AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 8, 1998.
REGISTRATION NO. 333--
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------

PATHNET, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 4813 52-1941838
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)

1015 31ST STREET, N.W.
WASHINGTON, DC 20007
(202) 625-7284

(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

MICHAEL A. LUBIN, ESQ.
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
1015 31ST STREET, N.W.
WASHINGTON, DC 20007
(202) 625-7284

(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------

COPIES TO:

PAUL D. GINSBERG, ESQ. ROBERT EVANS III, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & SHEARMAN & STERLING
GARRISON 599 LEXINGTON AVENUE
1285 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10022
NEW YORK, NEW YORK 10019 (212) 848-4000
(212) 373-3000

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

APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES 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, please 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

PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE (1)(2) REGISTRATION FEE

Common Stock, par value $.01 per share............................................ $100,000,000 $29,500

(1) Includes shares issuable upon exercise of over-allotment options granted to
the Underwriters.

(2) Estimated pursuant to Rule 457 solely for purposes of calculating the
registration fee.
------------------------

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, AS AMENDED, 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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EXPLANATORY NOTE

This Registration Statement contains a Prospectus relating to an offering in
the United States and Canada ("U.S. Offering") of an aggregate of shares
of common stock of Pathnet, Inc., par value $.01 per share (the "Common Stock"),
together with separate Prospectus pages relating to a concurrent offering
outside of the United States and Canada ("International Offering") of an
aggregate of shares of Common Stock. The complete Prospectus for the U.S.
Offering follows immediately after this Explanatory Note. After such Prospectus
are the following alternate pages for the International Offering: a front cover
page, an "Underwriting" section, a section captioned "Certain United States
Federal Tax Consequences to Non-United States Holders of Common Stock" and a
back cover page. All other pages of the Prospectus for the U.S. Offering are
identical and are to be used for both the U.S. Offering and the International
Offering. The complete Prospectus for each of the U.S. Offering and
International Offering in the exact forms in which they are to be used after
effectiveness of this Registration Statement will be filed with the Securities
and Exchange Commission pursuant to Rule 424(b).

Information contained in this Prospectus is subject to completion or amendment.
A registration statement relating to these securities has been filed with the
Securities and Exchange Commission. 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 jurisdiction in which such offer, solicitation or
sale would be unlawful prior to registration, qualification or filing under the
securities law of any such jurisdiction.

PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION DATED , 1998

P_R_O_S_P_E_C_T_U_S
SHARES

[LOGO]

COMMON STOCK
--------------------

All of the shares of Common Stock, par value $.01 per share (the "Common
Stock"), offered hereby are being sold by Pathnet, Inc. ("Pathnet" or the
"Company"). Of the shares of Common Stock offered hereby, shares are
being offered for sale initially in the United States and Canada by the U.S.
Underwriters (the "U.S. Offering") and shares are being offered for sale
initially in a concurrent offering outside the United States and Canada by the
International Managers (the "International Offering" and, together with the U.S.
Offering, the "Offering"). The initial public offering price and the
underwriting discount per share will be identical for both the U.S. Offering and
the International Offering. See "Underwriting."

Prior to the Offering, there has been no public market for the Common Stock.
It is currently estimated that the initial public offering price will be between
$ and $ per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price.

Application will be made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "PTNT".

At the Company's request, the U.S. Underwriters have reserved up to
shares of Common Stock for sale at the initial public offering price to certain
of the Company's officers, directors and employees, members of their immediate
families and other individuals who are business associates of the Company
(including certain vendors and consultants). The number of shares available for
sale to the general public will be reduced to the extent these individuals
purchase such reserved shares. Any reserved shares not purchased will be offered
by the U.S. Underwriters to the general public on the same basis as the other
shares offered hereby.

SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
--------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)

Per Share................................................ $ $ $
Total.................................................... $ $ $

(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the U.S. Underwriters and the International Managers
options to purchase up to an additional shares and shares of
Common Stock, respectively, in each case exercisable within 30 days after
the date hereof, solely to cover over-allotments, if any. If such options
are exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
----------------------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.

----------------------
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
BEAR, STEARNS & CO. INC.

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

The date of this Prospectus is , 1998.

[ARTWORK: MAP SHOWING THE COMPANY'S NETWORK]

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE PURCHASES OF SHARES TO STABILIZE THE MARKET PRICE OF
THE COMMON STOCK, PURCHASES OF SHARES OF COMMON STOCK TO COVER SYNDICATE SHORT
POSITIONS IN THE SHARES OF COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND THE NOTES THERETO AND THE OTHER
FINANCIAL DATA CONTAINED ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS
SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH HEREIN UNDER THE CAPTION "RISK
FACTORS" AND ARE URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. PLEASE REFER TO
THE GLOSSARY FOR DEFINITIONS OF CERTAIN CAPITALIZED TERMS USED IN THIS SUMMARY
AND ELSEWHERE IN THE PROSPECTUS WITHOUT DEFINITION. UNLESS OTHERWISE INDICATED,
THE INFORMATION IN THIS PROSPECTUS (I) GIVES EFFECT TO THE CONVERSION OF ALL
OUTSTANDING SHARES OF THE COMPANY'S PREFERRED STOCK INTO COMMON STOCK (THE
"PREFERRED STOCK CONVERSION"), (II) GIVES EFFECT TO A FIVE-FOR-ONE SPLIT OF THE
COMPANY'S COMMON STOCK (THE "STOCK SPLIT") AND (III) ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTIONS ARE NOT EXERCISED. UNLESS OTHERWISE NOTED,
STATEMENTS IN THIS PROSPECTUS CONCERNING ROUTE MILES HAVE BEEN DERIVED FROM
INFORMATION PUBLICLY AVAILABLE FROM THE FEDERAL COMMUNICATIONS COMMISSION (THE
"FCC"). UNLESS OTHERWISE SPECIFIED OR THE CONTEXT OTHERWISE REQUIRES, REFERENCES
IN THIS PROSPECTUS TO THE "UNITED STATES" MEAN THE 48 CONTINENTAL STATES OF THE
UNITED STATES OF AMERICA AND REFERENCES TO THE "COMPANY" OR "PATHNET" MEAN
PATHNET, INC. AND ITS SUBSIDIARIES, COLLECTIVELY.

THE COMPANY

Pathnet intends to become a leading provider of high quality, low cost, long
haul telecommunications capacity to second and third tier markets throughout the
United States primarily by upgrading existing wireless infrastructure to develop
a state-of-the-art, digital SONET network. The Company is positioning itself
primarily as a 'carrier's carrier,' providing a high capacity, dedicated network
to interexchange carriers ("IXCs"), local exchange carriers ("LECs"), Internet
service providers ("ISPs"), the Regional Bell Operating Companies ("RBOCs"),
other 'carrier's carriers,' cellular operators and resellers (collectively,
"Telecom Service Providers"). The Company plans to deploy its digital network by
upgrading, integrating and leveraging existing telecommunications assets, sites
and rights of way, including those utilized by railroads, utilities, state and
local governments and pipelines ("Incumbents"). By integrating the existing
networks of Incumbents, the Company expects to obtain the equivalent of a
nationwide spectrum license at minimal licensing cost.

The Company's goal is to deploy a network covering 29,000 route miles within
two years and ultimately to deploy a network encompassing more than 100,000
route miles. Based on market research prepared for the Company by the Yankee
Group, a leading telecommunications research firm, the estimated addressable
market for the Company's services is expected to grow from approximately $6
billion in 1998 to approximately $17 billion by 2008. The Company believes its
strategy of developing a high quality, low cost, digital network primarily in
smaller markets will enable the Company to take advantage of (i) the limited
capacity currently available or expected to be constructed in smaller markets,
(ii) higher prices generally available in those markets and (iii) technological
and cost advantages of the Company's deployment strategy. The Company is
currently in various stages of designing, constructing, testing and
commissioning its digital network, which will initially serve markets in 34
states. The Company has completed over 800 route miles of its network, is
currently constructing approximately 2,100 additional route miles and has
entered into one agreement relating to the sale of capacity on its network.

Incumbents. To date, 47 of these entities, which together control approximately
89,000 route miles, have authorized the Company in writing to prepare
preliminary engineering evaluations of their networks for the intended purpose
of entering into a long-term strategic relationship with the Company. Of these
47 entities, seven, which collectively control approximately 11,000 route miles,
have entered into binding agreements relating to the initial design and
construction of approximately 7,000 route miles of network. Six of these binding
agreements are long-term fixed point microwave services agreements ("FPM
Agreements") with Enron, Idaho Power Company, KN Energy, Northeast Missouri
Electric Power Cooperative, Northern Indiana Public Service Company ("NIPSCO")
and Texaco or their affiliates. The seventh agreement is a binding term sheet
with American Tower Corporation ("ATC"), which controls certain
telecommunications assets, including certain assets divested by CSX Railroad,
ARCO Pipeline and MCI Communications Corporation ("MCI"). In addition, the
Company is currently pursuing long-term strategic relationships with 25 out of
the 47 entities that control approximately 63,000 additional route miles of
network. These potential relationships are in varying stages of evaluation,
system design and business and contract negotiations. In addition to deploying
its network by forming long-term relationships with Incumbents, the Company may
enter into alternative markets or acquire or deploy complementary
telecommunications assets or technologies.

The Company's network is being designed for maximum reliability and security
and will be capable of carrying a full array of voice, data and video
communications. Bell Communications Research ("Bellcore"), an independent
telecommunications technical consultant, has evaluated the Company's system
design and existing network and has confirmed that the Company's network will be
built using proven, off-the-shelf components and will meet or exceed prevailing
industry standards for reliability and error free operation. The Company's
network will employ various design features that enhance its reliability,
including SONET architecture.

Pathnet was founded in August 1995, and its initial investors include a
group of financial sponsors led by Spectrum Equity Investors ("Spectrum") and
New Enterprise Associates ("NEA"). The Company's current investors also include
Dennis R. Patrick, former Chairman of the FCC. The Company's Chairman, David
Schaeffer, has more than 20 years of business and entrepreneurial experience,
including building and operating wireless networks. Richard A. Jalkut, the
Company's President and Chief Executive Officer, has over 30 years of
telecommunications experience, including as President of NYNEX
Telecommunications, an operating subsidiary of NYNEX Corporation with more than
$12.0 billion in annual revenues and 60,000 employees. Kevin J. Bennis, formerly
President of Frontier Communications, is Executive Vice President of the Company
serving as President of the Company's Communications Services Division. Prior to
working at Frontier Communications, Mr. Bennis served in various positions for
21 years at MCI, including as Senior Vice President of Marketing. Michael L.
Brooks, the Company's Vice President of Network Development, directed the
initial construction of the 3,500-mile digital microwave network at Qwest
Microwave Communications, a predecessor of Qwest Communications International
Inc. ("Qwest"), as its Vice President of Engineering.

MARKET OPPORTUNITY

development of the Internet, (iii) growth in data traffic, including WANs,
extranets, CAD/CAM and other applications which require substantial amounts of
bandwidth and (iv) continued growth in voice traffic.

Based on FCC data and other publicly available information, the Company
estimates that most existing or planned facilities-based long distance
providers' networks are designed to connect primarily the top 120 Metropolitan
Statistical Areas ("MSAs") in the United States. Facilities-based IXCs and other
telecommunications providers must rely, directly or indirectly, on facilities
provided primarily by incumbent local exchange carriers ("ILECs") to transmit
calls beyond their existing owned or leased facilities. Current facilities-based
providers serve the second and third tier markets primarily utilizing a
combination of copper, fiber or microwave transport facilities. The Company
believes that many Telecom Service Providers will choose the Company's network
for long haul capacity serving second and third tier markets as a result of its
(i) availability in markets where there are currently insufficient or limited
high capacity facilities, (ii) lower prices compared to those currently offered
by ILECs, (iii) ubiquity in these markets compared to many other long haul
carriers due to the projected reach of the Company's network, as well as an
increased number of access and termination points compared to most other long
haul networks, (iv) greater product flexibility as a result of the ability to
sell capacity in increments as small as DS-1s and as large as OC-24s, (v)
non-competitive marketing position as primarily a 'carrier's carrier', (vi)
comparable or greater reliability due to the digital SONET architecture of the
Company's network and (vii) ability to provide network redundancy and enhanced
reliability by offering an alternative to the existing network.

COMPETITIVE ADVANTAGES

The Company believes that it will enjoy the following competitive
advantages:

UBIQUITOUS COVERAGE. The Company's goal is to deploy a network covering
29,000 route miles within 24 months and ultimately to deploy a network
encompassing more than 100,000 route miles. The extensive scope of such existing
networks, combined with the attractive characteristics of Pathnet's network
architecture, should enable the Company to provide greater ubiquity than many
other long haul carriers. Pathnet's network architecture enables the Company to
provide access and termination points approximately every 25 miles, which is not
economically feasible for most fiber optic networks. This architecture increases
the number of cities that can be served cost effectively on each route. In
addition, the Company expects that its tower rights will enable it to
interconnect with Telecom Service Providers by digital microwave anywhere within
an approximate 25-mile line of sight surrounding any transmission tower on its
network. This will allow Pathnet in many cases to bypass existing local
infrastructure and deliver traffic directly to an access tandem, local serving
office, mobile switching office, ISP point of presence ("POP") or large
end-user.

LOWER NETWORK COST. By leveraging the resources of Incumbents and other
owners of telecommunications assets and by utilizing lower-cost wireless
technology, the Company believes it will gain a significant competitive
advantage over carriers seeking to deploy newly constructed digital networks to
serve the Company's target markets. The Company intends to reduce its initial
costs by utilizing the assets, including towers and rights-of-way, of Incumbents
and other owners of existing telecommunications assets. In addition, the Company
will be able to utilize many of the requisite local permits and local regulatory
approvals already in place. Based upon publicly available information, the
Company believes that, for capacity of OC-24, the Company's average capital cost
per DS-0 circuit mile will be approximately $1.55 versus approximately $1.90 for
newly constructed digital microwave capacity, approximately $3.00 for newly
constructed aerial fiber and approximately $4.10 for newly constructed fiber
buried in conduit.

design of its network should allow the Company to expand rapidly in response to
increased customer demand or to delay the deployment of network equipment until
justified by specific customer demand. In addition, the Company will be able to
mitigate its capital expenditures by redeploying network equipment to respond to
shifting customer demand.

BARRIERS TO ENTRY. The Company's strategy of entering into long-term
relationships with Incumbents is designed to enable the Company to minimize the
significant costs and obstacles associated with the development of long haul
telecommunications capacity. Leveraging the existing assets of Incumbents will
enable the Company to avoid certain capital expenditures related to real estate
and right-of-way acquisition, permits and zoning requirements, and generally is
expected to shift to Incumbents certain costs of shelter development, tower
upgrades and enhancement of utility service. The Company's relationships with
Incumbents also are expected to mitigate maintenance and ongoing administrative
costs by using Incumbents' existing technicians to perform facility and
equipment maintenance and on-site circuit provisioning and by leaving ongoing
utility, real estate taxes and other infrastructure costs with Incumbents. The
Company believes that fiber networks, the primary alternative source of
bandwidth, may be too expensive to install in the smaller markets targeted by
the Company. The greater capacity offered by fiber networks may not be cost
effective in smaller markets due to the higher costs per bit of capacity sold to
low volume markets.

HIGH QUALITY, TECHNOLOGICALLY ADVANCED NETWORK. The Company's network is
being deployed using a high capacity digital SONET platform, which will provide
high quality voice, data and video transmission comparable to or exceeding that
of most fiber optic networks. The Company expects to deliver 99.999% network
reliability on any individual path with a bit error rate of no greater than
10(-13). The capacity created by Pathnet is expected to meet the highest
industry standards, including those of AT&T and MCI, and Bellcore specifications
for reliability. The Company will continuously monitor and maintain high quality
control of its network on a 24 hours per day, seven days per week basis through
its Network Operations Center (the "NOC").

EXPERIENCED MANAGEMENT. Pathnet's management team includes its Chief
Executive Officer, Richard A. Jalkut, the former President of NYNEX
Telecommunications, and Kevin J. Bennis, who is Executive Vice President serving
as President of the Company's Communications Services Division and was formerly
President of Frontier Communications and Senior Vice President of Marketing at
MCI. The Company has commenced development of its network under the direction of
Michael L. Brooks, who was responsible, as Vice President of Engineering of
Qwest Microwave Communications, a predecessor of Qwest, for the initial
construction of the 3,500-mile digital microwave network of Qwest. This team has
significant and proven operational, technical, financial and regulatory
experience in the telecommunications industry.

BUSINESS STRATEGY

Key components of the Company's business and operating strategies are
described below:

FOCUS ON SMALLER, CAPACITY CONSTRAINED MARKETS. The Company intends to focus
on smaller markets that typically have limited access to transmission capacity
and that currently are served by ILECs and few other competitors. Private line
rates in second and third tier markets are believed by the Company to be
significantly higher than rates between larger markets because there are few
suppliers. Smaller markets are often unattractive to new entrants because their
relatively limited traffic does not normally economically justify new network
construction. Focusing on smaller markets should enable the Company to take
advantage of its low cost, flexible network, which is capable of servicing
markets requiring small increments of capacity.

POSITION THE COMPANY AS A 'CARRIER'S CARRIER.' The Company intends to sell a
majority of its capacity to Telecom Service Providers. The Company believes
there are substantial benefits to a 'carrier's carrier' strategy, including (i)
lower sales, marketing and servicing costs, (ii) elimination of significant
capital outlays to provide switching services to end-users, (iii) the ability to
carry most of its customer traffic on its

own network, thereby increasing operating margins, and (iv) increased
attractiveness to Telecom Service Providers, who will not view the Company as a
potential competitor.

ESTABLISH STRATEGIC RELATIONSHIPS WITH INCUMBENTS AND OTHER OWNERS OF
TELECOMMUNICATIONS ASSETS. The Company's core strategy for deploying its network
is to form strategic relationships with Incumbents and other owners of
telecommunications assets that will enable the Company to utilize existing
infrastructure, permits and other regulatory approvals in order to reduce the
Company's time to market and construction costs. The Company believes that
Incumbents will find a strategic relationship with the Company to be attractive
due to the opportunity for Incumbents to (i) reduce the costs of upgrading the
Incumbent's infrastructure, (ii) receive incremental capacity which has greater
reliability characteristics than most of the Incumbents' existing systems, and
(iii) leverage under-utilized assets and receive a share of the incremental
revenues generated by Pathnet. See "Risk Factors--Dependence on Relationship
with Incumbents; Rights of Incumbents to Certain Assets."

BUILD EFFECTIVE SALES FORCE AND PROVIDE SUPERIOR CUSTOMER SERVICE. The
Company is building a national accounts sales force that will use a consultative
approach designed to provide a systematic review of a large carrier's network
requirements in smaller markets and to offer solutions to reduce the carrier's
network costs and improve its reliability. The Company will also build a
regional sales force that will market the Company's network capacity to smaller
carriers and to selected large end-users. The Company expects to offer high
reliability and superior customer service, including maintaining a centralized
NOC to initiate new services and monitor existing circuit capacity more easily.
In addition, pursuant to the FPM Agreements, the Company utilizes Incumbents as
an alternative sales channel to sell to large end-users who reside in the cities
near Incumbents' facilities.

FINANCING PLAN

To date, the Company has funded its expenditures primarily with equity
investments made by the Company's stockholders and the proceeds from the
Company's debt financings. The development of the Company's business plan will
require substantial additional capital to fund capital expenditures, working
capital and operating losses. The Company's principal capital expenditures
include costs related to the installation of digital transmission equipment and,
to a lesser extent, site preparation work. The Company projects that a majority
of its capital expenditures will relate to deploying incremental capacity to
meet specific customer demand. This characteristic of the Company's network is
expected to reduce materially the risks associated with the Company's capital
investment. The Company currently forecasts that it will require approximately
$380 million to fund the Company's operating losses, working capital and capital
expenditures for the next 24 months, at which time the Company expects to have
completed a 29,000 route mile network. Proceeds from the Offering and cash on
hand are expected to provide the Company with adequate resources to meet these
projected capital requirements. The Company intends to use any additional
available funds to accelerate its development plans. The Company's financing
plan consists of the following components:

- DEBT OFFERING. On April 8, 1998, the Company completed the issuance and
sale of the 350,000 units (collectively, the "Units"), consisting of
Senior Notes due 2008 (the "Notes") and warrants to purchase shares of
Common Stock (the "Warrants"), resulting in net proceeds to the Company of
$339.5 million (the "Debt Offering"). The Company used $81.1 million of
the net proceeds of the Debt Offering to purchase securities (the "Pledged
Securities") in an amount sufficient to provide for payment in full of the
interest due on the Notes through April 15, 2000 and which have been
pledged as security for repayment of the Notes.

- PRIVATE EQUITY INVESTMENT. Concurrently with the Debt Offering, the
Company completed the issuance and sale of 1,879,699 shares of Series C
Convertible Preferred Stock at an aggregate price of $20.0 million (the
"1998 Private Equity Investment"), bringing the total investment by the
Company's private equity investors to $36.0 million. In connection with
the Offering, all of the

Company's outstanding preferred stock will be converted into an aggregate
of 27,352,975 shares of Common Stock (the "Preferred Stock Conversion").
The Debt Offering, the 1998 Private Equity Investment and the Preferred
Stock Conversion are collectively referred to herein as the
"Transactions."

- INITIAL PUBLIC OFFERING. Net proceeds of the Offering to the Company are
estimated to be $ million.

In addition, the Company is currently exploring several vendor financing
alternatives and other credit facilities. Although the Company has received
commitments (subject to definitive documentation) from certain of its vendors
and prospective lenders in connection with two such proposed vendor financing
facilities, as of the date of this Prospectus, the Company has not decided to
pursue any one particular proposed facility.

The actual amount of the Company's future capital requirements will depend
upon many factors, including the costs of the development of its network in each
of its markets, the speed of the development of the Company's network, the
extent of competition and pricing of telecommunications services in its markets,
other strategic opportunities pursued by the Company and the acceptance of the
Company's services. See "Risk Factors--Significant Capital Requirements;
Uncertainty of Additional Financing."
------------------------

The Company was formed under the laws of the State of Delaware and commenced
operations in August 1995. The Company's principal executive office is located
at 1015 31st Street, N.W., Washington, D.C. 20007, and its telephone number is
(202) 625-7284.

THE OFFERING

Common Stock offered hereby:
U.S. Offering.............................. shares
International Offering..................... shares
Total.................................... shares
Common Stock to be outstanding after the
Offering(1)................................ shares
Use of proceeds.............................. The Company intends to use the net proceeds
from the Offering for capital expenditures,
working capital and other general corporate
purposes, including the funding of operating
losses. The precise allocation of funds among
these uses will depend on a variety of
factors.
Proposed Nasdaq National Market symbol....... "PTNT"

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

(1) Includes 27,352,975 shares of Common Stock to be issued in connection with
the Preferred Stock Conversion. Does not include (i) 1,925,000 shares of
Common Stock issuable upon exercise of the Warrants and (ii) 4,258,530
shares of Common Stock issuable upon the exercise of outstanding options
under the Company's existing stock option plans.

RISK FACTORS

Prospective purchasers of Common Stock should carefully consider the risk
factors set forth under the caption "Risk Factors" and the other information
included in this Prospectus prior to making an investment decision. See "Risk
Factors."

RISK FACTORS

AN INVESTMENT IN THE COMMON STOCK INVOLVES A SIGNIFICANT DEGREE OF RISK. IN
DETERMINING WHETHER TO MAKE AN INVESTMENT IN THE COMMON STOCK, PROSPECTIVE
PURCHASERS SHOULD CONSIDER CAREFULLY ALL OF THE INFORMATION SET FORTH IN THIS
PROSPECTUS AND, IN PARTICULAR, THE FOLLOWING FACTORS.

LIMITED HISTORY OF OPERATIONS; OPERATING LOSSES AND NEGATIVE CASH FLOW

The Company was formed in August 1995 to begin deployment of its digital
network. The Company has completed over 800 route miles of its network, which
are commercially available, and to date has entered into one customer capacity
contract. There can be no assurance that the Company will enter into any
additional customer contracts. Based on Pathnet's experience, it expects that it
may take between six and 18 months from the initial contact with an Incumbent to
complete a long-term contract and 12 months thereafter to complete a
commercially available system. Prospective investors, therefore, have extremely
limited historical financial information about the Company upon which to base an
evaluation of the Company's performance and an investment in the Common Stock.
As a result of development and operating expenses, the Company has incurred
significant operating and net losses to date. The Company's operations have
resulted in cumulative net losses of $8.8 million and cumulative net losses
before interest income (expense), income tax benefit, depreciation and
amortization of $8.8 million from inception in 1995 through March 31, 1998.

The Company expects to incur significant operating losses, to generate
negative cash flows from operating activities and to invest substantial funds to
construct its digital network during the next several years. There can be no
assurance that the Company will achieve or sustain profitability or generate
sufficient positive cash flow to meet its debt service obligations, capital
expenditure requirements or working capital requirements. If the Company cannot
achieve operating profitability or positive cash flows from operating
activities, it will not be able to meet its debt service obligations, capital
expenditure requirements or working capital requirements, which would have a
material adverse effect on the financial condition and results of operations of
the Company. See "--Significant Capital Requirements; Uncertainty of Additional
Financing," "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the financial statements
included elsewhere in this Prospectus.

SIGNIFICANT CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FINANCING

Deployment of the Company's network and expansion of the Company's
operations and services will require significant capital expenditures, primarily
for continued development and construction of its network and implementation of
the Company's sales and marketing strategy. The Company anticipates that it will
require approximately $120 million and $260 million to fund capital
expenditures, working capital and operating losses for the twelve-month periods
ending June 30, 1999 and 2000, respectively. By March 31, 2000, the Company
expects to have approximately 29,000 route miles operational plus additional
route miles under construction. The Company will need to seek additional
financing to fund capital expenditures and working capital to expand further its
network to its target of approximately 100,000 route miles. The Company
estimates that this will require substantial additional external financing but
presently has no negotiated commitments for any such additional financing. The
Company may also require additional capital for activities complementary to its
currently planned businesses, or in the event it decides to pursue network
development through acquisitions, joint ventures or strategic alliances. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Certain
Indebtedness."

The actual amount of the Company's future capital requirements will depend
upon many factors, including the costs of network deployment in each of its
markets, the speed of the development of the Company's network, the extent of
competition and pricing of telecommunications services in its markets, other
strategic opportunities pursued by the Company and the acceptance of the
Company's services.

Accordingly, there can be no assurance that the actual amount of the Company's
financing needs will not exceed (perhaps significantly) the current estimates.

There can be no assurance that the Company will be successful in raising
additional capital on terms that it will consider acceptable, that the terms of
such indebtedness or other capital will not impair the Company's ability to
develop its business or that all available capital will be sufficient to service
its indebtedness. Sources of additional capital may include cash flow from
operations, additional equipment financing facilities and public and private
equity and debt financings. If the Company decides to raise additional capital
through the issuance of equity, the ownership interests represented by the
Common Stock will be diluted. In addition, the Indenture relating to the Notes
(the "Indenture") contains, and other debt instruments governing future
indebtedness may contain, covenants that limit the operational and financial
flexibility of the Company. Failure to raise sufficient funds may require the
Company to modify, delay or abandon some of its planned future expansion or
expenditures, which could have a material adverse effect on the Company's
business, financial condition and results of operations, including the Company's
ability to make principal and interest payments on its indebtedness. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Certain
Indebtedness."

SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT; RESTRICTIVE COVENANTS

The Company is highly leveraged. As of March 31, 1998, on a pro forma basis
after giving effect to the Transactions and the Offering, the Company would have
had $345.9 million of indebtedness outstanding (__% of total invested capital).
The Company will incur substantial additional indebtedness (including secured
indebtedness) following the Offering, for the development of its network and
other capital and operating requirements. The level of the Company's
indebtedness could adversely affect the Company in a number of ways. For
example, (i) the ability of the Company to obtain necessary financing in the
future for working capital, capital expenditures, debt service requirements or
other purposes may be limited; (ii) the Company's level of indebtedness could
limit its flexibility in planning for, or reacting to, changes in its business;
(iii) the Company will be more highly leveraged than some of its competitors,
which may place it at a competitive disadvantage; (iv) the Company's degree of
indebtedness may make it more vulnerable to a downturn in its business or the
economy generally; (v) the terms of the existing and future indebtedness
restrict, or may restrict, the payment of dividends by the Company; and (vi) a
substantial portion of the Company's cash flow from operations must be dedicated
to the payment of principal and interest on its indebtedness and will not be
available for other purposes.

The Indenture and certain of the Company's FPM Agreements contain, or will
contain, restrictions on the Company and its subsidiaries that will affect, and
in certain cases significantly limit or prohibit, among other things, the
ability of the Company and its subsidiaries to create liens, make investments,
pay dividends and make certain other restricted payments, issue stock of
subsidiaries, consolidate, merge, sell assets and incur additional indebtedness.
There can be no assurance that such covenants and restrictions will not
adversely affect the Company's ability to finance its future operations or
capital needs or to engage in other business activities that may be in the
interest of the Company. See "Description of Certain Indebtedness" and
"Business--Agreements with Incumbents and Other Telecommunications Assets--
Fixed Point Microwave Services Agreements."

In addition, any future indebtedness incurred by the Company or its
subsidiaries is likely to impose similar restrictions. Failure by the Company or
its subsidiaries to comply with these restrictions could lead to a default under
the terms of the Company's indebtedness notwithstanding the ability of the
Company to meet its debt service obligations. In the event of such a default,
the holders of the Company's indebtedness could elect to declare all such
indebtedness due and payable, together with accrued and unpaid interest. In such
event, a significant portion of the Company's indebtedness may become
immediately due and payable, and there can be no assurance that the Company
would be able to make such payments or borrow

sufficient funds from alternative sources to make any such payments. Even if
additional financing could be obtained, there can be no assurance that it would
be on terms that would be acceptable to the Company.

The successful implementation of the Company's strategy, including expanding
its digital network and obtaining and retaining a sufficient number of
customers, and significant and sustained growth in the Company's cash flow will
be necessary for the Company to meet its debt service requirements. The Company
does not currently, and there can be no assurance that the Company will be able
to, generate sufficient cash flows to enable it to meet its debt service
obligations. If the Company were unable to generate sufficient cash flow or
otherwise obtain funds necessary to make required payments, or if the Company
otherwise fails to comply with the various covenants under the terms of its
existing or future indebtedness, it could trigger a default under the terms
thereof, which would permit the holders of such indebtedness to accelerate the
maturity of such indebtedness and could cause defaults under other indebtedness
of the Company. The ability of the Company to meet its obligations will be
dependent upon the future performance of the Company, which will be subject to
prevailing economic conditions and to financial, business, regulatory and other
factors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Description of
Certain Indebtedness."

RISKS OF COMPLETING THE COMPANY'S NETWORK; MARKET ACCEPTANCE

The Company's ability to achieve its strategic objectives will depend in
large part upon the successful, timely and cost effective completion of its
network, as well as on selling a substantial amount of its capacity. The
successful completion of the Company's network may be affected by a variety of
factors, uncertainties and contingencies, many of which are beyond the Company's
control. Although the Company believes that its cost estimates and build-out
schedules are reasonable, only 12% of route miles under contract have been
completed to date. There can be no assurance that the Company's network will be
completed as planned at the cost and within the time frame currently estimated,
if at all. In addition, the Company currently has only one contract relating to
the sale of capacity to Telecom Service Providers and there can be no assurance
that the Company will attract additional purchasers of capacity.

The successful and timely construction of the Company's network will depend
upon, among other things, the Company's ability to (i) obtain substantial
amounts of additional capital and financing at reasonable cost and on
satisfactory terms and conditions, (ii) manage effectively and efficiently the
construction of its network, (iii) enter into agreements with Incumbents and
other owners of telecommunications assets that will enable the Company to
leverage the assets of Incumbents and of other owners of telecommunications
assets, (iv) access markets and enter into customer contracts to sell capacity
on its network, (v) integrate successfully such networks and associated rights
acquired in connection with the development of the Company's network including
cost-effective interconnections and (vi) obtain necessary FCC licenses and other
approvals. Successful construction of the Company's network also will depend
upon the timely performance by third party contractors of their obligations.
There can be no assurances that the Company will achieve any or all of these
objectives. Any failure by the Company to accomplish these objectives may have a
material adverse affect on the Company's business, financial condition and
results of operations. See "--Significant Capital Requirements; Uncertainties of
Additional Financing" and "--Dependence on Relationship with Incumbents; Rights
of Incumbents to Certain Assets."

The development of the Company's network and the expansion of the Company's
business may involve acquisitions of other telecommunications businesses and
assets and implementation of other technologies either in lieu of or as a
supplement to the excess capacity created by upgrading Incumbents' networks. In
addition, the Company may enter into relationships with Telecom Service
Providers or other entities to manage existing assets or to deploy alternative
telecommunications technologies. If pursued, these opportunities could divert
the resources and management time of the Company and could require integration
with the Company's other operations. There can be no assurance that any such
opportunity, if pursued, could be successfully integrated into the Company's
operations or that any such opportunity

would perform as expected. Furthermore, as the Company builds out its network,
there can be no assurance that the Company will enter into agreements with the
best suited Incumbents or such other owners of telecommunications assets, as the
case may be, or that the Company will continue to pursue its core strategy of
leveraging the assets of Incumbents as opposed to other telecommunications
assets, technologies or other markets. Moreover, there can be no assurance that
the resulting network will match or be responsive to the demand for
telecommunications capacity or will maximize the possible revenue to be earned
by the Company. There can be no assurance the Company will be able to develop
and expand its business and enter new markets as currently planned. Failure of
the Company to implement its expansion and growth strategy successfully could
have a material adverse effect on the Company's business, financial condition
and results of operations.

DEPENDENCE ON RELATIONSHIP WITH INCUMBENTS; RIGHTS OF INCUMBENTS TO CERTAIN
ASSETS

Although the Company has entered into long-term contracts with six
Incumbents, entered into one binding term sheet with an independent tower
company, and is currently pursuing long-term contracts with 25 additional
Incumbents, there can be no assurances that existing long-term relationships
will be maintained or that additional long-term relationships will result on
terms acceptable to the Company, on terms substantially similar to those
described herein or at all. If the Company is not successful in negotiating such
agreements, its ability to deploy its network would be adversely affected.

The Company does not typically expect to own the underlying sites and
facilities upon which its network is deployed. Instead, the Company expects to
enter into long-term relationships with Incumbents whereby each such Incumbent
agrees to grant to the Company a leasehold interest in or a similar right to use
such Incumbent's facilities and infrastructure as is required for the Company to
deploy its network. In some cases, system assets may be held by subsidiaries in
which both the Company and the Incumbent own an interest. In the case of Idaho
Power, the Incumbent owns a majority interest in a subsidiary formed in April
1998 to hold its Initial System. As a result, the Company will depend on the
facilities and infrastructure of its Incumbents for the operation of its
business. Long-term relationships with Incumbents may expire or terminate if the
Company does not satisfy certain performance targets with respect to sales of
excess capacity or fails to commission an Initial System within specified time
periods. In such case, certain equipment relating to the Initial System will be
transferred to the Incumbent. Any such earlier than expected expiration of a
relationship with an Incumbent, and the resulting loss of use of the Initial
System and opportunity to utilize such segment of its network, could result in
the Company not being able to recoup its initial capital expenditure with
respect to such segment and could have a material adverse effect on the business
and financial condition of the Company. In addition, such a loss under certain
circumstances could result in an event of default under the Company's existing
or future indebtedness. There can be no assurance that the Company will continue
to have access to such Incumbent's sites and facilities after the expiration of
such agreements or in the event that an Incumbent elects to terminate its
agreement with the Company. If such an agreement were terminated or expires and
the Company were forced to remove or abandon a significant portion of its
network, such termination or expiration, as the case may be, could have a
material adverse effect on the business, financial condition and results of
operations of the Company. See "Business--Agreements with Incumbents and Other
Owners of Telecommunications Assets."

The Company expects to rely significantly on its Incumbents for the
maintenance and provisioning of circuits on its network. The Company has entered
into maintenance agreements with three Incumbents and expects to enter into
agreements with additional Incumbents pursuant to which, among other things, the
Company will pay the Incumbent a monthly maintenance fee and a provisioning
services fee in exchange for such Incumbent providing maintenance and
provisioning services for that portion of the Company's network that primarily
resides along such Incumbent's system. Failure by the Company to enter
successfully into similar agreements with other Incumbents or the cancellation
or non-renewal of any of such existing agreements could have a material adverse
effect on the Company's business. To the extent the

Company is unable to establish similar arrangements in new markets with
additional Incumbents or establish replacement arrangements on systems where a
maintenance agreement with a particular Incumbent is canceled or not renewed,
the Company may be required to maintain its network and provision circuits on
its network through establishment of its own maintenance and provisioning
workforce or by outsourcing maintenance and provisioning to a third party. The
Company's operating costs under these conditions may increase. See
"Business--Agreements with Incumbents and Other Owners of Telecommunications
Assets--Network Maintenance and Provisioning of Circuits."

MANAGEMENT OF GROWTH

The Company's business plan may, if successfully implemented, result in
rapid expansion of its operations. Rapid expansion of the Company's operations
may place a significant strain on the Company's management, financial and other
resources. The Company's ability to manage future growth, should it occur, will
depend upon its ability to monitor operations, control costs, maintain
regulatory compliance, maintain effective quality controls and expand
significantly the Company's internal management, technical, information and
accounting systems and to attract and retain additional qualified personnel. See
"--Dependence on Key Personnel." Furthermore, as the Company's business develops
and expands, the Company will need additional facilities for its growing
workforce. There can be no assurance that the Company will successfully
implement and maintain such operational and financial systems or successfully
obtain, integrate and utilize the employees and management, operational and
financial resources necessary to manage a developing and expanding business in
an evolving and increasingly competitive industry which is subject to regulatory
change. Any failure to expand these areas and to implement and improve such
systems, procedures and controls in an efficient manner at a pace consistent
with the growth of the Company's business could have a material adverse effect
on the business, financial condition and results of operations of the Company.

The expansion and development of the Company's business will depend upon,
among other things, the Company's ability to implement successfully its sales
and marketing strategy, evaluate markets, design network path routes, secure
financing, install facilities, obtain any required government authorizations,
implement interconnection to, and co-location with, facilities owned by
Incumbents, purchasers of capacity and other owners of telecommunications
assets. The Company's ability to implement its growth strategy successfully will
require the Company to enhance its operational, management, financial and
information systems and controls and to hire and retain qualified sales,
marketing, administrative, operating and technical personnel. There can be no
assurance that the Company will be able to do so, and any failure to accomplish
these objectives could result in lower than expected levels of customer service,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.

