AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 27, 1998.

REGISTRATION NO. 333-52247
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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

AMENDMENT NO. 2 TO

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

Common Stock, par value $.01 per share 5,390,625 shares $17.00 $91,640,625 $27,034 (3)

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

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

(3) Previously paid.
------------------------

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 3,750,000
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 937,500 shares of Common Stock. The complete Prospectus for the
U.S. Offering follows immediately after this Explanatory Note. After such
Prospectus is the front cover page for the Prospectus for the International
Offering. 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 herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.

PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED JULY 27, 1998

4,687,500 SHARES

[LOGO]

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

ALL OF THE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE, OFFERED HEREBY ARE
BEING SOLD BY PATHNET, INC. OF THE 4,687,500 SHARES OF COMMON STOCK BEING
OFFERED, 3,750,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES
AND CANADA BY THE U.S. UNDERWRITERS AND 937,500 SHARES ARE BEING OFFERED
INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL
UNDERWRITERS. SEE "UNDERWRITERS." PRIOR TO THE OFFERING, THERE HAS
BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS
CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE PER
SHARE WILL BE BETWEEN $15.00 AND $17.00. SEE "UNDERWRITERS" FOR
A DISCUSSION OF THE FACTORS CONSIDERED IN DETERMINING THE
INITIAL PUBLIC OFFERING PRICE.

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

APPLICATION HAS BEEN MADE FOR QUOTATION OF THE SHARES ON THE NASDAQ NATIONAL
MARKET UNDER THE SYMBOL "PTNT."

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

SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR INFORMATION THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-----------------

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 $ A SHARE
-------------------

UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------------------- -------------------- --------------------

PER SHARE............................................ $ $ $
TOTAL(3)............................................. $ $ $

- ---------

(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. SEE "UNDERWRITERS."

(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $850,000.

(3) THE COMPANY HAS GRANTED THE U.S. UNDERWRITERS AN OPTION, EXERCISABLE
WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF
703,125 ADDITIONAL SHARES OF COMMON STOCK AT THE PRICE TO PUBLIC LESS
UNDERWRITING DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF COVERING
OVER-ALLOTMENTS, IF ANY. IF THE U.S. UNDERWRITERS EXERCISE SUCH OPTION IN
FULL, THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS
AND PROCEEDS TO COMPANY WILL BE $ , $ AND $ ,
RESPECTIVELY. SEE "UNDERWRITERS."

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

THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY SHEARMAN & STERLING, COUNSEL FOR THE UNDERWRITERS. IT IS EXPECTED THAT
DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT , 1998, AT THE
OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y., AGAINST PAYMENT
THEREOF IN IMMEDIATELY AVAILABLE FUNDS.

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

MORGAN STANLEY DEAN WITTER

BEAR, STEARNS & CO. INC.

LEHMAN BROTHERS

J. P. MORGAN & CO.

, 1998

[ARTWORK: MAP SHOWING THE COMPANY'S TARGETED NETWORK AND A PHOTOGRAPH OF THE
COMPANY'S NETWORK OPERATIONS CENTER]

NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.

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

For investors outside the United States: No action has been or will be taken
in any jurisdiction by the Company or any Underwriter that would permit a public
offering of the Common Stock or possession or distribution of this Prospectus in
any jurisdiction where action for that purpose is required, other than in the
United States. Persons into whose possession this Prospectus comes are required
by the Company and the Underwriters to inform themselves about, and to observe
any restrictions as to, the offering of the Common Stock and the distribution of
this Prospectus.

In this Prospectus, references to "dollar" and "$" are to United States
dollars.
------------------------

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 obligation of dealers to deliver a Prospectus
when acting as Underwriters and with respect to their unsold allotments or
subscriptions.
------------------------

TABLE OF CONTENTS

PAGE
-----

Prospectus Summary............................... 4
Risk Factors..................................... 9
Use of Proceeds.................................. 22
Dividend Policy.................................. 22
Dilution......................................... 23
Capitalization................................... 24
Selected Consolidated Financial Data............. 26
Management's Discussion and
Analysis of Financial Condition
and Results of Operations...................... 27
Business......................................... 36
Management....................................... 54
Certain Relationships and Related Transactions... 64
Security Ownership of Certain Beneficial Owners
and Management................................. 67

PAGE
-----

Description of Capital Stock..................... 69
Description of Certain Indebtedness.............. 73
Shares Eligible for Future Sale.................. 74
Underwriters..................................... 76
Certain United States Federal Tax Consequences to
Non-United States Holders of Common Stock...... 79
Legal Matters.................................... 82
Experts.......................................... 82
Available Information............................ 82
Forward-Looking Statements....................... 83
Index to Financial Statements.................... F-1
Glossary......................................... A-1

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

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE
OFFERING AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN
MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."

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 A 2.9-FOR-ONE SPLIT OF
THE COMPANY'S COMMON STOCK (THE "STOCK SPLIT"), (II) ASSUMES THE CONVERSION OF
ALL OUTSTANDING SHARES OF THE COMPANY'S PREFERRED STOCK INTO 15,864,716 SHARES
OF COMMON STOCK (THE "PREFERRED STOCK CONVERSION") WHICH WILL BE EFFECTED AFTER
GIVING EFFECT TO THE STOCK SPLIT AND UPON COMPLETION OF THE OFFERING, AND (III)
ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS 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 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's digital network is based on a
Synchronous Optical Network Technology ("SONET") architecture which enables
transmission of voice, data and video at very high speed. The network is being
deployed 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 21,000 route miles by the
middle of 2000 and eventually to deploy a network encompassing more than 100,000
route miles. Based on market research prepared for the Company by 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 a
development stage enterprise that is currently 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 located in
Iowa, Minnesota, Montana, North Dakota and South Dakota, is currently
constructing approximately 5,000 additional route miles and is providing
commercial service on a portion of its network. The Company's operations have
resulted in cumulative net losses of $8.8 million from inception in 1995 through
March 31, 1998. The Company expects that the capital expenditures needed to
deploy the first 21,000 route miles of its network through the middle of 2000
will be approximately $290 million.

and legal professionals, the Company has held meetings with over 300 of these
Incumbents. As of June 2, 1998, 49 of these entities, which together control
approximately 95,000 route miles, have authorized the Company in writing to
prepare preliminary engineering evaluations of their networks for the purpose of
entering into long-term strategic relationships with the Company. Of these 49
entities, seven entities, which collectively control approximately 15,000 route
miles, have entered into eight binding agreements relating to the initial design
and construction of approximately 9,000 route miles of network. Seven of these
binding agreements are long-term fixed point microwave services agreements ("FPM
Agreements") with affiliates of Enron, Idaho Power Company, Northeast Missouri
Electric Power Cooperative, Northern Indiana Public Service Company ("NIPSCO"),
Texaco and two affiliates of KN Energy. The eighth 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 49 entities which control approximately 66,000 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 wireless network to serve second and third tier markets by forming long-term
relationships with Incumbents, the Company may pursue opportunities to acquire
or deploy complementary telecommunications assets or technologies and to serve
other markets. See "Risk Factors--Risks of Completing the Company's Network;
Market Acceptance."

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.

COMPETITIVE ADVANTAGES

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

addition, the Company's relationships with Incumbents also are expected to
mitigate maintenance and ongoing administrative costs by utilizing Incumbents'
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.

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 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 principal strategy is to enter into
exclusive long-term relationships with Incumbents to upgrade and develop their
fixed point microwave networks. This strategy enables the Company to minimize
the significant costs and obstacles associated with the development of long haul
telecommunications capacity. 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 lower volume markets.

HIGH QUALITY, TECHNOLOGICALLY ADVANCED NETWORK. The Company's network is
being designed for superior reliability and security and will be capable of
carrying a full array of voice, data and video communications. 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 an average 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 Corporation
("AT&T") and MCI, and Bell Communications Research's ("Bellcore") specifications
for reliability.

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 incumbent local exchange carriers ("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 these smaller markets are typically dependent on ILECs and other
facilities-based carriers. 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.

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. 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 DIRECT 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 is also building a
regional sales force that will market the Company's network capacity to smaller
carriers and to selected large end-users. In addition, pursuant to the FPM
Agreements, the Company utilizes Incumbents as an alternative sales channel to
sell to large end-users who reside near Incumbents' facilities. The Company
expects to offer high reliability and superior customer service, including
maintaining a centralized Network Operations Center (the "NOC") to initiate new
services and monitor existing circuit capacity more easily.

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 expects that a majority
of its capital expenditures will relate to deploying incremental capacity to
meet specific customer demand. The Company currently forecasts that it will
require approximately $315 million to fund the Company's operating losses,
working capital and capital expenditures through the middle of 2000, at which
time the Company expects to have completed a 21,000 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"), of which the Company used $81.1
million to purchase securities (the "Pledged Securities") to provide for
payment in full of interest due on the Notes through April 15, 2000.

- PRIVATE EQUITY INVESTMENT. Concurrently with the Debt Offering, the
Company completed the issuance and sale of 1,879,699 shares of Series C
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 15,864,716 shares of Common Stock. The Debt
Offering, the 1998 Private Equity Investment and the Preferred Stock
Conversion are collectively referred to herein as the "Transactions."

- INITIAL PUBLIC OFFERING. Gross proceeds of the Offering to the Company are
estimated to be approximately $75.0 million.

In addition, the Company is currently exploring several equipment financing
and other financing alternatives. Although the Company has received commitments
(subject to definitive documentation) from prospective lenders in connection
with two such proposed financing facilities, as of the date of this Prospectus,
the Company has not decided to enter into any 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:
U.S. Offering.............................. 3,750,000 shares
International Offering..................... 937,500 shares
Total.................................... 4,687,500 shares
Common Stock to be outstanding after the
Offering(1)................................ 23,454,574 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. See "Use of Proceeds" and "Risk
Factors--Broad Management Discretion in Use
of Proceeds."
Nasdaq National Market symbol................ "PTNT"

