SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period ended September 30, 1999

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

For the transition period from __________ to _________

Commission file number: 000-26103

---------------------------------------------------------
CAIS INTERNET, INC.
(Exact name of registrant as specified in it charter)

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

Delaware 52-2066769
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

1255 22nd Street, N.W., Fourth Floor, Washington, D.C. 20037
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (202) 715-1300

Former name, former address, and former
year, if changed since last report: Not applicable

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

Yes [X] No [ ]

Indicate the number of outstanding shares of each of the registrant's
classes of Common Stock, as of the latest practicable date.

Title of each class
- -------------------
Common Stock, $.01 par value
22,428,164 shares outstanding on September 30, 1999

CAIS INTERNET, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 1999

INDEX

Page
PART I - FINANCIAL INFORMATION Number

Item 1. Financial Statements:

Consolidated Condensed Balance Sheets as of September 30, 1999 and
December 31, 1998. 4

Consolidated Condensed Statements of Operations for the Three
Months and for the Nine Months Ended September 30, 1999 and 1998. 5

Consolidated Condensed Statements of Changes
in Stockholders' Equity (Deficit) for the Nine Months Ended
September 30, 1999. 6

Consolidated Condensed Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998. 8

Notes to Consolidated Condensed Financial Statements. 9

Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of Operations. 17

Item 3. Quantitative and Qualitative Disclosures About Market Risk. 23

PART II - OTHER INFORMATION

Item 1. Legal Proceedings. 23

Item 2. Changes in Securities and Use of Proceeds. 23

Item 6. Exhibits and Reports on Form 8-K. 24

Signatures 25

This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects" and similar
expressions are intended to identify forward-looking statements. The important
factors discussed below under the caption "Risks and Other Important Factors,"
among others, and in the Company's Prospectus dated May 20, 1999 under the
caption "Risk Factors," could cause actual results to differ materially from
those indicated by forward-looking statements made herein and presented
elsewhere by management from time to time. Such forward-looking statements
represent management's current expectations and are inherently uncertain.
Investors are warned that actual results may differ from management's
expectations.

CAIS Internet, Inc.'s trademarks and pending trademark applications
include "OVERVOICE," "CAIS," "LANJACK," "MEET JACK" and "DESKJACK." All other
trademarks referred to herein are the property of their respective owners.

CAIS INTERNET, INC
Consolidated Condensed Balance Sheets
(in thousands except share and per share data)

September 30, 1999 December 31, 1998
------------------ -----------------
(Unaudited)

Current Assets
Cash and cash equivalents.......................................... $ 52,981 $ 95
Short-term investments............................................. 16,501 -
Accounts receivable, net of allowance for doubtful accounts
of $165 and $137, respectively................................. 1,706 648
Prepaid expenses and other current assets.......................... 2,308 228
Current assets of discontinued operations.......................... - 8,170
-------- ---------
Total current assets.................................. 73,496 9,141
-------- ---------
Property and equipment, net............................................. 61,809 2,638
Deferred offering costs................................................. - 237
Deferred debt financing costs, net...................................... 1,425 292
Intangible assets and goodwill, net..................................... 54,454 277
Receivable from officer................................................. 400 -
Other assets............................................................ 1,392 -
Noncurrent assets of discontinued operations............................ - 1,936
-------- ---------
Total noncurrent assets............................... 119,480 5,380
-------- ---------
Total assets.......................................... $192,976 $ 14,521
======== =========
Current liabilities
Accounts payable and accrued expenses.............................. $ 40,448 $ 4,396
Payable to discontinued operations................................. - 5,342
Unearned revenues.................................................. 632 572
Current liabilities of discontinued operations..................... - 8,205
-------- ---------
Total current liabilities............................. 41,080 18,515

Loan, net of unamortized debt discount of $0 and $817,
respectively....................................................... - 6,183
Notes payable to related parties, net of current portion................ - 1,983
Other long-term liabilities............................................. 717 -
Long-term liabilities of discontinued operations........................ - 2,601
-------- ---------
Total liabilities..................................... 41,797 29,282
-------- ---------
Series C cumulative mandatory redeemable convertible preferred
stock; 125,000 shares authorized, issued and
outstanding as of September 30, 1999 (aggregate
liquidation preference of $15,000)................................. 15,000 -

Put warrants............................................................ 1,267 -

Commitments and contingencies (Note 7)

Stockholders' equity (deficit)
Common stock, $0.01 par value; 100,000,000 shares
authorized; 22,440,930 and 9,965,505 shares issued
and 22,428,164 and 9,965,505 shares outstanding, respectively..... 224 100
Additional paid-in capital......................................... 188,235 7,794
Warrants outstanding............................................... 13,233 1,226
Deferred compensation.............................................. (3,435) (2,888)
Treasury stock, 12,766 shares of common stock...................... (150) -
Accumulated deficit................................................ (63,195) (20,993)
-------- ---------
Total stockholder's equity (deficit).................. 134,912 (14,761)
-------- ---------
Total liabilities and stockholders' equity (deficit).. $192,976 $ 14,521
======== =========

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

CAIS INTERNET, INC.
Consolidated Condensed Statements of Operations
(in thousands except per share amounts)
(unaudited)

Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
------ ------ ------ ------

Net revenues................................................ $ 2,682 $ 1,357 $ 6,102 $ 3,924

Cost of services............................................ 2,558 776 5,126 2,243

Operating expenses:
Selling, general and administrative.................... 13,333 2,471 22,813 6,712
Depreciation and amortization.......................... 1,738 374 2,485 944
Fair value of stock issued to third party for services. - - 723 -
Non-cash compensation.................................. 1,009 356 4,130 1,068
-------- ------- -------- -------
Total operating expenses............... 16,080 3,201 30,151 8,724
-------- ------- -------- -------

Loss from operations........................................ (15,956) (2,620) (29,175) (7,043)

Interest income (expense), net:
Interest income........................................ 1,190 - 1,730 -
Interest expense....................................... (198) (295) (1,330) (469)
-------- ------- -------- -------
Total interest income (expense), net... 992 (295) 400 (469)
-------- ------- -------- -------

Loss from continuing operations before income taxes......... (14,964) (2,915) (28,775) (7,512)
Provision for income taxes............................. - - - -
-------- ------- -------- -------

Loss from continuing operations............................. (14,964) (2,915) (28,775) (7,512)
Income (loss) from discontinued operations............. - (249) (340) 116
-------- ------- -------- -------

Loss before extraordinary item.............................. (14,964) (3,164) (29,115) (7,396)
Extraordinary item -- early extinguishment of debt..... - - (551) -
-------- ------- -------- -------

Net loss................................................... (14,964) (3,164) (29,666) (7,396)
Dividends and accretion on preferred stock............. (3,851) - (4,201) -
-------- ------- -------- -------
Net loss attributable to common stockholders................ $(18,815) $(3,164) $(33,867) $(7,396)
======== ======= ======== =======
Basic and diluted earnings (loss) per share:
Loss attributable to common stockholders before
discontinued operations and extraordinary item....... $(0.91) $ (0.29) (2.20) $ (0.76)
Discontinued operations................................ - (0.03) (0.02) 0.01
Extraordinary item..................................... - - (0.04) -
-------- ------- -------- -------
Total.................................. $(0.91) $ (0.32) $ (2.26) $ (0.75)
======== ======= ======== =======

Basic and diluted weighted-average shares outstanding....... 20,586 9,966 14,955 9,834
======== ======= ======== =======

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

CAIS INTERNET, INC.

CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

(IN THOUSANDS)

(UNAUDITED)

REDEEMABLE CONVERTIBLE PREFERRED STOCK
----------------------------------------------------------
SERIES A SERIES B SERIES C
------------------ --------------- ---------------- PUT
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS
------ ------ ------ ------ ------ ------ --------

DECEMBER 31, 1998................................. - $ - - $ - - $ - $ -
Issuance of common stock and options in
connection with litigation settlement....... - - - - - - -
Issuance of Series A, Series B and Series C
Preferred Stock, net of offering costs of $175
and amounts allocated to warrants........... 2,827 3,209 1,120 4,557 125 11,149 -
Capital contribution.......................... - - - - - - -
Distribution of Cleartel net assets........... - - - - - - -
Initial public offering gross proceeds, net of
underwriting discounts and commissions and
other IPO fees and expenses................. - - - - - - -
Accrued dividends on preferred shares
and accretion of discount................... - 246 - 104 - - -
Accretion of Series A and Series C Preferred
Stock warrant and issuance costs............ - 8,292 - - - 3,851 -
Conversion of Series A and Series B
Preferred Stock and accrued dividend
to common stock............................. (2,827) (11,747) (374) (1,557) - - -
Redemption of Series B Preferred Stock........ - - (746) (3,104) - - -
Issuance of common stock to third party....... - - - - - - -
Issuance of put warrants...................... - - - - - - 1,267
Deferred compensation pursuant to
issuance of stock options................... - - - - - - -
Amortization of unearned compensation......... - - - - - - -
Issuance of common stock for acquisitions..... - - - - - - -
Exercise of stock options..................... - - - - - - -
Treasury stock................................ - - - - - - -
Net loss...................................... - - - - - - -
------ ------ ------ ------ ------ ------- --------
SEPTEMBER 30, 1999................................ - $ - - $ - 125 $15,000 $1,267
====== ====== ====== ====== ====== ======= ========
(Continued)

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

CAIS INTERNET, INC.

CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

(IN THOUSANDS)

(UNAUDITED)

STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
------------- PAID-IN WARRANTS DEFERRED TREASURY ACCUMULATED
SHARES PAR CAPITAL OUTSTANDING COMPENSATION STOCK DEFICIT TOTAL
------- ------ ------- ----------- ------------ ------- -------- -----

DECEMBER 31, 1998................................. 9,965 $ 100 $ 7,794 $ 1,226 $(2,888) $ - $ (20,993) (14,761)
Issuance of common stock and options in
connection with litigation settlement....... 25 - - - - - - -
Issuance of Series A, Series B and Series C
Preferred Stock, net of offering costs of $175
and amounts allocated to warrants.......... - - - 12,007 - - - 12,007
Capital contribution.......................... - - 1,083 - - - - 1,083
Distribution of Cleartel net assets........... - - - - - - (43) (43)
Initial public offering gross proceeds, net of
underwriting discounts and commissions and
other IPO fees and expenses................. 6,842 68 118,165 - - - - 118,233
Accrued dividends on preferred shares
and accretion of discount................... - - - - - - (350) (350)
Accretion of Series A and Series C Preferred
Stock warrant and issuance costs............ - - - - - - (12,143) (12,143)
Conversion of Series A and Series B
Preferred Stock and accrued dividend
to common stock............................. 2,909 29 13,275 - - - - 13,304
Redemption of Series B Preferred Stock........ - - - - - - - -
Issuance of common stock to third party....... 67 1 722 - - - - 723
Issuance of put warrants...................... - - - - - - - -
Deferred compensation pursuant to
issuance of stock options................... - - 4,677 - (4,677) - - -
Amortization of unearned compensation......... - - - - 4,130 - - 4,130
Issuance of common stock for acquisitions..... 2,615 26 42,461 - - - - 42,487
Exercise of stock options..................... 18 - 58 - - - - 58
Treasury stock................................ - - - - - (150) - (150)
Net loss...................................... - - - - - - (29,666) (29,666)
------- ----- -------- -------- --------- ------- -------- -------
SEPTEMBER 30, 1999................................ 22,441 $224 $188,235 $13,233 $(3,435) $ (150) $(63,195) $134,912
======== ===== ======== ======== ========= ======= ======== =======
(Concluded)

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

CAIS INTERNET, INC.
Consolidated Condensed Statements of Cash Flows
(in thousands)
(unaudited)

Nine Months Ended
September 30,
----------------------------
1999 1998
------------- ------------

Cash flows from operating activities:
Net loss..................................................................... $ (29,666) $ (7,397)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash compensation.................................................. 4,130 1,068
Amortization of debt discount and deferred financing costs............. 877 102
Extraordinary item -- early extinguishment of debt..................... 551 -
Fair value of shares issued to third party for services................ 723 -
Depreciation and amortization.......................................... 2,485 944
Depreciation and amortization of discontinued operations............... 58 396
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable, net........................................... (728) (22)
Prepaid expenses and other current assets.......................... (2,023) 104
Other long term assets............................................. (784) -
Accounts payable and accrued liabilities........................... 9,667 1,192
Payable to discontinued operations................................. (3,892) 2,085
Unearned revenue................................................... 60 82
Deferred rent, net................................................. 609 -
Changes in operating assets and liabilities of
discontinued operations......................................... (73) 468
---------- --------
Net cash used in operating activities (18,006) (978)
---------- --------
Cash flows from investing activities:
Purchases of property and equipment.......................................... (43,710) (1,187)
Purchases of property and equipment of discontinued operations............... (14) (279)
Purchases of short-term investments.......................................... (16,501) -
Purchase of restricted investments........................................... (350) -
Cash paid for acquisitions, net of cash acquired............................. (59) -
Acquisition costs............................................................ (1,268) -
Payment of contract fees..................................................... (2,006) -
Net payments advanced on notes receivable.................................... (538) (350)
Net payments advanced on related party accounts receivable................... - (423)
---------- --------
Net cash used in investing activities (64,446) (2,239)
---------- --------
Cash flows from financing activities:
Net borrowings (repayments) under receivables-based credit facility of
discontinued operations................................................ 313 (30)
Borrowings under Loan........................................................ - 5,000
Repayments under Loan........................................................ (7,000) -
Repayments under long-term debt.............................................. - (2,000)
Borrowings under notes payable - related parties............................. 1,000 936
Principal payments under capital lease obligations........................... (11) -
Net proceeds from issuance of Series A Preferred Stock....................... 11,365 -
Redemption of Series B Preferred Stock....................................... (3,104) -
Net proceeds from issuance of Series C Preferred Stock and warrants.......... 15,000 -
Net proceeds from initial public offering.................................... 118,233 -
Payment of debt financing costs.............................................. (366) (476)
Proceeds from issuance of common stock....................................... 58 1,000
Repurchase of common stock................................................... (150) -
----------- --------
Net cash provided by financing activities 135,338 4,430
----------- --------
Net increase in cash and cash equivalents 52,886 1,213
Cash and cash equivalents, beginning of period 95 149
----------- --------
Cash and cash equivalents, end of period $ 52,981 $ 1,362
=========== ========

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

CAIS INTERNET, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 30, 1999
(unaudited)

1. Business Description:

Overview

CAIS Internet, Inc. (the "Company") delivers end-to-end high-speed Internet
access and content solutions. The Company operates two business segments: the
visitor-based and multi-family networks segment provides high-speed Internet
access and content solutions for hotels, apartment communities and other public
areas using its patented OverVoice solution and IPORT server software; and the
Internet services segment provides high-speed Internet access and content
solutions for businesses and consumers, including digital subscriber line
("DSL") services using HyperDSL lines, always-on access solutions for ISPs and
businesses, and web hosting and other Internet services.

Organization

CAIS Internet, Inc. was incorporated under the name CGX Communications,
Inc. ("CGX") as a "C" corporation in Delaware in December 1997 to serve as a
holding company for two operating entities, CAIS, Inc., a Virginia "S"
Corporation, and Cleartel Communications Limited Partnership ("Cleartel"), a
District of Columbia limited partnership. The Company completed a reorganization
in October 1998 such that CAIS and Cleartel became wholly owned subsidiaries of
the Company. In February 1999, the Company spun-off Cleartel to the Company's
stockholders (see Note 3) and changed its name from CGX Communications, Inc. to
CAIS Internet, Inc.

Initial Public Offering

In May 1999, the Company completed an initial public offering of its
common stock (the "IPO"). The Company sold 6,842,100 shares (including the over-
allotment option), yielding net proceeds to the Company of approximately $118.2
million, after deducting underwriting discounts and commissions and other fees
and expenses of approximately $11.8 million. The Company used approximately $12
million of the net proceeds in the second quarter of 1999 to repay indebtedness
and redeem shares of Series B cumulative mandatory redeemable convertible
preferred stock.

Risks and Other Important Factors

The Company historically has experienced losses and negative cash flows
due to the development and deployment of its services and execution of its
business plan. Further, there can be no assurance that the Company will generate
positive cash flows or income from operations in the future.

As of September 30, 1999, the Company had cash, cash equivalents, and
short-term investments of approximately $69.5 million. The Company expects that
it will require additional financing to meet its anticipated cash needs for the
next twelve months, and is actively exploring alternatives for such financing.
If such sources of financing are insufficient or unavailable, or if the Company
experiences shortfalls in anticipated revenues or increases in anticipated
expenses, the Company would curtail the planned roll-out of its services and
reduce marketing and development activities.