DEPENDENCE ON KEY PERSONNEL

The success of the Company will depend to a significant extent upon the
abilities and continued efforts of its senior management, particularly members
of its senior management team, including David Schaeffer, Chairman, Richard A.
Jalkut, President and Chief Executive Officer, Kevin J. Bennis, Executive Vice
President serving as President of the Company's Communications Services Division
and Michael L. Brooks, Vice President of Network Development. Other than its
Employment Agreement with Richard Jalkut, the Company does not have any
employment agreements with, nor does the Company maintain "key man" insurance
on, these employees. The loss of the services of any such individuals could have
a material adverse effect on the Company's business, financial condition and
results of operations. The success of the Company will also depend, in part,
upon the Company's ability to identify, hire and retain additional key
management personnel, including the senior management, who are also being sought
by other businesses. Competition for qualified personnel in the
telecommunications industry is intense. The inability to identify, hire and
retain such personnel could have a material adverse effect on the Company's

results of operations. See "--Management of Growth" and "Management--Directors
and Executive Officers."

COMPETITION; PRICING PRESSURES

The telecommunications industry is highly competitive. In particular, price
competition in the 'carrier's carrier' market has generally been intense and is
expected to increase. The Company competes and expects to compete with numerous
competitors who have substantially greater financial and technical resources,
long-standing relationships with their customers and potential to subsidize
competitive services from less competitive service revenues and from federal
universal service subsidies. Such competitors may be operators of existing or
newly deployed wireline or wireless telecommunications networks. The Company
will also face intense competition due to an increased supply of
telecommunications capacity, the effects of deregulation and the development of
new technologies, including technologies that will increase the capacity of
existing networks.

The Company anticipates that prices for its 'carrier's carrier' services
will continue to decline over the next several years. The Company is aware that
certain long distance carriers are expanding their capacity and believes that
other long distance carriers, as well as potential new entrants to the industry,
are constructing new microwave, fiber optic and other long distance transmission
networks in the United States. If industry capacity expansion results in
capacity that exceeds overall demand along the Company's routes, severe
additional pricing pressure could develop. As a result, within a few years, the
Company could face dramatic and substantial price reductions. Such pricing
pressure could have a material adverse effect on the business, financial
condition and results of operations of the Company.

While the Company generally will not compete with Telecom Service Providers
for end-user customers, the Company may compete, on certain routes, as a
'carrier's carrier' with long distance carriers such as AT&T, MCI, Sprint,
WorldCom, Inc. ("WorldCom") and operators of nationwide fiber optic systems,
such as IXC Communications, Inc., Qwest and Level 3 Communications, Inc., who
would otherwise be the Company's customers in second and third tier markets. The
Company will also face competition increasingly in the long haul market from
local exchange carriers, regional network providers, resellers and satellite
carriers and may eventually compete with public utilities and cable companies.
In particular, RBOCs are now allowed to provide inter-LATA long distance
services outside their home regions, as well as inter-LATA mobile services
within their regions. RBOCs will be allowed to provide inter-LATA long distance
services within their regions after meeting certain regulatory requirements
intended to foster opportunities for local telephone competition. Certain RBOCs
have requested regulatory approval to provide inter-LATA data services within
their regions. The RBOCs already have extensive fiber optic cable, switching,
and other network facilities in their respective regions that can be used for
their long distance services after a waiting period. In addition, other new
competitors may build additional fiber capacity in the geographic areas served
and to be served by the Company.

The Company may also face competitors seeking to deploy a digital wireless
network in the same manner as the Company by leveraging the assets of Incumbents
or other owners of telecommunications assets or from Incumbents leveraging their
own assets. Although the Company believes its strategy will provide it with a
cost advantage, there can be no assurance that technological developments will
not result in competitors achieving even greater cost efficiency and therefore a
competitive advantage. See "--Risk of Rapid Technological Changes."

A continuing trend toward business combinations and strategic alliances in
the telecommunications industry may create stronger competitors to the Company,
as the resulting firms and alliances are likely to have significant
technological, marketing and financing resources which will, in many cases, be
greater than those available to the Company. See "Business--Competition."

RELIANCE ON EQUIPMENT SUPPLIERS

The Company currently purchases most of its telecommunications equipment
pursuant to an agreement with NEC America, Inc. and its affiliates ("NEC") and
has entered into an equipment purchase agreement with Andrew Equipment
Corporation ("Andrew"). Any reduction or interruption in supply from either
supplier or any increase in prices for such equipment could have a disruptive
effect on the Company. Currently NEC is the only manufacturer of SONET radios
that are compatible with the Company's proposed system design and reliability
standards, although Northern Telecom Ltd. ("Nortel"), Harris Corporation and
Alcatel Alsthom Compagnie Generale d'Electricite SA ("Alcatel") are in the
process of developing and testing a similar product which would be compatible
with the Company's SONET wireless network. Further, the Company does not
manufacture, nor does it have the capability to manufacture, any of the
telecommunications equipment used on its network. As a result, the failure of
the Company to procure sufficient equipment produced by NEC at reasonable prices
could adversely affect the Company's successful deployment of its network and
results of operations. See "Business--Equipment Supply Agreements."

TECHNICAL LIMITATIONS OF THE NETWORK

The Company's network requires a direct line of sight between two antennae
(each such interval comprising a "path") and are subject to distance
limitations, freespace fade, multipath fade and rain attenuation. In order to
meet industry standards for reliability, the maximum length of a single path
similar to those being designed by the Company is generally limited to 40 miles
and, as a result, intermediate sites in the form of back-to-back terminals or
repeaters are required to permit digital wireless transmission beyond this limit
based on the climate and topographic conditions of each path. In the absence of
a direct line of sight, additional sites may be required to circumvent
obstacles, such as tall buildings in urban areas or mountains in rural areas.
Topographic conditions of a path and climate can cause reflections of signals
from the ground which can affect the transmission quality of digital wireless
services. In addition, in areas of heavy rainfall, the intensity of rainfall and
the size of the raindrops can affect the transmission quality of digital
wireless services. Paths in these areas are engineered for shorter distances to
maintain transmission quality and use space diversity, frequency diversity,
adaptive power control and forward error correction to minimize transmission
errors. The Company will not be able to offer route diversity until such time as
it has completed a substantial portion of its mature network. The use of
additional sites and shorter paths to overcome obstructions, multipath fade or
rain attenuation will increase the Company's capital costs. While these
increased costs may not be significant in all cases, such costs may render
digital wireless services uneconomical in certain circumstances.

Due to line of sight limitations, the Company currently installs its
antennae on towers, the rooftops of buildings or other tall structures. Line of
sight and distance limitations generally do not present problems because
Incumbents have already selected, developed and constructed unobstructed
transmission sites. In certain instances, however, the additional frequencies
required for the excess capacity to be installed by the Company may not be
available from Incumbents' existing sites. In these instances, the Company
generally expects to use another developed site already owned or leased by such
Incumbent. In some instances, however, the Company has encountered, and may in
the future encounter, line of sight, frequency blockage and distance limitations
that cannot be solved economically. While the effect on the financial condition
and results of operations of the Company resulting from such cases has been
minimal to date, there can be no assurance that such limitations will not be
encountered more frequently as the Company expands its network. Such limitations
may have a material adverse effect on the Company's future development costs and
results of operations. In addition, the current lack of compression applications
for wireless technology limits the Company's ability to increase capacity
without significant capital expenditures for additional equipment.

In order to obtain the necessary access to install its radios, antennae and
other equipment required for interconnection to the PSTN or to POPs of the
Company's capacity purchasers, the Company must acquire

the necessary rights and enter into the arrangements to deploy and operate such
interconnection equipment. There can be no assurance that the Company will
succeed in obtaining the rights necessary to deploy its interconnection
equipment in its market areas on acceptable terms, if at all, or that delays in
obtaining such rights will not have a material adverse effect on the Company's
development or results of operations.

RISK OF RAPID TECHNOLOGICAL CHANGES

The telecommunications industry is subject to rapid and significant changes
in technology. Although the Company believes that, for the foreseeable future,
these changes will neither materially affect the continued use of its network
equipment, nor materially hinder its ability to acquire necessary technologies,
the effect of technological changes on the business of the Company, such as
changes relating to emerging wireline (including fiber optic) and wireless
(including broadband) transmission technologies, cannot be predicted. There can
be no assurance that (i) the Company's network will not be economically or
technically outmoded by technology or services now existing or developed and
implemented in the future, (ii) the Company will have sufficient resources to
develop or acquire new technologies or to introduce new services capable of
competing with future technologies or service offerings or (iii) the cost of the
equipment used on its network will decline as rapidly as that of competitive
alternatives. The occurrence of any of the foregoing events may have a material
adverse effect on the operations of the Company and the ability of the Company
to make principal and interest payments on its outstanding indebtedness.

REGULATION

The Company's arrangements with Incumbents contemplate that the Company's
digital network will provide largely "common carrier fixed point-to-point
microwave" telecommunications services under Part 101 of the FCC's Rules ("Part
101"), which services are subject to regulation by federal, state and local
governmental agencies. Changes in existing federal, state or local laws and
regulations, including those relating to the provision of Part 101
telecommunications services, any failure or significant delay in obtaining
necessary licenses, permits or renewals, or any expansion of the Company's
business that subjects the Company to additional regulatory requirements could
have a material adverse effect on the Company's business, financial condition,
and results of operations.

LICENSING BY THE COMPANY AND INCUMBENTS. Many Incumbents whose existing
systems operate in the 2 GHz band of the frequency spectrum will be required to
relocate their systems and operations to the 6 GHz band or other alternate
spectrum. In most instances the Company will enter into a strategic relationship
with an Incumbent and, as part of the upgrade of such Incumbent's system, the
Company will license the upgraded network in the 6 GHz band, which will depend
on its obtaining newly issued Part 101 licenses for the use of existing
facilities and infrastructure of such relocated Incumbents.

The Company intends to establish any such arrangement so as to ensure that
there is no DE FACTO transfer of control of a FCC license from an Incumbent,
which has obtained authorization from the FCC to operate a Part 101
telecommunications system at the newly occupied 6 GHz location (a "Licensed
Incumbent"), to the Company, because such a transfer without FCC consent would
violate the FCC's rules. Because any review by the FCC of such an arrangement
would be fact specific and would involve the review of conduct that has not yet
occurred, there can be no assurance that, if such an arrangement between the
Company and a Licensed Incumbent were challenged, the FCC would not deem such as
arrangement to constitute an unauthorized transfer of control. Such a finding
could result in a restructuring of the arrangement with a Licensed Incumbent or
the loss of the FCC license.

comprise each such licensed point along the network, the Company expects to be
the first and only entity to apply for these licenses at or near the specific
locations and in the frequencies to be designated by the Company, and hence to
have licensing priority under the FCC's procedures. There can be no assurance,
however, that other entities will not seek licenses to operate in the same
portion of the frequency spectrum as the Company, in locations geographically
close to those designated by the Company.

In the event that a mutually exclusive situation were to arise, the FCC may
hold a comparative hearing to decide which applicant will be awarded the
relevant licenses, in which case there can be no assurance that the Company
would be able to obtain the desired license. In the event that numerous mutually
exclusive applications were to be filed, the FCC may decide to impose a filing
freeze with respect to additional applications, and would, in the interim,
decide on the most appropriate manner in which to resolve the mutual
exclusivity. In this vein, the FCC may decide to seek from Congress enabling
legislation that would permit the FCC to hold an auction in order to determine
which of the competing applicants would obtain the sought-after licenses, in
which case the Company could be required to pay potentially large sums in order
to obtain the necessary license, and there would be no assurance that the
Company would be able ultimately to obtain any auctioned licenses. The FCC might
also decide to impose fees on the use of the desired spectrum, in which case the
Company would be required to pay potentially large sums in order to obtain and
use its FCC licenses.

FREQUENCY COORDINATION. Prior to applying to the FCC for authorization to
use portions of the 6 GHz band, the Company must coordinate its use of the
frequency with any existing licensees, permittees, and applicants in the same
area whose facilities could be subject to interference as a result of the
Company's proposed use of the spectrum. There can be no assurance in any
particular case that the Company will not encounter other entities and proposed
uses of the desired spectrum that would interfere with the Company's planned
use, and that the Company will be able to successfully coordinate such usage
with such entities. See "--Technical Limitations of the Network." If the Company
were unable to coordinate effectively with other users of or applicants for the
spectrum at a substantial number of proposed sites, there can be no assurance
that the Company would be able to obtain and retain the licenses necessary for
the successful operation of the Company's network.

FCC LICENSE REQUIREMENTS. As part of the requirements of obtaining a Part
101 license, the FCC will require the Company to demonstrate the site owner's
compliance with the reporting, notification and technical requirements of the
Federal Aviation Administration ("FAA") with respect to the construction,
installation, location, lighting and painting of transmitter towers and
antennae, such as those to be used by the Company in the operation of its
network. Specifically, the FCC requires compliance with the FAA's notification
requirement, and where such notification is required, a "no hazard"
determination from the FAA before granting a license with respect to a
particular facility. Any failure by the Company to comply with the FAA's
notification procedures, any finding of a hazard by the FAA with respect to a
proposed new or substantially modified facility, or any delay on the part of the
FAA in making such a finding, may have an adverse effect on the Company's
ability to obtain in a timely manner all necessary FCC licenses in accordance
with its business plan.

In addition to FAA requirements, in order to obtain the Part 101 licenses
necessary for the operation of its network, the Company, and in some cases
Licensed Incumbents, will have to file applications with the FCC for such
licenses and demonstrate compliance with routine technical and legal
qualification to be an FCC licensee. The Company must also obtain FCC
authorization before transferring control of any of its licenses or making
certain modifications to a licensed facility. Such requirements for obtaining
such Part 101 licenses and for transferring such licenses include items such as
certifying to the FCC that frequency coordination has been completed, disclosing
the identity and relationship of all entities directly or indirectly owning or
controlling the applicant, and demonstrating the applicant's legal, technical
and other qualifications to be an FCC licensee. Nevertheless, there can be no
assurance that the Company or any Licensed Incumbent will obtain all of the
licenses or approvals necessary for the operation of the

Company's business, the transfer of any license, or the modification of any
facility, or that the FCC will not impose burdensome conditions or limitations
on any such license or approval.

CONSTRUCTION OF FACILITIES AND CHANNEL LOADING REQUIREMENTS. Under the
FCC's rules, the Company will be required to have each licensed Part 101
facility constructed and "in operation" (I.E., capable of providing service),
and to complete each authorized modification to an existing facility, within 18
months of the grant of the necessary license or approval. Failure to meet the
FCC's timetable for construction or operation or to obtain an extension of said
timetable will automatically cancel the underlying license or approval, to the
detriment of the Company's ability to execute its business plan. A license or
authorization will also lapse if, after construction and operation, the facility
is removed or altered to render it non-operational for a period of 30 days or
more. Similarly, the FCC's rules provide that, in the absence of the Company
obtaining a waiver of such rule, any authorized Part 101 station that fails to
transmit operational traffic during any 12 consecutive months after construction
is complete is considered permanently discontinued under the FCC's rules, and
its underlying license is forfeited. In addition, the FCC requires that a
certain portion of the available channels on Part 101 digital systems be loaded
with traffic within 30 months of licensing. There can be no assurance that the
Company's Part 101 licenses will not lapse because of failure to meet the FCC's
construction or channel loading benchmarks or to obtain an extension of such
deadlines, or because of the Company's failure to comply with the FCC's
requirements with respect to operational traffic.

FCC LICENSE RENEWAL. The Part 101 licenses obtained by the Company or a
Licensed Incumbent will be issued for a term of 10 years, after which such
licenses will have to be renewed by the filing of applications with the FCC.
Although such renewals are typically granted routinely, there can be no
assurance that necessary license renewals will be granted by the FCC.

PROVISION OF COMMON AND PRIVATE CARRIER SERVICES. The Company's and
Licensed Incumbents' Part 101 licenses will allow the Company to sell excess
capacity on its network to the customers targeted under the Company's business
plan. Although the Part 101 licenses that the Company and Licensed Incumbents
will hold are designated for "common carriers," under the FCC's rules, a Part
101 licensee may provide both common carriage and private carriage over Part 101
facilities. The Company is currently offering, and expects to offer in the
future, its services on a private carrier basis. The Company's private carrier
services will be essentially unregulated, while any common carrier offerings
would be subject to additional regulations and reporting requirements including
payment of additional fees and compliance with additional rules and regulations
including that any such services must be offered pursuant to filed tariffs and
non-discriminatory terms, rates and practices. There can be no assurance that
the FCC will not find that some or all of the private carrier services offered
by the Company are in fact common carrier services, and thus subject to such
additional regulations and reporting requirements including the
non-discrimination and tariff filing requirements imposed on common carriers, in
which case the Company may be required to pay additional fees or adjust, modify
or cease provision of certain of its services in order to comply with any such
regulations, including offering such services on the same terms and conditions
to all of those seeking such services, and pursuant to rates made public in
tariff filings at the FCC.

FOREIGN OWNERSHIP. As the licensee of facilities designated for common
carriage, the Company is subject to Section 310(b)(4) of the Communications Act,
which by its terms restricts the holding company of an FCC common carrier
licensee (the Company is such a holding company, because it expects to hold all
FCC licenses indirectly, through subsidiaries) to a maximum of 25% foreign
ownership and/or voting control. The FCC has determined that it will allow a
higher level (up to 100%) on a blanket basis with respect to all common carrier
licensees, but only for foreign ownership by citizens of, or companies organized
under the laws of, World Trade Organization ("WTO") member countries. The FCC
continues to apply the 25% foreign ownership limitation with respect to citizens
or corporations of non-WTO nations.

Although the Company is presently within the 25% foreign ownership
limitation, there can be no assurance that, as a result of future financings,
the Company will not exceed this limitation, in which case the Company would
have to analyze its foreign ownership with respect to the WTO status of the
nations with which the Company's foreign owners are associated. In addition, if
any Incumbent elects to be a Licensed Incumbent on the portion of the Company's
network relating to its system, such Licensed Incumbent would also be subject to
such foreign ownership restrictions. If such analysis showed that the Company or
any Licensed Incumbent had more than 25% foreign ownership from non-WTO member
nations, the Company or such Licensed Incumbent, as the case may be, would have
to seek a further ruling from the FCC and/or reduce its non-WTO foreign
ownership. In the event that a Licensed Incumbent were to choose to hold the
relevant Part 101 license itself, and not through a holding company, that
Licensed Incumbent would be subject to Section 310(b)(3) of the Communications
Act, which limits direct foreign ownership of FCC licenses to 20%. The FCC does
not have discretion to waive this limitation, and there can be no assurance than
such a Licensed Incumbent would not exceed the 20% limitation, in which case the
Licensed Incumbent would be required to reduce its foreign ownership in order to
obtain or retain its Part 101 license.

STATE AND LOCAL REGULATION. Although the Company expects to provide most of
its services on an interstate basis, in those instances where the Company
provides service on an intrastate basis, the Company may be required to obtain a
certification to operate from state utility commissions in certain of the states
where such interstate services are provided, and may be required to file tariffs
covering such intrastate services. In addition, the Company may be required to
obtain authorizations from or notify such states with respect to certain
transfers or issuances of capital stock of the Company. The Company does not
expect any such state or local requirements to be burdensome; however, there can
be no assurance that the Company will obtain all of the necessary state and
local approvals and consents or that the failure to obtain such approvals and
consents will not have a material adverse affect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that Incumbents will be able to obtain all necessary authorizations or
permits from state or local authorities, or that state or local authorities will
not impose burdensome taxes, requirements or conditions on the Incumbent or the
Company.

RADIO FREQUENCY EMISSION CONCERNS

The use of wireless equipment may pose health risks to humans due to radio
frequency ("RF") emissions from the radios and antennae. Any allegations of
health risks, if proven, could result in liability on the part of the Company.
The FCC recently adopted new guidelines and methods for evaluating the
environmental effects of RF emissions from FCC regulated transmitters, including
wireless antennae which are more stringent than those previously in effect. The
FCC also incorporated into its rules provisions of the Communications Act which
preempt state or local government regulation of wireless service facilities
based on environmental effects, to the extent such facilities comply with the
FCC's rules concerning such RF emissions. The Company cannot predict whether
more stringent laws or regulations will be enacted in the future. Compliance
with more stringent laws or regulations regarding RF emissions could in the
future require material expenditures by the Company which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

CONTROL BY EXISTING STOCKHOLDERS

The Company's principal equity investors (collectively, the "Original
Investors"), including Spectrum, NEA, Onset Enterprise Associates II, L.P.,
Toronto Dominion Capital (U.S.A.) Inc., Grotech Partners IV, L.P. and David
Schaeffer, Chairman of the Company, beneficially own % of the common stock
of the Company on a pro forma basis after giving effect to the Transactions and
the Offering. As a result, the Original Investors have the ability to control
the election of the members of the Company's Board of Directors and the outcome
of all corporate actions requiring stockholder approval and have the right to

approve other significant corporate actions. The Original Investors, as
stockholders of the Company and through their ability to control the election of
directors, may authorize actions that could have an anti-takeover effect and may
delay, defer or prevent a tender offer or takeover attempt that a stockholder
might consider in its best interest, including an attempt that might result in
the receipt of a premium over the market price for the shares held by such
stockholder. See "Description of Capital Stock" and "Security Ownership of
Certain Beneficial Owners and Management."

INVESTMENT COMPANY ACT CONSIDERATIONS

After the Offering, the Company will have substantial cash, cash equivalents
and short-term investments. The Company intends to invest the proceeds of the
Offering and other financings so as to preserve capital by investing in
short-term instruments consistent with prudent cash management and not primarily
for the purpose of achieving investment returns. Investment in securities
primarily for the purpose of achieving investment returns could result in the
Company being treated as an "investment company" under the Investment Company
Act of 1940 (the "1940 Act"). The 1940 Act requires the registration of, and
imposes various substantive restrictions on, investment companies that are, or
hold themselves out as being, engaged primarily, or propose to engage primarily
in, the business of investing, reinvesting or trading in securities, or that
fail certain statistical tests regarding the composition of assets and sources
of income and are not primarily engaged in businesses other than investing,
reinvesting, owning, holding or trading securities.

The Company believes that it is primarily engaged in a business other than
investing, reinvesting, owning, holding or trading securities and, therefore, is
not an investment company within the meaning of the 1940 Act. If the Company
were required to register as an investment company under the 1940 Act, it would
become subject to substantial regulation with respect to its capital structure,
management, operations, transactions with affiliated persons (as defined in the
1940 Act) and other matters. Application of the provisions of the 1940 Act to
the Company would have a material adverse effect on the Company's business,
financial condition and results of operations.

ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to the Offering, no public market for the Common Stock has existed.
The initial public offering price will be determined by negotiation between the
Company and representatives of the Underwriters and may not be indicative of the
price at which the Common Stock will trade after the Offering. See
"Underwriting" for the factors to be considered in determining the initial
public offering price. The Company has applied for quotation of the Common Stock
on the Nasdaq National Market. No assurance can be given that an active trading
market for the Common Stock will develop or, if developed, continue after the
Offering. The market price of the Common Stock after the Offering may be subject
to significant fluctuations from time to time in response to numerous factors,
including variations in the reported periodic financial results of the Company,
changing conditions in the economy in general or in the Company's industry in
particular and unfavorable publicity affecting the Company or its industry. In
addition, stock markets generally, and the stock prices of competitors in the
Company's industry in particular, may experience significant price and volume
volatility from time to time which may affect the market price of the Common
Stock for reasons unrelated to the Company's performance.

IMMEDIATE AND SUBSTANTIAL DILUTION

Purchasers of Common Stock in the Offering will experience an immediate and
substantial dilution of $ in the net tangible book value per share of
their investment based on an assumed initial public offering price of $ per
share (the midpoint of the range set forth on the cover page of this
Prospectus). In the event the Company issues additional Common Stock in the
future, purchasers of Common Stock in the Offering may experience further
dilution in the net tangible book value per share of their shares of Common
Stock. See "Dilution."

SHARES ELIGIBLE FOR FUTURE SALE

The Company can make no prediction as to the effect, if any, that future
sales of Common Stock or the availability of shares for future sale will have on
the market price of the Common Stock prevailing from time to time. Sales of a
substantial number of shares of Common Stock in the public market following the
Offering, or the perception that such sales could occur, could have an adverse
effect on the market price of the Common Stock. As of March 31, 1998 after
giving effect to the Transactions and the Offering, shares of Common Stock
will be outstanding and shares will be issuable upon exercise of
outstanding stock options and the Warrants ( of which will be immediately
exercisable). The shares of Common Stock sold in the Offering will be
freely tradeable without restriction or further registration under the
Securities Act, except for any shares held by an "affiliate" of the Company (as
that term is defined under the Securities Act), which will be subject to the
resale limitations of Rule 144 under the Securities Act. Substantially all of
the remaining outstanding shares of Common Stock held by the Company's
current stockholders will be "restricted securities" (within the meaning of Rule
144) and, therefore, will not be eligible for sale to the public unless they are
sold in transactions registered under the Securities Act or pursuant to an
exemption from Securities Act registration, including pursuant to Rule 144. See
"Shares Eligible for Future Sale."

ABSENCE OF DIVIDENDS ON COMMON STOCK

The Company has not paid and does not anticipate paying any cash dividends
on its Common Stock in the foreseeable future. The Company intends to retain its
earnings, if any, for use in the Company's growth and ongoing operations. In
addition, the terms of the Indenture and the Company's future credit facilities
restrict, or may restrict, the ability of the Company to pay dividends on the
Common Stock. See "Dividend Policy" and "Description of Certain Indebtedness."

ANTI-TAKEOVER PROVISIONS

Certain provisions of the Company's Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") and Amended and Restated
Bylaws (the "Bylaws"), as well as provisions of the Delaware General Corporation
Law (the "DGCL"), may have the effect of delaying, deferring or preventing a
change of control of the Company, including transactions in which stockholders
might otherwise receive a substantial premium for their shares over then current
market prices. For example, under the Certificate of Incorporation, the Board of
Directors (or a committee thereof) is authorized to issue one or more series of
preferred stock having such designations, rights and preferences as may be
determined by the Board of Directors. Also, the Certificate of Incorporation and
the Bylaws provide for a classified Board of Directors, and the Bylaws provide
advance notice procedures for stockholders to submit proposals for consideration
at stockholders' meetings or to nominate persons for election as directors. See
"--Control by Existing Stockholders" and "Description of Capital Stock."

In addition, the Indenture includes provisions regarding a change of control
of the Company. Under the Indenture, a change of control would be triggered, if,
for among other reasons, any person other than certain permitted holders becomes
the beneficial owner, directly or indirectly, of more than 50% of the total
outstanding voting stock of the Company, thereby requiring the Company to offer
to purchase the Notes at a price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest thereon. See "Description of Certain
Indebtedness."

USE OF PROCEEDS

The net proceeds to the Company from the Offering are estimated to be
approximately $ million, based on an assumed initial public offering price
of $ per share (the midpoint of the range set forth on the cover page of
this Prospectus) after deducting the underwriting discounts and other estimated
expenses payable by the Company. The Company intends to use the net proceeds
from the Offering for capital expenditures, working capital and other general
corporate purposes, including the funding of operating losses. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." The Company currently intends to
allocate substantial proceeds to each of the foregoing uses; however, the
precise allocation of funds among these uses will depend on future
technological, regulatory and other developments in or affecting the Company's
business, the competitive climate in which it operates and the emergence of
future opportunities.

DIVIDEND POLICY

Since its inception, the Company has not declared or paid any dividends on
its Common Stock and does not expect to pay cash dividends on its Common Stock.
The Company anticipates substantial net losses and negative cash flow for the
foreseeable future. It is anticipated that earnings, if any, which might be
generated from operations of the Company will be used to finance the growth of
the Company and that cash dividends will not be paid to holders of the Common
Stock. Any future decision regarding the payment of dividends, however, will be
at the discretion of the Company's Board of Directors, subject to applicable
law. In addition, the terms of the Indenture and other credit facilities
governing future indebtedness of the Company restrict, or may restrict, the
payment of dividends. See "Description of Certain Indebtedness."

DILUTION

As of March 31, 1998, the pro forma net tangible book value of the Company's
Common Stock after giving effect to the Transactions was $ million, or
approximately $ per share outstanding. As of March 31, 1998, the pro
forma net tangible book value of the Company's Common Stock after giving effect
to the Transactions and the Offering and the application of the net proceeds
from the Offering (after deducting underwriting discounts and estimated offering
expenses) was $ million, or approximately $ per share, assuming
an inital public offering price of $ per share (the midpoint of the range
of initial public offering prices set forth on the cover page of this
Prospectus). This represents an immediate increase in net tangible book value of
$ per share to stockholders holding shares prior to the Offering and an
immediate dilution in net tangible book value of $ per share to new
investors in the Offering. The net tangible book value per share of Common Stock
represents the amount of the Company's tangible assets less its liabilities
divided by the number of shares of Common Stock outstanding.

The following table illustrates this dilution in pro forma net tangible book
value per share to new investors at March 31, 1998:

Assumed initial public offering price(1) $
Pro forma net tangible book value per share at March
31, 1998 after giving effect to the Transactions $
Increase in net tangible book value per share
attributable to new investors in the Offering $ $
Pro forma as adjusted net tangible book value per share
at March 31, 1998 after giving effect to the
Transactions and the Offering $
--------- ---------
Dilution per share to new investors $
--------- ---------
--------- ---------

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

(1) Before deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company.

The following table sets forth, at March 31, 1998 and after giving effect to
the Transactions and the Offering, the difference between the number of shares
of Common Stock issued by the Company, the total consideration paid and the
average price per share paid by the existing holders of Common Stock (including
securities convertible into Common Stock) and to be paid by purchasers of Common
Stock in the Offering, assuming that shares in the Offering are sold at $
per share (the midpoint of the range of set forth on the cover page of this
Prospectus), before deducting underwriting discounts and estimated offering
expenses payable by the Company.

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

Existing stockholders.......................... % $ % $

New investors..................................

Total...................................... % $ %
------------- --------- ------------- ---------
100.0% 100.0%
------------- --------- ------------- ---------
------------- --------- ------------- ---------

CAPITALIZATION

The following table sets forth the cash, Pledged Securities and
capitalization of the Company, as of March 31, 1998, (i) on an actual unaudited
basis; (ii) on a pro forma basis as adjusted to give effect to the Debt Offering
and the 1998 Private Equity Investment; (iii) on a pro forma basis as further
adjusted to give effect to the Offering assuming an initial public offering
price of $ per share (the midpoint of the range set forth on the cover page
of this Prospectus) in each case as if the same occurred on March 31, 1998 and
the Preferred Stock Conversion. This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included elsewhere in
this Prospectus.

AS OF MARCH 31, 1998
------------------------------------
PRO FORMA PRO FORMA
AS AS FURTHER
ACTUAL ADJUSTED(1) ADJUSTED(2)
---------- ----------- -----------

Cash and cash equivalents (excluding restricted
cash)(3).......................................... $4,856,610 $282,547,857 $
---------- ----------- -----------
---------- ----------- -----------
Pledged Securities(4)............................... $ -- $81,128,751 $81,128,751
---------- ----------- -----------
---------- ----------- -----------
Total debt:
Senior Notes(5)................................... $ -- $345,905,000 $345,905,000
---------- ----------- -----------
Convertible preferred stock:
Series A convertible preferred stock, par value
$0.01 per share, 1,000,000 shares authorized;
1,000,000 shares issued and outstanding, actual
and pro forma as adjusted; none issued or
outstanding, pro forma as further adjusted...... 1,000,000 1,000,000 --
Series B convertible preferred stock, par value
$0.01 per share, 1,651,046 shares authorized;
1,651,046 shares issued and outstanding, actual
and pro forma as adjusted; none issued or
outstanding, pro forma as further adjusted...... 5,008,367 5,008,367 --
Series C convertible preferred stock, par value
$0.01 per share, 2,819,549 shares authorized;
939,850 shares issued and outstanding actual;
2,819,549 shares issued and outstanding pro
forma as adjusted; none issued or outstanding,
pro forma as further adjusted................... 9,961,274 29,961,272 --
---------- ----------- -----------
Total convertible preferred stock............. 15,969,641 35,969,639 --
---------- ----------- -----------
Stockholders' equity (deficit):
Common Stock, par value $0.01 per share, 7,500,000
shares authorized; 5,004,065 shares issued and
outstanding actual and pro forma as adjusted;
issued and outstanding, pro forma as
further adjusted(6)............................. 50,041 50,041
Additional paid in capital........................ 382,030 4,477,030
Deficit accumulated during development stage...... (8,872,702) (8,872,702) (8,872,702)
---------- ----------- -----------
Total stockholders' equity (deficit).......... (8,440,631) (4,345,631)
---------- ----------- -----------
Total capitalization........................ $7,529,010 $377,529,008 $
---------- ----------- -----------
---------- ----------- -----------

FOOTNOTES ON FOLLOWING PAGE

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

(1) Gives pro forma effect to the Debt Offering and the 1998 Private Equity
Investment as if each occurred on March 31, 1998.

(2) Gives pro forma effect to the transactions described in footnote (1) above,
the Offering and the Preferred Stock Conversion.

(3) Cash and cash equivalents excludes approximately $289,000 of restricted cash
held in escrow to secure the Company's obligations under its FPM Agreement
with Texaco Pipeline, Inc. Cash and cash equivalents on a pro forma basis as
further adjusted includes the net cash proceeds of the Offering.

(4) The Company used $81.1 million of the net proceeds from the Debt Offering to
purchase the Pledged Securities.

(5) Of the $350.0 million gross proceeds of the Debt Offering, approximately
$345.9 million and $4.1 million were allocated to the Notes and the
Warrants, respectively. No assurance can be given that the value allocated
to the Warrants will be indicative of the prices at which the Warrants may
actually trade.

(6) Common Stock excludes (i) 4,258,530 shares of Common Stock issuable upon
exercise of outstanding options and (ii) 1,925,000 shares of Common Stock
issuable upon exercise of the Warrants. See "Management--1995 Stock Option
Plan," "--1997 Stock Incentive Plan" and "Description of Certain
Indebtedness."

SELECTED CONSOLIDATED FINANCIAL DATA

The following balance sheet data of the Company as of December 31, 1996 and
1997 and statement of operations data for the periods from inception to December
31, 1995 and the twelve months ended December 31, 1996 and 1997 and the period
from August 25, 1997 (date of inception) to December 31, 1997, have been derived
from the Company's financial statements and the notes thereto, included
elsewhere in this Prospectus, which have been audited by Coopers & Lybrand
L.L.P., independent accountants, as stated in their report included herein. Such
summary statement of operations and balance sheet data should be read in
conjunction with such audited financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The following balance sheet data of the Company as of December 31,
1995 have been derived from the Company's audited financial statements which are
not included in this Prospectus, which have been audited by Coopers & Lybrand
L.L.P. The following balance sheet data as of March 31, 1998 and statement of
operations data for the three months ended March 31, 1997 and 1998 and the
period from August 25, 1995 (date of inception) to March 31, 1998 have been
derived from unaudited consolidated financial statements of the Company included
elsewhere in this Prospectus. In the opinion of management, the unaudited
financial statements of the Company have been prepared on the same basis as the
audited financial statements and include all adjustments necessary for the fair
presentation of financial position and results of operations at these dates and
for these periods, which adjustments are only of a normal recurring nature. The
results of the three months ended March 31, 1998, as reported, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.

PERIOD FROM PERIOD FROM PERIOD FROM
AUGUST 25, 1995 AUGUST 25, 1995 AUGUST 25, 1995
(DATE OF YEAR ENDED (DATE OF THREE MONTHS ENDED (DATE OF
INCEPTION) TO DECEMBER 31, INCEPTION) TO MARCH 31, INCEPTION) TO
DECEMBER 31, ------------------------ DECEMBER 31, ------------------------ MARCH 31,
1995 1996 1997 1997 1997 1998 1998
--------------- ----------- ----------- --------------- ----------- ----------- ---------------

STATEMENT OF OPERATIONS
DATA:
Revenue..................... $ -- $ 1,000 $ 162,500 $ 163,500 $ 10,000 $ 100,000 $ 263,500
--------------- ----------- ----------- --------------- ----------- ----------- ---------------
Expenses:
Cost of revenue........... -- -- -- -- -- 714,740 714,740
General and
administrative.......... 290,318 913,646 3,537,926 4,741,890 486,630 1,922,217 6,664,107
Research and
development............. 19,038 226,021 -- 245,059 -- -- 245,059
Legal and consulting...... 120,083 202,651 755,817 1,078,551 71,324 225,813 1,304,364
--------------- ----------- ----------- --------------- ----------- ----------- ---------------
Total expenses............ 429,439 1,342,318 4,293,743 6,065,500 557,954 2,862,770 8,928,270
--------------- ----------- ----------- --------------- ----------- ----------- ---------------
Net operating loss.......... (429,439) (1,341,318) (4,131,243) (5,902,000) (547,954) (2,762,770) (8,664,770)
Interest expense(1)......... -- (415,357) -- (415,357) -- -- (415,357)
Interest and other income,
net....................... 2,613 13,040 153,843 169,496 17,107 77,929 247,425
--------------- ----------- ----------- --------------- ----------- ----------- ---------------
Net loss.................. $ (426,826) $(1,743,635) $(3,977,400) $ (6,147,861) $ (530,847) $(2,684,841) $ (8,832,702)
--------------- ----------- ----------- --------------- ----------- ----------- ---------------
--------------- ----------- ----------- --------------- ----------- ----------- ---------------
Basic and diluted loss per
common share.............. $ (0.09) $ (0.35) $ (0.80) $ (1.23) $ (0.11) $ (0.54) $ (1.77)
--------------- ----------- ----------- --------------- ----------- ----------- ---------------
--------------- ----------- ----------- --------------- ----------- ----------- ---------------
Weighted average number of
common shares
outstanding............... 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,001,762 5,000,167
--------------- ----------- ----------- --------------- ----------- ----------- ---------------
--------------- ----------- ----------- --------------- ----------- ----------- ---------------
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash equivalents... $ 82,973 $ 2,318,037 $ 7,831,384 $ 1,688,533 $ 4,856,610
Property and equipment,
net....................... 8,551 46,180 7,207,094 77,453 9,964,580
Total assets................ 91,524 2,365,912 16,097,688 1,767,681 15,266,642
Total liabilities........... 17,350 145,016 5,892,918 77,633 7,737,632
Convertible preferred
stock..................... 500,000 4,008,367 15,969,641 4,008,367 15,969,641
Stockholders' equity
(deficit)................. $ (425,826) $(1,787,471) $(5,764,871) $(1,690,048) $(8,440,631)

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

(1) Relates to a beneficial conversion feature of a bridge loan. See Note 5 to
the financial statements included elsewhere in this Prospectus.