- ---------

(1) Includes 15,864,716 shares of Common Stock to be issued in connection with
the Preferred Stock Conversion. Does not include (i) 1,143,248 shares of
Common Stock issuable upon exercise of the Warrants and (ii) 2,541,381
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 development of its digital
network. The Company has completed over 800 route miles of its network, which
are commercially available, and through June 2, 1998 has entered into seven FPM
Agreements and one binding term sheet. In addition, as of the date of this
Prospectus the Company has entered into only two customer capacity contracts.
There can be no assurance that the Company will enter into any additional
contracts with Incumbents or customers. Based on its experience, Pathnet 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 $8.7 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 $100 million and $215 million for the twelve month periods
ending June 30, 1999 and 2000, respectively, to fund capital expenditures,
working capital and operating losses. By the middle of 2000, the Company expects
to have approximately 21,000 route miles of network operational. The Company
will need to seek additional financing to fund capital expenditures and working
capital to expand its network further to its eventual 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 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 $350 million of indebtedness outstanding (approximately 75% of total
invested capital). The Company will likely 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 Owners of 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 to 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 meet its debt service obligations. If the
Company is 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, less than 1,000 route miles under contract have been
completed as of June 2, 1998. 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, as of the date of this Prospectus,
the Company had only two contracts relating to the sale of capacity to a Telecom
Service Provider 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 assurance 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 (such as fiber optic cable)
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. Furthermore, the Company may
seek to serve markets which are not second or third tier and which may present
differing market risks (including as to pricing and competition). If pursued,
these opportunities could require additional financing, impose additional risks
(such as increased or different

competition, additional regulatory burdens and network economics different from
those described elsewhere herein) and could divert the resources and management
time of the Company. 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 seven FPM Agreements with six
Incumbents and one binding term sheet with an independent tower company and is
currently pursuing FPM Agreements with 25 additional Incumbents, there can be no
assurance 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 the 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 cases, certain equipment relating to the Initial System will be
transferred to the Incumbent. Any such expiration of a relationship with an
Incumbent, and the resulting loss of use of the corresponding 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 A. 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
Corporation ("Sprint"), WorldCom, Inc. ("WorldCom") and operators of fiber optic
systems, such as IXC Communications, Inc., The Williams Companies, Inc.
("Williams"), Qwest and Level 3 Communications, Inc. ("Level 3"), 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, certain ILECs and competitive local exchange carriers ("CLECs")
are allowed to provide inter-LATA long distance services. Furthermore, 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 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") from
whom the Company has agreed to purchase $200 million of equipment by March 31,
2003 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 and Northern Telecom Ltd. ("Nortel") are
the only manufacturers of SONET radios that are compatible with the Company's
proposed system design and reliability standards, although Harris Corporation
and Alcatel Alsthom Compagnie Generale d'Electricite SA ("Alcatel") are in the
process of developing and testing similar and compatible products. 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 at reasonable prices and
in a timely manner 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 will not be able to offer route diversity until such time as it
has completed a substantial portion of its mature network. In addition, the
Company's network requires a direct line of sight between two antennae (each
such interval comprising a "path") which is 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 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 other developed sites 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 points of
presence ("POP") 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.

DEPENDENCE ON INFORMATION AND PROCESSING SYSTEMS

Sophisticated information and processing systems are vital to the Company's
growth and its ability to monitor network performance, provision customer orders
for telecommunications capacity, bill customers accurately, provide high-quality
customer service and achieve operating efficiencies. As the Company grows, any
inability to operate its billing and information and processing systems, or to
upgrade internal systems and procedures as necessary, could have a material
adverse impact on the Company's ability to reach its objectives, or on its
business, financial condition and 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 an
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.

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, 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 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 coordinate successfully 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 requires 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, must 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 is 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 have been and 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 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 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 are
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
of 1934, as amended (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, and upon completion of the Offering will
be 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 intrastate 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 existing equity investors, including Spectrum, NEA, Onset
Enterprise Associates II, L.P., Toronto Dominion Capital (U.S.A.) Inc. and
Grotech Partners IV, L.P. (collectively, the "Original Investors"), David
Schaeffer, Chairman of the Company, and Richard A. Jalkut, Chief Executive
Officer of the Company, beneficially own approximately 84% of the Common Stock
on a pro forma basis after giving effect to the Transactions and the Offering.
As a result, the Original Investors and Messrs. Schaeffer and Jalkut 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. 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."

BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS

A substantial portion of the net proceeds to be received by the Company in
connection with the Offering will be allocated to capital expenditures, working
capital and general corporate purposes. The Company is not yet able to estimate
with any precision the allocation of the majority of the proceeds from the
Offering among the uses of proceeds identified in this Prospectus. The timing
and amount of expenditures will vary depending upon numerous factors. The
Company's Board of Directors and management will have broad discretion to
allocate proceeds of the Offering to uses that they believe are appropriate.
There can be no assurance that the proceeds of the Offering can or will be
invested to yield an acceptable return. See "Use of Proceeds."

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 primarily
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
"Underwriters" 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 $11.71 in the net tangible book value per share of their
investment based on an assumed initial public offering price of $16.00 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 for any
purpose,

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, 23,454,574 shares of Common
Stock will be outstanding, 2,541,381 shares will be issuable upon exercise of
outstanding stock options (1,840,049 of which will be immediately exercisable)
and 1,143,248 shares will be issuable upon exercise of the Warrants. The
4,687,500 shares of Common Stock sold in the Offering will be freely tradeable
without restriction or further registration under the Securities Act of 1933, as
amended (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 18,767,074 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. The shares issuable upon exercise of the
Warrants will be eligible for sale in private transactions exempt from the
registration requirements of the Securities Act and will be effectively eligible
for sale publicly through swap transactions or other agreements or transactions
that transfer to another, in whole or in part, the economic consequence of
ownership of the underlying shares of Common Stock. 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 $68.9
million, based on an assumed initial public offering price of $16.00 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 (including radio electronics, transmission equipment,
other telecommunications assets and installation costs), working capital, the
funding of operating losses and other general corporate purposes. The Company
expects that through the middle of 2000 approximately 75% of its capital
requirements will be for telecommunications and transmission equipment and that
the majority of the remaining capital requirements of the Company will be for
installation and other site construction related costs. The net proceeds from
the Offering, the Debt Offering and the 1998 Private Equity Investment are
expected to provide the Company with adequate resources to meet these projected
capital requirements through the middle of 2000, at which time the Company
expects to have completed 21,000 route miles of its network. 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. See "Risk Factors--Broad Management Discretion in Use of
Proceeds."

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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,"
"Description of Certain Indebtedness" and Note 9 to the financial statements
included elsewhere in this Prospectus.

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 approximately $31.6
million, or approximately $1.69 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 payable by the Company) was approximately $100.5 million, or
approximately $4.29 per share, assuming an inital public offering price of
$16.00 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 $2.60 per share to stockholders holding
shares prior to the Offering and an immediate dilution in net tangible book
value of $11.71 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)............... $ 16.00
Pro forma net tangible book value per share at March
31, 1998 after giving effect to the Transactions..... $ 1.69
Increase in net tangible book value per share
attributable to new investors in the Offering........ $ 2.60
Pro forma as adjusted net tangible book value per share
at March 31, 1998 after giving effect to the
Transactions and the Offering........................ $ 4.29
---------
Dilution per share to new investors.................... $ 11.71
---------
---------

- ---------

(1) Before deducting underwriting discounts 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 $16.00
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........................ 18,767,074 80.01% $ 36,043,500 32.46% $ 1.92

New investors................................ 4,687,500 19.99 75,000,000 67.54 16.00
------------- --------- -------------- ---------

Total.................................... 23,454,574 100.0% $ 111,043,500 100.0%
------------- --------- -------------- ---------
------------- --------- -------------- ---------

CAPITALIZATION

The following table sets forth the cash, Pledged Securities and
capitalization of the Company, as of March 31, 1998, (i) on an actual 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 $16.00 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. The actual capitalization data as of March 31,
1998 are derived from the Company's unaudited financial statements included
elsewhere in this Prospectus. 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 $282,447,857 $351,447,705
---------- ----------- -----------
---------- ----------- -----------
Pledged Securities(4)............................... $ -- $81,128,751 $81,128,751
---------- ----------- -----------
---------- ----------- -----------
Total debt:
Senior Notes(5)................................... $ -- $345,905,000 $345,905,000
---------- ----------- -----------
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 --
Preferred stock, par value $0.01 per share, no
shares authorized, issued or outstanding, actual
and pro forma as adjusted; 10,000,000 shares
authorized and none issued or outstanding, pro
forma as further adjusted....................... -- -- --
---------- ----------- -----------
Total preferred stock......................... 15,969,641 35,969,639 --
---------- ----------- -----------
Stockholders' equity (deficit):
Common Stock, par value $0.01 per share,
10,200,000 shares authorized; 2,902,358 shares
issued and outstanding actual and pro forma as
adjusted; 60,000,000 shares authorized and
23,454,574 shares issued and outstanding, pro
forma as further adjusted(6).................... 29,024 29,024 234,546
Additional paid in capital........................ 382,047 4,477,047 109,141,012
Deficit accumulated during development stage...... (8,851,702) (8,851,702) (8,851,702)
---------- ----------- -----------
Total stockholders' equity (deficit).......... (8,440,631) (4,345,631) 100,523,856
---------- ----------- -----------
Total capitalization........................ $7,429,010 $377,529,008 $446,428,856
---------- ----------- -----------
---------- ----------- -----------

(FOOTNOTES CONTINUED 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. The Pledged Securities secure the Notes and
are sufficient to provide for payment in full of interest due on the Notes
through April 15, 2000. See "Description of Certain Indebtedness."

(5) Of the $350.0 million gross proceeds of the Debt Offering, $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) 2,541,381 shares of Common Stock issuable upon
exercise of outstanding options and (ii) 1,143,248 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, the twelve months ended December 31, 1996 and 1997 and the period from
August 25, 1995 (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 PricewaterhouseCoopers LLP,
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 PricewaterhouseCoopers LLP. The
following balance sheet data as of March 31, 1997 and 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(2) 1998(2)
--------------- ----------- ----------- --------------- ----------- ----------- ---------------

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.............. $ (0.15) $ (0.60) $ (1.37) $ (2.12) $ (0.18) $ (0.93) $ (3.05)
--------------- ----------- ----------- --------------- ----------- ----------- ---------------
--------------- ----------- ----------- --------------- ----------- ----------- ---------------
Weighted average number of
common shares
outstanding............... 2,900,000 2,900,000 2,900,000 2,900,000 2,900,000 2,901,022 2,900,097
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.

(2) See Note 10 to the financial statements included elsewhere in this
Prospectus for a discussion of possible additional compensation expense (not
expected to exceed $308,324 for the quarter ended March 31, 1998) that may
be recorded in connection with certain stock options granted in March 1998.

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 enable the Company to leverage these assets,
thereby reducing 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 private
networks in the United States that in the aggregate cover approximately 465,000
route miles. As of June 2, 1998, the Company has entered into eight binding
agreements, seven of which are long-term FPM Agreements and the eighth of which
is a binding term sheet with ATC. The Company is currently pursuing long-term
relationships with 25 additional Incumbents that control approximately 66,000
route miles of network and is in varying stages of evaluation, system design and
business and contract negotiations. The Company has also entered into two
agreements 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 serving second and third tier markets by forming long-term relationships
with Incumbents, the Company may pursue other strategic opportunities that may
arise to acquire or deploy complementary telecommunications assets or
technologies (such as fiber optic cable) and to serve markets which are not
second or third tier. See "Risk Factors--Risks of Completing the Company's
Network; Market Acceptance."

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." The Company sells 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
within twelve months of commencing commercial service due to (i) low marginal
costs associated with the operation of each individual route and (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. 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 maturity, 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 in
second and third tier markets. 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
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, 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 wireless
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 wireless 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 wireless 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 marketing dedicated capacity in increments as small as DS-1s and as large as
OC-24s and may offer discounts for larger volumes or multiple route purchases.
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 Company's network nodes are primarily expected to be
located on sites currently owned and operated by Incumbents. Each of the
Incumbents and ATC 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 "Risk Factors--Dependence on
Relationships with Incumbents; Rights of Incumbents to Certain Assets,"
"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 being assumed by the
Company's NOC, the Company is beginning to incur NOC operating costs similar to
those of other facilities-based telecommunications companies, including the cost
of additional personnel to monitor the network, to plan and provision circuits,
and to 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 direct 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 is also building 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 its estimated useful life.

