PAETEC CORP, S-1/A, 2000-12-08

PAETEC CORP
S-1/A, 2000-12-08
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE>

As filed with the Securities and Exchange Commission on December 8, 2000

Registration No. 333-34770
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

Amendment No. 3
to
Form S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933

---------------
PaeTec Corp.
(Exact Name of Registrant as Specified in its Charter)

Delaware 4813 16-1551094
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)

290 Woodcliff Drive
Fairport, New York 14450
(716) 340-2500
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

Daniel J. Venuti, Esq.
Executive Vice President and General Counsel
PaeTec Corp.
290 Woodcliff Drive
Fairport, New York 14450
(716) 340-2500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Copies to:
Richard J. Parrino, Esq. Robert Evans III, Esq.
Charles E. Sieving, Esq. Shearman & Sterling
Hogan & Hartson L.L.P. 599 Lexington Avenue
8300 Greensboro Drive New York, New York 10022
McLean, Virginia 22102 (212) 848-4000
(703) 610-6100

Approximate date of commencement of proposed sale to the public: As soon
as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
<CAPTION>
Proposed
Proposed maximum
maximum aggregate Amount of
Title of each class of Amount to offering price offering registration
securities to be registered be registered(1) per share(2) price fee
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, $.01 par value........... 8,050,000 $14.00 $112,700,000 $29,753(3)
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 1,050,000 shares of Class A common stock that the underwriters
have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(a) under the Securities Act of 1933.
(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 this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

EXPLANATORY NOTE

This registration statement contains two forms of prospectus: a "U.S.
prospectus" to be used in connection with a United States and Canadian offering
and an "international prospectus" to be used in a concurrent international
offering. The two prospectuses will be identical in all respects except for the
front and back cover pages, the page marked "Table of Contents" and the section
entitled "Underwriting." Pages to be included in the international prospectus
and not the U.S. prospectus are marked "alternate page."
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ Subject to Completion +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+ Preliminary Prospectus dated December 8, 2000 +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

PROSPECTUS

7,000,000 Shares

PaeTec Corp.

Class A Common Stock

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

This is PaeTec's initial public offering of Class A common stock. PaeTec is
selling all of the shares of Class A common stock. The U.S. underwriters are
offering 5,600,000 shares in the U.S. and Canada and the international managers
are offering 1,400,000 shares outside the U.S. and Canada.

We expect the public offering price to be between $12.00 and $14.00 per
share. Currently, no public market exists for the shares. After pricing of the
offerings, we expect that the shares will be quoted on the Nasdaq National
Market under the symbol "PAET."

Investing in the Class A common stock involves risks that are described in
the "Risk Factors" section beginning on page 6 of this prospectus.

-----------

<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>

Public offering price....................... $ $

Underwriting discount....................... $ $

Proceeds, before expenses, to PaeTec........ $ $
</TABLE>

The U.S. underwriters may also purchase up to an additional 840,000 shares of
Class A common stock from PaeTec at the initial public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments. The international managers may similarly purchase up to an
additional 210,000 shares of Class A common stock from PaeTec.

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

The shares will be ready for delivery on or about , 2000.

-----------
Merrill Lynch & Co. Bear, Stearns & Co. Inc.

-----------
CIBC World Markets
Deutsche Banc Alex. Brown

-----------

The date of this prospectus is , 2000.
<PAGE>

PaeTec Coverage

[A map of the continental United States appears here. The following states
appear in black font color: California (excluding Southern California, which is
yellow, and the central coast, which is white), Arizona, New Mexico, Colorado,
Wyoming, Nebraska, Texas (excluding the area surrounding Dallas, which is
white), Louisiana, Alabama, Florida (excluding central Florida, which is white,
and southeastern Florida, which is yellow), Georgia (excluding the northwestern
portion of the state, which is white), South Carolina, North Carolina, Virginia
(excluding the northern Virginia area, which is yellow), Kentucky, Ohio
(excluding the northeastern corner of Ohio, which is white), Indiana, Illinois
(excluding the northeastern Illinois area, which is white), Wisconsin, Michigan
(excluding the entire eastern part of Michigan, which is white) and
Pennsylvania (excluding the southeastern Pennsylvania area, which is yellow,
and the far western Pennsylvania area, which is white). The following states
appear in yellow: New Jersey, Maryland, Delaware, Rhode Island, Massachusetts,
New Hampshire, Connecticut and New York (excluding the south central portion of
New York, which is black).]