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

THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL
STATEMENTS AND THE NOTES THERETO AND THE OTHER FINANCIAL DATA APPEARING
ELSEWHERE IN THIS PROSPECTUS. CERTAIN STATEMENTS UNDER THIS CAPTION CONSTITUTE
FORWARDING-LOOKING STATEMENTS. SEE "FORWARD-LOOKING STATEMENTS."

OVERVIEW

The Company intends to capitalize on the growing demand for high quality,
low cost, long haul telecommunications capacity and the capacity constrained
long haul infrastructure that currently serves second and third tier markets
throughout the United States. The Company's core strategy for deploying its
network is to form strategic relationships with Incumbents and other owners of
telecommunications assets that will enable the Company to leverage these assets
and thereby reduce the Company's time to market and capital costs. The Company
intends to offer high quality, low cost, long haul telecommunications capacity
to Telecom Service Providers as a 'carrier's carrier.' The Company believes its
strategy of developing a high quality, low cost digital network in smaller
markets will enable the Company to take advantage of (i) the limited capacity
currently available or expected to be constructed in smaller markets, (ii)
higher prices generally available in those markets and (iii) technological and
cost advantages of the Company's deployment strategy.

The Company's business commenced on August 25, 1995 and has been funded
primarily through equity investments by the Company's stockholders and the Debt
Offering in April 1998. A substantial portion of the Company's activities to
date has involved developing strategic relationships with Incumbents. The
Company has identified Incumbents currently holding or operating large private
networks in the United States that in the aggregate cover approximately 465,000
route miles. To date, the Company has entered into seven binding agreements, six
of which are long-term FPM Agreements and the seventh of which is a binding term
sheet with ATC. The Company is currently pursuing long-term relationships with
25 Incumbents that control approximately 63,000 route miles of network and is in
varying stages of evaluation, system design and business and contract
negotiations. The Company has also entered into one agreement relating to the
sale of its network capacity. See "Risk Factors--Dependence on Relationship with
Incumbents; Rights of Incumbents to Certain Assets" and "Business--Commercial
Roll-Out." Due to Pathnet's focus on developing strategic relationships with
Incumbents, the Company's historical revenues only reflect certain consulting
services in connection with the design, development and construction of digital
microwave infrastructure. The Company has also been engaged in the acquisition
of equipment, the development of operating systems, the design and construction
of a NOC, capital raising and the hiring of management and other key personnel.
In addition to deploying its network by forming long-term relationships with
Incumbents, the Company may pursue other strategic opportunities that may arise
to acquire or deploy complementary telecommunications assets.

The Company has experienced significant operating and net losses and
negative operating cash flow to date and expects to continue to experience
operating and net losses and negative operating cash flow until such time as it
is able to generate revenue sufficient to cover its operating expenses. See
"Risk Factors-- Limited History of Operations; Operating Losses and Negative
Cash Flow." Upon completion of the construction of digital microwave paths, the
Company intends to sell capacity to Telecom Service Providers. The opportunity
to begin offering service on a route specific basis will enable the Company to
generate revenue and positive operating cash flow on a particular route as soon
as sufficient capacity can be sold. The Company expects to be able to produce
positive operating cash flow results on an individual route basis prior to
achieving overall profitability due to (i) low marginal costs associated with
the operation of each individual route, (ii) low fixed costs due to the
anticipated responsibility of Incumbents to pay for a majority of the
maintenance, utilities, upkeep and taxes associated with the network
infrastructure and (iii) demand-driven capital expenditures, which are expected
to enable the Company to delay a substantial portion of its capital outlays
until receipt of customer orders. While individual networks

may produce positive operating cash flow relatively quickly after start-up, the
Company's ability to achieve positive operating cash flow as a whole is not
expected to be achieved until 2000 at the earliest due to the costs associated
with the operation of the Company's sales, marketing, network operation and
management activities. As the Company's network approaches completion, the
Company expects that it will produce net income and positive free cash flow as a
result of declining capital outlays associated with network development and
construction. See "Risk Factors--Significant Capital Requirements; Uncertainty
of Additional Financing," "--Risks of Completing the Company's Network; Market
Acceptance" and "--Liquidity and Capital Resources."

FACTORS AFFECTING FUTURE OPERATIONS

ADDRESSABLE MARKET. The Company commissioned the Yankee Group, a leading
telecommunications research firm, to study the Company's addressable market. The
Yankee Group study estimated the potential addressable market for the Company's
services to be approximately $6 billion in 1998 and estimated that such market
will grow to approximately $17 billion by 2008, indicating a compounded annual
growth rate of approximately 11% per year. The Yankee Group attributes this
growth to (i) an expected shift in market share of interexchange services away
from established carriers, such as AT&T, MCI and Sprint, to non-facilities-based
IXCs that are more likely to rely on alternative carriers such as the Company to
transmit traffic, (ii) the development of the Internet, (iii) growth in data
traffic, including WANs, extranets, CAD/CAM and other applications which require
substantial amounts of bandwidth and (iv) continued growth in voice traffic. See
"Risk Factors--Risks of Completing the Company's Network; Market Acceptance."

TARGET MARKET PENETRATION. The Company intends to position itself primarily
as a 'carrier's carrier' providing high quality, low cost, long haul
telecommunications capacity to Telecom Service Providers. The Company believes
that Telecom Service Providers will choose the Company's network for long haul
capacity serving second and third tier markets as a result of its (i)
availability in markets which currently have insufficient or limited high
capacity facilities, (ii) lower prices compared to those currently offered by
existing carriers, (iii) ubiquity due to the projected reach of the Company's
network, as well as a greater number of access and termination points compared
to most other long haul networks, which reduces or eliminates the need to
utilize multiple carriers to transmit traffic to second and third tier markets,
(iv) greater product flexibility as a result of the ability to sell capacity in
increments as small as DS-1s and as large as OC-24s, (v) non-competitive
marketing position as primarily a 'carrier's carrier,' (vi) comparable or
greater reliability due to the SONET architecture of the Company's network and
(vii) ability to provide network redundancy and enhanced reliability by offering
alternative capacity to the ILEC or other facilities-based carriers. See "Risk
Factors--Risks of Completing the Company's Network; Market Acceptance" and
"--Competition; Pricing Pressures."

SERVICE OFFERING. Pathnet intends to derive a majority of its revenues
through the sale of dedicated, high capacity long haul circuits. As compared
with a network comprised solely of fiber optic cable, the Company's network
provides more frequent access and termination points and an ability to deliver
traffic by digital microwave anywhere within an approximate 25-mile line of
sight surrounding any transmission tower on its network for interconnection to
other Telecom Service Providers. This will allow Pathnet in many cases to bypass
existing local infrastructure and deliver traffic directly to an access tandem,
local serving office, mobile switching office, ISP POP or large end-user. The
flexibility of the Pathnet network, combined with its projected ubiquity, should
enable the Company to provide comprehensive capacity arrangements for Telecom
Service Providers. Specifically, Pathnet expects to be able to provide dedicated
circuit capacity from most IXC POPs to access tandems or local serving offices
throughout the Pathnet network, thereby enabling Telecom Service Providers to
bypass ILECs for a substantial portion of their transport requirements.

PRICING. Pathnet's pricing structures will vary according to bandwidth
requirements and the demand characteristics of specific routes. Dedicated
capacity is expected to be sold on a monthly basis based on DS-0 circuit
capacity multiplied by the circuit length. Pathnet charges customers for this
capacity regardless of the actual usage of the dedicated circuits. The Company
is selling dedicated capacity in increments as small as DS-1s and as large as
OC-24s and may offer volume discounts for larger volumes and multiple routes.
See "Risk Factors--Competition; Pricing Pressures."

CUSTOMER TURNOVER. Unlike telecommunications service providers who have a
preponderance of end-user customers, Pathnet is positioning itself as a
'carrier's carrier' providing long haul capacity to Telecom Service Providers.
The Company believes that similar companies which provide long haul dedicated
capacity have experienced levels of customer turnover which are lower than those
experienced by end-user service providers. The Company also believes that
Pathnet will encounter generally low levels of customer turnover as a result of
(i) the scarcity and expense of provisioning new circuits on other networks,
(ii) the lower prices which the Company expects to charge for capacity on its
network as compared with competing ILEC rates, and (iii) the network reliability
advantages of the Company's digital, SONET-based architecture.

NETWORK-RELATED COSTS

The limited incremental cost of operating and maintaining Pathnet's network,
as well as the financial support of Incumbents who will be responsible for a
significant portion of such operating and maintenance costs, are expected to
enable the Company to enjoy significant operating leverage. The Company's
primary network operating costs are expected to be the costs of maintenance,
provisioning of new circuits, interconnection and operation of the NOC.

MAINTENANCE COSTS. The vast majority of the Company's network nodes are
expected to be located on sites currently owned and operated by Incumbents. Each
Incumbent will be required to maintain the physical assets at each site along
its route. The Company intends to enter into agreements with Incumbents whereby
Incumbents' existing maintenance staff will maintain the upgraded network
equipment. These agreements are expected to provide the Company with an
established workforce to maintain and install new capacity on the network. This
arrangement allows Incumbents to retain oversight of their allocated circuits on
the Company's network and to receive maintenance revenue from the Company. The
Company intends to maintain network nodes which are not located on an Incumbent
site through Incumbents' staff deployed nearby or through third party
maintenance suppliers. In addition, the Company expects to provide an inventory
of spare parts for maintenance of its network. See "Business--Agreements with
Incumbents and Other Owners of Telecommunications Assets" and "--Equipment
Supply Agreements."

PROVISIONING COSTS. A substantial majority of the Company's network circuit
capacity will be provisioned remotely at the Company's NOC. There will be
occasions, however, when the physical configuration of portions of the network
must be modified through the installation of additional network components.
While much of this work is expected to be performed by Incumbents' staff, the
Company will also require a number of network engineers and technicians to
perform network modifications in certain areas or facilities not covered by an
Incumbent's staff.

INTERCONNECTION COSTS. Because it intends to be a 'carrier's carrier,' the
Company's network will originate and terminate at facilities owned and operated
by other Telecom Service Providers. These facilities may be IXC, ISP, or CLEC
POPs, an ILEC's access tandem, central office, or local serving office or at an
end-user. The Company will require a secure location at these facilities to
house its equipment and may be required to construct the housing for such
equipment. In addition, the Company may interconnect portions of its network via
fiber optic cable or other media.

NETWORK OPERATIONS CENTER COSTS. The Company has constructed a
state-of-the-art NOC located in Washington, D.C., which currently monitors its
network operations during business hours. The Company is

currently increasing its NOC staff and expects to monitor its network operations
24 hours per day, seven days per week in 1999. For the period before the NOC
becomes operational on a 24 hour per day basis, the Company has engaged TCI
Wireline, Inc. ("WTCI") to assist in monitoring its network. As this function is
relocated to the Company's NOC, the Company will begin to incur NOC operating
costs similar to those of other facilities-based telecommunications companies,
including the cost of additional personnel to monitor the network, plan and
provision circuits, and manage and monitor maintenance operations. Additional
costs associated with the NOC include software licensing and maintenance fees
and the costs of transmitting network data to and from the NOC.

COST OF OPERATIONS

Pathnet will incur costs common to all telecommunications providers,
including customer service and technical support, information systems, billing
and collections, general management and overhead expenses. As a facilities-based
'carrier's carrier,' the Company will differ from non-facilities-based Telecom
Service Providers in the scope and complexity of systems supporting its business
and network. The Company anticipates that the vast majority of its customers
will be Telecom Service Providers purchasing bulk private line transport
capacity across multiple portions of the Company's network. Consequently, the
Company's customer base is expected to be comprised of a relatively limited
number of companies that are generally sophisticated and knowledgeable regarding
telecommunications. The relatively small number of customers and the limited
additional support and servicing of customers beyond initial provisioning should
enable the Company to maintain a relatively low ratio of overhead expenses to
revenues compared to other Telecom Service Providers.

SALES AND MARKETING COSTS. The Company is building a national accounts
sales force that will pursue a consultative approach designed to provide a
systematic review of a large carrier's network requirements in smaller markets
and to offer solutions to reduce the carrier's network costs and improve its
network reliability. The Company also intends to build a regional sales force
which will market the Company's network capacity to smaller carriers and to
selected large end-users. The Company is assembling a centralized marketing
organization to focus on product development, market analysis and pricing
strategies, as well as customer communications, public relations, and branding.

ADMINISTRATION COSTS. The Company's general and administrative costs will
include expenses typical of other telecommunications service providers,
including infrastructure costs, customer care, billing, corporate
administration, and human resources. The Company expects that these costs will
grow significantly as it expands operations.

DEPRECIATION AND AMORTIZATION

Depreciation of property and equipment is computed using the straight-line
method, generally over three to ten years, based upon estimated useful lives.
Leasehold improvements are amortized over the lesser of the useful lives of the
assets or the term of the lease. Network construction costs incurred during
development are capitalized. Amortization of network construction costs begins
when the network equipment is ready for its intended use and will be amortized
over a ten-year period.

CAPITAL EXPENDITURES

The Company's principal capital requirements include installation of digital
equipment and, to a lesser extent, site preparation work. The Company's goal is
to leverage the assets of Incumbents to (i) reduce the capital costs associated
with developing long haul, digital network capacity, (ii) lower the future
operating costs of a digital wireless network by relying on Incumbents to pay
for the costs of facilities maintenance, local taxes and utilities for Incumbent
sites and (iii) improve the Company's speed to market due to the elimination of
site preparation activities, including local permitting, power connection,
securing road access and rights of way and tower construction.

The Company believes that utilizing the Incumbent's infrastructure will also
enable the Company to reduce significantly its cost of constructing an initial
network path. For markets requiring OC-24 capacity or less, the Company believes
this deployment strategy will result in the Company having the lowest capital
costs per circuit mile in comparison to fiber or "green field" digital wireless
networks. In addition, because more than half of all of the Company's capital
expenditures are expected to be related to incremental capacity built to meet
customer demand, the network will have substantially less capital at risk than
comparable fiber-based networks, which require that a substantial majority of
all capital expenditures be spent prior to serving any customers. See "Risk
Factors -- Significant Capital Requirements; Uncertainty of Additional
Financing."

NETWORK CONFIGURATION. The Company's network is expected to be made up
predominantly of digital wireless equipment designed to provide high quality,
low cost, long haul transmission capacity. The Company expects the typical trunk
route will be approximately 400 miles. Based upon an average length of 25 miles
per wireless path, the Company expects to upgrade the digital wireless
electronics on an average of 16 trunk paths per network route. In order to
connect Pathnet's network to the PSTN, the Company also expects to construct one
interconnection path for every three trunk paths. These interconnection paths,
which the Company estimates will average 20 miles in length, will typically
originate at an Incumbent tower site and terminate at a Telecom Service Provider
facility. Most of these facilities are designed and equipped to handle wireless
traffic. In other instances, the network will connect to the PSTN from an
Incumbent facility by fiber optic cable or alternate media. These Incumbent
facilities could include office buildings or tower sites with access to the
PSTN.

The primary capital costs of deploying the Company's network include the
costs of tower enhancement, site preparation work, base digital wireless
equipment and incremental digital wireless equipment. Based on its limited
experience to date, the Company expects that Incumbents will be primarily
responsible for site development costs and Pathnet will be responsible for the
costs of base and incremental digital wireless equipment. The actual allocation
of costs between the Company and each Incumbent is expected to vary, perhaps
significantly, on a case-by-case basis.

The Company currently has no plans to purchase switching equipment to
provide switched minutes of capacity on a wholesale or end-user basis. Virtually
all of the Company's capacity will be utilized for dedicated private line
capacity, which does not require such switching equipment.

NETWORK ECONOMICS. The following tables compare the estimated cost and
economics of the Pathnet program versus construction of a "green field" digital
microwave network. The tables show the estimated average costs (i) on a path by
path basis, (ii) for a 500 route mile network consisting of 16 trunk paths and
five additional interconnection paths of 20 miles each, and (iii) per circuit
mile. The following tables are based on information and estimates available as
of the date of this Prospectus, reflect only the Company's limited experience in
the construction of its network to date and are for illustrative purposes only.
Although the Company believes that these estimates are reasonable, there can be
no assurance that the Company's actual cost of building its network will not
vary significantly from the estimates set forth below, that Incumbents will
share costs as shown or that the actual cost of a "green field" construction
would not be lower. See "Risk Factors--Risks of Completing the Company's
Network; Market Acceptance" and "--Dependence on Relationships with Incumbents;
Rights of Incumbents to Certain Assets."

ESTIMATED PATH COSTS

PATHNET PROGRAM
----------------------- GREEN PATHNET VS.
PATHNET INCUMBENT FIELD(7) GREEN FIELD
---------- ----------- ---------- ---------------

Site Development Costs(1)....................................... $ 25,000 $ 75,000 $ 250,000
Base Digital Wireless Equipment(2).............................. 215,000 -- 215,000
---------- ----------- ----------
Base Path Cost.............................................. 240,000 75,000 465,000 (48%)
Incremental Digital Wireless Equipment(3)....................... 320,000 -- 320,000
---------- ----------- ----------
Maximum Capacity Path Cost(4)............................... $ 560,000 N/A $ 785,000 (29%)
---------- ----------- ----------
---------- ----------- ----------

500 MILE INCUMBENT SEGMENT INCLUDING INTERCONNECTIONS CAPITAL COSTS(4)

GREEN PATHNET VS.
PATHNET FIELD(7) GREEN FIELD
------------- ------------- ---------------

Upgrade 16 Trunk Paths................................................ $ 3,840,000 $ 7,440,000
Install Five Interconnection Paths.................................... 1,200,000 1,200,000
------------- -------------
Total Base Segment................................................ 5,040,000 8,640,000 (42%)
Incremental Capacity.................................................. 6,720,000 6,720,000
------------- -------------
Maximum Capacity.................................................. $ 11,760,000 $ 15,360,000 (23%)
------------- -------------
------------- -------------

ANALYSIS OF ESTIMATED COSTS PER CIRCUIT MILE

GREEN PATHNET VS.
PATHNET FIELD(7) GREEN FIELD
---------- ---------- ------------

Total Mileage (trunk plus interconnection paths)........................... 500 500
Base Circuit Capacity in DS-3s(5).......................................... 5 6
Maximum Circuit Capacity in DS-3s(5)....................................... 23 24
Base DS-0 Circuit Mile Capacity(5)(6)...................................... 1,680,000 2,016,000
Maximum DS-0 Circuit Mile Capacity(5)(6)................................... 7,728,000 8,064,000
Capital Cost Per Circuit Mile:
Base Capacity.......................................................... $3.00 $4.29 (30%)
Maximum Capacity....................................................... $1.55 $1.90 (19%)

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

(1) Includes site acquisition, site preparation, tower strengthening or
replacement, road and utility access and miscellaneous related costs.

(2) Based on OC-6 installation.

(3) Represents the cost to upgrade an Incumbent path to OC-24 of capacity.

(4) Assumes 16 trunk paths of 25 miles and an additional five interconnection
paths of 20 miles each (100 miles total).

(5) Assumes in the Pathnet case that one DS-3 of capacity is allocated to the
Incumbent.

(6) Factors which likely will decrease the actual measurement of the capacity
available for sale include the provisioning of protection circuits and the
variance between geographic route miles versus direct miles.

(7) Company estimate based on "green field" construction by the Company and
Incumbents.

BUSINESS DEVELOPMENT, CAPITAL EXPENDITURES AND ACQUISITIONS

From inception through March 31, 1998, expenditures for property, plant and
equipment, including construction in progress, totaled $10.1 million. In
addition, the Company incurred significant other costs and expenses in the
development of its business and has recorded cumulative losses from inception
through March 31, 1998 of $8.8 million. See "Risk Factors--Limited History of
Operations; Operating Losses and Negative Cash Flow."

RESULTS OF OPERATIONS

The Company's principal activity from inception through the third quarter of
1996 involved introducing its business plan to over 300 Incumbents with
significant private networks through face to face meetings. As the Company began
to enter into formal relationships with Incumbents in 1996, additional
engineering, legal, and financial personnel were recruited to support the
increased workflow and to negotiate Incumbent contracts. By the first quarter of
1997, the Company initiated construction on the first segment of the network,
and additional engineering and management personnel were recruited, including
Mr. Jalkut. The Company has also begun marketing and sales efforts, and hired
Mr. Bennis to develop and execute its marketing plan.

REVENUE. In establishing relationships with Incumbents, the Company has
acted as a provider of services for transitioning the Incumbents from their old
network system onto the Company's network. The services provided by the Company
to Incumbents, including analysis of existing facilities and system performance,
advisory services relating to PCS relocation matters, and turnkey network
construction management, provided substantially all of the Company's historical
revenues. The Company expects substantially all future revenue to be generated
from the sale of telecommunications services. For the three months ended March
31, 1998, the Company generated revenues of $100,000 from construction
management services. For the year ended December 31, 1997, the Company generated
revenues of $162,500, of which $100,000 was derived from construction management
services and $62,500 from PCS relocation advisory services compared with
revenues of $1,000 from PCS relocation advisory services for the year ended
December 31, 1996. The Company generated no revenue during the period from
inception (August 25, 1995) to December 31, 1995.

COSTS AND EXPENSES. For the three months ended March 31, 1998, the Company
incurred operating expenses of approximately $2.8 million. For the year ended
December 31, 1997, the Company incurred operating expenses of approximately $4.3
million compared to operating expenses of $1.3 million for the year ended
December 31, 1996 and $429,000 for the period from inception through December
31, 1995. The increase in expense was directly related to an increase in
selling, general and administrative expenses ("SG&A") as the Company expanded
its engineering, technical, legal, finance, and general management personnel in
connection with the continued signing of new Incumbent agreements and the
ongoing construction of the Company's network. The Company expects SG&A to
continue to increase in 1998 as additional staff is added in all functional
areas, particularly in sales and marketing.

LIQUIDITY AND CAPITAL RESOURCES

The Company expects to generate cash primarily from external financing and,
as its network matures, from operating activities. The Company's primary uses of
cash will be to fund capital expenditures, working capital and operating losses.
Deployment of the Company's digital network and expansion of the Company's
operations and services will require significant capital expenditures. Capital
expenditures will be used primarily for continued development and construction
of its network, implementing the Company's sales and marketing strategy and
constructing and improving the Company's NOC. The Company anticipates that, for
the twelve month periods ending June 30, 1999 and 2000, it will require
approximately $120 million and $260 million, respectively, to fund capital
expenditures, working capital and operating losses. See "Risk
Factors--Significant Capital Requirements; Uncertainty of Additional Financing."

On April 8, 1998, the Company completed the sale of the Units (comprised of
the Notes and the Warrants) for net proceeds of $339.5 million. The Notes bear
interest at 12 1/4% per annum and principal on the Notes is due in full in 2008.
Of the net proceeds from the issuance of the Units, $81.1 million were used to
purchase the Pledged Securities which secure the repayment of the Notes and are
sufficient to provide for payment in full of interest due on the Notes through
April 15, 2000. The Indenture contains provision restricting, among other
things, the incurrence of additional indebtedness, the payment of dividends and
the making of restricted payments, the sale of assets and the creation of liens.

Also on April 8, 1998, the Company completed the 1998 Private Equity
Investment from which the Company received gross proceeds of $20 million.

In addition, the Company is currently exploring several vendor financing
alternatives. Although the Company has received commitments (subject to
definitive documentation) from certain of its vendors and prospective lenders in
connection with two such proposed vendor financing facilities, as of the date of
this Prospectus, the Company has not decided to pursue any one particular
proposed facility.

The Company expects that a majority of future capital expenditures will
result from customer orders for additional capacity. The Company believes that
the modular design of its network will enable the Company to rely on traditional
sources of financing. In addition, the Company expects to rely on other sources,
including public and private debt and equity financings and operating cash flow
to fund future growth. The Company has not finalized commitments for any
additional financing and there can be no assurance that the Company will be able
to secure financing from these sources on terms that are favorable to the
Company. In addition, the Company may require additional capital in the future
to fund operating deficits and net losses and for potential strategic alliances,
joint ventures and acquisitions. Actual capital requirements may vary based upon
the timing and success of the Company's network roll out. Although there can be
no assurance, if the network roll out were delayed from the schedule currently
anticipated by the Company or if demand for the Company's services were lower
than expected, the Company expects that it would be able to defer or reduce
portions of its capital expenditures.

Immediately following the consummation of the Offering, the Company expects
to have $[ ] million in cash and cash equivalents (on a pro forma basis giving
effect to the Transactions and the Offering as if each had occurred as of March
31, 1998). Based on its current business plan, the Company believes that such
amounts will provide sufficient liquidity to meet the Company's capital
requirements for the next 24 months, at which time the Company expects to have
completed a 29,000 route mile network. See "Risk Factors--Significant Capital
Requirements; Uncertainty of Additional Financing." The Company intends to use
any additional available funds to accelerate its development plans.

Because the Company's cost of rolling out its network and operating its
business, as well as its revenues, will depend on a variety of factors
(including the ability of the Company to meet its roll-out schedules, its
ability to negotiate favorable prices for purchases of network equipment, the
number of customers and the services they purchase, regulatory changes and
changes in technology), actual costs and revenues will vary from expected
amounts, possibly to a material degree, and such variations are likely to affect
the Company's future capital requirements. Accordingly, there can be no
assurance that the Company's actual capital requirements will not exceed the
anticipated amounts described above. Further, the exact amount of the Company's
future capital requirements will depend upon many factors, including the cost of
the development of its network, the extent of competition and pricing of
telecommunication services in its markets, the acceptance of the Company's
services and the development of new products.

INFLATION

Management does not believe that its business is affected by inflation to a
significantly different extent than the general economy.

YEAR 2000

The Company has established processes for evaluating and managing the risks
and costs associated with Year 2000 software failures. Management is in the
process of taking steps to ensure a smooth Year 2000 transition, including
working with its software vendors to assure that by the end of the first quarter
of 1999, the Company is fully prepared for the Year 2000. The Company has
identified and analyzed both internally developed and acquired software that
utilizes date embedded codes that may experience operational problems when the
Year 2000 is reached. The Company is making and intends to complete necessary
modifications to the identified software by the end of the first quarter of
1999. The Company is also communicating with Incumbents, suppliers, financial
institutions and others with which it does business to coordinate Year 2000
compliance. Management does not anticipate that the Company will incur
significant operating expenses or be required to invest heavily in computer
systems improvements to be Year 2000 compliant, and does not anticipate that
business operations will be disrupted or that its customers will experience any
interruption of service as a result of the millenium change.

NEW ACCOUNTING STANDARDS

The Financial Accounting Standards Board has issued two new standards that
became effective for reporting periods beginning after December 15, 1997:
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130), and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). Effective March 31, 1998, the Company adopted SFAS 130 and SFAS 131. The
adoption of these standards has no material affect on the Company's financial
statements.

BUSINESS

THE COMPANY

Pathnet intends to become a leading provider of high quality, low cost, long
haul telecommunications capacity to second and third tier markets throughout the
United States primarily by upgrading existing wireless infrastructure to develop
a state-of-the-art, digital SONET network. The Company is positioning itself
primarily as a 'carrier's carrier,' providing a high capacity, dedicated network
to IXCs, LECs, ISPs, RBOCs and other Telecom Service Providers. The Company
plans to deploy its digital network by upgrading, integrating and leveraging
existing telecommunications assets, sites and rights of way, including those
utilized by Incumbents. By integrating the existing networks of Incumbents, the
Company expects to obtain the equivalent of a nationwide spectrum license at
minimal licensing cost.

The Company's goal is to deploy a network covering 29,000 route miles within
two years and ultimately to deploy a network encompassing more than 100,000
route miles. Based on market research provided for the Company by the Yankee
Group, a leading telecommunications research firm, the estimated addressable
market for the Company's services is expected to grow from approximately $6
billion in 1998 to approximately $17 billion by 2008. The Company believes its
strategy of developing a high quality, low cost, digital network primarily in
smaller markets will enable the Company to take advantage of (i) the limited
capacity currently available or expected to be constructed in smaller markets,
(ii) higher prices generally available in those markets and (iii) technological
and cost advantages of the Company's development strategy. The Company is
currently in various stages of designing, constructing, testing and
commissioning its digital network, which will initially serve markets in 34
states. The Company has completed over 800 route miles of its network, is
currently constructing approximately 2,100 additional route miles and has
entered into one agreement relating to the sale of capacity on its network.

The Company's core strategy for deploying its network is to form strategic
relationships with Incumbents and other owners of telecommunications assets that
will enable the Company to leverage these existing assets and thereby reduce the
Company's time to market and capital costs. The Company believes that Incumbents
will find a strategic relationship with the Company to be attractive due to the
opportunity for the Incumbents to (i) reduce the costs of upgrading internal
network infrastructure, (ii) receive incremental capacity which has greater
reliability characteristics than most of the Incumbents' existing systems and
(iii) leverage under-utilized assets and receive a share of the incremental
revenues generated by Pathnet. The Company has identified Incumbents currently
holding or operating private networks in the United States that in the aggregate
cover approximately 465,000 route miles. Through its sales staff and other
engineering, financial and legal professionals, the Company has held meetings
with over 300 of these Incumbents. To date, 47 of these entities, which together
control approximately 89,000 route miles, have authorized the Company in writing
to prepare preliminary engineering evaluations of their networks for the
intended purpose of entering into a long-term strategic relationship with the
Company. Of these 47 entities, seven, which collectively control approximately
11,000 route miles, have entered into binding agreements relating to the initial
design and construction of approximately 7,000 route miles of network. Six of
these binding agreements are long-term FPM Agreements with Enron, Idaho Power
Company, KN Energy, Northeast Missouri Electric Cooperative, NIPSCO and Texaco
or their affiliates. The seventh agreement is a binding term sheet with ATC,
which controls certain telecommunications assets including certain assets
divested by CSX Railroad, ARCO Pipeline and MCI. In addition, the Company is
currently pursuing long-term strategic relationships with 25 out of the 47
entities that control approximately 63,000 additional route miles of network.
These potential relationships are in varying stages of evaluation, system design
and business and contract negotiations. In addition to deploying its network by
forming long-term relationships with Incumbents, the Company may enter into
alternative markets or acquire or deploy complementary telecommunications assets
or technologies.

The Company's network is being designed for maximum reliability and security
and will be capable of carrying a full array of voice, data and video
communications. Bellcore has evaluated the Company's

system design and existing network and has confirmed that the Company's network
will be built using proven, off-the-shelf components and will meet or exceed
prevailing industry standards for reliability and error free operation. The
Company's network will employ various design features that enhance its
reliability, including SONET architecture.

Pathnet was founded in August 1995, and its initial investors include a
group of financial sponsors led by Spectrum and NEA. The Company's current
investors also include Dennis R. Patrick, former Chairman of the FCC. The
Company's Chairman, David Schaeffer, has more than 20 years of business and
entrepreneurial experience, including building and operating wireless networks.
Richard A. Jalkut, the Company's President and Chief Executive Officer, has over
30 years of telecommunications experience, including as President of NYNEX
Telecommunications, an operating subsidiary of NYNEX Corporation with more than
$12.0 billion in annual revenues and 60,000 employees. Kevin J. Bennis, formerly
President of Frontier Communications, is Executive Vice President of the Company
serving as President of the Company's Communications Services Division. Prior to
working at Frontier Communications, Mr. Bennis served in various positions for
21 years at MCI, including as Senior Vice President of Marketing. Michael L.
Brooks, the Company's Vice President of Network Development, directed the
initial construction of the 3,500-mile digital microwave network at Qwest
Microwave Communications, a predecessor of Qwest, as its Vice President of
Engineering.

MARKET OPPORTUNITY

The Company believes there is a substantial market opportunity to provide
high quality, low cost, long haul telecommunications capacity for second and
third tier markets throughout the United States. The Company commissioned the
Yankee Group to study the Company's addressable market. The Yankee Group
estimated the potential addressable market for the Company's services to be
approximately $6 billion in 1998 and estimated that such market will grow to
approximately $17 billion by 2008, indicating a compounded annual growth rate of
approximately 11% per year. The Yankee Group attributes this growth to (i) an
expected shift in market share of interexchange services away from established
carriers, such as AT&T, MCI and Sprint, to non-facilities-based IXCs that are
more likely to rely on alternative carriers such as the Company to transmit
traffic, (ii) the development of the Internet, (iii) growth in data traffic,
including WANs, extranets, CAD/CAM and other applications which require
substantial amounts of bandwidth and (iv) continued growth in voice traffic. The
Yankee Group determined this addressable market size by estimating the amount of
off-network traffic in the Company's targeted geographic markets for long
distance and other services. The Yankee Group estimates indicate that
approximately 16% of the $108 billion long distance, special access, and
intra-LATA market in the United States is carried off-network by carriers that
lease capacity from other providers such as ILECs or the Company. Of that 16%
carried off-network, the Yankee Group believes that Pathnet will be positioned
to address 35% of that market based upon the geographic and market profile of
the Company's business plan.

Based on FCC data and other publicly available information, the Company
estimates that most existing or planned facilities-based long distance
providers' networks are designed to connect primarily the top 120 MSAs in the
United States. Facilities-based IXCs and other telecommunications providers must
rely, directly or indirectly, on facilities provided primarily by ILECs to
transmit calls beyond their existing owned or leased facilities. Current
facilities-based providers serve the second and third tier markets primarily
utilizing a combination of copper, fiber and microwave transport facilities. The
Company believes that many Telecom Service Providers will choose the Company's
network for long haul capacity serving second and third tier markets as a result
of its (i) availability in markets where there are currently insufficient or
limited high capacity facilities, (ii) lower prices compared to those currently
offered by ILECs, (iii) ubiquity in these markets compared to many other long
haul carriers due to the projected reach of the Company's network, as well as an
increased number of access and termination points compared to most other long
haul networks, (iv) greater product flexibility as a result of the ability to
sell capacity in increments as small as DS-1s and as large as OC-24s, (v)
non-competitive marketing position as

primarily a 'carrier's carrier', (vi) comparable or greater reliability due to
the digital SONET architecture of the Company's network, and (vii) ability to
provide network redundancy and enhanced reliability by offering an alternative
to the existing network.

COMPETITIVE ADVANTAGES

The Company believes that it will enjoy the following competitive
advantages:

LOWER NETWORK COST. By leveraging the resources of Incumbents and other
owners of telecommunications assets and by utilizing lower-cost wireless
technology, the Company believes it will gain a significant competitive
advantage over carriers seeking to deploy newly constructed digital networks to
serve the Company's target markets. The Company intends to reduce its initial
costs by utilizing the assets, including towers and rights of way, of Incumbents
and other owners of existing telecommunications assets. In addition, the Company
will be able to utilize many of the requisite local permits and local regulatory
approvals already in place. Based upon publicly available information, the
Company believes that, for capacity of OC-24, the Company's average capital cost
per DS-0 circuit mile will be approximately $1.55 versus approximately $1.90 for
newly constructed digital microwave capacity, approximately $3.00 for newly
constructed aerial fiber and approximately $4.10 for newly constructed fiber
buried in conduit.

SUCCESS-BASED CAPITAL EXPENDITURE. The Company's network is designed to
reduce the risk of capital investment by deploying a substantial portion of its
network on a demand-driven basis. After an Initial System is deployed, the
Company's additional capital expenditures will relate primarily to deploying
incremental equipment to provide additional capacity in response to specific
customer demand. As a result, the Company believes that a majority of its
capital expenditures will be success-based. The modular design of its network
should allow the Company to expand rapidly in response to increased customer
demand or to delay the deployment of network equipment until justified by
specific customer demand. In addition, the Company will be able to mitigate its
capital expenditures by redeploying network equipment to respond to shifting
customer demand.

may not be cost effective in smaller markets due to the higher costs per bit of
capacity sold to low volume markets.

BUSINESS STRATEGY

Key components of the Company's business and operating strategies are
described below:

FOCUS ON SMALLER, CAPACITY CONSTRAINED MARKETS. The Company intends to
focus on smaller markets that typically have limited access to transmission
capacity and that currently are served by ILECs and few other competitors.
Private line rates in second and third tier markets are believed by the Company
to be significantly higher than rates between larger markets because there are
few suppliers. Smaller markets are often unattractive to new entrants because
their relatively limited traffic does not normally economically justify new
network construction. Focusing on smaller markets should enable the Company to
take advantage of its low cost, flexible network, which is capable of servicing
markets requiring small increments of capacity.

POSITION THE COMPANY AS A 'CARRIER'S CARRIER.' The Company intends to sell
the majority of its capacity to Telecom Service Providers. The Company believes
there are substantial benefits to a 'carrier's carrier' strategy, including (i)
lower sales, marketing and servicing costs, (ii) elimination of significant
capital outlays to provide switching services to end-users, (iii) the ability to
carry most of its customer traffic on its own network, thereby increasing
operating margins, and (iv) increased attractiveness to Telecom Service
Providers, who will not view the Company as a potential competitor.

ESTABLISH STRATEGIC RELATIONSHIPS WITH INCUMBENTS AND OTHER OWNERS OF
TELECOMMUNICATIONS ASSETS. The Company's core strategy for deploying its network
is to form strategic relationships with Incumbents and other owners of
telecommunications assets that will enable the Company to utilize existing
infrastructure, permits and other regulatory approvals in order to reduce the
Company's time to market and construction costs. The Company believes that
Incumbents will find a strategic relationship with the Company to be attractive
due to the opportunity for Incumbents to (i) reduce the costs of upgrading the
Incumbent's infrastructure, (ii) receive incremental capacity which has greater
reliability characteristics than most of the Incumbents' existing systems, and
(iii) leverage under-utilized assets and receive a share of the incremental
revenues generated by Pathnet. See "Risk Factors--Dependence on Relationships
with Incumbents; Rights of Incumbents to Certain Assets."

BUILD EFFECTIVE SALES FORCE AND PROVIDE SUPERIOR CUSTOMER SERVICE. The
Company intends to build a national accounts sales force that will use a
consultative approach designed to provide a systematic review

of a large carrier's network requirements in smaller markets and to offer
solutions to reduce the carrier's network costs and improve its reliability. The
Company will also build a regional sales force that will market the Company's
network capacity to smaller carriers and to selected large end-users. The
Company expects to offer high reliability and superior customer service,
including maintaining a centralized NOC to initiate new services and monitor
existing circuit capacity more easily. In addition, pursuant to the FPM
Agreements, the Company utilizes Incumbents as an alternative sales channel to
sell to large end-users who reside in the cities near Incumbents' facilities.