The Company is subject to various risks in connection with the operation
of its business. These risks include, but are not limited to, regulations,
dependence on effective billing and information systems, intense competition,
rapid technological change, and any effects on the Company or its suppliers
relating to the Year 2000 Issue. The Company's future plans are substantially
dependent on the successful roll-out of its visitor-based and multi-family
networks. Net revenues generated from visitor-based and multi-family networks
were approximately $702,000 and $858,000 for the three and nine month periods
ended September 30, 1999, respectively. There can be no assurance that the
Company will be successful in its roll-out of services nor can there be any
assurance that the Company will be successful in defending its related patent
rights. Many of the Company's competitors are significantly larger and have
substantially greater financial, technical, and marketing resources than the
Company.

2. Summary of Significant Accounting Policies:

Basis of Presentation

The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
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 normal recurring adjustments) considered necessary for a fair
presentation have been included. All significant intercompany accounts and
transactions have been eliminated in consolidation. Operating results for the
nine month period ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's registration statement on Form S-1.

Consolidated Financial Statements

The consolidated condensed financial statements include the results of the
Company and its wholly-owned subsidiaries. These results include CAIS, Inc. for
all periods presented, and Atcom, Inc. ("Atcom") and Business Anywhere USA, Inc.
("Business Anywhere") for the period from their respective acquisition dates in
September, 1999 through the end of the third quarter. The Company acquired
Atcom, which it renamed CAIS Software Solutions, and Business Anywhere in
September 1999 (see Note 8).

In February 1999, the Company spun-off its operator and long-distance
services subsidiary, Cleartel, to its stockholders as a non-cash distribution
(See Note 3). The spin-off has been presented as discontinued operations and,
accordingly, the Company has presented its financial statements for all periods
prior to that date in accordance with Accounting Principles Board ("APB")
Opinion No. 30. All expenses related to members of senior management who
continued with the Company are included within loss from continuing operations.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

Net Loss Per Share

Basic and diluted loss per share is based on the weighted-average number of
shares of common stock outstanding during the period. Stock options and warrants
are not reflected in diluted loss per share since their effect would be
antidilutive. As of September 30, 1999, there were approximately 6,858,000
options and warrants that would have been included in this calculation had the
effect not been antidilutive.

Comprehensive Income

Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting of
Comprehensive Income", requires "comprehensive income" and the components of
"other comprehensive income" to be reported in the financial statements and/or
notes thereto. Since the Company does not have any components of "other
comprehensive income", reported net income is the same as "comprehensive income"
for the three and nine months ended September 30, 1999 and 1998.

Recently Adopted Accounting Pronouncements

In July 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 is effective for fiscal years beginning after December 31, 2000,
and its purpose is to replace existing pronouncements with a single, integrated
accounting framework for derivatives and hedging activities. The Company has not
yet evaluated the effect of this standard on the financial statements.

In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." It provides
guidance on accounting for costs of computer software developed or obtained for
internal use. It is effective for fiscal years beginning after December 15,
1998, for projects in progress and prospectively, with earlier application
encouraged. The Company has adopted this standard which had no significant
impact on its financial statements to date.

Excess of Cost over Net Assets Acquired (Goodwill)

Goodwill and other intangibles were recorded as a result of the
acquisitions by the Company of

Capital Area Internet Service, Inc. ("Capital Area") in May 1996, and of Atcom
and Business Anywhere in September 1999. Goodwill and acquired intangibles are
amortized on a straight-line basis over three years. Amortization of goodwill
and intangibles was approximately $1,163,000 and $1,440,000 for the three and
nine months ended September 30, 1999, respectively. Goodwill with respect to the
Capital Area acquisition was fully amortized in May 1999.

Non-cash compensation

Non-cash compensation is recorded for stock options granted to certain
executives at exercise prices less than the estimated fair market value at the
dates of the grants. The non-cash compensation expense is recorded over the
vesting periods of the options and was approximately $1,009,000 and $4,130,000
for the three and nine month periods ended September 30, 1999, respectively.

Visitor-based and Multi-family Network Contract Rights

The Company makes up-front contract payments to its contract partners in
connection with entering into long-term master agreements for visitor-based and
multi-family networks. These payments give the Company various installation and
marketing rights to provide high speed Internet services to customers in hotels
and apartment buildings. The net total balance of these payments was
approximately $10,859,000 and $0 as of September 30, 1999 and December 31, 1998,
respectively, and is included in intangible assets and goodwill in the
consolidated condensed balance sheets. The payments are amortized over the term
of the agreements, ranging from five to seven years. Amortization expense of
these costs for the three and nine month periods ended September 30, 1999 was
approximately $69,000 for both periods.

Short-Term Investments

The Company considers all investments with original maturities of between
91 and 270 days inclusive to be short-term investments. Short-term investments
consist of investment-grade securities. The carrying amount in the consolidated
condensed balance sheets approximates fair value.

Treasury Stock

In connection with the acquisition of Atcom in September 1999, the Company
purchased approximately 13,000 shares of its common stock at fair market value
from a former shareholder of Atcom, which are currently being held by the
Company.

3. Spin-off/Discontinued Operations:

Through the date of the spin-off of Cleartel in February 1999, profits and
cash flows from Cleartel were used to finance operating losses at the Company.
This obligation of the Company as of February 12, 1999, was approximately
$4,941,000 and was reduced to $1,991,000 in February 1999 upon cash payments of
$1,500,000 and the Company's assumption of related party debt totaling
$1,450,000 from Cleartel. The remaining obligation and additional transactions
after the spin-off date were paid to Cleartel in May 1999.

During the nine months ended September 30, 1999 and 1998, the Company and
Cleartel shared certain support services such as bookkeeping, information
systems, and advertising and marketing support. After the spin-off of Cleartel
in February 1999, the Company has been providing these services at cost plus a
fixed percentage until Cleartel replaces this arrangement with its own services
in 1999. Amounts charged for services are included as an offset to the
respective operating expenses in the accompanying statements of operations. A
summary of these transactions is as follows (in thousands, unaudited):

Nine Months Ended
September 30,
------------------
1999 1998
---- ----

Bookkeeping, MIS, advertising, and marketing support.. $141 $163
Office lease.......................................... $ 40 $122

4. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following (in
thousands):

September 30, 1999 December 31, 1998
------------------ -----------------
(unaudited)

Qwest Communications Corp
Indefeasible Right of Use (see Note 7) $ 14,521 $ -
Visitor-based and multi-family network
contract rights (see Note 2) 8,922 -
Other 17,005 4,396
--------- ------------
$ 40,448 $ 4,396
========= ============

5. Extinguishment of Debt:

In September 1998, the Company entered into a $7 million loan facility
(the "Loan") with an investment banking firm. In connection with the Loan, the
Company issued the investment banking firm warrants to acquire 3 percent of the
fully diluted outstanding shares of common stock of the Company or 390,000
shares at September 4, 1998. The $7 million loan was repaid in full from net
proceeds from the IPO.

The Company recorded debt discount costs of $1,226,000 attributable to the
redeemable warrants issued and other direct financing costs in connection with
the Loan. The unamortized debt discount and deferred debt financing costs were
approximately $817,000 and $292,000, respectively, as of December 31, 1998. Upon

the early extinguishment of the Loan in May 1999, the Company recognized an
extraordinary charge of $551,000 related to the write-off of the unamortized
debt discount and deferred financing costs.

6. Convertible Preferred Stock and Warrants:

On April 23, 1999, in connection with an amendment to the Company's master
agreement with a hotel customer (the "Customer") to provide the Company with
exclusive rights and to extend the contract term, the Company issued warrants to
the Customer to purchase 66,667 shares of common stock at an exercise price of
$0.01 per share, as an additional contribution by the Company in support of the
Customer's marketing of the Company's services. The warrants have been valued at
their estimated fair value of $19.00 per share (or approximately $1,267,000 in
the aggregate) based upon a Black-Scholes valuation model. The fair value of the
warrants has been recorded as an intangible asset and will be amortized over the
expected benefit life of the five year contract term. In connection with the
warrants, the Customer received certain demand and incidental registration
rights. The warrants expire on April 23, 2004. The Customer has a put option to
sell all of the warrants (or shares of the Company issued pursuant to the
exercise of the warrants) back to the Company at $19.00 per share. The put
option expires ninety days following the earlier of: (1) the effective date of
the first registration statement that includes any warrant shares for resale and
(2) the date on which the Customer may sell all of the warrant shares within a
three-month period pursuant to the 1933 Securities Act Rule 144. Due to the
existence of the put rights, the value ascribed to the warrants will not be
included within stockholders' equity until the put option expires.

Following the completion of the IPO, the Company converted 2,827,168
shares of Series A convertible preferred stock into an equal number of common
shares. In addition, the Company redeemed 745,645 Series B shares for cash
totaling $3,000,000 (plus accrued dividends of $104,000), and converted the
remaining Series B Shares into 81,946 shares of common stock.

