerning:

- liquidity and capital expenditures;

- growth strategy;

- acquisitions activities;

- regulatory matters affecting the telecommunications industry;

- competitive conditions in the telecommunications industry;

- projected growth of the telecommunications industry;

- general economic conditions; and

- Year 2000 issues.

Actual results may differ materially from those suggested by the
forward-looking statements for various reasons, including those discussed in
this section.

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23

USE OF PROCEEDS

We estimate that we will receive net proceeds from the sale of our common
stock offered by this prospectus of approximately $ million, assuming an
initial offering price of $ per share. This estimate includes the deduction
of the underwriting discount and estimated offering expenses payable by us. We
will not receive any proceeds from the sale of the shares being offered by the
selling stockholder.

We intend to use a portion of the net proceeds to us from the offering as
follows:

- capital expenditures in connection with our planned roll-out of DSL
service and planned expansion of our network, including the purchase and
installation of DSL equipment in central offices, the purchase of DSL
modems for use at customer premises and the purchase of ATM switches;

- the acquisition of rights for collocation of our equipment with Bell
Atlantic and other service providers;

- the enhancement of our network to enable us to provide additional
value-added services rather than reselling services of other companies;

- the hiring of additional direct sales, operations and support personnel;

- the expansion of our marketing efforts; and

- the improvement of our network management, billing and other back office
systems to facilitate our planned growth.

We will also use a portion of the net proceeds to us from this offering to
fund working capital requirements and for other general corporate purposes. This
may include using a portion of the net proceeds to finance acquisitions of
businesses or technologies that complement our business. Although we have
discussions in the ordinary course of our business with potential acquisition
targets, we currently do not have any commitments or agreements with respect to
any acquisitions.

We currently intend to allocate substantial proceeds among the foregoing
uses. The precise allocation of funds among these uses will depend on future
commercial, technological, regulatory or other developments in or affecting our
business, the competitive climate in which we operate and the emergence of
future opportunities. Because of the number and variability of factors that
determine our use of the net proceeds to us from this offering, we cannot assure
you that our application of the net proceeds will not vary substantially from
our current intentions. Pending application of the net proceeds for the purposes
described above, we intend to invest such funds in short-term, investment-grade,
interest-bearing securities.

DIVIDEND POLICY

We have never paid any cash dividends on our common stock and do not
anticipate declaring or paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings, if any, to fund the development and
growth of our business. Declaration or payment of future dividends, if any, will
be at the discretion of our board of directors after taking into account various
factors, including our financial condition, operating results, current and
anticipated cash needs and plans for expansion.

Because Eastern Computer Services, L.L.C. operated as a limited liability
company from its formation in 1995 until the reorganization of Eastern Computer
Services, L.L.C. and Cooperative Communications, Inc. as our subsidiaries in
March 2000, the net income of Eastern Computer Services, L.L.C. in past years
has been distributed to its members. Distributions were made through May 31,
1999 and no additional distributions were made after that date or will be made
in subsequent periods.

20
24

CAPITALIZATION

The following table sets forth our pro forma capitalization as of November
30, 1999:

- on a pro forma basis giving effect to the reorganization of Cooperative
Communications, Inc. and Eastern Computer Services, L.L.C. as our
wholly-owned subsidiaries; and

- on an as adjusted basis to give effect to the sale by us of
shares of common stock offered hereby, assuming an initial public
offering price of $ per share, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us
and the application of the estimated net proceeds therefrom.

You should read this table in conjunction with "Selected Combined Financial
Data," our historical combined financial statements, including the notes
thereto, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which appear elsewhere in this prospectus.

NOVEMBER 30, 1999
--------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)

Cash and cash equivalents................................... $ 2,327 $
=======
Long term obligations....................................... $ 6,640 $
-------
Stockholders' equity (deficit):
Preferred stock: $0.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding...........
Common stock: $0.01 par value, 60,000,000 shares
authorized; shares issued and outstanding,
proforma; shares issued and outstanding as
adjusted...............................................
Accumulated deficit.......................................
------- -------
Total stockholders' equity (deficit)...................
------- -------
Total capitalization................................... $ $
======= =======

The number of shares of capital stock excludes:

- any shares of common stock to be issued pursuant to the over-allotment
option;

- 3,540,000 shares of common stock authorized for issuance under our 2000
Stock Plan under which 1,029,047 options will be outstanding upon the
consummation of this offering at exercise prices equal to the initial
public offering price; and

- 30,000 shares of common stock issuable upon the exercise of an
outstanding non-plan option as of the date of this prospectus at an
exercise price of $0.01 per share.

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25

DILUTION

Our pro forma net tangible book value as of November 30, 1999, was $
million, or $ per share of common stock. Pro forma net tangible book
value per share is determined by dividing our tangible net worth, tangible
assets less liabilities, by the number of shares of common stock outstanding
before the offering.

After giving effect to the sale of the shares of common stock offered by
us, at an assumed initial public offering price of $ per share, and
after deducting the underwriting discounts and commissions and estimated
offering expenses payable by us, our pro forma net tangible book value as of
November 30, 1999 was $ per share of common stock. This represents an
immediate increase in such net tangible book value of $ per share to
our existing investors and immediate dilution of $ per share to new investors
purchasing shares in this offering. The following table illustrates the per
share dilution.

Assumed initial public offering price per share............. $
Pro forma net tangible book value as of November 30,
1999...................................................... $
Increase per share attributable to this offering............
--------
Pro forma net tangible book value per share after this
offering..................................................
--------
Dilution per share to new investors......................... $
========

The following table shows the difference between existing stockholders and
new investors with respect to the number of shares purchased from us, the total
consideration paid and the average price paid per share at an assumed initial
public offering price of $ per share. Underwriting discounts and commissions
and offering expenses have not been deducted.

SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- -------- ------- ---------

Existing investors...................... % $ % $
New investors...........................
--------- ----- -------- -----
Total.............................. 100.0% $ 100.0%
========= ===== ======== =====

The calculations above exclude from the number of outstanding shares of
common stock:

- 3,540,000 shares of common stock issuable upon the exercise of options
reserved for grant under our 2000 Stock Plan of which no shares were
issuable upon the exercise of outstanding plan options as of November
30, 1999, but under which 1,029,047 options will be outstanding upon the
consummation of this offering at exercise prices equal to the initial
public offering price; and

- 30,000 shares of common stock issuable upon the exercise of an
outstanding non-plan option with an exercise price of $0.01 per share as
of November 30, 1999.

If all of the options outstanding as of November 30, 1999 had been
exercised at that date, there would be additional dilution to new investors.

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26

SELECTED COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The selected combined financial data as of May 31, 1997, 1998 and 1999 and
for each of the years ended May 31, 1997, 1998 and 1999, are derived from our
audited combined financial statements, including the notes thereto, which are
included elsewhere in this prospectus. The selected combined financial data as
of May 31, 1995 and 1996 and for each of the two years ended May 31, 1995 and
1996 and as of November 30, 1998 and 1999 and for the six month periods ended
November 30, 1998 and 1999 have been derived from our unaudited combined
financial statements. The unaudited financial data include all adjustments
(consisting only of normal, recurring adjustments) that we consider necessary
for fair presentation of the combined financial position and results of
operations for these periods. The results of the six month period ended November
30, 1999 are not necessarily indicative of the results for any future period.
You should read the selected combined financial data together with our combined
financial statements, including the notes thereto, and the sections of this
prospectus entitled "Capitalization" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

COMBINED STATEMENT OF OPERATIONS
DATA:
Revenue......................... $12,573 $20,474 $28,718 $37,200 $40,598 $20,441 $19,827
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Costs of revenue (excluding
depreciation and
amortization)............... 9,383 16,314 22,468 29,073 31,725 16,418 16,382
Selling, general and
administrative expenses..... 2,869 4,736 5,957 7,286 8,222 3,956 3,853
Depreciation and
amortization................ 46 194 333 455 780 356 389
Stock based compensation...... -- -- 840 -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total operating expenses...... 12,298 21,244 29,598 36,814 40,727 20,730 20,624
------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations.................. 275 (770) (880) 386 (129) (289) (797)
Other income (expense), net..... (27) (78) (61) 92 109 38 (269)
------- ------- ------- ------- ------- ------- -------
Income (loss) before income
tax expense (benefit)....... 248 (848) (941) 478 (20) (251) (1,066)
Income tax expense
(benefit)................... 100 (215) 128 195 98 98 --
------- ------- ------- ------- ------- ------- -------
Net income (loss)(1).......... $ 148 $ (633) $(1,069) $ 283 $ (118) $ (349) $(1,066)
======= ======= ======= ======= ======= ======= =======
PRO FORMA INFORMATION:
Historical loss before income
tax expense (benefit)......... $ (20) $(1,066)
Pro forma income tax expense
(benefit) (unaudited)(2).... 200 (350)
------- -------
Pro forma net loss
(unaudited)................. $ (220) $ (716)
======= =======
Pro forma net loss per common
share (unaudited)(3):
Basic....................... $ $
Diluted..................... $ $
======= =======
Pro forma weighted average
common shares outstanding
(unaudited)(4):
Basic.......................
Diluted.....................
======= =======

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27

COMBINED BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash equivalents....... $ 14 $ 1,655 $ 1,993 $ 8,590 $ 7,180 $ 7,443 $ 2,327
Working capital (deficit)....... 387 (368) (995) 6,431 470 1,203 (1,516)
Total assets.................... 3,556 7,505 10,168 18,188 19,131 19,407 15,105
Long term capital lease
obligations................... 121 1,033 710 773 1,292 410 3,451
Long term accrued
telecommunications costs...... -- -- -- 8,661 4,277 5,177 3,189
Stockholders' and members'
equity (deficit).............. 665 33 (555) (972) (1,630) (1,371) (2,696)

- ---------------
(1) Since Eastern Computer Services, L.L.C., or Eastern, was operated as a
limited liability company which was taxed as a partnership for federal, state
and local income tax purposes until March 2000, each member of Eastern had been
individually responsible for reporting the member's share of Eastern's net
income or loss. Accordingly, we have not provided for income taxes in our
combined financial statements related to Eastern's income. Cash distributions
were made to Eastern's members of $360, $700 and $540 in the years ended May 31,
1997, 1998 and 1999. No additional distributions were made after May 31, 1999 or
will be made in subsequent periods.

(2) Pro forma income tax expense (benefit) gives effect to the change of Eastern
from a limited liability company to a tax paying entity as though this event
occurred as of June 1, 1998.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and
results of operations in conjunction with the combined financial statements and
notes thereto included elsewhere in this prospectus. The results shown in this
prospectus are not necessarily indicative of the results we will achieve in any
future periods. This discussion contains forward-looking statements based upon
our current expectations which involve risks and uncertainties. Our actual
results could differ materially from those described in the forward-looking
statements due to a number of factors, including those set forth in the section
entitled "Risk Factors" and elsewhere in this prospectus.

OVERVIEW

We are an innovative provider of integrated telecommunications services,
including local and long distance service and our recently launched DSL service.
Our customer base consists of over 7,500 small and medium-sized businesses. The
majority of our customers are located in New Jersey, and we plan to aggressively
expand our services to Pennsylvania, New York, Massachusetts and portions of
Connecticut. As of December 31, 1999, we had over 35,000 local access lines
providing local and long distance services and approximately 28,000 equal access
lines providing local toll and/or long distance services. Approximately 60% of
this traffic historically has originated and terminated on our network and we
expect this to increase as we roll out our DSL service. We began reselling long
distance services in 1990 and providing local service in 1993. We offer our
customers telecommunications services consisting of outbound local and long
distance services, inbound toll free service, data services, calling cards,
paging services, Internet services and our recently introduced DSL service. In
the years ended May 31, 1998 and 1999 and the six month period ended November
30, 1999, local service represented 45.9%, 51.4% and 51.2%, respectively, of our
revenue; outbound service, or long distance and inter-local access and transport
area calls, represented 28.6%, 20.3% and 18.9%, respectively, of our revenue;
toll free calls represented 13.1%, 13.4% and 12.6%, respectively, of our
revenue; monthly fees represented 8.3%, 10.9% and 14.0%, respectively, of our
revenue; and other services represented 4.1%, 4.0% and 3.3%, respectively, of
our revenue.

In 1998, we hired four key employees from Westinghouse Communications, now
owned by RSL Communications, to lead our efforts to pursue new technologies such
as DSL. These executives have over 85 years of combined experience in the
telecommunications industry. We expect that a significant portion of our future
revenue will be generated from the sale of DSL services. Our strategy is to
offer DSL service as a comprehensive telecommunications solution to offer cost
efficiency, flexibility, high quality and reliability for video, voice and data
telecommunications.

Our "smart build" strategy, whereby we locate equipment in or near an
incumbent local exchange carrier's central offices, is central to the success of
our DSL roll-out. By collocating, we have the ability to lease local loop and
other network elements owned by the incumbent local exchange carrier. This
enables us to reach a wide range of customers without having to build network
connections to each one of them. The availability of space in central offices
and the timing and cost of obtaining that space varies by location. Based on our
experience to date, we estimate that it will cost between $285,000 and $310,000
to lease space, purchase and install equipment in each central office we enter
and, where space is available in a desired central office, we believe the time
to obtain the required local approvals and deploy our equipment in that space
will typically range from three to nine months. Where collocation space is not
available, we will install equipment in nearby leased facilities which we will
connect to the central office. Where it is not economically feasible to deploy
such facilities, we intend to continue to resell services of other providers. As
a collocation becomes operational, we will migrate our local and DSL customers
onto our network facilities.

In March 2000, we entered into a two-year interconnection agreement with
Bell Atlantic to provide us with collocation rights to Bell Atlantic's central
offices in New Jersey. The agreement will contain an

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29

implementation schedule for collocation under which we can collocate in various
Bell Atlantic central offices throughout New Jersey. The agreement also
includes:

- access to unbundled network elements;

- the switching and routing of service;

- reciprocal compensation for the transport and termination of local calls
over the terminating carrier's switch;

- network maintenance and management;

- number portability; and

- directory services, such as listing information and directory assistance.

As we expand into new geographic markets and roll out our DSL service, we
expect to incur significant additional capital expenditures and selling and
marketing expenses. Capital expenditures will primarily consist of the purchase
of switching equipment, DSL equipment, customer site equipment, central office
equipment and network management equipment. We will incur other costs and
expenses, including costs related to the development and maintenance of our
network, administrative overhead and premises leases. We expect that a
significant amount of these costs and expenses will be incurred before we
generate revenue from such activities in a particular market. However, we
believe these expenses will become a smaller percentage of our revenue as we
increase our customer base, roll out our DSL service and migrate customers onto
our network.

Telecommunications services provided by Bell Atlantic constitute the
majority of our costs of revenue. Services provided by Bell Atlantic totaled
$9.0 million, $15.4 million and $20.6 million in the years ended May 31, 1997,
1998 and 1999, respectively, and $10.7 million in the six month period ended
November 30, 1999. As we intend to expand in the Bell Atlantic footprint, we
anticipate that telecommunications services provided by Bell Atlantic will
continue to comprise a significant portion of our costs of revenue.

FACTORS AFFECTING OPERATIONS

Revenue. To date, our revenue has been derived from monthly recurring
charges, usage charges and initial non-recurring charges in connection with
providing local and long distance service. Monthly recurring charges include the
fees paid by customers for lines in service and additional features on those
lines. Usage charges consist of fees paid by our customers for local, outbound,
toll-free and calling card services. Initial non-recurring charges are paid by
customers, if applicable, for the initiation of our service. Monthly fees
include both monthly recurring charges and initial non-recurring charges. In the
future, we expect that a significant portion of our revenue will be derived from
the sale of DSL services. Reciprocal compensation payable by incumbent local
exchange carriers historically has not constituted a significant portion of our
revenue. We do not expect that reciprocal compensation payable by Bell Atlantic
under the recently executed interconnection agreement will represent a
significant portion of our revenue in the foreseeable future.

Costs of Revenue. Our costs of revenue are comprised primarily of
transport expenses, expenses for local services, long distance expenses, access
charges, line installation expenses and engineering costs. Such costs do not
include amortization or depreciation costs. The transport expenses are payments
incurred by us for transmission facilities used to connect our customers to our
switches and to connect to the incumbent local exchange carrier and other
competitive local exchange carrier networks. Our interconnection agreement with
Bell Atlantic provides for reciprocal compensation related to calls that
originate with a customer of ours and terminate on Bell Atlantic's network. We
do not anticipate that reciprocal compensation will represent a significant
portion of our costs of revenue in the foreseeable future. Other fees under this
interconnection agreement include charges for unbundled loops, cross connection
fees, installation charges and rental costs of space in central offices.
Although it has recently increased slightly due to a decrease in revenue, over
time, we expect our aggregate costs of revenues to decline as a percentage of
revenue due to the up front costs we incur when we initially enter a new
geographic market.
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30

In fiscal 1999, approximately 60% of our costs of revenue were usage
sensitive costs, such as transport expenses, local and long distance expenses
and access charges.

We believe the cost of securing long distance service capacity will
increase as our customers' long distance calling volume increases. We expect
that these costs will be a significant portion of our cost of long distances
services. We have entered into resale agreements with several long distance
carriers to provide us with the ability to provide our customers with long
distance service. Our existing resale agreements contain minimum volume
commitments. We expect to enter into resale agreements for long distance service
with other carriers in the future. Such agreements typically provide for the
resale of long distance services on a per-minute basis and also may contain
minimum and maximum line restrictions. If we fail to meet minimum volume
commitments, we may be obligated to pay underutilization charges. In the past,
we have met our minimum volume commitments. If we underestimate our need for
transmission capacity and exceed our maximum volume limits and are unable to
negotiate agreements with telecommunications carriers, we may be required to
obtain capacity through more expensive means. In the past, we have had to obtain
additional lines under tariffs which were more expensive than the rates under
our agreements. We expect that we will exceed our maximum line limits until we
have migrated a sufficient number of customers to our DSL service.

Under our network build-out strategy, we have leased from Bell Atlantic and
other carriers the local fiber trunking capacity required to connect our switch
to particular central offices of Bell Atlantic. We intend to continue obtaining
the capacity we need by leasing it from other carriers. In the future, however,
we may seek to replace this leased trunk capacity with our own fiber if
warranted by traffic volume growth. We cannot assure you that all required
trunking capacity will be available to us on a timely basis or on favorable
terms. The failure to obtain leased fiber could delay our ability to penetrate
some of our markets or require us to make additional unexpected up-front capital
expenditures to install our own fiber and could have a material adverse effect
on our business prospects, financial condition and results of operations.

We offset contributions to the federal universal service subsidy by passing
on our cost of the contribution to our customers as permitted by FCC
regulations.

Selling, General and Administrative Expenses. Our recurring selling,
general and administrative expenses include sales and marketing, customer
service, corporate administration, personnel and billing. Currently, our sales
and marketing efforts are directed through a network of 85 commission-based
independent agents and a direct sales force of seven professionals primarily
focused on cultivating new accounts and maintaining and expanding existing
accounts. As we expand our service offerings, we believe that a direct sales
force is more effective to capitalize on cross-selling opportunities. Therefore,
we intend to increase our direct sales force to 35 professionals by December 31,
2000. We plan to accomplish this, in part, by recruiting from the most effective
of our 85 independent representatives. By the end of 2001, we plan to have a
sales force equally divided between direct sales people and independent agents.
We do not expect an increase in our selling expenses as a result of our planned
increase in sales professionals as the related salaries will be offset by
decreased sales commissions to commission-based independent agents.

Depreciation and amortization expense. Depreciation and amortization
expense includes depreciation on switching equipment as well as general property
and equipment. This expense includes:

- depreciation of network and operations equipment;

- depreciation of computer hardware and information systems; and

- amortization and depreciation of building, property and equipment under
capital leases.

We expect depreciation and amortization expense to increase significantly
as we increase capital expenditures in our expansion efforts.

Stock-based compensation. During fiscal 1997, we granted options to an
employee to purchase 30,000 shares of common stock at a nominal exercise price.
Such grant resulted in non-cash employee compensation expense which has been
recorded to account for the difference, on the date of the grant, between the
fair market value and the exercise price of stock options granted to the
employee. The
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31

resulting employee compensation of $840,000 was recognized in the combined
statement of operations in 1997 as such options vested immediately.

Income taxes. From its inception in May 1995 until the contribution of all
of the ownership interests in Eastern Computer Services, L.L.C., or Eastern, by
its members to us in March 2000, Eastern operated as a limited liability company
which was taxed as a partnership for federal and state tax purposes.
Accordingly, the earnings of Eastern were included in the taxable income of the
members of Eastern for federal and state income tax purposes. In connection with
this offering and due to the contribution, Eastern is now taxed as a C
Corporation. As a result, we will record future tax expense and benefits using
the asset and liability method pursuant to the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Income
tax expense recorded in the historical combined financial statements principally
reflects income taxes currently payable to federal and state taxing authorities
based on the results of the operations of Cooperative Communications, Inc., and
its subsidiaries, or Cooperative, during the respective periods. No income tax
benefit has been provided on the losses realized by Cooperative as we believe it
is more likely than not that Cooperative will not realize such benefits.

Assuming the contribution of Eastern had occurred on June 1, 1998, our
pro-forma effective tax rate for fiscal 1999 and the six month period ended
November 30, 1999 would have been different from the combined federal and state
statutory tax rate of approximately 40% since we believe it is more likely than
not that deferred tax benefits will not be realized. The effect of taxes on our
results of operations is not discussed below because the historic taxation of
our operations does not provide a meaningful comparison with respect to periods
following the contribution of Eastern to us.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated certain financial
data as a percentage of revenue:

PERCENTAGE OF REVENUE
-------------------------------------------------------------------------------
SIX MONTH PERIODS ENDED
YEAR ENDED MAY 31, NOVEMBER 30,
--------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1998 1999
----------- ----------- ------ ----- ------ ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)

Revenue............................. 100% 100% 100% 100% 100% 100% 100%
----- ------ ------ ----- ------ ------ ------
Operating expenses:
Cost of revenue (excluding
depreciation and
amortization)................... 74.63 79.68 78.24 78.15 78.15 80.32 82.63
Selling, general and
administrative expenses......... 22.82 23.13 20.74 19.59 20.25 19.35 19.43
Depreciation and amortization..... 0.37 0.95 1.16 1.22 1.92 1.74 1.96
Stock based compensation.......... -- -- 2.92 -- -- -- --
----- ------ ------ ----- ------ ------ ------
Total operating expenses........ 97.82 103.76 103.06 98.96 100.32 101.41 104.02
----- ------ ------ ----- ------ ------ ------
Income (loss) from operations... 2.18 (3.76) (3.06) 1.04 (0.32) (1.41) (4.02)
Other income (expense), net......... (0.20) (0.38) (0.21) 0.25 0.27 0.18 (1.36)
----- ------ ------ ----- ------ ------ ------
Income (loss) before income tax
expense (benefit)................. 1.98 (4.14) (3.27) 1.29 (0.05) (1.23) (5.38)
Income tax expense (benefit)...... 0.80 (1.05) 0.45 0.52 0.24 0.48 --
----- ------ ------ ----- ------ ------ ------
Net income (loss)................. 1.18 (3.09) (3.72) 0.77 (0.29) (1.71) (5.38)
===== ====== ====== ===== ====== ====== ======

Six Months Ended November 30, 1999 compared to Six Months Ended November 30,
1998

Revenue. Our revenue for the six month period ended November 30, 1999 was
$19.8 million, as compared to $20.4 million in the six month period ended
November 30, 1998, a decrease of $614,000, or 3.0%. This decrease resulted
primarily from a decrease in usage charges, offset in part by an increase in

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32

monthly recurring charges. Competitive pricing pressure continued to lower the
average price we charged for calling minutes. In the six month period ended
November 30, 1999, our average price per minute of domestic retail traffic
decreased approximately 11.1% as compared to the 1998 period. We expect that our
pricing for the foreseeable future will continue to be subject to competitive
pricing pressure. During the past several years, market prices for many
telecommunications services have been declining, a trend we believe will likely
continue.