SALES AND MARKETING STRATEGY

CUSTOMERS

The Company primarily targets Telecom Service Providers as well as smaller
carriers and large end-users. The Company's marketing focus is to (i) offer
capacity to fill gaps in its customers' networks; (ii) provide alternative
capacity to ILECs, and (iii) capture demand, as a lower cost provider, from
incremental growth in the Company's addressable market. The Company markets its
network to major IXCs such as AT&T, MCI, Sprint and WorldCom to satisfy their
expanded requirements for feeder and gathering networks. The Company expects
that it will be well positioned to provide capacity to meet spot shortages in
isolated geographic areas and to provide economic transport facilities that will
complement existing IXC networks. The Company plans to exploit its network
flexibility in providing access and termination capabilities and in providing
capacity to small IXCs that need both a feeder network and backbone transport.
The Company also intends to market capacity to ISPs by providing additional POPs
for local dial-up connectivity, rather than toll-free service, to the ISPs'
customer base, thereby eliminating the ISPs' dependence on IXCs for capacity.

The Company believes there will be significant opportunities to market its
capacity to the RBOCs when they commence long distance service outside of their
current service areas. The Company also plans to market the Company's network to
RBOCs for use within their own service areas. The Company believes RBOCs will be
attracted to the Company's ability to provide supplemental capacity on a leased
basis, permitting them to conserve capital and providing a low-cost redundancy
alternative. The Company believes its network will allow RBOCs to focus on
larger cities while providing small communities within their service areas with
broadband connectivity.

The Company expects that mobile wireless operators (both PCS and cellular)
will be attracted to the Company's ability to provide the backhaul capacity
needed to interconnect its mobile switches with backbone transport capacity. The
Company also intends to market its capacity to competitive access providers and
CLECs who can utilize the Company's network to interconnect various service
areas on an intra-LATA and inter-LATA basis. Lastly, the Company also
anticipates offering capacity to providers of switched video services, as the
Company's 1.2 gigabyte per second OC-24 network is expected to be capable of
providing up to 150 digital video channels on demand as advances in digital
switching continue.

PRODUCTS AND SERVICES

The Company is offering dedicated private line access for voice, data and
video transmission in DS-1, DS-3 and OC-3 increments that are well suited to
second and third tier markets. The Company expects that its state-of-the-art
network architecture will enable it to provide access and termination points as
frequently as every 25 miles, thereby providing a more flexible routing capacity
than networks comprised solely of fiber optic cable. This architecture is
expected to increase the number of cities that can be cost effectively served on
each route. In addition, the Company expects this architecture to enable it to
deliver traffic anywhere within an approximate 25-mile line of sight surrounding
any Incumbent tower, allowing it in many cases to bypass existing local
infrastructure and deliver traffic directly to the access tandem, local serving
office, mobile switching office, ISP POP or to large end-users. This flexibility
plus the ubiquity of the Company's network is expected to appeal to a broad
variety of customers.

The Company also is offering provisioning services and other customer
service features. The Company's network architecture is designed to allow it to
deploy incremental equipment rapidly in response to customer needs. The Company
will employ a state-of-the-art operating support system that will be capable of
supporting on-line order entry and remote circuit provisioning. The Company also
employs information systems that permit customers to monitor network quality
using benchmarks such as network uptime, mean time to repair, installation
intervals, timeliness of billing and NOC responsiveness. The Company expects
that its state-of-the-art NOC will permit pro-active service monitoring and
system management on a 24 hours per day, seven days per week basis. The Company
expects to combine network management, billing and customer care on an
integrated platform to offer its customers a single point of contact.

The Company expects that it will locate network nodes near LEC and IXC
service offices and expects to be able to interconnect with customers using
multiple technologies, including both fiber optic and microwave transmission
media. The diagram below illustrates the portion of a telecommunications circuit
for which the Company intends to provide service:

[Artwork: Diagram showing a typical telecommunications circuit and the portion
served by the Company.]

PRICING

Private line rates in second and third tier markets are believed by the
Company to be significantly higher than rates between larger markets because
there are fewer suppliers serving such markets. Although the Company intends to
take advantage of its lower network costs to offer competitive pricing, it
believes that demand for capacity in second and third tier markets will
nonetheless permit higher profit margins than those obtainable in larger
markets. Moreover, the Company believes that services currently available in
second and third tier markets do not offer the flexibility and route diversity
that the Company's network is expected to offer. The Company believes that
customers may be willing to pay premium prices for use of the Company's flexible
and diverse routes.

Pathnet's pricing structures will vary according to bandwidth requirements
and the demand characteristics of specific routes. Dedicated capacity is
expected to be sold on a monthly basis based on DS-0 circuit capacity multiplied
by the circuit length. Pathnet charges customers for this capacity regardless of
the actual usage of the dedicated circuits. The Company sells dedicated capacity
in increments as small as DS-1s and as large as OC-24s and expects to offer
volume discounts for larger volumes and multiple routes.

SALES AND MARKETING RESOURCES

The Company is building a sales force designed to focus on large carriers
and small carriers. A national accounts sales force will pursue a consultative
approach to provide a systematic review of a large carrier's network
requirements in smaller markets and to offer solutions to reduce the carrier's
network costs and improve its network reliability. A regional sales force will
market the Company's network capacity to smaller carriers and to selected large
end-users. The Company will deploy its sales force in regional offices
throughout the United States. The Company is recruiting an experienced and well
trained sales force and retaining its sales and marketing team with a
compensation package that includes salary, quarterly performance bonuses and
stock option incentives. In addition, the Company utilizes Incumbents as an
alternate sales channel to sell to large end-users who reside in the cities near
Incumbents' facilities in return for a referral fee.

The Company is also assembling a centralized marketing organization to focus
on product development, market analysis and pricing strategies as well as
responsibility for customer communications, public relations and branding.
Pathnet intends to develop its brand name and its service mark, "A Network of
Opportunities" through advertising in carrier trade publications and quarterly
newsletters to update network development, service statistics and Company
highlights.

COMMERCIAL ROLL-OUT

The Company is currently deploying its network on a modular basis. In its
efforts to attract Incumbents, the Company is capitalizing on the fact that many
Incumbents currently operate on outmoded analog platforms which provide
low-quality transmission and little room for network expansion. In addition,
many Incumbents currently use a portion of the spectrum recently reallocated by
the FCC to PCS providers and other emerging technology licensees. Pursuant to
the FCC's rules and regulations, an Incumbent must relocate its operations to
another portion of the spectrum whenever the 2 GHz frequencies used by such
Incumbent are needed to implement PCS or another emerging technology. The FCC's
rules provide for a voluntary negotiation period during which the Incumbent and
PCS licensee may, but are not required to, negotiate the Incumbent's relocation.
After the expiration of such period, a mandatory negotiation period commences,
during which time the Incumbent and PCS licensee must negotiate in good faith.
The starting dates and durations of these negotiation periods vary depending on
the PCS spectrum block in which the Incumbent operates and whether the Incumbent
operates a public safety service (I.E., fire, police or emergency medical
service). Mandatory negotiation periods for all Incumbents expired or, will
expire, as follows: (i) April 1998 and April 2000, for non-public safety and
public safety Incumbents, respectively, in the PCS A and B blocks; (ii) May 1998
and May 2001, for non-public safety and public safety Incumbents, respectively,
in the PCS C block; and (iii) January 1999 and January 2002, for non-public
safety and public safety Incumbents, respectively, in the PCS D, E and F blocks.
Should any Incumbent and PCS licensee fail to agree on a relocation plan by the
end of their respective mandatory negotiation periods, the PCS licensee can
request that the Incumbent be involuntarily relocated; the FCC's rules do,
however, provide incentives for parties to agree to relocation plans on their
own.

As part of developing a long-term relationship with an Incumbent, the
Company generally will offer to assist the Incumbent in the relocation of its
system to the 6 GHz portion of the spectrum and, in certain cases, assist the
Incumbent in negotiating legally mandated reimbursement for the cost of such
relocation from the new PCS entrant. Any funds received from such PCS entrants
are generally applied to the cost of the relocation and an upgrade of the
Incumbent's network and, as such, benefit both the Incumbent and the Company.

Based on Pathnet's experience, it may take between six and 18 months from
the initial contact to complete a long-term contract with an Incumbent and 12
months thereafter to complete a commercially available system utilizing the
Incumbent's assets. After a long-term agreement is signed, and throughout the
installation and construction of a system, the Company provides a project
manager for each Incumbent to provide a single point of contact for
installations across many sites and the upgrade of the Incumbent's
telecommunications system. The system replacement and upgrade is planned in two
stages. During the first stage, the Company's engineering department visits the
Incumbent to evaluate the existing system and to recommend an optimum route for
the system. The Company's engineering department develops a detailed system
design to satisfy the Incumbent's build out and routing requirements. Once
approved by the Incumbent, the Company begins the construction and build-out of
the new system.

In the second stage, the Company oversees and manages the construction,
installation, testing and cutover of the new system within a mutually agreed
upon timetable. The Incumbent is invited to observe and participate in
acceptance testing. Once the Incumbent has accepted the new system the cutover
plan can proceed with the commissioning of circuits on the new equipment. The
Company coordinates with the Incumbent cutover of the new system to minimize
system downtime and service interruption. Once installed, the new system is
expected to deliver 99.999% network reliability on any individual path with a
bit error rate not greater than 10(-13). The capacity created by Pathnet is
expected to meet the highest industry standards, including those of AT&T and
MCI, and Bellcore specifications for reliability. See "Risk Factors--Risks of
Completing the Company's Network; Market Acceptance."

AGREEMENTS WITH INCUMBENTS AND OTHER OWNERS OF TELECOMMUNICATIONS ASSETS

FIXED POINT MICROWAVE SERVICES AGREEMENTS

As of the date of this Prospectus, the Company has entered into six
long-term FPM Agreements with Enron, Idaho Power Company, KN Energy, Northeast
Missouri Electric Power Cooperative, NIPSCO and Texaco or their affiliates.

Under the terms of the FPM Agreements, the Company typically leases from the
Incumbent an interest in the Incumbent's sites and facilities on which to build
and operate its network. The Company's FPM Agreements typically provide that the
Company will, in consideration of such lease, allocate to the Incumbent, solely
for its own use, a certain portion of the circuits on the upgraded system and
pay the Incumbent a portion of the revenue derived from sales capacity by the
Company of excess telecommunications on such Incumbent's system. The portion of
such revenues and the amount of such circuits typically depends on the relative
contributions of the Company and of the Incumbent to the system upgrade. The
Company expects that this portion will typically be approximately 10% of such
revenue, although the exact portion negotiated with each Incumbent is expected
to vary (possibly significantly) on a case-by-case basis. Under the FPM
Agreements signed to date, the Incumbents share between zero and approximately
50% of the revenue generated from the sale of excess capacity, with such revenue
sharing commencing one to four years after the commissioning of the Initial
System or any capacity expansion, and receive circuits ranging from 672 to 1,200
DS-0s for their internal communications needs. Generally, the Incumbent is also
entitled to purchase a certain amount of capacity in excess of its allocated
amount along its own system. The Company expects that FPM Agreements will
generally permit the Incumbent to purchase this additional capacity at the
Company's lowest market rate for such route. The Incumbent is usually required
to make certain capital investments up to a predetermined amount to upgrade its
system infrastructure to make it suitable for installation of the Company's
network system which, in most cases, includes significant modifications to
structures, towers, battery plants and equipment shelters. Certain Incumbents
who have executed FPM Agreements, however, have elected not to contribute any
capital toward the upgrade of their system and accordingly have agreed not to
participate in the revenue generated by the system. The Company is generally
responsible for capital investments relating to the Incumbent's facilities that
exceed such predetermined amount, as well as the installation cost of certain
other equipment, including new digital radios and antenna systems.

Pursuant to an FPM Agreement, the Incumbent grants to the Company an
exclusive right to market and sell excess telecommunications capacity created by
the Incumbent's system. The Company sets the selling price of such excess
capacity to maximize revenue on Pathnet's entire network rather than that
portion of the network covered by the Incumbent's system. The FPM Agreements
typically prohibit Incumbents from operating parallel microwave
telecommunications facilities for the purpose of selling digital circuits.
Moreover, the FPM Agreements usually provide that Incumbents will refer network
customers to the Company, and, in certain cases, the Incumbent will earn a fee
for a referral that results in a sale of capacity.

The FPM Agreements generally provide for a 25-year term consisting of an
initial term and two extension terms. The initial term generally includes a
design and installation period and an additional five years commencing upon the
commissioning of the system. The FPM Agreements executed to date provide that
the Company will be granted a first extension term for an additional ten years
if it sells 10% or more of the excess capacity available for sale during the
initial term, and a second extension term for an additional ten years if it
sells 10% or more of the excess capacity available for sale during the first
extension term. After commissioning the upgraded system and so long as the
Company satisfies such excess capacity sale requirements, the FPM Agreements are
typically non-terminable by either party. After the 25-year period, the FPM
Agreements typically provide for automatic one-year extensions which may be
terminated at the election of either the Company or the Incumbent. Upon
expiration of an FPM

Agreement, the Company is typically obligated to transfer the Initial System to
the Incumbent and may remove from the Incumbent's facilities all of its
equipment utilized for capacity expansion above the Initial System.

The FPM Agreements typically require the Company to grant the Incumbent a
security interest in the equipment required to operate the Initial System, which
includes the first radio, the protection radio and the other assets and
equipment required to operate such radios.

In the case of the Company's FPM Agreement with Idaho Power Company, in
addition to granting the Incumbent a security interest in the equipment required
to operate the Initial System, the Company contributed such equipment to a
special purpose subsidiary in which Idaho Power Company holds a majority
interest. The Company has veto rights with regard to the taking of certain
extraordinary actions by the subsidiary. Should it enter into similar FPM
Agreements in the future, the Company expects that it will own all or a majority
of the interests in the related special purpose subsidiary and that (in cases
where such subsidiary is majority owned) the Incumbent will have veto rights
with respect to the taking of certain extraordinary actions.

AMERICAN TOWER TERM SHEET

Under the Binding Term Sheet executed by the Company and ATC, ATC has
granted the Company the right to perform due diligence on approximately 4,200
route miles of linear network comprised of two Incumbent systems in 26 states.
Upon completion of a six-month due diligence process that commenced on May 1,
1998, the Company has the unilateral right to reserve each of the tower assets
on which the Company would like to install its network. The contract then
provides that the Company will have up to 14 months to commence construction of
its digital system. Upon completion of network construction, the Company will
enter into a license agreement with ATC that will grant to the Company a 25-year
license to use the tower assets and other facilities of ATC in exchange for
three to five percent of all revenue collected from the sale of excess capacity.

NETWORK MAINTENANCE AND PROVISIONING OF CIRCUITS

The Company expects to enter into maintenance and provisioning services
agreements (each, a "Maintenance and Provisioning Agreement") with each
Incumbent with whom it enters into an FPM Agreement. To date, the Company has
entered into agreements with KN Energy, NIPSCO and Northern Border relating to
the maintenance of Pathnet's network. The Incumbent will be required to maintain
the physical assets at each site along its route. The Company anticipates
entering additional Maintenance and Provisioning Agreements as its network is
developed. The Maintenance and Provisioning Agreements generally require an
Incumbent to provide all services necessary for the maintenance and operation of
the Company's network, including regularly scheduled maintenance and inspections
and 24 hours per day, seven days per week emergency repair services. The
Company's Maintenance and Provisioning Agreements also typically provide for
certification of the Incumbent's maintenance employees and establish service
standards that the Incumbent must meet. The Incumbent receives a monthly fee per
site serviced, subject to cost of living adjustments and adjustments for changes
in the scope of the services provided. The Incumbent is also reimbursed for
certain out-of-pocket expenses, subject to certain limitations. Maintenance and
Provisioning Agreements typically have a one-year term and renew automatically
unless either party gives notice of its intention not to renew. A Maintenance
and Provisioning Agreement may be terminated sooner if an Incumbent breaches its
obligations thereunder or if the Company fails to pay charges due thereunder. An
Incumbent's performance is evaluated annually in connection with the renewal of
the related Maintenance and Provisioning Agreement.

The Company intends to expand the scope of the Maintenance and Provisioning
Agreements it has entered into that relate only to maintenance and intends to
execute additional agreements with additional Incumbents relating to the
provisioning of circuits. To the extent the Company requires manpower in the
field to provision circuits or install incremental radios, the Company plans to
utilize the Incumbents' existing maintenance staff to provide such services for
an additional fee. If the Company were unable or unwilling to establish or renew
Maintenance and Provisioning Agreements with Incumbents, or if the Company
should utilize telecommunications assets from entities other than Incumbents,
the Company may be required to hire its own staff or third parties to provide
such services. Although the Company believes that its maintenance and
provisioning support arrangements will ensure the quality and reliability of its
network, there can be no assurance that Incumbents or third-party service
providers will adequately maintain the Company's network. See "Risk
Factors--Dependence on Relationship with Incumbents; Rights of Incumbents to
Certain Assets."

EQUIPMENT SUPPLY AGREEMENTS

Pursuant to a Master Agreement entered into by the Company and NEC on August
8, 1997, the Company agreed to purchase from NEC certain equipment, services and
licensed software to be used by the Company in its network under pricing and
payment terms that the Company believes are favorable. In addition, NEC has
agreed, subject to certain conditions, to warranty equipment purchased by the
Company from NEC for three years, if defective, to repair or replace certain
equipment promptly and to maintain a stock of critical spare parts for up to 15
years. The Company's agreement with NEC provides for fixed prices during the
first three years of its term. In addition, pursuant to a Purchase Agreement
between Andrew and the Company, the Company agreed exclusively to recommend to
the Incumbents certain products manufactured by Andrew and Andrew agreed to sell
such products to Incumbents and the Company for a three-year period, renewable
for two additional one-year periods at the option of the Company. The Company's
agreement with Andrew generally provides for discounted pricing based on
projected order volume.

RELIABILITY OF NETWORK

Bellcore states that generally accepted industry standards for reliability
are 99.98% error free seconds for overall network reliability, 99.999% for any
individual path in the network, and bit error rate less than 10(-13). Bellcore's
analysis of the Company's system design indicates that the Company's network
consists of available, off-the-shelf components that meet or exceed the
standards listed above.

The Company has constructed a state-of-the-art NOC located in Washington,
D.C. which currently provides real-time end-to-end monitoring of Pathnet's
network operations during business hours. The Company is currently increasing
its NOC staff and expects to monitor its network operations 24 hours per day,
seven days per week in 1999. For the period before the NOC becomes operational
on a 24 hour per day basis, the Company has engaged WTCI to assist in monitoring
its network. The NOC ensures the efficient and reliable performance of the
network by enabling the Company to identify, and often prevent, potential
network disruptions, and to respond immediately to actual disruptions. In
addition, the NOC enables the Company to schedule and conduct maintenance of
Pathnet's network while minimizing interference with the use of the network.
Specific features provided by the NOC include traffic management and
forecasting, line performance reporting and alarm monitoring, remote link
restoration and coordination, and provisioning of network services.

COMPETITION

While the Company generally will not compete with Telecom Service Providers
for end-user customers, the Company may compete, on certain routes, as a
'carrier's carrier' with long-distance carriers such as AT&T, MCI, Sprint and
WorldCom and operators of nationwide fiber optic systems such as IXC
Communications, Inc., Qwest and Level 3 Communications, Inc., who would
otherwise be the Company's customers in second and third tier markets. The
Company will also face competition increasingly in the long haul market from
local exchange carriers, regional network providers, resellers and satellite
carriers and may eventually compete with public utilities and cable companies.
In particular, RBOCs are now allowed to provide inter-LATA long distance
services outside their home regions, as well as inter-LATA mobile services
within their regions. RBOCs will be allowed to provide inter-LATA long distance
services within their regions after meeting certain regulatory requirements
intended to foster opportunities for local telephone competition. Certain RBOCs
have requested regulatory approval to provide inter-LATA data services within
their rights. The RBOCs already have extensive fiber optic cable, switching, and
other network facilities in their respective regions that can be used for long
distance services after a waiting

period. In addition, other new competitors may build additional fiber capacity
in the geographic areas served and to be served by the Company.

REGULATION

OVERVIEW

The Company's current arrangements with its Incumbents contemplate that the
Company's digital network will be largely Part 101 telecommunications services
which are subject to regulation by federal, state and local governmental
agencies. At the federal level, the Communications Act grants the FCC exclusive
jurisdiction to set rules and policies regarding interstate telecommunications
services (I.E., services that originate in one state and terminate in another
state) and use of the electromagnetic spectrum (I.E., wireless services). The
Company or its affiliates, or in certain cases Licensed Incumbents, must obtain
licenses described below from the FCC in order to construct and operate the
communications network necessary to support the Company's business, although the
Company may commence construction of proposed facilities prior to applying for
or obtaining authorization from the FCC, and may, upon satisfaction of certain
basic requirements, begin operations over constructed facilities prior to
obtaining a final license.

The FCC is also responsible for, among other matters, granting renewals of
the Company's Part 101 licenses, granting pro forma authorizations for transfers
of such licenses, imposing regulatory fees in connection with the granting of
such licenses, performing inspections of licensed facilities, adjudicating
disputes between the Company and other telecommunications carriers, and taking
disciplinary actions against the Company for any violation of the FCC's rules or
policies.

State regulatory commissions have jurisdiction over intrastate
communications (I.E., those that originate and terminate in the same state), and
may impose certain regulatory requirements and restrictions on the Company with
respect to such services. As a result of the Company's offerings of intrastate
service to date, the Company has registered with the Montana Public Service
Commission to provide telecommunications services within the State of Montana.
In addition, municipalities and other local jurisdictions may regulate limited
aspects of the Company's business by, for example, imposing zoning and franchise
requirements and requiring installation permits, particularly with respect to
the construction of new or modified towers necessary to the Company's business.
The Company also is subject to varying taxation at the federal, state and local
levels.

The Company expects to obtain Part 101 authorizations and approvals as
necessary and appropriate to conduct its currently planned operations, and
believes that it is in compliance with all laws, rules and regulations
applicable to its business. Nevertheless, changes in existing laws and
regulations, including those relating to the provision of Part 101
telecommunications services in the 6 GHz band and the relocation of Incumbents
from the 2 GHz to the 6 GHz band, could have a material effect on the Company's
business, financial condition and results of operations. See "Risk
Factors--Regulation-- Licensing by the Company and Incumbents."

As a result of the nature of the Company's business and recent regulatory
streamlining actions taken by the FCC, the Company, as compared to most other
wireless carriers, traditional IXCs and LECs, is subject to a substantially
lesser degree of FCC regulation, and is required to deal with far fewer federal
and state regulatory hurdles in the implementation of its business plan. In
connection with its 1998 biennial regulatory review, the FCC has initiated a
rulemaking proceeding that would further revise and streamline the rules
governing application procedures for the services currently planned to be
offered by the Company and make licensing procedures for such services faster,
less burdensome, and more consistent. The Company expects that these simplified
licensing procedures, if adopted by the FCC, will make it easier to obtain and
maintain the licenses required for its business.

Other regulatory hurdles that are normally encountered by traditional IXCs
and LECs will have no material bearing on the Company's current business. For
example, while IXCs have to pay access charges to LECs in order to access local
networks, the Company will sell capacity to IXCs but will not itself provide
switched traffic, thus eliminating the need to encounter the regulatory issues
surrounding such access. Similarly, while competitive LECs must interconnect
with the facilities of incumbent LECs in order to provide local service, and
must therefore deal with such regulatory issues as interconnection, number
portability, dialing parity, and unbundled network access, the Company does not
now plan to offer local switched service and therefore need not address these
issues. Finally, because the Company's business plan will rely heavily on
existing towers and facilities of Incumbents, the likelihood of encountering
burdensome state or local zoning or tower siting issues is substantially
reduced. The Company expects that its streamlined regulatory status will serve
as an asset and a competitive advantage as it pursues its business plan.

For a discussion of the risks associated with the regulation of the
Company's business, see "Risk Factors--Regulation."

FEDERAL REGULATION

LICENSING BY THE COMPANY. Because of the development and deployment of
emerging technologies such as PCS, many Incumbents operating private
telecommunications systems in the 2 GHz band of the frequency spectrum are or
will be required to relocate their systems and operations to the 6 GHz band or
alternate spectrum. At the same time, technology has made obsolete the analog
microwave systems typically operated by Incumbents. The transition to the 6 GHz
band provides these Incumbents with an opportunity to convert to more advanced,
more spectrum-efficient digital microwave systems. These two developments--one
regulatory, one technological--form the backdrop for the Company's efforts to
aggregate and deploy a digital Part 101 telecommunications network in the 6 GHz
band.

Working closely with relocated Incumbents, the Company expects in most cases
to obtain and aggregate (through wholly owned subsidiaries) Part 101 licenses
from the FCC to conduct operations in the 6 GHz frequency band and from the same
locations as each such relocated Incumbent. Generally, the Company will then
upgrade each relocated Incumbent's telecommunications system from analog to high
capacity digital, provide each Incumbent with the capacity needed by the
Incumbent for its own business, interconnect all of the digital systems to form
an extensive network, and sell excess capacity on the aggregated network to
customers of the Company.

LICENSING BY INCUMBENTS. In a limited number of instances, a relocated
Incumbent may itself obtain authorization from the FCC to operate a Part 101
telecommunications system at the newly occupied 6 GHz location, and may, as part
of its strategic relationship with the Company, construct and operate a digital
system to operate in that band of the frequency spectrum. In those instances,
the Company and the Licensed Incumbent will enter into contractual arrangements
that will allow the Licensed Incumbent to retain a limited amount of capacity on
the relocated network for its own purposes, and will allow the Company to market
and sell the excess capacity on the network and collect the revenue generated
from such sales (a portion of which may be distributed to the Licensed Incumbent
also as part of such

relationship). The Company intends to establish any such arrangement so as to
ensure that there is no DE FACTO transfer of control of the FCC license from the
Licensed Incumbent to the Company, because such a transfer without FCC consent
would violate the FCC's rules.

MUTUAL EXCLUSIVITY. Pursuant to its arrangements with Incumbents, the
Company will, in most cases, apply to the FCC for new Part 101 licenses to
operate in the 6 GHz band. As each such Part 101 license is granted by the FCC
with respect to the frequencies to be used between two specific points as
designated by specific latitude and longitude coordinates, and as Incumbents
already own the infrastructure and sites that comprise each such licensed point
along the network, the Company expects to be the first and only entity to apply
for these licenses at or near the specific locations and in the frequencies to
be designated by the Company, and hence to have licensing priority under the
FCC's procedures. There can be no assurance that other entities will not seek
licenses to operate in the same portion of the frequency spectrum as the
Company, in locations geographically close to those designated by the Company.
The Company believes, however, that such situations are not likely to create
mutual exclusivity for FCC purposes between the Company and any such other
entity, because (i) the FCC's current licensing is on a "first come, first
served" basis, (ii) it will be difficult for any such other entity to obtain
tower site locations in close enough geographical proximity to the Company's
proposed tower sites (on land typically controlled by the Incumbent) so as to
cause a mutually exclusive situation to arise and (iii) the FCC imposes
construction and channel loading requirements with respect to each frequency so
licensed to prevent warehousing of spectrum which would force any such potential
mutual exclusive licensee to invest significant capital in the form of sites,
equipment and actual traffic using such licensed frequencies in order to
maintain its license.

FREQUENCY COORDINATION. Prior to applying to the FCC for authorization to
use portions of the 6 GHz band, the Company must coordinate its use of the
frequency with any existing licensees, permittees, and applicants in the same
area whose facilities could be subject to interference as a result of the
Company's proposed use of the spectrum; in applying for a license the applicant
must certify that such coordination has taken place. The Company must circulate
coordination notifications and allow 30 days for a response from other potential
applicants or licensees expressing concerns about interference; in the event of
such a response, the parties must take all reasonable steps to resolve the
potential interference. If there are no responses to the notification, the
desired frequency will effectively be "reserved" for the Company's use, and the
Company will be required to file an application for a license to use the
frequency within six months of the notification, or to file a renewal
notification. As a Part 101 licensee, the Company may itself receive
coordination notifications from would-be applicants, and would be required to
take reasonable steps to solve any interference problems.

FCC LICENSE REQUIREMENTS. As part of the requirements of obtaining a Part
101 license, the FCC will require the Company to demonstrate the site owner's
compliance with the FAA reporting and notification requirements with respect to
the construction, installation, location, lighting and painting of transmitter
towers and antennas, such as those to be used by the Company in the operation of
its network. In certain instances, the Company may be required to notify the FAA
of proposed construction of facilities (E.G., more than 200 feet above ground
level), so as to allow the FAA to determine whether the proposed construction
poses a hazard to aviation safety. The FCC requires compliance with the FAA's
notification requirement; where such FAA notification is required, the FCC
requires a "no hazard" determination from the FAA before granting a license with
respect to a particular facility. The FAA has a substantial backlog of requests
for "no hazard" determinations, and this may affect in certain situations the
timing of the FCC's issuance of a license to the Company. If the FAA finds that
a particular structure will pose a hazard, the Company will have to reduce its
size or location, or take other steps to bring the structure into compliance
with the FAA's guidelines.

In addition, in order to obtain the Part 101 licenses necessary for the
operation of its network, the Company, and in some cases Licensed Incumbents,
will have to file applications with the FCC for such licenses and demonstrate
technical and legal qualification to be an FCC licensee. The licensing
procedures

for Part 101 applicants have recently been streamlined by the FCC. For example,
Part 101 applicants may begin and complete the construction of facilities to be
licensed, at their own risk, even before filing applications. An applicant is
also allowed to operate such facilities at the time of filing an application or
while its formal license application is being processed, provided the applicant
certifies that, among other things: (i) it has successfully completed the
frequency coordination process; (ii) the operations will have no significant
environmental impact; (iii) no rule waiver is being requested; and (iv) no FAA
or FCC notification is required.

The Company or a Licensed Incumbent must obtain prior FCC authorization in
order to make significant modifications to existing microwave facilities
(although certain modifications can be made without prior approval or
notification). Additionally, the Company or a Licensed Incumbent is required to
provide notice to the FCC before transferring control of an FCC license to a
third party.

Under the rules of the FCC, the Company will be required to have each
licensed Part 101 facility constructed and "in operation" (I.E., capable of
providing service), and to complete each authorized modification to an existing
facility, within 18 months of the grant of the necessary license or approval.
Each license also contains a separate deadline for the completion of
construction of the underlying facility. A licensee may obtain a six-month
extension of these periods upon a showing of good cause, and such extensions are
routinely granted. In addition, the FCC has eliminated the requirement that Part
101 licensees certify to the FCC the completion of construction of licensed
facilities. The FCC also requires that a certain portion of the available
channels on Part 101 digital systems be loaded with traffic within 30 months of
licensing.

Failure to meet the FCC's timetable for construction or operation, or to
obtain an extension of said timetable, will automatically cancel the underlying
license or approval, to the detriment of the Company's ability to execute its
business plan. A license or authorization will also lapse if, after construction
and operation, the facility is removed or altered to render it non-operational
for a period of 30 days or more. Any authorized Part 101 station that fails to
transmit operational traffic during any twelve consecutive months after
construction is complete is considered permanently discontinued under the FCC's
files, and its underlying license is forfeited. A Part 101 license may also
lapse for failure to comply with the FCC's channel loading requirements.

There are several additional regulatory requirements with which the Company
will have to comply as a Part 101 licensee. For example, the Company must allow
the FCC, upon its request, to gain access to the licensed facilities in order to
conduct inspections. Additionally, licensees are required to give priority on
their systems to the transmission of public safety messages. Licensees are also
required to notify the FCC of any disruptions in the service offered over the
licensed facilities.

FCC LICENSE RENEWAL. Part 101 licenses obtained by the Company or an
Incumbent will be issued for a term of ten years, after which such licenses will
have to be renewed by the filing of applications with the FCC. Renewals of such
licenses are generally routinely granted for companies that have complied with
all material aspects of the FCC's rules and regulations.

PROVISION OF COMMON AND PRIVATE CARRIER SERVICES. The Company's and
Licensed Incumbents' Part 101 licenses will allow the Company to sell the excess
capacity on its network to the customers targeted under the Company's business
plan. Although the Part 101 licenses that the Company and Licensed Incumbents
will hold are designated for "common carriers," under the FCC's rules, a Part
101 licensee may provide both common carriage and private carriage over Part 101
facilities.

The Company's services will be offered on a private carrier basis, I.E., to
selected companies on an individualized basis, subject to separately negotiated
contracts. For example, the capacity to be provided to Incumbents for their own
use will be provided on a private carrier basis. Similarly, the Company will
offer services to common carriers on an individualized basis as a 'carrier's
carrier.' The Company's private carrier services will be specifically tailored
to meet the unique requirements of each customer, and will not

subject the Company to common carrier regulation, such as tariff filing
requirements, with respect to those private carriage offerings.

Although the Company does not currently plan on providing services on a
common carrier basis the Company may, in the future, provide services on such
basis, I.E., the services would be offered indiscriminately to the public, thus
making the Company a common carrier with respect to those services. Being a
common carrier with respect to the services would subject the Company to certain
regulatory requirements and restrictions. For example, with respect to the
Company's common carrier offerings, the Company would be required to offer them
to the public indiscriminately, without unreasonable discrimination in its
charges, practices, classifications, regulations, facilities, or services. In
addition, the Company would be required to file tariffs with the FCC with
respect to the rates and terms of its common carrier interexchange offerings;
this tariffing requirement may be modified or eliminated in the future. The
tariffing requirement is non-burdensome; the FCC has adopted streamlined
tariffing procedures for nondominant common carriers, allowing tariffs to become
effective within one day of filing, and presuming such tariffs to be just and
reasonable unless otherwise demonstrated.

FOREIGN OWNERSHIP. As the licensee of facilities designated for common
carriage, the Company will be subject to Section 310(b)(4) of the Communications
Act, which by its terms restricts the holding company of an FCC common carrier
licensee (the Company is such a holding company, because it expects to hold all
FCC licensees indirectly, through subsidiaries) to a maximum of 25% foreign
ownership and/or voting control. In addition, if any Incumbent elects to be an
Incumbent Licensee on the portion of the Company's network relating to its
system, such Incumbent Licensee would also be subject to such foreign ownership
restrictions. The FCC has determined that it will allow a higher level (up to
100%) on a blanket basis with respect to all common carrier licensees, but only
for foreign ownership by citizens of, or companies organized under the laws of,
WTO member countries.

The FCC continues to apply the 25% foreign ownership limitation with respect
to citizens or corporations of non-WTO nations. Although the Company is
presently within the 25% foreign ownership limitation, future financings may
cause the Company to exceed this limitation, in which case the Company would
have to analyze its foreign ownership with respect to the WTO status of the
nations with which the Company's foreign owners are associated. Also, in the
event that a Licensed Incumbent were to choose to hold the relevant Part 101
licenses itself, and not through a holding company, that Licensed Incumbent
would be subject to Section 310(b)(3) of the Communications Act, which limits
direct foreign ownership of FCC licenses to 20%. The FCC does not have
discretion to waive this limitation.

UNIVERSAL SERVICE. The FCC's universal service rules require certain
providers of interstate telecommunications services to make contributions to a
fund based on their telecommunications revenues from end-users. Revenues
received by a provider from carriers that are reasonably expected to make
contributions to the fund based on their own end-user revenues need not be
included in such provider's contribution base. The proceeds in the universal
service fund are to be distributed among eligible schools and libraries, certain
carriers delivering telecommunications services to low-income consumers,
communication carriers in high cost-of-service areas and other entities
designated as eligible by a state commission.

Because the vast majority of the Company's telecommunications services will
be sold to other carriers that will themselves be contributors to the fund, the
Company does not expect to be assessed fund contributions with respect to most
of the telecommunications revenues that it receives. Such contributions will be
assessed solely with respect to revenues received by the Company from its
limited number of actual end-users, such as Incumbents, ISPs and other
non-carrier end-users, and from other carriers that are not required to
contribute to the fund because they fall under one of the contribution
exemptions established by the FCC (E.G., non-profit schools and government
agencies, and carriers whose total annual contribution would be less than
$10,000). The Company expects that, to the extent it is required to contribute
to the fund, it will be able to recover the amounts contributed through
appropriate charges to end-users and others.

To the extent that the Company provides capacity to carriers and other
entities eligible for universal service fund support, the Company may be able to
obtain, either directly or indirectly, some funding from the universal service
fund. The Company has no present intention to rely on any such funding, and has
not included any such funding in its financial projections.

STATE AND LOCAL REGULATION

State and local governments have regulatory authority over the provision of
intrastate communication services, including the approval of those seeking to
provide certain intrastate services. Such state and local regulatory
requirements may also include registering with regulatory authorities, paying
fees, acquiring permits, filing tariffs and notifying or obtaining approval from
regulatory authorities with respect to certain transfers or issuances of the
Company's capital stock. The Company expects that most of its services will be
provided on an interstate basis; however, in those instances where the Company
will provide intrastate services, it does not expect state regulatory
requirements to be burdensome.

The siting and construction of telecommunications equipment may be subject
to state and local zoning, land use, and other regulations. The types and timing
of approvals required to install transmitter towers, antennae and other
equipment and to conduct other aspects of the Company's business will likely
vary among local governments. Under its arrangements with Incumbents, it will be
the primary responsibility of Incumbents to obtain all necessary state and local
authorizations with respect to towers and other equipment for the Company's
network. Because the Company intends to rely heavily on existing towers and
facilities, however, the Company does not expect that Incumbents or other owners
of telecommunications assets will generally encounter burdensome state zoning or
tower siting issues.

INTELLECTUAL PROPERTY

The Company uses the name "Pathnet" as its primary business name and service
mark and has registered that name with the United States Patent and Trademark
Office. On February 26, 1998, the Company filed an application to register its
service mark "A NETWORK OF OPPORTUNITIES" in the United States Patent and
Trademark Office for communications services, namely establishing and operating
a network through the use of fiber optic and high capacity digital radio
equipment. First action upon the application is expected in the third quarter of
1998. The Company reasonably believes that the application will mature to
registration, but there can be no assurance that such registration will actually
be issued.

The Company relies upon a combination of licenses, confidentiality
agreements and other contractual covenants, to establish and protect its
technology and other intellectual property rights. The Company currently has no
patents or patent applications pending. There can be no assurance that the steps
taken by the Company will be adequate to prevent misappropriation of its
technology or other intellectual property. In addition, the Company depends on
the use of intellectual property of others, including the hardware and software
used to construct, operate and maintain its network. Although the Company
believes that its business as currently conducted does not infringe on the valid
proprietary rights of others, there can be no assurance that third parties will
not assert infringement claims against the Company or that, in the event of an
unfavorable ruling on such claim, a license or similar agreement to utilize
technology relied upon by the Company in the conduct of its business will be
available to the Company on reasonable terms. The Company's equipment supply
contracts with NEC and Andrew provide for indemnification by the supplier to the
Company for intellectual property infringement claims regarding the suppliers'
equipment. In the case of the agreement with Andrew, however, such
indemnification is limited to the purchase price paid for the particular
equipment.