In September 1999, the Company issued 125,000 shares of Series C Cumulative
Mandatory Redeemable Convertible Preferred Stock (the "Series C Preferred
Stock") and warrants to acquire 500,000 shares of the Company's common stock at
$12.00 per share to Qwest Communications Corporation ("Qwest") for total gross
proceeds of $15,000,000, less approximately $40,000 of offering costs paid to
third parties. The Series C Preferred Stock ranks prior to the Company's common
stock with respect to dividends and rights upon liquidation, dissolution, or
winding up of the Company. Each holder of Series C Preferred Stock is entitled:
(i) to receive, when, as and if declared by the Company's Board of Directors,
cumulative dividends of $10.20 per annum per share; (ii) to a liquidation
preference equal to the sum of $120.00 per share, plus any accrued but unpaid
dividends; (iii) to the number of votes equal to the number of whole shares of
Common Stock into which all of the shares of Series C Preferred Stock held by
such holder are convertible; and (iv) to certain demand and piggyback
registration rights. Subject to certain limitations, each share of Series C
Preferred Stock is convertible, at the option of the holder, into such number of
fully paid and nonassessable shares of common stock at the ratio of ten common
shares for each share of Series C Preferred Stock. The Company shall redeem (i)
up to 41,667 shares of the Series C Preferred Stock by the second anniversary of
the date of issuance of the Series C Preferred Stock; and (ii) the remaining
shares of the Series C Preferred Stock upon the third anniversary of the date of
issuance of the Series C Preferred Stock.

Approximately $3.9 million of the proceeds received were allocated to the
value of the warrants to acquire 500,000 shares of the Company's common stock at
$12.00 per share. The warrants have been valued at their estimated fair value
of $7.70 per share (or approximately $3,851,000 in the aggregate) based on the
Black-Scholes valuation model. The warrants expire on October 28, 2002.

As the Series C Preferred Stock is immediately convertible into common
stock, the discount on the preferred stock (as a result of the allocation of
proceeds to the warrants) was fully accreted on the date of issuance and is
reflected as a dividend on preferred stock in the accompanying financial
statements.

7. Commitments and Contingencies:

Litigation

On March 25, 1999, the Company filed a patent infringement lawsuit against
LodgeNet Entertainment Corp. ("LodgeNet") in Maryland U.S. District Court. The
complaint charged LodgeNet with infringement of one of the OverVoice patents,
which is directed to the delivery of high-speed audio and video signals over
active telephone wiring. On September 15, 1999 the Company and LodgeNet entered
into a settlement agreement, and on September 16, 1999 the Company submitted a
Stipulation of Dismissal of the lawsuit, under terms satisfactory to the
Company.

The Company is not a party to any lawsuit or proceeding which, in the
opinion of its management, is likely to have a material adverse effect on its
business, financial condition or results of operation.

Network Capacity

The Company and Qwest entered into a twenty-year Indefeasible Right of Use
("IRU") agreement, dated as of September 28, 1999. The Company purchased
$44 million of capacity on Qwest's fiber network. The Qwest capacity will
support the delivery of the Company's network services to 38 metropolitan areas
across the United States. The Company also committed to purchase $10 million of
Qwest's communications services over five years. The IRU agreement terminates
the Company's $100 million commitment in the parties' June 1998 Memorandum of
Understanding.

Equipment Financing

The Company and Nortel Networks, Inc. ("Nortel Networks") entered into a
five-year, $30 million equipment financing line of credit, dated as of June 4,
1999. As of September 30, 1999, the Company had not yet borrowed under this
credit facility, and $30 million was available. In addition, the Company entered
into a purchase agreement with Nortel Networks, dated as of April 1, 1999, and
committed to purchase $10 million of Nortel equipment by April 1, 2000. In
addition, the Company will be subject to a reduction in its purchase discount
percentages after that date if its annual purchases do not exceed $10 million
for the year ended April 1, 2001 and $9.9 million for the year ended April 1,
2002. The Company and Nortel Networks entered into a First Amendment to Credit
Agreement effective as of September 7, 1999 to amend certain provisions of the
original credit agreement.

Deferred debt financing costs represent direct financing costs incurred in
connection with entering into the equipment financing agreements. The Company
accrued debt financing costs of approximately $1.3 million as of September 30,
1999 in connection with completing the Nortel and Cisco lines of credit. The
deferred debt financing costs are being amortized over the terms of the
equipment financing agreements and are included in interest expense. The
amortization was approximately $162,000 and $177,000 for the three and nine
month periods ended September 30, 1999, respectively.

Regulatory Matters

At the present time, ISPs like the Company are not subject to direct
regulation by the Federal Communications Commission ("FCC") even though they
provide Internet access through transmission over public telephone lines.
However, as the growth of the Internet industry continues, there has been
considerable discussion and debate about whether the industry should be
subjected to regulation. This regulation could include universal service
subsidies for local telephone services and enhanced communications systems for
schools, libraries and certain health care providers. Local telephone companies
could be allowed to charge ISPs for the use of their local telephone network to
originate calls, similar to charges currently assessed on long distance
telecommunications companies. In addition, many state and local government
officials have asserted the right or indicated a willingness to impose taxes on
Internet-related services and commerce, including sales, use and excise taxes.

8. Acquisitions

In September 1999, the Company acquired Atcom, which it renamed CAIS
Software Solutions, for a purchase price of approximately $30,856,000 in the
form of shares of the Company's common stock, and options valued at
approximately $10,131,000 based on the Black-Scholes valuation model to acquire
shares of common stock. The Company issued approximately 2,493,000 shares of
common stock valued at $12.375 per share, and options to acquire approximately
839,000 shares of common stock. The Company also incurred approximately
$1,469,000 for direct acquisition costs. The Atcom transaction combines the
Company's OverVoice hardware technology with Atcom's IPORT server software and
kiosk products to deliver high speed Internet access solutions to hotels,
apartment communities and public areas. The acquisition was accounted for under
the purchase method of accounting for business combinations, and accordingly,
the operating results of CAIS Software Solutions have been included in the
Company's consolidated condensed financial statements from the date of
acquisition. The purchase price was allocated on a preliminary basis as follows:
tangible assets, principally cash, accounts receivable and

property and equipment of approximately $3,163,000; assumed liabilities of
approximately $2,481,000; and intangible assets including but not limited to
acquired technology, existing work-force, installed customer base, and goodwill
of approximately $41,774,000. The purchase price allocation is preliminary and
may change upon final determination of the fair value of net assets acquired.
The Company has not specifically identified amounts to assign to certain
intangibles; changes in amounts allocated to such assets could result in changes
to the amount of goodwill recorded. An amortization period of three years has
been selected, which is expected in all material respects to be representative
of the amortization expense that will result from the ultimate allocation to the
specific intangible assets.

In September 1999, the Company acquired Business Anywhere for a purchase
price of approximately $200,000 in cash and $1,500,000 in the Company's common
stock. The Company issued approximately 122,000 shares of common stock valued at
$12.325 per share. The Company will issue $1,000,000 in additional common stock
at each of the first and second annual anniversaries of the transaction based
upon the fair market value of the stock at that time, provided Business Anywhere
meets certain revenue targets. The Company also incurred approximately $94,000
for direct acquisition costs. The Business Anywhere transaction expands the
Company's services to include Internet-ready twenty-four hour automated self-
service business centers in hotels. The acquisition was accounted for under the
purchase method of accounting for business combinations, and accordingly, the
operating results of Business Anywhere have been included in the Company's
consolidated condensed financial statements from the date of acquisition. The
purchase price was allocated on a preliminary basis as follows: tangible assets,
principally cash, accounts receivable and property and equipment of
approximately $658,000; assumed liabilities of approximately $687,000; and
intangible assets including but not limited to acquired technology, existing
work-force, installed customer base, and goodwill of approximately $1,822,000.
The purchase price allocation is preliminary and may change upon final
determination of the fair value of net assets acquired. The Company has not
specifically identified amounts to assign to certain intangibles; changes in
amounts allocated to such assets could result in changes to the amount of
goodwill recorded. An amortization period of three years has been selected,
which is expected in all material respects to be representative of the
amortization expense that will result from the ultimate allocation to the
specific intangible assets.