CAPITAL EXPENDITURES

The Company's principal capital requirements for deployment of its wireless
network 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 and (ii) 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 newly constructed "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 currently is expected to be
made up predominantly of digital wireless equipment designed to provide high
quality, low cost, long haul transmission capacity, although the Company may
pursue opportunities to deploy other telecommunications assets and technologies.
See "Risk Factors--Risks of Completing the Company's Network; Market
Acceptance." The Company expects the typical wireless 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 wireless 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.

WIRELESS NETWORK ECONOMICS. The following tables compare the estimated cost
and economics of the Pathnet program versus new construction of a "green field"
digital microwave network. The tables show the estimated average costs for the
Company's wireless network (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 and do not reflect costs that may
be associated in circumstances where the Company chooses to deploy other
complementary telecommunications assets, such as fiber optic cable, in lieu of
digital microwave equipment. The site development costs under the heading
"Pathnet Program" set forth in the following tables are based on Pathnet's
estimated average contribution to site development costs negotiated with
existing Incumbents. The site development costs relating to costs of "green
field" construction appearing under the heading "Green Field" are based on the
industry experience of Pathnet's employees and consultants in the development of
similar microwave systems, including estimates by such persons of average costs
of site acquisition, towers and shelters. The cost of base and incremental
digital wireless equipment set forth in the following tables is based primarily
on

prices for such equipment quoted by NEC and Andrew in their supply agreements
with the Company. 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 WIRELESS PATH COSTS

PATHNET PROGRAM
----------------------- GREEN PATHNET VS.
PATHNET INCUMBENT FIELD(1) GREEN FIELD(2)
---------- ----------- ---------- -----------------

Site Development Costs(3)..................................... $ 25,000 $ 75,000 $ 250,000
Base Digital Wireless Equipment(4)............................ 215,000 -- 215,000
---------- ----------- ----------
Base Path Cost............................................ 240,000 75,000 465,000 (48%)
Incremental Digital Wireless Equipment(5)..................... 320,000 -- 320,000
---------- ----------- ----------
Maximum Capacity Path Cost(6)............................. $ 560,000 N/A $ 785,000 (29%)
---------- ----------- ----------
---------- ----------- ----------

500 MILE INCUMBENT SEGMENT INCLUDING INTERCONNECTIONS CAPITAL COSTS(6)

GREEN PATHNET VS.
PATHNET FIELD(1) GREEN FIELD(2)
------------- ------------- -----------------

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 WIRELESS CIRCUIT MILE

PATHNET VS.
GREEN GREEN
PATHNET FIELD(1) FIELD(2)
---------- ---------- -------------

Total Mileage (trunk plus interconnection paths)......................... 500 500
Base Circuit Capacity in DS-3s(7)........................................ 5 6
Maximum Circuit Capacity in DS-3s(7)..................................... 23 24
Base DS-0 Circuit Mile Capacity(7)(8).................................... 1,680,000 2,016,000
Maximum DS-0 Circuit Mile Capacity(7)(8)................................. 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) Company estimate based on "green field" construction by the Company and
Incumbents.

(2) Difference between "Pathnet Program" and "Green Field" columns expressed as
a percentage of the amount in the "Green Field" column.

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

(4) Based on OC-6 installation.

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

(6) Assumes 16 trunk paths of 25 miles each plus five interconnection paths of
20 miles each.

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

(8) 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.

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 sales efforts and 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 $2.9 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
increase significantly 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 $100 million and $215 million, respectively, to fund capital
expenditures, working capital and operating losses aggregating $290 million, $10
million and $15 million, respectively, at which time it expects to have

completed a 21,000 route mile network. The Company also expects that during the
next two years, approximately 75% of its capital requirements will be for
telecommunications and transmission equipment. The majority of the remaining
capital requirements of the Company will be for installation and other site
construction related costs. 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. Also on April 8,
1998, the Company completed the 1998 Private Equity Investment from which the
Company received net proceeds of $20.0 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 remaining net proceeds from the issuance of the Units and the Private Equity
Investment are being used for capital expenditures, working capital and general
corporate purposes, including the funding of operating losses. The Indenture
relating to the Notes contains provisions restricting, among other things, the
incurrence of additional indebtedness, the payment of dividends, the making of
restricted payments, the sale of assets and the creation of liens. See
"Description of Certain Indebtedness--Senior Notes."

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,
net losses and debt service, 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 $351.4 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 and excluding the Pledged Securities). Based on its current business
plan, the Company believes that such amounts will provide sufficient liquidity
to meet the Company's capital requirements through the middle of 2000, at which
time the Company expects to have completed a 21,000 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 three 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"), Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), and Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132").
Effective March 31, 1998, the Company adopted SFAS 130, SFAS 131 and SFAS 132.
The adoption of these standards has no material effect on the Company's
financial statements.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which requires a Company to
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. This standard is effective for the
Company's 1998 calendar year. The Company has not yet determined the effects
SFAS 133 will have on its financial position or the results of its operations.

BUSINESS

THE COMPANY

The Company's goal is to deploy a network covering 21,000 route miles by the
middle of 2000 and eventually 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 a
development stage enterprise that is currently 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 located in
Iowa, Minnesota, Montana, North Dakota and South Dakota, is currently
constructing approximately 5,000 additional route miles and is providing
commercial service on a portion of 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
enable the Company to leverage these existing assets, thereby reducing the
Company's capital costs and time to market. 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. As of June 2, 1998, 49 of these entities,
which together control approximately 95,000 route miles, have authorized the
Company in writing to prepare preliminary engineering evaluations of their
networks for the purpose of entering into long-term strategic relationships with
the Company. Of these 49 entities, seven entities, which collectively control
approximately 15,000 route miles, have entered into eight binding agreements
relating to the initial design and construction of approximately 9,000 route
miles of network. Seven of these binding agreements are long-term FPM Agreements
with affiliates of Enron, Idaho Power Company, Northeast Missouri Electric
Cooperative, NIPSCO, Texaco and two affiliates of KN Energy. The eighth
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 49 entities which control
approximately 66,000 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 wireless network to
serve second and third tier markets by forming long-term relationships with
Incumbents, the Company may pursue opportunities to acquire or deploy
complementary telecommunications assets or technologies (such as fiber optic
cable) and to serve other markets. See "Risk Factors--Risks of Completing the
Company's Network; Market Acceptance."

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 wireless 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 employs various design features that enhance its reliability, including
frequency diversity, space diversity and SONET architecture.

Pathnet was incorporated 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 in second and third tier
markets. 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 or other existing facilities-based carriers, (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 ILEC or other facilities-based
carriers.

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
21,000 route miles by the middle of 2000 and eventually to deploy a network
encompassing more than 100,000 route miles. The extensive scope and attractive
characteristics of Pathnet's network architecture should enable the Company to
provide greater ubiquity than many other long haul carriers. Pathnet's wireless
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 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 and federal permits and
local and federal 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.

BARRIERS TO ENTRY. The Company's principal strategy is to enter into
exclusive long-term relationships with Incumbents to upgrade and develop their
fixed point microwave networks. This strategy enables 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 utilizing
Incumbents' 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 lower 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 an average 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's
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 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 Qwest's 3,500-mile digital microwave network. 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 these
smaller markets are typically dependent on ILECs and other facilities-based
carriers. 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. 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 DIRECT 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 is building a regional
sales force that will market the Company's network capacity to smaller carriers
and to selected large end-users. In addition, pursuant to its FPM Agreements,
the Company utilizes Incumbents as an alternative sales channel to sell to large
end-users who reside near Incumbents' facilities. 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.

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 to facilitate the creation
of additional POPs for local dial-up connectivity 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 or other ILECs for use within their own service areas. The Company
believes ILECs 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 and ILECs to focus on larger cities while providing small
communities within their service areas with broadband connectivity.

The Company expects that mobile wireless operators (PCS, cellular and ESMR)
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 many of the 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.

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 marketing dedicated
capacity in increments as small as DS-1s and as large as OC-24s and expects to
offer discounts for larger volumes and multiple route purchases. See
"--Competition" and "Risk Factors--Competition; Pricing Pressures."

SALES AND MARKETING RESOURCES

The Company is building a direct sales force designed to focus on large 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. The regional sales force
markets the Company's network capacity to smaller carriers and to selected large
end-users. The Company is deploying 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 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 band 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 an average 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's specifications for reliability.
See "Risk Factors--Risks of Completing the Company's Network; Market
Acceptance."

In addition to deploying its digital wireless network by leveraging the
assets of Incumbents, the Company may pursue opportunities to acquire or deploy
complementary telecommunications assets or technologies (such as fiber optic
cable) either in lieu of or as a supplement to digital wireless paths. 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 June 2, 1998, the Company has entered into seven long-term FPM
Agreements with affiliates of Enron, Idaho Power Company, Northeast Missouri
Electric Power Cooperative, NIPSCO and Texaco and two affiliates of KN Energy.

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 up 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. Generally, the FPM
Agreements also 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 an affiliate of Idaho Power
Company ("Idaho Power"), 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
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 network in 25 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 pursuant to a license agreement. The Binding Term Sheet
provides that the Company will have up to 14 months to commence construction of
its digital system. Prior to commencement 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. As of the date of this Prospectus, the Company has entered into a
license agreement which will be effective as of August 1, 1998 with ATC relating
to the construction of approximately 250 route miles of network.

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. As of the date of this
Prospectus, the Company has entered into agreements with KN Energy, NIPSCO,
Northern Border and Texaco relating to the maintenance of Pathnet's network.
Each Incumbent will be required to maintain the physical assets at each site
along its route. The Company anticipates entering into 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. They 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 by March 31, 2003 a total of
$200 million worth of 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 fiber optic systems such as IXC Communications, Inc.,
Williams, Qwest and Level 3, 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, certain ILECs and
CLECs are allowed to provide inter-LATA long distance services. Furthermore,
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 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 has obtained and 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 has obtained, and
expects in most future cases to obtain, 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 then upgrades each
relocated Incumbent's telecommunications system from analog to high capacity
digital, provides 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 sells 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 have entered into, and will enter into,
contractual arrangements that allow the Licensed Incumbent to retain a limited
amount of capacity on the relocated network for its own purposes, and 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 has, and 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 requires 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,
must 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 is 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 have been and 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 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
hold or 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 are and 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 offers and will offer services to common carriers on an individualized
basis as a 'carrier's carrier.'

The Company's private carrier services are and 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 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 licensees indirectly, through subsidiaries) to a maximum of 25% foreign
ownership and/or voting control. In addition, any Incumbent Licensees is also
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, and upon completion of the Offering will be, 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 by the end 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, 1999 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 June 2, 1998, the Company had 88 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, results of operations and cash flows.

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)................................ 43 Director
Richard K. Prins (2)(3).............................. 41 Director
Stephen A. Reinstadtler.............................. 32 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, Chief Executive Officer and
director 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 a General
Partner of New Enterprise Associates, a firm that manages venture capital
investments. Mr. Barris is also a member of the Board of Directors of Mobius
Management Systems, Inc., a computer software company which is quoted on the
Nasdaq National Market.