Costs of revenue. Our costs of revenue for the six month period ended
November 30, 1999 decreased nominally to $16.4 million from $16.4 million for
the six month period ended November 30, 1998. This decrease was primarily due to
a decrease in access charges, offset in part by increased costs associated with
purchasing additional Centrex lines at tariff prices after we exceeded our
contractual limit. As a percentage of revenue, costs of revenue increased
slightly from 80.3% in the 1998 period to 82.6% in the 1999 period primarily as
a result of the decrease in revenue.

Selling, general and administrative expenses. Our selling, general and
administrative expenses for the six month period ended November 30, 1999
decreased $103,000, or 2.6%, to $3.9 million from $4.0 million for the six month
period ended November 30, 1998. This decrease was primarily due to a reduction
of employee expenses related to the realignment of our direct sales force which
we began in July 1999, as well as the termination of one of our telemarketing
programs. This decrease was also due to a reduction of rent expense associated
with the capitalization of our lease on the Belleville, New Jersey facility in
December 1998. Selling, general and administrative expenses as a percentage of
revenue represented 19.4% for each of the six month periods ended November 30,
1999 and 1998. Salaries and related employee expenses were the largest
components of selling, general and administrative expenses for the six month
periods ended November 30, 1999 and 1998.

Depreciation and amortization expense. Our depreciation and amortization
expense for the six month period ended November 30, 1999 increased $33,000, or
9.3%, to $389,000 from $356,000 for the six month period ended November 30,
1998. This increase was primarily due to the acquisition of telecommunications
equipment, including our Class 4/5 switch in August 1999, and, to a lesser
extent, the capitalization of the lease on our Belleville, New Jersey facility.

Interest income (expense). Our interest income for the six months ended
November 30, 1999 decreased $19,000, or 10.2%, to $168,000 from $187,000 for the
six month period ended November 30, 1998. This decrease was primarily due to
increased available cash in the fiscal 1998 period because of payments we
withheld from a major supplier pending settlement of a dispute. Our interest
expense for the six month period ended November 30, 1999 increased $288,000, or
184.6%, to $444,000 from $156,000 for the six month period ended November 30,
1998. This increase was primarily due to interest associated with the settlement
of this dispute and additional acquisitions of property and equipment under
capital leases.

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

Revenue. Our revenue for the year ended May 31, 1999 was $40.6 million, as
compared to $37.2 million in the year ended May 31, 1998, an increase of $3.4
million, or 9.1%. This increase was primarily due to an increase in usage
charges and monthly recurring charges, offset in part by a decrease in sales of
long distance telecommunications services. The number of calling minutes
increased 6.9% as a result of additional customers and additional calling
minutes sold. However, due to competitive pressures, our average price per
minute of domestic retail traffic decreased approximately 9.1% in fiscal 1999 as
compared to fiscal 1998.

Costs of revenue. Our costs of revenue for the year ended May 31, 1999
increased $2.7 million, or 9.3%, to $31.7 million from $29.1 million in the year
ended May 31, 1998. Such increase was primarily due to the increase in transport
costs and local service costs associated with higher calling minutes. As a
percentage of revenue, costs of revenue remained constant at 78.2% in fiscal
1999 and fiscal 1998.

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Selling, general and administrative expenses. Our selling, general and
administrative expenses for the year ended May 31, 1999 increased $936,000, or
12.8%, to $8.2 million from $7.3 million in the year ended May 31, 1998. Such
increase was primarily due to higher salaries as a result of our expanding
business and the hiring of several key employees from Westinghouse
Communications in connection with our DSL roll-out and, to a lesser extent, bad
debt expense. Selling, general and administrative expenses as a percentage of
revenue represented 20.3% and 19.6% in fiscal 1999 and fiscal 1998,
respectively. Salaries and related employee expenses were the largest components
of selling, general and administrative expenses in fiscal 1999 and fiscal 1998.
DSL research and roll-out expenses represented $490,000, or 6.0%, of selling,
general and administrative expenses in fiscal 1999. DSL-related expenses were
minimal in fiscal 1998.

Depreciation and amortization expense. Our depreciation and amortization
expense for the year ended May 31, 1999 increased $325,000, or 71.4%, to
$780,000 from $455,000 in the year ended May 31, 1998. This increase was
primarily due to our acquisition of telecommunications equipment directly and
under capital leases in the second half of fiscal 1998, as well as additional
equipment in 1999 and the capitalization of the lease on our Belleville, New
Jersey facility. This increase also reflected an amortization charge for a
customer list acquired in May 1998.

Interest income (expense). Our interest income for the year ended May 31,
1999 increased $148,000, or 64.3%, to $378,000 from $230,000 in the year ended
May 31, 1998. This increase was due primarily to interest earned on funds we
withheld from a major supplier in connection with a dispute. Our interest
expense for the year ended May 31, 1999 increased $166,000, or 109.2%, to
$318,000 from $152,000 in the year ended May 31, 1998. This increase was
primarily due to additional acquisitions of property and equipment under capital
leases.

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

Revenue. Our revenue for the year ended May 31, 1998 was $37.2 million, as
compared to $28.7 million in the year ended May 31, 1997, an increase of $8.5
million, or 29.6%. This increase was primarily due to an increase in usage
charges, and, to a lesser extent, an increase in monthly recurring charges. The
number of calling minutes increased 22% as a result of additional customers and
additional calling minutes sold. Our average price for a minute of domestic
retail traffic decreased approximately 12.5% in fiscal 1998 due to competitive
pressures.

Costs of revenue. Our costs of revenue for the year ended May 31, 1998
increased $6.6 million, or 29.3%, to $29.1 million from $22.5 million in the
year ended May 31, 1997. This increase was primarily due to the increase in
transport costs and local service costs associated with higher calling minutes.
As a percentage of revenue, costs of revenue remained constant at 78.2% in
fiscal 1998 and fiscal 1997.

Selling, general and administrative expenses. Our selling, general and
administrative expenses for the year ended May 31, 1998 increased $1.3 million,
or 21.7%, to $7.3 million from $6.0 million in the year ended May 31, 1997. This
increase was primarily due to higher commissions associated with higher levels
of sales. Commissions, as a percentage of revenue, remained relatively
consistent from fiscal 1997 to fiscal 1998. To a lesser extent, such increase
was due to the hiring of additional telemarketing personnel. Selling, general
and administrative expenses as a percentage of revenue represented 19.6% and
20.7% in fiscal 1998 and fiscal 1997, respectively. Salaries and related
employment expenses were the largest components of selling, general and
administrative expenses in fiscal 1998 and fiscal 1997.

Depreciation and amortization expense. Our depreciation and amortization
expense for the year ended May 31, 1998 increased $122,000, or 36.6%, to
$455,000 from $333,000 in the year ended May 31, 1997. This increase was due
primarily to the acquisition of additional telecommunications equipment in the
second half of fiscal 1997 and fiscal 1998.

Interest income (expense). Our interest income for the year ended May 31,
1998 increased $162,000, or 238.2%, to $230,000 from $68,000 in the year ended
May 31, 1997. This increase was primarily due to interest earned on funds we
withheld from a major supplier in connection with a dispute.

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Our interest expense for the year ended May 31, 1998 increased $12,000, or 8.6%,
to $152,000 from $140,000 in the year ended May 31, 1998. Such increase was due
primarily to acquisitions of equipment under capital leases.

LIQUIDITY AND CAPITAL RESOURCES

Historically, we have financed our operations through operating cash flow
supplemented by funds from equipment financing. Cash provided by operating
activities was $8.3 million and $692,000 for the years ended May 31, 1998 and
1999. Cash used in operating activities was $4.6 million for the six month
period ended November 30, 1999. The decrease in cash from operating activities
in the 1999 periods resulted primarily from the payment of amounts owed to a
major supplier and a decrease in net income, offset in part by changes in assets
and liabilities, principally trade accounts receivable.

Our working capital was $6.4 million and $470,000 as of May 31, 1998 and
1999. Working capital as of May 31, 1999 included $7.2 million in cash and cash
equivalents. As of November 30, 1999, we had negative working capital of $1.5
million, which included $2.3 million in cash and cash equivalents.

Net cash used in investing activities was $610,000, $106,000 and $77,000
for the years ended May 31, 1998 and 1999 and the six month period ended
November 30, 1999. Cash used in investing activities during the 1998 and 1999
periods principally represents the purchase of computer equipment for use by
office personnel and a customer list in 1998.

Net cash used in financing activities was $1.1 million, $2.0 million and
$162,000 for the years ended May 31, 1998 and 1999 and the six month period
ended November 30, 1999. In the six month period ended November 30, 1999, cash
used in financing activities was primarily for payments under capital leases. In
fiscal 1998, cash used in financing activities was primarily for payments under
capital leases and distributions to members. In fiscal 1999, cash used in
financing activities was primarily for payments under capital leases,
distributions to members and a loan to stockholders. In the three years ended
May 31, 1999, Eastern made total aggregate distributions to its members of $1.6
million. With the conversion of Eastern to a C Corporation for tax purposes, we
will not be obligated to make such member distributions.

In June 1998, we informally settled an ongoing dispute with one of our
major suppliers. The settlement was formalized by written agreement in June
1999. Under this settlement, we agreed to pay a total of $10.5 million as
follows: approximately $1.0 million was paid in June 1998, $3.0 million was paid
in June 1999 and $181,000 per month is payable for 36 months thereafter. The
settlement did not have a significant impact on our results of operations as the
settlement approximated the net amount of the supplier's invoices that we
accrued. We expect to be able to satisfy the future obligations associated with
the settlement through cash provided by operations or borrowings under credit
facilities.

We have a credit facility with a bank that allows us to borrow up to $1.5
million. This credit facility is subject to renewal at three month intervals and
expires on May 2, 2000. Amounts outstanding under this facility bear interest at
the bank's prime lending rate which was 9.0% per annum as of March 31, 2000.
This loan is secured by our trade accounts receivable. No amounts were
outstanding under this facility as of March 31, 2000. We intend to renew this
credit facility upon its expiration. We have not historically relied on
borrowings under credit facilities to finance our operations. If cash from
operations is not sufficient to meet our financing requirements, we will pursue
additional bank credit facilities to finance our operations.

We expect to lease additional office space in New Jersey in the next six
months to accommodate the growth of our administrative staff and sales and
marketing personnel. Recently, we entered into equipment leases aggregating
approximately $3.5 million for equipment relating to our DSL roll-out payable
over five years.

We believe that our existing available cash, the proceeds from this
offering, credit facilities and the cash flow expected to be generated from
operations will be adequate to satisfy our current and planned operations for at
least the next 12 months. No assurance can be given, however, that this will be
the case. Depending upon our rate of growth and profitability, particularly if
we pursue any significant acquisitions,
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we may require additional equity or debt financing to meet our working capital
requirements or capital equipment needs. We intend to make significant capital
expenditures in connection with the roll-out of our DSL services and our
expansion into new markets. We expect to fund these expenditures through
existing resources, internally generated funds, and equity and debt financings.
If we are unable to raise sufficient funds, we may have to delay or abandon some
of our expenditures or plans for future expansion. There can be no assurance
that additional financing will be available when required or, if available, will
be on terms satisfactory to us. Our failure to raise additional financing, if
needed, could impair our ability to achieve profitability or positive cash flow,
which could have a material adverse effect on our business prospects, financial
condition and results of operations.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts and for hedging
activities. SFAS No. 133 (as amended by SFAS No. 137) is effective for all of
our fiscal quarters beginning June 1, 2001. This statement is not expected to
affect us as we currently do not have derivative instruments or engage in
hedging activities.

In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position, or SOP, 98-5, "Reporting on the Costs of Start-Up
Activities," which requires the costs of start-up activities to be expensed as
incurred. SOP 98-5 is effective for us beginning in fiscal 2000. We do not
believe that adoption of this SOP will have a material effect on our financial
statements as start-up costs have historically been expensed as incurred.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have limited exposure to financial market risks, including changes in
interest rates. At March 31, 2000, all of our available excess funds are cash or
cash equivalents whose value is not subject to changes in interest rates. We
currently hold no derivative instruments and do not earn foreign-source income.
We expect to invest our cash only in debt obligations issued by the United
States government or its agencies with maturities of less than one year.

YEAR 2000 COMPUTER ISSUES

We did not experience any significant computer or systems problems relating
to the Year 2000. Upon review of our internal and external systems during 1999,
we determined that we did not have any material exposure to such computer
problems and that the software and systems required to operate our business and
provide our services were Year 2000 compliant. As a result, we did not incur,
and do not expect to incur, any material expenditures relating to Year 2000
systems remediation.

We are not aware of any material problems resulting from Year 2000 issues
associated with products and services of third party providers. We will continue
to monitor our mission critical computer applications and those of our suppliers
and vendors throughout the Year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.

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BUSINESS

OUR COMPANY

Our DSL service offers high-speed data, voice, Internet and video
connectivity. We began offering QuikSpeed on a limited basis in September 1999
and are preparing to broadly introduce the service in April 2000. As of March
15, 2000, we had 137 orders for DSL service and we had installed the necessary
DSL equipment for 100 of these orders.

- our ability to offer one-stop services for voice, including local and
long distance, and data, all on a single bill;

- our ten years of providing superior customer service to small and
medium-sized businesses, as evidenced by our low customer turnover or
churn rate which has averaged 4.7% over the last three years;

- our in-depth knowledge of our geographic market, including our long-term
relationship with our customers;

- our ability to offer VPN functionality for voice and data transmission;

- our QuikSpeed DSL service permits voice over DSL, creating a lower cost
solution to our customers, and does not require our customers to have
their own ISP;

- our interconnection agreement with Bell Atlantic for New Jersey.

Our Centrex voice service network currently interfaces with 70 Bell
Atlantic central offices in New Jersey. In March 2000, we entered into an
interconnection agreement with Bell Atlantic which allows us to collocate our
networking equipment in Bell Atlantic central offices in each local area in
which we operate in New Jersey, providing a direct connection between us and our
customers. We expect to have approximately 20 collocations operational by
December 31, 2000. This agreement further enables us to provide fully
operational local and toll service. Where we do not have collocation facilities,
we will install DSLAMs, ATM switches and test equipment in leased facilities
which we will connect to the central office. We believe that pursuing a
"smart-build" strategy, whereby we own more of the network elements, while
continuing to lease transmission lines, will allow us to eventually generate
higher operating margins, obtain origination and termination fees from other
carriers and maintain greater control over our network operations and service
quality.

telecommunications services and our QuikSpeed DSL services all on a single bill.
Many of our target customers want customized solutions but do not have the
internal expertise to design, purchase and maintain these kinds of systems and
services themselves.

- implementing a rapid DSL roll-out;

- offering our customers one-stop shopping;

- maximizing speed to market through our smart-build strategy;

- focusing on the small and medium-sized business market;

- building market share by focusing on direct sales; and

- providing superior customer service.

INDUSTRY BACKGROUND

Market Trends

According to data published by the FCC, the United States local and long
distance telecommunications market had revenues of approximately $210 billion in
1998, $65.6 billion of which were generated within the Bell Atlantic footprint.
The Bell Atlantic footprint consists of portions of Connecticut, New York,
Maine, Massachusetts, New Hampshire, Rhode Island, Vermont, New Jersey,
Pennsylvania, Virginia, West Virginia, Maryland, Delaware and Washington, D.C.
In addition, industry sources have projected the United States small business
market for DSL will reach $2.3 billion by 2003. The small business market is
defined as businesses with fewer than 100 employees.

We believe that a number of important trends are reshaping the United
States telecommunications industry, creating substantial market opportunity.
These trends include:

- rapid opening of telecommunications networks to competition;

- increasing demand, particularly from small and medium-sized businesses,
for

- high-speed data services, such as DSL;

- Internet access and transport;

- personal computer-based applications;

- telecommuting solutions;

- integrated and customized solutions; and

- emergence of electronic commerce in the marketplace.

We believe that the primary determinants of a competitive local exchange
carrier's ability to take advantage of these opportunities will be:

- the ability to provide one-stop shopping on a single bill;

- speed to market;

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- availability of scalable service offerings;

- customized solutions;

- superior customer service;

- building a direct sales force; and

- the ability to provide competitively priced services.

By leveraging existing customer relationships and bundling service
offerings, competitive local exchange carriers have begun to exploit a variety
of opportunities, including high-speed Internet access and transport, DSL,
local-area and wide-area network connectivity, managed network services, virtual
private networks, remote access and electronic commerce services. We believe
that new entrants have an excellent opportunity to establish themselves as
leading providers of such value-added services.

DSL Service

DSL technology has emerged as a commercially viable, cost-effective means
of providing high-speed data transmission using an existing telecommunications
network. DSL technology enables the transmission of packets of voice and data
over existing copper telephone wires, which allows multiple users to
simultaneously transmit and receive voice and data over a single connection. DSL
equipment, when deployed at each end of a standard copper telephone line,
increases the data carrying capacity of the line speeds depending on the type of
DSL service, distance between the user and the central office and the quality of
the copper telephone line. There currently are five types of commercially
available DSL service. The following table lists the types of DSL and their
respective speeds. Speed is measured in kilobits per second, or kb/s, or
megabits per second, or mb/s.

MAXIMUM SPEED MAXIMUM SPEED
TO CUSTOMER FROM CUSTOMER
TYPE OF DSL SERVICE (DOWNSTREAM) (UPSTREAM)
- ------------------- ------------- -------------

IDSL 160 kb/s 160 kb/s
SDSL 1.54 mb/s 1.54 mb/s
HDSL 2.048 mb/s 2.048 mb/s
ADSL 9 mb/s 648 kb/s
VDSL 27 mb/s 1.1 mb/s

In order for DSL service to operate at its maximum speed, the provider's
DSL equipment must be located in or near an incumbent local exchange carrier's
central office no more than 12,000 feet to 15,000 feet away from the customer's
site.

By using existing facilities and copper telephone lines, DSL avoids the
considerable up-front fixed costs necessary to deploy alternative high-speed
digital telecommunications technologies, such as fiber, cable, wireless and
satellite networks. As a result, a significant portion of the investment in a
DSL network is incurred only as customers order the service. In addition, we
anticipate that continued advances in DSL technologies and transmission speeds,
as well as advances in DSL equipment manufacturing efficiencies, will further
reduce the cost of deploying DSL services.

Small and Medium-Sized Businesses

Small and medium-sized businesses are increasingly using high-speed
telecommunications connections to access the Internet in order to compete more
effectively with larger organizations. High-speed data services and Internet
connectivity are becoming increasingly important due to the dramatic increase in
Internet usage and the proliferation of personal computer and Internet
Protocol-based applications. The popularity of the Internet with consumers has
also driven the rapid growth in exploiting the Internet as a commercial medium,
as businesses establish websites, corporate intranets and extranets and
implement electronic commerce applications to expand their customer reach and
improve their telecommunications efficiency. International Data Corporation, or
IDC, predicts that as of December 31, 2000, 51% of small to

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medium-sized businesses will have Internet access. To remain competitive, we
believe companies will require high-speed connections to maintain complex
Internet websites, to access critical information and business applications, and
to communicate more efficiently with employees, customers and suppliers. We
believe DSL service is particularly attractive to small and medium-sized
businesses who seek to obtain these high-speed data services at affordable
prices. IDC also forecasts that, in the United States, small business DSL lines
will increase from 60,000 in 1999 to 2.5 million in 2003, representing 20% of
all DSL lines. DSL service provides a lower cost alternative to T-1 lines, which
are typically used by larger businesses. A T-1 line costs, on average, from $400
to $600 per month. In addition, because small and medium-sized businesses
typically have no telecommunications manager, their ability to navigate through
the various choices of local and long distance services, data services, Internet
access, paging and other customized services is limited. We believe small and
medium-sized business customers prefer to use one telecommunications service
provider that will provide them with a scalable package of services on a single
bill.

OUR GROWTH STRATEGY

Our objective is to become a leading provider of integrated
telecommunications services, including voice, DSL, data and Internet to small
and medium-sized businesses in New Jersey, Pennsylvania, New York, Massachusetts
and portions of Connecticut. By offering a comprehensive package of high-speed
telecommunications services, together with traditional local and long distance
services, we believe that we can accelerate our ability to establish new
customer accounts and cross-sell our existing scalable telecommunications
services. Our strategy to meet this objective is to:

Implement a rapid DSL roll-out. We intend to leverage our existing
customer base to build a significant customer base for our QuikSpeed DSL service
of high-speed voice, data, Internet and video connectivity. This service seeks
to capitalize on the growing demand for high-speed digital telecommunications by
small and medium-sized businesses who are seeking lower cost alternatives to T-1
lines. In April 2000, we introduced our QuikSpeed DSL service on a broad basis.
As of March 15, 2000, we had 137 orders for DSL service and we had installed the
necessary DSL equipment for 100 of these orders.

We expect to have approximately 20 collocations operational by December 31,
2000.

Offer our customers one-stop shopping. We offer our customers one-stop
shopping for telecommunications services by offering them the ability to
purchase from a single provider on a single bill a comprehensive package of
telecommunications services, including local and long distance services, DSL
data and voice services, Internet services and local area network
interconnections. We believe that our ability to provide one-stop shopping for
telecommunications services, all conveniently invoiced in a single bill, will
enable us to better meet the needs of our customers, penetrate our target
markets, capture a larger portion of our customers' total expenditures on
telecommunications services.

Maximize speed to market through our smart-build strategy. We believe our
switched-based, leased-transport, or "smart-build," strategy enables us to
roll-out our complete suite of telecommunications services and generate revenue
more rapidly than if we first constructed our own transmission lines. Under this
strategy, we plan to:

- deploy our QuikSpeed DSL service using existing copper telephone lines as
our solution to the growing demand for integrated voice, high-speed data
and Internet services;

- locate our equipment in or near the central office facilities of Bell
Atlantic as indicated by customer demand; and

- lease unbundled network elements from other carriers until growth
justifies acquiring additional network assets.

We believe that this flexible deployment strategy has the additional
advantage of reducing initial capital requirements in each market, allowing us
to focus our capital resources on equipping central offices where customer
demand for DSL services justifies such capital outlay. Once we install our DSL

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equipment in a central office, our subsequent capital investments to expand
service from that location are directly related to the number of customers who
order our DSL service. This reduces our overall capital expenditures until
additional paying customers have ordered our service. Where we cannot collocate
in a central office, we plan to install DSL equipment in nearby leased
facilities and connect such equipment to the central office.

We believe our relationship with Bell Atlantic is a key facilitator of our
strategy. In March 2000, we executed an interconnection agreement with Bell
Atlantic which allows us to collocate in multiple Bell Atlantic central offices
in areas in which we operate in New Jersey. We will need to enter into
interconnection agreements with Bell Atlantic in each of the other States in our
target market over the next two years. Our existing interconnection agreement
will contain an implementation schedule for collocation for business and
residential services in New Jersey. The agreement also includes:

- access to unbundled network elements;

- the switching and routing of service;

- reciprocal compensation for the transport and termination of local calls
over the terminating carrier's switch;

- network maintenance and management;

- number portability; and

- directory services, such as listing information and directory
assistance.