The following pro forma results give effect to the foregoing acquisitions
as if such transactions had been consummated on January 1, 1998 (in thousands
except per share amounts, unaudited):

Nine Months Ended
September 30,
1999 1998
-------- --------

Net revenues $ 7,896 $ 5,634
Net loss $(46,534) $(19,804)
Basic and diluted loss per share $ (2.69) $ (1.59)
Weighted-average common shares outstanding 17,310 12,449

9. Segment Reporting

The Company has two reportable segments: visitor-based and multi-family
networks ("Networks") and Internet Services (see Note 1). Networks includes the
Company's wholly-owned subsidiaries, CAIS Software Solutions and Business
Anywhere. The accounting principles of the segments are the same as those
applied in the consolidated condensed financial statements. Since Networks is a
new segment, its revenues and costs are being reported on an incremental basis
without any allocations of corporate overhead. Interest is allocated based upon
the respective percentage of losses before interest of the two segments. The
evaluation of the Networks segment's performance is based on the accumulation of
revenues and specific costs identified to Networks operations.

The following is a summary of information about each of the Company's
reportable segments that is used by the Company to measure the segment's
operations (in thousands, unaudited):

Three Months Ended September 30, 1999
-------------------------------------
Internet
Services Networks Consolidated
---------- ---------- -------------

Revenues $ 1,980 $ 702 $ 2,682
Depreciation and amortization 297 1,441 1,738
Interest income (expense), net 726 266 992
Segment losses (10,955) (4,009) (14,964)
Segment assets 55,048 66,621 121,669
Expenditures for segment assets 46,926 7,633 54,559

Three Months Ended September 30, 1998
-------------------------------------
Internet
Services Networks Consolidated
---------- ---------- -------------

Revenues $ 1,341 $ 16 $ 1,357
Depreciation and amortization 372 2 374
Interest income (expense), net (235) (60) (295)
Segment losses (2,326) (589) (2,915)
Segment assets 1,859 614 2,473
Expenditures for segment assets 482 512 994

Nine Months Ended September 30, 1999
------------------------------------
Internet
Services Networks Consolidated
---------- ---------- -------------

Revenues $ 5,245 $ 857 $ 6,102
Depreciation and amortization 972 1,513 2,485
Interest income (expense), net 250 150 400
Segment losses (21,954) (6,821) (28,775)
Segment assets 55,048 66,621 121,669
Expenditures for segment assets 50,214 10,575 60,789

Nine Months Ended September 30, 1998
------------------------------------
Internet
Services Networks Consolidated
---------- ---------- -------------

Revenues $ 3,903 $ 21 $ 3,924
Depreciation and amortization 942 2 944
Interest income (expense), net (394) (75) (469)
Segment losses (5,884) (1,628) (7,512)
Segment assets 1,859 614 2,473
Expenditures for segment assets 652 736 1,388

The following is a reconciliation of the reportable segments' losses and
assets to the Company's consolidated totals (in thousands, unaudited):

Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------

Losses
Total losses for reportable segments $(14,964) $ (2,915) $(28,775) $ (7,512)
Income (loss) from discontinued operations - (249) (340) 116
Extraordinary item - - (551) -
-------- -------- -------- --------
Consolidated net loss $(14,964) $ (3,164) $(29,666) $ (7,396)
======== ======== ======== ========

September 30, September 30,
1999 1998
------------- ------------
Assets
Total assets for reportable segments $ 121,669 $ 2,473
Total current assets, excluding reportable segment assets 69,482 11,332
Deferred financing and offering costs, net 1,425 476
Intangible assets and goodwill, net - 469
Receivable from officer 400 -
Noncurrent assets of discontinued operations - 2,308
------------ ------------
Consolidated total assets $ 192,976 $ 17,058
============ ============

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with the
Consolidated Condensed Financial Statements and the Notes thereto contained
herein under Item 1.

The cautionary statements set forth below and elsewhere in this Report
identify important risks and uncertainties that could materially adversely
affect our business, financial condition, results of operations or prospects.

Overview

The Company delivers end-to-end high-speed Internet access and content
solutions. The Company operates two business segments: the visitor-based and
multi-family networks segment provides high-speed Internet access and content
solutions for hotels, apartment communities and other public areas using its
patented OverVoice solution and IPORT server software; and the Internet services
segment provides high-speed Internet access and content solutions for businesses
and consumers, DSL services using HyperDSL lines, always-on access solutions for
ISPs and businesses, and web hosting and other Internet services. The Company
operates a clear-channel Internet and ATM network, and currently peers with
public and private partners, and at national exchange points MAE East, MAE East
ATM, MAE West, and AADS. The Company entered into an agreement with Qwest to
expand the Company's network to 38 metropolitan areas across the United States.

During 1998 and the first three quarters of 1999, the Company derived most
of its revenue from the sale of various Internet services, including always-on
Internet access services, web hosting and domain registration services and, to a
lesser extent, dial-up Internet access. During the third quarter of 1999, the
Company began to increase its visitor-based and multi-family networks revenues,
as it began to install its services in various hotels and apartment communities,
and acquire complementary businesses. The Company incurred significant costs and
devoted substantial resources associated with the research, development and
deployment of its visitor-based and multi-family networks services. The costs
included equipment, contract labor for surveys and the actual property
installation, and Internet bandwidth and local loop connection charges. The
Company capitalizes the costs of installations in hotels and apartment
buildings, including equipment and labor.

Through its bandwidth purchase in the Qwest IRU, the Company has made a
significant investment in its nationwide network infrastructure. The Company's
business plan will require substantial capital to fully develop, deploy, and to
fund start-up losses. The Company also plans to devote considerable sales and
marketing resources to the sale of its services in hotels and apartment
communities and its DSL services in the commercial and residential markets. The
Company plans to continue to expand its research and development activities to
develop new products and services to be offered using its patented OverVoice and
IPORT technologies.

The Company's nationwide deployment of its services, and the expansion of
its network, will result in increased cost of services, selling, general and
administrative expenses and capital expenditures. The Company's ability to
generate positive cash flow from operations and achieve profitability is
dependent upon its ability to successfully expand its customer base for visitor-
based and multi-familty networks and other services and achieve further
operating efficiencies. The Company might not be able to achieve or sustain
revenue growth, positive cash flow or profitability in the future.

Key Developments in the Three Months Ended September 30, 1999

Qwest investment and bandwidth purchase. Qwest invested $15 million in the
Company in Series C Preferred Stock and warrants to purchase 500,000 shares of
the Company's common stock at $12.00 per share. Additionally, the Company and
Qwest entered into a twenty-year IRU agreement. The Company purchased $44
million of capacity on Qwest's fiber network. The Qwest capacity will support
the delivery of the Company's network services to 38 metropolitan areas by year-
end 1999. The Company also committed to purchase $10 million of Qwest's
communications services over five years. The IRU agreement terminates the
Company's $100 million commitment in the parties' June 1998 Memorandum of
Understanding.

Cendant and VirtuaLINC. The Company entered into a five-year agreement
with Cendant Corporation ("Cendant") to offer the Company's services to
approximately 6,000 properties and 700,000 rooms of Cendant's hotel franchise
systems. Cendant property names include Ramada (R), Howard Johnson(R), and Days
Inns(R) and resort properties affiliated with Resort Condominiums International,
LLC (RCI), Cendant's timeshare exchange company.

Staybridge Suites by Holiday Inn. The Company entered into a master
agreement to offer the Company's services to 60 hotels and 6,700 rooms access
and content with Staybridge Suites by Holiday Inn. The agreement marked the
first brand standard for broadband Internet access in the extended stay
hospitality market.

Carlson Properties Worldwide. The Company entered into an agreement with
VirtualLINC Corporation ("VirtuaLINC") to service approximately 450 Carlson
hotels and 83,000 rooms, including hospitality brands like Radisson, and others.

Tarragon Realty Trust. The Company entered into an agreement with Tarragon
Realty Trust to provide its services as the in-residence solution for
approximately 75 properties and 16,000 residences. Tarragon announced its plans
to use the CAIS customer support, lobby Internet kiosk powered by IPORT, content
and access system to create a property-wide network to serve its residents.

Acquisition - CAIS Software Solutions (formerly Atcom, Inc.). The Company
acquired Atcom (subsequently renamed CAIS Software Solutions) to combine the
Company's OverVoice hardware technology with Atcom's IPORT server software and
kiosk products to deliver high speed Internet access solutions to hotels,
apartment communities and public areas, including like shopping centers,
airports, travel plazas and lobbies and common areas.

Acquisition - Business Anywhere. The Company acquired Business Anywhere to
expand its public area services portfolio. Business Anywhere centers are self-
operated, self-contained units that offer the most popular business services to
travelers on-the-go, including round-the-clock access to printers, fax machines,
copiers, and PCs with Internet connectivity. The services are activated by
touch-screen, and are remotely monitored.