[Each of the following cities is represented on the map in the applicable
location by a red dot and such city's name, printed in beige font: Los Angeles,
Miami, Northern Virginia, Philadelphia, New York City, Boston, Albany,
Rochester and Chicago. Each of the following cities is represented on the map
in the applicable location by a blue dot and such city's name, printed in
beige: San Francisco, Dallas, Orlando, Atlanta and Detroit.]

[Green diamonds appear on the map in various locations]

Key:
[Shield with PaeTec logo]
[Red Dot] Current Switch Locations*

[Yellow Square] Current Local Service Areas

[Green Diamond] Properties Currently Served by PaeTec's Campuslink Business
Unit

[Blue Dot] Switch Locations Planned to be Installed by the End of 2001*

[White Square] Local Service Areas Planned to be Operational by the End of 2001

* Switches are computers that connect customers to PaeTec's network and
transmit voice and data communications over the network.
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Consolidated Financial and Operating Data....................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 28
Regulation of Our Services............................................... 49
Management............................................................... 54
Transactions Involving Related Parties................................... 65
Security Ownership of Certain Beneficial Owners and Management........... 70
Description of Capital Stock............................................. 74
Shares Eligible for Future Sale.......................................... 79
U.S. Tax Consequences to Non-U.S. Holders................................ 82
Underwriting............................................................. 85
Legal Matters............................................................ 89
Experts.................................................................. 89
Where You Can Find Additional Information................................ 89
Index to Consolidated Financial Statements and Unaudited Pro Forma
Financial Information................................................... F-1
</TABLE>
<PAGE>

SUMMARY

This summary contains important information about PaeTec and the
offerings. We caution you, however, that the summary may not contain all of the
information that may be important to you. You should read the entire
prospectus, including the risk factors and our consolidated financial
statements and related notes, before making an investment decision.

Our Company

Through our existing data-ready network, we provide our services to over
24,000 businesses and institutions primarily in eight major U.S. cities and an
additional 17 metropolitan areas adjacent to those cities. As of September 30,
2000, we had installed for these customers over 3,300 digital transmission
lines which represent over 78,000 telephone lines and provide us with the
capacity to deliver a variety of our value-added services to these customers
over our network at higher profit margins. The businesses in the areas we
currently serve represent over 30% of the total business telephone lines in the
U.S. We plan to expand our network to an additional ten major metropolitan
areas by the end of 2001 and additional metropolitan areas beginning in 2002.
When we complete this expansion, we expect to provide communications services
using efficient, high capacity technology that will allow us to operate voice
and data networks as a single integrated network and further integrate our
service offerings.

We seek to reduce customer turnover, increase our profit margins and
increasingly differentiate ourselves from other communications providers by
delivering, in a seamless manner, complete communications solutions organized
around the following four categories of value-added services:

Network Connection Services--Our advanced network facilitates delivery of
our service offerings through an expanding variety of technologies, including
advanced digital technologies that allow us to offer high-speed digital network
connections at competitive prices. Our initial network deployment strategy, in
which we combine voice and data transmission lines we lease with other
electronic network components we own and operate, provides us with control over
the quality of our service offerings, reduces our capital investments and
allows us to bring our services more quickly to market.

Core Voice and Data Services--We offer an expanding range of core
communications services to customers connected to our network. These services
currently include voice services, such as local dial tone services, domestic
and international long distance services and calling card services, as well as
data services, such as Internet access and outsourced private networking
services.

Comprehensive Voice and Data Programs--We believe that many
communications-intensive users are principally interested in value-added
programs that enhance our core communications services. Consequently, we offer
a growing range of standard and customized voice programs, such as conference
calling and voice mail, and data programs, such as e-commerce.

Network Operations Services--We offer a growing variety of network
operations services that help customers build and operate their own networks.
These network operations services include equipment sales, installation and
maintenance, network management, network design and implementation, wide area
network support, and billing and customer care.

1
<PAGE>

Our Business Strategy

Our objective is to become the most customer- and employee-oriented
network-based services provider to medium-sized and large businesses and
institutions in our markets. As part of our business strategy, we:

. offer a full range of bundled services to communications-intensive
users;

. work closely with our customers to develop end-to-end communications
solutions tailored to each customer's particular needs;

. operate efficient, integrated back office systems;

. continue to deploy an advanced network with reduced capital
expenditures; and

. supplement our internal growth with strategic acquisitions.