Focus on the small and medium-sized business market. We believe that small
and medium-sized businesses have significant and increasing needs for advanced
telecommunications services. We believe that incumbent local exchange carriers
have generally neglected to target these small and medium-sized businesses. Our
strategy is to meet these needs by offering customized solutions, integrated
telecommunications services and our QuikSpeed DSL services all on a single bill.
Many of our target customers want customized solutions but do not have the
internal expertise to design, purchase and maintain these kinds of systems and
services themselves. We believe that these target customers are not adequately
served by incumbent local exchange carriers who typically offer customized
solutions only to large customers. Our scalable service offerings allow us to
offer customized solutions to all customers. We believe our QuikSpeed DSL
service will be attractive to small and medium-sized businesses because it
provides voice and high-speed data services without the high costs associated
with a T-1 line.

Build market share by focusing on direct sales. We intend to sell directly
to customers and provide them personalized customer care through a single point
of contact. We often act as a consultant to our small and medium-sized business
customers who typically do not have an in-house telecommunications manager. We
believe that employing a direct sales force with extensive local market and
telecommunications sales experience, rather than independent representatives who
tend to be less technologically proficient, enhances the likelihood of success.
We intend to expand our direct sales force by adding approximately 28 in-house
sales professionals during 2000 to service our existing customer base as well as
to implement our rapid QuikSpeed DSL deployment plan. We believe that a larger
direct sales force will enable us to learn additional information from our
customers about their needs and preferences and help us expand our service
offerings to include additional value-added services based on customer demand.

Provide Superior Customer Service. We believe that superior customer
service is critical to attracting and retaining customers. We continually seek
to enhance our service approach, which utilizes a highly trained team of
customer sales and service representatives to coordinate customer installation,
billing and service. Our information systems provide integrated functionability
for all aspects of our business. Our experienced customer care representatives
provide 24x7 customer support. Our superior customer service is evidenced by our
low annual churn rate which has averaged 4.7% over the last three years.

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OUR NETWORK STRATEGY

Overview. We intend to pursue a "smart-build" network deployment strategy
that involves owning and operating our own switches while leasing transmission
lines on an incremental basis as customer demand dictates. Our strategy has been
to build a geographic concentration of customers before building, acquiring or
extending our network to serve those customers. Once this geographic
concentration exists and network economics justify deployment, we plan to expand
our switching transport capacity and migrate existing customers onto our
network. Currently, we have identified certain capital expenditures related to
the enhancement of our network to provide DSL and various value-added services.
We intend to use a portion of the proceeds of this offering to fund such capital
expenditures.

We believe that expanding control over certain components of our network,
rather than relying solely on the telecommunications facilities of third
parties, will enable us to have more flexibility in meeting customer needs for
new services. We believe expansion of our network will allow us to generate
higher operating margins, obtain origination and termination fees from other
carriers and maintain greater control over our network operations and service
quality. Where expected market penetration does not economically justify the
deployment of our own network elements, we will continue to utilize the networks
of alternative carriers. For customers outside of our target markets, we can
provide services through the resale of other carriers' services.

Our QuikSpeed DSL service will permit voice as well as data transmission.
We believe that by combining voice and data transmissions over one line, we will
substantially lower our aggregate costs for providing DSL service.

To roll-out our QuikSpeed DSL service, we intend to install DSLAM equipment
in or near strategically located Bell Atlantic central offices where we expect
customer demand to be greatest. We estimate that it will cost between $285,000
to $310,000 to lease space, purchase and install our equipment in each central
office we enter. We will also acquire DSL modems to lease to our customers at
their locations to interface with our network.

As of December 31, 1999, we had over 35,000 local access lines providing
local and long distance services and approximately 28,000 equal access lines
providing local toll and long distance services. Approximately 60% of this
traffic historically has originated and terminated on our network.

Integrated network architecture. We provide services to our customers over
a single integrated network that supports local, long distance and high-speed
data and Internet services. We believe that the integrated design of our local,
long distance and data networks significantly reduces our cost of providing a
bundled service offering. Our integrated network architecture includes customer
premise equipment, unbundled network elements, collocations, switches and an ATM
network which utilizes synchronous optical network, or SONET, fiber rings.

Unbundled network elements. To reach our customers, we lease simple copper
loops, or, if customer traffic justifies, T-1 lines, as unbundled network
elements, or UNEs, from the incumbent local exchange carrier. By utilizing UNEs,
we obtain access and termination revenues as if we owned the copper loop and are
able to rapidly connect the customer directly to our network. We are also able
to avoid the cost and delay associated with deploying our own fiber lines to our
customers' premises. We are not burdened by the operating and financing expenses
associated with owning a fiber optic transport network. To support our planned
high-speed DSL service, we plan to provide our customer with a DSL modem that we
connect digitally to a copper loop that we will lease as a UNE.

Collocation facilities. Our Centrex voice service network currently
interfaces with 70 Bell Atlantic central offices in New Jersey. In March 2000,
we entered into an interconnection agreement with Bell Atlantic which allows us
to collocate in Bell Atlantic central offices in any local area in which we
operate in New Jersey. With this ability to collocate, each UNE we deploy,
whether for local service or high-speed DSL service, will be a direct connection
from our customer to a collocation facility. Within each collocation facility,
we plan to deploy digital access nodes to support switched voice services, and

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DSLAMs to support our high-speed DSL service offering. This approach is designed
to be scalable in order to support emerging applications as customer
requirements dictate.

Where we do not have collocation facilities, we will install DSLAMs in
nearby leased facilities which we will connect to the central office. Where it
is not economically feasible to deploy such facilities, we intend to resell DSL
services of other providers. As a collocation becomes operational, we will
migrate local and DSL customers onto our own network facilities.

DSL modems and on-site connections. We will purchase DSL modems and lease
them to our customers as part of the DSL service contract. We will configure the
DSL modem and arrange for the installation of the modem and on-site wiring
needed to connect the modem to the copper telephone line that we lease. We plan
to contract with independent field service organizations to perform these
services, in addition to using a small internal staff.

Copper telephone lines. We will lease a copper telephone line running to
each customer from our equipment in the incumbent local exchange carrier's
central office under terms specified in our interconnection agreements with such
carriers. Each copper line must be specifically conditioned by the incumbent
local exchange carrier to carry digital signals, typically for an additional
charge.

Switching platforms. In 1995, we began operating our first switch, a
Siemens/Stromberg Carlson DCO (CS) Class 4 switch. In November 1999, we began
operating a Siemens EWSD Class 4/5 switch which is capable of handling DSL
traffic. We are in the process of migrating traffic from the Class 4 switch to
the Class 4/5 switch. After this migration, we plan to discontinue use of the
Class 4 switch. We also lease DS-3s which integrate hundreds of T-1's from Bell
Atlantic Centrex dedicated customers into our switching system.

All of our local and long distance switched services use Signaling System
7, or SS7, services for enhanced network efficiencies and increased customer
satisfaction. The SS7 signaling system reduces connect time delays, thereby
enhancing overall network efficiencies.

Transmission capacity. We currently lease our transmission lines from
interexchange carriers, incumbent local exchange carriers and other competitive
local exchange carriers. We currently lease transmission lines from Bell
Atlantic, Sprint, Qwest, RSL Communications, CNE Communications (formerly
Fonorola) and Cable and Wireless. We generally seek to lease fiber optic
transmission lines in each of our current and target markets and work with
carriers to ensure connections to SONETs wherever possible. This increases
network transmission capacity and improves service restoration following a fiber
optic cable failure on the core network.

Interconnection. We have an interconnection agreement with Bell Atlantic
covering New Jersey. As we expand our network into other portions of the Bell
Atlantic footprint, we will need to enter into additional interconnection
agreements with Bell Atlantic covering certain new states we enter. Each
interconnection agreement we enter into with Bell Atlantic is subject to
approval of the relevant state utility commission. Under the terms of the
Telecom Act, each incumbent local exchange carrier is required to negotiate
interconnection agreements with competitive local exchange carriers. Where an
interconnection agreement cannot be reached on terms and conditions satisfactory
to us, we may pursue arbitration of any disputes before the state utility
commissions as provided under the Telecom Act. In states where collocation is
available through tariffs, we plan on collocating pursuant to available tariffs.

Information systems. Our current information system supports the following
applications:

- a customer billing retrieval system supporting six years of prior
invoicing;

- a tracking system covering all customer records, order entry, trouble
tickets and sales information;

- call detail record rating and billing operations;

- a complete scanning and retrieval system;

- Internet and e-mail connectivity; and

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- an on-line Internet retrieval system supporting both sales professionals
and customer billing and reporting.

We plan to tailor and upgrade our information systems and procedures to satisfy
changing customer requirements.

Orders are received through the United States mail, fax, or the Internet
and scanned electronically into various databases. Credit is checked via on-line
connectivity with various credit reporting agencies and the orders are processed
with multiple local exchange carriers and underlying carriers. The individual
process varies from electronic data entry to handwritten orders. Call detail
from our two switches and underlying carriers are rated on a daily basis. We
provide consolidated billing with our proprietary billing system. Billing
reports and invoicing are produced on a single cycle at the end of the month.

SERVICES

We have tailored our scalable voice, data and Internet service offerings to
meet the specific needs of small and medium-sized businesses. Through our direct
sales force, we are able to further customize service offerings to meet our
customer's needs.

Local services. We provide local telephone services including local toll
service, via Centrex. Centrex is a business voice service offered by a local
telephone company from a local central office. Centrex offers features similar
to those of a PBX, or a private branch exchange. Through Centrex service, small
and medium-sized businesses are able to avoid the costs of locating expensive
equipment at their own premises. Some of the Centrex features include intercom,
call forwarding, call transfer, toll restriction, least cost routing and call
hold.

Long distance services. We provide domestic and international long
distance services. Long distance calls which do not terminate on our network are
passed to long distance carriers which route the remaining portion of the call.
As our customers grow geographically, we can service their branch offices across
the United States by providing the long distance services of other carriers. Our
ability to integrate local and long distance services allows us to aggregate a
customer's monthly recurring, local usage and long distance in bound and out
bound charges on a single, consolidated bill.

QuikSpeed DSL services. We are preparing to broadly introduce DSL service
in April 2000 under the name "QuikSpeed." We began offering QuikSpeed DSL
service in September 1999 on a limited basis. As of March 15, 2000 we had 137
customers for QuikSpeed service. DSL technology is a cost-effective means of
providing high-speed data transmission using existing copper telephone lines.
Our QuikSpeed DSL service will permit voice as well as data transmission. We
believe that by combining voice and data transmissions over one line, we will
substantially lower our aggregate cost for providing DSL service.

We currently offer Symmetrical DSL, or SDSL service, which provides up to
1.54 megabits per second of speed to and from the customer. The speed and
effectiveness of the DSL connection varies based on a number of factors,
including the distance of the customer from the central office and the condition
of the copper line that connects the customer to the central office.

VPN services. Virtual private networks, or VPNs, are generally used to
connect the separate locations of a single business beyond the local calling
area. Our VPN services include a dedicated, non-switchable link from one or more
customer-specified locations to other customer-specified locations. We provide
these services by leasing required network facilities.

Switched digital services. Switched digital services provide the
capability to transmit voice, video or data. These services allow a customer to
transmit at full duplex, digital synchronous 56/64 kilobits per second or
higher.

Frame relay. Our frame relay services are designed for customers requiring
the flexibility of serving single or multiple locations from one originating
location. These services can be used to facilitate multi-media networking
between high-speed devices such as work stations, super computers, routers and
bridges. We currently have nationwide availability.
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Enhanced Internet services. We offer dedicated and dial-up high-speed
Internet access services. Dedicated access services are telecommunications lines
dedicated or reserved for use by particular customers. Our Internet services
also include e-mail, web hosting, website design and dial-up services for our
customers' employees.

VDSL. When network demand is light, we intend to offer VDSL to our
customers to take advantage of excess capacity. VDSL allows customers to access
video data such as movies and video games over their personal computers.

Value-Added services. In addition to these services, we offer additional
value-added services to compliment our core local and long distance services,
including:

- Audioconferencing. This service allows up to 1,000 toll callers and up
to 60 local callers to communicate at the same time.

- Audio 2000 and Directory Live. This service allows customized telephone
commercials and Internet advertising for our customers and also allows
them to establish a customer website.

- Calling Cards. These traditional calling cards allow the user to place
calls from anywhere in the United States or Canada. We offer features
such as conference calling, international origination, speed dialing and
messaging.

- Cellular Service. We provide economical outbound long distance and
international calling and equipment for cellular telephone service.

- Videoconferencing. We provide video and audio telecommunication between
two or more people via a videocodec at either end and linked by digital
circuits.

- Integrated Billing On-Line. We provide our customers with a single bill
for all of their telecommunications services. These integrated billings,
which are also available on-line or on CD-ROM, permit our customers to
better analyze their telecommunications expenditures. Our billing
on-line service allows customers to access in a second environment and
manipulate the data within the bill in conducting their customized
analysis.

Unified messaging. We are currently testing a unified messaging service
which will enable customers to direct, retrieve, deliver, compile and manage
their voice telecommunications through a single telephone number.

Services under development. We are currently developing the following
service offerings:

- data-only Asymmetrical DSL, or ADSL, which we plan on deploying by the
end of this year, which will provide up to nine megabits per second; and

- application oriented services such as the ability to block telemarketing
calls.

SALES AND MARKETING

Sales. Currently, our sales and marketing efforts are directed through a
network of commission-based independent agents and a direct sales force of
professionals primarily focused on cultivating new accounts and maintaining and
expanding existing accounts. As we expand our service offerings, we believe that
a direct sales force is more effective to capitalize on cross-selling
opportunities. Therefore, we intend to increase our direct sales force from
seven to 35 professionals, by December 31, 2000. We plan to accomplish this, in
part, by recruiting from the most effective of our 85 independent
representatives. By the end of 2001, we plan to have a sales force equally
divided between direct sales people and independent agents. Unlike large
businesses, our small to medium-sized business customers typically have no
in-house telecommunications manager and generally can make decisions concerning
telecommunications services in a relatively short time frame. Our experienced
sales professionals work closely with the decision maker in such businesses to
analyze their telecommunications needs and provide responsive solutions in a
short period of time.

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All new sales representatives receive formal training to give them a
thorough knowledge of our services. We train our sales force with a
customer-focused program that promotes increased sales through both customer
attraction and customer retention.

We will continue to seek salespeople with strong sales backgrounds in our
existing and target markets, including salespeople from long distance companies,
telecommunications equipment manufacturers, network systems integrators and
incumbent local exchange carriers. We plan to continue to attract and retain
highly qualified salespeople by offering them an opportunity to work with an
experienced management team in an entrepreneurial environment and to participate
in the potential economic rewards made available through a results-oriented
compensation program that emphasizes commissions based upon continuing sales
with a customer. We believe this gives us a competitive advantage in attracting
and retaining sales personnel.

Our sales force compensation strategy is designed to provide significant
incentives for customer retention. We compensate all sales personnel with both a
salary and a commission structure based on signing new customers and retaining
existing customers. We believe that our compensation structure motivates each
sales person to remain actively involved with customers and participate in the
customer support process. We believe this approach provides us with competitive
advantages that increase customer retention and cross-selling opportunities and
reduce the costs of customer support.

Marketing. In our existing markets, we position ourselves as a high
quality alternative to the incumbent local exchange carrier by offering a
complete package of customized voice, data and Internet services conveniently on
a single bill. This is designed to allow us to capture the total
telecommunications expenditures of any single customer. Through our QuikSpeed
DSL roll-out, we also plan to market new customers who may become customers for
our other services. We offer network reliability and superior customer support
at competitive prices. We intend to build our reputation and brand identity by
working closely with our customers to develop services tailored to their
particular needs and by implementing targeted advertising and promotional
efforts, such as print ads, cable advertising and direct mail. Marketing
personnel identify potential business customers by several methods, including
customer referral, market research and telemarketing.

CUSTOMERS

Our 7,500 small and medium-sized business customers for voice service
include regional banks, alarm companies, universities, healthcare providers,
real estate agencies, law firms, telemarketers and transportation companies. The
majority of our customers are located in New Jersey, and we plan to aggressively
expand our services to Pennsylvania, New York, Massachusetts and portions of
Connecticut. We have targeted potential large volume users of our services such
as businesses who have intranets and extranets or who make significant use of
the Internet. Our target customers are businesses with fewer than 100 employees
with telecommunications service costs ranging from $400 to $5,000 per month.

Our target customers, particularly for DSL services, include our existing
base of 7,500 small and medium-sized business customers as well as the
following:

- businesses currently using other high-speed data telecommunications
services, such as T-1, ISDN, or Integrated Services Digital Network, and
frame relay services, or low-speed dial-up Internet access;

- professional or service-based firms that have multiple ISP accounts and
phone lines;

- branch offices that require transmission of large files between
locations;

- businesses with a substantial amount of revenue from mail order or
Internet sales from customers outside their immediate geographic
territory; and

- businesses that use data-intensive applications, such as financial
services, technology, and publishing.

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None of our customers accounted for more than 5% of our total revenues in
either fiscal 1999 or the first six months of fiscal 2000. Our customer churn
rate has averaged 4.7% over the last three years.

CUSTOMER SERVICE

We believe that superior customer service is critical to attracting and
retaining customers. We continually seek to enhance our service approach, which
utilizes a highly trained team of customer sales and service representatives to
coordinate customer installation, billing and service. Our information systems
are designed to provide integrated functionality for all aspects of our
business, including order provisioning and monitoring, customer care and
billing.

We provide 24x7 customer support primarily through our Network Operations
Control Center, or NOCC, located in Belleville, New Jersey. Experienced customer
care representatives answer all customer calls. Many of our customer care
representatives are cross-trained in sales, allowing customers to work with a
single representative.

The NOCC is a single point of interface for monitoring all of the networks
and provisioning services and systems necessary to operate the network. The NOCC
is designed to accommodate our anticipated growth. The NOCC is utilized for a
variety of network management and control functions, such as trouble resolution,
trouble ticket status and carrier interface. The NOCC is located with the
provisioning, testing and business office functions. In addition, the NOCC
maintains a database of circuits and network availability. Highly trained
technicians monitor our network 24 hours a day, to ensure the highest quality
transmissions. We conduct monthly or quarterly meetings with each of our
telecommunications service providers to assess service levels, order status,
trouble ticket resolution and commitment levels.

Our customer support department currently receives approximately 320
support calls per day. We believe that our level of customer service will
provide us with a competitive advantage selling local and DSL services. As of
December 31, 1999, we employed 20 people in customer support provisioning. We
anticipate that we will continue to hire additional customer support personnel
as the size of our customer base increases.

COMPETITION

The telecommunications industry is highly competitive. We believe that the
principal competitive factors affecting our business will be pricing, network
reliability, broad service offerings, customer service and accurate billing. Our
ability to compete effectively will depend upon our continued ability to
maintain high quality, market driven services at prices generally equal to or
below those charged by our competitors. To maintain our competitive posture, we
believe that we must be in a position to reduce our prices in order to meet
reductions in rates, if any, by others. Any such reductions could adversely
affect us. Many of our current and potential competitors have financial,
personnel, and other resources, including brand name recognition, substantially
greater than ours as well as other competitive advantages over us.

Incumbent Local Exchange Carriers. In each of the markets we have
targeted, we will compete principally with Bell Atlantic, the incumbent local
exchange carrier servicing New Jersey, New York, Pennsylvania, Massachusetts and
portions of Connecticut. Bell Atlantic is now able to offer long distance
services to its local telephone customers in New York. Bell Atlantic and the
other regional Bell operating companies are actively seeking removal of federal
regulatory restrictions that prevent them from entering the long distance market
in other states. Many experts expect the regional Bell operating companies to be
successful in entering the long distance market in other states within the next
two years. We believe the regional Bell operating companies expect to offset
market share losses in their local markets by capturing a significant percentage
of the long distance market.

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The regional Bell operating companies and other local telephone companies
have the following competitive advantages:

- long-standing relationships with their customers;

- substantially greater financial, technical and marketing resources;

- ability to subsidize competitive services with revenues from a variety
of businesses;

- long-standing relationships with regulatory authorities at the federal
and state levels; and

- certain existing regulations that favor the incumbent local exchange
carriers over us in certain respects.

While recent regulatory initiatives, which allow competitive local exchange
carriers such as ourselves to interconnect with incumbent local exchange carrier
facilities, provide us with increased business opportunities, such
interconnection opportunities have been, and likely will continue to be,
accompanied by increased pricing flexibility for and relaxation of regulatory
oversight of the incumbent local exchange carriers.

The FCC recently adopted an order that provides for increased incumbent
local exchange carrier pricing flexibility and deregulation of some access
services and provides a framework of increased pricing flexibility of other
services based on a showing by the incumbent local exchange carrier that there
exists facilities-based competition in specified geographic areas. After meeting
these requirements, incumbent local exchange carriers will be allowed to offer
discounts to large customers through contract arrangements. The order also
permits incumbent local exchange carriers to offer new access services by filing
tariffs without prior approval and dispensing with the requirement that they
provide cost supports for their pricing. The FCC also issued a Notice of
Proposed Rulemaking that would permit added pricing flexibility for local
exchange carriers for additional services conditioned on to be determined
competitive criteria and initiates an inquiry into whether competitive local
exchange carrier access rates should be regulated. Implementation of the FCC's
order could have a material adverse effect on us. As purchasers of access
services, we may see increased competition for those services which could lower
prices we have to pay for such services.

Competitive Access Carriers/Competitive Local Exchange Carriers/Other
Market Entrants. We also face, and expect to continue to face, competition from
other current and potential market entrants, including:

- long distance carriers seeking to enter, re-enter or expand entry into
the local exchange market such as AT&T, MCI Worldcom, and Sprint;

- other competitive local exchange carriers;

- out-of-region incumbent local exchange carriers;

- resellers of local exchange services;

- cable television companies;

- electric utilities;

- microwave carriers;

- wireless telephone system operators; and

- private networks built by large end-users.

In addition, a continuing trend toward mergers, acquisitions and strategic
alliances in the telecommunications industry could also increase the level of
competition we face. Consolidation is also occurring in the incumbent local
exchange carrier industry, such as the proposed plans for mergers between SBC
and Ameritech, and between Bell Atlantic and GTE. These types of consolidations
and alliances could put us at a further competitive disadvantage.
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The Telecom Act imposes certain regulatory requirements on all local
exchange carriers, including competitors such as ourselves, while granting the
FCC expanded authority to reduce the level of regulation applicable to any or
all telecommunications carriers. The manner in which these provisions of the
Telecom Act are implemented and enforced could have a material adverse effect on
our ability to successfully compete against incumbent local exchange carriers
and other telecommunications service providers.

The changes in the Telecom Act radically altered the market opportunity for
traditional competitive local exchange carriers. Because many existing
competitive local exchange carriers initially entered the market providing
dedicated access in the pre-1996 era, they had to build a fiber infrastructure
before offering services. Since 1996, switches were added by most competitive
local exchange carriers to take advantage of the opening of the local market.
With the Telecom Act requiring unbundling of the incumbent local exchange
carrier networks, competitive local exchange carriers are now able to enter the
market more rapidly by installing switches and leasing fiber transport capacity
until traffic volume justifies building facilities. New competitive local
exchange carriers will not have to replicate existing facilities and can be more
opportunistic in designing and implementing networks.

Competition for Provision of Long Distance Services. The long distance
telecommunications industry has numerous entities competing for the same
customers and a high average churn rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. We believe that business customers have a lower
average churn rate. Prices in the long distance market have declined
significantly in recent years and are expected to continue to decline.