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 served as a
consultant at Harvard Management Company from 1990 to 1992, where he worked in
the private equity group. Mr. Maroni is also currently on the board of directors
of several private companies and CTC Communications Corp., an integrated
communications provider which is quoted on the Nasdaq National Market.

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. The
three classes of the Board of Directors consist of the following: (i) Patrick J.
Kerins and Stephen A. Reinstadtler, whose terms of office expire at the first
annual meeting of stockholders of the Company after the end of the Company's
fiscal year ending December 31, 1998, (ii) Richard K. Prins and Peter J. Barris,
whose terms of office expire at the first annual meeting of stockholders of the
Company after the end of the Company's fiscal year ending December 31, 1999, and
(iii) Richard A. Jalkut, David Schaeffer and Kevin J. Maroni, whose terms of
office expire at the annual meeting of stockholders of the Company after the end
of the Company's fiscal year ending December 31, 2000. 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 70,731 shares of Common Stock 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, violations of the DGCL regarding the improper payment of dividends 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 INTERLOCKS 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) $ -- 858,754 $ 9,857(2)
President and Chief Executive Officer
David Schaeffer................................ 216,923(3) -- 430,413 --
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)............. 858,754 66.6% $ 1.13 Aug. 4, 2007 $ 20,343,882 $ 31,430,396
David Schaeffer (3)............... 430,413 33.4 3.67 Oct. 31, 2007 9,180,709 14,892,290
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 $16.00 per share (the midpoint of the range
set forth on the cover page of this Prospectus) as of August 1, 1998 and
increases at the rate indicated 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 858,754 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 430,413 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 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 (1)
--------------------------- ----------------------------------

NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------ ------------ ------------- ---------------- ----------------
Richard A. Jalkut (2)..................... -- 858,754 $ -- $ 12,769,672
David Schaeffer (3)....................... -- 430,413 -- 5,306,992
Michael A. Lubin.......................... 117,885 23,580 1,874,372 374,922
David J. Daigle........................... 176,830 35,366 2,811,597 562,319
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 $16.00 per share (the midpoint of the range set forth on
the cover page of this Prospectus). See Note 6 to the financial statements
included elsewhere in this prospectus.

(2) All of the stock options granted to Mr. Jalkut will vest and become
exercisable upon the consummation of the Offering.

(3) All of the stock options granted to Mr. Schaeffer will vest and become
exercisable upon the consummation of 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 1,218,549 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 June 2, 1998, options to acquire an aggregate of 495,123 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 June 2, 1998, the 1995 Plan authorizes the grant of awards to
participants with respect to a maximum of 495,123 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 3,345,635 Shares, subject to adjustment as described below. As
of June 2, 1998, options to acquire an aggregate of 2,046,258 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 1997
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 to "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 3,345,635 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 Code, (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 1,160,000 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 1,160,000
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 of the Company 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, 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.

THE PATHNET 401(K) PLAN

The Pathnet 401(k) Plan (the "401(k) Plan") is a defined contribution
retirement benefit plan that is qualified for favorable tax treatment under
Section 401 of the Code. All employees of the Company, subject to certain
regulatory qualifications, including the Named Executive Officers, who are at
least 21 years of age and have completed the minimum service requirement are
eligible to participate in the 401(k) Plan. The 401(k) Plan participants may
defer pre-tax income by contributing to the plan up to the maximum amount
permitted by law. After-tax contributions are also permitted under the 401(k)
Plan. At present, the Company does not match any participant's contributions,
but the Company may consider matching contribution arrangements from time to
time. The amounts that are deposited into each participant's account are
invested among various investment options according to the direction of the
participant. Each participant's pre-tax and after-tax contributions are
immediately vested and nonforfeitable. Each participant is eligible to begin
receiving benefits under the 401(k) Plan on the first day of the month
coincident with or following the attainment of normal retirement age. There is
no provision for early retirement benefits under the 401(k) Plan.

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 858,754 shares of Common Stock
at an exercise price of $1.13 per share. Such options will vest ratably over
three years or immediately 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 below). 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. "Constructive Termination" is defined in
the Jalkut Employment Agreement to mean the

occurrence, without Mr. Jalkut's prior written consent, of one or more of the
following events: (1) a reduction in Mr. Jalkut's then current annual base
salary or the termination or material reduction of any employee benefit or
perquisite enjoyed by him (other than as part of an across-the-board reduction
applicable to all executive officers of Pathnet); (2) the failure to elect or
reelect Mr. Jalkut to the position of chief executive officer or removal of him
from such position; (3) a material diminution in Mr. Jalkut's duties or the
assignment to Mr. Jalkut of duties which are materially inconsistent with his
duties or which materially impair Mr. Jalkut's ability to function as the chief
executive officer of Pathnet; (4) the failure to continue Mr. Jalkut's
participation in any incentive compensation plan unless a plan providing a
substantially similar opportunity is substituted, or under certain other limited
circumstances; or (5) the relocation of Pathnet's principal office, or Mr.
Jalkut's own office location as assigned to him by Pathnet, to a location more
than 50 miles from Washington, D.C.

OTHER AGREEMENTS

Messrs. Schaeffer, Lubin, Daigle, Brooks, Bennis 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 the 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 (the
"Bridge Loan Commitment"). 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 the Bridge Loan
Commitment 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"). The Bridge Loan Notes carried an interest rate of 12%
per annum and were due and payable in full on the earlier to occur of the first
anniversary of the issuance of the Bridge Loan Notes or the closing date of the
Company's next equity financing. The Bridge Loan Notes were to be convertible
into any future equity security issued by the Company at 73% of the price to be
paid for such security by other investors. 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. Of
these amounts, 609,756 shares of Series B Preferred Stock were purchased on
December 23, 1996, for an aggregate purchase price of $2.0 million. In addition,
the $700,000 principal amount of Bridge Loan Notes, plus $33,367 of accrued
interest, were converted into 306,242 shares of Series B Preferred Stock. At the
same time, the Series A Purchasers paid $300,000 representing the committed but
undrawn portion of the Additional Bridge Loan commitment to the Company for the
sale of 125,292 shares of Series B Preferred Stock. The Series B Purchasers
purchased the remaining 609,756 shares of Series B Preferred Stock subject to
the Series B Purchase Agreement for $2.0 million on June 18, 1997. See Note 5 to
the financial statements included elsewhere in this Prospectus.

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 (collectively, 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. These amendments restated the provisions of
such agreements relating to affirmative and negative covenants, transfer
restrictions, rights to purchase and registration rights. These sections of each
of the Series A Purchase Agreement, the amendments thereto, and the Series B
Purchase Agreement were similar in all material respects. In order to remove any
doubt as to this fact, to simplify matters and for convenience (to have in one
agreement the material provisions that survive the purchase and sale of the
Series Preferred Stock and the closing of an initial public offering such as the
Offering), the aforementioned sections were amended and restated in the
Investment and Stockholders' Agreement. See "--Investment and Stockholders'
Agreement."

TERMS OF THE SERIES PREFERRED STOCK

Each share of Series Preferred Stock will automatically be converted into
Common Stock immediately upon the closing of a qualified public offering of
capital stock of the Company. The Offering is a qualified public offering and,
upon the closing of the Offering, all of the outstanding shares of Series
Preferred Stock will automatically convert into an aggregate of 15,864,716
shares of Common Stock.

Each share of Series A, Series B and Series C Preferred Stock entitles its
holder to a number of votes equal to the number of shares of Common Stock into
which such share of Series A, Series B or Series C Preferred Stock is
convertible. With respect to the Board of Directors of the Company, prior to
completion of a qualified public offering (such as the Offering) (i) the holders
of Series A Preferred Stock are entitled to vote separately as a class to elect
two directors of the Company (the "Series A Investor Directors"), (ii) the
holders of Series B Preferred Stock are entitled to vote separately as a class
to elect one director (the "Series B Investor Director"), (iii) the holders of
the Series C Preferred Stock are entitled to vote separately as a class to elect
one director (the "Series C Investor Director"), (iv) the holders of Common
Stock are entitled to vote separately as a class to elect two directors (the
"Common Stock Directors"), (v) the chief executive officer (the "CEO") of the
Company is appointed by the affirmative vote of the Common Stock Directors and
the Series A Investor Directors, Series B Investor Director and Series C

Investor Director, voting together, and (vi) the CEO will be elected to the
Board of Directors of the Company by the holders of Common Stock and Series
Preferred Stock, voting together.

The holders of the Series 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, winding up or deemed
liquidation of the Company, whether voluntary or involuntary, each holder of a
share of Series Preferred Stock outstanding is entitled to be paid before any
payment may be made to the holders of any class of Common Stock or any stock
ranking on liquidation junior to the Series Preferred Stock, an amount, in cash,
equal to the original purchase price paid by such holder, appropriately adjusted
for stock splits, stock dividends and the like, plus any declared but unpaid
dividends.

The liquidation preferences of the outstanding shares of Series A, Series B
and Series C Preferred Stock were $1,000,000, $5,033,367, and $10,000,054,
respectively, as of March 31, 1998. In the event the assets of the Company are
insufficient to pay liquidation preference amounts, all of the assets available
for distribution shall be distributed to each holder of Series Preferred Stock
PRO RATA in proportion to the number of shares of Series Preferred Stock held by
such holder.

Shares of the Series Preferred Stock may be converted at any time, at the
option of the holder, into shares of Common Stock. All of the outstanding Series
Preferred Stock will automatically be converted into Common Stock immediately
upon the closing of the Offering. The number of shares of voting Common Stock to
be received upon conversion is subject to adjustment in the event of stock
dividends and subdividends, certain combinations of Common Stock, and certain
issuances of Common Stock and of securities convertible into Common Stock that
have a dilutive effect.

INVESTMENT AND STOCKHOLDERS' AGREEMENT

Pursuant to the terms of the Investment and Stockholders' Agreement, the
Investors and Mr. Jalkut are entitled to certain registration rights with
respect to securities of the Company. On any three occasions, the holders of a
majority of the securities registrable under the terms of the Investment and
Stockholders' Agreement ("Registrable Securities") 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
holders of Registrable Securities have the right (subject to certain cut-back
limitations) to request that the Company register such holder'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 terms, 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,
1999 and may be renewed at the option of the Company for two additional one-year
periods on the same terms and conditions. Rent paid to the Kenilworth
Partnership during the year ended December 31, 1997, was approximately $60,980.
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 June 2, 1998 on a pro forma
basis after giving effect to the Offering and the Preferred Stock Conversion, 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) each of 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 PREFERRED STOCK
CONVERSION AND AFTER
THE OFFERING(1)
-----------------------------
TOTAL SHARES PERCENTAGE(2)
------------ ---------------

Spectrum Equity Investors, L.P. (3).................................................. 3,773,581 16.1%
Spectrum Equity Investors II, L.P. (3)............................................... 1,363,406 5.8
New Enterprise Associates VI, Limited Partnership (4)................................ 2,581,065 11.0
Onset Enterprise Associates II, L.P. (5)............................................. 1,803,648 7.7
Toronto Dominion Capital (U.S.A.) Inc. (6)........................................... 1,890,646 8.1
Grotech Partners IV, L.P. (7)........................................................ 1,890,646 8.1
David Schaeffer (8).................................................................. 3,330,413 13.9
Richard A. Jalkut (9)................................................................ 858,754 3.5
Kevin J. Maroni (10)................................................................. 3,773,581 16.1
Peter J. Barris (11)................................................................. 2,581,065 11.0
Richard K. Prins (12)................................................................ 70,731 *
Patrick J. Kerins (13)............................................................... 1,890,646 8.1
Stephen A. Reinstadtler (14)......................................................... 1,890,646 8.1
Michael A. Lubin (15)................................................................ 117,885 *
David J. Daigle (16)................................................................. 176,831 *
Michael L. Brooks (17)............................................................... 35,363 *
William R. Smedberg, V (18).......................................................... 21,217 *
All Directors and Officers
as a Group (8)(9)(10)(11)(12)(13)(14)(15)(16)(17)(18)(19).......................... 14,747,129 58.6

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

* Less than 1%.