Other Information

PaeTec was organized under the laws of the State of Delaware. Our
principal executive offices are located at 290 Woodcliff Drive, Fairport, New
York 14450, and our main telephone number at that address is (716) 340-2500. We
maintain our general corporate website at www.paetec.com. The contents of our
websites are not part of this prospectus.

Unless we indicate otherwise, the information in this prospectus:

. assumes that the initial public offering price of the Class A common
stock will be $13.00 per share, which is the midpoint of the range we
show on the cover page of this prospectus;

. assumes that the underwriters will not exercise their over-allotment
options; and

. reflects the conversion of all of our outstanding Series A convertible
preferred stock into 17,866,666 shares of Class A common stock upon
completion of the offerings.

You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.

2
<PAGE>

The Offerings

<TABLE>
<S> <C> <C>
Class A common stock
offered by PaeTec:
U.S. offering........ 5,600,000 shares
International
offering............ 1,400,000 shares
----------
Total.............. 7,000,000 shares

Shares outstanding
before
the offerings......... 25,275,376 shares of Class A common stock
2,635,000 shares of Class B common stock
----------
27,910,376 shares of common stock

Shares outstanding after
the offerings......... 50,142,042 shares of Class A common stock
2,635,000 shares of Class B common stock
----------
52,777,042 shares of common stock
Voting rights:
Class A common
stock............... One vote per share
Class B common
stock............... 20 votes per share

Use of proceeds........ We estimate that our net proceeds from the offerings
without exercise of the over-allotment options will be
approximately $83.8 million. We intend to use the net
proceeds for the following purposes:

. to fund capital expenditures;
. for working capital;
. to hire additional employees;
. to fund operating losses;
. to fund potential acquisitions; and
. for other general corporate purposes.

The amounts we actually spend in these areas will
depend on a variety of factors, including our
future revenues.

Risk factors........... See "Risk Factors" beginning on page 6 and other
information included in this prospectus for a
discussion of factors you should carefully consider
before deciding whether to buy our Class A common
stock.

Proposed Nasdaq National
Market symbol......... "PAET"
</TABLE>

The number of shares of our common stock we show as outstanding after the
offerings excludes:

. 4,043,574 shares of Class A common stock subject to outstanding
options at a weighted average exercise price of $5.07 per share as of
September 30, 2000;

. 93,166 shares of Class A common stock subject to outstanding warrants
at a weighted average exercise price of $5.35 per share as of
September 30, 2000;
. additional shares of Class A common stock we would be required to
issue under existing acquisition agreements if the market price of the
Class A common stock is not at least $25 per share during valuation
periods occurring after the offerings; and

. any shares we may issue if the underwriters exercise their over-
allotment options.

3
<PAGE>

Summary Consolidated Financial and Operating Data

We derived the summary consolidated financial data presented below for
the period from our inception on May 19, 1998 to December 31, 1998, for the
year ended December 31, 1999, and as of December 31, 1998 and 1999 from our
consolidated financial statements, which have been audited by Deloitte & Touche
LLP, independent auditors. The summary consolidated statements of operations
data for the nine months ended September 30, 1999 and September 30, 2000 and
the consolidated balance sheet data as of September 30, 2000 are unaudited, but
include, in the opinion of our management, all adjustments, consisting only of
normal, recurring adjustments, necessary for a fair presentation of such data.
The results of operations for the nine months ended September 30, 2000 are not
necessarily indicative of results to be expected for the entire year or for any
other period. You should also read the information under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 19 and our consolidated financial statements and related
notes beginning on page F-1. We have presented the following data in thousands,
except per share amounts and the information shown under "Operating Data."

<TABLE>
<CAPTION>
Period from inception Nine months ended
(May 19, 1998) Year ended September 30,
to December 31, 1998 December 31, 1999(1) 1999 2000
--------------------- -------------------- -------- --------
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Service revenue....... $ 150 $ 20,695 $ 7,741 $ 72,127
Equipment sales....... -- 2,652 -- 9,929
------- -------- -------- --------
150 23,347 7,741 82,056