Data/Internet Service Providers. The competition for ISP customers in the
telecommunications industry is high and we expect that competition will
intensify. In addition, alternative competing technologies regarding this
service may emerge. Our competitors in this market include other
telecommunications companies, including integrated on-line services providers
with their own telecommunications networks. Many of these competitors have
greater financial, technological, marketing, personnel and other resources than
ours.

Cable Modem Service Providers. Cable modem service providers, such as
Excite@Home and its cable partners, are offering or preparing to offer
high-speed Internet access over cable networks to consumers and businesses.
Where deployed, these networks provide high-speed local access services, in some
cases at speeds higher than DSL service.

Wireless and Satellite Data Service Providers. Several new companies,
including Advanced Radio Telecom, Teligent and WinStar Communications, are
emerging as wireless data service providers. In addition, other companies,
including Motorola Satellite Systems and Hughes Communications, are emerging as
satellite-based data service providers. These companies use a variety of new and
emerging technologies to provide high-speed data services.

Competition from International Telecommunications Providers. Under the
recent World Trade Organization agreement on basic telecommunications services,
the United States and 68 other members of the World Trade Organization committed
themselves to opening their respective telecommunications markets to foreign
ownership and/or to adopting regulatory measures to protect competitors against
anticompetitive behavior by dominant telecommunications companies, effective in
some cases as early as January 1998. Although we believe that the World Trade
Organization agreement could provide us with significant opportunities to
compete in markets that were not previously accessible and to provide more
reliable services at lower costs than we could have provided prior to
implementation of the World Trade Organization agreement, it could also provide
similar opportunities to our competitors. There can be no assurance that the
pro-competitive effects of the World Trade Organization agreement will not have
a material adverse effect on our business prospects, financial condition and
results of operations or that members of the World Trade Organization will
implement the terms of the World Trade Organization agreement.

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REGULATION

Our telecommunications and information services business is subject to
varying degrees of federal, state and local regulation.

FEDERAL REGULATION

Overview. The FCC regulates interstate and international
telecommunications services. The FCC imposes extensive regulation on common
carriers such as incumbent local exchange carriers that have some degree of
market power. The FCC imposes less regulation on common carriers without market
power, such as us. The FCC permits nondominant carriers to provide domestic
interstate services (including long distance and local access services) without
prior authorization; but it requires carriers to receive an authorization to
operate facilities, or resell telecommunications services between the United
States and international points. We have obtained FCC authorization to provide
international services and have filed tariffs for our interstate and
international long distance services with the FCC. We are also required
periodically to pay federal regulatory fees and to file reports regarding our
international traffic and revenues. Failure to comply with these requirements
could subject us to fines and penalties. We are in compliance with most of these
requirements and have undertaken to achieve full compliance.

Telecommunications Act of 1996 and Implementing Regulations. We are also a
competitive local exchange carrier competing with incumbent local exchange
carriers such as the regional Bell operating companies subject to the provisions
of the Telecom Act. The Telecom Act is intended to increase competition by
permitting any entity, including cable television companies, and utilities, to
enter any telecommunications market, subject to reasonable state regulation of
safety, quality and consumer protection. Because implementation of the Telecom
Act is subject to numerous federal and state policy rulemaking proceedings and
judicial review, there is still uncertainty as to what impact it will have on
us.

The Telecom Act opens the local services market by requiring incumbent
local exchange carriers to permit interconnection to their networks and
establishing incumbent local exchange carriers' obligations with respect to:

- Reciprocal Compensation. Requires all incumbent local exchange carriers
and competitive local exchange carrier to complete calls originated by
competing carriers under reciprocal arrangements at prices based on a
reasonable approximation of incremental cost or through mutual exchange
of traffic without explicit payment.

- Resale. Requires all incumbent local exchange carriers and competitive
local exchange carriers to permit resale of their telecommunications
services without unreasonable restrictions or conditions. In addition,
incumbent local exchange carriers are required to offer wholesale
versions of all retail services to other telecommunications carriers for
resale at discounted rates, based on the costs avoided by the incumbent
local exchange carrier in the wholesale offering.

- Interconnection. Requires all incumbent local exchange carriers and
competitive local exchange carriers to permit their competitors to
interconnect with their facilities. Requires all incumbent local exchange
carriers to permit interconnection at any technically feasible point
within their networks, on nondiscriminatory terms and at prices based on
cost (which may include a reasonable profit). At the option of the
carrier seeking interconnection, collocation of the requesting carrier's
equipment in an incumbent local exchange carrier's premises must be
offered, except where the incumbent local exchange carrier can
demonstrate space limitations or other technical impediments to
collocation.

- Unbundled Access. Requires all incumbent local exchange carriers to
provide nondiscriminatory access to specified unbundled network elements
(including certain network facilities, equipment, features, functions,
and capabilities) at any technically feasible point within their
networks, on nondiscriminatory terms and at prices based on cost (which
may include a reasonable profit).

- Number Portability. Requires all incumbent local exchange carriers and
competitive local exchange carriers to permit, to the extent technically
feasible, users of telecommunications services

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to retain existing telephone numbers without impairment of quality,
reliability or convenience when switching from one telecommunications
carrier to another.

- Dialing Parity. Requires all incumbent local exchange carriers and
competitive local exchange carriers to provide "l+" equal access to
competing providers of telephone exchange service and toll service, and
to provide nondiscriminatory access to telephone numbers, operator
services, directory assistance, and directory listing, with no
unreasonable dialing delays.

Access to Rights-of-Way. Requires all incumbent local exchange carriers
and competitive local exchange carriers to permit competing carriers access to
poles, ducts, conduits and rights-of-way at regulated prices.

Incumbent local exchange carriers are required to negotiate in good faith
with carriers requesting any or all of the above arrangements. If the
negotiating carriers cannot reach agreement within a prescribed time, either
carrier may request binding arbitration of the disputed issues by the state
regulatory commission. We recently executed an interconnection agreement with
Bell Atlantic.

The FCC established the rules implementing the above requirements and
provided guidelines for review of interconnection agreements by state public
utility commissions in its August 1996 Interconnection Decision. The specific
terms and scope of the interconnection rules has been shaped by subsequent
litigation in the federal courts, including the Supreme Court. The FCC recently
released an order largely retaining its list of unbundled network elements but
eliminating the requirement that incumbent local exchange carriers provide
unbundled access to local switching for customers with four or more lines in the
densest portion of the top 50 Metropolitan Statistical Areas, operator services
and directory assistance.

These federal court decisions continue to cause uncertainty about the rules
governing the pricing, terms and conditions of interconnection agreements.
Although state public utilities commissions have continued to conduct
arbitrations, and to implement and enforce interconnection agreements during the
pendency of the United States Court of Appeals for the Eighth Circuit
proceedings, the Supreme Court's recent ruling and further proceedings on remand
may affect the scope of state commissions' authority to conduct such proceedings
or to implement or enforce interconnection agreements. Given the general
uncertainty surrounding the effect of these decisions, we may not be able to
continue to obtain or enforce interconnection terms that are acceptable to us or
that are consistent with our business plans.

Regional Bell Operating Companies' Authority to Offer In-Region Long
Distance Service. The Telecom Act permits a regional Bell operating company to
enter the long distance market in its traditional service area if it satisfies
several procedural and substantive requirements, including obtaining FCC
approval upon a showing that 1) the regional Bell operating company has entered
into interconnection agreements, 2) under some circumstances, the regional Bell
operating company has offered to enter into such agreements in those states in
which it seeks long distance relief, 3) the interconnection agreements satisfy a
14-point checklist of competitive requirements, and 4) the FCC is satisfied that
the regional Bell operating company's entry into long distance markets is in the
public interest. The Telecom Act permitted the regional Bell operating company
to enter the out-of-region long distance market immediately upon its enactment.
Recently, the FCC approved Bell Atlantic's petition to offer long distance in
New York. The FCC's decision has been appealed to the United States Court of
Appeals for the District of Columbia Circuit, or the D.C. Circuit, which, on
January 27, 2000, declined to stay the FCC's decision pending appeal. Bell
Atlantic therefore has begun to provide long distance service in New York, one
of our target markets for providing services including long distance services.
Bell Atlantic is also in the process of applying for, and may obtain, authority
to offer in-region long distance services in other states within our target
geographic region.

Tariffs. The FCC has attempted to eliminate, in an October 1996 order, the
requirement that non-dominant carriers such as us maintain tariffs on file with
the FCC for domestic interstate services. The order does not apply to regional
Bell operating companies, such as Bell Atlantic, or other local exchange
providers. That order has been stayed by the D.C. Circuit pending its review of
the order on the merits.

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If the stay is lifted and the FCC order becomes effective,
telecommunications carriers such as us will no longer be able to rely on the
filing of tariffs with the FCC as a means of providing notice to customers of
prices, terms and conditions on which they offer their interstate services.

Access Charges. Our cost of providing long distance services, as well as
our revenues from providing local services, are affected by changes in the
access charge rates imposed by incumbent local exchange carriers on long
distance carriers for origination and termination of calls over local
facilities. The FCC has made major changes in the interstate access charge
structure, including recent changes granting price cap local exchange carriers
additional pricing flexibility. If this increased pricing flexibility is not
effectively monitored by federal regulators, it could have a material adverse
effect on our ability to price our interstate access services competitively. A
recent FCC order also initiated a rulemaking to determine whether the FCC should
regulate the access charges of competitive local exchange carriers.

Reciprocal Compensation for ISP Traffic. Several FCC and state public
utility commission rulings may affect our ability to recover reciprocal
compensation for ISP traffic. Beginning in June 1997, regional Bell operating
companies such as Bell Atlantic advised competitive local exchange carrier that
they did not consider calls in the same local calling area from their customers
to competitive local exchange carriers customers, who are ISPs, to be local
calls under the interconnection agreements between the regional Bell operating
companies and the competitive local exchange carriers. The regional Bell
operating companies claim that these calls are exchange access calls for which
exchange access charges would be owed. The regional Bell operating companies
claimed, however, that the FCC exempted these calls from access charges so that
no compensation is owed to the competitive local exchange carrier for
transporting and terminating such calls. As a result, the regional Bell
operating companies threatened to withhold, and in many cases did withhold,
reciprocal compensation for the transport and termination of such calls.

On February 25, 1999, the FCC adopted a Declaratory Ruling on reciprocal
compensation for local exchange traffic to ISPs. The FCC determined that traffic
to Internet service providers is largely interstate, which would relieve the
carrier originating such traffic of the obligation to pay reciprocal
compensation. On appeal the D.C. Circuit recently vacated the FCC's decision and
required the FCC to provide better support for its determination. Separately,
the FCC has initiated a proceeding to determine an alternative compensation
scheme for Internet traffic. We currently do not receive reciprocal compensation
for ISP traffic under our interconnection agreement with Bell Atlantic in New
Jersey, and we may never be able to obtain such compensation in New Jersey or
any other state.

Regulation of Internet Services. The FCC has to date treated ISPs as
enhanced service providers, exempt from federal and state regulations governing
common carriers, including the obligation to pay access charges and contribute
to the universal service fund. Nevertheless, regulations governing disclosure of
confidential communications, copyright excise tax, and other requirements may
apply to our provision of Internet access services. We cannot predict the
likelihood that state, federal or foreign governments will impose additional
regulation on our Internet business, nor can we predict the impact that future
regulation will have on our operations.

Universal Service. The FCC has established a significantly expanded
federal universal service subsidy regime. In a May 1997 order, the FCC
established new universal service funds to support telecommunications and
information services provided to qualifying schools and libraries and to rural
health care providers. The FCC also expanded the federal subsidies for local
exchange telephone services provided to low-income consumers. Providers of
interstate telecommunications service, such as us, as well as certain other
entities, must pay for these programs. Our contribution to these universal
service funds is based on our telecommunications service end-user revenues.
Currently, the FCC assesses such payments on the basis of a provider's revenue
for the previous year. We are currently unable to quantify the amount of future
subsidy payments that we will be required to make and the effect that these
required payments will have on our financial condition because of uncertainties
concerning the size of the universal fund and uncertainties concerning the
classification of ours services. The FCC has also announced that it will revise
its rules for subsidizing service provided to consumers in high cost areas,
which may result in further

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substantial increases in the overall cost of the subsidy program. The FCC's
universal service program may also be altered as a result of the agency's
reconsideration of its policies, or by future Congressional action.

Collocation. In March 1999, the FCC adopted rules designed to make it
easier and less expensive for competitive local exchange carrier such as us to
collocate our equipment at the central offices of incumbent local exchange
carriers such as Bell Atlantic. The rules, among other things, restricted the
incumbent local exchange carrier's ability to prevent certain types of equipment
from being collocated and required incumbent local exchange carriers to offer
alternative collocation arrangements which will be less costly. The D.C. Circuit
recently overturned portions of those rules, holding that they allow competitive
local exchange carriers too much leeway to collocate multifunctional equipment,
connect with other competitive local exchange carriers, and decide, over
incumbent local exchange carrier objections, where to place equipment in
incumbent local exchange carrier premises. The Court directed the FCC to
redefine the terms that the court considered over broad in further proceedings.

Digital Wiretapping. The Communications Assistance to Law Enforcement Act,
or CALEA, enacted in 1994, requires telecommunications carriers to make
available certain telecommunications capabilities to United States law
enforcement officials to permit those authorities to continue to intercept
communications involving advanced technologies such as digital and wireless
transmission communications. As a telecommunications carrier, we are obligated
to ensure that our equipment, facilities, and services will meet capability and
capacity requirements in order to enable law enforcement agencies to intercept
wireline and wireless transmission communications transmitted over our network.
Courts may impose fines of up to $10,000 per day on telecommunications carriers
that fail to meet the required capability functions, as determined by industry
standards. We are also required to meet a CALEA capacity requirement mandating
that, by March 12, 2001, carriers enable a specific number of simultaneous
interceptions determined on a geographic basis. We cannot predict the nature and
extent of the impact that the CALEA requirements will have on us in general.

Regulation That Particularly Affects DSL Services. To provide DSL services
we will lease necessary network elements from incumbent local exchange carriers
such as Bell Atlantic or resell the DSL services that they offer to their retail
customers. The FCC has adopted and is considering several regulations that
particularly affect the rates, terms and conditions upon which we can obtain
these elements and services and our ability to compete in the DSL market.

- Advanced Services Orders. In August 1998, the FCC adopted requirements
for incumbent local exchange carriers such as Bell Atlantic to offer to
competitive local exchange carriers such as us the necessary unbundled
network elements to provide advanced data transmission services. The FCC
concluded that DSL services are telecommunications services and,
therefore, incumbent local exchange carriers are required (a) to allow
interconnection of their facilities and equipment used to provide data
transport functionality, such as unbundled local telecommunications
lines, and (b) to offer for resale DSL services. This decision has been
the subject of appeals and further litigation.

In a separate context, the FCC recently reaffirmed its conclusion that
incumbent local exchange carriers must offer their retail DSL services
at a discount to competitive local exchange carriers for resale. The FCC
clarified, however, that DSL services provided to ISPs would not be
subject to resale at a discount. Accordingly, incumbent local exchange
carriers may enter into volume and term discounts for the provisioning
of DSL services for ISPs without having to make such arrangements
available to other requesting competitive local exchange carriers at
discounted rates. The FCC has thus allowed Bell Atlantic to sell its DSL
services at a discounted price to ISPs who commit to buying Bell
Atlantic's DSL service in bulk over a multi-year period for resale to
consumers. This FCC decision could adversely affect us if it gives ISPs,
particularly large ISPs such as America Online, an economic incentive to
use Bell Atlantic to meet all of their DSL needs in order to qualify for
the bulk discount pricing that Bell Atlantic now offers

- Line Sharing. The FCC recently ruled that incumbent local exchange
carriers are required to provide line sharing, which will allow
competitive local exchange carriers such as us to offer data
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services over the same copper line the consumer uses for voice services
without the competitive local exchange carrier being required to offer
the voice services. The FCC's December 1999 ruling provides for state
PUCs to establish the prices that incumbent local exchange carriers may
charge to competitive local exchange carrier for such services. While
the rates for line sharing have not yet been determined, the FCC's order
is expected to result in lower costs for competitive local exchange
carrier to obtain copper telephone lines to provide some types of DSL
services. The FCC's order has been appealed to the D.C. Circuit. Even if
the FCC's order is upheld, further arbitration proceedings at the state
level may be required to enforce the FCC requirements. The line sharing
requirements are also subject to technical restrictions to prevent
disruptions in any services that the incumbent local exchange carrier
may provide on the same line. It is uncertain whether we will be able to
benefit from the FCC's line sharing decision.

- Separate DSL Affiliate Requirements. In various proceedings, the FCC
has considered whether incumbent local exchange carriers such as Bell
Atlantic may or should provide advanced data services through a separate
affiliate. In the proceeding in which the FCC recently granted Bell
Atlantic authority to provide long distance services in New York, Bell
Atlantic agreed to provide DSL services in New York through a separate
affiliate. At present it is not clear how Bell Atlantic's use of a
separate affiliate to provide DSL services will ultimately affect
competing DSL providers such as us. On the one hand, the establishment
of a separate DSL affiliate could benefit Bell Atlantic by allowing it
to offer advanced services to the public on a largely unregulated basis.
On the other hand, the establishment of a separate DSL affiliate could
benefit competitors like us by enabling us to obtain interconnection,
unbundled network elements and other wholesale services under the same
rates, terms and conditions as those offered by Bell Atlantic to its
affiliate. We cannot determine the affect of separate DSL affiliate
requirements until those requirements have been further implemented and
enforced.

Cellular Service. The package of telecommunications services that we
provide includes cellular services of Bell Atlantic Mobile, or BAM, that we
resell to our customers. Under Section 20.12 of the FCC's rules, BAM must permit
unrestricted resale of its cellular services. The resale requirement under
Section 20.12 of the FCC's rules expires in November of 2002.

Our resale of cellular service is generally unregulated, except for fees
and assessments such as universal service fund contributions. Our underlying
provider, BAM, must be licensed by the FCC to provide cellular services. If BAM
fails to comply with FCC regulations, then the FCC could take enforcement action
such as revoking or declining to renew a BAM license. BAM could also terminate
its cellular service at any time because of insolvency or other reasons beyond
our control. If we were unable to resell BAM's cellular services for any reason,
we may be unable to obtain replacement services on acceptable terms or at all.
Any change in the underlying cellular service provider could require changes in
customer equipment at significant expense and inconvenience to our customers.

Slamming. A user may change service providers at any time, but the FCC
regulates the process. Specific client-instituted procedures must be followed,
and when they are not, particularly if the change is unauthorized or fraudulent,
the process is known as slamming. The FCC recently decided to apply its slamming
rules, which originally covered only long distance, to local service. The FCC
has levied significant fines for certain slamming cases. The risk of financial
damage and harm to business reputation from slamming offenses can be
significant. Several complaints alleging slamming have been filed at the FCC
over the past five years, but none has resulted in adverse FCC action.

STATE REGULATION

The states' regulation of competitive local exchange carrier varies in
intensity. The majority of states require that companies seeking to provide
local exchange and other intrastate services apply for and obtain the requisite
authorization from the state public utility commission. The resale of services
provided by other carriers is sometimes exempt from such requirements. The
authorization process generally requires the carrier to demonstrate that it has
sufficient financial, technical and managerial capability and that

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granting the authorization will serve the public interest. We currently provide
resold competitive local exchange services and intrastate long distance services
in New Jersey and Massachusetts, which do not require specific authorization by
the state public utility commission for these services. In New York, North
Carolina and Pennsylvania, we provide resold intrastate long distances services
under authorizations issued by the state public utility commissions as required
in those states. We intend to file in the near future applications for authority
in additional states or to expand the authority we have already obtained in the
above states. There can be no assurance that such state authorizations will be
granted on a timely basis, or at all.

In the states in which we operate, we are, and will continue to be, subject
to regulatory directives. Most states require that competitive local exchange
carriers charge just and reasonable rates and not discriminate among similarly
situated customers. Other state requirements include the filing of periodic
reports, the payment of various regulatory fees and surcharges, and compliance
with service standards and consumer protection rules. In most states, intrastate
tariffs are required for various intrastate services, although non-dominant
carriers like us are not typically subject to price or rate of return regulation
for tariffed intrastate services.

Many states require prior approvals or notifications for certain transfers
of assets, customers, or ownership, including reorganizations, of certificated
carriers, and for the issuance of stock, debt and related transactions. Our
holding company structure will reduce the impact of many of these requirements.
We have not received approval for our reorganization into a holding company
structure. We are filing the necessary papers at the relevant public utility
commissions seeking approval, retroactively as necessary, of the reorganization
and arguing that approval of the transaction is in the public interest. Although
we believe that our applications will be approved in due course, it is possible
that the state commissions will deny the applications and/or impose fines,
license conditions, commence revocation proceedings or otherwise exercise their
authority to address violations of statutes and regulations.

State public utility commissions have a substantial role in setting rates
for unbundled elements and wholesale services that we need to purchase from
incumbent local exchange carriers to provide service to our customers. The
results of state rate-setting proceedings have determined, and will continue to
determine, the price we pay for, and whether it is economically attractive for
us to use, these network elements and services. State public utility commissions
also have broad authority to review and approve, reject, or set the terms of our
interconnection agreements with incumbent local exchange carriers.

LOCAL REGULATION

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

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FACILITIES

We are headquartered in Belleville, New Jersey and lease, pursuant to oral
and written lease agreements, offices and space in a number of locations
primarily for sales and marketing offices and network equipment deployment. As
of November 30, 1999, we leased offices and space at three locations. The table
below lists our material facilities:

APPROXIMATE
LOCATION USE LEASE EXPIRATION SQUARE FOOTAGE
- -------- --- ---------------- --------------

Belleville, NJ corporate headquarters and December 2028 12,120
switching facility
Monroeville, PA sales and marketing office April 2000 2,573
Rutherford, NJ equipment deployment Month-to-month 294

We expect to lease additional office space in New Jersey in the next six
months to accommodate the growth of our administrative staff and sales and
marketing personnel. After obtaining such new leased facilities, we believe that
our leased facilities will be adequate to meet our current needs in the markets
in which we have begun to offer services, and that additional facilities are
available to meet our development and expansion needs in existing and projected
target markets for the foreseeable future.

EMPLOYEES

As of March 15, 2000, we had a total of 78 full-time employees consisting
of 20 in customer support/provisioning, 16 in sales and marketing, 13 in finance
and MIS, 11 in management and administration, 9 in Operations, 5 in network
engineering, and 4 in switching. None of our employees are covered by a
collective bargaining agreement. We believe that our relations with our
employees are good.

LEGAL PROCEEDINGS

We are not currently subject to any material legal proceedings. However, we
may from time to time become a party to various legal proceedings arising in the
ordinary course of our business.

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MANAGEMENT

EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS

Our executive officers, key employees and directors are as follows:

NAME AGE POSITION(S)
- ---- --- -----------

EXECUTIVE OFFICERS:
Louis A. Lombardi, Sr. ........... 61 President and Chief Executive Officer and Chairman of the
Board
Louis A. Lombardi, Jr. ........... 37 Chief Operating Officer and Director
Jay M. Brzezanski................. 53 Chief Financial Officer and Secretary
Michael Lombardi.................. 35 Vice President of Finance, Treasurer and Director
Daniel L. Hradesky................ 59 Vice President of Business Development and Strategic
Planning and Director
Keith T. Fallon................... 37 Vice President of Sales

KEY EMPLOYEES:
Dawn B. Androsky.................. 39 Vice President of Marketing
Karen McDine...................... 48 Vice President of Network Engineering
Richard A. Snyder................. 53 Vice President of Technology

NON-EMPLOYEE DIRECTORS:
Ronald O. Brown, Ph.D.(1)(2)...... 58 Director
Myron Feldman(1)(2)............... 76 Director
John H. Trzaka(1)(2).............. 67 Director

- ---------------
(1) Member of Compensation Committee.