FACILITIES, REAL PROPERTY AND LEASES

As part of its network, the Company holds leasehold interests or licenses in
the land, towers, shelters and other facilities located at each Incumbent's
sites and will have leasehold and other real estate interests pursuant to its
agreements with independent tower companies and other owners of
telecommunications assets. See "--Agreements with Incumbents and Other Owners of
Telecommunications Assets--Fixed Point Microwave Services Agreements" and
"--American Tower Term Sheet." The Company expects to lease additional
facilities from Incumbents and other owners of telecommunications assets in
connection with the planned expansion of its digital network.

The Company leases its corporate headquarters space in Washington, D.C. from
6715 Kenilworth Avenue General Partnership, a general partnership of which David
Schaeffer, Chairman of the Company, is General Partner (the "Kenilworth
Partnership"), pursuant to a Lease Agreement between the Company and the
Kenilworth Partnership, dated as of August 9, 1997 (the "Headquarters Lease").
The Headquarters Lease expires on August 31, 1998 and can be renewed at the
option of the Company for two additional one-year periods on the same terms and
conditions. See "Certain Relationships and Related Transactions--Lease from the
Kenilworth Partnership." The Company also leases office space in Richardson,
Texas; Lewiston, Texas; and Independence, Kansas pursuant to leases that expire
in 2000, 2001 and 2000, respectively.

The Company believes that all of its properties are well maintained.

EMPLOYEES

As of May 4, 1998, the Company had 83 full time employees, none of whom was
represented by a union or covered by a collective bargaining agreement. The
Company believes that its relationship with its employees is good. In connection
with the construction and maintenance of its network and the conduct of its
other operations, the Company uses third party contractors, some of whose
employees may be represented by unions or covered by collective bargaining
agreements.

LEGAL PROCEEDINGS

Other than licensing and other regulatory proceedings described under "Risk
Factors--Regulation" and "--Regulation," the Company is not currently a party to
any legal proceedings, which, individually or in the aggregate, the Company
believes will have a material adverse effect on the Company's financial
condition or results of operations.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The table below sets forth certain information concerning the directors and
executive officers of the Company. Directors of the Company are elected at the
annual meeting of stockholders. Executive officers of the Company generally are
appointed at the Board of Directors' first meeting after each annual meeting of
stockholders.

NAME AGE POSITION(S) WITH COMPANY
- ----------------------------------------------------- --- -----------------------------------------------------

David Schaeffer (1).................................. 42 Chairman of the Board, Treasurer and Director
Richard A. Jalkut (1)................................ 53 President, Chief Executive Officer and Director
Kevin J. Bennis...................................... 44 Executive Vice President, and President,
Communications Services Division
William R. Smedberg, V............................... 37 Vice President, Finance and Corporate Development
Michael A. Lubin..................................... 49 Vice President, General Counsel and Secretary
Michael L. Brooks.................................... 54 Vice President, Network Development
Peter J. Barris (2).................................. 46 Director
Kevin J. Maroni (2)(3)............................... 35 Director
Patrick J. Kerins (3)................................ 42 Director
Richard K. Prins (2)(3).............................. 40 Director
Stephen A. Reinstadtler.............................. 31 Director

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

(1) Member of Contract Committee.

(2) Member of Compensation Committee.

(3) Member of Audit Committee.

Set forth below is the background of each of the Company's executive
officers and directors.

DAVID SCHAEFFER founded the Company in August 1995, has served as Chairman
of the Board, Treasurer and director of the Company since August 1997, and
served as President and Chief Executive Officer of the Company from 1995 until
August 1997. From 1986 to the present, Mr. Schaeffer has also served as
President and Chief Executive Officer of Empire Leasing, Inc., a specialized
mobile radio licensee and operator. In addition, Mr. Schaeffer founded and,
since 1992, has served as President and Chief Executive Officer of Mercury
Message Paging, Inc., a paging company which operates networks in Washington,
D.C., Baltimore and Philadelphia.

RICHARD A. JALKUT has served as President and Chief Executive Officer of the
Company since August 1997. Mr. Jalkut has over 30 years of telecommunications
experience. From 1995 to August 1997, he served as President and Group Executive
of NYNEX Telecommunications Group, where he was responsible for all activities
of the NYNEX Telecommunications Group, an organization with over 60,000
employees. Prior to that, Mr. Jalkut served as President and Chief Executive
Officer of New York Telephone Co. Inc., the predecessor company to NYNEX
Telecommunications Group, from 1991 until 1995. Mr. Jalkut currently serves as a
member of the Board of Directors of Marine Midland Bank, a commercial bank, Ikon
Office Solutions, Inc., a company engaged in wholesale and retail office
equipment, and Home Wireless Networks, a start-up company developing a wireless
product for home and business premises.

KEVIN J. BENNIS has served as Executive Vice President, serving as President
of the Company's Communications Services Division since February 1998. From 1996
until he joined the Company, Mr. Bennis served as President of Frontier
Communications, a long-distance communications company, where he was responsible
for the sales, marketing and customer service activities of 3,500 employees.
Prior

to that, Mr. Bennis served in various positions for 21 years at MCI, including
as President of MCI's Integrated Client Services Division from 1995 to 1996, as
President and Chief Operating Officer of Avantel Telecommunications, MCI's joint
venture with Banamex in Mexico, from 1994 to 1995, and as Senior Vice President
of Marketing from 1992 to 1994.

WILLIAM R. SMEDBERG, V joined the Company initially as a consultant in 1996,
and has assumed the position of Vice President, Finance and Corporate
Development since January 1997. Prior to joining the Company, Mr. Smedberg
served in various financial and planning positions at the James River
Corporation of Virginia, Inc. ("James River") for nine years. In particular, he
served as Director, Strategic Planning and Corporate Development for Jamont, a
European consumer products joint venture among Nokia Oy, Montedison S.p.A. and
James River, from 1991 to 1996, where he was responsible for Jamont's corporate
finance, strategic planning and corporate development. Prior to that, Mr.
Smedberg worked in the defense industry as a consultant and engineer for TRW,
Inc.

MICHAEL A. LUBIN has served as Vice President, General Counsel and Secretary
of the Company since its inception in August 1995. Prior to joining the Company,
Mr. Lubin was an attorney-at-law at Michael A. Lubin, P.C., a law firm which he
founded in 1985. Mr. Lubin has experience in telecommunications matters,
copyright and intellectual property matters, corporate and commercial law,
construction claims adjudication and trial work. Earlier he served as a Federal
prosecutor with the Fraud Section, Criminal Division, United States Department
of Justice.

MICHAEL L. BROOKS has served as Vice President, Network Development of the
Company since June 1996. Mr. Brooks has extensive experience in voice and data
communications. From 1992 through May 1996, Mr. Brooks served as Vice President,
Engineering for Ikelyn, Inc. Ikelyn provided system design and technical support
for telecommunication systems and support facilities. From 1982 to 1992, Mr.
Brooks worked for Qwest Microwave Communications, a predecessor of Qwest, where
he directed the initial construction of a 3,500-mile digital network.

PETER J. BARRIS has been a director of the Company since August 1995. Since
1992, Mr. Barris has been a partner, and, in 1994, was appointed as General
Partner, of New Enterprise Associates Venture Capital, a firm that manages
venture capital investments.

KEVIN J. MARONI has been a director of the Company since August 1995. Since
1994, Mr. Maroni has been a principal, and, in 1995, was appointed as a General
Partner of Spectrum Equity Investors, L.P., which manages private equity funds
focused on growth capital for telecommunications companies. From 1992 to 1994,
he served as Manager, Finance and Development at Time Warner Telecommunications,
where he was involved in corporate development projects. Mr. Maroni also served
as a consultant at Harvard Management Company from 1990 to 1992, where he worked
in the private equity group.

PATRICK J. KERINS has been a director of the Company since July 1997. Mr.
Kerins has served as Managing Director of Grotech Capital Group, which is
engaged in venture capital and other private equity investments, since March
1997. From 1987 to March 1997, he worked in the investment banking division of
Alex. Brown & Sons, Incorporated, including serving as Managing Director
beginning in January 1994. Mr. Kerins is also a member of the Board of Directors
of CDnow, Inc., an online retailer of compact discs and other music-related
products which is quoted on the Nasdaq National Market.

RICHARD K. PRINS has been a director of the Company since 1995. Since 1996,
Mr. Prins has served as Senior Vice President of Ferris Baker Watts
Incorporated, where he heads the technology and communication practice in the
investment banking division. From 1988 to 1996, he was Senior Vice President and
Managing Director in the investment banking division of Crestar Financial
Corporation. Mr. Prins is currently a director of Startec Global Communications
Corporation, a communications company which is quoted on the Nasdaq National
Market.

STEPHEN A. REINSTADTLER has been a director of the Company since October
1997. Mr. Reinstadtler has served as Vice President and Director at Toronto
Dominion Capital (U.S.A.) Inc., where he has been

involved in private equity and mezzanine debt investments, since August 1995.
From April 1994 to July 1995, he served as Manager at The Toronto-Dominion Bank,
where he was involved in commercial lending activities to the telecommunications
industry. From August 1992 to April 1994, Mr. Reinstadtler also served as
Associate at Kansallis-Osake-Pankki, where he was involved in commercial lending
activities to the telecommunications industry.

BOARD OF DIRECTORS

The Company's Board of Directors consists of seven directors. Subject to the
restrictions set forth in the Company's Certificate of Incorporation and the
Bylaws, directors and executive officers of the Company are elected to serve
until they resign or are removed, or are otherwise disqualified to serve, or
until their successors are elected and qualified. The Certificate of
Incorporation and the Bylaws provide for the Board of Directors to be divided
into three classes of directors serving staggered three-year terms. As a result,
approximately one-third of the Board of Directors will be elected each year. See
"Description of Capital Stock."

COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors currently has
three committees, the Audit Committee, the Compensation Committee and the
Contract Committee. The Audit Committee has been established to, among other
things, make recommendations to the Board of Directors with respect to the
engagement or discharge of independent auditors, review with the independent
auditors the plan and results of the auditing engagement, and review the
Company's system of internal accounting controls. The current members of the
Audit Committee are Messrs. Maroni, Kerins and Prins.

The Compensation Committee has been established to, among other things,
administer the Company's stock incentive plans, review and make recommendations
to the Board of Directors concerning the compensation of executive officers, and
consider existing and proposed employment agreements between the Company and any
executive officer of the Company. The current members of the Compensation
Committee are Messrs. Maroni, Prins and Barris.

The Contract Committee reviews and evaluates each FPM Agreement that the
Company proposes to enter into and has the authority to authorize the Company to
execute and deliver any FPM Agreement so long as the terms and conditions of
such FPM Agreement do not differ substantially from the FPM Agreements
previously authorized and approved by the full Board of Directors. The current
members of the Contract Committee are Messrs. Schaeffer and Jalkut.

DIRECTOR COMPENSATION. Mr. Prins, a director of the Company, was granted
options to purchase 121,950 shares of Common Stock under the Company's 1995 Plan
(as defined herein) in 1995. See "Security Ownership of Certain Beneficial
Owners and Management." Directors of the Company are currently not reimbursed
for their out-of-pocket expenses incurred in connection with attendance at
meetings of, and other activities relating to serving on, the Board of Directors
and any committees thereof. The Company may consider additional compensation
arrangements for its directors from time to time.

LIMITATION OF LIABILITY AND INDEMNIFICATION. The Restated Certificate of
Incorporation of the Company limits, to the fullest extent permitted by law, the
liability of directors to the Company and its stockholders for monetary damages
for breach of directors' fiduciary duty. This provision is intended to afford
the Company's directors benefit of the Delaware General Corporation Law (the
"DGCL"), which provides that directors of Delaware corporations may be relieved
of monetary liability for breach of their fiduciary duty of care, except under
certain circumstances, including any breach of a director's duty of loyalty,
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, or any transaction from which the director derived any
improper personal benefit. In addition, the Certificate of Incorporation of the
Company provides that the Company will indemnify its directors and officers to
the fullest extent authorized or permitted by law.

COMPENSATION COMMITTEE AND INSIDER PARTICIPATION

The Company's Compensation Committee consists of Messrs. Maroni, Prins and
Barris, none of whom is currently an employee of the Company. During the fiscal
year ended December 31, 1997, no executive officer of the Company served as a
member of a compensation committee or as a director of any entity of which any
of the Company's directors serves as an executive officer.

EXECUTIVE COMPENSATION

The following table sets forth certain information concerning the cash and
non-cash compensation during the fiscal year ended December 31, 1997 earned by
or awarded to the Chief Executive Officer and the five other most highly
compensated executive officers of the Company whose combined salary and bonus
exceeded $100,000 during the fiscal year ended December 31, 1997 (the "Named
Executive Officers").

LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -------------------
--------------------- SHARES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS GRANTED COMPENSATION
- ----------------------------------------------- ---------- --------- ------------------- -------------

Richard A. Jalkut.............................. $ 166,154(1) $ -- 1,480,610 $ 9,857(2)
President and Chief Executive Officer
David Schaeffer................................ 216,923(3) -- 742,090 --
Chairman of the Board and Treasurer
Michael A. Lubin............................... 136,115 -- -- --
Vice President, General Counsel and Secretary
David J. Daigle................................ 103,077 -- -- --
Vice President, Sales and Marketing
Michael L. Brooks.............................. 103,077 -- -- --
Vice President, Network Operations
William R. Smedberg, V......................... 103,385 -- -- --
Vice President, Finance and Corporate
Development

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

(1) Mr. Jalkut commenced employment with the Company in August 1997, and is
compensated at a rate of $400,000 per annum.

(2) Includes amounts reimbursed by the Company pursuant to the Jalkut Employment
Agreement (as defined herein) for expenses, including certain travel
expenses.

(3) Mr. Schaeffer's salary increased to $300,000 per annum from $150,000 per
annum in August 1997.

OPTION GRANTS AND EXERCISES

The following table sets forth the aggregate number of stock options granted
to each of the Named Executive Officers during the fiscal year ended December
31, 1997. Stock options are exercisable for Common Stock of the Company. As of
December 31, 1997, no stock options had been exercised by any Named Executive
Officers.

OPTION GRANTS IN LAST FISCAL YEAR

POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATE OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE THE OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% 10%
- -------------------------------------- ----------- --------------- ----------- ---------------- ------------ ----------

Richard A. Jalkut (2)................. 1,480,610(3) 66.6% $ 0.66 Aug. 4, 2007 $ -- $ --
David Schaeffer (3)................... 742,090(3) 33.4 2.13 Oct. 31, 2007 -- --
Michael A. Lubin...................... -- -- -- -- -- --
David J. Daigle....................... -- -- -- -- -- --
Michael L. Brooks..................... -- -- -- -- -- --
William R. Smedberg, V................ -- -- -- -- -- --

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

(1) The information disclosed assumes, solely for purposes of demonstrating
potential realizable value of the stock options, that the fair market value
per share of Common Stock was $0.02 per share as of December 31, 1997
(calculated on a book value basis) and increases at the rate indicated,
effective as of December 31 of each subsequent year during the option term.
See Note 6 to the financial statements included elsewhere in this
Prospectus.

(2) On August 4, 1997, the Company granted stock options to purchase an
aggregate of 1,480,610 shares of Common Stock to Mr. Jalkut. Such stock
options will vest and become exercisable upon the consummation of the
Offering.

(3) On October 31, 1997, the Company granted stock options to purchase an
aggregate of 742,090 shares of Common Stock to Mr. Schaeffer. Such stock
options will vest and become exercisable upon the consummation of the
Offering.

OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES

None of the Named Executive Officers have exercised any of their options
during the fiscal year ended December 31, 1997. The following table sets forth
the aggregate number of options held by each of the Named Executive Officers and
the fiscal year-end value of the unexercised options.

FISCAL YEAR-END OPTION VALUES

NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED IN-THE-MONEY
DECEMBER 31, 1997 OPTIONS AT DECEMBER 31, 1997 (1)
--------------------------- ----------------------------------

NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------ ------------ ------------- ---------------- ----------------
Richard A. Jalkut......................... -- 1,480,610 $ -- $ --
David Schaeffer........................... -- 742,090 -- --
Michael A. Lubin.......................... 203,250 40,655 -- --
David J. Daigle........................... 304,880 60,975 -- --
Michael L. Brooks......................... -- -- -- --
William R. Smedberg, V.................... -- -- -- --

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

(1) The information disclosed assumes, solely for purposes of demonstrating
potential value of the stock options, that the fair market value per share
of Common Stock was $0.02 per share as of December 31, 1997 (calculated on a
book value basis). See Note 6 to financial statements included elsewhere in
this prospectus. Such fair market value as of December 31, 1997 is
substantially lower than the price to the public in the Offering.

1995 STOCK OPTION PLAN

The Company has adopted the Pathnet, Inc. 1995 Stock Option Plan (the "1995
Plan") which originally authorized the grant of stock options (including
incentive stock options and nonqualified stock options) to participants with
respect to a maximum of 2,100,945 shares of Common Stock ("Shares"). The 1995
Plan has been frozen so that no further awards will be made under the 1995 Plan
in the future. The following is a summary of the material features of the 1995
Plan. As of the date hereof, options to acquire an aggregate of 853,655 Shares
have been authorized and are outstanding under the 1995 Plan, subject to
adjustment as described below.

PURPOSES

The purposes of the 1995 Plan are to encourage and enable employees of the
Company and its subsidiaries to acquire an interest in the Company through the
granting of stock options and to encourage such individuals to acquire or
increase their ownership of Common Stock in order to attract and retain the
services of persons of exceptional competence and to furnish an added incentive
for them to increase their efforts on behalf of the Company.

ADMINISTRATION/ELIGIBLE PARTICIPANTS

The 1995 Plan is administered by the Board of Directors of the Company,
acting through the Compensation Committee; PROVIDED that the Board is empowered
to appoint from its members a committee of two or more persons to exercise the
powers of the Board in granting stock options and taking any other action under
the 1995 Plan (the Board, or such committee, as applicable being referred to as
the "1995 Plan Committee"). Any actions taken by the 1995 Plan Committee are
final and conclusive for purposes of the 1995 Plan.

Stock options may be awarded under the 1995 Plan to any employees of the
Company or its subsidiaries and any non-employee directors of the Company,
consultants to the Company and to such other persons as the Board may select
from time to time.

NUMBER OF SHARES AUTHORIZED UNDER THE 1995 PLAN

As of the date hereof, the 1995 Plan authorizes the grant of awards to
participants with respect to a maximum of 853,655 Shares, subject to adjustment
to avoid dilution or enlargement of intended benefits in the event of certain
significant corporate events, which awards may be made in the form of (i)
nonqualified stock options and (ii) stock options intended to qualify as
incentive stock options under section 422 of the Internal Revenue Code of 1986,
as amended. As described above, the 1995 Plan has been frozen so that no further
awards will be made under the 1995 Plan in the future.

TERMS AND CONDITIONS OF OPTIONS UNDER THE 1995 PLAN

Option grants made under the 1995 Plan are subject to such terms, including
exercise price and conditions and timing of exercise, to the extent applicable,
as may be determined by the 1995 Plan Committee and specified in the applicable
award agreement or thereafter; PROVIDED that stock options intended to qualify
as incentive stock options will be subject to terms and conditions that comply
with such rules as may be prescribed by section 422 of the Code.

TRANSFERABILITY

Options granted under the 1995 Plan will not be transferable by an optionee,
other than by will or laws of descent and distribution, and are exercisable
during the optionee's lifetime only by the optionee.

AMENDMENT TO 1995 PLAN

The Board may discontinue the 1995 Plan or amend the 1995 Plan at any time,
subject to any required regulatory approval and the limitation that no amendment
shall be effective unless approved by the stockholders of the Company. Any such
termination or amendment must be made in accordance with applicable law and
regulations at an annual or special meeting held within twelve months before or
after the date of adoption of such amendment, if such amendment will (i)
increase the number of Shares as to which options may be granted under the 1995
Plan, (ii) change in substance the participants who are eligible to participate
in the 1995 Plan or (iii) otherwise materially increase the benefits accruing to
participants under the 1995 Plan. No option granted under the 1995 Plan may be
altered or impaired by any amendment to the 1995 Plan, except with the consent
of the optionee.

1997 STOCK INCENTIVE PLAN

The Company has adopted the Pathnet, Inc. 1997 Stock Incentive Plan (the
"1997 Plan") which authorizes the grant of awards to participants with respect
to a maximum of 5,768,335 Shares, subject to adjustment as described below. As
of May 4, 1998, options to acquire an aggregate of 3,404,875 Shares have been
granted under the 1997 Plan.

PURPOSES

The purposes of the 1997 Plan are to promote the interests of the Company
and its stockholders by (i) attracting and retaining exceptional officers and
other key employees, consultants and directors of the Company and its
subsidiaries; (ii) motivating such individuals by means of performance-related
incentives to achieve performance goals; and (iii) enabling such individuals to
participate in the long-term growth and financial success of the Company.

ADMINISTRATION/ELIGIBLE PARTICIPANTS

The 1997 Plan is administered by a committee (the "1997 Plan Committee")
which shall either be the Board or a committee of two or more members of the
Board designated by the Board to administer the 1997 Plan. Each such director is
expected, but not required, to be a "Non-Employee Director" (within the meaning
of Rule 16b-3 promulgated under the Exchange Act) and an "outside director"
(within the meaning of Internal Revenue Code section 162(m)) to the extent that
Rule 16b-3 and section 162(m), respectively, are applicable to the Company and
the Plan. If a 1997 Plan Committee member shall fail to qualify as a
Non-Employee Director or outside director, such failure will not invalidate any
otherwise valid award made under the 1997 Plan.

Any officer or other employee, director or consultant to the Company of any
of its subsidiaries shall be eligible to be designated as a participant under
the 1997 Plan.

The 1997 Plan Committee has the authority to determine the participants to
whom awards shall be granted under the 1997 Plan. Such committee may delegate to
one or more officers of the Company the authority to grant awards to
participants who are not officers or directors of the Company subject to section
16 of the Exchange Act or "covered employees" within the meaning of section
162(m) of the Code.

NUMBER OF SHARES AUTHORIZED UNDER THE 1997 PLAN

The 1997 Plan authorizes the grant of awards to participants with respect to
a maximum of 5,768,335 Shares, subject to adjustment to avoid dilution or
enlargement of intended benefits in the event of certain significant corporate
events. Such awards may be made in the form of (i) nonqualified stock options;
(ii) stock options intended to qualify as incentive stock options under section
422 of the Internal Revenue Code of 1986, as amended; (iii) stock appreciation
rights; (iv) restricted stock and/or restricted stock units; (v) performance
awards; and (vi) other stock based awards; PROVIDED that the maximum number of
Shares with respect to which stock options and stock appreciation rights may be
granted to any participant in the 1997 Plan in any calendar year may not exceed
2,000,000 and the maximum number of Shares which may be paid to a participant in
the 1997 Plan in connection with the settlement of any award(s) designated as a
performance compensation award under the 1997 Plan in respect of a single
performance period shall be 2,000,000 or, in the event such performance
compensation award is paid in cash, the equivalent cash value thereof. If, after
the effective date of the 1997 Plan, any Shares covered by an award granted
under the 1997 Plan, or to which such an award relates, are forfeited, or if an
award has expired, terminated or been canceled for any reason whatsoever (other
than by reason of exercise or vesting), then the Shares covered by such award
shall again be, or shall become, Shares with respect to which awards may be
granted under the 1997 Plan.

SUBSTITUTE AWARDS

Awards may be made under the 1997 Plan in assumption of, or in substitution
for, outstanding awards previously granted by the Company or its affiliates or a
company acquired by the Company or with which the Company combines. The number
of Shares underlying any such assumed or substitute awards shall be counted
against the aggregate number of Shares which are available for grant under
awards made under the 1997 Plan.

TERMS AND CONDITIONS OF AWARDS UNDER THE 1997 PLAN

Awards made under the plan shall be subject to such terms, including
exercise price and a conditions and timing of exercise, to the extent
applicable, as may be determined by the 1997 Plan Committee and specified in the
applicable award agreement or thereafter; PROVIDED that stock options that are
intended to qualify as incentive stock options will be subject to terms and
conditions that comply with such rules as may be prescribed by section 422 of
the Code. Payment in respect of the exercise of an option granted under the 1997
Plan may be made in cash, or its equivalent, or (i) by exchanging Shares owned
by the optionee

(which are not the subject of any pledge or other security interest and which
have been owned by such optionee for at least six months) or (ii) subject to
such rules as may be established by the 1997 Plan Committee, through delivery of
irrevocable instructions to a broker to sell the shares being acquired upon
exercise of the option and to deliver promptly to the Company an amount equal to
the aggregate exercise price, or by a combination of the foregoing, PROVIDED
that the combined value of all cash and cash equivalents and the fair market
value of such Shares so tendered to the Company as of the date of such tender is
at least equal to the aggregate exercise price of the option.

In addition to the foregoing, the 1997 Plan Committee shall have the
discretion to designate any award as a performance compensation award. While
awards in the form of stock options and stock appreciation rights are intended
to qualify as "performance-based compensation" under section 162(m) of the Code
provided that the exercise price or grant price, as the case may be, is
established by the Committee to be equal to the fair market value per Share as
of the date of grant, this form of award enables the 1997 Plan Committee to
treat certain other awards under the 1997 Plan as "performance-based
compensation" and thus preserve deductibility by the Company for Federal income
tax purposes of such awards which are made to individuals who are "covered
employees" as defined in section 162(m).

Each performance compensation award shall be payable only upon achievement
over a specified performance period of a duration of at least one year of a
pre-established objective performance goal established by the 1997 Plan
Committee for such period. The 1997 Plan Committee may designate one or more
performance criteria for purposes of establishing a performance goal with
respect to Performance Compensation Awards made under the 1997 Plan. The
performance criteria that will be used to establish such performance goals will
be based on attainment of specific levels of performance of the Company (or
subsidiary, affiliate, division or operational unit of the Company) and will be
limited to the following: Return on net assets, return on stockholders' equity,
return on assets, return on capital, stockholder returns, profit margin,
earnings per Share, net earnings, operating earnings, price per Share and sales
or market share.

With regard to a particular performance period, the 1997 Plan Committee
shall have the discretion, subject to the 1997 Plan's terms, to select the
length of the performance period, the type(s) of performance compensation
award(s) to be issued, the performance goals that will be used to measure
performance for the period and the performance formula that will be used to
determine what portion, if any, of the performance compensation award has been
earned for the period. Such discretion shall be exercised by the 1997 Plan
Committee in writing no later than 90 days after the commencement of the
performance period and performance for the period shall be measured and
certified by the 1997 Plan Committee upon the period's close. In determining
entitlement to payment in respect of a performance compensation award, the 1997
Plan Committee may through use of negative discretion reduce or eliminate such
award, provided such discretion is permitted under section 162(m) of the Code.

TRANSFERABILITY

Each award, and each right under any award, shall be exercisable only by the
participant during the participant's lifetime, or, if permissible under
applicable law, by the participant's guardian or legal representative. Except as
otherwise provided in an applicable award agreement, no award may be assigned,
alienated, pledged, attached, sold or otherwise transferred or encumbered by a
participant otherwise than by will or by the laws of descent and distribution
and any such purported assignment, alienation, pledge, attachment, sale,
transfer or encumbrance shall be void and unenforceable against the Company or
any affiliate; PROVIDED that the designation of a beneficiary shall not
constitute an assignment, alienation, pledge, attachment, sale, transfer or
encumbrance. Notwithstanding the foregoing, the 1997 Plan Committee has the
discretion under the 1997 Plan to provide that options granted under the 1997
Plan that are not intended to qualify as incentive stock options may be
transferred without consideration to certain family members or trusts,
partnerships or limited liability companies whose only beneficiaries or partners
are the original grantee and/or such family members.

CHANGE OF CONTROL

In the event of a "Change of Control" (as defined in the 1997 Plan) and upon
the termination of an optionee's employment thereafter by the Company without
"Cause" or due to the optionee's resignation due to "Constructive Termination"
(each as defined in the 1997 Plan), that portion, if any, of any outstanding
awards then held by a participant which are unexercisable or otherwise unvested
and which would otherwise have become exercisable or vested within one year
following the date of such termination, will be deemed automatically exercisable
or otherwise vested, as the case may be, immediately prior to termination of
such optionee's employment.

AMENDMENT TO 1997 PLAN

The Board may amend the 1997 Plan or any portion thereof at any time;
PROVIDED that no such amendment, alteration, suspension, discontinuation or
termination shall be made without stockholder approval if such approval is
necessary to comply with any tax or regulatory requirement applicable to the
1997 Plan and no such action that would adversely affect the rights of any
participant with respect to awards previously granted under the 1997 Plan shall
not that extent be effective without the participant's consent.

JALKUT EMPLOYMENT AGREEMENT

The Employment Agreement among the Company and Richard Jalkut (the "Jalkut
Employment Agreement") took effect on August 4, 1997 and expires on August 4,
2000. The Jalkut Employment Agreement shall renew automatically for one year
terms unless terminated by either party. Under the Jalkut Employment Agreement,
Mr. Jalkut is entitled to an annual base salary of $400,000, subject to increase
at the discretion of the Company. In addition, Mr. Jalkut is entitled to
participate in the Company's benefit plans on the same basis as other salaried
employees of the Company and on the same basis as other senior executives of the
Company and is entitled to reimbursement up to a total of $50,000 per year for
certain expenses.

In addition, pursuant to the Jalkut Employment Agreement, on August 4, 1997,
Mr. Jalkut received nonqualified stock options on 1,480,610 shares of Common
Stock at an exercise price of $0.66 per share. Such options will vest upon
completion of the Offering. Under the Jalkut Employment Agreement, under certain
circumstances, upon the election of Mr. Jalkut within 10 business days after the
date of termination of Mr. Jalkut's employment with the Company, the Company
will be required to pay, subject to the terms of the Indenture, to Mr. Jalkut
the aggregate Fair Value (as defined in the Jalkut Option Agreement) of the
options then vested or held by Mr. Jalkut on the date of such termination of
employment with the Company.

The Jalkut Employment Agreement (other than certain restrictive covenants of
Mr. Jalkut and certain severance obligations of the Company) may be terminated
(i) by the Company (a) without cause by giving 60 days' prior written notice or
(b) for cause upon the Board of Directors' confirmation that Mr. Jalkut has
failed to cure the grounds for termination within 30 days of notice thereof and
(ii) by Mr. Jalkut (a) without cause by giving 180 days' prior written notice
and (b) immediately upon a Constructive Termination (as defined in the Jalkut
Employment Agreement) without Mr. Jalkut's consent. The Jalkut Employment
Agreement prohibits disclosure by Mr. Jalkut of any of the Company's
confidential information at any time. In addition, while he is employed by the
Company and for two years thereafter, Mr. Jalkut is prohibited from engaging or
significantly investing in competing business activities and from soliciting any
Company employee to be employed elsewhere. The Company has granted Mr. Jalkut
registration rights with respect to the shares he will receive upon exercise of
his options.

OTHER AGREEMENTS

Messrs. Schaeffer, Lubin, Daigle, Brooks and Smedberg have entered into
Employee Agreements Regarding Non-Disclosure, Assignment of Inventions and
Non-Competition with the Company in which such officers agreed (i) not to
disclose any of the Company's confidential and proprietary information to third
parties, (ii) to assign all work products to the Company as "works for hire,"
and (iii) not to compete against the Company for a two-year period following the
termination of the respective officer's employment with the Company.

In exchange for a non-compete covenant and a restriction on soliciting any
employee of the Company to be employed elsewhere, the Company has agreed to pay
Mr. Bennis a severance payment in the aggregate amount of $275,000 paid over one
year if his employment with the Company is terminated.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

SERIES A PURCHASE AGREEMENT

Pursuant to an Investment and Stockholders' Agreement, dated as of August
28, 1995 (the "Series A Purchase Agreement"), by and among the Company and
Spectrum Equity Investors, L.P., New Enterprise Associates VI, Limited
Partnership, Onset Enterprise Associates II, L.P., IAI Investment Funds VIII,
Inc., Thomas Domencich, Dennis R. Patrick and the Corman Foundation
Incorporated, (together, the "Series A Purchasers") and David Schaeffer, the
Series A Purchasers made their initial investments in the Company. The Series A
Purchasers (i) agreed, subject to the satisfaction of certain conditions, to
purchase in the aggregate 1,000,000 shares of Series A Preferred Stock for an
aggregate purchase price of $1.0 million, (ii) purchased 500,000 shares of such
1,000,000 shares of Series A Preferred Stock for an aggregate purchase price of
$500,000 and (iii) agreed to make available to the Company, under certain
circumstances, bridge loans in an aggregate principal amount of $500,000.
Pursuant to Amendment No. 1 to the Investment and Stockholders' Agreement, dated
as of February 8, 1996, the Series A Purchasers purchased the remaining 500,000
shares of Series A Preferred Stock for an aggregate purchase price of $500,000.
Pursuant to Amendment No. 2 to the Investment and Stockholders' Agreement dated
as of August 2, 1996, the Series A Purchasers, among other things, increased the
amount of their bridge loan commitments to the Company to an aggregate principal
amount of $700,000 and advanced such amount to the Company, such loans being
evidenced by bridge loan notes (collectively, the "Bridge Loan Notes"). In
addition, the Series A Purchasers agreed to make available to the Company, upon
the occurrence of certain events, additional bridge loans in an aggregate
principal amount of $300,000 (the "Additional Bridge Loan Commitment.")

SERIES B PURCHASE AGREEMENT

The Company, each of the Series A Purchasers and several additional
purchasers (together, the "Series B Purchasers") and Mr. Schaeffer entered into
an Investment and Stockholders' Agreement, dated as of December 23, 1996 (the
"Series B Purchase Agreement"), pursuant to which, among other things, the
Series B Purchasers agreed to acquire in the aggregate 1,651,046 shares of
Series B Preferred Stock for an aggregate purchase price of $5.0 million. As
part of the purchase of such shares of Series B Preferred Stock and pursuant to
the Series B Purchase Agreement, the Series A Purchasers acquired that number of
shares of Series B Preferred Stock equal to the Additional Bridge Loan
Commitment divided by the purchase price of $2.3944 per share of Series B
Preferred Stock. The Series B Purchasers purchased 1,041,290 shares of Series B
Preferred Stock for $3.0 million on December 23, 1996, and purchased 609,756
shares of Series B Preferred Stock for $2.0 million on June 18, 1997.

SERIES C PURCHASE AGREEMENT

The Company, the Series A Purchasers, the Series B Purchasers and one
additional purchaser (together the "Series C Purchasers") and Mr. Schaeffer
entered into the Investment and Stockholders'

Agreement, dated October 31, 1997, as amended (the "Investment and Stockholders'
Agreement"), pursuant to which, among other things, the Series C Purchasers
agreed to acquire 2,819,549 shares of Series C Preferred Stock for an aggregate
purchase price of $30.0 million. The Series C Purchasers purchased 939,850
shares of Series C Preferred Stock for an aggregate purchase price of $10.0
million on October 31, 1997, and purchased an additional 1,879,699 shares of
Series C Preferred Stock for an aggregate purchase price of $20.0 million
simultaneously with the closing of the Debt Offering. In connection with the
Investment and Stockholders' Agreement, the Company, the holders of Preferred
Stock (the "Investors") and Mr. Schaeffer agreed to amend and restate, in part,
the Series A Purchase Agreement, Amendment No. 1 to the Series A Purchase
Agreement, Amendment No. 2 to the Series A Purchase Agreement, Amendment No. 3
to the Series A Purchase Agreement and the Series B Purchase Agreement. See
"--Investment and Stockholders' Agreement."

INVESTMENT AND STOCKHOLDERS' AGREEMENT

Pursuant to the terms of the Investment and Stockholders' Agreement, the
Investors acquired certain registration rights with respect to securities of the
Company. On any three occasions, the holders of a majority of the Registrable
Securities (as defined in the Investment and Stockholders' Agreement) may
require the Company to effect a registration under the Securities Act of their
Registrable Securities, subject to the Company's right to defer such
registration for a period of up to 60 days. In addition, if the Company proposes
to register securities under the Securities Act (other than a registration
relating either to the sale of securities to employees pursuant to a stock
option, stock purchase or similar plan or a transaction under Rule 145 of the
Securities Act), then any of the Investors have the right (subject to certain
standard cut-back limitations) to request that the Company register such
Investor's Registrable Securities. All registration expenses of the Investors
(exclusive of underwriting discount and commissions) up to $60,000 per offering
will be borne by the Company. The Company has agreed to indemnify the Investors
against certain liabilities in connection with any registration effected
pursuant to the foregoing registration rights agreement, including liabilities
arising under the Securities Act.

LEASE FROM THE KENILWORTH PARTNERSHIP

The Company has entered into the Headquarters Lease for approximately 15,000
square feet of office space from the Kenilworth Partnership, a general
partnership of which David Schaeffer, Chairman of the Company, is General
Partner. The rental rate is approximately $20 per square foot, plus fees to
cover the Company's proportional share of real estate taxes and insurance
premiums relating to the building. The Headquarters Lease expires on August 31,
1998 and may be renewed at the option of the Company for two additional one-year
periods on the same terms and conditions. Management believes that the terms and
conditions of the Headquarters Lease are at least as favorable to the Company as
those which the Company could have received from an unaffiliated third party.

PAYMENT OF ADVISORY FEE

In connection with the placement of the Company's Series A Preferred Stock,
Crestar Securities Corporation, a subsidiary of Crestar Financial Corporation of
which Mr. Prins served as Senior Vice President and Managing Director at the
time, received an advisory fee of $60,000 from the Company in 1995.

SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information concerning beneficial
ownership of the capital stock of the Company as of May 4, 1998 on a pro forma
basis after giving effect to the Transactions and the Offering, by (i) each
person known by the Company to be the beneficial owner of more than five percent
of the outstanding capital stock of the Company, (ii) each director of the
Company, (iii) the Named Executive Officers and (iv) all directors and executive
officers of the Company as a group. Unless otherwise indicated, each of the
stockholders listed below has sole voting and investment power with respect to
the shares shown as beneficially owned by them.