Cost of Sales:
Service costs......... 96 14,576 6,602 37,160
Equipment costs....... -- 2,233 -- 7,549
------- -------- -------- --------
96 16,809 6,602 44,709
------- -------- -------- --------
Gross margin.......... 54 6,538 1,139 37,347
Selling, general and
administrative
expenses............. 5,770 40,294 23,416 72,442
Depreciation and
amortization......... 243 4,508 1,849 12,668
------- -------- -------- --------
Loss from operations.. (5,959) (38,264) (24,126) (47,763)
Other income, net..... 107 355 711 2,596
Interest expense...... -- (2,434) (2,042) (4,899)
------- -------- -------- --------
Net loss.............. $(5,852) $(40,343) $(25,457) $(50,066)
======= ======== ======== ========
Net loss per share,
basic and diluted.... $ (0.67) $ (1.93) $ (1.36) $ (1.81)
======= ======== ======== ========
Balance Sheet Data (at
period end):
Cash and cash
equivalents.......... $ 2,434 $ 7,435 $ 77,411
Property and
equipment, net....... 11,784 62,384 91,141
Total assets.......... 15,716 121,986 263,397
Long-term debt........ -- 69,166 106,312
Series A convertible,
redeemable
preferred stock...... -- -- 128,326
Total stockholders'
equity............... 12,635 30,061 (3,012)

Other Financial Data:
Capital expenditures.. $12,027 $ 41,781 $ 36,296 $ 37,971
EBITDA(2)............. (5,716) (33,756) (22,277) (35,095)
Cash used by operating
activities........... (3,229) (39,759) (22,128) (43,923)
Cash used by investing
activities........... (12,027) (37,407) (35,942) (44,329)
Cash provided by
financing
activities........... 17,690 82,167 61,525 158,228
</TABLE>

4
<PAGE>

<TABLE>
<CAPTION>
At December 31, At September 30,
1999 2000
--------------- -----------------
<S> <C> <C>
Operating Data:
Markets served(3)....... 25 25
Number of switches
deployed(4)............ 8 8
Digital T1 transmission
lines installed(5)..... 912 3,300
Access line equivalents
installed(5)........... 21,200 78,000
Sales force employees... 211 263
Total employees......... 590 918
</TABLE>
--------

(1) Includes the operating results of Campuslink Communications Systems, Inc.
from September 9, 1999, which is the date we completed our acquisition of
Campuslink.
(2) We have included data with respect to EBITDA because it is commonly used in
our industry as a measurement of financial performance and by investors to
analyze and compare companies on the basis of operating performance. When
we refer to "EBITDA," we mean net earnings or loss before interest expense,
income taxes, depreciation and amortization. EBITDA is not a measurement of
financial performance under generally accepted accounting principles and
should not be considered an alternative to operating income, as determined
in accordance with generally accepted accounting principles, as an
indicator of our operating performance, or to cash flows from operating
activities, as determined in accordance with generally accepted accounting
principles, as a measure of our liquidity. EBITDA is not necessarily
comparable with similarly titled measures for other companies.
(3) Each market represents a metropolitan statistical area as defined by the
U.S. Census Bureau.

(4) Switches are computers that connect customers to our network and transmit
voice and data communications over the network.

(5) An access line is a telephone line which extends from one of our central
offices to our customer's premises. We connect customers to our network by
leasing digital T1 telephone and data transmission lines linking our
customers to the central office. Each digital T1 transmission line provides
the customer with 24 channels for telephone or data service, although some
customers do not use or pay for all 24 channels. We calculate the number of
access line equivalents we have installed by multiplying the number of
digital T1 transmission lines by 24. The number of access line equivalents
shown excludes access line equivalents sold or installed by our Campuslink
unit.

5
<PAGE>

RISK FACTORS

You should carefully consider the following risk factors before deciding
whether to buy our Class A common stock.

Risks Involving Our Business

We have a limited operating history, which limits the information available to
you to make an informed decision whether to buy our Class A common stock.

We formed our company in May 1998 and began generating revenue in
November 1998. As a result, you have limited operating and financial
information to evaluate our performance and future prospects and to determine
whether you should invest in our Class A common stock. We face the risks and
difficulties of an early stage company. We expect to increase the number of
markets in which we operate and expand the scope of services that we offer.
Because these markets and services will be new, we are unable to predict their
potential contribution to our future revenues or earnings.

If we are unable to raise additional capital, we will not be able to expand our
business and develop our network and services as planned.