(2) Member of Audit Committee.

Louis A. Lombardi, Sr. is the father of Louis A. Lombardi, Jr. and Michael
Lombardi.

The executive officers and key employees listed above have held their
respective positions with Cooperative Holdings, Inc. since inception with the
exception of Mr. Hradesky who has been a director since April 6, 2000. Prior to
that, with the exception of Mr. Hradesky, such persons held similar positions
with Cooperative Communications, Inc. The present principal occupations and
recent employment history of each of our executive officers, key employees and
directors listed above are set forth below.

All directors hold office until the next annual meeting of stockholders or
until their successors have been elected and qualified. All executive officers
are elected annually by the board of directors and serve at the discretion of
the board of directors and until their successors are elected and qualified.

Louis A. Lombardi, Sr. founded Cooperative and all related entities and has
served as our President and Chief Executive Officer and as a director since our
inception. Mr. Lombardi has more than twenty years of experience in the
telecommunications industry. From 1965 to 1980, Mr. Lombardi was President of
Eastern Computer Systems, Inc., a computer billing and services company
primarily serving the telecommunications industry.

Louis A. Lombardi, Jr., joined Cooperative in 1990 and has served in
various executive capacities, most recently as Chief Operating Officer. In this
capacity, he directs the day-to-day operations including sales and marketing,
customer services, operations and engineering, administration and management
information systems. Mr. Lombardi was elected to our board of directors in
December 1999. From 1981 to 1991, he served in various capacities with Eastern
Computer Services, Inc. His most recent position was as Operations Manager, in
which capacity he was primarily responsible for the day-to-day operations of the
business.

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Jay M. Brzezanski has served as our Chief Financial Officer since January
2000. Mr. Brzezanski has over twenty-eight years of experience in senior
financial positions, including experience with telecommunications and computer
conversions. Mr. Brzezanski was employed as the Senior Vice President -- Finance
and Chief Information Officer of Sleepy's Inc. and affiliates from 1997 to 2000
and as the Senior Vice President and Chief Financial Officer of Rockaway
Bedding, Inc. and affiliates from 1994 to 1997. Mr. Brzezanski is a Certified
Management Accountant and a Certified Internal Auditor. Mr. Brzezanski is a
Colonel in the United States Army Reserves.

Michael Lombardi has served as our Vice President of Finance and Treasurer
since 1994 and was and continues to be, together with the Chief Financial
Officer, responsible for accounting and finance functions. Mr. Lombardi was
elected to our board of directors in December 1999. Before joining us, Mr.
Lombardi was the Vice President and Controller of Atlantic Express, Inc. Mr.
Lombardi held such positions from 1989 to 1994 and his responsibilities included
monitoring cash flow, acting as the liaison with external auditors and banks and
developing and implementing financial policies and procedural manuals.

Daniel L. Hradesky has served as our Vice President of Business Development
and Strategic Planning since 1998. Mr. Hradesky was elected to our board of
directors in April 2000. Between 1969 and 1998, Mr. Hradesky held various
positions with Westinghouse Communications, now owned by RSL Communications
(Westinghouse), including Director -- Sales, Director -- Network Services and
Manager -- Network Operations. During his tenure with Westinghouse, he was named
a "Top 100 Manager." Most recently, Mr. Hradesky was responsible for providing
support, maintenance and proposal development services to major customers as
well as supervising product development and field sales.

Keith T. Fallon has served as our Vice President of Sales since 1993. Prior
to joining us, Mr. Fallon was employed by MCI Telecommunications from 1985 to
1993 where, immediately prior to his departure, he served as National Account
Manager -- Carrier Services. In that capacity, Mr. Fallon was responsible for
sales to interexchange carriers, competitive local exchange carriers and
independent telephone companies.

Dawn B. Androsky has served as our Vice President of Marketing since 1998.
As Vice President of Marketing, Ms. Androsky is responsible for all of our
marketing efforts, including development and maintenance of our website and
sales intranet, product launches and private label programs. Ms. Androsky has
over sixteen years of supervisory experience in all facets of the
telecommunications industry. From 1994 to 1998, Ms. Androsky served as both the
Director -- Marketing and Director -- Sales Engineering for Westinghouse. Prior
to her employment with Westinghouse, Ms. Androsky served as the Manager, Access
Services with Sprint. Ms. Androsky is also a Major in the United States Air
Force Reserves, having served in the United States Air Force on active duty from
1983 to 1988.

Karen McDine has served as our Vice President of Network Engineering since
1995. In that capacity, Ms. McDine is responsible for the design and engineering
of our network for local, long distance and international services. From 1970 to
1995, Ms. McDine held various network design and sales engineering positions
with Westinghouse. From 1994 to 1995, she was Director -- Sales Engineering and
from 1990 to 1994, she was Manager -- Network Design.

Richard A. Snyder has served as our Vice President of Technology since
1998. Prior to joining us, Mr. Snyder was employed with Westinghouse for over
twenty-five years where he held several senior level project management and
customer service positions, most recently as Director -- Customer Service.

Ronald O. Brown, Ph.D. was elected to our board of directors in February
2000. Dr. Brown is currently the President and a director of Ronald O. Brown
Consulting, Inc., an independent information technology and enterprise network
management consulting firm, founded by Dr. Brown in 1996. In that capacity, Dr.
Brown provides consulting services to corporations, governments, vendors and
carriers on all aspects of data, voice, multimedia, and image
telecommunications, strategic planning, systems engineering and design, market
development, operations and management, and information systems management and
implementation. Dr. Brown is also an occasional lecturer at Ball State
University where he teaches a telecommunications class. Formerly, Dr. Brown was
the National Director of Telecommunications and

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Office Information Systems Consulting for Coopers & Lybrand. Dr. Brown is a
Registered Professional Engineer and a member of the board of directors of the
Maine Telecommunications Users Group.

Myron Feldman was elected to our board of directors in February 2000. Mr.
Feldman currently serves as the Vice Chairman of the board of directors of
Allied Beverage Group, a position he has held since 1996. Prior to joining
Allied Beverage Group, Mr. Feldman held various positions during a 50 year
career with F&A Distributing Company, a New Jersey based wine and spirits
distributor, culminating with the position of President and Chief Executive
Officer.

John H. Trzaka was elected to our board of directors in February 2000. Mr.
Trzaka is a retired financial management executive. From 1986 until his
retirement in 1993, Mr. Trzaka served as the Director -- Financial Division of
the New Jersey Casino Control Commission. In that capacity, Mr. Trzaka was
responsible for the operation and management of the financial valuation,
auditing and collection units. From 1966 to 1985, Mr. Trzaka served in various
positions with McGraw Hill, Inc., including Vice President -- Finance and
Administration for its broadcasting company. Mr. Trzaka is a Certified Public
Accountant who has participated as a task force member for the Financial
Accounting Standards Board.

CLASSES OF THE BOARD

We currently have seven directors. Following the closing of this offering,
our board of directors will be divided into three classes of directors, with
each class serving staggered three-year terms. Class A, initially comprised of
Ronald O. Brown, Ph.D., Michael Lombardi and Daniel L. Hradesky will serve until
our annual meeting of stockholders in 2000. Class B, initially comprised of
Louis A. Lombardi, Jr. and Myron Feldman will serve until our annual meeting of
stockholders in 2001. Class C, initially comprised of Louis A. Lombardi, Sr. and
John H. Trzaka will serve until our annual meeting of stockholders in 2002.

Our Bylaws permit the board of directors to increase or decrease the size
of the board. Any additional directorships resulting from an increase in the
number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one-third of the total number of
directors. This classification of the board of directors may have the effect of
delaying or preventing changes in control or management of Cooperative.

COMPENSATION COMMITTEE

Our board of directors has a compensation committee, which approves
salaries and incentive compensation for our executive officers and administers
our stock plan. The compensation committee currently consists of Ronald O.
Brown, Ph.D., Myron Feldman and John H. Trzaka.

AUDIT COMMITTEE

Our board of directors has an audit committee, which reviews the results
and scope of the audit and other services provided by our independent
accountants. The audit committee currently consists of Ronald O. Brown, Ph.D.,
Myron Feldman and John H. Trzaka.

DIRECTOR COMPENSATION

Directors who are employed by us, including Louis A. Lombardi, Sr., Louis
A. Lombardi, Jr., Michael Lombardi and Daniel L. Hradesky, are not currently
entitled to receive any compensation for serving on our board of directors. Our
outside directors, Ronald O. Brown, Ph.D., Myron Feldman and John H. Trzaka
receive $500 per meeting as compensation for serving on our board of directors.
In addition, each outside director shall receive, upon the consummation of the
offering, options to purchase 20,000 shares of our common stock at exercise
prices equal to the initial public offering price. The stock options will vest
over a three-year period with one-third vesting at the end of each year. We pay
for the reasonable out-of-pocket expenses incurred by each director in
connection with attending board and committee meetings.

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EXECUTIVE COMPENSATION

The following table summarizes the compensation we paid to our named
executive officers, consisting of our chief executive officer and four most
highly compensated executive officers for the fiscal year ended May 31, 1999.
None of the perquisites and other benefits paid to each named executive officer
exceeded the lesser of $50,000 or 10% of the total annual salary and bonus
received by that officer.

FISCAL 1999 SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION
------------------------
ALL OTHER
NAME AND PRINCIPAL ANNUAL ALL OTHER
POSITION(S) SALARY COMPENSATION COMPENSATION
- ------------------ -------- ------------ ------------

Louis A. Lombardi, Sr.
President and Chief Executive Officer................ $118,800 $125,430(1)(2) $128,700(5)
Louis A. Lombardi, Jr.
Chief Operating Officer.............................. $132,712 $ 30,560(1)(2) $ 13,600(5)
Michael Lombardi
Executive Vice President and Treasurer............... $109,038 $ 11,325(3) --
Keith T. Fallon
Vice President of Sales.............................. $ 93,769 $ 76,077(4) --

- ---------------
(1) Represents automobile allowance.

(2) Represents amounts paid as commissions on certain sales and distributions to
members of Eastern Computer Services, L.L.C., including payments to fund tax
liabilities.

(3) Represents an automobile allowance and amounts paid as commissions on
certain sales.

(4) Includes an automobile allowance and amounts paid as commissions on sales.

(5) Represents amounts paid to members of Eastern Computer Services, L.L.C. in
excess of payments to fund tax liabilities.

OPTION GRANTS IN LAST FISCAL YEAR

No options were granted to or exercised by the Named Executive Officers
during the fiscal year ended May 31, 1999. There were no options exercised
during the fiscal year ended May 31, 1999. Upon the consummation of this
offering, there will be 1,029,047 options outstanding under the 2000 Stock Plan,
100,000 of which will be issued to Louis A. Lombardi, Jr., 100,000 of which will
be issued to Michael Lombardi and 50,000 of which will be issued to Keith T.
Fallon, each at an exercise price equal to the initial public offering price.
Mr. Fallon also holds a non-plan option to purchase 30,000 shares of common
stock which was issued in fiscal 1997 at an exercise price of $0.01 per share.

2000 STOCK PLAN

The 2000 Stock Plan was adopted by the board of directors on February 11,
2000 and approved by our stockholders on March 21, 2000. The 2000 Stock Plan was
effective as of March 21, 2000 and shall remain in effect until terminated by
the board of directors. The total number of shares of Common Stock with respect
to which options may be granted under the Plan shall not exceed 15% of the
shares of Common Stock outstanding at any time during the term of the Plan,
calculated on a fully diluted basis, provided that no more than 3,540,000 shares
shall be cumulatively available for the grant of Incentive Stock Options under
the Plan. Those eligible to receive stock option grants under the 2000 Stock
Plan include employees, non-employee directors and consultants. The 2000 Stock
Plan is administered by the compensation committee of our board of directors.

Subject to the provisions of the 2000 Stock Plan, the administrator of the
2000 Stock Plan has the discretion to determine the optionees and/or grantees,
the type of options to be granted, the vesting

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provisions, the terms of the grants and other related provisions as are
consistent with the 2000 Stock Plan. The exercise price of an incentive stock
option may not be less than the fair market value per share of the common stock
on the date of grant or, in the case of an optionee who beneficially owns 10% or
more of the voting power of all classes of our capital stock, not less than 110%
of the fair market value per share on the date of grant. The exercise price of a
non-qualified stock option may not be less than 85% of the fair market value per
share of the common stock on the date of grant. Fair market value is determined
by the board of directors in good faith. We anticipate that following
consummation of this offering, fair market value shall be determined in
accordance with the closing sale price of our common stock as quoted on the
Nasdaq National Market. In addition, the 2000 Stock Plan allows for the grant of
stock purchase rights.

Incentive stock options terminate not more than ten years from the date of
grant, subject to earlier termination upon or after a fixed period following the
optionee's death, disability or termination of employment with us. The term of
any options granted to a holder of more than 10% of the capital stock may be no
longer than five years. Options granted under the 2000 Stock Plan to our
employees will vest in the manner determined by the board of directors. Options
are not assignable or otherwise transferable except by will or as per the laws
of descent and distribution. In the event of a merger or consolidation of us
with or into another corporation or the sale of all or substantially all our
assets in which the successor corporation does not assume outstanding options or
issue equivalent options, our board of directors is required to provide
accelerated vesting of outstanding options.

NON-PLAN OPTIONS ISSUED TO EMPLOYEES

In June 1996, Cooperative issued to Keith T. Fallon a non-plan option to
purchase 30,000 shares of our common stock at an exercise price of $0.01. In
March 2000, this option was exchanged for an identical option in Cooperative
Holdings, Inc. in connection with our reorganization. The option is fully vested
and may be exercised until the expiration of two years after Mr. Fallon's
termination of employment.

QUALIFIED 401(k) AND PROFIT SHARING PLAN

We maintain a tax-qualified 401(k) plan. Employees who are 18 years of age
may elect to participate in the plan after completing six months of service with
us. We match 33% of employee contributions up to 6% of compensation deferred.
Our matching contributions vest at a rate 20% per year starting with the
employee's first year of service. Although we have not historically done so, we
may also make discretionary profit-sharing contributions to all employees who
satisfy plan participation requirements.

EMPLOYMENT AGREEMENTS, NON-COMPETITION, NON-DISCLOSURE AND INVENTION ASSIGNMENT
AGREEMENTS

Louis A. Lombardi, Sr. is a party to an agreement with us effective March
20, 2000 under which he serves as our President and Chief Executive Officer at
an initial annual base salary of $225,000, subject to annual adjustment. Louis
A. Lombardi, Jr. is a party to an agreement with us effective March 20, 2000
under which he serves as our Chief Operating Office at an initial annual base
salary of $165,000, subject to annual adjustment. The Compensation Committee may
award either or both of these individuals additional bonus payments or incentive
compensation in its discretion. The initial term of each such agreement is for
three years and is automatically extended for successive one-year periods unless
terminated by either party upon written notice four months before the employment
would otherwise end. Each of the employment agreements may be terminated earlier
by us or the respective executive under certain conditions.

If the employment period is terminated by us without cause, by the
executive for good reason (as defined in the respective employment agreements),
because the executive is not reelected to office, or as a result of the
executive's death or disability, then the executive and/or his estate or
beneficiaries will be entitled to receive benefits under our employee benefit
programs as in effect on the date of such termination to the extent permitted
under such programs. In addition, the beneficiary will be entitled to

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receive an amount equal to that executive's base salary for a period of time
ending on the later to occur of (i) the date which is twelve months after the
date of termination, or (ii) the date the employment agreement would have
otherwise expired.

In addition to the amounts payable pursuant to the preceding sentence, if,
during the six month period immediately preceding or following a change of
control (as defined in the respective employment agreement), Mr. Lombardi, Sr.
or Mr. Lombardi, Jr. is terminated other than for cause by us, upon death,
disability or without cause by Mr. Lombardi, Sr. or Mr. Lombardi, Jr., then the
terminated party shall receive a lump sum payment equal to his annual salary as
in effect immediately prior to his termination.

If we terminate the employment period for cause or if the executive resigns
without good reason, then the executive will be entitled to receive his base
salary through the date of termination and we will have no further liability
whatsoever to the executive.

In addition, each of Mr. Lombardi, Sr. and Mr. Lombardi, Jr. also is the
beneficiary of a term life insurance policy in his respective name, in the face
amount of $50,000 and $10,000, respectively, for which we pay the premiums. Each
employment agreement also contains certain non-competition, non-solicitation and
confidentiality provisions.

In addition to the foregoing agreements, we have executed agreements with
each of our employees, whereby each employee agrees to maintain the
confidentiality of our information and to assign inventions to us.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During the year ended May 31, 1999, the compensation of our executive
officers was determined by the board of directors. The compensation committee
was established by the board of directors in February 2000. The compensation
committee consists of Ronald O. Brown, Ph.D., Myron Feldman and John H. Trzaka.
There are no compensation committee interlocks.

KEY PERSON INSURANCE

We intend to obtain, prior to the consummation of this offering, key man
life insurance policies on the lives of Louis A. Lombardi, Sr. and Louis A.
Lombardi, Jr. The face amount of each such policy is intended to be $1,000,000.
We do not intend to maintain key person life insurance on any of our other
executive officers or key personnel.

LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:

- any breach of their duty of loyalty to the corporation or its
stockholders;

- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

- unlawful payments of dividends or unlawful stock repurchases or
redemption; or

- any transaction from which the director derived an improper personal
benefit.

This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or recession.

Our Bylaws provide that we shall indemnify our directors and executive
officers, employees and our agents to the fullest extent permitted by law. We
believe that indemnification under our Bylaws covers at least negligence and
gross negligence on the part of indemnified parties. Our Bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of

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his or her actions in that capacity, regardless of whether the Bylaws would
permit indemnification. We intend to obtain, prior to the consummation of this
offering, director and officer liability insurance that covers matters,
including matters arising under the Securities Act.

We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our Bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for judgments, fines, settlement amounts and expenses,
including attorneys' fees, incurred by any of these persons in any action or
proceeding, including any action by or in the right of Cooperative, arising out
of that person's services as a director, executive officer, employee, agent,
contractor, of ours, any subsidiary of ours or any other company or enterprise
to which the person provides services at our request. We believe that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and executive officers.

There is no pending litigation or proceeding involving any director,
officer, employee or agent of Cooperative where indemnification will be required
or permitted. We are not aware of any pending or threatened litigation or
proceeding that might result in a claim for such indemnification.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In November 1998, we loaned $1,000,000 to Louis A. Lombardi, Sr. and
Patrick C. Lombardi evidenced by a promissory note. The note is a 20 year note
with interest at a rate of 9.5% per year. The promissory note is secured by our
facility in Belleville, New Jersey, which is owned by Louis A. Lombardi, Sr. and
the estate of Patrick C. Lombardi.

In December 1998, we entered into a 20 year net lease agreement with Louis
A. Lombardi, Sr. and the estate of Patrick C. Lombardi for the Belleville, New
Jersey facility. The lease agreement requires monthly payments of approximately
$17,000 per month. The terms of the lease require us to pay for essentially all
costs of operating and maintaining the Belleville facility, including taxes,
utilities, insurance and maintenance. The lease also provides for increased
rental payments due to increases in the Consumer Price Index for Northern New
Jersey.

We sublease a portion of the Belleville facility to Cooperative Industries,
L.L.C. and Eastern Computer Systems, Inc. each of which are owned by Louis A.
Lombardi, Sr. and the estate of Patrick C. Lombardi pursuant to a five year
lease expiring in fiscal 2004. The entities are engaged in business operations
different from those in which we engage. The lease arrangements provide for
rental payments in the amount of $1,000 per month.

In connection with the lease on the Belleville facility, we and Louis A.
Lombardi, Sr. and the estate of Patrick C. Lombardi entered into an Offset
Agreement which provides for a legal right of full and complete offset of the
lease obligation in the event that Louis A. Lombardi, Sr. and the estate of
Patrick C. Lombardi fail to make payment when due under the $1,000,000
promissory note.

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth as of February 29, 2000 and as adjusted to
give effect to the sale of common stock offered hereby, certain information
regarding beneficial ownership of our common stock by:

- each person we expect to be the beneficial owner of more than 5% of the
outstanding shares of common stock;

- each director and any named executive officer;

- and all directors and named executive officers as a group; and

- each selling stockholder.

The address for each officer is c/o Cooperative Holdings, Inc., 412-420
Washington Avenue, Belleville, New Jersey 07109.

PERCENTAGE(2)
SHARES TO BE SOLD -----------------------------------
NAME NUMBER(1) BY SELLING STOCKHOLDER PRIOR TO OFFERING AFTER OFFERING
- ---- --------- ---------------------- ----------------- --------------

The Louis A. Lombardi 1996 Family
Limited Partnership,
420 Washington Avenue
Belleville, NJ 07109...........
The Patrick C. Lombardi 1996
Family
Limited Partnership,
420 Washington Avenue
Belleville, NJ 07109...........
Louis A. Lombardi, Sr.(3)........
Daniel L. Hradesky(4)............
Louis A. Lombardi, Jr.(4) .......
Michael Lombardi(4)..............
Keith T. Fallon(5)...............
Ronald O. Brown, Ph.D.(6) .......
Myron Feldman(6).................
John H. Trzaka(6)................
Directors and named executive
officers as a group (eight
persons)(7)....................

- ---------------
Less than 1%.

(1) Beneficial ownership includes any shares as to which the individual or
entity has sole or shared voting power or investment power and also any
shares which the individual or entity has a right to acquire within 60 days
after this offering through the exercise of any stock options. The inclusion
herein of such shares, however, does not constitute an admission that the
named stockholder is a direct or indirect beneficial owner of such shares.
Unless otherwise indicated, each person or entity named in the table has
sole voting power and investment power with respect to all shares of capital
stock listed as owned by such person or entity.

(2) Applicable percentage of ownership is based on an aggregate of
shares of common stock outstanding on February 29, 2000 and an aggregate
of shares of common stock outstanding after the completion of this
offering.

(3) Includes shares of common stock held by The Louis A. Lombardi 1996
Family Limited Partnership of which Louis A. Lombardi, Sr. is a general
partner. Mr. Lombardi has voting and dispositive power with respect to such
shares.

(4) Excludes 100,000 shares of common stock issuable pursuant to options granted
under the 2000 Stock Plan, none of which are exercisable within 60 days of
the date hereof.

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(5) Represents options to purchase 30,000 shares of common stock exercisable on
the date hereof. Excludes 50,000 shares of common stock issuable pursuant to
options granted under the 2000 Stock Plan, none of which are exercisable
within 60 days of the date hereof.

(6) Excludes 20,000 shares of common stock issuable pursuant to options granted
under the 2000 Stock Plan, none of which are exercisable within 60 days of
the date hereof.

(7) Excludes 410,000 shares of common stock issuable pursuant to options granted
under the 2000 Stock Plan, none of which are exercisable within 60 days of
the date hereof.

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DESCRIPTION OF CAPITAL STOCK

GENERAL MATTERS

Cooperative Communications, Inc. was incorporated in New Jersey in 1990. In
February 2000, Cooperative Holdings, Inc. was incorporated in Delaware and the
stockholders of Cooperative Communications, Inc. exchanged all of their
outstanding shares of common stock of that company for newly issued shares of
Cooperative Holdings, Inc. with equivalent rights and preferences. As a result,
Cooperative Communications, Inc. became a wholly-owned subsidiary of Cooperative
Holdings, Inc. In addition, each outstanding option to purchase shares of common
stock of Cooperative Communications, Inc. is now exercisable for shares of
common stock of Cooperative Holdings, Inc.