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

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

(8) Includes 430,413 shares of Common Stock that can be acquired through options
exercisable within 60 days of June 2, 1998.

(9) Includes 858,754 shares of Common Stock that can be acquired through options
exercisable within 60 days of June 2, 1998.

(10) Includes 3,773,581 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.

(11) Includes 2,581,065 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.

(12) Includes 70,731 shares of Common Stock that can be acquired through options
exercisable within 60 days of June 2, 1998.

(13) Includes 1,890,646 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.

(14) Includes 1,890,646 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.

(15) Includes 117,885 shares of Common Stock that can be acquired through
currently exercisable options, but excludes outstanding options to purchase
23,580 shares of Common Stock which are not exercisable within sixty days of
June 2, 1998.

(16) Includes 176,831 shares of Common Stock that can be acquired through
currently exercisable options,
but excludes outstanding options to purchase 35,365 shares of Common Stock
which are not exercisable within sixty days of June 2, 1998.

(17) Includes 35,363 shares of Common Stock that can be acquired through
currently exercisable options, but excludes outstanding options to purchase
35,368 shares of Common Stock which are not exercisable within sixty days of
June 2, 1998.

(18) Includes 21,217 shares of Common Stock that can be acquired through
currently exercisable options, but excludes outstanding options to purchase
42,438 shares of Common Stock which are not exercisable within sixty days of
June 2, 1998.

(19) Excludes outstanding options to purchase 362,500 shares of Common Stock
held by Mr. Bennis, which are not exercisable within sixty days of June 2,
1998.

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 COMPANY'S RESTATED CERTIFICATE OF INCORPORATION AND
THE COMPANY'S 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 60,000,000 shares of Common Stock, par
value $0.01 per share, and 10,000,000 shares of Preferred Stock, par value $.01
per share (the "Preferred Stock"). Of such authorized shares, (i) 23,454,574
shares of Common Stock will be issued and outstanding, (ii) no shares of
Preferred Stock will be issued and outstanding, (iii) warrants to purchase
1,143,248 shares of Common Stock will be issued and outstanding and (iv) 495,123
shares and 3,345,635 shares of Common Stock will be reserved for issuance in
connection with the 1995 Plan and the 1997 Plan, respectively. Stock options to
purchase 495,123 shares and 2,046,258 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 American Stock Transfer & Trust Company.

PREFERRED STOCK

The Company's Board of Directors (or a committee thereof) is authorized to
issue, without further authorization from stockholders, up to 10,000,000 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 3.27 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 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 (as will be the case upon completion of
the Offering); 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 Warrant 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
Warrant Securities (the "Subject Equity") following an Exercise Event and the
completion of the Offering. This demand registration right is subject to the
"lock-up" or "black-out" periods, if any, imposed upon the Company in connection
with any underwriting or purchase agreement relating to an underwritten Rule
144A or registered public offering of Common Stock. In connection with this
Offering, the Company will be subject to a 180-day "lock-up" period. See
"Underwriters." In addition, holders of Registrable Warrant Securities have the
right to include the Registrable Warrant 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 of the Company,
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 of
the Company.

CERTAIN ANTI-TAKEOVER 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 INDENTURE GOVERNING THE
NOTES DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE PROVISIONS OF SUCH INDENTURE, A COPY OF WHICH HAS BEEN FILED AS
AN EXHIBIT 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 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 payment of the principal and
interest due on 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.

OTHER

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

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have outstanding
23,454,574 shares of Common Stock. Of these shares, the 4,687,500 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 18,767,074 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 (2,345,457 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, 7,688,028 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 directors and executive officers and certain other
stockholders of the Company, including 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 to purchase or
transfer, lend dispose of, directly or indirectly, any shares of Common Stock or
securities convertible into or exchangeable or exercisable for Common Stock, or
(ii) enter into any swap or other agreement or any transaction that transfers to
another, in whole or in part, the economic consequence of ownership of the
Common Stock whether any transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the Underwriters for a period of 180 days after the
date of this Prospectus. See "Underwriters."

Pursuant to the Investment and Stockholders' Agreement, the Company has
granted certain stockholders, including the Original Investors and Mr. Jalkut,
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 1,143,248 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. The Warrant Shares will be eligible for
sale in private transactions exempt from the registration requirements of the
Securities Act and will be effectively eligible for sale publicly through swap
transactions or other agreements or transactions that transfer to another, in
whole or in part, the economic consequence of ownership of the underlying shares
of Common Stock. Pursuant to a registration rights agreement (the "Warrant
Registration Rights Agreement"), upon completion of the Offering the holders of
a number of Registrable Warrant Securities 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. This demand registration right
is subject to the "lock-up" or "black-out" periods, if any, imposed upon the
Company in connection with any underwriting or purchase agreement relating to an
underwritten Rule 144A or registered public offering of Common Stock. In
connection with this Offering, the Company will be subject to a 180-day
"lock-up" period. See "Underwriters." Holders of Registrable Warrant Securities
will also have the right to piggy-back on registration statements filed by the
Company under the Securities Act, subject to certain limitations.

In addition, an aggregate of 3,840,758 shares of Common Stock have been
reserved for issuance to employees, officers and directors of the Company upon
exercise of stock options, of which options for 2,541,381 shares of Common Stock
are outstanding as of June 2, 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 the Underwriters 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.

UNDERWRITERS

Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the U.S.
Underwriters named below for whom Morgan Stanley & Co. Incorporated, Bear,
Stearns & Co. Inc., Lehman Brothers Inc. and J.P. Morgan Securities Inc. are
acting as U.S. Representatives, and the International Underwriters named below
for whom Morgan Stanley & Co. International Limited, Bear, Stearns International
Limited, Lehman Brothers International (Europe) and J.P. Morgan Securities Ltd.
are acting as International Representatives, have severally agreed to purchase,
and the Company has agreed to sell to them, severally, the respective number of
shares of Common Stock set forth opposite the names of such Underwriters below:

NUMBER OF
NAME SHARES
- ----------------------------------------------------------------------------------------------------- ----------

U.S. Underwriters:
Morgan Stanley & Co. Incorporated..................................................................
Bear, Stearns & Co. Inc. ..........................................................................
Lehman Brothers Inc. ..............................................................................
J.P. Morgan Securities Inc. .......................................................................
----------
Subtotal......................................................................................... 3,750,000

International Underwriters:
Morgan Stanley & Co. International Limited.........................................................
Bear, Stearns International Limited................................................................
Lehman Brothers International (Europe).............................................................
J.P. Morgan Securities Ltd. .......................................................................
----------
Subtotal......................................................................................... 937,500
----------

Total.......................................................................................... 4,687,500
----------
----------

The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively referred
to as the "Underwriters" and the "Representatives", respectively. The
Underwriting Agreement provides that the obligations of the several Underwriters
to pay for and accept delivery of the shares of Common Stock offered hereby are
subject to the approval of certain legal matters by the counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all of the
shares of Common Stock offered hereby (other than those covered by the U.S.
Underwriters, over-allotment option described below) if any such shares are
taken.

Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (i)
it is not purchasing any Shares (as defined herein) for the account of anyone
other than a United States or Canadian Person (as defined herein) and (ii) it
has not offered or sold, and will not offer or sell, directly or indirectly, any
Shares or distribute any prospectus relating to the Shares outside the United
States or Canada or to anyone other than a United States or

Canadian Person. Pursuant to the Agreement between U.S. and International
Underwriters, each International Underwriter has represented and agreed that,
with certain exceptions: (i) it is not purchasing any Shares for the account of
any United States or Canadian Person and (ii) it has not offered or sold, and
will not offer or sell, directly or indirectly, any Shares or distribute any
prospectus relating to the Shares in the United States or Canada or to any
United States or Canadian Person. With respect to any Underwriter that is a U.S.
Underwriter and an International Underwriter, the foregoing representations and
agreements (i) made by it in its capacity as a U.S. Underwriter apply only to it
in its capacity as a U.S. Underwriter and (ii) made by it in its capacity as an
International Underwriter apply only to it in its capacity as an International
Underwriter. The foregoing limitations do not apply to stabilization
transactions or to certain other transactions specified in the Agreement between
U.S. and International Underwriters. As used herein, "United States or Canadian
Person" means any national or resident of the United States or Canada, or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside the United States and Canada of any
United States or Canadian Person), and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian Person. All
shares of Common Stock to be purchased by the Underwriters under the
Underwriting Agreement are referred to herein as the "Shares."

Pursuant to the Agreement between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and International Underwriters of any
number of Shares as may be mutually agreed. The per share price of any Shares so
sold shall be the public offering price set forth on the cover page hereof, in
United States dollars, less an amount not greater than the per share amount of
the concession to dealers set forth below.

Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any Shares, directly or indirectly, in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and has
represented that any offer or sale of Shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made. Each U.S.
Underwriter has further agreed to send to any dealer who purchases from it any
of the Shares a notice stating in substance that, by purchasing such Shares,
such dealer represents and agrees that it has not offered or sold, will not
offer or sell, directly or indirectly, any of such Shares in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and that
any offer or sale of Shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of Canada
in which such offer or sale is made, and that such dealer will deliver to any
other dealer to whom it sells any of such Shares a notice containing
substantially the same statement as is contained in this sentence.

Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not offered
or sold and, prior to the date six months after the closing date for the sale of
the Shares to the International Underwriters, will not offer or sell, any Shares
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 have not resulted and will not result in 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 Shares 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 offering of the Shares 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.

The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $ a share under the public offering price. Any Underwriter
may allow, and such dealers may reallow, a concession not in excess of $ a
share to other Underwriters or to certain dealers. After the initial offering of
the shares of Common Stock, the offering price and other selling terms may from
time to time be varied by the Representatives.

The Company has granted to the U.S. Underwriters an option, exercisable for
30 days from the date of this Prospectus, to purchase up to an aggregate of
703,125 additional shares of Common Stock at the public offering price set forth
on the cover page hereof, less underwriting discounts and commissions. The U.S.
Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
Common Stock offered hereby. To the extent such option is exercised, each U.S.
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock as
the number set forth next to such U.S. Underwriter's name in the preceding table
bears to the total number of shares of Common Stock set forth next to the names
of all U.S. Underwriters in the preceding table.

The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Common Stock offered by them.