We expect that we will continue to incur significant and increasing
operating and net losses, negative EBITDA and negative cash flow from
operations as we continue to expand our business and develop our network and
services. Accordingly, we will require significant amounts of additional
capital to finance our growth and fund future operating losses. In addition, we
are subject to the restrictive covenants of our senior credit facility which
may limit our ability to access additional capital. We may be required to seek
waivers or modifications of some of these covenants before June 30, 2001. Our
failure to obtain additional financing or any required waivers or modifications
of these covenants, if necessary, may force us to delay or abandon our plans to
expand our market, operations, facilities, network and services, which could
harm our competitive position. We may seek to meet our additional capital needs
by issuing debt or additional equity securities or borrowing funds from one or
more lenders. Our ability to incur additional debt is substantially limited by
the terms of our credit facility. We cannot assure you that we will have timely
access to additional financing sources on acceptable terms, if at all.

If our services do not achieve sufficient market acceptance, we will not be
able to achieve or sustain profitability or positive cash flow.

To build a customer base sufficient to support the costs of our
operations and to enable us to operate on a profitable basis, our target
customers must accept us as an alternative provider of integrated
communications services. If we do not develop and market services that are
widely accepted by businesses and institutions at profitable prices, our
ability to continue operations will be adversely affected. Further, the market
for many of our current and proposed services, particularly high-speed data and
Internet services, is relatively new, highly competitive and evolving rapidly.
We cannot assure you that the market for these services will develop, or that
businesses and institutions will use these services, to the degree or in the
manner we currently anticipate.

If we are unable to manage our anticipated growth effectively, our prospects
for profitable operations will be harmed.

To achieve the growth anticipated in our business plan, we will have to
complete the deployment and upgrading of our network and continue to develop
and integrate our back office systems, expand our service offerings and augment
our sales, technical and managerial staffs. Our plans to expand rapidly will
place significant demands on our management and other employees, our
operational and financial systems, and our procedures and controls. If we fail
to manage effectively the expansion and development of our operations, we may
experience higher costs of operations, a decline in service quality, the loss
of customers and other limitations that would adversely affect our prospects
for profitable operations.

6
<PAGE>

We may not be successful in integrating acquired companies into our operations,
which could slow our growth.

We supplement our internal growth with a program of strategic
acquisitions. Acquisitions will not enhance our business and earnings if we do
not successfully integrate acquired businesses into our operations. The
following risks could adversely affect our integration of companies we acquire:

. we may be unable to retain skilled management, technical, sales and
back office personnel of acquired companies;

. customers of acquired companies may resist our marketing programs,
pricing levels or services;

. we may not successfully incorporate acquired services into our suite
of service offerings;

. the attention we can devote to any one acquired company will be
restricted by our allocation of limited management resources among
various integration efforts;

. our acquisition and integration activities may cause disruptions of
our ongoing business;

. we may be unable to maintain uniform standards, controls, procedures
and policies throughout all of our acquired companies; and

. our relationships with vendors may be impaired.

Our acquisition strategy may adversely affect our earnings.

Even if businesses we acquire eventually contribute to an increase in our
profitability, the acquisitions may adversely affect our earnings in the short
term. Our earnings may decrease as a result of transaction-related expenses we
record for the quarter in which we complete an acquisition. Our earnings may be
further reduced by the higher operating and administrative expenses we may
incur in the quarters immediately following an acquisition as we seek to
integrate the acquired business into our operations. The amortization of
goodwill and depreciation resulting from acquisitions also will contribute to
reduced earnings.

If we are unable to install additional network equipment, convert our network
to more advanced technology or expand our data service offerings, we may not be
able to compete effectively.

Our network deployment plan calls for us to install additional network
equipment in additional states and metropolitan areas and complete the
conversion of our existing network to a network using more advanced technology.
We cannot assure you that we will complete the installation of additional
network equipment and the conversion to more advanced technology in a timely
manner and at a commercially reasonable cost, or that we will not face
technological problems that cannot be resolved. In addition, although we intend
to offer an expanding array of high-speed data and Internet services, we cannot
assure you that we will successfully implement these services. If we are unable
successfully to install or operate new network equipment, convert our network
to a network using more advanced technology or implement high-speed data and
Internet services, we may not be able to compete effectively and our results of
operations could be adversely affected.

If we are unable to keep pace with rapid technological changes in our industry,
we may lose customers to competitors offering more advanced services.