Unisys. The Company entered into an alliance with Unisys Corporation to
accelerate a full range of Unisys installation, maintenance, and end-user and
network support services for CAIS Internet's solutions in hotels and apartment
communities. The partnership mobilizes a global workforce of Unisys field
operations, project managers and installers to install more than 200 hotel and
apartment properties, or 60,000 units, per month.

Business Segments

Visitor-based and Multi-family Networks. The Company delivers high-speed
Internet access and content solutions to hotels, apartment communities and other
public areas on top of the property's existing telephone system at speeds up to
175 times faster than 56K dial-up modems. As of September 30, 1999, the Company
had master contracts to roll-out services in approximately 6,700 properties and
870,000 units/rooms in: Hilton Hotels; John Q. Hammons hotels; Haverford Hotels;
Town & Country Trust apartment communities; Tarragon Realty Investors;
Staybridge Suites by Holiday Inn; Carlson Properties; Cendant Corporation hotels
in partnership with VirtuaLINC including Ramada, Howard Johnsons and Days Inn
hotels; and trial agreements with several other hotel and apartment
owner/operators.

Internet Services. The primary services in the Company's Internet Services
segment include HyperDSL, always-on access and web hosting:

HyperDSL Services: The Company has initiated its roll-out of a new
always-on, high-speed Internet access service using DSL technology
under the name HyperDSL. The Company partners with Covad
Communications Group to provide HyperLAN DSL services to small and
medium-sized businesses, and Bell Atlantic to provide HyperLINK DSL
services to the residential and SOHO (small office, home office)
markets. During the quarter ended September 30, 1999, the Company
began to offer HyperDSL services in nine additional U.S. metro areas,
raising its service coverage to twelve metro areas. The Company
intends to enter additional markets in 1999 and 2000 as it expands its
network with Qwest.

High-Speed Always-On Access and Other Services: The Company
provides dedicated Internet access to businesses and other Internet
providers, including T-1, fractional T-1, DS-3 and fractional DS-3
services. The Company also provides web hosting and collocation
services. In addition, the Company provides dial-up and other
narrowband connectivity services which are not marketed generally.

Statements of Operations

The Company records revenues for all services, including installation fees,
when the services are provided to customers. For visitor-based services in
hotels and other public areas, the hotel or other partner bills the end-user
customer and the Company bills the partner according to the parties' revenue
sharing agreement. For multi-family services in apartment buildings, the Company
bills the end-user directly. Amounts for services billed in advance of the
service period and cash received in advance of revenues earned are recorded as
unearned revenues and recognized as revenue when earned. Customer contracts for
Internet access and web hosting services are typically for periods ranging from
one month to three years. Internet access services typically require the
customer to purchase equipment and incur the related installation fees. Revenues
from equipment sales are recorded when the related equipment is shipped to the
customer. Dial-up access customers typically subscribe to service contracts on a
monthly or annual basis .

Cost of services represents primarily recurring expenses for the lease of
data facilities from national and local fiber providers. These costs include
long haul bandwidth and local interconnection charges. Cost of services also
includes charges for installation and customer equipment.

Selling, general and administrative expenses are incurred in the areas of
sales and marketing, customer support, network operations and maintenance,
engineering, research and development, accounting and administration. Selling,
general and administrative expenses will increase over time as the Company's
operations, including the nationwide deployment of hotel and multi-family
services and the expansion of its HyperDSL services, increase. In addition,
significant levels of marketing activity may be necessary for the Company to
build or increase its customer base among hotel guests and apartment residents
to a significant enough size in a particular building or market. Any such
increased marketing efforts may have a negative effect on earnings.

Operating results for any period are not necessarily indicative of results
for any future period. Also, the operating results for interim periods are not
necessarily indicative of the results that might be expected for the entire
year.

Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998

Net revenues. Net revenues for the three months ended September 30, 1999
increased 98% to approximately $2,682,000, from approximately $1,357,000 for the
three months ended September 30, 1998. Net revenues increased primarily due to
an increase of $686,000 in visitor-based and multi-family network revenues,
$284,000 in DSL revenues, $296,000 in Internet access services, and $59,000 in
web hosting services. The increases were due to an increase in the number of
properties and customers for these services, and the acquisitions of Atcom and
Business Anywhere.

Cost of services. Cost of services for the three months ended September 30,
1999 totaled approximately $2,558,000 or 95% of net revenues, compared to
approximately $776,000 or 57% of net revenues for the three months ended
September 30, 1998. This increase resulted primarily from an increase of
$762,000 in visitor-based and multi-family network charges for equipment,
bandwidth and network installation, $712,000 in additional nationwide bandwidth,
and $308,000 in DSL charges for customer connectivity, equipment and
installation.

Selling, general and administrative. Selling, general and administrative
expenses for the three months ended September 30, 1999 totaled approximately
$13,333,000 or 497% of net revenues, compared to approximately $2,471,000 or
182% of net revenues for the three months ended September 30, 1998. This
increase resulted primarily from an increase of $997,000 related to visitor-
based and multi-family network payroll, $2,041,000 related to Internet services
payroll, $1,232,000 related to visitor-based and multi-family network costs
(e.g. marketing and professional fees and expenses), and $6,592,000 in
advertising and other sales, marketing and administrative expenses.

Depreciation and amortization. Depreciation and amortization totaled
approximately $1,738,000 for the three months ended September 30, 1999, compared
to approximately $374,000 for the three months ended September 30, 1998. This
increase

resulted from an increase of $297,000 in depreciation of capital assets to
support the expansion of the Company's network, $132,000 related to the
amortization of purchased contract rights from visitor-based and multi-family
network partners, and $935,000 related to the amortization of goodwill and
intangibles as a result of acquisitions.

Non-cash compensation. Non-cash compensation totaled approximately
$1,009,000 for the three months ended September 30, 1999, compared to
approximately $356,000 for the three months ended September 30, 1998. This
increase resulted from the amortization of deferred compensation related to
additional stock options granted in 1999.

Interest income (expense). Interest income (expense) totaled income of
approximately $992,000 for the three months ended September 30, 1999, compared
to expense of approximately $295,000 for the three months ended September 30,
1998. This income total was attributable primarily to interest income earned
from the proceeds of the IPO, offset by the amortization of financing costs
related to the Company's equipment financing agreements.

Loss from continuing operations. Loss from continuing operations totaled
approximately $14,964,000 for the three months ended September 30, 1999,
compared to approximately $2,915,000 for the three months ended September 30,
1998, due to the foregoing factors.

Income (loss) from discontinued operations. There was no income or loss
from discontinued operations for the three months ended September 30, 1999 due
to the spinoff of Cleartel in February 1999. Loss from discontinued operations
totaled approximately $249,000 for the three months ended September 30, 1998.

Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998

Net revenues. Net revenues for the nine months ended September 30, 1999
increased 56% to approximately $6,102,000, from approximately $3,924,000 for the
nine months ended September 30, 1998. Net revenues increased primarily due to
an increase of $837,000 in visitor-based and multi-family network revenues,
$472,000 in DSL revenues, $671,000 in Internet access services, and $198,000 in
web hosting services. The increases were due to an increase in the number of
properties and customers for these services, and the acquisitions of Atcom and
Business Anywhere.

Cost of services. Cost of services for the nine months ended September 30,
1999 totaled approximately $5,126,000 or 84% of net revenues, compared to
approximately $2,243,000 or 57% of net revenues for the nine months ended
September 30, 1998. This increase resulted primarily from an increase of
$905,000 in visitor-based and multi-family network charges for equipment,
bandwidth and network installation, $1,445,000 in additional nationwide
bandwidth, and $533,000 in DSL charges for customer connectivity, equipment and
installation.

Selling, general and administrative. Selling, general and administrative
expenses for the nine months ended September 30, 1999 totaled approximately
$22,813,000 or 374% of net revenues, compared to approximately $6,712,000 or
171% of net revenues for the nine months ended September 30, 1998. This increase
resulted primarily from increases of $1,612,000 related to visitor-based and
multi-family network payroll, $4,275,000 related to Internet services payroll,
$1,469,000 related to visitor-based and multi-family network costs (e.g.
marketing and professional fees and expenses), and $8,745,000 in advertising and
other sales, marketing and administrative expenses.

Depreciation and amortization. Depreciation and amortization totaled
approximately $2,485,000 for the nine months ended September 30, 1999, compared
to approximately $944,000 for the nine months ended September 30, 1998. This
increase resulted from an increase of $556,000 in depreciation of capital assets
to support the expansion of the Company's network, $175,000 related to the
amortization of purchased contract rights from visitor-based and multi-family
network partners, and $810,000 related to the amortization of goodwill and
intangibles as a result of acquisitions.