At the request of the Company, the Underwriters have reserved approximately
234,375 shares of Common Stock, representing 5% of the Shares to be sold in the
Offering, for sale to certain of its employees, officers and directors and
certain other persons at the public offering price set forth on the cover page
hereof. If such shares are not so sold to such persons, they will be sold to the
public.

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

Each of the Company and the directors, executive officers and certain other
stockholders of the Company, including the Original Investors, have agreed that,
without prior written consent of Morgan Stanley & Co. Incorporated on behalf of
the Underwriters and subject to certain exceptions, they will not, during the
period ending 180 days after the date of this Prospectus, (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 to purchase or
otherwise transfer, lend or dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock or (ii) enter into any swap or other arrangement that transfers
to another, in whole or in part, any of the economic consequences of ownership
of the Common Stock, whether any such transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The restrictions described in this paragraph
do not apply to (x) the sale of Shares to the Underwriters, (y) the grant of
options pursuant to and on the same or similar terms as, employee benefit plans
existing on the date of this Prospectus and the issuance by the Company of
shares of Common Stock upon the exercise of an option or a warrant or the
conversion of a security outstanding on the date of this Prospectus or upon the
exercise of options granted after the date of this Prospectus under employee
benefit plans existing on the date of this Prospectus or (z) transactions by any
person other than the Company relating to shares of Common Stock or other
securities acquired in open market transactions after the completion of the
offering of the Shares.

In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the Offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an Underwriter or a dealer for distributing the
Common Stock in the Offering, if the syndicate repurchases previously
distributed

Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.

The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.

PRICE OF THE OFFERING

Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price will be determined by negotiations
between the Company and the U.S. Representatives. Among the factors to be
considered in determining the initial public offering price will be the future
prospects of the Company and its industry in general, the progress that the
Company has made in recent periods toward the achievement of aspects of its
business plan, the projected cash flow of the Company and certain comparative
financial and operating information of companies engaged in activities similar
to those of the Company. The estimated initial public offering price range set
forth on the cover page of this Preliminary Prospectus is subject to change as a
result of market conditions and other factors.

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 with 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.

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 balance sheets as of December 31, 1996 and 1997 and the
consolidated 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 the period
August 25, 1995 (date of inception) to December 31, 1997 included in this
prospectus, have been included herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that 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 (Deficit) for the period
August 25, 1995 (date of inception) to December 31, 1995, the years ended December
31, 1996 and 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.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows present fairly, in all material respects, the financial position
of Pathnet, Inc. and its subsidiary (the Company) (A Development Stage
Enterprise) at December 31, 1996 and 1997, and the results of their operations
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, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

McLean, Virginia
February 20, 1998, except for the information in Note 9, for which the dates are
April 8, 1998, April 13, 1998, May 4, 1998 and July 24, 1998, respectively.

F-2

PATHNET, INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED BALANCE SHEETS

---------

ASSETS

PRO FORMA
MARCH 31,
MARCH 31, 1998
DECEMBER 31, DECEMBER 31, 1998 (NOTE 2)
1996 1997 (UNAUDITED) (UNAUDITED)
------------- ------------- ------------- --------------

Current assets:
Cash and cash equivalents........................ $ 2,318,037 $ 7,831,384 $ 4,856,610 $ 282,547,705
Prepaid expenses and other current assets........ 1,695 48,571 156,716 156,716
------------- ------------- ------------- --------------
Total current assets......................... 2,319,732 7,879,955 5,013,326 282,704,421
Property and equipment, net........................ 46,180 7,207,094 9,964,580 9,964,580
Deferred financing costs........................... -- 250,428 -- 11,180,000
Restricted cash.................................... -- 760,211 288,736 288,736
Pledged securities................................. -- -- -- 81,128,751
------------- ------------- ------------- --------------
Total assets................................. $ 2,365,912 $ 16,097,688 $ 15,266,642 $ 385,266,488
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Accounts payable................................. $ 114,799 $ 5,592,918 $ 7,280,298 $ 7,280,298
Accrued expenses................................. 30,217 -- 257,334 257,334
Deferred revenue................................. -- 300,000 200,000 200,000
------------- ------------- ------------- --------------
Total liabilities............................ 145,016 5,892,918 7,737,632 7,737,632
Notes payable.................................... -- -- -- 345,905,000
------------- ------------- ------------- --------------
Total current liabilities.................... 145,016 5,892,918 7,737,632 353,642,632
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 at December 31, 1996 and
1997 and 10,200,000 shares authorized at March
31, 1998; 2,900,000, 2,900,000 and 2,902,358
shares issued and outstanding at December 31,
1996 and 1997 and March 31, 1998,
respectively.................................. 29,000 29,000 29,024 187,671
Note receivable from stockholder................. (9,000) (9,000) -- --
Additional paid-in capital....................... 381,990 381,990 382,047 40,287,887
Deficit accumulated during the development
stage......................................... (2,189,461) (6,166,861) (8,851,702) (8,851,702)
------------- ------------- ------------- --------------
Total stockholders' equity (deficit)......... (1,787,471) (5,764,871) (8,440,631) 31,623,856
------------- ------------- ------------- --------------
Total liabilities and stockholders' equity
(deficit).................................. $ 2,365,912 $ 16,097,688 $ 15,266,642 $ 385,266,488
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------

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............. $ (0.15) $ (0.60) $ (1.37) $ (2.12) $ (0.18) $ (0.93) $ (3.05)
------------ ------------ ------------ ------------ ----------- ----------- ------------
------------ ------------ ------------ ------------ ----------- ----------- ------------
Weighted average number of
common shares
outstanding.............. 2,900,000 2,900,000 2,900,000 2,900,000 2,900,000 2,901,022 2,900,097
------------ ------------ ------------ ------------ ----------- ----------- ------------
------------ ------------ ------------ ------------ ----------- ----------- ------------

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
NOTE ACCUMULATED
COMMON STOCK RECEIVABLE ADDITIONAL DURING THE
------------------------- FROM PAID-IN DEVELOPMENT
SHARES AMOUNT STOCKHOLDER CAPITAL STAGE TOTAL
------------- ---------- ----------- ------------- ------------- -------------

Balance, August 25, 1995............. -- $ -- $ -- $ -- $ -- $ --
Issuance of voting common stock...... 1,450,000 14,500 (4,500) -- (9,500) 500
Issuance of non-voting common
stock.............................. 1,450,000 14,500 (4,500) -- (9,500) 500
Net loss............................. -- -- -- -- (426,826) (426,826)
------------- ---------- ----------- ------------- ------------- -------------
Balance, December 31, 1995........... 2,900,000 29,000 (9,000) -- (445,826) (425,826)
Cancellation of non-voting common
stock.............................. (1,450,000) (14,500) -- -- -- (14,500)
Issuance of voting common stock...... 1,450,000 14,500 -- -- -- 14,500
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........... 2,900,000 29,000 (9,000) 381,990 (2,189,461) (1,787,471)
Net loss............................. -- -- -- -- (3,977,400) (3,977,400)
------------- ---------- ----------- ------------- ------------- -------------
Balance, December 31, 1997........... 2,900,000 29,000 (9,000) 381,990 (6,166,861) (5,764,871)
Exercise of stock options
(unaudited)........................ 2,358 24 -- 57 -- 81
Repayment of note receivable
(unaudited)........................ -- -- 9,000 -- -- 9,000
Net loss (unaudited)................. -- -- -- -- (2,684,841) (2,684,841)
------------- ---------- ----------- ------------- ------------- -------------
Balance, March 31, 1998
(unaudited)........................ 2,902,358 $ 29,024 $ -- $ 382,047 $ (8,851,702) $ (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) (710,337)
Expenditures for network
construction in progress.......... -- -- (1,739,782) (1,739,782) -- (2,084,372)
Restricted cash..................... -- -- (760,211) (760,211) -- 471,475
Repayment of note receivable........ -- -- -- -- -- 9,000
------------- ------------ ------------ ------------- ----------- -----------
Net cash used in investing
activities.................. (8,903) (46,653) (2,881,254) (2,936,810) (37,385) (2,314,234)
------------- ------------ ------------ ------------- ----------- -----------
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 -- --
------------- ------------ ------------ ------------- ----------- -----------
Net cash provided by (used in)
financing activities........ 501,000 3,475,000 11,710,846 15,686,846 -- (87,401)
------------- ------------ ------------ ------------- ----------- -----------
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.... $ -- $ 14,500 $ -- $ 14,500 $ -- $ --
------------- ------------ ------------ ------------- ----------- -----------
------------- ------------ ------------ ------------- ----------- -----------
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)
Repayment of note receivable........ 9,000
-------------
Net cash used in investing
activities.................. (5,251,044)
-------------
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
-------------
Net cash provided by (used in)
financing activities........ 15,599,445
-------------
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.... $ 14,500
-------------
-------------
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 5) 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.

PRO FORMA FINANCIAL INFORMATION

The unaudited pro forma balance sheet is based upon available information
and certain assumptions that management of the Company believes are reasonable.
The unaudited pro forma balance sheet does not purport to be indicative of the
Company's financial position had the aforementioned transactions taken place on
March 31, 1998. Unaudited pro forma financial information gives effect to (i)
the issuance and sale of 350,000 units, each consisting of a $1,000 principal
amount of 12 1/4% Senior Notes due 2008 and a warrant to purchase 3.27 shares of
common stock at an exercise price of $0.01 (see Note 9), (ii) the sale of
1,879,699 shares of Series C convertible preferred stock (see Note 9) nd (iii)
the conversion of all shares of Series A, Series B and Series C convertible
preferred stock into 15,854,716 shares of common stock (see Note 5).

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. For each
of the years presented, basic and diluted loss per share are the same. The
exercising of 1,791,365 employee common stock options and the conversion of
3,590,896 shares of Series A, B and C convertible preferred stock into
10,413,598 shares of common stock as of December 31, 1997, which could
potentially dilute basic earnings per share in the future, were not included in
the computation of diluted loss per share because to do so would have been
antidilutive for each of the years presented.

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.

F-8

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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.

F-9

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.

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.

NEW ACCOUNTING STANDARDS

The Financial Accounting Standards Board has issued three 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), Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131), and Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" (SFAS 132).
Effective March 31, 1998, the Company adopted SFAS 130, SFAS 131 and SFAS 132.
The adoption of these standards has no material affect on the Company's
consolidated financial statements.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities", which requires a company to recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. This standard is effective for the Company's
1998 calendar year. The Company

F-10

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
has not yet determined the effects SFAS 133 will have on its financial position
or the results of its operations.

3. PROPERTY AND EQUIPMENT

Property and equipment, stated at cost, is comprised of the following at
December 31, 1996 and 1997 and at March 31, 1998:

DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1998
------------ ------------ -------------

(UNAUDITED)
Network construction in progress................. $ -- $6,831,795 $ 8,916,167
Office and computer equipment.................... 31,006 248,880 732,748
Furniture and fixtures........................... 24,550 120,093 309,074
Leasehold improvements........................... -- 62,344 99,832
------------ ------------ -------------
55,556 7,263,112 10,057,821
Less accumulated depreciation.................... (9,376) (56,018) (93,241)
------------ ------------ -------------
Property and equipment, net...................... $ 46,180 $7,207,094 $ 9,964,580
------------ ------------ -------------
------------ ------------ -------------

Network construction in progress includes 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.