If we cannot obtain new communications technology on satisfactory terms,
we may not be able to increase our revenues and number of customers. The rapid
changes in communications technology influence the demand for our services. We
need to anticipate these changes and develop or obtain new and enhanced
products and services quickly and accurately enough to remain competitive in
this changing market. We currently rely on third parties to develop and provide
us with new technology. Because some of these new technologies may be protected
by intellectual property laws and may not be available to us, we cannot assure
you that we will obtain timely access to new technology we may need to compete
effectively on satisfactory terms.

7
<PAGE>

If we do not retain our senior management and continue to attract and retain
qualified personnel and independent sales agents, we may not be able to execute
our business plan.

Our future success depends on the continued employment of our senior
management team, particularly Arunas A. Chesonis, our Chairman of the Board and
Chief Executive Officer. Our existing senior management has extensive
experience in the telecommunications industry working as a team and has
developed and directed our business strategy since our formation. Because of
this experience, the loss of the services of one or more of our senior managers
could impair our ability to execute our strategy, which could hinder our
introduction of new services, our entry into new markets and our expansion in
general. We also could be less prepared for technological or marketing
problems, which could reduce our ability to serve our customers and could lower
the quality of our services. We have not entered into employment agreements
with any members of our senior management team, although our stock rights
agreements with some of these members contain severance and non-competition
provisions.

We face intense competition for qualified personnel, including
management, technical and sales personnel. We also rely on a large number of
independent sales agents to market and sell our services. If we are unable to
attract and retain experienced and motivated personnel, including a large and
effective direct sales force, and a substantial number of sales agents, we may
not be able to obtain new customers and sell sufficient amounts of service to
execute our business plan.

If we are unable to maintain or enhance our back office information systems, we
may not be able to expand as quickly as planned or compete effectively.

Sophisticated back office information systems are vital to our growth and
our ability to monitor costs, bill customers, initiate, implement and track
customer orders and achieve operating efficiencies. Our plans for the continued
development and implementation of these systems primarily depend on our
selecting products and services offered by third-party vendors and efficiently
integrating those products and services into our existing operations. We cannot
assure you that we will successfully implement these products, services and
systems on a timely basis, or at all, or that our existing or new systems will
perform as expected. A failure or delay in implementation or performance could
slow the pace of our expansion or harm our competitiveness by adversely
affecting our service quality.

If we cannot continue to obtain key elements of our network from some of our
primary competitors, we may not be able to offer services on a profitable
basis, if at all.

We depend in each of our markets on our primary competitors, which
include the incumbent local telecommunications providers, competitive local
telecommunications providers, long distance providers and other communications
providers, to provide us with key elements of our network. To offer local
service in a target market, we must interconnect with the incumbent provider in
that market. In addition, as part of our network deployment strategy, we lease
from other providers the telephone and data transmission lines we need to
connect customers to our network. We will not be able to provide our services
on a profitable basis, if at all, unless our competitors comply with their
provisioning obligations on a timely basis, maintain their networks in good
working order and provide us with adequate telephone and data transmission
capacity. Moreover, we cannot assure you that the rates that these or other
providers will charge us under future interconnection, lease or resale
agreements will allow us to offer usage rates low enough to attract a
sufficient number of customers and to operate at satisfactory profit margins.

Network failures or system breaches could cause delays or adversely affect our
service quality, which may cause us to lose customers and revenues.

In operating our network, we may be unable to connect and manage a large
number of customers or a large quantity of traffic at high speeds. Any failure
to achieve or maintain high-speed data transmission could significantly reduce
demand for our services and adversely affect our operating results. In
addition, computer viruses, break-ins,

8
<PAGE>

human error, natural disasters and other problems may disrupt our network. We
cannot assure you that the network security and stability measures we implement
will not be circumvented in the future or otherwise prevent the disruption of
our services. The costs and resources required to eliminate computer viruses
and other security problems may result in interruptions, delays or cessation of
services to our customers, which could decrease demand, decrease our revenue
and slow our planned expansion.

Expansion of our network may result in increased costs which we may not be able
to offset by higher revenues.

We incur operating expenses in leasing telephone and data transmission
lines that are proportionately higher than those incurred by communications
providers that own telephone and data transmission lines. This could place us
at a competitive disadvantage. We cannot assure you that we will be able to
mitigate the effect of these higher, anticipated operating expenses by
achieving higher revenue per line as a result of our focus on providing
services to communications-intensive medium-sized and large businesses and
institutions. If we are not successful in offsetting these higher operating
expenses, our profit margins will be reduced.

If we do not accurately estimate our future requirements for off-network long
distance services and establish effective resale agreements, we may not be able
to provide these services on a profitable basis.