Upon consummation of this offering, our authorized capital stock will
consist of 60,000,000 shares of common stock, par value $0.01 per share, and
5,000,000 shares of undesignated preferred stock, par value $0.01 per share.
After completion of this offering, there will be shares of common stock
issued and outstanding based upon the shares outstanding as of
, 2000 and the shares being issued by us in this offering.
The following statements are brief summaries of certain provisions with respect
to our capital stock contained in our Certificate of Incorporation and Bylaws,
copies of which have been filed as exhibits to our registration statement. See
"Where You Can Find More Information." The following summary is qualified in its
entirety by reference thereto.

COMMON STOCK

The holders of our common stock are entitled to one vote for each share
held of record upon such matters and in such manner as may be provided by law.
There are no cumulative voting rights with respect to the election of directors.
Subject to preferences applicable to any outstanding shares of preferred stock,
the holders of common stock are entitled to receive ratably dividends, if any,
as may be declared by the board of directors out of funds legally available for
dividend payments. In the event we liquidate, dissolve or wind up, the holders
of common stock are entitled to share ratably in all assets remaining after
payment of liabilities and liquidation preferences of any outstanding shares of
the preferred stock. Holders of common stock have no preemptive rights or rights
to convert their common stock into any other securities. There are no redemption
or sinking fund provisions applicable to the common stock. All outstanding
shares of common stock are fully paid and nonassessable.

PREFERRED STOCK

The preferred stock is issuable from time to time in one or more series and
with such designations, preferences and other rights for each series as shall be
stated in the resolutions providing for the designation and issue of each such
series adopted by our board of directors. The board of directors is authorized
by our Certificate of Incorporation to determine, among other things, the
voting, dividend, redemption, conversion, exchange and liquidation powers,
rights and preferences and the limitations thereon pertaining to such series.
The board of directors, without stockholder approval, may issue preferred stock
with voting and other rights that could adversely affect the voting power of the
holders of the common stock and that could have certain anti-takeover effects.
We have no present plans to issue any shares of preferred stock. The ability of
the board of directors to issue preferred stock without stockholder approval
could have the effect of delaying, deferring or preventing a change in control
of us or the removal of existing management.

CERTAIN ANTI-TAKEOVER PROVISIONS

General

Provisions of Delaware law and our Certificate of Incorporation and Bylaws
could make it difficult for a third party to acquire us and to remove our
incumbent officers and directors. These provisions, summarized below, are
expected to discourage coercive takeover practices and inadequate takeover bids
and to encourage persons seeking to acquire control of us to negotiate first
with our board of directors. We

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believe that the benefits of increased protection of our ability to negotiate
with the proponent of an unfriendly or unsolicited acquisition proposal outweigh
the disadvantages of discouraging such proposals because, among other things,
negotiation could result in an improvement of the terms of the proposal.

Delaware Statute

We are subject to Section 203 of the Delaware General Corporation Law,
which regulates corporate acquisitions. In general, Section 203 prohibits a
publicly-held Delaware corporation from engaging in a business combination with
an interested stockholder for a period of three years following the date the
person became an interested stockholder, unless:

- the board of directors approved the business combination or the
transaction in which such stockholder became an interested stockholder
prior to the date the interested stockholder attained such status;

- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or

- on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
corporation's voting stock not owned by the interested stockholder.

A business combination generally includes a merger, sale of assets or
stock, or other transaction resulting in a financial benefit to the interested
stockholder. In general, an interested stockholder is a person who, together
with affiliates and associates, owns, or within three years prior the
determination of interested stockholder status did own, 15% or more of a
corporation's outstanding voting stock.

Board of Directors

Our Bylaws provide that the number of our directors shall be fixed from
time to time by resolutions adopted by the affirmative vote of either a majority
of the board of directors or the stockholders. However, there shall not be less
than one director. In addition, the Bylaws provide that any vacancies may be
filled by the affirmative vote of:

- a majority of the remaining directors, even if less than a quorum;

- a sole remaining director; or

- a majority of the stockholders.

Generally, directors may be removed from office by the affirmative vote of
the holders of a majority of our voting power.

Our Certificate of Incorporation and Bylaws provide that, effective upon
the closing of this offering, the terms of office of the members of the board of
directors will be divided into three classes: Class A, whose term will expire at
the annual meeting of stockholders to be held in 2000, Class B, whose term will
expire at the annual meeting of stockholders to be held in 2001 and Class C,
whose term will expire at the annual meeting of stockholders to be held in 2002.
At each annual meeting of stockholders after the initial classification, the
successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. Our Bylaws permit the board of directors to increase or
decrease the size of the board of directors. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of
one-third of the total number of directors. This classification of the board of
directors may have the effect of delaying or preventing changes in control or
management of our company.

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Advance Notice Procedures

Our Bylaws provide for an advance notice procedure for the nomination, by
stockholders, of candidates for election as directors, and other stockholder
proposals to be considered at annual meetings of stockholders. In general,
notice of intent to nominate a director or raise matters at such meetings must:

- be received in writing by us at least 150 days prior to the anniversary
of the previous year's annual meeting of stockholders or, for any
special meeting, no later than ten days after notice of such meeting is
first given to stockholders;

- contain certain information concerning the person to be nominated or the
matters to be brought before the meeting; and

- contain certain information concerning the stockholder submitting the
proposal.

Special Meetings and Action by Written Consent

Our Bylaws provide that, effective upon the closing of this offering,
special meetings of stockholders may be called only by the President, the
Chairman of the Board, or by order of a majority of the board of directors. In
addition, our Certificate of Incorporation provides that, upon closing of this
offering, our stockholders may not act by written consent in lieu of a meeting
of stockholders.

Amendment

Amendment of the foregoing provisions requires approval by holders of at
least 66 2/3% of all of the outstanding shares of our capital stock entitled to
vote in the election of directors, voting together as a single class. The super
majority voting requirement is 80% of all outstanding shares for any amendment
of the provisions of our Certificate of Incorporation and Bylaws with respect to
limitations on directors' liability, the staggered board of directors and
indemnification of directors and officers. Our Bylaws may also be amended by
action of the board of directors.

REGISTRATION RIGHTS

In connection with our reorganization in March 2000, we issued an option to
purchase 30,000 shares of our common stock in exchange for an identical option
of Cooperative issued in June 1996. The shares under this option have piggyback
registration rights on our registration of shares under option plans.

LIMITATIONS ON DIRECTORS' LIABILITY

Our Certificate of Incorporation provides that none of our directors shall
be liable to us or our stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability:

- for any breach of the director's duty of loyalty to us or our
stockholders;

- for acts or omissions not in good faith or involving a knowing violation
of law;

- in respect of certain unlawful dividend payments or stock redemptions or
repurchases;

- for any transaction from which the director derived an improper personal
benefit.

The effect of these provisions will be to eliminate our right and the right of
our stockholders to recover monetary damages against a director for breach of
fiduciary duty as a director, including breaches resulting from grossly
negligent behavior, except in the situations described above. Our Bylaws mandate
that we indemnify our directors to the fullest extent authorized under Delaware
law. We have entered into indemnification agreements with each of our directors
providing for indemnification of such directors to the fullest extent permitted
by applicable law.

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LISTING

We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol "CCII."

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company. The transfer agent's address and telephone number is
40 Wall Street, New York, New York 10005, (212) 936-5100.

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SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, we will have shares of common
stock outstanding. Of these shares, the shares sold in the offering,
plus any additional shares sold upon exercise of the underwriters'
over-allotment option, will be freely transferable by persons other than our
affiliates without restriction or further registration under the Securities Act.
The remaining outstanding shares will be restricted securities
within the meaning of Rule 144 under the Securities Act and may not be sold in
the absence of registration under the Securities Act unless an exemption from
registration is available, such as the exemption afforded by Rule 144.

LOCK-UP AGREEMENTS

Our officers and directors, and each of our stockholders each have entered
into lock-up agreements with representatives of the underwriters, providing
that, subject to certain exceptions, they will not offer, sell or otherwise
dispose of any shares of common stock, or securities convertible into or
exchangeable for common stock, or enter into any agreement to sell, for a period
of 180 days after the date of this prospectus without the prior written consent
of Pennsylvania Merchant Group, acting as the representative of the
underwriters. Pennsylvania Merchant Group may release any of such shares in its
sole discretion at any time and without prior notice. Immediately following
expiration of the lock-up period, all of the Restricted Shares will become
eligible for sale pursuant to Rule 144, subject to certain limitations described
below.

RULE 144

In general, under Rule 144 of the Securities Act, a person, or persons
whose shares are aggregated, who has beneficially owned restricted securities
for at least one year, including a person who may be deemed an affiliate, is
entitled to sell within any three month period a number of our shares of common
stock that does not exceed the greater of:

- 1% of the then-outstanding shares of our common stock; or

- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on
which notice of the sale is filed with the Securities and Exchange
Commission.

Sales under Rule 144 are subject to restrictions relating to manner of
sale, notice and availability of current public information about us. A person
who is not our affiliate at any time during the 90 days preceding a sale and who
has beneficially owned shares for at least two years would be entitled to sell
shares following this offering under Rule 144(k) without regard to the volume
limitations, manner of sale provisions or notice requirements of Rule 144.

RULE 701

Our employees, directors, officers or consultants who purchased our shares
in connection with a written compensatory plan or contract may be entitled to
rely on the resale provisions of Rule 701. Rule 701 permits non-affiliates to
sell their Rule 701 of the Securities Act shares without having to comply with
the public information, holding period, volume limitation or notice provisions
of Rule 144. Affiliates may sell their Rule 701 shares without having to comply
with Rule 144's holding period restrictions. In each of these cases, Rule 701
allows the stockholders to sell 90 days after the date of this prospectus.

Upon the consummation of this offering, there will be outstanding options
to purchase an aggregate of 1,059,047 shares of common stock. Giving effect to
vesting provisions limiting the exercisability of all the outstanding options
and the lock-up period applicable to certain option holders, none of these
shares will become available for sale in the public market pursuant to Rules 144
and 701 under the Securities Act until at least 180 days after completion of
this offering. After the expiration of the lock-up period shares will
become available for resale.
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REGISTRATION STATEMENT ON FORM S-8

Following this offering, we intend to file a registration statement on Form
S-8 under the Securities Act to register the shares of common stock reserved for
issuance under our 2000 Stock Plan as well as non-plan options. The stock
registered under that registration statement will thereafter be available for
sale in the public market, subject to the resale limitations of Rule 144
applicable to our affiliates.

Since there has been no public market for shares of the Common Stock prior
to this offering, we are unable to predict the effect that sales made pursuant
to Rules 144 or 701 under the Securities Act, or otherwise, may have on the
prevailing market price of the shares of the common stock. Sales of a
substantial amount of the common stock in the public market, or the perception
that such sales could occur, could adversely affect the market prices of our
stock.

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UNDERWRITING

Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each of the underwriters named below has severally agreed
to purchase, and we and the selling stockholder have agreed to sell to such
underwriters, the number of shares set forth opposite the name of such
underwriter.

NUMBER OF
UNDERWRITER SHARES
- ----------- ---------

Pennsylvania Merchant Group.................................
Roth Capital Partners, Inc. ................................
---------
Total.............................................
=========

The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the shares (other than those
covered by the over-allotment option described below) if they purchase any of
the shares.

The underwriters, for whom Pennsylvania Merchant Group and Roth Capital
Partners, Inc. are acting as representatives, propose to offer some of the
shares directly to the public at the public offering price set forth on the
cover page of this prospectus and some of the shares to certain dealers at the
public offering price less a concession not in excess of $ per share. The
underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share on sales to certain other dealers. If all of the shares are
not sold at the initial offering price, the representatives may change the
public offering price and the other selling terms. The representatives have
advised us and the selling stockholder that the underwriters do not intend to
confirm any sales to any accounts over which they exercise discretionary
authority.

The selling stockholder has granted to the underwriters an option,
exercisable for 30 days from the date of this prospectus, to purchase up to
additional shares of common stock at the public offering price less the
underwriting discount. The underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, in connection with this offering.
To the extent such option is exercised, each underwriter will be obligated,
subject to certain conditions, to purchase a number of additional shares
approximately proportionate to such underwriter's initial purchase commitment.

We, our officers and directors, and all of our stockholders have agreed
that, for a period of 180 days from the date of this prospectus, we and they
will not, without the prior written consent of Pennsylvania Merchant Group
dispose of or hedge any shares of common stock of Cooperative or any securities
convertible into or exchangeable for common stock. Pennsylvania Merchant Group
in its sole discretion may release any of the securities subject to those
lock-up agreements at any time without notice.

Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price for the shares was
determined by negotiations between us, the selling stockholder and the
representatives. Among the factors considered in determining the initial public
offering price were our record of operations, our current financial condition,
our future prospects, our markets, the economic conditions in and future
prospects for the industry in which we compete, our management, and currently
prevailing general conditions in the equity securities markets, including
current market valuations of publicly traded companies considered comparable to
us. There can be no assurance, however, that the prices at which the shares will
sell in the public market after this offering will not be lower than the price
at which they are sold by the underwriters or that an active trading market in
the common stock will develop and continue after this offering.

We have applied to have the common stock included for quotation on the
Nasdaq National Market under the symbol "CCII." We cannot assure you, however,
that an active or orderly trading market will develop for the common stock or
that our common stock will trade in the public markets subsequent to the
offering at or above the initial offering price.

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In order to facilitate the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock during and after the offering. Specifically, the underwriters may
over-allot or otherwise create a short position in the common stock for their
own account by selling more shares of common stock than we have actually sold to
them. The underwriters may elect to cover any short position by purchasing
shares of common stock in the open market or by exercising the over-allotment
option granted to the underwriters. In addition, the underwriters may stabilize
or maintain the price of the common stock by bidding for or purchasing shares of
common stock in the open market and may impose penalty bids, under which selling
concessions allowed to syndicate members or other broker-dealers participating
in the offering are reclaimed if shares of common stock previously distributed
in the offering are repurchased in connection with stabilization transactions or
otherwise. The effect of these transactions may be to stabilize or maintain the
market price at a level above that which might otherwise prevail in the open
market and these transactions may be discontinued at any time. The imposition of
a penalty bid may also affect the price of the common stock to the extent that
it discourages resales.

The underwriters may, from time to time, engage in transactions with, and
perform services for, us in the ordinary course of their business.

The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us and the selling stockholder in connection with
this offering. These amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares of common
stock.

PAID BY COOPERATIVE PAID BY SELLING STOCKHOLDER
---------------------------- ----------------------------
NO EXERCISE FULL EXERCISE NO EXERCISE FULL EXERCISE
----------- ------------- ----------- -------------

Per share........................ $ $ $ $
Total............................ $ $ $ $

In connection with the offering, Pennsylvania Merchant Group and Roth
Capital Partners, Inc., on behalf of the underwriters, may purchase and sell
shares of common stock in the open market. These transactions may include
over-allotment, syndicate covering transactions and stabilizing transactions.
Over-allotment involves syndicate sales of common stock in excess of the number
of shares to be purchased by the underwriters in the offering, which creates a
syndicate short position. Syndicate covering transactions involve purchases of
the common stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Stabilizing transactions consist of
certain bids or purchases of common stock made for the purpose of preventing or
retarding a decline in the market price of the common stock while the offering
is in progress.

The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Pennsylvania Merchant Group or Roth Capital Partners, Inc., in covering
syndicate short positions or making stabilizing purchases, repurchases shares
originally sold by that syndicate member.

Any of these activities may cause the price of the common stock to be
higher than the price that otherwise would exist in the open market in the
absence of such transactions. These transactions may be effected on the Nasdaq
National Market or in the over-the-counter market, or otherwise and, if
commenced, may be discontinued at any time.

We and the selling stockholder have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, or to contribute to payments the underwriters may be required to make in
respect of any of those liabilities.

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LEGAL MATTERS

The validity of the shares of the common stock offered hereby will be
passed upon by Buchanan Ingersoll Professional Corporation. Certain legal
matters in connection with the offering will be passed upon for the Company by
Swidler Berlin Shereff Friedman, LLP, special FCC counsel, and for the
underwriters by Pepper Hamilton LLP.

EXPERTS

The combined financial statements and financial statement schedule of
Cooperative Communications, Inc. and subsidiaries and Eastern Computer Services,
L.L.C. as of May 31, 1998 and 1999, and for each of the years in the three-year
period ended May 31, 1999, have been included herein and in the prospectus in
reliance upon the reports of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
Common Stock offered hereby. This prospectus does not contain all the
information which is in the registration statement. We refer you to the
registration statement and to the exhibits and schedules filed with the
registration statement for further information with respect to us and the shares
of common stock offered in this prospectus. Statements contained in this
Prospectus as to the content of any contract or other document are necessarily
summaries. However, we refer you to the copy of such contract or other document
filed as an exhibit to the registration statement, and each such statement is
qualified in its entirety by such reference.

The registration statement and the exhibits and schedules attached thereto
may be inspected without charge at the Public Reference Room of the Commission
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of the registration statement
may be obtained from the Public Reference Room of the Commission at prescribed
rates. This material also may be obtained on the Commission's website at
www.sec.gov. Information regarding the operation of the Public Reference Room
may be obtained by calling the Commission at (800) SEC-0330.

We intend to furnish our stockholders with annual reports containing
financial statements certified by our independent accountants and make available
quarterly reports containing unaudited financial information for the first three
quarters of each year.

70
74

COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

INDEX

PAGE
----

Combined Financial Statements:
Independent Auditors' Report.............................. F-2
Combined Balance Sheets as of May 31, 1998 and 1999 and
November 30, 1999 (unaudited).......................... F-3
Combined Statements of Operations for the Years ended May
31, 1997, 1998 and 1999 and for the six month periods
ended November 30, 1998 and 1999 (unaudited)........... F-4
Combined Statements of Stockholders' and Members' Deficit
for the Years ended May 31, 1997, 1998 and 1999 and for
the six month period ended November 30, 1999
(unaudited)............................................ F-5
Combined Statements of Cash Flows for the Years ended May
31, 1997, 1998 and 1999 and for the six month periods
ended November 30, 1998 and 1999 (unaudited)........... F-6
Notes to Combined Financial Statements.................... F-7

F-1
75

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Members
Cooperative Communications, Inc. and
Eastern Computer Services, L.L.C.:

We have audited the accompanying combined balance sheets of Cooperative
Communications, Inc. and subsidiaries and Eastern Computer Services, L.L.C., as
of May 31, 1998 and 1999, and the related combined statements of operations,
stockholders' and members' deficit, and cash flows for each of the years in the
three-year period ended May 31, 1999. These combined financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these combined financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Cooperative
Communications, Inc. and subsidiaries and Eastern Computer Services, L.L.C. as
of May 31, 1998 and 1999, and the results of their operations and their cash
flows for each of the years in the three-year period ended May 31, 1999 in
conformity with generally accepted accounting principles.

KPMG LLP

Short Hills, New Jersey
March 29, 2000

F-2
76

COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOVEMBER 30
----------------------------
MAY 31 PRO FORMA
----------------- STOCKHOLDERS'
1998 1999 ACTUAL DEFICIT
------- ------- ------------ -------------
(unaudited) (unaudited)

ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,590 $ 7,180 $ 2,327
Trade accounts receivable, less allowance for doubtful
accounts and billing adjustments of $700 and $835 at May
31, 1998 and 1999, respectively, and $885 at November
30, 1999 (note 4)....................................... 7,138 8,058 6,995
Due from affiliates (note 9).............................. -- 53 89
Prepaid line costs, current............................... 257 127 99
Prepaid expenses and other current assets................. 15 141 50
------- ------- -------
Total current assets............................... 16,000 15,559 9,560
Property and equipment, net (note 5)........................ 1,542 3,181 5,241
Due from affiliates (note 9)................................ 24 -- --
Prepaid line costs, excluding current portion............... 84 43 38
Intangible asset -- customer list (note 6).................. 475 317 238
Other assets................................................ 63 31 28
------- ------- -------
Total assets....................................... $18,188 $19,131 $15,105
======= ======= =======
LIABILITIES AND STOCKHOLDERS' AND MEMBERS' DEFICIT
Current liabilities:
Current installments of obligations under capital leases
(note 10)............................................... $ 474 $ 642 $ 614
Current installments of obligations under capital
lease -- affiliate (note 9)............................. -- 15 15
Accounts payable and accrued expenses (note 8)............ 8,524 14,112 10,180
Income taxes payable...................................... 80 60 60
Deferred revenue, current................................. 491 260 207
------- ------- -------
Total current liabilities.......................... 9,569 15,089 11,076
Obligations under capital leases, excluding current
installments (note 10).................................... 773 526 2,692
Obligations under capital lease -- affiliate, excluding
current installments (note 9)............................. -- 766 759
Deferred revenue, excluding current portion................. 157 103 85
Accrued telecommunications costs, excluding current portion
(note 14)................................................. 8,661 4,277 3,189
------- ------- -------
Total liabilities.................................. 19,160 20,761 17,801
------- ------- -------
Stockholders' and members' deficit: (notes 3 and 11)
Preferred stock $.01 par value. Authorized 5,000,000
shares; no shares issued and outstanding -- pro forma... -- -- --
Common stock $.01 par value. Authorized 60,000,000 shares;
18,600,000 shares issued and outstanding -- pro forma... -- -- -- $ 186
Common stock, no par value. Authorized -- 20,000,000
shares, issued and outstanding 5,400,000 shares......... 1 1 1 --
Additional paid-in capital................................ 840 840 840 713
Accumulated deficit....................................... (2,067) (2,497) (3,595) (3,595)
Members' equity........................................... 254 26 58 --
------- ------- ------- -------
Total stockholders' and members' deficit........... (972) (1,630) (2,696) (2,696)
Commitments and contingencies (notes 9, 10, 14 and 16)......
------- ------- ------- -------
Total liabilities and stockholders' and members'
deficit.......................................... $18,188 $19,131 $15,105 $(2,696)
======= ======= ======= =======

See accompanying notes to combined financial statements.
F-3
77

COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

SIX MONTH PERIODS
ENDED
YEARS ENDED MAY 31 NOVEMBER 30
--------------------------- -------------------------
1997 1998 1999 1998 1999
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)

Revenue........................................ $28,718 $37,200 $40,598 $20,441 $19,827
------- ------- ------- ------- -------
Operating expenses:
Costs of revenue (excluding depreciation and
amortization) (notes 1 and 16)............ 22,468 29,073 31,725 16,418 16,382
Selling, general and administrative expenses
(notes 9 and 15).......................... 5,957 7,286 8,222 3,956 3,853
Depreciation and amortization (notes 5 and
6)........................................ 333 455 780 356 389
Stock based compensation (note 12)........... 840 -- -- -- --
------- ------- ------- ------- -------
Total operating expenses............. 29,598 36,814 40,727 20,730 20,624
------- ------- ------- ------- -------
Income (loss) from operations........ (880) 386 (129) (289) (797)
------- ------- ------- ------- -------
Other income (expense):
Interest income -- affiliate (note 9)........ -- -- 47 -- 47
Interest income.............................. 68 230 331 187 121
Interest expense -- affiliate (note 9)....... -- -- (72) -- (85)
Interest expense............................. (140) (152) (246) (156) (359)
Other income -- affiliate (note 9)........... 11 14 14 7 7
Other income, net............................ -- -- 35 -- --
------- ------- ------- ------- -------
Other income (expense), net.......... (61) 92 109 38 (269)
------- ------- ------- ------- -------
Income (loss) before income tax
expense............................ (941) 478 (20) (251) (1,066)
Income tax expense (note 13)................... 128 195 98 98 --
------- ------- ------- ------- -------
Net income (loss).................... $(1,069) $ 283 $ (118) $ (349) $(1,066)
======= ======= ======= ======= =======
Pro forma information (note 3):
Historical loss before income tax expense
(benefit)................................. $ (20) $(1,066)
Pro forma income tax expense (benefit)
(unaudited)............................... 200 (350)
------- -------
Pro forma net loss (unaudited)............... $ (220) $ (716)
======= =======
Pro forma net loss per common share
(unaudited):
Basic..................................... $ (0.01) $ (0.04)
Diluted................................... $ (0.01) $ (0.04)
======= =======
Pro forma weighted average common shares
outstanding (unaudited):
Basic..................................... 18,600 18,600
Diluted................................... 18,630 18,630
======= =======