Fair value of stock issued to third party for services. Fair value of stock
issued to a third party for services totaled approximately $723,000 for the nine
months ended September 30, 1999. There was no comparable expense for the nine
months ended September 30, 1998.

Non-cash compensation. Non-cash compensation totaled approximately
$4,130,000 for the nine months ended September 30, 1999, compared to
approximately $1,068,000 for the nine months ended September 30, 1998. This
increase resulted from the acceleration of deferred compensation charges that
occurred as a result of the IPO, and from the amortization of deferred
compensation related to additional stock options granted in 1999.

Interest income (expense). Interest income (expense) totaled income of
approximately $400,000 for the nine months ended September 30, 1999, compared to
expense of approximately $469,000 for the nine months ended September 30, 1998.
This income total was attributable primarily to interest income earned from the
proceeds of the IPO, offset by the amortization of financing costs related to
the Company's financing agreements.

Loss from continuing operations. Loss from continuing operations totaled
approximately $28,775,000 for the nine months ended September 30, 1999, compared
to approximately $7,512,000 for the nine months ended September 30, 1998, due to
the foregoing factors.

Income (loss) from discontinued operations. Loss from discontinued
operations totaled approximately $340,000 for the nine months ended September
30, 1999, compared to income of approximately $116,000 for the nine months ended
September 30, 1998. This decrease in income from discontinued operations of
Cleartel resulted primarily from a reduction in net revenues generated from
operator assisted telephone calls.

Extraordinary item - early extinguishment of debt. Extraordinary item -
early extinguishment of debt totaled approximately $551,000 for the nine months
ended September 30, 1999. This charge was related to the write-off of
unamortized debt discount and deferred financing fees associated with the
repayment of the $7 million loan from an investment banking firm. There were no
extraordinary items for the nine months ended September 30, 1998.

Liquidity and Capital Resources

Prior to the IPO, the Company financed its operations with various debt
and private equity placements. During the nine months ended September 30, 1998,
the Company's continuing operations were also financed in part from operating
profits and cash flows generated from its now discontinued operation (Cleartel).
Net cash used in operating activities for the nine month periods ended September
30, 1999 and 1998 was approximately $(18,006) and $(978) respectively. Cash used
in operating activities in each period was primarily affected by the net losses
caused by increased costs relating to the Company's expansion in infrastructure
and personnel and sales and marketing activities for its Internet-related
businesses.

In May 1999, the Company completed the IPO of its common stock. The
Company sold 6,842,100 shares (including the over-allotment option) of common
stock for approximately $130 million, yielding net proceeds to the Company of
approximately $118.2 million after deducting underwriting discounts and
commissions and other fees and expenses. The Company used approximately $12
million of the net proceeds to repay indebtedness and redeem shares of Series B
cumulative mandatory redeemable convertible preferred stock.

At the completion of the IPO, the Company converted 2,827,168 shares of
Series A convertible preferred stock into an equal number of common shares. In
addition, the Company redeemed 745,645 Series B Shares for cash totaling
$3,000,000 (plus accrued interest of $104,000), and converted the remaining
Series B Shares into 81,946 shares of common stock.

In September 1999, the Company issued 125,000 shares of Series C Preferred
Stock and warrants to acquire 500,000 shares of the Company's common stock at an
exercise price of $12.00 per share to Qwest for total gross proceeds of
$15,000,000, less approximately $40,000 of offering costs paid to third parties.
The Series C Preferred Stock ranks prior to the Company's common stock with
respect to dividends and rights upon liquidation, dissolution, or winding up of
the Company. Each holder of Series C Preferred Stock is entitled: (i) to
receive, when, as and if declared by the Company's Board of Directors,
cumulative dividends of $10.20 per annum per share; (ii) to a liquidation
preference equal to the sum of $120.00 per share, plus any accrued but unpaid
dividends; (iii) to

the number of votes equal to the number of whole shares of common stock into
which all of the shares of Series C Preferred Stock held by such holder are
convertible; and (iv) to certain demand and piggyback registration rights.
Subject to certain limitations, each share of Series C Preferred Stock is
convertible, at the option of the holder, into such number of fully paid and
nonassessable shares of common stock at the ratio of ten common shares for each
share of Series C Preferred Stock. The Company shall redeem (i) up to 41,667
shares of the Series C Preferred Stock by the second anniversary of the date of
issuance of the Series C Preferred Stock; and (ii) the remaining shares of the
Series C Preferred Stock upon the third anniversary of the date of issuance of
the Series C Preferred Stock.

Approximately $3.9 million of the proceeds received were allocated to the
value of the warrants to acquire 500,000 shares of the Company's common stock at
$12.00 per share. The warrants have been valued at their estimated fair value of
$7.70 per share (or approximately $3,851,000 in the aggregate) based on the
Black-Scholes valuation model. The warrants expire on October 28, 2002.

The Company and Nortel Networks entered into a five-year, $30 million
equipment financing line of credit, dated as of June 4, 1999. The line of credit
bears interest at an annual rate of a commercial prime rate plus 3.75%. The
financing requires the Company to meet certain financial covenants including
EBITDA targets, revenue targets and leverage and debt service ratios. Borrowings
under the financing are secured by a first priority lien on all Nortel Networks
products purchased using the financing. As of September 30, 1999, the Company
had not yet borrowed under this credit facility, and $30 million was available.
In addition, the Company entered into a purchase agreement with Nortel Networks,
dated as April 1, 1999, and committed to purchase $10 million of Nortel
equipment by April 1, 2000. The Company will be subject to a reduction in its
purchase discount percentages after that date if its annual purchases do not
exceed $10 million for the year ended April 1, 2001 and $9.9 million for the
year ended April 1, 2002. The Company and Nortel Networks entered into a First
Amendment to Credit Agreement effective as of September 7, 1999 to amend certain
provisions of the original credit agreement.

The Company and Cisco Systems Capital Corporation entered into a three-
year, $50 million equipment financing line of credit, dated as of June 30, 1999.
Under the facility, $25 million is available during the first year of the
facility and an additional $25 million is available during the second year of
the facility, provided the Company meets certain financial performance
requirements. The line of credit bears interest at an annual rate equal to the
three-month LIBOR plus 6.0%. The facility requires the Company to meet certain
financial covenants including EBITDA targets, revenue targets and leverage and
debt service ratios. Borrowings under the facility are secured by a first
priority lien in all assets of the Company, other than its property securing the
Nortel facility, in which assets Cisco will have a second priority lien. As of
September 30, 1999, the Company had not yet borrowed under this credit facility,
and $25 million was available.

The Company from time to time engages in discussions involving potential
business acquisitions. Depending on the circumstances, the Company may not
disclose material acquisitions until completion of a definitive agreement. The
Company may determine to raise additional debt or equity capital to finance
potential acquisitions and/or to fund accelerated growth. Any significant
acquisitions or increases in the Company's growth rate could materially affect
the Company's operating and financial expectations and results, liquidity and
capital resources.

Impact of the Year 2000 Issue

Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs may recognize a date using "00" as the year 1900
rather than the year 2000. This, in turn, could result in major system failures
or miscalculations, and is generally referred to as the "Year 2000 issue." The
Company's failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, the Company's normal business activities and

operations. The Company has formulated and, to a large extent, effected a plan
to address Year 2000 issues.

During 1998, the Company established a Year 2000 compliance program to
coordinate appropriate activity and report to its Board of Directors with regard
to Year 2000 issues. The Company is addressing the Year 2000 issue through a
comprehensive assessment and resolution of both its internal systems and the
systems of its external partners and suppliers.

The Company's internal systems assessment and review consists of
four-phases:

. assessment;
. analysis and planning;
. conversion and testing; and
. implementation.

The Company's assessment of the Year 2000 problem has focused on conducting
an inventory of existing systems, performing risk assessment, prioritizing
systems, and determining resource needs and is substantially complete. The
analysis and planning phase of the Company's Year 2000 compliance program has
involved selecting corrective methods, developing certain standards, determining
conversion sequences, and establishing a detailed time line for correcting Year
2000 issues and is substantially complete. The Company's conversion and testing
phase which has included developing codes and purchasing known fixes,
documenting the effort made, conducting unit and system tests, and scheduling
data migration is substantially complete. As part of the implementation of its
Year 2000 solution, the Company has moved various systems into production,
installed third party solutions, updated operational procedures, and trained
users. This implementation phase is substantially complete. The Company has
completed assessment and remediation of critical systems.