BENEFICIAL OWNERSHIP
OF COMMON STOCK
AFTER THE TRANSACTIONS
AND AFTER THE OFFERING(1)
-----------------------------
TOTAL SHARES PERCENTAGE(2)
------------ ---------------

Spectrum Equity Investors, L.P.(3)................................................... 6,506,175 %
Spectrum Equity Investors II, L.P.(3)................................................ 2,350,700
New Enterprise Associates VI, Limited Partnership(4)................................. 4,450,115
Onset Enterprise Associates II, L.P.(5).............................................. 3,109,740
Onset Enterprise Associates III, L.P.(5)............................................. 469,920
Corman Foundation Incorporated(6).................................................... 314,815
IAI Investment Funds VIII, Inc. (IAI Value Fund)(7).................................. 715,765
Thomas Domencich(8).................................................................. 357,885
FBR Technology Venture Partners L.P.(9).............................................. 469,925
Toronto Dominion Capital (U.S.A.) Inc.(10)........................................... 3,259,735
Grotech Partners IV, L.P.(11)........................................................ 3,259,735
Utech Climate Challenge Fund, L.P.(12)............................................... 997,160
Utility Competitive Advantage Fund, L.L.C.(12)....................................... 632,725
David Schaeffer...................................................................... 5,742,090
Richard A. Jalkut.................................................................... 1,480,610
Kevin J. Maroni (13)................................................................. 6,506,175
Peter J. Barris (14)................................................................. 4,450,115
Richard K. Prins..................................................................... 121,950
Patrick J. Kerins (15)............................................................... 3,259,735
Stephen A. Reinstadtler (16)......................................................... 3,259,735
Michael A. Lubin..................................................................... 203,250
David J. Daigle...................................................................... 304,880
Michael L. Brooks.................................................................... 30,490
William R. Smedberg, V............................................................... 36,585
All Directors and Officers as a Group(13)(14)(15)(16)................................ 25,395,615

FOOTNOTES ON FOLLOWING PAGE

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

(1) Includes shares of Common Stock issuable upon the exercise or conversion of
options, warrants and convertible securities, if exercisable or convertible
within 60 days.

(2) The percentages of beneficial ownership as to each person, entity or group
assume the exercise or conversions of all outstanding options, warrants and
convertible securities held by such person, entity or group which are
exercisable or convertible within 60 days, but not the exercise or
conversion of options, warrants and convertible securities held by others
shown in the table.

(3) The address for Spectrum is One International Place, Boston, MA 02110.

(4) The address for NEA is 1119 Saint Paul Street, Baltimore, MD 21202.

(5) The address for Onset Enterprise Associates II, L.P. and Onset Enterprise
Associates III, L.P. is 8911 Capital of Texas Highway, Austin, TX 78759.

(6) The address for Corman Foundation Incorporated is 100 Brookwood Road,
Atmore, AL 36502.

(7) The address for IAI Investment Funds VIII, Inc. (IAI Value Fund) is 3700
First Bank Place, Minneapolis, MN 55440.

(8) The address for Thomas Domencich is 104 Benevolent Street, Providence, RI
02906.

(9) The address for FBR Technology Venture Partners L.P. is 1001 19th Street
North, Arlington, VA 22209.

(10) The address for Toronto Dominion Capital (U.S.A.) Inc. is 31 West 52nd
Street, New York, NY 10019.

(11) The address for Grotech Partners IV, L.P. is 9690 Deereco Road, Timonium,
MD 21093.

(12) The address for Utech Climate Challenge Fund, L.P. and Utility Competitive
Advantage Fund, L.L.C. is c/o Arete Ventures, Two Wisconsin Circle, Chevy
Chase, MD 20815.

(13) Includes 6,506,175 shares owned by Spectrum Equity Investors, L.P. Mr.
Maroni, who is a limited partner of the general partner of Spectrum and a
general partner of the general partner of Spectrum Equity Investors II,
L.P., disclaims beneficial ownership of the shares owned by Spectrum Equity
Investors, L.P. and Spectrum Equity Investors II, L.P.

(14) Includes 4,450,115 shares owned by New Enterprise Associates VI, Limited
Partnership. Mr. Barris, who is general partner of the general partner of
New Enterprise Associates VI, Limited Partnership, disclaims beneficial
ownership of the shares owned by New Enterprise Associates VI, Limited
Partnership.

(15) Includes 3,259,735 shares owned by Grotech Partners IV, L.P. Mr. Kerins,
Managing Director of the general partner of Grotech Partners IV, L.P.,
disclaims beneficial ownership of the shares owned by Grotech Partners IV,
L.P.

(16) Includes 3,259,735 shares owned by Toronto Dominion Capital (U.S.A.) Inc.
Mr. Reinstadtler, Vice President and Director of Toronto Dominion Capital
(U.S.A.) Inc., disclaims beneficial ownership of the shares owned by Toronto
Dominion Capital (U.S.A.) Inc.

DESCRIPTION OF CAPITAL STOCK

THE FOLLOWING SUMMARY OF THE OUTSTANDING CAPITAL STOCK OF THE COMPANY DOES
NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED PROVISIONS OF THE FOLLOWING DOCUMENTS: (I) THE COMPANY'S RESTATED
CERTIFICATE OF INCORPORATION, AS AMENDED (THE "CERTIFICATE OF INCORPORATION"),
AND (II) THE COMPANY'S BYLAWS (THE "BYLAWS"), COPIES OF WHICH HAVE BEEN FILED AS
EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART. SEE
"AVAILABLE INFORMATION."

GENERAL

Upon completion of the Transactions and the Offering, the authorized capital
stock of the Company will consist of shares of Common Stock and
shares of Preferred Stock, par value $.01 per share (the "Preferred Stock"). Of
such authorized shares, (i) shares of Common Stock will be issued and
outstanding, (ii) no shares of Preferred Stock will be issued and outstanding,
(iii) 853,655 shares and 5,768,335 shares of Common Stock will be reserved for
issuance in connection with the 1995 Plan and the 1997 Plan, respectively, and
(iv) stock options to purchase 853,655 shares and 3,404,875 shares of Common
Stock under the 1995 Plan and the 1997 Plan, respectively, will be issued and
outstanding.

Prior to the Offering, there has been no public market for the Common Stock.
See "Risk Factors-- Absence of Prior Public Market; Possible Volatility of Stock
Price."

COMMON STOCK

VOTING RIGHTS. The Company's Certificate of Incorporation provides that
holders of Common Stock are entitled to one vote per share held of record on all
matters submitted to a vote of stockholders. The stockholders are not entitled
to vote cumulatively for the election of directors.

DIVIDENDS. Subject to the preferential rights of holders of Preferred
Stock, if any, the holders of shares of Common Stock will be entitled to
receive, when, as and if declared by the Board of Directors, out of the assets
of the Company which are legally available therefor, dividends payable either in
cash, in property or in shares of capital stock. Under Delaware law, a
corporation may declare and pay dividends out of surplus or, if there is no
surplus, out of net profits for the fiscal year in which the dividend is
declared and/or the preceding year. No dividends may be declared, however, if
the capital of the corporation has been diminished by depreciation in the value
of its property, losses or otherwise to an amount less than the aggregate amount
of capital represented by any issued and outstanding stock having a preference
on the distribution of assets. See "Dividend Policy."

LIQUIDATION. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, after payment of debts and other
liabilities of the Company and after distribution in full of the preferential
amounts, if any, to be distributed to holders of shares of Preferred Stock,
unless otherwise required by law, holders of shares of Common Stock will be
entitled to receive all of the remaining assets of the Company of whatever kind
available for distribution to stockholders in proportion to the number of shares
of Common Stock held by them.

OTHER RIGHTS. Stockholders of the Company have no preemptive or other
rights to subscribe for additional shares. Subject to any rights of the holders
of any Preferred Stock that may be issued subsequent to the Offering, all
holders of Common Stock are entitled to share equally on a share-for-share basis
in any assets available for distribution to stockholders on liquidation,
dissolution or winding up of the Company. No shares of Common Stock are subject
to conversion, redemption or a sinking fund. All outstanding shares of Common
Stock are, and the Common Stock to be outstanding upon completion of the
Offering will be, fully paid and nonassessable.

TRANSFER AGENT AND REGISTRAR. The Transfer Agent and Registrar for the
Common Stock is .

PREFERRED STOCK

The Company's Board of Directors (or a committee thereof) is authorized to
issue, without further authorization from stockholders, up to shares of
Preferred Stock in one or more series and to determine, at the time of creating
each series, the distinctive designation of, and the number of shares in, the
series, its dividend rate, the number of votes, if any, for each share of such
series, the price and terms on which such shares may be redeemed, the terms of
any applicable sinking fund, the amount payable upon liquidation, dissolution or
winding up, the conversion rights, if any, and such other rights, preferences
and priorities of such series as the Board of Directors (or a committee thereof)
may be permitted to fix under the laws of the State of Delaware as in effect at
the time such series is created. The issuance of Preferred Stock could adversely
affect the voting power of the holders of Common Stock and could have the effect
of delaying, deferring or preventing a change in control of the Company. The
Company has no present plan to issue any shares of Preferred Stock.

WARRANTS

In connection with the Debt Offering, the Company issued 350,000 Warrants,
each entitling the owner thereof to purchase 5.5 shares of Common Stock at an
exercise price of $0.01 per share. The Warrants were issued pursuant to a
Warrant Agreement dated as of April 8, 1998 (the "Warrant Agreement"), between
the Company and The Bank of New York, as Warrant Agent, and are scheduled to
expire on April 15, 2008 (the "Expiration Date"). The Warrants are not tradeable
separately from the Notes until the earliest of (the "Separability Date") (i)
October 5, 1998, (ii) the date on which a registration statement with respect to
an exchange offer for the Notes or covering the sale by holders of the Notes is
declared effective under the Securities Act; (iii) the occurrence of an Exercise
Event (as defined below); (iv) the occurrence of an Event of Default under the
indenture or (v) such earlier date as determined by Merrill Lynch & Co. in its
sole discretion. The Warrants may be exercised on the first day on or after the
Separability Date that any of the following occurs (each, an "Exercise Event"):
(i) a Change of Control (as such term is defined in the Indenture) with respect
to the Company; (ii)(a) the 180th day (or such earlier date as may be determined
by the Company in its sole discretion) following the consummation of the
Offering or (b) upon the consummation of the Offering, but only in respect of
Warrants, if any, required to be exercised to permit the holders thereof to sell
shares issued upon the exercise of the Warrants pursuant to their registration
rights; or (iii) a class of equity securities of the Company is listed on a
national securities exchange or authorized for quotation on the Nasdaq National
Market or is otherwise subject to registration under the Exchange Act; or (iv)
April 8, 2000.

A majority of the holders of the Warrants or other equity securities issued
or issuable with respect to the Warrants (the "Registrable Securities") may
require the Company to effect a demand registration of the Warrants, the shares
of Common Stock issuable upon exercise of the Warrants or the Registrable
Securities (the "Subject Equity") following an Exercise Event and the completion
of the Offering. In addition, holders of Registrable Securities have the right
to include the Registrable Securities in a registration statement under the
Securities Act filed by the Company for its own account or for the account of
any of its security holders, subject to certain customary cut-back limitations.
Under certain circumstances, if certain specified holders of Common Stock
described in the indenture (the "Permitted Holders") or their affiliates
transfer or sell shares of Common Stock or certain other equity securities of
the Company in a transaction resulting in a Change of Control, the holders of
Subject Equity will have the right to require the purchasers thereof to purchase
the Subject Equity. In addition, under certain circumstances, the Permitted
Holders or their affiliates can require holders of Subject Equity to sell such
securities in the event that such Permitted Holders or their affiliates transfer
or sell all of their equity securities of the Company to a non-affiliate in a
transaction resulting in a Change of Control.

CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS

Certain provisions of the Certificate of Incorporation and Bylaws of the
Company summarized below may be deemed to have an anti-takeover effect and may
delay, defer or prevent a tender offer to takeover

attempt that a stockholder might consider in its best interest, including an
attempt that might result in the receipt of a premium over the market price for
the shares held by stockholders.

CLASSIFIED BOARD OF DIRECTORS. The Certificate of Incorporation and the
Bylaws provide that the Board of Directors shall be divided into three classes
of directors serving staggered three-year terms. Notwithstanding the foregoing,
the term of any director who is also an officer of the Company shall
automatically end if he or she ceases to be an employee of the Company. As a
result, approximately one-third of the Board of Directors will be elected each
year. Moreover, under DGCL, in the case of a corporation having a classified
board, stockholders may remove a director only for cause. This provision, when
coupled with the provision of the Bylaws authorizing only the Board of Directors
to fill vacant directorships, will preclude a stockholder from removing
incumbent directors without cause and simultaneously gaining control of the
Board of Directors by filling the vacancies created by such removal with its own
nominees.

SPECIAL MEETING OF STOCKHOLDERS. The Certificate of Incorporation and the
Bylaws provide that special meetings of stockholders of the Company may be
called only by the Board of Directors, the Chairman of the Board of Directors or
the President. This provision will make it more difficult for stockholders to
take actions opposed by the Board of Directors.

STOCKHOLDER ACTION BY WRITTEN CONSENT. The Certificate of Incorporation and
the Bylaws provide that no action required or permitted to be taken at any
annual or special meeting of the stockholders of the Company may be taken
without a meeting, and the power of stockholders of the Company to consent in
writing, without a meeting, to the taking of any action is specifically denied.

ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The Bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to the nominate candidates of
election as directors at an annual or special meeting of stockholders, must
provide timely notice thereof in writing. To be timely, a stockholder's notice
must be delivered to or mailed and received at the principal executive offices
of the Company not less than 30 days nor more than 60 days prior to the meeting;
PROVIDED, HOWEVER, that in the event that less than 40 days' notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be received no later than the close
of business on the tenth day following the day on which such notice of the date
of the meeting was mailed or such public discourse was made. The Bylaws also
specify certain requirements for a stockholder's notice to be in proper written
form. These provisions may preclude some stockholders from bringing matters
before the stockholders at an annual or special meeting or from making
nominations for directors at an annual or special meeting.

LIMITATION OF DIRECTORS' LIABILITY

The Company has included in its Certificate of Incorporation provisions to
eliminate the rights of the Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover monetary damages from a
director resulting from breaches of fiduciary duty (including breaches resulting
from grossly negligent behavior). This provision does not eliminate liability
for breaches of the duty of loyalty, acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, violations
under Section 174 of the DGCL concerning the unlawful payment of dividends or
stock redemptions or repurchases or for any transaction from which the director
derived an improper personal benefit. However, these provisions will not limit
the liability of the Company's Directors under Federal securities laws. The
Company believes that these provisions are necessary to attract and retain
qualified persons as directors and officers.

SECTION 203 OF THE DELAWARE LAW

Section 203 of the DGCL prohibits publicly held Delaware corporations from
engaging in a "business combination" with an "interested stockholder" for a
period of three years following the time of the transaction in which the person
or entity became an interested stockholder, unless (i) prior to such time,

either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder is approved by the Board of
Directors of the corporation, (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the outstanding voting stock of the
corporation (excluding for this purpose certain shares owned by persons who are
directors and also officers of the corporation and by certain employee benefit
plans) or (iii) at or subsequent to such time the business combination is
approved by the Board of Directors of the corporation and by the affirmative
vote (and not by written consent) of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder. For the purposes of
Section 203, a "business combination" is broadly defined to include mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder. An "interested stockholder" is a person who, together
with affiliates and associates, owns (or within the immediately preceding three
years did own) 15% or more of the corporation's voting stock.

DESCRIPTION OF CERTAIN INDEBTEDNESS

SENIOR NOTES

THE FOLLOWING SUMMARY OF THE MATERIAL TERMS OF THE AGREEMENTS GOVERNING
CERTAIN OF THE COMPANY'S INDEBTEDNESS DOES NOT PURPORT TO BE COMPLETE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PROVISIONS OF SUCH AGREEMENTS,
COPIES OF WHICH HAVE BEEN FILED AS EXHIBITS TO THE REGISTRATION STATEMENT OF
WHICH THIS PROSPECTUS IS A PART.

On April 8, 1998, the Company issued 350,000 Units consisting of the Notes
and the Warrants. Concurrently with this Offering, the Company will offer to
exchange up to $350.0 million aggregate principal amount of its 12 1/4% Senior
Notes due 2008 (the "New Notes") for a like principal amount of its outstanding
Notes. The New Notes will be issued pursuant to, and entitled to the benefits
of, the Indenture, dated as of April 8, 1998, between the Company and The Bank
of New York, as trustee (the "Trustee"), governing the Notes. The Notes and New
Notes outstanding under the Indenture at any time are referred to collectively
herein as the "Notes."

The Notes will mature on April 15, 2008 and all outstanding principal will
be repayable on maturity. Interest on the Notes accrues at the rate of 12 1/4%
per annum and is payable semiannually in arrears on April 15 and October 15 of
each year, commencing October 15, 1998.

The Company used $81.1 million of the net proceeds of the issuance and sale
of the Existing Notes to purchase the Pledged Securities (in such amount as will
be sufficient to provide for payment in full of the first four interest payments
due on the Notes) which are pledged as security for repayment of the principal
amount of the Notes. Except for the pledge by the Company of the Pledged
Securities, the Notes are general unsecured obligations of the Company and rank
equally in right of payment to all existing and future unsecured debt of the
Company that is not subordinated to the Notes by its express terms. The Notes
rank senior in right of payment to any and all existing and future debt of the
Company subordinated in right of payment to the Notes. The Notes are redeemable
for cash at any time on or after April 15, 2003 at the option of the Company, in
whole or in part, at certain redemption prices set forth in the Indenture. In
addition, upon the occurrence of a "Change of Control" (as defined in the
Indenture) each holder of the Notes may require the Company to repurchase all or
a portion of such holder's Notes at a purchase price in cash equal to 101% of
the principal amount thereof.

The Indenture contains numerous affirmative and negative covenants that
restrict the activities of the Company in many respects. Among other things, the
Indenture includes covenants with respect to the following: (i) a limitation on
debt, (ii) a limitation on restricted payments, (iii) a limitation on issuances
and sales of capital stock of certain subsidiaries, (iv) a limitation on
transactions with affiliates, (v) a limitation on liens, (vi) a limitation on
issuances of certain guarantees by and debt securities of, certain subsidiaries,
(vii) a limitation of sale of assets, and (viii) a limitation on dividend and
other payment restrictions affecting certain subsidiaries.

The rights of the holders of the Notes may be modified or amended by a
supplemental indenture entered into by the Company and the Trustee with the
consent of the holders of a majority in aggregate principal amount of the Notes.
Certain modifications or amendments, however, require the consent of the holder
of each outstanding Note affected thereby.

In addition, the Company is currently exploring several vendor financing
alternatives and other credit facilities. Although the Company has received
commitments (subject to definitive documentation) from certain of its vendors
and prospective lenders in connection with two such proposed vendor financing
facilities, the Company has not, as of the date of this Prospectus, decided to
pursue any one particular proposed facility.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have outstanding
shares of Common Stock. Of these shares, the shares sold in the
Offering will be freely tradeable without restriction or further registration
under the Securities Act, except for any shares purchased or acquired by an
"affiliate" of the Company (as that term is defined under the rules and
regulations promulgated the Securities Act), which shares will be subject to the
resale limitations of Rule 144. Substantially all of the remaining
outstanding shares of Common Stock will be "restricted securities," as
that term is defined in Rule 144, that may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including the exemptions contained under Rule 144.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, 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 to be an affiliate of the Company, is
entitled to sell within any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock of
the Company ( shares immediately after the Offering) or (ii) the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the date on which a notice of sale is filed with the Commission. A
person (or persons whose shares are aggregated) who is not an "affiliate" at any
time during the 90 days preceding a sale is entitled to sell such shares under
Rule 144, commencing two years after the date such shares were acquired from the
Company or an affiliate of the Company, without regard to the volume limitations
described above. Sales under Rule 144 are subject to certain other restrictions
relating to the manner of sale, notice and the availability of current public
information about the Company.

Subject to the lock-up arrangements described below, shares of Common
Stock owned by the Original Investors will be eligible for sale in the public
market subject to the volume and other limitations described above because the
Original Investors will be deemed to have held such shares for more than one
year. The Company's executive officers and directors and the Original Investors
have agreed, subject to certain exceptions, not to directly or indirectly (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any shares of Common Stock or
securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or thereafter acquired by the person executing the agreement
or with respect to which the person executing the agreement has or thereafter
acquires the power of disposition, or file a registration statement under the
Securities Act with respect to the forgoing or (ii) enter into any swap or other
agreement or any transaction that transfers, in whole or in part, the economic
consequence of ownership of the Common Stock whether any such swap or
transaction is to be settled by delivery of Common Stock or other securities, in
cash or otherwise, without the prior written consent of Merrill Lynch on behalf
of the Underwriters for a period of 180 days after the date of this Prospectus.
See "Underwriting."

Pursuant to the Investment and Stockholders' Agreement, the Company has
granted certain stockholders, including the Original Investors, demand and
piggy-back registration rights. See "Certain Relationships and Related
Transactions--Investment and Stockholders' Agreement."

In connection with the Debt Offering, the Company issued Warrants to
purchase an aggregate of 1,925,000 shares of Common Stock. The Warrants will
become exercisable upon completion of the Offering and the shares of Common
Stock issued upon exercise of the Warrants (the "Warrant Shares") will be
"restricted securities" under Rule 144. Pursuant to a registration rights
agreement (the "Warrant Registration Rights Agreement"), upon completion of the
Offering the holders of a number of Warrants, Warrant Shares and other
Registrable Securities (as defined in the Warrants Registration Rights
Agreement) equivalent to at least a majority of the Warrant Shares subject to
the Warrants originally issued at the time of the Debt Offering will be entitled
to require the Company to effect one registration under the Securities Act,
subject to certain limitations. Holders of Registrable Securities will also have
the right to

piggyback on registration statements filed by the Company under the Securities
Act, subject to certain limitations.

In addition, an aggregate of 6,621,990 shares of Common Stock have been
reserved for issuance to employees, officers and directors upon exercise of
stock options, of which stock options for 4,258,530 shares of Common Stock are
outstanding as of May 4, 1998. The Company anticipates filing a registration
statement on Form S-8 under the Securities Act to register all of the shares of
Common Stock issuable or reserved for future issuance under the 1995 Plan and
the 1997 Plan. Shares purchased upon exercise of options granted pursuant to the
1995 Plan and the 1997 Plan generally will, therefore, be available for resale
in the public market to the extent the lock-up arrangements with Merrill Lynch &
Co. have expired, except that any such shares issued to affiliates are subject
to the volume limitations and certain other restrictions of Rule 144. See
"Management--1995 Stock Option Plan" and "--1997 Stock Incentive Plan."

Prior to the Offering, there has been no public market for the Common Stock
of the Company and no prediction can be made as to the effect, if any, that the
sale or availability for sales of shares of Common Stock will have on the market
price of the Common Stock. Nevertheless, sales of significant amounts of such
shares in the public market, or the perception that such sales may occur, could
adversely affect the market price of Common Stock and could impair the Company's
future ability to raise capital through an offering of its equity securities.

UNDERWRITING

Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Morgan
Stanley & Co. Incorporated and Bear, Stearns & Co. Inc. are acting as
representatives (the "U.S. Representatives") of each of the Underwriters named
below (the "U.S. Underwriters"). Subject to the terms and conditions set forth
in a U.S. purchase agreement (the "U.S. Purchase Agreement") among the Company
and the U.S. Underwriters, and concurrently with the sale of shares of Common
Stock to the International Managers (as defined below), the Company has agreed
to sell to the U.S. Underwriters, and each of the U.S. Underwriters severally
and not jointly has agreed to purchase from the Company, the number of shares of
Common Stock set forth opposite its name below.

U.S. UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------

Merrill Lynch, Pierce, Fenner & Smith
Incorporated.....................................................
Morgan Stanley & Co. Incorporated..........................................
Bear, Stearns & Co. Inc....................................................
-----------------
Total...........................................................
-----------------
-----------------

The Company has also entered into an international purchase agreement (the
"International Purchase Agreement") with certain underwriters outside the United
States and Canada (the "International Purchase Agreement") with certain
underwriters outside the United States and Canada (the "International Managers")
and, together with the U.S. Underwriters, the "Underwriters") for whom Merrill
Lynch International, Morgan Stanley & Co. International Limited and Bear,
Stearns International Limited are acting as lead managers (the "Lead Managers").
Subject to the terms and conditions set forth in the International Purchase
Agreement, and concurrently with the sale of shares of Common Stock to the
U.S. Underwriters pursuant to the U.S. Purchase Agreement, the Company has
agreed to sell to the International Managers, and the International Managers
severally have agreed to purchase from the Company, an aggregate of shares
of Common Stock. The initial public offering price per share and the total
underwriting discount per share of Common Stock are identical under the U.S.
Purchase Agreement and the International Purchase Agreement.

In the U.S. Purchase Agreement and the International Purchase Agreement, the
several U.S. Underwriters and the several International Managers, respectively,
have agreed, subject to the terms and conditions set forth therein, to purchase
all of the shares of Common Stock being sold pursuant to each such agreement if
any of the shares of Common Stock being sold pursuant to such agreement are
purchased. Under certain circumstances, under the U.S. Purchase Agreement and
the International Purchase Agreement, the commitments of non-defaulting
Underwriters may be increased. The closings with respect to the sale of shares
of Common Stock to be purchased by the U.S. Underwriters and the International
Managers are conditioned upon one another.

The U.S. Representatives have advised the Company that the U.S. Underwriters
propose initially to offer the shares of Common Stock to the public at the
initial public offering price set forth on the cover page of this Prospectus,
and to certain dealers at such price less a concession not in excess of $ per
share of Common Stock. The U.S. Underwriters may allow, and such dealers may
reallow, a discount not in excess of $ per share of Common Stock on sales to
certain other dealers. After the initial public offering, the public offering
price, concession and discount may be changed.

The Company has granted options to the U.S. Underwriters, exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of
additional shares of Common Stock at the initial public offering price set forth
on the cover page of this Prospectus, less the underwriting discount. The U.S.
Underwriters may exercise these options solely to cover over-allotments, if any,
made on the sale of the Common Stock offered hereby. To the extent that the U.S.
Underwriters exercise these options, each

U.S. Underwriter will be obligated, subject to certain conditions, to purchase a
number of additional shares of Common Stock proportionated to such U.S.
Underwriters' initial amount reflected in the foregoing table. The Company also
has granted options to the International Managers, exercisable for 30 days after
the date of this Prospectus, to purchase up to an aggregate of additional
shares of Common Stock to cover over-allotments, if any, on terms similar to
those granted to the U.S. Underwriters.

At Company's request, the U.S. Underwriters have reserved up to shares
for sale at the initial public offering price to certain of the Company's
officers, directors and employees, members of their immediate families and other
individuals who are business associates of the Company (including certain
vendors and consultants), in each case as such parties have expressed an
interest in purchasing such shares. The number of shares of Common Stock
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares which are not orally
confirmed for purchase within one day of the price of the Offerings will be
offered by the Underwriters to the general public on the same terms as the other
shares offered hereby.

The Company and the Company's executive officers and directors and the
Original Investors have agreed, subject to certain exceptions, not to directly
or indirectly (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, or otherwise dispose of or transfer any shares
of Common Stock or securities convertible into or exchangeable or exercisable
for Common Stock, whether now owned or thereafter acquired by the person
executing the agreement or with respect to which the person executing the
agreement has or thereafter acquires the power of disposition, or file a
registration statement under the Securities Act with respect to the forgoing or
(ii) enter into any swap or other agreement or any transaction that transfers,
in whole or in part, the economic consequence of ownership of the Common Stock
whether any such swap or transaction is to be settled by delivery of Common
Stock or other securities, in cash or otherwise, without the prior written
consent of Merrill Lynch on behalf of the Underwriters for a period of 180 days
after the date of this Prospectus. See "Shares Eligible for Future Sale."

The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
U.S. Underwriters and the International Managers are permitted to sell shares of
Common Stock to each other for purposes of resale at the initial public offering
price, less an amount not greater than the selling concession. Under the terms
of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom
they sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to persons who are non-U.S. or non-Canadian persons or to persons they
believe intend to resell to persons who are non-U.S. or non-Canadian persons,
and the International Managers and any dealer to whom they sell shares of Common
Stock will not offer to sell or sell shares of Common Stock to U.S. persons or
to Canadian persons or to persons they believe intend to resell to U.S. or
Canadian persons, except in the case of transactions pursuant to the
Intersyndicate Agreement.

Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined through negotiations
between the Company and the U.S. Representatives and the Lead Managers. Among
the factors to be considered in such negotiations are an assessment of the
Company's recent results of operations, future prospects of the Company and its
industry in general, market prices of securities of companies engaged in
activities similar to those of the Company and prevailing conditions in the
securities markets. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the public
market subsequent to the Offerings at or above the initial public offering
price.

Application will be made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "PTNT".

The Underwriters do not expect sales of the Common Stock to any accounts
over which they exercise discretionary authority to exceed 5% of the number of
shares being offered hereby.

The Company agreed to indemnify the U.S. Underwriters and the International
Managers against certain liabilities, including certain liabilities under the
Securities Act, or to contribute to payments the U.S. Underwriters and
International Managers may be required to make in respect thereof.

Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the U.S. Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock.

If the Underwriters create a short position in the Common Stock in
connection with the Offerings, I.E., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the U.S.
Representatives may reduce that short position by purchasing Common Stock in the
open market. The U.S. Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.

The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase shares of Common Stock in the open market to reduce the
Underwriters' short position or to stabilize the price of the Common Stock, they
may reclaim the amount of the selling concession from the Underwriters and
selling group members who sold those shares as part of the Offerings.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Common Stock to the extent that it
discourages resales of the Common Stock.

Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.

LEGAL MATTERS

Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Paul, Weiss, Rifkind,
Wharton & Garrison, New York, New York. Certain legal matters relating to the
Offering will be passed upon for the Underwriters by Shearman & Sterling, New
York, New York.

EXPERTS

The consolidated financial statements of the Company included in this
Prospectus as of December 31, 1997 and 1996 and for the period from August 25,
1995 (date of inception) to December 31, 1995, the years ended December 31, 1996
and 1997 and the period from August 25, 1995 (date of inception) to December 31,
1997 have been audited by Coopers & Lybrand L.L.P., independent accountants, as
stated in their report appearing elsewhere herein. Such financial statements and
selected financial data are included in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company has not previously been subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon
completion of the Offering, the Company will be subject to the informational
requirements of the Exchange Act, and in accordance with the Exchange Act, will
be required to file periodic reports and other information with the Securities
and Exchange Commission (the "Commission"). Such information can be inspected
without charge at the public reference facilities of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Suite 1400, Northwest Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material may also
be obtained at prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also
maintains an Internet Web Site (http://www.sec.gov) that will contain all
information filed electronically by the Company with the Commission.

This Prospectus, which constitutes a part of a Registration Statement on
Form S-1 (the "Registration Statement") filed by the Company with the Commission
under the Securities Act, does not contain all information set forth in the
Registration Statement, including the exhibits to the Registration Statement.
For further information with respect to the Company and the Common Stock offered
by this Prospectus, reference is made to the Registration Statement and the
exhibits to the Registration Statement. Statements contained in this Prospectus
as to the contents of any contract or other document are summaries of the
material terms of such contract or other document not necessarily complete, and,
with respect to each such contract or document filed as an exhibit to the
Registration Statement, reference is made to the copy of such contract or
document, and each such statement is qualified in all respect by such reference.
A copy of the Registration Statement, including the exhibits thereto, may be
inspected and copies thereof may be obtained as described in the preceding
paragraph with respect to periodic reports and other information to be filed by
the Company under the Exchange Act.

The Company intends to furnish its stockholders with annual reports
containing financial statements audited by an independent public accounting firm
and quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information for so long as required
by applicable law or regulation or by any securities exchange or other market
upon which the Common Stock is traded.

FORWARD-LOOKING STATEMENTS

This Prospectus includes "forward-looking statements," including statements
which can be identified by the use of forward-looking terminology such as
"believes," "anticipates," "expects," "may," "will," or "should" or the negative
of such terminology or other variations on such terminology or comparable
terminology, or by discussions of strategies that involve risks and
uncertainties. All statements other than statements of historical facts included
in this Prospectus including, without limitation, such statements under
"Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" and located elsewhere in this Prospectus,
regarding the Company or any of the transactions described in this Prospectus,
including the timing, financing, strategies and effects of such transaction, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from expectations
are disclosed in this Prospectus, including, without limitation, the amount of
capital needed to deploy the Company's network as described in this Prospectus;
the Company's substantial leverage and its need to service its indebtedness; the
restrictions imposed by the Company's current and possible future financing
arrangements; the ability of the Company to successfully manage the cost
effective and timely completion of its network and its ability to attract and
retain customers for its services; the ability of the Company to retain and
attract relationships with the incumbent owners of the telecommunications assets
with which the Company expects to build its network; the Company's ability to
retain and attract key management and other personnel as well as the Company's
ability to manage the rapid expansion of its business and operations; the
Company's ability to compete in the highly competitive telecommunications
industry in terms of price, service, reliability and technology; the Company's
dependence on the reliability of its network equipment, its reliance on key
suppliers of network equipment and the risk that its technology will become
obsolete or otherwise not economically viable; the Company's ability to conduct
its business in a regulated environment; and the other factors described in
conjunction with the forward-looking statements in this Prospectus and/or under
the caption "Risk Factors." The Company does not intend to update these
forward-looking statements.

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

INDEX TO FINANCIAL STATEMENTS

Report of Independent Accountants..................................................... F-2

Consolidated Balance Sheets, as of December 31, 1996 and 1997 and March 31, 1998
(unaudited)......................................................................... F-3

Consolidated Statements of Operations for the period August 25, 1995 (date of
inception) to December 31, 1995, the years ended December 31, 1996 and 1997, the
period
August 25, 1995 (date of inception) to December 31, 1997, the three months ended
March 31, 1997 (unaudited) and 1998 (unaudited) and the period August 25, 1995 (date
of inception) to March 31, 1998 (unaudited)......................................... F-4

Consolidated Statements of Changes in Stockholders' Equity for the period August 25,
1995 (date of inception) to December 31, 1995, the years ended December 31, 1996 and
1997, the period August 25, 1995 (date of inception) to December 31, 1997 and the
three months ended March 31, 1998 (unaudited)....................................... F-5

Consolidated Statements of Cash Flows for the period August 25, 1995 (date of
inception) to December 31, 1995, the years ended December 31, 1996 and 1997, the
period
August 25, 1995 (date of inception) to December 31, 1997, the three months ended
March 31, 1997 (unaudited) and 1998 (unaudited) and the period August 25, 1995 (date
of inception) to March 31, 1998 (unaudited)......................................... F-6

Notes to Consolidated Financial Statements............................................ F-7

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Pathnet, Inc.

We have audited the accompanying consolidated balance sheets of Pathnet,
Inc. and its subsidiary (the Company) (A Development Stage Enterprise) as of
December 31, 1996 and 1997, and the related statements of operations, changes in
stockholders' equity (deficit) and cash flows for the period August 25, 1995
(date of inception) to December 31, 1995, the years ended December 31, 1996 and
1997, and for the period August 25, 1995 (date of inception) to December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1996 and 1997, and the results of their operations and their
cash flows for the period August 25, 1995 (date of inception) to December 31,
1995, the years ended December 31, 1996 and 1997, and the period August 25, 1995
(date of inception) to December 31, 1997, in conformity with generally accepted
accounting principles.

McLean, Virginia
February 20, 1998, except for the information in Note 9, for which the dates are
April 8, 1998 and May 4, 1998, respectively.

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

The foregoing report is in the form that will be signed by Coopers & Lybrand
L.L.P., upon consummation of the matters, on or before the effective date of the
Registration Statement of which this Prospectus is a part, as described in Note
9 to the financial statements and assuming that from the date hereof to the
effective date no other events shall have occurred that would affect the
accompanying financial statements.