See accompanying notes to combined financial statements.
F-4
78

COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

COMBINED STATEMENTS OF STOCKHOLDERS' AND MEMBERS' DEFICIT
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

COMMON STOCK
------------------- ADDITIONAL ACCUMULATED MEMBERS'
SHARES AMOUNT PAID-IN CAPITAL DEFICIT EQUITY TOTAL
--------- ------ --------------- ----------- -------- -------

Balance at June 1,
1996................. 5,400,000 $ 1 -- $ 18 $ 15 $ 34
Net income (loss)...... -- -- -- (1,816) 747 (1,069)
Stock based
compensation (note
12).................. -- -- $ 840 -- -- 840
Distributions to
members.............. -- -- -- -- (360) (360)
--------- --- ----- ------- ------- -------
Balance at May 31,
1997................. 5,400,000 1 840 (1,798) 402 (555)
Net income............. -- -- -- (269) 552 283
Distributions to
members.............. -- -- -- -- (700) (700)
--------- --- ----- ------- ------- -------
Balance at May 31,
1998................. 5,400,000 1 840 (2,067) 254 (972)
Net income (loss)...... -- -- -- (430) 312 (118)
Distributions to
members.............. -- -- -- -- (540) (540)
--------- --- ----- ------- ------- -------
Balance at May 31,
1999................. 5,400,000 1 840 (2,497) 26 (1,630)
Net income (loss)...... -- -- -- (1,098) 32 (1,066)
--------- --- ----- ------- ------- -------
Balance at November 30,
1999 (unaudited)..... 5,400,000 $ 1 $ 840 $(3,595) $ 58 $(2,696)
========= === ===== ======= ======= =======

See accompanying notes to combined financial statements.
F-5
79

COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

SIX MONTH PERIODS ENDED
YEARS ENDED MAY 31 NOVEMBER 30
--------------------------- -------------------------
1997 1998 1999 1998 1999
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)

Cash flows from operating activities:
Net income (loss)............................ $(1,069) $ 283 $ (118) $ (349) $(1,066)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Loss on disposal of fixed assets.......... -- -- 3 -- --
Stock based compensation.................. 840 -- -- -- --
Depreciation and amortization............. 333 455 780 356 389
Allowance for doubtful accounts........... 100 100 135 151 50
Changes in assets and liabilities:
Trade accounts receivable............... (2,424) (853) (1,055) (1,430) 1,013
Due from affiliates..................... (27) (14) (29) (7) (36)
Prepaid line costs...................... (195) 124 171 80 33
Prepaid expenses and other current
assets............................... 12 (15) (126) (155) 91
Other assets............................ -- (60) 32 36 3
Accounts payable and accrued expenses... 3,024 8,401 1,204 1,631 (5,019)
Income taxes payable.................... 3 77 (20) 37 --
Deferred revenue........................ 435 (211) (285) (129) (72)
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities............... 1,032 8,287 692 221 (4,614)
------- ------- ------- ------- -------
Cash flows from investing activities:
Capital expenditures......................... (123) (135) (106) (65) (77)
Acquisition of customer lists................ -- (475) -- -- --
------- ------- ------- ------- -------
Net cash used in investing
activities......................... (123) (610) (106) (65) (77)
------- ------- ------- ------- -------
Cash flows from financing activities:
Payments under capital leases................ (211) (380) (456) (253) (171)
Distributions to members..................... (360) (700) (540) (50) --
Loans to/repayments from stockholders........ -- -- (1,000) (1,000) 9
------- ------- ------- ------- -------
Net cash used in financing
activities......................... (571) (1,080) (1,996) (1,303) (162)
------- ------- ------- ------- -------
Net increase (decrease) in cash and
cash equivalents................... 338 6,597 (1,410) (1,147) (4,853)
Cash and cash equivalents at beginning of
period....................................... 1,655 1,993 8,590 8,590 7,180
------- ------- ------- ------- -------
Cash and cash equivalents at end of period..... $ 1,993 $ 8,590 $ 7,180 $ 7,443 $ 2,327
======= ======= ======= ======= =======
Supplemental disclosure of cash paid for:
Interest..................................... $ 139 $ 142 $ 291 $ 144 $ 434
======= ======= ======= ======= =======
Income taxes................................. $ 125 $ 118 $ 118 -- --
======= ======= ======= ======= =======
Supplemental disclosure of noncash financing
and investing activities:
Stock based compensation..................... $ 840 -- -- -- --
Capital lease of equipment................... $ 18 $ 551 $ 2,165 $ 333 $ 2,982
Exchange of equipment under capital lease.... -- -- -- -- $ (690)
======= ======= ======= ======= =======

See accompanying notes to combined financial statements.
F-6
80

COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS
MAY 31, 1998 AND 1999 AND NOVEMBER 30, 1999
(INFORMATION AS OF AND FOR THE SIX MONTH PERIODS
ENDED NOVEMBER 30, 1998 AND 1999 IS UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

(1) DESCRIPTION OF COMPANY BUSINESS

Cooperative Communications, Inc. and subsidiaries (Cooperative) and Eastern
Computer Services, LLC (Eastern) (collectively, the Company) provide integrated
voice and data communication services to small and medium-sized businesses. The
Company offers its customers a single point of contact for a comprehensive
package of communication services, including local, long distance, Internet,
cellular and other enhanced voice and data services. The Company has
approximately 8,000 customers and is authorized to provide services in five
states with the majority of its customers being located in New Jersey. No single
customer accounted for more than 5% of revenues during each of the periods
presented.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation

The accompanying combined financial statements include the accounts of
Cooperative Communications, Inc. and subsidiaries and Eastern Computer Services,
L.L.C., a Delaware Limited Liability Company. All of the issued and outstanding
capital stock of Cooperative Communications, Inc. was owned by three
shareholders. The same three shareholders owned the members interests in Eastern
Computer Services, L.L.C. On March 20, 2000, the entities were reorganized
through the formation of Cooperative Holdings, Inc. (note 3). The combined
financial statements are intended to present the financial position and results
of operations of the entities with common ownership and business purpose. All
significant intercompany balances and transactions have been eliminated in
combination and consolidation.

(b) Unaudited Interim Financial Information

The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions of Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments, consisting of only normal recurring
adjustments, considered necessary for a fair presentation have been included.
Operating results for the six month period ended November 30, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending May 31, 2000.

The Company currently leases its transport capacity from a limited number
of suppliers and is dependent upon the availability of collocation space and
fiber optic transmission facilities owned by the suppliers. The Company is
currently vulnerable to the risk of renewing favorable supplier contracts,
timeliness of the supplier in processing the Company's orders for customers and
is at risk to regulatory agreements that govern the rates to be charged to the
Company.

(d) Use of Estimates

The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amount of revenues and expenses during the
reporting

F-7
81
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

period. Such estimates include the levels of valuation allowances for billing
adjustments and doubtful accounts receivable and deferred tax assets. Actual
results could differ from those estimates. The markets for the Company's
services are characterized by intense competition, rapid technological
development, regulatory changes, and frequent new product introductions, all of
which could impact the future value of the Company's assets.

(e) Cash Equivalents

Cash equivalents of $6,991, $5,260 and $2,327 at May 31, 1998, 1999 and
November 30, 1999, respectively, consist of U.S. Treasury bills with an initial
term of less than three months. For purposes of the combined statements of cash
flows, the Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.

(f) Property and Equipment

Property and equipment are stated at cost. Equipment under capital leases
are stated at the present value of minimum lease payments.

Depreciation of property and equipment is calculated on the straight-line
method over the estimated useful lives of the assets. Property and equipment
held under capital leases and leasehold improvements are amortized straight-line
over the lease term or estimated useful life of the asset.

ESTIMATED
USEFUL LIVES
IN YEARS
------------

Building.................................................... 20
Equipment................................................... 5
Computer equipment.......................................... 5
Telecommunications equipment................................ 5-10
Furniture and fixtures...................................... 10
Leasehold improvements...................................... 20

Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized. Expenditures for maintenance
and repairs are charged to expense as incurred.

(g) Income Taxes

Eastern has been organized and operated under a limited liability company
agreement structured in a manner that is intended to result in the
classification of Eastern as a partnership for federal and state income tax
purposes. Consequently, the results of operations of Eastern are subject to
corporate federal and state income tax but pass directly through to the
individual members of Eastern in proportion to their respective ownership
interests. Upon contribution of Eastern to Cooperative Holdings, Inc., Eastern
will be taxed as a C Corporation (note 3).

Income taxes for Cooperative are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.

F-8
82
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(h) Revenue Recognition

The Company recognizes revenues from telecommunications services in the
period the related services are provided.

Deferred revenue principally represents payment received related to
installation and activation fees charged customers to initiate service.
Installation and activation fees are initially deferred and subsequently
recognized in revenue over the estimated subscriber life which approximates
three years.

Costs incurred in connection with activation of customer services are
initially deferred and recognized as costs of telecommunications services over
the estimated subscriber life. Such costs are included in prepaid line costs in
the accompanying balance sheet.

(i) Accounting for Stock Options

The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25 "Accounting for
Stock Issued to Employees", and related interpretations, in accounting for its
fixed plan employee stock options. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. For disclosure purposes, pro forma net loss
and pro forma net loss per common share information included in note 12 are
provided in accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" as if the fair-value-based method had
been applied.

(j) Fair Value of Financial Instruments

The fair value of financial instruments is determined by reference to
market data and other valuation techniques as appropriate. The Company believes
the fair value of its financial instruments, principally cash and cash
equivalents, trade accounts receivable, accounts payable and accrued expenses,
obligations under capital leases and other long term obligations approximates
their recorded values due to the short-term nature of the instruments or
interest rates, which are comparable with current rates.

(k) Impairment of Long-lived Assets and Long-lived Assets to be Disposed of

Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

(l) Segment Information

The Company is managed and operated as one business. The entire business is
managed by a single management team that reports to the chief executive officer.
The Company does not operate separate lines of business or product lines.
Accordingly, the Company does not prepare discrete financial information with
respect to separate product areas and does not have separately reportable
segments as defined by Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information."

F-9
83
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(m) Impact of Recent Accounting Standards

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," (SFAS No. 133), which establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts and for hedging activities. SFAS No. 133 (as amended
by SFAS No. 137) is effective for all of the Company's fiscal quarters beginning
June 1, 2001. This statement is not expected to affect the Company as it
currently does not have derivative instruments or engage in hedging activities.

In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up
Activities", which requires the costs of start-up activities and organization
costs be expensed as incurred. SOP 98-5 is effective for the Company beginning
in fiscal 2000. Management of the Company does not believe that adoption of this
SOP will have a material effect on its combined financial statements as start-up
costs have historically been expensed as incurred.

(3) RECAPITALIZATION, PROFORMA INFORMATION AND PROFORMA NET LOSS PER COMMON
SHARE

Recapitalization

In January 2000, the Company's Board of Directors authorized the filing of
a Registration Statement on Form S-1 to sell shares of common stock through an
initial public offering (IPO). In connection with the contemplated IPO, the
Board of Directors, stockholders and members of the Company approved the
formation of Cooperative Holdings, Inc. (Holdings) through the filing of a
certificate of incorporation on February 9, 2000. Holdings is authorized to
issue up to 60,000,000 shares of common stock with a par value of $.01 per share
and up to 5,000,000 shares of undesignated preferred stock with a par value of
$.01 share. Accordingly, the total number of shares of all classes of capital
stock Holdings is authorized to issue is 65,000,000. Holders of common stock are
entitled to one vote for each share held, receive dividends ratably, if any, as
may be declared by the Board of Directors and share ratably in all assets
remaining after payment of liabilities and liquidation preferences of any
outstanding shares of preferred stock. The preferred stock is issuable from time
to time in one or more series and with such designations, preferences and other
rights as determined by the Board of Directors. The Board of Directors is
authorized to determine, among other things, the voting, dividend, redemption,
conversion, exchange and liquidation powers, rights and preferences and the
limitations thereon pertaining to such series.

On March 20, 2000, Cooperative, its stockholders and Holdings entered into
a plan of reorganization and exchange agreement (the Reorganization). Pursuant
to the Reorganization, the stockholders of Cooperative exchanged all of their
issued and outstanding shares of no par value common stock for shares of $.01
par value common stock of Holdings at which time Cooperative became a
wholly-owned subsidiary of Holdings. The stockholders of Cooperative received
3.444 shares of Holdings common stock for each share of Cooperative common stock
held. Also on March 20, 2000, the members of Eastern entered into a contribution
agreement with Holdings (the Contribution) pursuant to which the members
contributed their equity ownership interests to Holdings and Eastern became a
wholly-owned subsidiary of Holdings. Outstanding options to purchase 30,000
shares of common stock of Cooperative were exchanged for an equal number of
options to purchase shares of common stock of Holdings (note 12). The exchanged
options in Holdings have been issued outside of the Cooperative Holdings, Inc.
2000 Stock Plan described in note 12 and with terms and conditions substantially
the same as the terms and conditions of the options prior to the exchange.
Subsequent to the Reorganization and Contribution, a total of 18,600,000 shares
of Holdings common stock are issued and outstanding. There are no issued and
outstanding shares of preferred stock. The Reorganization and Contribution are
intended to qualify as a non-taxable reorganization pursuant to Section
368(a)(1)(B) of the Internal Revenue Code of 1986, as amended. The

F-10
84
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Reorganization and Contribution were accounted for using carryover basis.
Accordingly, no gain or loss was reorganized on the transactions.

Pro Forma Information -- Unaudited

The accompanying combined financial statements include unaudited pro forma
information which gives effect to the following:

Stockholders' Deficit Information

(a) The formation of Holdings and the exchange of each of the issued and
outstanding shares of no par value common stock of Cooperative for
3.444 shares of $.01 par value common stock of Holdings.

(b) The reclassification of the undistributed earnings in Eastern to
additional paid-in capital assuming a distribution to the members
followed by a contribution to the capital of Holdings.

Income Tax Expense (Benefit) and Net Loss Per Common Share

(a) The organization of Eastern as a tax paying entity. As discussed in
note 2, prior to the Contribution, Eastern was not subject to income
taxes and, therefore, no provision for income taxes is included in the
historical combined financial statements. Pro forma income tax expense
(benefit) was computed in accordance with the asset and liability
method and assumes Eastern was organized as a tax paying entity at the
beginning of the periods presented.

(b) The formation of Holdings and the exchange of each of the issued and
outstanding shares of no par value common stock of Cooperative for
3.444 shares of $.01 par value common stock of Holdings.

Pro Forma Net Loss Per Common Share

Pro forma basic net loss per common share is computed by dividing pro forma
net loss by the pro forma weighted average number of common shares outstanding
assuming the formation of Holdings had occurred at the beginning of the periods
presented.

Pro forma diluted net loss per common share was calculated in a manner
consistent with pro forma basic net loss per common share except that pro forma
diluted net loss per common share also includes the dilutive effect of 30,000
options issued in 1997 to acquire an equivalent number of shares of common stock
for nominal consideration (note 12). There were no additional potential common
shares outstanding other than the options described above.

All share and per share data have been retroactively adjusted to reflect
the effects of the stock split (see note 11).

F-11
85
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(4) TRADE ACCOUNTS RECEIVABLE

Trade accounts receivable, consist of the following:

MAY 31
----------------
1998 1999
------ ------

Billed...................................................... $7,629 $8,727
Unbilled.................................................... 209 166
------ ------
7,838 8,893
Less allowance for doubtful accounts and billing
adjustments............................................... 700 835
------ ------
$7,138 $8,058
====== ======

Unbilled receivables represents telecommunication services rendered as of
the balance sheet date for which a bill has not been issued to the customer.
Unbilled receivables are generally billed to customers in the immediately
succeeding month.

Increases to the allowance for billing adjustments have been recorded with
a corresponding reduction in revenues in the accompanying combined statements of
operations.

(5) PROPERTY AND EQUIPMENT

Property and equipment, including equipment under capital leases, consists
of the following:

MAY 31
---------------- NOVEMBER 30
1998 1999 1999
------ ------ -----------

Building.............................................. $ -- $1,788 $1,788
Equipment............................................. 110 140 140
Computer equipment.................................... 580 879 940
Telecommunications equipment.......................... 1,509 1,603 2,895
Furniture and fixtures................................ 291 328 353
Leasehold improvements................................ 108 115 117
------ ------ ------
2,598 4,853 6,233
Less accumulated depreciation and amortization........ 1,056 1,672 992
------ ------ ------
$1,542 $3,181 $5,241
====== ====== ======

Depreciation and amortization expense related to property and equipment
(including capital leases) amounted to $333, $455 and $622 for the years ended
May 31, 1997, 1998 and 1999, respectively, and $277 and $310 for the six-month
periods ended November 30, 1998 and 1999, respectively. During the six-month
period ended November 30, 1999, the Company exchanged telecommunications
equipment under capital lease with a net book value of $690 for similar
equipment having a capitalized value of $2,808 (see note 10).

(6) INTANGIBLE ASSET -- CUSTOMER LIST

Commencing in 1994, the Company had a sales agent agreement with a
third-party for the purposes of selling telecommunications services. The sales
agent agreement required the Company to pay a commission based on the type of
service to be rendered. In May 1998, the Company reached a settlement agreement
(the Agreement) with the third-party for the termination of the sales agent
agreement. The Agreement required the Company to pay all then outstanding and
unpaid commissions due amounting to

F-12
86
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

$25 plus $475 payable in four equal installments with the first installment due
at signing. The remaining three installments were paid during fiscal 1999. In
return, the third party transferred ownership of the customer lists and any
relationships therewith to the Company. In addition, the third party agreed not
to directly or indirectly participate in the solicitation, sale or provision of
telecommunications services to any specified customer for a period of three
years.

The Company has reflected the settlement payment of $475 as an intangible
asset and is amortizing the asset to operations over the duration of the
Agreement which is three years. During the year ended May 31, 1999, the Company
recorded amortization expenses of $158.

(7) CREDIT FACILITY

The Company has a credit facility with a bank which provides for borrowings
of up to $1,500 secured by trade accounts receivable. The credit facility is
subject to renewal at three-month intervals and is currently set to expire
(subject to further renewal) on May 2, 2000. Outstanding borrowings under the
credit facility bear interest at the bank's prime lending rate of 7.75% at May
31, 1999. The Company had no outstanding borrowings under the credit facility at
May 31, 1998 and 1999 and November 30, 1999.

(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

MAY 31
-----------------
1998 1999
------ -------

Accounts payable............................................ $1,042 $ 921
Accrued telecommunications costs............................ 4,271 9,576
Sales taxes payable......................................... 2,075 823
Universal service taxes payable............................. 808 2,497
Accrued commissions......................................... 328 295
------ -------
$8,524 $14,112
====== =======

Included in accrued telecommunications costs is $979 and $4,389 at May 31,
1998 and 1999 respectively, related to the current portion of amounts due to a
supplier pursuant to a settlement arrangement (see note 14).

(9) RELATED PARTY TRANSACTIONS

In November 1998, the Company advanced two shareholders/executive officers
$1,000 evidenced by a promissory note. The advance was used to repay in full the
then outstanding mortgage obligation on the Company's headquarters and
operations facility (the Facility) located in Belleville, New Jersey. The
promissory note is repayable by the shareholders/executives to the Company over
a period of 20 years in equal monthly installments of approximately $9 including
interest at a rate of 9.5% per annum. Principal payments to be received by the
Company over the next five fiscal years are as follows: 2000 -- $18;
2001 -- $20; 2002 -- $22; 2003 -- $25; and; 2004 -- $27. The promissory note is
secured by the Facility.

In December 1998, the Company entered into a lease agreement (the Lease
Agreement) with the same two shareholders/executive officers for a lease of the
Facility. The lease agreement requires monthly payments of approximately $17 per
month ($200 per annum) for a period of 20 years. Principal payments to be made
by the Company over the next five fiscal years are as follows: 2000 -- $33;
2001 -- $36; 2002 -- $40; 2003 -- $44; and; 2004 -- $48. Monthly lease payments
are subject to escalation to reflect

F-13
87
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

any increases in the Consumer Price Index for northern New Jersey. The lease is
a "Triple Net Lease" requiring the Company to pay for essentially all costs of
operating and maintaining the Facility including taxes, utilities, insurance,
maintenance and reports.

The lease has been accounted for as a capital lease in accordance with the
provisions of Statement of Financial Accounting Standards No. 13, "Accounting
for Leases." Accordingly, the Company capitalized the Facility at the
commencement of the lease in the amount of $1,788 representing the present value
of the future minimum lease payments discounted at the Company's incremental
borrowing rate estimated at 9.5%. The amount capitalized approximated the fair
value of the Facility. The Company is amortizing the building on a straight-line
basis over a period of 20 years.

In connection with the execution of the lease, the Company and the
shareholders/executives entered into a legal right of full and complete offset
of the lease obligation and aforementioned note receivable. Accordingly, the
Company has reflected the initial net obligation in the amount of $781 as
subsequently reduced through net principal payments as a capital lease
obligation-affiliate in the accompanying combined balance sheets at May 31,
1999.

Prior to entering into the Lease Agreement, the Company leased the Facility
from the same two shareholders/executive officers under an informal
month-to-month arrangement which included essentially the same cost structure as
the Lease Agreement except that real estate taxes were not paid by the Company.

Rent expense charged to operations under the aforementioned month-to-month
lease arrangement amounted to $205, $205, and $103 for the years ended May 31,
1997, 1998, 1999, respectively.

The Company subleases a portion of its headquarters and operations facility
to two entities owned by the same shareholders as the Company. The entities are
engaged in business operations different from that of the Company. The lease
arrangements provide for rental payments in the amount of $1 per month, plus a
pro-rata share of the utilities, taxes, insurance, maintenance and repairs for a
period of five years expiring in 2004. Sublease rental income to be recognized
by the Company over the next five fiscal years will be approximately $14 per
year.

For the years ended May 31, 1997, 1998 and 1999, the Company recognized
rental income in the amount of $11, $14 and $14, respectively. Such amounts are
included in other income-affiliate in the accompanying combined statements of
operations. Amounts due from these entities under the aforementioned lease
arrangements amounted to $24 and $37 at May 31, 1998 and 1999, respectively, and
are included in due from affiliates in the accompanying combined balance sheets.