In offering long distance services for traffic not carried on our
network, we rely on other carriers to provide domestic and international
transmission services through resale agreements. If we do not accurately
estimate our future requirements for these services and establish effective
resale agreements, we may not be able to provide these off-network services on
a profitable basis. Our resale agreements typically provide for the resale of
long distance services on a per minute basis and may contain minimum volume
commitments. Negotiation of these agreements involves estimates of future
supply and demand for transmission capacity, as well as estimates of the
calling pattern and traffic levels of our future customers. If we fail to meet
our minimum volume commitments, we will be obligated to pay underutilization
charges. If we underestimate our need for transmission capacity, we must obtain
additional capacity through alternative means, which may prove to be more
expensive than we currently estimate.

If we do not compete effectively in the highly competitive communications
services industry, we could lose customers and revenue and may face more
difficulties in entering new markets or expanding in existing markets.

We face intense competition in all of our markets. Our inability to
compete effectively could result in loss of customers and lower revenue for us.
It could also make it more difficult for us to enter new markets or expand in
our existing markets. Incumbent telephone companies, including BellSouth
Corporation and Verizon Communications, currently dominate their local
telecommunications markets and are our primary competitors in some of our
markets. Many of our existing and potential competitors have financial and
other resources far greater than our own. In addition, the trend toward mergers
and strategic alliances in the communications industry may strengthen some of
our competitors, which could put us at a significant competitive disadvantage.
Verizon Communications recently obtained authority to provide long distance
services in the State of New York, and Verizon Communications and other
incumbent carriers are seeking similar authority in a number of other states.
These companies will become more powerful competitors as they obtain authority
to provide long distance services in addition to local services.

In addition, three major competitors, AT&T Corp., WorldCom, Inc. and
Sprint Corporation, dominate the long distance market. Hundreds of other
companies also compete in the long distance marketplace. AT&T, WorldCom and
Sprint also offer local telecommunications services in many locations. We also
compete with other communications services companies which, like us, compete
with the incumbent local telephone companies and the dominant long distance
companies in some markets.

9
<PAGE>

Our other competitors may include cable television companies, providers
of communications network facilities dedicated to particular customers,
providers of digital access and data services, microwave and satellite
carriers, wireless telecommunications providers, private networks owned by
large end-users, and telecommunications management companies. These and other
firms may enter the markets where we focus or plan to focus our sales efforts.

Our need to comply with extensive government regulation could increase our
costs and slow our growth.

Many of the communications services we provide are subject to significant
regulation and are affected by regulatory developments at the federal, state
and, to a lesser extent, local levels. Delays in receiving required regulatory
approvals or the enactment of adverse regulation may slow our growth and
increase our operating costs.

Decisions of regulatory authorities and of the courts that review these
decisions on appeal may greatly affect the rates, terms and conditions of our
interconnection agreements and arrangements. These decisions may not be
favorable to us. The implementation of new FCC rules may lead to litigation,
which could make negotiating, maintaining and enforcing interconnection
agreements more difficult and protracted, and may require renegotiation of our
existing agreements.

The FCC or state commissions may not grant us required authority or may
take action against us if we are found to have provided services without
obtaining the necessary authorizations or to have violated other requirements
of their rules and orders. Regulators and others could challenge our compliance
with rules and orders that apply to us. These challenges could cause us to
incur substantial legal and administrative expenses and could cause delays in
the implementation of our business plan.

The fees we receive for terminating calls of other providers may be reduced,
which would adversely affect our profit margins and operating results.

The rates that we charge long distance service providers for completing
calls by their customers to customers served by our network and for
transferring calls by our customers onto their networks could be reduced by
government regulators. The reduction of these access charges could adversely
affect our profit margins and operating results. Our access charges may be
reduced if government regulators determine that the charges are unjust,
unreasonable or unreasonably discriminatory. Regulators could take this action
by resolving in a manner adverse to us disputes that have arisen regarding the
obligation of long distance providers to pay access charges to competitive
local providers. For example, AT&T has stated that it believes it does not have
to pay these access charges to any competitive local provider unless it is
contractually obligated to do so. In addition, Sprint has asserted that it is
only obligated to pay access charges to competitive local providers to the
extent that the access charges do not exceed those of the incumbent local
provider. The FCC has initiated a rulemaking proceeding seeking comment on
whether to impose regulatory restrictions on the access charges received by
competitive local providers.