May 8, 1998

F-2

PATHNET, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED BALANCE SHEETS

---------

ASSETS

MARCH 31,
DECEMBER 31, DECEMBER 31, 1998
1996 1997 (UNAUDITED)
------------- ------------- -------------

Current assets:
Cash and cash equivalents......................................... $ 2,318,037 $ 7,831,384 $ 4,856,610
Prepaid expenses and other current assets......................... 1,695 48,571 156,716
------------- ------------- -------------
Total current assets.......................................... 2,319,732 7,879,955 5,013,326
Property and equipment, net......................................... 46,180 7,207,094 9,964,580
Deferred financing costs............................................ -- 250,428 --
Restricted cash..................................................... -- 760,211 288,736
------------- ------------- -------------
Total assets.................................................. $ 2,365,912 $ 16,097,688 $ 15,266,642
------------- ------------- -------------
------------- ------------- -------------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................................. $ 114,799 $ 5,592,918 $ 7,280,298
Accrued expenses.................................................. 30,217 -- 257,334
Deferred revenue.................................................. -- 300,000 200,000
------------- ------------- -------------
Total current liabilities..................................... 145,016 5,892,918 7,737,632
------------- ------------- -------------
Series A convertible preferred stock, $0.01 par value 1,000,000
shares authorized, issued and outstanding at December 31, 1996 and
1997, and March 31, 1998, respectively (liquidation preference
$1,000,000)....................................................... 1,000,000 1,000,000 1,000,000
Series B convertible preferred stock, $0.01 par value, 1,651,046
shares authorized; 1,041,290, 1,651,046 and 1,651,046 shares
issued and outstanding at December 31, 1996 and 1997 and March 31,
1998, respectively (liquidation preference $5,033,367)............ 3,008,367 5,008,367 5,008,367
Series C convertible preferred stock, $0.01 par value, 2,819,549
shares authorized; 939,850 shares issued and outstanding at
December 31, 1997 and March 31, 1998, respectively (liquidation
preference $10,000,054)........................................... -- 9,961,274 9,961,274
------------- ------------- -------------
Total convertible preferred stock............................. 4,008,367 15,969,641 15,969,641
------------- ------------- -------------

Commitments and contingencies

Stockholders' equity (deficit):
Voting common stock, $0.01 par value, 7,500,000 shares authorized;
5,000,000 shares issued and outstanding at December 31, 1996 and
1997 and 5,004,065 issued and outstanding at March 31, 1998..... 50,000 50,000 50,041
Common stock subscription receivable.............................. (9,000) (9,000) --
Additional paid-in capital........................................ 381,990 381,990 382,030
Deficit accumulated during the development stage.................. (2,210,461) (6,187,861) (8,872,702)
------------- ------------- -------------
Total stockholders' equity (deficit).......................... (1,787,471) (5,764,871) (8,440,631)
------------- ------------- -------------
Total liabilities and stockholders' equity (deficit).......... $ 2,365,912 $ 16,097,688 $ 15,266,642
------------- ------------- -------------
------------- ------------- -------------

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

F-3

PATHNET, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE
FOR THE FOR THE PERIOD
PERIOD PERIOD AUGUST 25,
AUGUST 25, AUGUST 25, 1995
1995 1995 (DATE OF
(DATE OF (DATE OF FOR THE THREE MONTHS INCEPTION)
INCEPTION) FOR THE YEAR FOR THE YEAR INCEPTION) ENDED MARCH 31, TO
TO ENDED ENDED TO ------------------------ MARCH 31,
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1998 1998
1995 1996 1997 1997 (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ------------ ----------- ----------- ------------

Revenue............................ $ -- $ 1,000 $ 162,500 $ 163,500 $ 10,000 $ 100,000 $ 263,500
------------ ------------ ------------ ------------ ----------- ----------- ------------
Expenses:
Cost of revenue.................. -- -- -- -- -- 714,740 714,740
General and administrative....... 290,318 913,646 3,537,926 4,741,890 486,630 1,922,217 6,664,107
Research and development......... 19,038 226,021 -- 245,059 -- -- 245,059
Legal and consulting............. 120,083 202,651 755,817 1,078,551 71,324 225,813 1,304,364
------------ ------------ ------------ ------------ ----------- ----------- ------------
Total expenses................. 429,439 1,342,318 4,293,743 6,065,500 557,954 2,862,770 8,928,270
------------ ------------ ------------ ------------ ----------- ----------- ------------
Net operating loss................. (429,439) (1,341,318) (4,131,243) (5,902,000) (547,954) (2,762,770) (8,664,770)
------------ ------------ ------------ ------------ ----------- ----------- ------------
Interest expense................... -- (415,357) -- (415,357) -- -- (415,357)
Interest and other income, net..... 2,613 13,040 153,843 169,496 17,107 77,929 247,425
------------ ------------ ------------ ------------ ----------- ----------- ------------
Net loss................... $ (426,826) $(1,743,635) $(3,977,400) $(6,147,861) $(530,847) ($2,684,841) $(8,832,702)
------------ ------------ ------------ ------------ ----------- ----------- ------------
------------ ------------ ------------ ------------ ----------- ----------- ------------
Basic and diluted loss per
common share............. $ (0.09) $ (0.35) $ (0.80) $ (1.23) $ (0.11) $ (0.54) $ (1.77)
------------ ------------ ------------ ------------ ----------- ----------- ------------
------------ ------------ ------------ ------------ ----------- ----------- ------------
Weighted average number of
common shares
outstanding.............. 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,001,762 5,000,167
------------ ------------ ------------ ------------ ----------- ----------- ------------
------------ ------------ ------------ ------------ ----------- ----------- ------------

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

F-4

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

DEFICIT
COMMON ACCUMULATED
COMMON STOCK STOCK ADDITIONAL DURING THE
----------------------- SUBSCRIPTION PAID-IN DEVELOPMENT
SHARES AMOUNT RECEIVABLE CAPITAL STAGE TOTAL
----------- ---------- ------------ ------------ ------------- -------------

Balance, August 25, 1995............... -- $ -- $ -- $ -- $ -- $ --
Issuance of voting common stock........ 2,500,000 25,000 (4,500) -- (20,000) 500
Issuance of non-voting common stock.... 2,500,000 25,000 (4,500) -- (20,000) 500
Net loss............................... -- -- -- -- (426,826) (426,826)
----------- ---------- ------------ ------------ ------------- -------------
Balance, December 31, 1995............. 5,000,000 50,000 (9,000) -- (466,826) (425,826)
Cancellation of non-voting common
stock................................ (2,500,000) (25,000) -- -- -- (25,000)
Issuance of voting common stock........ 2,500,000 25,000 -- -- -- 25,000
Interest expense for beneficial
conversion feature of bridge loan.... -- -- -- 381,990 -- 381,990
Net loss............................... -- -- -- -- (1,743,635) (1,743,635)
----------- ---------- ------------ ------------ ------------- -------------
Balance, December 31, 1996............. 5,000,000 50,000 (9,000) 381,990 (2,210,461) (1,787,471)
Net loss............................... -- -- -- -- (3,977,400) (3,977,400)
----------- ---------- ------------ ------------ ------------- -------------
Balance, December 31, 1997............. 5,000,000 50,000 (9,000) 381,990 (6,187,861) (5,764,871)
Exercise of stock options
(unaudited).......................... 4,065 41 -- 40 -- 81
Repayment of stock subscription
receivable (unaudited)............... -- -- 9,000 -- -- 9,000
Net loss (unaudited)................... -- -- -- -- (2,684,841) (2,684,841)
----------- ---------- ------------ ------------ ------------- -------------
Balance, March 31, 1998 (unaudited).... 5,004,065 $ 50,041 $ -- $ 382,030 $ (8,872,702) $ (8,440,631)
----------- ---------- ------------ ------------ ------------- -------------
----------- ---------- ------------ ------------ ------------- -------------

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

F-5

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE
PERIOD FOR THE
AUGUST 25, PERIOD
1995 AUGUST 25, FOR THE THREE MONTHS
(DATE OF FOR THE YEAR FOR THE YEAR 1995 (DATE OF ENDED MARCH 31,
INCEPTION) TO ENDED ENDED INCEPTION) TO ------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1998
1995 1996 1997 1997 (UNAUDITED) (UNAUDITED)
------------- ------------ ------------ ------------- ----------- -----------

Cash from operating activities:
Net loss............................ $ (426,826) $(1,743,635) $(3,977,400) $(6,147,861) $(530,847) ($2,684,841)
Adjustment to reconcile net loss to
net cash used in operating
activities:
Depreciation expense.............. 352 9,024 46,642 56,018 6,112 37,223
Loss on disposal of asset......... -- -- 5,500 5,500 -- --
Write-off of deferred financing
costs........................... -- -- -- -- -- 337,910
Interest expense for beneficial
conversion feature of bridge
loan............................ -- 381,990 -- 381,990 -- --
Accrued interest satisfied by
conversion of bridge loan to
Series B preferred stock........ -- 33,367 -- 33,367 -- --
Changes in assets and liabilities:
Prepaid expenses and other
current assets................ -- (1,695) (46,876) (48,571) -- (108,145)
Deferred revenue................ -- -- 300,000 300,000 -- (100,000)
Accounts payable................ 4,705 110,094 386,106 500,905 (63,259) 1,687,380
Accrued expenses................ 12,645 17,572 (30,217) -- (4,125) 257,334
------------- ------------ ------------ ------------- ----------- -----------
Net cash used in operating
activities.................. (409,124) (1,193,283) (3,316,245) (4,918,652) (592,119) (573,139)
------------- ------------ ------------ ------------- ----------- -----------
Cash flows from investing activities:
Expenditures for property and
equipment......................... (8,903) (46,653) (381,261) (436,817) (37,385) (467,661)
Expenditures for network
construction in progress.......... -- -- (1,739,782) (1,739,782) -- (2,327,048)
Restricted cash..................... -- -- (760,211) (760,211) -- 471,475
------------- ------------ ------------ ------------- ----------- -----------
Net cash used in investing
activities.................. (8,903) (46,653) (2,881,254) (2,936,810) (37,385) (2,323,234)
------------- ------------ ------------ ------------- ----------- -----------
Cash flows from financing activities:
Issuance of voting and non-voting
common stock...................... 1,000 -- -- 1,000 -- --
Proceeds from sale of Series A
preferred stock................... 500,000 500,000 -- 1,000,000 -- --
Proceeds from sale of Series B
preferred stock................... -- 2,000,000 2,000,000 4,000,000 -- --
Proceeds from sale of Series B
preferred stock representing the
conversion of committed but
undrawn portion of bridge loan to
Series B preferred stock.......... -- 300,000 -- 300,000 -- --
Proceeds from sale of Series C
preferred stock................... -- -- 10,000,054 10,000,054 -- --
Exercise of stock option............ -- -- -- -- -- 81
Issuance costs...................... -- (25,000) (38,780) (63,780) -- --
Financing costs..................... -- -- (250,428) (250,428) -- (87,482)
Proceeds from bridge loan........... -- 700,000 -- 700,000 -- --
Repayment of stock subscription
receivable........................ -- -- -- -- -- 9,000
------------- ------------ ------------ ------------- ----------- -----------
Net cash provided by (used in)
financing activities........ 501,000 3,475,000 11,710,846 15,686,846 -- (78,401)
------------- ------------ ------------ ------------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents...................... 82,973 2,235,064 5,513,347 7,831,384 (629,504) (2,974,774)
Cash and cash equivalents at the
beginning of period................... -- 82,973 2,318,037 -- 2,318,037 7,831,384
------------- ------------ ------------ ------------- ----------- -----------
Cash and cash equivalents at the end
of period............................. $ 82,973 $2,318,037 $7,831,384 $ 7,831,384 $1,688,533 $4,856,610
------------- ------------ ------------ ------------- ----------- -----------
------------- ------------ ------------ ------------- ----------- -----------
Supplemental disclosure:
Noncash transactions:
Conversion of bridge loan plus
accrued interest to Series B
preferred stock................. $ -- $ 733,367 $ -- $ 733,367 $ -- $ --
------------- ------------ ------------ ------------- ----------- -----------
------------- ------------ ------------ ------------- ----------- -----------
Conversion of non-voting common
stock to voting common stock.... $ -- $ 25,000 $ -- $ 25,000 $ -- $ --
------------- ------------ ------------ ------------- ----------- -----------
------------- ------------ ------------ ------------- ----------- -----------
Issuance of voting and non-voting
common stock.................... 9,000 $ -- $ -- $ 9,000 $ -- $ --
------------- ------------ ------------ ------------- ----------- -----------
------------- ------------ ------------ ------------- ----------- -----------
Acquisition of network equipment
included in accounts payable.... $ -- $ -- $5,092,013 $ 5,092,013 $ -- $ --
------------- ------------ ------------ ------------- ----------- -----------
------------- ------------ ------------ ------------- ----------- -----------

FOR THE
PERIOD
AUGUST 25,
1995
(DATE OF
INCEPTION) TO
MARCH 31,
1998
(UNAUDITED)
-------------

Cash from operating activities:
Net loss............................ $(8,832,702)
Adjustment to reconcile net loss to
net cash used in operating
activities:
Depreciation expense.............. 93,241
Loss on disposal of asset......... 5,500
Write-off of deferred financing
costs........................... 337,910
Interest expense for beneficial
conversion feature of bridge
loan............................ 381,990
Accrued interest satisfied by
conversion of bridge loan to
Series B preferred stock........ 33,367
Changes in assets and liabilities:
Prepaid expenses and other
current assets................ (156,716)
Deferred revenue................ 200,000
Accounts payable................ 2,188,285
Accrued expenses................ 257,334
-------------
Net cash used in operating
activities.................. (5,491,791)
-------------
Cash flows from investing activities:
Expenditures for property and
equipment......................... (904,478)
Expenditures for network
construction in progress.......... (4,066,830)
Restricted cash..................... (288,736)
-------------
Net cash used in investing
activities.................. (5,260,044)
-------------
Cash flows from financing activities:
Issuance of voting and non-voting
common stock...................... 1,000
Proceeds from sale of Series A
preferred stock................... 1,000,000
Proceeds from sale of Series B
preferred stock................... 4,000,000
Proceeds from sale of Series B
preferred stock representing the
conversion of committed but
undrawn portion of bridge loan to
Series B preferred stock.......... 300,000
Proceeds from sale of Series C
preferred stock................... 10,000,054
Exercise of stock option............ 81
Issuance costs...................... (63,780)
Financing costs..................... (337,910)
Proceeds from bridge loan........... 700,000
Repayment of stock subscription
receivable........................ 9,000
-------------
Net cash provided by (used in)
financing activities........ 15,608,445
-------------
Net increase (decrease) in cash and
cash equivalents...................... 4,856,610
Cash and cash equivalents at the
beginning of period................... --
-------------
Cash and cash equivalents at the end
of period............................. $ 4,856,610
-------------
-------------
Supplemental disclosure:
Noncash transactions:
Conversion of bridge loan plus
accrued interest to Series B
preferred stock................. $ 733,367
-------------
-------------
Conversion of non-voting common
stock to voting common stock.... $ 25,000
-------------
-------------
Issuance of voting and non-voting
common stock.................... $ 9,000
-------------
-------------
Acquisition of network equipment
included in accounts payable.... $ 5,092,013
-------------
-------------

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

F-6

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS

1. BUSINESS AND FINANCING

Pathnet, Inc. (the Company) was incorporated in the State of Delaware on
August 25, 1995. On August 28, 1995, Path Tel, Inc. (Path Tel), a shell company
with no operations, was merged with and into the Company, with the Company being
the surviving corporation. The sole owner of Path Tel was the founder (Founder)
of the Company. The business of the Company is to aggregate and build a digital
microwave network through strategic alliances with enterprises operating private
microwave networks (Incumbents) not currently connected to the public switched
telephone network.

The Company plans to deploy its digital network by upgrading, integrating
and leveraging existing telecommunications assets, sites and rights of way,
including those utilized by railroads, utilities, state and local governments
and pipelines. By integrating the existing networks of Incumbents, the Company
expects to obtain the equivalent of a nationwide spectrum license at minimal
licensing costs. In return for providing equipment, designing systems and
managing the construction of Incumbent networks, the Company will receive the
exclusive contractual right to market excess capacity created and aggregated on
Incumbent networks. The revenue generated from this activity may be shared with
the Incumbents.

The Company has in place several contracts requiring it to upgrade existing
telecommunication systems. In addition, the Company is currently in the process
of negotiating with several national long distance carriers who will likely be
purchasers of the excess capacity created. Management believes the first network
upgrade has been completed and capacity is available for commercial sale.
However, the outcome is uncertain and depends on a variety of factors, some of
which are beyond the Company's control. The Company is dependent upon the
network upgrades to achieve its objective. Management's plans to fund operations
and the transitioning services will potentially include public and private
sources and strategic corporate alliances.

The Company has incurred an accumulated deficit of $6,147,861 for the period
August 25, 1995 (date of inception) to December 31, 1997. Management believes
that as of December 31, 1997, the Company has received funding from the
preferred stock offerings consummated during 1997 (Note 3) to fund operations
through the first quarter of 1999. The Company will need to achieve positive
operational cash flow or complete additional equity or debt financings to fund
operations beyond the first quarter of 1999.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF ACCOUNTING

The Company's activities to date principally have been securing contractual
alliances with Incumbents, designing and constructing network segments,
obtaining capital and planning its proposed service. Accordingly, the Company's
financial statements are presented as a development stage enterprise, as
prescribed by Statement of Financial Accounting Standards No. 7, "Accounting and
Reporting by Development Stage Enterprises." As a development stage enterprise,
the Company has been relying on the issuance of preferred stock rather than
recurring revenues, for its primary sources of cash since inception.

CONSOLIDATION

The consolidated financial statements include the accounts of Pathnet, Inc.
and its wholly-owned subsidiary, Pathnet Finance I, LLC. All material
intercompany accounts and transactions have been eliminated in consolidation.

F-7

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED INTERIM FINANCIAL STATEMENTS

The unaudited consolidated balance sheet as of March 31, 1998, the unaudited
consolidated statements of operations, changes in stockholders' equity and cash
flows for the three months ended March 31, 1997 and 1998 and the unaudited
consolidated statements of operations and cash flows for the period August 25,
1995 (date of inception) through March 31, 1998, have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (consisting of only
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1998 are
not necessarily indicative of results that may be expected for the year ending
December 31, 1998.

LOSS PER SHARE

The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128), effective December 31, 1997. Basic earnings
(loss) per share is computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding. Diluted earnings (loss)
per share is computed by dividing net income (loss) by the weighted average
common and potentially dilutive common equivalent shares outstanding determined
in the following table. The computation of diluted loss per share was
antidilutive in each of the years presented; therefore, basic and diluted loss
per share are the same.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company believes that the carrying amount of certain of its financial
instruments, which include cash equivalents and accounts payable, approximate
fair value due to the relatively short maturity of these instruments.

USE OF ESTIMATES

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. The estimates involve judgments with
respect to, among other things, various future factors which are difficult to
predict and are beyond the control of the Company. Therefore, actual amounts
could differ from these estimates.

CASH EQUIVALENTS

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

CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents and
restricted cash. The Company has invested its excess cash in a money market

F-8

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
fund with a commercial bank. The money market fund is collateralized by the
underlying assets of the fund. The Company's restricted cash is maintained in an
escrow account (see Note 4) at a major bank. The Company has not experienced any
losses on its cash and cash equivalents and restricted cash.

PROPERTY AND EQUIPMENT

Property and equipment, consisting of office and computer equipment,
furniture and fixtures, leasehold improvements and network construction costs,
is stated at cost. Depreciation of the office and computer equipment and
furniture and fixtures is computed using the straight-line method, generally
over three to five years, based upon estimated useful lives, commencing when the
assets are available for service. Leasehold improvements are amortized over the
lesser of the useful lives of the assets or the lease term. Expenditures for
maintenance and repairs are expensed as incurred. Network construction costs
incurred during development are capitalized. Depreciation of the network
construction costs begins when the network equipment is ready for its intended
use and will be amortized over its estimated useful life. When assets are
retired or disposed, the cost and the related accumulated depreciation are
removed from the accounts, and any resulting gain or loss is recognized in
operations for the period.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company periodically evaluates the recoverability of its long-lived
assets. This evaluation consists of a comparison of the carrying value of the
assets with the assets' expected future cash flows, undiscounted and without
interest costs. Estimates of expected future cash flows represent management's
best estimate based on reasonable and supportable assumptions and projections.
If the expected future cash flow, undiscounted and without interest charges,
exceeds the carrying value of the asset, no impairment is recognized. Impairment
losses are measured as the difference between the carrying value of long-lived
assets and their fair value. No impairment losses were recognized during the
period August 25, 1995 (date of inception) to December 31, 1995 and the years
ended December 31, 1996 and 1997.

DEFERRED INCOME TAXES

Deferred income taxes are recognized for tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end, based on enacted laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
net deferred tax assets to the amount expected to be realized. The provision for
income taxes consists of the Company's current provision for federal and state
income taxes and the change in the Company's net deferred tax assets and
liabilities during the period.

STOCK-BASED COMPENSATION

The Statement of Financial Accounting Standards No. 123, (SFAS 123),
"Accounting for Stock-Based Compensation," allows companies to account for
employee stock-based compensation either under the provisions of SFAS 123 or
under the provisions of Accounting Principles Board Opinion No. 25, (APB 25),
"Accounting for Stock Issued to Employees", but requires pro forma disclosure in
the footnotes to the financial statements as if the measurement provisions of
SFAS 123 had been adopted. The Company has continued to account for its stock
based compensation in accordance with the provisions of APB 25.

F-9

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE

The Company earns revenue for project management and consulting services.
The Company defers revenue when contractual payments are received in advance of
the performance of services. Revenue is recognized over the related project
period as milestones are achieved. All of the Company's revenue to date has been
earned from four customers.

DEFERRED FINANCING COSTS

The Company has incurred costs related to obtaining future debt financing
arrangements. When the financing is obtained, the costs will be amortized over
the term of the financing arrangement. If the financing is not obtained, the
costs will be expensed.

RECENTLY ISSUED ACCOUNTING STANDARDS

NEW ACCOUNTING STANDARDS

The Financial Accounting Standards Board has issued two new standards that
became effective for reporting periods beginning after December 15, 1997,
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130), and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). Effective March 31, 1998, the Company adopted SFAS 130 and SFAS 131. The
adoption of these standards has no material affect on the Company's consolidated
financial statements.

3. PROPERTY AND EQUIPMENT

Property and equipment, stated at cost, is comprised of the following at
December 31, 1996 and 1997:

DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------

Network construction in progress................................. $ -- $6,831,795
Office and computer equipment.................................... 31,006 248,880
Furniture and fixtures........................................... 24,550 120,093
Leasehold improvements........................................... -- 62,344
------------ ------------
55,556 7,263,112
Less accumulated depreciation.................................... (9,376) (56,018)
------------ ------------
Property and equipment, net...................................... $ 46,180 $7,207,094
------------ ------------
------------ ------------

Network construction costs include all direct material and labor costs
necessary to construct components of a high capacity digital microwave network
which is owned and maintained by the Company. Network construction in progress
includes approximately $5,100,000 of telecommunications equipment obtained from
NEC Industries, Inc. (NEC). As the Company has not yet paid for this equipment,
a corresponding amount is included in accounts payable at December 31, 1997.

F-10

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. RESTRICTED CASH

On June 3, 1997, the Company signed the Agreement to Create and Manage a
High Capacity Telecommunications System (the Agreement) with Texaco Pipeline,
Inc. (Texaco). To assure performance of the installation services to be provided
by the Company under the Agreement, Texaco and the Company entered into an
Escrow Agreement which required the Company to make an initial cash deposit of
$750,000 with a financial institution. Interest earned on these funds remains in
the escrow. Upon providing documentation to Texaco showing expenses related to
the installation, the Company obtains approval from Texaco to draw down a
corresponding amount from the escrow balance to fund the network construction in
progress. This balance is wholly restricted and may not be used for any other
purpose.

5. CAPITAL STOCK TRANSACTIONS

COMMON STOCK

The initial capitalization of the Company on August 28, 1995 occurred
through the issuance of 2,500,000 shares of voting common stock and 2,500,000
shares of non-voting common stock. The shares of both the voting and non-voting
common stock are owned by the Founder of the Company. In February 1996, the
Founder returned 2,500,000 shares of non-voting common stock in exchange for
2,500,000 shares of voting common stock.

CONVERTIBLE PREFERRED STOCK

As part of its initial capitalization on August 25, 1995, the Company
initiated a private offering of 1,000,000 shares of Series A convertible
preferred stock for $1,000,000. Pursuant to the terms of the Investment and
Stockholders' Agreement, the offering closed in two phases of $500,000 each. As
of the signing of the Investment and Stockholders' Agreement, the Company
received $500,000, representing the first closing on this offering in 1995. In
addition, the offering provided for a convertible bridge loan in the amount of
$1,000,000. The bridge loan carries an interest rate of 12% per annum and is due
and payable in full on the earlier to occur of the anniversary date of the
bridge loan issuance or the closing date of the Company's next equity financing.
The bridge loan is convertible into Series B preferred stock at 73% of the price
of the preferred stock issued in an equity financing.

In February 1996, the Company issued 500,000 shares of Series A convertible
preferred stock to the original investors in exchange for $500,000, representing
the second closing of the Investment and Stockholders' Agreement. In August
1996, the Company drew $700,000 on a bridge loan with the original investors.

On December 23, 1996, the Company consummated a private offering of 609,756
shares of Series B convertible preferred stock for $2,000,000 less issuance
costs of $25,000. In addition, simultaneously, the $700,000 bridge loan plus
$33,367 of accrued interest was converted into 306,242 shares of Series B
convertible preferred stock. The Company recognized $271,107 of interest expense
to account for the beneficial conversion feature of the bridge loan. In
addition, $300,000 representing the committed but undrawn portion of the bridge
loan, was paid to the Company for the sale of 125,292 shares of Series B
convertible preferred stock at a discounted rate. The Company recognized
$110,883 of interest expense to account for the beneficial conversion feature of
the committed but undrawn bridge loan. On June 18, 1997, the Company received an
additional $2,000,000 in a second closing in exchange for 609,756 shares of
Series B convertible preferred stock. There were no issuance costs associated
with the second closing.

F-11

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. CAPITAL STOCK TRANSACTIONS (CONTINUED)
On October 31, 1997, the Company consummated a private offering of 939,850
shares of Series C convertible preferred stock for $10,000,054 less issuance
costs of $38,780. The Company will receive an additional $19,999,998 in a second
closing in exchange for 1,879,699 shares of Series C convertible preferred stock
upon the occurrence of all of the following: (1)(a) the Company has executed
definitive agreements, having terms and conditions which are approved by a
majority of the directors designated by the holders of the preferred stock, with
NEC or certain financial institutions, relating to credit facilities between the
Company, and NEC or such financial institutions, respectively or (b) the Company
closes a private offering of high yield debt, having terms and conditions which
are approved by a majority of the directors designated by the holders of the
preferred stock, (2) the Company has executed Fixed Point Microwave Services
Agreements or Agreements to Create and Manage a Telecommunications Network with
at least four Incumbents, (3) if neither the Company nor the Founder are then in
breach of any material terms of the Series A, Series B or Series C Investor and
Stockholder Agreements and (4) all conditions of purchase set forth in the
Series C convertible preferred stock Investors and Stockholders' Agreement have
been fulfilled. As of December 31, 1997, the Company had executed Fixed Point
Microwave Services Agreements or Agreements to Create and Manage a
Telecommunications Network with four Incumbents in satisfaction of item (2)
above. None of the other events have occurred.

Each share of Series A, Series B and Series C convertible preferred stock
entitles each holder to a number of votes per share equal to the number of
shares of Common Stock into which each share of Series A, Series B and Series C
convertible preferred stock is convertible.

The holders of the convertible preferred stock are entitled to receive
dividends in preference to and at the same rate as dividends are paid with
respect to the common stock. In the event of any liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, holders of each
share of Series A, Series B and Series C convertible preferred stock outstanding
are entitled to be paid before any payment shall be made to the holders of any
class of common stock or any stock ranking on liquidation junior to the
convertible preferred stock, an amount, in cash, equal to the original purchase
price paid by such holder plus any declared but unpaid dividends.

The liquidation preferences of the outstanding shares of Series A, Series B
and Series C convertible preferred stock are $1,000,000, $5,033,367, and
$10,000,054, respectively, as of December 31, 1997. In the event the assets of
the Company are insufficient to pay liquidation preference amounts, then all of
the assets available for distribution shall be distributed pro rata so that each
holder receives that portion of the assets available for distribution as the
number of shares of convertible preferred stock held by such holder bears to the
total number of shares of convertible preferred stock then outstanding.

Shares of the Series A, Series B, and Series C convertible preferred stock
may be converted at any time, at the option of the holder, into voting common
stock. The number of shares of voting common stock entitled upon conversion is
the quotient obtained by dividing the face value of the Series A, Series B and
Series C convertible preferred stock by the Applicable Conversion Rate, defined
as the Applicable Conversion Value of $0.20, $0.66 or $2.13 per share,
respectively.

Each share of convertible preferred stock shall automatically be converted
into the number of shares of voting common stock which such shares are
convertible upon application of the Applicable Conversion Rate immediately upon
the closing of a qualified underwritten public offering covering the offer and
sale of capital stock which is defined as: (i) the Company is valued on a
pre-money basis at greater than

F-12

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. CAPITAL STOCK TRANSACTIONS (CONTINUED)
$50,000,000, (ii) the gross proceeds received by the Company exceed $20,000,000,
and (iii) the Company uses a nationally recognized underwriter approved by
holders of a majority interest of the convertible preferred stock.

If the Company issues any additional shares of common stock of any class at
a price less than the Applicable Conversion Value, in effect for the Series A,
Series B or Series C convertible preferred stock immediately prior to such
issuance or sale, then the Applicable Conversion Value shall be adjusted
accordingly.

In the event a qualified public offering has not occurred prior to December
23, 2000, the holder of shares of Series A or Series B preferred stock can
require the Company to redeem the shares of Series A and Series B convertible
preferred stock. After receipt from any one holder of an election to have any
shares redeemed, the Company is required to send a notice to the Series A and
Series B preferred stockholders on December 24, 2000 of the redemption price. If
after sending the redemption notice to Series A and Series B preferred
stockholders, the Company receives requests for redemption on or prior to
January 11, 2001, from the holders of at least 67% of the Series A and Series B
convertible preferred stock taken together, the Company must redeem all shares
of Series A and Series B convertible preferred stock. Payment of the redemption
price is due on January 23, 2001, for a cash price equal to the original
purchase price paid by such holders for each share of Series A and Series B
convertible preferred stock as adjusted for any stock split, stock distribution
or stock dividends with respect to such shares. The successful completion of a
qualified public offering is not within the control of the Company. Therefore,
the Company does not present the Series A and Series B preferred stock as a
component of stockholders' equity.

In the event that a qualified public offering has not occurred prior to
November 3, 2001, the holder of shares of Series C preferred stock can require
the Company to redeem the shares of Series C convertible preferred stock. After
receipt from any one holder of an election to have any shares redeemed, the
Company is required to send a notice to the Series C preferred stockholders on
November 4, 2001 of the redemption price. If after sending the redemption notice
to Series C preferred stockholders, the Company receives requests for redemption
on or prior to November 21, 2001, from the holders of at least 67% of the Series
C convertible preferred stock, the Company must redeem all shares of Series C
convertible preferred stock. Payment of the redemption price is due on December
3, 2001 for a cash price equal to the original purchase price paid by such
holders for each share of Series C convertible preferred stock as adjusted for
any stock split, stock distribution or stock dividends with respect to such
shares. The successful completion of a qualified public offering is not within
the control of the Company. Therefore, the Company does not present the Series C
preferred stock as a component of stockholders' equity.

6. STOCK OPTIONS

On August 28, 1995, the Company adopted the 1995 Stock Option Plan (1995
Plan), under which incentive stock options and non-qualified stock options may
be granted to the Company's employees and certain other persons and entities in
accordance with law. The Compensation Committee, which administers the 1995
Plan, determines the number of options granted, the vesting period and the
exercise price. The 1995 Plan will terminate August 28, 2005 unless terminated
earlier by the Board of Directors.

F-13

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. STOCK OPTIONS (CONTINUED)
Options granted to date under the 1995 Plan generally vest over a three
period and expire either 30 days after termination of employment or 10 years
after date of grant. As of December 31, 1997, a total of 134,145 non-qualified
stock options and 731,710 incentive stock options were issued at an exercise
price of $0.02 per share, an amount estimated to equal or exceed the per share
fair value of the common stock at the time of any such grant.

On August 1, 1997, the Company adopted the 1997 Stock Incentive Plan (1997
Plan), under which incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock, performance awards and certain other
types of awards may be granted to the Company's employees and certain other
persons and entities in accordance with the law. To date, only non-qualified
stock options have been granted. The Compensation Committee, which administers
the 1997 Plan, determines the number of options granted, the vesting period and
the exercise price. The 1997 Plan will terminate July 31, 2007 unless terminated
earlier by the Board of Directors.

Options granted under the 1997 Plan generally vest over a three to seven
year period and expire after: (1) ten years after the date of grant, (2) two
years after the date of the participant's termination without cause, disability
or death, (3) three months after the date of the participant's resignation, (4)
the date of the participant's termination with cause or (5) the date of any
material breach of any confidentiality or non-competition covenant or agreement
entered into between the participant and the Company.

As of December 31, 1997, a total of 2,222,700 non-qualified options were
issued, 1,480,610 at $0.66 and 742,090 at $2.13. Management estimates that the
exercise price of the options issued in 1997 is greater than the estimated per
share value of the common stock. The options issued at $2.13 vest on October 31,
2004 provided, however (i) if the Company has met 80% of its revenue and
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) budget
for the calendar year ending December 31, 1998, which budget is approved by the
Board of Directors of the Company, 50% of the shares covered by the options
shall vest and become exercisable on January 1, 1999, (ii) if the Company has
met 80% of its revenue and EBITDA budget for the calendar year ending December
31, 1999, which budget is approved by the Board of Directors of the Company, the
remaining 50% of the shares covered by the options shall vest and become
exercisable on January 1, 2000, and (iii) in the event that the first 50% of the
shares covered by the options did not vest on January 1, 1999 as set forth in
(i) above and the Company not only meets 80% of its revenue and EBITDA budget
for the year ending December 31, 1999 but exceeds 80% of its revenue and EBITDA
budget for the year ending December 31, 1999, which budget is approved by the
Board of Directors of the Company, in an amount at least equal to the deficiency
that occurred in the year ending December 31, 1998, 100% of the shares covered
by the options shall vest and become exercisable on January 1, 2000.

The options issued at $0.66 vest over three consecutive years subject to
certain acceleration provisions set forth in an employment agreement. Under
certain circumstances, upon the election of the employee upon termination of
employment, the Company will be required to pay the employee the fair value of
the vested options held on the date of such termination.

F-14

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. STOCK OPTIONS (CONTINUED)
Stock option activity for the period from the August 25, 1995 (date of
inception) to December 31, 1997 was as follows:

1995 PLAN 1997 PLAN
------------------------------- -------------------------
NON- NON- WEIGHTED
INCENTIVE QUALIFIED QUALIFIED AVERAGE
STOCK STOCK STOCK EXERCISE
OPTIONS OPTIONS PRICE OPTIONS PRICE PRICE
--------- --------- --------- ---------- ------------- -----------

Options outstanding, August 25, 1995......... -- -- -- -- -- --
Granted...................................... 707,320 121,950 $ 0.02 -- -- $ 0.02
Exercised.................................... -- -- -- -- -- --
Canceled..................................... -- -- -- -- -- --
--------- --------- ----------
Options outstanding, December 31, 1995....... 707,320 121,950 $ 0.02 -- -- $ 0.02
Granted...................................... 24,390 12,195 $ 0.02 -- -- $ 0.02
Exercised.................................... -- -- -- -- -- --
Canceled..................................... -- -- -- -- -- --
--------- --------- ----------
Options outstanding, December 31, 1996....... 731,710 134,145 $ 0.02 -- -- $ 0.02
Granted...................................... -- -- -- 2,222,700 $ 0.66-$2.13 $ 1.15
Exercised.................................... -- -- -- -- -- --
Canceled..................................... -- -- -- -- -- --
--------- --------- ----------
Options outstanding, December 31, 1997....... 731,710 134,145 $ 0.02 2,222,700 $ 0.66-$2.13 $ 0.87
--------- --------- ----------
--------- --------- ----------

At December 31, 1995, 1996 and 1997, 0, 560,975 and 707,315 options,
respectively, were exercisable. The weighted-average fair value of options
granted during the years ended December 3, 1995, 1996 and 1997, was $0.004,
$0.006 and $0.00, respectively.

The Company accounts for the fair value of its grants in accordance with APB
25. No compensation cost has been recognized for the stock options as all
options have been granted at the estimated per share fair value of the stock to
employees or directors of the Company. Had compensation cost for the Company's
stock option plan been determined based on the fair value at the grant date for
awards under the plan consistent with the method of SFAS 123, the Company's net
loss would have been increased to the pro forma amounts indicated below:

1995 1996 1997
------------ ------------ ------------

Net loss as reported................................ $ 426,826 $ 1,743,635 $ 3,977,400
Pro forma net loss.................................. $ 427,793 $ 1,747,570 $ 3,978,164
Basic and diluted net loss per share as reported.... $ (0.09) $ (0.35) $ (0.80)
Pro forma basic and diluted net loss per share...... $ (0.09) $ (0.35) $ (0.80)

The fair value of each option is estimated on the date of grant using a type
of Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the year ended

F-15

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. STOCK OPTIONS (CONTINUED)
December 31, 1995, 1996 and 1997, respectively: dividend yield of 0%, expected
volatility of 0%, risk-free interest rate of 6.0190, 6.35% and 6.55% and
expected terms of 4.6, 5.8 and 5.0 years.

As of December 31, 1997, the weighted average remaining contractual life of
the options is 9.21 years.

As of December 31, 1997 and 1996, the pro forma tax effects would include an
increase to the deferred tax asset and the valuation allowance of $298 and
$1,535, respectively; therefore, there is no pro forma tax effect related to
SFAS 123.

7. COMMITMENTS AND CONTINGENCIES

The Company maintains office space in Washington, D.C., Kansas and Texas.
The most significant lease relates to the Company's headquarters facility in
Washington, D.C. The partnership leasing the space in Washington, D.C. is
controlled by the Founder of the Company. The lease expires on August 31, 1998,
and is renewable by the Company for two additional years. Rent paid to this
related party during the year ended December 31, 1997, was approximately
$60,980. The Company has no amounts due to the related party as of December 31,
1997.

The Company's future minimum rental payments under noncancellable operating
leases are as follows: $215,222 in 1998, $79,491 in 1999, $58,155 in 2000, and
$1,354 in 2001. Rent expense for the years ended December 31, 1997 and 1996, was
$114,673 and $4,399, respectively.

In exchange for a non-compete agreement, the Company will pay an employee a
severance payment of $275,000 if such employee's employment with the Company is
terminated.

8. INCOME TAXES

The tax effect of temporary differences that give rise to significant
portions of the deferred tax asset at December 31, 1996 and 1997, is as follows:

DECEMBER 31, DECEMBER 31,
1996 1997
------------- -------------

Deferred revenue................................................ $ -- $ 117,000
Capitalized start-up costs...................................... 661,000 1,271,227
Capitalized research and development costs...................... -- 79,333
Net operating loss carryforward................................. 14,000 754,458
------------- -------------
675,000 2,222,018
Less valuation allowance.................................. (675,000) (2,222,018)
------------- -------------
Net deferred tax asset.......................................... $ -- $ --
------------- -------------
------------- -------------

Capitalized costs represent expenses incurred in the organization and
start-up of the Company. For federal income tax purposes, these costs will be
amortized over sixty months once business operations commence.

F-16

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. SUBSEQUENT EVENTS

Subsequent to December 31, 1997, the Company determined that certain
financing agreements being pursued may not be obtained resulting in the
immediate expensing of deferred financing costs recorded as an asset as of
December 31, 1997.

On April 8, 1998, the Company completed the issuance and sale of 350,000
units, each consisting of a $1,000 principal amount of 12 1/4% Senior Notes due
2008 (the "Notes") and a warrant to purchase 5.5 shares of common stock or
1,925,000 shares in total (the "Warrants") at an exercise price of $0.01 per
share for total gross proceeds of $350,000,000. Issuance costs of approximately
$11,200,000 have been paid. Approximately $345,900,000 of the proceeds have been
allocated to the Notes and approximately $4,100,000 have been allocated to the
Warrants based upon estimated fair values. Interest on the Notes will accrue at
an annual rate of 12 1/4% payable semiannually, in arrears, beginning October
15, 1998, with principal due in full on April 15, 2008. The Company used
$81,128,751 of proceeds to purchase U.S. Government debt securities which are
pledged as collateral for repayment of all interest through April 15, 2000 with
the balance deposited in cash accounts. The Notes are redeemable, in whole or
part, at any time on or after April 15, 2003 at the option of the Company, at
the following redemption prices (i) April 15, 2003; 106% of the principal
amount, (ii) April 15, 2004; 104% of the principal amount, (iii) April 15, 2005;
102% of the principal amount and (iv) April 15, 2006; 100% of the principal
amount. In addition, upon a change in control, as defined, each holder of the
Notes may require the Company to repurchase all or a portion of such holder's
Notes at a purchase price of cash equal to 101% of the principal amount.

The Notes contain numerous covenants which restrict the activities of
including limitations of debt, restricted payments, issuances and sales of
capital stock, affiliate transactions, liens, guarantees, sale of assets and
dividends.