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 1,450,000 shares of voting common stock and 1,450,000
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 1,450,000 shares of non-voting common stock in exchange for
1,450,000 shares of voting common stock.

F-11

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. CAPITAL STOCK TRANSACTIONS (CONTINUED)
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.

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) 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.

F-12

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. CAPITAL STOCK TRANSACTIONS (CONTINUED)
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 $0.34, $1.13 or $3.67 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 $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

F-13

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. CAPITAL STOCK TRANSACTIONS (CONTINUED)
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.

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 77,805 non-qualified
stock options and 424,393 incentive stock options were issued at an exercise
price of $0.034 per share, an amount estimated to equal or exceed the per share
fair value of the common stock at the time of grant. As of December 31, 1997,
the options issued at an exercise price of $0.034 have a weighted average
contractual life of 7.77 years. As of December 31, 1997, 410,244 of the options
issued at an exercise price of $0.034 were exercisable.

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

F-14

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. STOCK OPTIONS (CONTINUED)
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 1,289,167 non-qualified options were
issued, 858,754 at an exercise price of $1.13 per share and 430,413 at an
exercise price of $3.67 per share. Management estimates that the exercise price
of the options issued in 1997 is greater than the estimated per share value of
the underlying common stock. None of the options issued at $1.13 or $3.67 were
exercisable at December 31, 1997. As of December 31, 1997, the weighted average
contractual life of the options issued at $1.13 and $3.67 was 9.68 and 9.92
years, respectively. The options issued at $3.67 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. Unvested and uncancelled options
issued at $3.67 immediately become fully vested and exercisable upon a change of
control or a qualified public offering, as defined in the option agreement.

The options issued at $1.13 vest ratably over three consecutive years
subject to certain acceleration provisions set forth in an employment agreement,
such as the immediate vesting upon a change in control or a qualified initial
public offering. 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.

For the three months ended March 31, 1998, a total of 667,370 (unaudited)
options were issued at an exercise price of $1.13 per share. The estimated fair
value of the Company's underlying common stock was determined to be $1.99
(unaudited) per share. Accordingly, the Company calculated deferred compensation
expense of $573,938 (unaudited) related to the options granted during the three
months ended March 31, 1998. The Company will recognize compensation expense
over the vesting period of those stock options. The Company did not record any
adjustment for deferred compensation expense since it did not have a material
effect on total stockholders' equity (deficit) and the statement of operations
as of and for the three months ended March 31, 1998.

F-15

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 March 31, 1998 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.................................... 410,246 70,731 $ 0.034 -- -- $ 0.034
Exercised.................................. -- -- -- -- -- --
Canceled................................... -- -- -- -- -- --
--------- --------- ----------
Options outstanding, December 31, 1995..... 410,246 70,731 $ 0.034 -- -- $ 0.034
Granted.................................... 14,147 7,074 $ 0.034 -- -- $ 0.034
Exercised.................................. -- -- -- -- -- --
Canceled................................... -- -- -- -- -- --
--------- --------- ----------
Options outstanding, December 31, 1996..... 424,393 77,805 $ 0.034 -- -- $ 0.034
Granted.................................... -- -- -- 1,289,167 $ 1.13-$3.67 $ 1.98
Exercised.................................. -- -- -- -- -- --
Canceled................................... -- -- -- -- -- --
--------- --------- ----------
Options outstanding, December 31, 1997..... 424,393 77,805 $ 0.034 1,289,167 $ 1.13-$3.67 $ 1.43
Options granted (unaudited)................ -- -- -- 667,370 $ 1.13 $ 1.13
Options exercised (unaudited).............. -- (2,358) $ 0.034 -- -- $ 0.034
Options cancelled (unaudited).............. -- (4,716) $ 0.034 -- -- $ 0.034
--------- --------- ----------
Options outstanding at March 31, 1998
(unaudited).............................. 424,393 70,731 $ 0.034 1,956,537 $ 1.13-$3.67 $ 1.36
--------- --------- ----------
--------- --------- ----------

At December 31, 1995, 1996 and 1997, 247,561, 325,366 and 410,244 options,
respectively, were exercisable. At March 31, 1998, 522,234 (unaudited) options
were exercisable. The weighted-average fair value of options granted during the
years ended December 31, 1995, 1996 and 1997, was approximately $0.007, $0.010
and $0.000, respectively. The weighted-average fair value of options granted
during the three months ended March 31, 1998 was approximately $3.29
(unaudited).

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 or above 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

F-16

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. STOCK OPTIONS (CONTINUED)
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:

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

Net loss as reported................................ $ 426,826 $ 1,743,635 $ 3,977,400 $ 2,684,841
Pro forma net loss.................................. $ 427,793 $ 1,747,570 $ 3,978,164 $ 2,807,008
Basic and diluted net loss per share as reported.... $ (0.15) $ (0.60) $ (1.37) $ (0.93)
Pro forma basic and diluted net loss per share...... $ (0.15) $ (0.60) $ (1.37) $ (0.97)

The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the year ended December 31, 1995, 1996 and
1997, respectively: dividend yield of 0%, expected volatility of 0%, risk-free
interest rate of 6.02%, 6.35% and 6.55% and expected terms of 4.6, 5.8 and 5.0
years. The following weighted-average assumptions were used for grants during
the three months ended March 31, 1998: dividend yield of 0% (unaudited),
expected volatity of 0% (unaudited), risk-free interest rate of 5.56%
(unaudited) and expected terms of 5.2 years (unaudited).

As of December 31, 1997, the weighted average remaining contractual life of
the options is 9.21 years. As of March 31, 1998, the weighted average
contractual life of the options is 9.20 years (unaudited).

As of December 31, 1996 and 1997, and March 31, 1998 the pro forma tax
effects would include an increase to the deferred tax asset and the valuation
allowance of $1,535, $2.98, and $48,867 (unaudited) 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, 1999,
and is renewable by the Company for two additional years. Rent paid to this
related party during the year ended December 31, 1997, was $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 period August 25, 1995 (date of inception)
to December 31, 1995 and the years ended December 31, 1996 and 1997, was $40,
$4,399 and $114,673, respectively.

In exchange for a non-compete agreement, the Company has agreed to pay a
particular senior management employee a severance payment of $275,000 if such
employee's employment with the Company is terminated.

F-17

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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.

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 3.27 shares of common stock or
1,143,248 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 the 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 plus accrued and unpaid interest (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 and thereafter; 100% of the principal amount. In addition, at any time on
or prior to April 15, 2001, the Company may redeem within 60 days, from the
proceeds of one or more public equity offerings, up to 35% of the aggregate
principal at a redemption price equal to 112.25% of the principal amount plus
accrued and unpaid interest, provided that at least 65% of the principal amount
of the Notes remain outstanding. 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 certain covenants which will affect and may restrict
certain activities of the Company including limitations of indebtedness,
restricted payments, issuances and sales of capital stock, affiliate
transactions, liens, guarantees, sale of assets and dividends.

F-18

PATHNET, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. SUBSEQUENT EVENTS (CONTINUED)
The Warrants expire on April 15, 2008 and are not separately transferable
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.

On April 13, 1998, Pathnet/Idaho Power License LLC and Pathnet/Idaho Power
Equipment, LLC, wholly-owned subsidiaries of the Company, were formed.

On May 4, 1998, the Company adopted the Pathnet 401(k) Plan, a defined
contribution retirement plan that is qualified for favorable tax treatment under
Section 401 of the Internal Revenue Code of 1996, as amended. The Company does
not match any participant's contributions. However, the Company may consider
matching contribution arrangements from time to time.

The Company intends to file a Registration Statement with the Securities and
Exchange Commission for an initial public offering (the Offering). On July 24,
1998, the Company's stockholders approved a 2.9-for-1 stock split. 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.

10. UNAUDITED INTERIM INFORMATION FOR RECENT DEVELOPMENTS SUBSEQUENT TO MARCH
31, 1998

As described in Note 6, for the three months ended March 31, 1998, a total
of 667,370 options were issued at an exercise price of $1.13 per share. On July
23, 1998, the Securities and Exchange Commission (SEC) issued a comment letter
related to the Company's intent to file a Registration Statement for an Offering
of common stock. In response to the comment letter, the Company revised its
estimate of the fair value of the common stock to $1.99 per share. Further SEC
comments may result in future revision. The Company believes the maximum
potential revised fair value of the common stock would be $3.67 per share. This
fair value is based on the per share price paid for the Company's series C
preferred stock during the same period. If the SEC requires the Company to use
$3.67 per share as the estimate of fair value of common stock, the Company would
be required to restate the March 31, 1998 interim financial statements by
recording deferred compensation expense of $1,695,120 and additional
compensation expense of $308,324, thereby, increasing the net loss to $2,993,165
for the quarter ended March 31, 1998.

In April and May 1998, a total of 89,721 options were issued at an exercise
price of $3.67 per share. In response to the July 23, 1998 SEC comment letter,
the Company has estimated the fair value of the underlying common stock to be
$16.00 per share, the midpoint of the price range for the Offering. Accordingly,
the Company will record deferred compensation expense of $1,106,260 and will
recognize compensation expense over the vesting period of these stock options.
In addition, as a result of granting these stock options at an exercise price
below fair value, pursuant to adjustments made in accordance with the Warrant
Agreement, the Warrants (see Note 9) will be adjusted to permit the holders
thereof to purchase 3.27 shares of common stock per warrant (rather than 3.19)
or 1,143,248 aggregate shares at an exercise price of $0.01 per share.

F-19

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

ESMR.......................... Enhanced Specialized Mobile Radio

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.

A-2

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

PCS (Personal Communications
Service).................... A type of wireless telecommunications service competitive
with cellular.

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 speed.

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

[LOGO]

[Artwork: inside back cover page --
Map showing universe of existing
private fixed point wireless networks;
Outside Back Cover page -- Company logo]

[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]

PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED JULY 27, 1998
4,687,500 SHARES

[LOGO]
COMMON STOCK
-----------------

ALL OF THE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE, OFFERED HEREBY ARE
BEING SOLD BY PATHNET, INC. OF THE 4,687,500 SHARES OF COMMON STOCK BEING
OFFERED, 937,500 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED
STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS AND 3,750,000 SHARES
ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE
U.S. UNDERWRITERS. SEE "UNDERWRITERS." PRIOR TO THE OFFERING,
THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE
COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC
OFFERING PRICE PER SHARE WILL BE BETWEEN $15.00 AND $17.00.
SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS
CONSIDERED IN DETERMINING THE
INITIAL PUBLIC OFFERING PRICE.
------------------------

APPLICATION HAS BEEN MADE FOR QUOTATION OF THE SHARES ON THE NASDAQ NATIONAL
MARKET UNDER THE SYMBOL "PTNT."
------------------------

SEE "RISK FACTORS" BEGINNING OF PAGE 9 FOR INFORMATION THAT SHOULD BE CONSIDERED
BY PROSPECTIVE INVESTORS.
-----------------

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
REPRESENTA TION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-------------------

PRICE $ A SHARE
-------------------

UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
------------------ ------------------ ------------------

PER SHARE.......................................... $ $ $
TOTAL(3)........................................... $ $ $

- ---------

(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. SEE "UNDERWRITERS."