(10) LEASES

The Company is obligated under various equipment and building capital
leases that expire at various dates during the next 2 to 20 years. The gross
amount of equipment and buildings and related accumulated amortization recorded
under capital leases consists of the following:

MAY 31
---------------- NOVEMBER 30
1998 1999 1999
------ ------ -----------

Building.............................................. $ -- $1,788 $1,788
Equipment............................................. 1,969 2,330 3,659
------ ------ ------
1,969 4,118 5,447
Less accumulated amortization....................... 823 1,346 495
------ ------ ------
$1,146 $2,772 $4,952
====== ====== ======

F-14
88
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

In August 1999, the Company exchanged telecommunications equipment under a
capital lease with a net book value of $690 for similar equipment with increased
capacity having a capitalized value of $2,808. The new lease is for a period of
five years (see note 5).

In March 2000, the Company entered into several lease agreements for
telecommunications equipment aggregating approximately $3,500. The lease
agreements require yearly payments in varying amounts ranging from $209 to
$1,149 over a five year period commencing when the Company takes possession of
the equipment.

The Company also has several noncancelable operating leases, primarily for
telecommunications equipment and office space, that expire over the next three
years. Rental expense for operating leases, including the informal
month-to-month headquarters and operations facility lease (see note 9), was
$228, $227, and $151 in the years ended May 31, 1997, 1998, and 1999,
respectively.

Future minimum lease payments under noncancelable operating leases and
future minimum capital lease payments, excluding the headquarters and operations
facility capital lease, as of May 31, 1999 and the twelve month period ending
November 30, 1999 are as follows:

CAPITAL OPERATING
LEASES LEASES
------- ---------

Year ending May 31:
2000...................................................... $ 756 $ 59
2001...................................................... 370 48
2002...................................................... 141 16
2003...................................................... 70 --
2004...................................................... 1 --
------ ----
Total minimum lease payments...................... 1,338 $123
====
Less amount representing interest (at rates ranging from
7.0% to 22.5%)............................................ 170
------
Present value of net minimum capital lease payments....... 1,168
Less current installments of obligations under capital
leases.................................................... 642
------
Obligations under capital leases, excluding current
installments........................................... $ 526
======

CAPITAL OPERATING
LEASES LEASES
------- ---------

Twelve month period ending November 30:
2000...................................................... $ 991 $51
2001...................................................... 1,032 16
2002...................................................... 981 --
2003...................................................... 902 --
2004...................................................... 362 --
------ ---
Total minimum lease payments...................... 4,268 $67
===
Less amount representing interest (at rates ranging from
7.0% to 22.5%)............................................ 962
------
Present value of net minimum capital lease payments....... 3,306
Less current installments of obligations under capital
leases.................................................... 614
------
Obligations under capital leases.......................... $2,692
======

F-15
89
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(11) STOCKHOLDER'S AND MEMBERS' EQUITY

Stockholder's Equity

In October 1996, the Board of Directors of Cooperative Authorized a 6 for 1
stock split increasing the number of authorized shares of no par value common
stock from 1,000,000 shares to 6,000,000 shares and the number of issued and
outstanding shares from 900,000 to 5,400,000 shares. All share and per share
data in the accompanying combined financial statements have been retroactively
adjusted to reflect the effect of the stock split. In June 1997, the Board of
Directors approved an increase in the number of authorized shares of no par
value common stock from 6,000,000 to 20,000,000.

Members' Equity

Eastern has one class of members. All equity members vote in proportion to
their respective equity ownership interests in Eastern. Net profits and losses
of Eastern are allocated to the capital accounts of the members as described in
the Eastern operating agreement, generally in proportion to their respective
ownership interests. No members are liable for any obligation of the Eastern or
are required to contribute any additional capital related to deficits incurred.
Distributions to members in the accompanying combined statements of
stockholder's and member's deficit represent payments made to such members in
proportion to their respective ownership interests.

(12) STOCK OPTIONS

In June 1996, Cooperative granted 30,000 options to acquire an equivalent
number of shares of common stock at an exercise price of $.01 per share to a
certain member of senior management. The options vested immediately upon grant
and may be exercised at any time on or before two years after the recipient is
no longer employed by Cooperative. The options are not subject to the effect of
stock split described in note 11. The fair market value of Cooperative's common
stock on the date of grant, as determined by the Company's Board of Directors,
was approximately $28 per share. Accordingly, the Company recognized
compensation expense of $840 in the combined statement of operations for the
year ended May 31, 1997.

Effective June 1, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). This statement defines a fair value method of
accounting for an employee stock option or similar equity instrument. However,
it allows an entity to continue to measure compensation cost for those
instruments using the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" provided it discloses the effect of SFAS 123 in footnotes to the
financial statements. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method.

Had the Company elected to recognize compensation cost based on the fair
value of the stock options at the date of grant under SFAS 123, net loss the
year ended May 31, 1997, would not have been materially different due to the
issuance of the aforementioned options with a nominal exercise price.

On February 11, 2000, the Board of Directors of Holdings approved the
adoption of an employee equity incentive plan. The Cooperative Holdings, Inc.
2000 Stock Plan (the Plan) authorizes the grant of incentive stock options
within the meaning of section 422 of the Internal Revenue Code of 1986, as
amended, and non-qualified stock options for the purchase of an aggregate of up
to 3,540,000 shares (subject to adjustment for stock splits and similar capital
changes) of common stock to employees and, in the case of non-qualified stock
options, to consultants and directors of Holdings as defined in the Plan. In

F-16
90
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

addition, the Plan provides for the granting of restricted stock awards and
other stock awards at the discretion of the Board of Directors.

(13) INCOME TAXES

Income tax expense attributable to income (loss) from operations consists
of the following:

YEARS ENDED MAY 31
--------------------
1997 1998 1999
---- ---- ----

Current:
Federal................................................... $ 99 $151 $76
State and local........................................... 29 44 22
---- ---- ---
128 195 98
---- ---- ---
Deferred:
Federal................................................... -- -- --
State and local........................................... -- -- --
-- -- --
---- ---- ---
Total income tax expense.......................... $128 $195 $98
==== ==== ===

The actual income tax expense differs from the expected income tax expense
(benefit) (computed by applying the U.S. Corporate income tax rate of 34% to
income (loss) before income tax expense) as follows:

YEARS ENDED MAY 31
-----------------------
1997 1998 1999
----- ----- -----

Computed "expected" federal income tax expense (benefit)... $(320) $ 163 $ (7)
Change in valuation allowance for deferred tax assets
allocated to income tax expense.......................... 763 187 188
State income taxes, net of federal income tax benefit...... 19 36 15
Income taxed directly to members........................... (254) (188) (106)
Other, net................................................. (80) (3) 8
----- ----- -----
$ 128 $ 195 $ 98
===== ===== =====

F-17
91
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:

MAY 31
----------------
1998 1999
------ ------

Deferred tax assets:
Trade accounts receivable allowances...................... $ 280 $ 334
Prepaid line costs........................................ 327 300
Deferred revenue.......................................... 122 77
Deferred stock-based compensation......................... 335 335
Other..................................................... 156 241
------ ------
Total gross deferred tax assets................... 1,220 1,287
Less valuation allowance.................................. 1,076 1,264
------ ------
Net deferred tax assets........................... 144 23
------ ------
Deferred tax liabilities:
Depreciation.............................................. (27) (23)
Section 481 adjustment, cash to accrual conversion........ (117) --
------ ------
Total gross deferred tax liabilities.............. (144) (23)
------ ------
Net deferred tax asset............................ $ -- $ --
====== ======

The valuation allowance for deferred tax assets as of June 1, 1997 and 1998
was $889 and $1,076, respectively. The net change in the valuation allowance for
the years ended May 31, 1997, 1998 and 1999 was an increase of $763, $187 and
$188, respectively.

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment.

Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences net of the existing
valuation allowance at May 31, 1999.

(14) TRANSMISSION COST SETTLEMENT

The Company is routinely involved in various disputes with its suppliers of
telecommunications services arising in the normal course of business, as is
common in the industry. The Company's policy is to record supplier invoices at
the full value and recognize any cost reduction upon written notification from
the vendor that a credit will be issued. Alternatively, if the amount of credit
can be estimated with reasonable accuracy, the Company will record the net
amount due.

Commencing in 1993, the Company had an ongoing dispute with one of its
major suppliers. A settlement of the dispute was verbally agreed to by the
parties in June 1998 and formalized in June 1999. Pursuant to the settlement,
the Company agreed to pay a total of $10,500, including interest, payable as
follows: $1,044 in June 1998, $2,957 in June 1999 and $181 per month for 36
months thereafter. The results of the settlement did not have a significant
impact on the Company's combined financial position

F-18
92
COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

and results of operations as the settlement approximated the net amount of
supplier invoices accrued by the Company.

The Company has recorded the present value of the settlement, using a
discount rate of 8%, of $9,640 and $8,661 in the accompanying combined balance
sheets at May 31, 1998 and 1999, respectively. The current portion of the
obligation of $979 and $4,389 at May 31, 1998 and 1999, respectively, has been
included in accrued telecommunications costs in accounts payable and accrued
expenses in the accompanying combined balance sheets (see note 8).

(15) EMPLOYEE BENEFIT PLANS

The Company adopted a 401(k) and profit sharing plan during fiscal 1999,
covering substantially all of its employees. Under the plan, employees may elect
to contribute a portion of their compensation to the 401(k) plan, subject to
certain limitations. Company matching contributions are made at a rate of 33% of
the first 6% of participant compensation contributed to the plan. In addition,
the Company may make discretionary profit sharing contributions to the plan.
Company contributions vest over a period of 5 years. Total contributions made by
the Company to the plan amounted to $1 for the year ended May 31, 1999.

(16) COMMITMENTS AND CONTINGENCIES

The Company has a resale agreement with an incumbent local exchange carrier
which expires in fiscal 2004. Per the agreement, the Company is obligated to pay
fees for a certain number of minimum lines and a surcharge in the event the
Company exceeds the maximum number of lines contracted. The Company has exceeded
this minimum amount stipulated in the agreement during each of the years in the
three year period ended May 31, 1999. The Company is dependent on the
cooperation of the incumbent local exchange carrier to provide access service
for the origination and termination of its local and long distance traffic.
Historically, these access charges can make up a significant percentage of the
overall cost of providing these services. To the extent the access services of
the local exchange carrier are used, the Company and its customers are subject
to the quality of service, equipment failures and service interruptions of the
local exchange carrier.

On March 24, 2000, the Company entered into a two-year interconnection
agreement with the same local exchange carrier. The agreement provides the
Company and the carrier with network interconnection or collocation and allows
for the formalization of a schedule for collocation for services in New Jersey.
The agreement also provides for access to unbundled network elements, switching
and routing of service, reciprocal compensation for the transport and
termination of local calls over the terminating carrier switch and various other
services. Fees for services provided are payable monthly at rates specified in
the agreement.

The Company has long distance telecommunications service agreements with
several interexchange carriers. The terms of these agreements range from month
to month to up to 24 months and generally require the Company to meet certain
minimum usage levels. Failure to meet the minimum usage levels would have an
adverse affect on the Company's pricing arrangements. The Company generally
meets the minimum usage requirements in the ordinary course of business.

The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.

F-19
93

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

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT OR ADDITIONAL
INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE
THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED
BY THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT
COVER OF THIS PROSPECTUS.

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

TABLE OF CONTENTS
------------------------

PAGE
----

Prospectus Summary.................... 1
Risk Factors.......................... 7
Use of Proceeds....................... 20
Dividend Policy....................... 20
Capitalization........................ 21
Dilution.............................. 22
Selected Combined Financial Data...... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 33
Management............................ 53
Certain Relationships and Related
Transactions........................ 59
Principal and Selling Stockholders.... 60
Description of Capital Stock.......... 62
Shares Eligible for Future Sale....... 66
Underwriting.......................... 68
Legal Matters......................... 70
Experts............................... 70
Where You Can Find More Information... 70
Index to Combined Financial
Statements.......................... F-1

UNTIL , 2000, ALL DEALERS THAT BUY, SELL OR TRADE THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------

COMMON STOCK

[COOPERATIVE HOLDINGS, INC. LOGO]
--------------------
PROSPECTUS
, 2000
--------------------
PENNSYLVANIA MERCHANT
GROUP

ROTH CAPITAL PARTNERS, INC.
------------------------------------------------------
------------------------------------------------------
94

PART II

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission registration fee and the NASD
filing fee. All the expenses below will be paid by us.

ITEM AMOUNT
- ---- --------

Securities and Exchange Commission Registration fee......... $ 21,859
NASD filing fee............................................. 8,780
Nasdaq National Market listing (entry) fee.................. *
Blue Sky fees and expenses.................................. *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer Agent and Registrar fees........................... *
Miscellaneous............................................... *
--------
Total....................................................... $ *
========

-----------------------
* To be supplied by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law permits each Delaware
business corporation to indemnify its directors, officers, employees and agents
against expenses and liabilities in connection with any proceeding involving
such persons by reason of his serving or having served in such capacities or for
each such person's acts taken in his capacity as a director, officer, employee
or agent of the corporation if such actions were taken in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal proceeding, if he
had no reasonable cause to believe his conduct was unlawful, provided that any
such proceeding is not by or in the right of the corporation.

Section 102(b)(7) of the Delaware General Corporation Law enables a
corporation in its certificate of incorporation to limit the liability of
directors of the corporation to the corporation or its stockholders.
Specifically, a certificate of incorporation may provide that directors of the
corporation will not be personally liable for money damages for breach of a duty
as a director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve a knowing violation of law, (iii) with respect to
unlawful payment of dividends or other unlawful purchase or redemption of shares
of the corporation, or (iv) for any transaction from which the director derived
an improper personal benefit.

Our Certificate of Incorporation limits the liability of our directors as
authorized by Section 102(b)(7).

Article XI of our Bylaws specifies that we shall indemnify our directors,
officers, employees and agents to the extent such party is a party to any action
because he was a director, officer, employee or agent of ours. We have agreed to
indemnify such parties for their actual and reasonable expenses. This provision
of the Bylaws is deemed to be a contract between us and each director and
officer who serves in such capacity at any time while such provision and the
relevant provisions of the Delaware General Corporation Law are in effect, and
any repeal or modification thereof shall not offset any action, suit or
proceeding theretofore or thereafter brought or threatened based in whole or in
part upon any such state of facts.

II-1
95

We have executed indemnification agreements with each of our officers and
directors pursuant to which we have agreed to indemnify such parties to the full
extent permitted by law, subject to certain exceptions, if such party becomes
subject to an action because such party is a director, officer, employee, agent
of fiduciary of ours.

We intend to obtain liability insurance for the benefit of our directors
and officers which will provide coverage for losses of directors and officers
for liabilities arising out of claims against such persons acting as directors
or officers of the registrant (or any subsidiary thereof) due to any breach of
duty, neglect, error, misstatement, misleading statement, omission or act done
by such directors and officers, except as prohibited by law.

At present, there is no pending litigation or proceeding involving a
director or officer of ours as to which indemnification is being sought nor are
we aware of any threatened litigation that may result in claims for
indemnification by any director or officer.

Reference is made to Section 6 of the Underwriting Agreement, the proposed
form of which is filed as Exhibit No. 1.1, in which the underwriters agree to
indemnify our directors and officers and certain other persons, against civil
liabilities, including certain liabilities under the Securities Act.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Prior to this offering, we issued the following securities:

In March 2000, we issued shares of our common stock to the holders of all
of the issued and outstanding shares of capital stock of Cooperative
Communications, Inc. As a result, Cooperative Communications, Inc. became a
wholly-owned subsidiary of ours. Prior to such issuance, we had no stockholders.
We also issued an option to purchase 30,000 shares of our common stock at an
exercise price of $0.01 per share in exchange for an option to purchase 30,000
shares of common stock of Cooperative Communications, Inc. In addition, all of
the members of Eastern Computer Services, L.L.C., who had constituted all of the
stockholders of Cooperative Communications, Inc., contributed to us all of their
membership interests in Eastern. As a result, Eastern Computer Services, L.L.C.
became a wholly-owned subsidiary of ours.

In April 2000, our board of directors approved the issuance, upon the
consummation of this offering, of options to purchase 1,029,047 shares of common
stock under our 2000 Stock Plan to employees, officers and consultants at
exercise prices equal to the initial public offering price.

We believe that the foregoing issuances of securities, if they constitute
sales, are exempt from registration under the Securities Act by virtue of the
exemption provided by Section 4(2) thereof for transactions not involving a
public offering or Rule 701 under the Securities Act as transactions made
pursuant to a written compensatory plan or pursuant to a written contract
relating to compensation. The sales of securities were made without the use of
an underwriter and the certificates evidencing the shares bear a restrictive
legend permitting their transfer only upon registration of the shares or an
exemption under the Securities Act. We believe that all recipients had adequate
access to information about us.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS

(a) Exhibits

EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------

1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of Cooperative Holdings, Inc.
3.2 Bylaws of Cooperative Holdings, Inc.
5* Form of Opinion of Buchanan Ingersoll Professional
Corporation.
10.1 Contribution Agreement dated March 20, 2000 among
Cooperative Holdings, Inc. and the members of Eastern
Computer Services, L.L.C.

II-2
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EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------

10.2+ Plan of Reorganization and Exchange Agreement dated March
20, 2000 among Cooperative Holdings, Inc., Cooperative
Communications, Inc. and the shareholders and optionholders
of Cooperative Communications, Inc.
10.3 Form of Indemnification Agreement by and between Cooperative
Holdings, Inc. and each of its directors and executive
officers.
10.4 Employment Agreement by and between Cooperative Holdings,
Inc. and Louis A. Lombardi, Sr., dated as of March 20, 2000.
10.5 Employment Agreement by and between Cooperative Holdings,
Inc. and Louis A. Lombardi, Jr., dated as of March 20, 2000.
10.6 2000 Stock Plan.
21 List of subsidiaries of Cooperative Holdings, Inc.
23.1 Independent Auditors' Report and Consent of KPMG LLP.
23.2* Consent of Buchanan Ingersoll Professional Corporation
(contained in the opinion filed as Exhibit 5 to the
Registration Statement).
23.3* Consent of Swidler Berlin Shereff Friedman LLP.
24 Powers of Attorney of certain officers and directors of
Cooperative Holdings, Inc. (contained on the signature page
of this Registration Statement).
27 Financial Data Schedule.

- ---------------
* To be filed by Amendment.

+ The schedules or exhibits to this document are not being filed herewith
because we believe that the information contained therein should not be
considered material to an investment decision in us or such information is
otherwise adequately disclosed in this Registration Statement on Form S-1. We
agree to furnish supplementally a copy of any schedule or exhibit to the
Commission upon request.

(b) Financial Statement Schedules

Schedule II -- Valuation and Qualifying Accounts

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SCHEDULE II

COOPERATIVE COMMUNICATIONS, INC. AND SUBSIDIARIES
AND EASTERN COMPUTER SERVICES, L.L.C.

VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MAY 31, 1997, 1998 AND 1999
AND SIX MONTH PERIOD ENDED NOVEMBER 30, 1999 (UNAUDITED)
(DOLLARS IN THOUSANDS)

ADDITIONS
---------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER ACCOUNTS DEDUCTIONS BEGINNING OF
DESCRIPTION PERIOD EXPENSES (DESCRIBE) (DESCRIBE) PERIOD
- ----------- ------------ ---------- -------------- ---------- ------------

Allowance for doubtful accounts and
billing adjustments:
Period Ending:
May 31, 1997................... $500 $1,042 $ (942) $600
May 31, 1998................... 600 1,067 (967) 700
May 31, 1999................... 700 1,390 (1,255) 835
November 30, 1999
(unaudited).................. 835 580 (530) 885

Deductions include amounts charged to the allowance for doubtful accounts and
billing adjustments during the respective periods.

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98

ITEM 17. UNDERTAKINGS

We hereby undertake that:

(1) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted as to directors, officers and controlling
persons pursuant to the provisions described in Item 14, or otherwise, we
have been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by a
director, officer or controlling person of ours in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, we
will, unless in the opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.

(2) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus as filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by Cooperative pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(3) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

(4) At the closing, as specified in the underwriting agreement, we
shall provide the underwriters certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.

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99

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Belleville, State of New
Jersey, on the 7th day of April, 2000.

COOPERATIVE HOLDINGS, INC.

By: /s/ LOUIS A. LOMBARDI, SR.
------------------------------------
Louis A. Lombardi, Sr.
President and Chief Executive
Officer

POWER OF ATTORNEY

KNOW BY ALL PERSONS, that each person whose signature appears below
constitutes and appoints Louis A. Lombardi, Sr. and Louis A. Lombardi, Jr., and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement and to sign any
registration statement for the same offering covered by the Registration
Statement that is to be effective upon filing pursuant to Rule 462 promulgated
under the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ Louis A. Lombardi, Sr. President and Chief Executive April 7, 2000
- --------------------------------------------------- Officer and Director
Louis A. Lombardi, Sr. (Principal Executive Officer)

/s/ Louis A. Lombardi, Jr. Chief Operating Officer and Director April 7, 2000
- ---------------------------------------------------
Louis A. Lombardi, Jr.

/s/ Jay Brzezanski Chief Financial Officer and April 7, 2000
- --------------------------------------------------- Secretary (Principal Financial and
Jay Brzezanski Accounting Officer)

/s/ Michael Lombardi Executive Vice President and April 7, 2000
- --------------------------------------------------- Treasurer and Director
Michael Lombardi

/s/ Daniel L. Hradesky Vice President of Business April 7, 2000
- --------------------------------------------------- Development and Strategic Planning
Daniel L. Hradesky and Director

/s/ Ronald O. Brown, Ph.D. Director April 7, 2000
- ---------------------------------------------------
Ronald O. Brown, Ph.D.

/s/ Myron Feldman Director April 7, 2000
- ---------------------------------------------------
Myron Feldman

/s/ John Trzaka Director April 7, 2000
- ---------------------------------------------------
John Trzaka

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100

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

EXHIBITS

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

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

COOPERATIVE HOLDINGS, INC.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
101

EXHIBIT INDEX

EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------

1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of Cooperative Holdings, Inc.
3.2 Bylaws of Cooperative Holdings, Inc.
5* Form of Opinion of Buchanan Ingersoll Professional
Corporation.
10.1 Contribution Agreement dated as of March 20, 2000 among
Cooperative Holdings, Inc. and the members of Eastern
Computer Services, L.L.C.
10.2+ Plan of Reorganization and Exchange Agreement dated as of
March 20, 2000 among Cooperative Holdings, Inc., Cooperative
Communications, Inc. and the shareholders and optionholders
of Cooperative Communications, Inc.
10.3 Form of Indemnification Agreement by and between Cooperative
Holdings, Inc. and each of its directors and executive
officers.
10.4 Employment Agreement by and between Cooperative Holdings,
Inc. and Louis A. Lombardi, Sr., dated as of March 20, 2000.
10.5 Employment Agreement by and between Cooperative Holdings,
Inc. and Louis A. Lombardi, Jr., dated as of March 20, 2000.
10.6 2000 Stock Plan.
21 List of subsidiaries of Cooperative Holdings, Inc.
23.1 Independent Auditors' Report and Consent of KPMG LLP.
23.2* Consent of Buchanan Ingersoll Professional Corporation
(contained in the opinion filed as Exhibit 5 to the
Registration Statement).
23.3* Consent of Swidler Berlin Shereff Friedman LLP.
24 Powers of Attorney of certain officers and directors of
Cooperative Holdings, Inc. (contained on the signature page
of this Registration Statement).
27 Financial Data Schedule.

- ---------------
* To be filed by Amendment. All other exhibits are filed herewith.

+ The schedules or exhibits to this document are not being filed herewith
because we believe that the information contained therein should not be
considered material to an investment decision in Cooperative or such
information is otherwise adequately disclosed in this Registration Statement
on Form S-1. We agree to furnish supplementally a copy of any schedule or
exhibit to the Commission upon request.