The Warrants expire on April 15, 2008 and are not separately transferrable
until the earlier of (i) October 15, 1998, (ii) a registered exchange offer for
the Notes, (iii) the occurrence of an exercise event as defined, (iv) an event
of default as defined, and (v) a date determined by the lead initial purchaser.

On April 8, 1998, the Company completed the sale of 1,879,699 shares of
Series C convertible preferred stock for an aggregate purchase price of
approximately $20,000,000. There were no issuance costs associated with the
sale.

The Company intends to file a Registration Statement with the Securities and
Exchange Commission for an initial public offering (the Offering). On May 4,
1998, the Company's Board of Directors approved a 5-for-1 stock split, subject
to shareholder approval. The stock split will occur upon the effective date of
the aforementioned Registration Statement. All share and per share information
in this report has been changed to give effect to this stock split.

F-17

GLOSSARY

access charges................ The fees paid by long distances carriers for LECs for
originating and terminating long distance calls on the LECs'
local networks.

access tandem................. An interconnection point on an ILEC local network where
calls from central offices are aggregated for transmission
to other central offices and IXC facilities.

Andrew........................ Andrew Corporation.

AT&T.......................... AT&T Corporation.

ATC........................... American Tower Company.

ATM (Asynchronous Transfer
Mode)....................... An information transfer standard that is one of a general
class of packet technologies that relay traffic by way of an
address contained within the first five bytes of a standard
fifty-three-byte-long packet or cell. The ATM format can be
used by many different information systems, including area
networks, to deliver traffic at varying rates, permitting a
mix of voice data and video (multimedia).

bandwidth..................... The width of a communications channel.

Bellcore...................... Bell Communications Research.

bit error rate................ The number of received bits in error compared to the total
number of bits received.

CAD/CAM....................... Software for computer aided design and computer aided
manufacturing.

carrier....................... A provider of communications transmission services.

central office................ The switching center or central switching facility of an
ILEC.

CLEC (Competitive Local
Exchange Carrier)........... A company that competes with ILECs in local services
markets.

digital....................... Describes a method of storing, processing and transmitting
information through the use of distinct electronic or
optical pulses that represent the binary digits 0 and 1.
Digital transmission/ switching technologies employ a
sequence of discrete, distinct pulses to represent
information, as opposed to the continuously variable analog
signal.

DS-0, DS-1, DS-3.............. Standard North American telecommunication industry digital
signal formats, which are distinguishable by bit rate (the
number of binary digits (0 and 1) transmitted per second).
DS-0 service has a bit rate of 64 kilobits per second. DS-1
service has a bit rate of 1.544 megabits per second and DS-3
service has a bit rate of 44.736 megabits per second. A DS-0
can transmit a single uncompressed voice conversation.

DS-0 circuit mile............. Industry measurement of bandwidth capacity. The measurement
equals the product of route miles and the number of DS-0s.

A-1

extranet...................... The private networks of information service providers which
operate on the same principles and make use of the same
network technologies as the Internet, but are not part of
the Internet.

FAA........................... Federal Aviation Administration.

FCC........................... Federal Communication Commission.

ILEC (Incumbent Local Exchange
Carrier).................... The incumbent carrier providing local exchange services,
typically an RBOC created by the divestiture of AT&T.

Incumbents.................... Railroads, utilities, state and local governments and
pipelines who own existing telecommunications assets.

Initial System................ The initial system with a 1 x 1 configuration which is
comprised of non-protect radio and protect radio and all
radio components, antennae, waveguides, multiplexers,
software and other equipment and parts necessary for the
operation thereof.

interconnect.................. Connection of a telecommunications device or services to the
public switched telephone network ("PSTN").

interconnection............... Connection of a telecommunications device or services to the
public switched telephone network.

ISP (Internet Service
Provider)................... A company that provides businesses and consumers with access
to the Internet.

IXC........................... Inter Exchange Carrier.

LATAs (Local Access and
Transport Areas)............ The approximately 160 geographic areas that define the areas
between which the RBOCs currently are prohibited from
providing long distance services.

LEC (local exchange
carrier).................... A company providing local switched services, including ILECs
and CLECs.

long-haul circuit............. A dedicated telecommunications circuit generally between
locations in different LATAs.

MCI........................... MCI Communications, Inc.

NEA........................... New Enterprises Associates.

NEC........................... NEC Corporation together with its affiliates, including NEC
America, Inc. and NEC Industries, Inc.

NIPSCO........................ Northern Indiana Public Service Company.

NOC........................... Network Operations Center.

OC-24, OC-48.................. OC, or Optical Carrier, is a measure of a SONET transmission
optical carrier level. The number following the OC
designation is equal to the corresponding number of DS-3s
(e.g., OC-48 is equal to 48 DS-3s).

Part 101...................... Part 101 of the FCC's Rules.

path.......................... The physical spatial separation between point-to-point
towers.

A-2

POPs (Points of Presence)..... Locations where a Telecom Service Provider has installed
transmission equipment in a service area that serves as, or
relays calls to, a network switching center of that long
distance carrier.

PSTN.......................... Public switched telephone network.

Qwest......................... Qwest Communications International Inc.

RBOCs (Regional Bell Operating
Companies).................. The five remaining local telephone companies (formerly part
of AT&T) established as a result of the AT&T Divestiture
Decree.

reseller...................... A carrier that does not own transmission facilities, but
obtains communications services from another carrier for
resale to the public.

RF............................ Radio frequency.

route miles................... The number of miles of the telecommunications path along
which a transmission is directed as it would appear on a
network map.

SONET (Synchronous Optical
Network Technology)......... An electronics and network architecture for
variable-bandwidth products which enables transmission of
voice, data and video (multimedia) at very high speeds.

Sprint........................ Sprint Corporation.

switch........................ A device that selects the paths or circuits to be used for
transmission of information and a connection. Switching is
the process of interconnecting circuits to form a
transmission path between users and it also captures
information for billing purposes.

Telecom Service Providers..... IXCs, LECs, ISPs, RBOCs, other carrier's carriers, cellular
operators and resellers.

WAN........................... Wide area network.

WorldCom...................... WorldCom, Inc.

WTO........................... World Trade Organization.

A-3

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

NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

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

TABLE OF CONTENTS

PAGE
-----

Prospectus Summary............................. 3
Risk Factors................................... 10
Use of Proceeds................................ 23
Dividend Policy................................ 23
Dilution....................................... 24
Capitalization................................. 25
Selected Financial Data........................ 27
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 28
Business....................................... 37
Management..................................... 55
Certain Relationships and Related
Transactions................................. 65
Security Ownership of Certain Beneficial Owners
and Management............................... 67
Description of Capital Stock................... 69
Description of Certain Indebtedness............ 73
Shares Available for Future Sale............... 74
Underwriting................................... 76
Legal Matters.................................. 78
Experts........................................ 78
Available Information.......................... 79
Forward-Looking Statements..................... 80
Index to Financial Statements.................. F-1
Glossary....................................... A-1

UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTION.

[LOGO]

COMMON STOCK

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

PROSPECTUS
------------

MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
BEAR, STEARNS & CO. INC.

, 1998

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

PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION DATED , 1998

P_R_O_S_P_E_C_T_U_S
SHARES

[LOGO]

COMMON STOCK
--------------------

All of the shares of Common Stock, par value $.01 per share (the "Common
Stock"), offered hereby are being sold by Pathnet, Inc. ("Pathnet" or the
"Company"). Of the shares of Common Stock offered hereby, shares are
being offered for sale initially outside the United States and Canada by the
International Managers (the "International Offering") and shares are being
offered for sale initially in a concurrent offering in the United States and
Canada by the U.S. Underwriters (the "U.S. Offering", and, together with the
International Offering, the "Offering"). The initial public offering price and
the underwriting discount per share will be identical for both the International
Offering and the U.S. Offering. See "Underwriting."

Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "PTNT".

At the Company 's request, the U.S. Underwriters have reserved up to
shares for sale at the initial public offering price to certain of the Company's
officers, directors and employees, members of their immediate families and other
individuals who are business associates of the Company (including certain
vendors and consultants). The number of shares available for sale to the general
public will be reduced to the extent these individuals purchase such reserved
shares. Any reserved shares not purchased will be offered by the U.S.
Underwriters to the general public on the same basis as the other shares offered
hereby.

SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
--------------------

PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)

Per Share....................................... $ $ $
Total........................................... $ $ $

(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the International Managers and the U.S. Underwriters
options to purchase up to an additional shares and shares of
Common Stock, respectively, in each case exercisable within 30 days after
the date hereof, solely to cover over-allotments, if any. If such options
are exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."

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

----------------------
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY DEAN WITTER
BEAR, STEARNS INTERNATIONAL LIMITED

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

The date of this Prospectus is , 1998.

CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS OF COMMON STOCK

The following is a general discussion of certain U.S. Federal income and
estate tax consequences of the ownership and disposition of Common Stock by a
"Non-United States Holder." A "Non-United States Holder" is a person or entity
that, for U.S. Federal income tax purposes, is (i) a non-resident alien
individual, (ii) a foreign corporation or partnership, or (iii) a non-resident
fiduciary of a foreign estate or trust.

This discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), and administrative interpretations as of the date hereof, all of
which may be changed either retroactively or prospectively. This discussion does
not address all aspects of U.S. Federal income and estate taxation that may be
relevant to Non-United States Holders in light of their particular circumstances
and does not address any tax consequences arising under the laws of any state,
local or foreign taxing jurisdiction.

PROSPECTIVE HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE
UNITED STATES FEDERAL, STATE, LOCAL AND NON-UNITED STATES INCOME AND OTHER TAX
CONSEQUENCES TO THEM OF HOLDING AND DISPOSING OF COMMON STOCK.

DIVIDENDS

Subject to the discussion below, dividends paid to a Non-United States
Holder of Common Stock generally will be subject to withholding tax at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty
unless the dividend is effectively connected with the conduct of a trade or
business within the United States, or, if an income tax treaty applies, is
attributable to a United States permanent establishment of the Non-United States
Holder and the Non-United States Holder provides the payor with proper
documentation (generally, Form 4224). In order to claim the benefit of an
applicable tax treaty rate, a Non-United States Holder may have to file with the
Company or its dividend paying agent an exemption or reduced treaty rate
certificate or letter in accordance with the terms of such treaty. Under United
States Treasury regulations currently in effect, for purposes of determining
whether tax is to be withheld at a 30% rate or at a reduced rate as specified by
an income tax treaty, the Company ordinarily will presume that dividends paid to
the address in a foreign country are paid to a resident of such country absent
knowledge that such presumption is not warranted (the "address rule"). However,
on October 6, 1997, the U.S. Treasury Department issued final regulations on
withholding of income tax payments to foreign persons, effective January 1,
2000, which will abolish the address rule for purposes of claiming a reduced
treaty rate. Effective January 1, 2000, a Non-United States Holder seeking a
reduced rate of withholding under an income tax treaty would generally be
required to provide to the Company a valid Internal Revenue Service Form W-8
certifying that such Non-United States Holder is entitled to benefits under an
income tax treaty. The final regulations also provide special rules for
determining whether, for purposes of assessing the applicability of an income
tax treaty, dividends paid to a Non-United States Holder that is an entity
should be treated as being paid to the entity itself or to the persons holding
an interest in that entity. A Non-United States Holder who is eligible for a
reduced withholding rate may obtain a refund of any excess amounts withheld by
filing an appropriate claim for a refund with the Internal Revenue Service.

In the case of dividends that are effectively connected with the Non-United
States Holder's conduct of a trade or business within the United States or, if
an income tax treaty applies, are attributable to a United States permanent
establishment of the Non-United States Holder, the Non-United States Holder will
generally be subject to regular U.S. income tax in the same manner as if the
Non-United States Holder were a United States resident. A Non-United States
corporation receiving effectively connected dividends also may be subject to an
additional "branch profits tax" which is imposed, under certain circumstances,
at a rate of 30% (or such lower rate as may be specified by an applicable
treaty) of the Non-United States corporation's "effectively connected earnings
and profits," subject to certain adjustments.

GAIN ON DISPOSITION OF COMMON STOCK

A Non-United States Holder generally will not be subject to U.S. Federal
income tax and respect to gain realized on a sale or other disposition of Common
Stock unless (i) the gain is effectively connected with a trade or business of
such Non-United States Holder in the U.S., (ii) in the case of certain Non-
United States Holders who are non-resident alien individuals and hold the Common
Stock as a capital asset, such individuals are present in the U.S. for 183 or
more days in the taxable year of the disposition and either (a) such individuals
have a "tax home" (as defined for United States Federal income tax purposes) in
the U.S., or (b) the gain is attributable to an office or other fixed place of
business maintained by such individuals in the U.S., (iii) the Non-United States
Holder is subject to tax, pursuant to the provisions of U.S. tax law applicable
to certain U.S. expatriates whose loss of U.S. citizenship had as one of its
principal purposes the avoidance of U.S. taxes, or (iv) the Company is or has
been a "United States real property holding corporation" within the meaning of
section 897(c)(2) of the Code and, assuming that the Common Stock is regularly
traded on an established securities market for tax purposes, the Non-United
States Holder held, directly or indirectly, at any time within the five-year
period preceding such disposition more than 5% of the outstanding Common Stock.
Based upon its current and anticipated assets, the Company believes that it is
not a United States real property holding corporation. However, since the
determination of United States real property holding corporation status in the
future will be based upon the composition of the assets of the Company from time
to time and there are uncertainties in the application of certain relevant
rules, there can be no assurance that the Company will not become a United
States real property holding corporation in the future.

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING

Under United States Treasury regulations, the Company must report annually
to the Internal Revenue Service and to each Non-United States Holder the amount
of dividends paid to such holder and any tax withheld with respect to such
dividends. These information reporting requirements apply even if withholding
was not required because the dividends were effectively connected with a trade
or business in the United States of the Non-United States Holder or withholding
was reduced or eliminated by an applicable income tax treaty. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-United States
Holder is a resident under the provisions of an applicable income tax treaty or
agreement.

United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting requirements)
generally will not apply to (i) dividends paid to Non-United States Holders that
are subject to the 30% withholding discussed above (or that are not so subject
because a tax treaty applies that reduces or eliminates such 30% withholding) or
(ii) under current law, dividends paid to a Non-United States Holder at an
address outside of the United States. However, under final United States
Treasury regulations, effective as of January 1, 2000, a Non-United States
Holder generally would be subject to backup withholding at a 31% rate, unless
certain certification procedures (or, in the case of payments made outside the
United States with respect to an offshore account, certain documentary evidence
procedures) are complied with, directly or through an intermediary.

Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of Common Stock
to beneficial owners that are not "exempt recipients" and that fail to provide
in the manner required certain identifying information.

The payment of the proceeds of the disposition of Common Stock to or through
the U.S. office of a broker is subject to information reporting unless the
disposing holder, under penalty of perjury, certifies its Non-United States
status or otherwise establishes an exemption. Generally, U.S. information
reporting and backup withholding will not apply to a payment of disposition
proceeds if the payment is made outside the U.S. through a Non-United States
office of a Non-United States broker. However, information

reporting requirements (but probably, prior to January 1, 2000, not backup
withholding) will apply to a payment of disposition proceeds outside the U.S. if
(A) the payment is made through an office outside the U.S. of a broker that is
either (i) a U.S. person, (ii) a foreign person which derives 50% or more of its
gross income for certain periods from the conduct of a trade or business in the
U.S., (iii) a "controlled foreign corporation" for U.S. Federal income tax
purposes, or (iv) effective January 1, 2000, but probably not prior to such
date, a foreign broker that is (1) a foreign partnership, one or more of whose
partners are U.S. persons who, in the aggregate hold more than 50% of the income
or capital interest in the partnership at any time during its tax year, or (2) a
foreign partnership engaged at any time during its tax year in the conduct of a
trade or business in the United States, and (B) the broker fails to maintain
documentary evidence that the holder is a Non-United States Holder and that
certain conditions are met, or that the holder otherwise is entitled to an
exemption.

Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withhold. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.

FEDERAL ESTATE TAX

An individual Non-United States Holder who is treated as the owner of or has
made certain lifetime transfers of an interest in the Common Stock will be
required to include the value thereof in his gross estate for U.S. Federal
estate tax purposes, and may be subject to U.S. Federal estate tax unless an
applicable estate tax treaty provides otherwise. Estates of non-resident aliens
are generally allowed a statutory credit which generally has the effect of
offsetting the U.S. Federal estate tax imposed on the first $60,000 of the
taxable estate.

THE FOREGOING DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS TAX ADVISOR WITH
RESPECT TO THE UNITED STATES FEDERAL INCOME TAX AND FEDERAL ESTATE TAX
CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF COMMON STOCK, INCLUDING THE
APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN, OR OTHER TAXING
JURISDICTION.

UNDERWRITING

Merrill Lynch International, Morgan Stanley & Co. International Limited and
Bear, Stearns International Limited are acting as lead managers (the "Lead
Managers") for each of the International Managers named below (the
"International Managers"). Subject to the terms and conditions set forth in an
international purchase agreement (the "International Purchase Agreement") among
the Company and the International Managers, and concurrently with the sale of
shares of Common Stock to the U.S. Underwriters (as defined below), the Company
has agreed to sell to the International Managers, and each of the International
Managers severally and not jointly has agreed to purchase from the Company, the
number of shares of Common stock set forth opposite its name below:

INTERNATIONAL MANAGER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------

Merrill Lynch International................................................
Morgan Stanley & Co. International Limited.................................
Bear, Stearns International Limited........................................
-------
Total..................................................................
-------
-------

The Company also entered into a U.S. purchase agreement (the "U.S. Purchase
Agreement") with certain underwriters in the United States and Canada (the "U.S.
Underwriters" and, together with the International Managers, the "Underwriters")
for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
are acting as representatives (the "U.S. Representatives"). Subject to the terms
and conditions set forth in the U.S. Purchase Agreement, and concurrently with
the sale of shares of Common Stock to the International Managers
pursuant to the International Purchase Agreement, the Company agreed to sell to
the U.S. Underwriters, and the U.S. Underwriters severally have agreed to
purchase from the Company, an aggregate of shares of Common Stock. The
initial public offering price per share and the total underwriting discount per
share of Common Stock are identical under the International Purchase Agreement
and the U.S. Purchase Agreement.

In the International Purchase Agreement and the U.S. Purchase Agreement, the
several International Managers and the several U.S. Underwriters, respectively,
have agreed, subject to the terms and conditions set forth therein, to purchase
all of the shares of Common Stock being sold pursuant to each such agreement, if
any, of the shares of Common Stock being sold pursuant to such agreement are
purchased. Under certain circumstances, under the International Purchase
Agreement and the U.S. Purchase Agreement, the commitments of non-defaulting
Underwriters may be increased. The closings with respect to the sale of shares
of Common Stock to be purchased by the International Managers and the U.S.
Underwriters are conditioned upon one another.

The Lead Managers have advised the Company that the International Managers
propose initially to offer the shares of Common Stock to the public at the
initial public offering price set forth on the cover page of this Prospectus,
and to certain dealers at such price less a concession not in excess of $
per share of Common Stock. The International Managers may allow, and such
dealers may reallow, a discount not in excess of $ per share of Common Stock
on sales to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.

The Company has granted options to the International Managers, exercisable
for 30 days after the date of this Prospectus, to purchase up to an aggregate of
additional shares of Common Stock at the initial public offering price set
forth on the cover page of this Prospectus, less the underwriting discount. The
International Managers may exercise these options solely to cover
over-allotments, if any, made on the sale of the Common Stock offered hereby. To
the extent that the International Managers exercise these options, each
International Manager will be obligated, subject to certain conditions, to
purchase a number of additional shares of Common Stock proportionated to such
International Managers' initial amount reflected in the foregoing table. The
Company also has granted options to the U.S. Underwriters exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of
additional shares of Common Stock to cover over-allotments, if any, on
terms similar to those granted to the International Managers.

At the Company's request, the Underwriters have reserved up to shares
for sale at the initial public offering price to certain of the Company's
directors, officers and employees, members of their immediate families and other
individuals who are business associates of the Company (including certain
vendors and consultants). The number of shares of Common Stock available for
sale to the general public will be reduced to the extent such persons purchase
such reserved shares. Any reserved shares which are not orally confirmed for
purchase within one day of the price of the Offerings will be offered by the
Underwriters to the general public on the same terms as the other shares offered
hereby.

The Company and the Company's executive officers and directors and the
Original Investors have agreed, subject to certain exceptions, not to directly
or indirectly (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, or otherwise dispose of or transfer any shares
of Common Stock or securities convertible into or exchangeable or exercisable
for Common Stock, whether now owned or thereafter acquired by the person
executing the agreement or with respect to which the person executing the
agreement thereafter acquires the power of disposition, or file a registration
statement under the Securities Act with respect to the foregoing or (ii) enter
into any swap or other agreement or any transaction that transfers, in whole or
in part, the economic consequence of ownership of the Common Stock whether any
such swap or transaction is to be settled by delivery of Common Stock or other
securities, in cash or otherwise, without the prior written consent of Merrill
Lynch on behalf of the Underwriters for a period of 180 days after the date of
this Prospectus. See "Shares Eligible for Future Sale."

The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
International Managers and the U.S. Underwriters are permitted to sell shares of
Common Stock to each other for purposes of resale at the initial public offering
price, less an amount not greater than the selling concession. Under the terms
of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom
they sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to persons who are non-U.S. or non-Canadian persons or to persons they
believe intend to resell to persons who are non-U.S. or non-Canadian persons,
and the International Managers and any dealer to whom they sell shares of Common
Stock will not offer to sell or sell shares of Common Stock to U.S. persons or
to Canadian persons or to persons they believe intend to resell to U.S. or
Canadian persons, except in the case of transactions pursuant to the
Intersyndicate Agreement.

Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined through negotiations
between the Company and the Lead Managers and the U.S. Representatives. The
factors considered in such negotiations are an assessment of the Company's
recent results of operations, future prospects of the Company and its industry
in general, market prices of securities of companies engaged in activities
similar to those of the Company and prevailing conditions in the securities
market. There can be no assurance that an active trading market will develop for
the Common Stock or that the Common Stock will trade in the public market
subsequent to the Offerings at or above the initial public offering price.

Application will be made for quotation of the Common Stock on the Nasdaq
National Market System, under the symbol "PTNT".

The Underwriters do not expect sales of the Common Stock to any accounts
over which they exercise discretionary authority to exceed 5% of the number of
shares being offered hereby.

The Company agreed to indemnify the International Managers and the U.S.
Underwriters against certain liabilities, including certain liabilities under
the Securities Act, or to contribute to payments the International Managers and
U.S. Underwriters may be required to make in respect thereof.

engage in certain transactions that stabilize the price of the Common Stock.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock.

Each International Manager has agreed that (i) it has not offered or sold
and, prior to the expiration of the period of six months from the Closing Date,
will not offer or sell any shares of Common Stock to persons in the United
Kingdom, except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which do not
constitute an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995; (ii) it has complied and will
comply with all applicable provisions of the Financial Services Act 1986 with
respect to anything done by it in relation to the Common Stock in, from or
otherwise involving the United Kingdom; and (iii) it has only issued or passed
on and will only issue or pass on in the United Kingdom any document received by
it in connection with the issuance of Common Stock to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements)(Exemptions) Order 1996 or is a person to whom such document may
otherwise lawfully be issued or passed on.

No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of Common
Stock, or the possession, circulation or distribution of this Prospectus or any
other material relating to the Company or shares of Common Stock in any
jurisdiction where action for that purpose is required. Accordingly, the shares
of Common Stock may not be offered or sold, directly or indirectly, and neither
this Prospectus nor any other offering material or advertisements in connection
with the shares of Common Stock may be distributed or published, in or from any
country or jurisdiction except in compliance with any applicable rules and
regulations of any such country or jurisdiction.

Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page hereof.

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

IN THE PROSPECTUS, REFERENCES TO "DOLLARS" AND "$" ARE TO UNITED STATES
DOLLARS.

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

TABLE OF CONTENTS

PAGE
-----

Prospectus Summary............................. 3
Risk Factors................................... 10
Use of Proceeds................................ 23
Dividend Policy................................ 23
Dilution....................................... 24
Capitalization................................. 25
Selected Financial Data........................ 27
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 28
Business....................................... 37
Management..................................... 55
Certain Relationships and Related
Transactions................................. 65
Security Ownership of Certain Beneficial Owners
and Management............................... 67
Description of Capital Stock................... 69
Description of Certain Indebtedness............ 73
Shares Eligible for Future Sale................ 74
Certain United States Federal Tax Consequences
to Non-United States Holders of Common
Stock........................................ 76
Underwriting...................................
Legal Matters..................................
Experts........................................
Available Information..........................
Forward-Looking Statements.....................
Index to Financial Statements.................. F-1
Glossary....................................... A-1

[LOGO]

COMMON STOCK

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

PROSPECTUS
-----------------

MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY DEAN WITTER
BEAR, STEARNS INTERNATIONAL LIMITED

, 1998

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

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the various expenses payable in connection
with the offering of the shares being registered hereby, other than underwriting
discounts and commissions. All the amounts shown are estimates, except the
Securities and Exchange Commission registration fee and the NASD filing fee. All
of such expenses are being borne by Pathnet, Inc. (the "Company").

SEC registration fee............................................... $ 29,500
NASD filing fee.................................................... 10,500
NASDAQ listing fee................................................. *
Accounting fees and expenses....................................... *
Legal fees and expenses............................................ *
Printing and engraving expenses.................................... *
Registrar and transfer agent's fees................................ *
Miscellaneous fees and expenses.................................... *
---------
Total.............................................................. $ *
---------
---------

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

* To be completed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL")
permits a provision in the certificate of incorporation of each corporation
organized thereunder, eliminating or limiting, with certain exceptions, the
personal liability of a director to the corporation or its stockholders for
monetary damages for certain breaches of fiduciary duty as a director. The
Amended and Restated Certificate of Incorporation of the Company (the "Restated
Certificate of Incorporation") eliminates the personal liability of directors to
the fullest extent permitted by Delaware law.

Section 145 of the DGCL ("Section 145"), in summary, empowers a Delaware
corporation, within certain limitations, to indemnify its officers, directors,
employees and agents against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement, actually and reasonably incurred by them
in connection with any suit or proceeding other than by or on behalf of the
corporation, if they acted in good faith and in a manner reasonably believed to
be in or not opposed to the best interest of the corporation, and, with respect
to a criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful.

With respect to actions by or on behalf of the corporation, Section 145
permits a corporation to indemnify its officers, directors, employees and agents
against expenses (including attorneys' fees) actually and reasonably incurred in
connection with the defense or settlement of such action or suit, provided such
person meets the standard of conduct described in the preceding paragraph,
except that no indemnification is permitted in respect of any claim where such
person has been found liable to the corporation, unless the Court of Chancery or
the court in which such action or suit was brought approves such indemnification
and determines that such person is fairly and reasonably entitled to be
indemnified.

The Restated Certificate of Incorporation and the Amended and Restated
Bylaws of the Company (the "Restated Bylaws"), provide for the indemnification
of officers and directors and certain other parties (the "Indemnitees") of the
Company to the fullest extent permitted by law.

The U.S. Purchase Agreement (the "U.S. Purchase Agreement") by and among the
Company, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley &
Co. Incorporated and Bear, Stearns &

II-1

Co. Inc. (collectively, the "U.S. Underwriters") will provide for
indemnification by the U.S. Underwriters of the Company, its directors and
officers, and persons who control the Company within the meaning of Section 15
of the Securities Act of 1933 (the "Securities Act") for certain liabilities,
including liabilities under the Securities Act.

The International Purchase Agreement (the "International Purchase
Agreement") by and among the Company, certain underwriters outside the United
States and Canada (the "International Managers"), with Merrill Lynch
International, Morgan Stanley & Co. International Limited and Bear, Stearns
International Limited acting as lead managers (the "Lead Managers") will provide
for indemnification by the International Managers of the Company, its directors
and officers, and persons who control the Company within the meaning of Section
15 of the Securities Act for certain liabilities, including liabilities under
the Securities Act.

The Purchase Agreement by and among Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc., TD Securities and
Salomon Brothers Inc (together, the "Initial Purchasers") and the Company, dated
as of April 1, 1998 (the "Unit Purchase Agreement"), provides for
indemnification of the Company and persons who control the Company within the
meaning of Section 15 of the Securities Act or Section 20 of the Securities
Exchange Act of 1934 (the "Exchange Act") for certain liabilities, including
liabilities under the Securities Act.

The Notes Registration Rights Agreement by and among the Company and the
Initial Purchasers, dated as of April 8, 1998 (the "Notes Registration Rights
Agreement"), provides for indemnification of the Company, its directors and
officers, and persons who control the Company within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act for certain liabilities,
including liabilities under the Securities Act.

The Warrant Registration Rights Agreement by and among the Company, the
Initial Purchasers and certain other persons, dated as of April 8, 1998 (the
"Warrant Registration Rights Agreement"), provides for indemnification of the
Company, its directors and officers, and persons who control the Company within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act for certain liabilities, including liabilities under the Securities Act.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

In the last three years, the Company has issued a total of 1,000,000 shares
of Common Stock to David Schaeffer, and has issued and sold in private
offerings: (i) a total of 1,500,000 shares of Series A convertible preferred
stock for an aggregate purchase price of $1,500,000; (ii) a total of 1,651,046
shares of Series B convertible preferred stock for an aggregate purchase price
of $5,000,000; (iii) a total of 2,819,549 shares of Series C convertible
preferred stock for an aggregate purchase price of $50,000,000; and (iv) a total
of 350,000 units, consisting of $350,000,000 aggregate principal amount of
12 1/4% Senior Notes due 2008 and Warrants to purchase shares of Common Stock,
for an aggregate purchase price of $350,000,000 (which includes $10,500,000 of
Initial Purchasers' Discount). For further details of these transactions, see
"Certain Relationships and Related Transactions," "Description of Certain
Indebtedness--Senior Notes" and Note 5 to the Company's financial statements
included in the Prospectus included in this Registration Statement. Also in the
last three years, the Company has issued options to purchase an aggregate of
853,655 shares of Common Stock under the Pathnet, Inc. 1995 Stock Option Plan,
and options to purchase an aggregate of 3,404,875 shares of Common Stock (as of
May 4, 1998) under the Pathnet, Inc. 1997 Stock Incentive Plan, to certain of
its employees. For further details of these options, see "Management--1995 Stock
Option Plan," "Management--1997 Stock Incentive Plan" and Note 6 to the
Company's financial statements included in the Prospectus included in this
Registration Statement. All of these shares, units and options were issued in
reliance upon the exemption from registration contained in Section 4(2) of the
Securities Act.

II-2

In addition, in connection with the Offering, an aggregate of 27,352,975
shares of Common Stock will be issued to the holders of the Company's Series A,
Series B and Series C convertible preferred stock in connection with the
Preferred Stock Conversion. These securities will be issued in reliance upon the
exemption from registration contained in Section 3(a)(9) of the Securities Act.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS

EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------- -------------------------------------------------------------------------------------------------------

1.1(1) Form of U.S. Purchase Agreement among the Company, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Morgan Stanley & Co. Incorporated and Bear, Stearns & Co. Inc. (collectively, the
"U.S. Underwriters").
1.2(1) Form of International Purchase Agreement among the Company, certain underwriters outside the United
States and Canada (the "International Managers"), with Merrill Lynch & Co., Merrill Lynch
International, Morgan Stanley & Co. International Limited and Bear, Stearns International Limited
acting as lead managers (the "Lead Managers").
3.1(1) Form of Amended and Restated Certificate of Incorporation of the Company.
3.1(1) Form of Amended and Restated Bylaws of the Company.
4.1(1) Form of Common Stock Certificate.
5.1(1) Opinion of Paul, Weiss, Rifkind, Wharton & Garrison regarding legality of securities.
10.1(2) Fixed Point Microwave Services Agreement by and between the Company and Northern Border Pipeline
Company, dated October 17, 1997.
10.2(2) Fixed Point Microwave Services Agreement by and between the Company and Northern Indiana Public Service
Company, dated January 30, 1998.
10.3(2) Fixed Point Microwave Services Agreement by and between the Company and Northeast Missouri Electric
Power Cooperative, dated December 1, 1997.
10.4(2) Fixed Point Microwave Services Agreement by and between the Company and KN Energy, Inc., dated
September 8, 1997.
10.5(2) Fixed Point Microwave Services Agreement by and between the Company and Pathnet/Idaho Power Equipment,
LLC, dated April 17, 1998.
10.6(2) Agreement to Create and Manage a High Capacity Telecommunications System by and between the Company and
Texaco Pipeline, Inc., dated June 3, 1997.
10.7 Binding Term Sheet, by and between the Company and American Tower Corporation, dated February 17, 1998,
as amended by Amendment No. 1, dated February 25, 1998, and Amendment No. 2, dated April 8, 1998.
10.8 Maintenance Services Agreement by and between the Company and KN Energy, Inc., dated October 11, 1997.
10.9 Maintenance Services Agreement by and between the Company and Northern Indiana Public Service Company,
dated January 30, 1998.
10.10 Maintenance and Provisioning Services Agreement by and between the Company and Northern Border Pipeline
Company, dated April 29, 1998.
10.11 Master Agreement by and between the Company and NEC America, Inc., dated August 8, 1997, as amended by
Amendment No. 1, dated November 9, 1997 and Amendment No. 2, dated April 2, 1998.
10.12 Letter Agreement, by and between the Company and TCI Wireline, Inc., dated December 16, 1997.
10.13(3) Non-Qualified Stock Option Agreement by and between the Company and Richard A. Jalkut, dated August 4,
1997.

II-3

10.14(3) Non-Qualified Stock Option Agreement by and between the Company and David Schaeffer, dated October 31,
1997.
10.15 Employment Agreement by and between the Company and Richard A. Jalkut, dated August 4, 1997, as amended
by Amendment to Employment Agreement, dated April 6, 1998.
10.16(3) Non-Disclosure, Assignment of Inventions and Non-Competition Agreement by and between the Company and
Kevin Bennis, dated February 2, 1998.
10.17(3) Pathnet, Inc. 1995 Stock Option Plan.
10.18(3) Pathnet, Inc. 1997 Stock Incentive Plan, as amended by Amendment No. 1 to 1997 Stock Incentive Plan.
10.19 Indenture by and between the Company and The Bank of New York, as trustee, dated April 8, 1998.
10.20 Pledge Agreement by and among the Company, The Bank of New York, as trustee, and The Bank of New York,
as securities intermediary, dated April 8, 1998.
10.21 Notes Registration Rights Agreement by and among the Company and Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co., Inc., TD Securities (USA) Inc. and Salomon
Brothers Inc (collectively, the "Initial Purchasers"), dated April 8, 1998.
10.22 Warrant Agreement by and between the Company and The Bank of New York, as warrant agent, dated April 8,
1998.
10.23 Warrant Registration Rights Agreement by and among the Company, Spectrum Equity Investors, L.P., New
Enterprise Associates VI, Limited Partnership, Onset Enterprise Associates II, L.P., FBR Technology
Venture Partners, L.P., Toronto Dominion Capital (U.S.A.) Inc., Grotech Partners IV, L.P., Richard A.
Jalkut, David Schaeffer and the Initial Purchasers, dated April 8, 1998.
10.24(1) Amended and Restated Investment and Stockholders' Agreement by and among the Company and certain
stockholders of the Company set forth on the signature pages.
10.25 Purchase Agreement by and between Andrew Corporation and Path Tel, Inc., dated July 1, 1995, as amended
by Amendment One, dated September 16, 1996, and Amendment Two, dated July 1, 1997.
10.26 Lease Agreement, by and between 6715 Kenilworth Avenue General Partnership and the Company, dated
August 9, 1997, as amended by Amendment to Lease, dated March 5, 1998.
21.1 Subsidiaries of the Company.
23.1 Consent of Coopers and Lybrand, L.L.P.
23.2(1) Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1).
24.1 Power of Attorney (included on signature pages).
27.1 Financial Data Schedule

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

(1) To be filed by amendment.

(2) Certain portions of this exhibit have been omitted based on a request for
confidential treatment filed separately with the Securities and Exchange
Commission.

(3) Constitutes management contract or compensatory arrangement.

(B) FINANCIAL STATEMENT SCHEDULES

All schedules for which provision is made in the applicable accounting
regulations of the Commission are not required, are inapplicable or have been
disclosed in the notes to other financial statements and therefore have been
omitted.

II-4

ITEM 17. UNDERTAKINGS

The Company hereby undertakes to provide to the underwriters at the closing
specified in the underwriting agreements certificates in such denominations and
registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the Restated Certificate of Incorporation, the Restated Bylaws, the
U.S. Purchase Agreement, the International Purchase Agreement, the Unit Purchase
Agreement, the Notes Registration Rights Agreement and the Warrant Registration
Rights Agreement or otherwise, the Company has been advised that in the opinion
of the Securities and Exchange Commission 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 the Company of expenses incurred or paid by a director, officer
or controlling person of the Company 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, the Company will, unless in
the opinion of its 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.

The Company hereby undertakes that:

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

(2) 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.

II-5

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the District of Columbia on this
eighth day of May, 1998.

PATHNET, INC.

By: /s/ RICHARD A. JALKUT
-----------------------------------------
Richard A. Jalkut
CHIEF EXECUTIVE OFFICER

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David Schaeffer, Richard A. Jalkut and Michael A.
Lubin 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 (until revoked in writing), to sign
any and all amendments, including post-effective amendments to this Registration
Statement, and any registration statement relating to the same offering as this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) and the Securities Act of 1933, and to file the same, with 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, 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 his or their 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 dated indicated.

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

/s/ DAVID SCHAEFFER
- ------------------------------ Chairman of the Board and May 8, 1998
David Schaeffer Director

/s/ RICHARD A. JALKUT
- ------------------------------ Chief Executive Officer May 8, 1998
Richard A. Jalkut and Director

/s/ WILLIAM R. SMEDBERG, V Vice-President, Finance
- ------------------------------ (principal accounting May 8, 1998
William R. Smedberg, V and financial officer)

/s/ PETER J. BARRIS
- ------------------------------ Director May 8, 1998
Peter J. Barris

/s/ KEVIN J. MARONI
- ------------------------------ Director May 6, 1998
Kevin J. Maroni

II-6

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

/s/ PATRICK J. KERINS
- ------------------------------ Director May 8, 1998
Patrick J. Kerins

/s/ RICHARD K. PRINS
- ------------------------------ Director May 7, 1998
Richard K. Prins

/s/ STEPHEN A. REINSTADTLER
- ------------------------------ Director May 6, 1998
Stephen A. Reinstadtler

II-7