The Company likewise has conducted a four-phase review of the systems of
its partners, suppliers, and other third parties (including equipment providers
and other telecommunications service providers) to monitor both the
vulnerability of such parties to the Year 2000 problem and any potential impact
on the Company. First, the Company identified its critical partners, suppliers,
and vendors. This phase involved requesting information from employees,
analyzing responses, performing risk assessments, prioritizing systems, and
determining resource needs and is fully complete. Secondly, the Company
developed Year 2000 contact standards. This phase, which has involved developing
questionnaires, drafting request letters, and gathering contact addresses and
e-mails is substantially complete. Thirdly, the Company has begun receiving
information through responses to its request letters, researching web sites,
making phone contacts, and summarizing the results of the information received.
Finally, the Company has focused on evaluating different systems,
reviewing such information with senior management, and identifying any
additional resources needed. The Company has developed a contingency plan and a
January 1, 2000 action plan should Year 2000 issues arise.

During the nine months ended September 30, 1999, the Company spent
approximately $43.7 million for capital expenditures related to the upgrade and
continuing build-out of its technical operations and network. The Company
believes that all of this equipment is Year 2000 compliant. The Company expects
to incur additional costs in 1999 in connection with our Year 2000 program,
which the Company believes will not be material. In addition, the Company has
acquired a new billing and customer care system as part of its business
strategy, which the Company believes is Year 2000 compliant. These additional
costs are based on the Company's best estimates and, in management's opinion,
will not have a material adverse effect on its business, financial condition and
results of operations. If the actual costs of implementing the Company's Year
2000 program significantly exceed the Company's estimates, it may have a
material adverse effect on the Company's business, financial condition or
results of operations.

The Company currently believes that its most likely, worst case scenario
related to the Year 2000 issue is associated with potential concerns with its
partners' and suppliers' Internet operations. To the extent that one or more of
these third parties experience Year 2000 problems, which would lead to decreased
Internet usage and the delay or inability to obtain necessary data communication

and telecommunication capacity, the Company's network and services could be
adversely affected.

The Company cannot guarantee that it will be able to timely and
successfully modify its products, services and systems to comply with Year 2000
requirements. Any failure to do so could have a material adverse effect on the
Company's operating results. Furthermore, despite the aforementioned testing
performed by the Company and its vendors, the Company's products, services and
systems may contain undetected errors or defects associated with Year 2000 date
functions. In the event any material errors or defects are not detected and
fixed, or third parties cannot timely provide the Company with products,
services or systems that meet the Year 2000 requirements, the Company's
operating results could be materially adversely affected. Known or unknown
errors or defects that affect the operation of the Company's products, services
or systems could result in delay or loss of revenue, interruption of network
services, cancellation of customer contracts, diversion of development
resources, damage to the Company's reputation and litigation costs. The Company
cannot guarantee that these or other factors relating to Year 2000 compliance
issues will not have a material adverse effect on the Company's business.

Subsequent Events

On October 20, 1999, the Company announced that Bass Hotels ("Bass") had
issued a letter of intent for the Company to be a chosen provider of broadband
access, portal content, IPORT kiosk solutions, meeting room and back office
solutions in its hotels and resorts. The letter of intent with Bass gives the
Company entry to negotiate a contract for Bass' 400,000 guest rooms and 2,700
properties worldwide. Bass lodging brands include Holiday Inn(R), Holiday Inn
Express(R), Crowne Plaza(R), Staybridge SuitesSM by Holiday Inn(R) and Inter-
Continental(R) Hotels and Resorts.

On November 10, 1999, the Company announced that it had entered into an
agreement with United Dominion Realty Trust, Inc. ("United Dominion"),
designating the Company as United Dominion's preferred broadband Internet
services provider. The agreement enables the Company to provide services to
more than 80,000 United Dominion apartment homes.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On March 25, 1999, the Company filed a patent infringement lawsuit against
LodgeNet in Maryland U.S. District Court. The complaint charged LodgeNet with
infringement of one of the OverVoice patents, which is directed to the delivery
of high-speed audio and video signals over active telephone wiring. On
September 15, 1999 the Company and LodgeNet entered into a settlement agreement,
and on September 16, 1999 the Company submitted a Stipulation of Dismissal of
the lawsuit, under terms satisfactory to the Company.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

SALES OF UNREGISTERED SECURITIES

All matters discussed in the Registration Statement are hereby
incorporated by reference. The reader is directed to read the entire
Registration Statement, but with regard to this item the reader should read:
Amended and Restated Stock Option Plan, Certain Relationships and Related

Transactions, Description of Capital Stock and Shares Eligible for Future Sale.

The following is a description of the unregistered securities sold by the
Company during the period from July 1, 1999 through September 30, 1999:

The Company granted stock options to employees to purchase an aggregate of
1,316,969 shares of common stock at the fair market value at the dates of the
grants.

The Company issued 2,493,383 and 121,704 shares of common stock in
connection with the acquisitions of Atcom and Business Anywhere, respectively.

The Company issued 17,624 shares of common stock in connection with the
exercise of stock options by former employees.

In September 1999, the Company issued 125,000 Series C Preferred Stock
to Qwest for total gross proceeds of $15,000,000. The Series C Preferred Stock
ranks prior to the Company's common stock with respect to dividends and rights
upon liquidation, dissolution, or winding up of the Company. Each holder of
Series C Preferred Stock is entitled: (i) to receive, when, as and if declared
by the Company's Board of Directors, cumulative dividends of $10.20 per annum
per share; (ii) to a liquidation preference equal to the sum of $120.00 per
share, plus any accrued but unpaid dividends; (iii) to the number of votes equal
to the number of whole shares of Common Stock into which all of the shares of
Series C Preferred Stock held by such holder are convertible; and (iv) to
certain demand and piggyback registration rights. Subject to certain
limitations, each share of Series C Preferred Stock is convertible, at the
option of the holder, into such number of fully paid and nonassessable shares of
common stock at the ratio of ten common shares for each share of Series C
Preferred Stock. The Company shall redeem (i) up to 41,667 shares of the Series
C Preferred Stock by the second anniversary of the date of issuance of the
Series C Preferred Stock; and (ii) the remaining shares of the Series C
Preferred Stock upon the third anniversary of the date of issuance of the Series
C Preferred Stock.

In connection with the Series C Preferred Stock, the Company issued
warrants to Qwest to purchase 500,000 shares of common stock at an exercise
price of $12.00 per share. The warrants have been valued at their estimated fair
value of $7.70 per share (or approximately $3,851,000 in the aggregate) based
upon a Black-Scholes valuation model. The fair value of the warrants has been
recorded as a dividend on preferred stock. The warrants expire on October 28,
2002.

The securities issued in the foregoing transactions were either (i)
offered and sold in reliance upon exemptions from registration set forth in
Sections 3(b) and 4(2) of the Securities Act of 1933, or regulations promulgated
thereunder, relating to sales by an issuer not involving any public offering, or
(ii) in the case of certain options to purchase shares of Common Stock and
shares of common stock issued upon the exercise of such options, such offers and
sales were made in reliance upon an exemption from registration under Rule 701
of the Securities Act. No underwriters or placement agents were involved in the
foregoing issuances and sales.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

A. EXHIBITS

See Exhibit Index.

B. REPORTS ON FORM 8-K

On September 16, 1999, the Company filed a Current Report on Form 8-K
with respect to the acquisition of Atcom on September 2, 1999. On November 12,
1999, the Company filed an amendment on Form 8-K/A for the purpose of including
financial statements and pro forma financial information with respect to such
acquisition.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Washington, D.C., on
November 15, 1999.

CAIS Internet, Inc.

/s/ Ulysses G. Auger, II
--------------------------------------------
Ulysses G. Auger, II, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)

/s/ Barton R. Groh
--------------------------------------------
Barton R. Groh, Vice President, Treasurer
and Chief Financial Officer
(Principal Financial and Accounting Officer)

CAIS INTERNET, INC.

EXHIBIT INDEX

Exhibit
No. Description
- -------- -----------

4.1 Series C Preferred Stock Purchase Agreement between CAIS Internet, Inc. and
U.S. Telesource, Inc. dated September 29, 1999.

4.2 Certificate of Designation of Series C Preferred Stock of CAIS Internet,
Inc.

4.3 Common Stock Warrant of CAIS Internet, Inc.

4.4 Certified Certificate of Amendment of Certificate of Designation of Series
filed in Delaware.

10.1 First Amendment, dated October 27, 1999, to Registration Rights and Lock-Up
Agreement dated September 29, 1999.

10.2 First Amendment to Credit Agreement, made and entered into effective September 7,
1999 by and among the Company and Nortel Networks, Inc.

27.1 Financial Data Schedule.