(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $850,000.

MORGAN STANLEY DEAN WITTER

BEAR, STEARNS INTERNATIONAL LIMITED

LEHMAN BROTHERS INTERNATIONAL

J.P. MORGAN SECURITIES LTD.

, 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................................................ 90,000
Accounting fees and expenses...................................... 150,000
Legal fees and expenses........................................... 300,000
Printing and engraving expenses................................... 180,000
Registrar and transfer agent's fees............................... 3,500
Miscellaneous fees and expenses................................... 86,500
---------
Total............................................................. $ 850,000
---------
---------

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 Underwriting Agreement by and among the Company, Morgan Stanley & Co.
Incorporated, Bear, Stearns & Co. Inc., Lehman Brothers Inc. and J.P. Morgan
Securities Inc. ("Underwriters") and Morgan Stanley & Co. International Limited,
Bear, Stearns International Limited, Lehman Brothers International (Europe) and
J.P. Morgan Securities Ltd. will provide for indemnification of the Company,

II-1

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 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.

The Investment and Stockholders' Agreement by and among the Company, certain
stockholders of the Company, Mr. Schaeffer and Mr. Jalkut, dated October 31,
1997, as amended (the "Investment and Stockholders' 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

The initial capitalization of the Company on August 28, 1995, occurred
through the issuance of 1,450,000 shares of voting common stock and 1,450,000
shares of non-voting common stock to David Schaeffer. In February 1996, David
Schaeffer returned 1,450,000 shares of non-voting common stock in exchange for
1,450,000 shares of voting stock.

On August 28, 1995, pursuant to an Investment and Stockholders' Agreement
(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 (i)
agreed 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. On February 8, 1996, pursuant to Amendment No. 1 to the Investment and
Stockholders' Agreement, the Series A Purchasers purchased the remaining 500,000
shares of Series A Preferred Stock for an aggregate purchase price of $500,000.
On August 2, 1996, pursuant to Amendment No. 2 to the Investment and
Stockholders' Agreement, 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").

II-2

On December 23, 1996, the Company, each of the Series A Purchasers, Grotech
Capital Group IV, L.P., Toronto Dominion Capital (U.S.A.), Inc., and Utech
Climate Challenge Fund, L.P. (together, the "Series B Purchasers") and Mr.
Schaeffer entered into an Investment and Stockholders' Agreement (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 and Amendment No. 3 to the Series A Purchase Agreement of the
same date, the Series B Purchasers purchased 1,041,290 shares of Series B
Preferred Stock for an aggregate purchase price of $3.0 million (which included
conversion of the Bridge Loan Notes into shares of Series B Preferred Stock) on
December 23, 1996, and purchased 609,756 shares of Series B Preferred Stock for
an aggregate purchase price of $2.0 million on June 18, 1997.

On October 31, 1997, the Company, the Series A Purchasers, the Series B
Purchasers and FBR Technology Venture Partners, L.P. (together the "Series C
Purchasers") and Mr. Schaeffer entered into the Investment and Stockholders'
Agreement (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. Pursuant to the Investment and Stockholders' Agreement, 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 on April 8, 1998.

On April 8, 1998, the Company issued and sold 350,000 units, each consisting
of $1,000 principal amount of 12 1/4% Senior Notes due 2008 (the "Notes") and
warrants to purchase shares of Common Stock (the "Warrants") to Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co.
Inc., TD Securities and Salomon Brothers Inc (together, the "Initial
Purchasers") for resale pursuant to Rule 144A and Regulation S under the
Securities Act. The aggregate purchase price of the Notes and Warrants was
$350,000,000 (including $10,500,000 in discounts to the Initial Purchasers).

Also in the last three years, the Company has issued options to purchase an
aggregate of 495,123 shares of Common Stock under the Pathnet, Inc. 1995 Stock
Option Plan, and options to purchase an aggregate of 2,046,258 shares of Common
Stock (as of June 2, 1998) under the Pathnet, Inc. 1997 Stock Incentive Plan, to
certain of its employees.

All of these shares, units and options were issued in reliance upon the
exemption from registration contained in Section 4(2) (in the case of original
issuances) or Section 3(a)(9) (in the case of exchanges) of the Securities Act.

In addition, in connection with the Offering, an aggregate of 15,864,716
shares of Common Stock will be issued to the holders of the Company's Series A,
Series B and Series C Convertible Preferred Stock. These shares of Common Stock
will be issued in reliance upon the exemption from registration contained in
Section 3(a)(9) of the Securities Act.

II-3

ITEM 16. EXHIBITS

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

1.1(1) Form of Underwriting Agreement among the Company, Morgan Stanley & Co. Incorporated,
Bear, Stearns & Co. Inc., Lehman Brothers Inc., J.P. Morgan Securities Inc., Morgan
Stanley & Co. International Limited, Bear, Stearns International Limited, Lehman Brothers
International (Europe) and J.P. Morgan Securities Ltd.
3.1(4) Form of Amended and Restated Certificate of Incorporation of the Company.
3.2(4) Form of Amended and Restated Bylaws of the Company.
4.1(4) Form of Common Stock Certificate.
5.1(4) Opinion of Paul, Weiss, Rifkind, Wharton & Garrison regarding legality of securities.
10.1(2)(6) Fixed Point Microwave Services Agreement by and between the Company and Northern Border
Pipeline Company, dated October 17, 1997.
10.2(2)(6) Fixed Point Microwave Services Agreement by and between the Company and Northern Indiana
Public Service Company, dated January 30, 1998.
10.3(2)(6) Fixed Point Microwave Services Agreement by and between the Company and Northeast
Missouri Electric Power Cooperative, dated December 1, 1997.
10.4(2)(6) Fixed Point Microwave Services Agreement by and between the Company and KN Energy, Inc.,
dated September 8, 1997.
10.5(2)(6) Fixed Point Microwave Services Agreement by and between the Company and Pathnet/Idaho
Power Equipment, LLC, dated April 17, 1998.
10.6(2)(6) 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(5) 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.
10.7.1(2)(4) License Agreement, by and between the Company and American Tower Corporation, dated as of
August 1, 1998.
10.8(5) Maintenance Services Agreement by and between the Company and KN Energy, Inc., dated
October 11, 1997.
10.9(5) Maintenance Services Agreement by and between the Company and Northern Indiana Public
Service Company, dated January 30, 1998.
10.10(5) Maintenance and Provisioning Services Agreement by and between the Company and Northern
Border Pipeline Company, dated April 29, 1998.
10.11(5) 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.
10.11.1(5) Amendment No. 3, dated May 4, 1998 to Master Agreement by and between the Company and NEC
America, Inc.
10.11.2(5) Amendment No. 4, dated July 10, 1998 to Master Agreement to Master Agreement by and
between the Company and NEC America, Inc.
10.12(5) Letter Agreement, by and between the Company and TCI Wireline, Inc., dated December 16,
1997.
10.13(3)(5) Non-Qualified Stock Option Agreement by and between the Company and Richard A. Jalkut,
dated August 4, 1997.
10.14(3)(5) Non-Qualified Stock Option Agreement by and between the Company and David Schaeffer,
dated October 31, 1997.
10.15(5) 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.

II-4

10.16(3)(5) Non-Disclosure, Assignment of Inventions and Non-Competition Agreement by and between the
Company and Kevin Bennis, dated February 2, 1998.
10.17(3)(5) Pathnet, Inc. 1995 Stock Option Plan.
10.18(3)(5) Pathnet, Inc. 1997 Stock Incentive Plan, as amended by Amendment No. 1 to 1997 Stock
Incentive Plan.
10.19(5) Indenture by and between the Company and The Bank of New York, as trustee, dated April 8,
1998.
10.20(5) 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(5) 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(5) Warrant Agreement by and between the Company and The Bank of New York, as warrant agent,
dated April 8, 1998.
10.23(5) 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(5) 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(5) 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.
10.26.1(5) Second Amendment to Lease, dated June 1, 1998.
10.27(2)(4) Fixed Point Microwave Services Agreement by and between the Company and KN
Telecommunications, Inc., dated June 2, 1998.
10.28(4) Maintenance Services Agreement by and between the Company and Texaco Pipeline, Inc.,
dated June 26, 1998.
21.1(5) Subsidiaries of the Company.
23.1(4) Consent of PricewaterhouseCoopers LLP.
23.2(4) Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1).
24.1(5) Power of Attorney.
27.1(5) Financial Data Schedule.
99.1(5) Consent of the Yankee Group.
99.2(5) Consent of Bell Communications Research.

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

(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.

(4) Filed herewith.

(5) Previously filed.

(6) Replaces previously filed exhibit.

II-5

(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.

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
Underwriting 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) 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-6

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the District of
Columbia on this 27th day of July, 1998.

PATHNET, INC.

By: /s/ DAVID SCHAEFFER
-----------------------------------------
Name: David Schaeffer
Title: Chairman of the Board

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the 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 July 27, 1998
David Schaeffer Director

*
- ------------------------------ Chief Executive Officer July 27, 1998
Richard A. Jalkut and Director

* Vice-President, Finance
- ------------------------------ (principal accounting July 27, 1998
William R. Smedberg, V and financial officer)

*
- ------------------------------ Director July 27, 1998
Peter J. Barris

*
- ------------------------------ Director July 27, 1998
Kevin J. Maroni

*
- ------------------------------ Director July 27, 1998
Patrick J. Kerins

*
- ------------------------------ Director July 27, 1998
Richard K. Prins

*
- ------------------------------ Director July 27, 1998
Stephen A. Reinstadtler

*By: /s/ DAVID SCHAEFFER
-------------------------
Name: David Schaeffer
Title: Attorney-in-fact

INDEX TO EXHIBITS

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

10.17(3)(5) Pathnet, Inc. 1995 Stock Option Plan.
10.18(3)(5) Pathnet, Inc. 1997 Stock Incentive Plan, as amended by Amendment No. 1 to 1997 Stock
Incentive Plan.
10.19(5) Indenture by and between the Company and The Bank of New York, as trustee, dated April 8,
1998.
10.20(5) 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(5) 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(5) Warrant Agreement by and between the Company and The Bank of New York, as warrant agent,
dated April 8, 1998.
10.23(5) 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(5) 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(5) 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.
10.26.1(5) Second Amendment to Lease, dated June 1, 1998.
10.27(2)(4) Fixed Point Microwave Services Agreement by and between the Company and KN
Telecommunications, Inc., dated June 2, 1998.
10.28(4) Maintenance Services Agreement by and between the Company and Texaco Pipeline, Inc.,
dated June 26, 1998.
21.1(5) Subsidiaries of the Company.
23.1(4) Consent of PricewaterhouseCoopers LLP.
23.2(4) Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1).
24.1(5) Power of Attorney.
27.1(5) Financial Data Schedule.
99.1(5) Consent of the Yankee Group.
99.2(5) Consent of Bell Communications Research.

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

(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.

(4) Filed herewith.

(5) Previously filed.

(6) Replaces previously filed exhibit.