If we have difficulty servicing or refinancing our substantial indebtedness,
our ability to expand and implement our business plan could be adversely
affected.

We cannot assure you that our business will generate sufficient cash
flows from operations or that our currently anticipated growth in revenues and
cash flow will be realized on schedule or in an amount sufficient to enable us
to pay or refinance our indebtedness. If we cannot service or refinance our
indebtedness, we may lack the funds we need to expand and implement our
business plan. As of September 30, 2000, we had $107.0 million of total
indebtedness, $128.3 million of preferred stock and $(3.0) million of
stockholders' equity. We anticipate incurring additional indebtedness in the
future, including under our senior credit facility and by issuing debt
securities. Our ability to refinance our current or future indebtedness will
depend on our financial condition at the time, the terms of our indebtedness,
market conditions and other factors beyond our control. If we are unable to
refinance our indebtedness, we may not have sufficient cash flow to meet our
debt service requirements and other liquidity needs. Any payment defaults on
particular indebtedness could cause defaults under our other indebtedness.

10
<PAGE>

Covenants in our credit facility restrict our capacity to borrow and invest,
which could impair our ability to expand or finance our operations.

Our senior credit facility agreement imposes operating and financial
restrictions that limit our discretion on some business matters, which could
make it more difficult for us to expand, finance our operations or engage in
other business activities that may be in our interest. These restrictions limit
our ability to:

. incur additional debt;

. pay dividends or make other distributions;

. make investments or other restricted payments;

. enter into sale and leaseback transactions;

. pledge or mortgage assets;

. enter into transactions with related persons;

. sell assets; and

. consolidate, merge or sell all or substantially all of our assets.

Our indebtedness may limit our flexibility in responding to important
business developments, which could place us at a competitive disadvantage. Our
indebtedness may:

. limit our ability to obtain necessary financing in the future;

. limit our ability to refinance all or a portion of our indebtedness
on or before maturity;

. limit our ability to fund planned capital expenditures;

. require us to use a significant portion of our cash flow from
operations to pay our debt obligations rather than for other
purposes, such as funding working capital or capital expenditures;
and

. make us more vulnerable to a downturn in our business or in the
economy in general.

Risks Involving Our Class A Common Stock

Members of our management, as Class B stockholders, possess superior voting
rights that give them the ability to control major corporate decisions.

We have two types of common stock, Class A common stock, which carries
one vote per share, and Class B common stock, which carries 20 votes per share.
As a result of their superior voting rights, the holders of our Class B common
stock will have the ability to control our major corporate decisions. Members
of our senior management and trusts they have established are the beneficial
owners of all of our outstanding Class B common stock and a significant number
of shares of our Class A common stock. These holders will control approximately
53.9% of the combined voting power of our common stock immediately following
the offerings. All of our Class B stockholders have granted Arunas A. Chesonis,
our Chairman of the Board and Chief Executive Officer, proxies authorizing him
to vote their shares of Class B common stock in his sole and absolute
discretion. As a result of the voting rights of the Class B stockholders, and
their grant of proxies to Mr. Chesonis, holders of our Class A common stock
will be subject to the following risks:

. immediately after the offerings, the Class B stockholders as a group
and, so long as the proxies remain in effect, Mr. Chesonis
individually will have the ability to elect all of our directors,

11
<PAGE>

subject to the provisions of the voting agreement to which Mr.
Chesonis is a party, and to control other major decisions involving
our company or its assets;

. the superior voting rights of the Class B common stock could render
more difficult or discourage a takeover attempt even if a change of
control of our company would be beneficial to the interests of our
stockholders; and

. the interests of our Class B stockholders may conflict with the
interests of our Class A stockholders.

Conflicts of interest may arise from investments made by some of our
institutional investors in other telecommunications companies.

Two of our principal institutional investors, Madison Dearborn Partners
and The Blackstone Group, and their affiliates currently have significant
investments in telecommunications services companies other than PaeTec. These
institutional investors and their affiliates may invest in the future in other
entities that compete with us. In addition, principals of these institutional
investors who will continue to serve as PaeTec directors following the
offerings also serve as directors of other telecommunications services
companies. As a result, these directors may be subject to conflicts of
interest during their tenure as directors of PaeTec. Because of the potential
conflicts, these directors may be required periodically to disclose our
financial or business opportunities to the other companies to which they owe
fiduciary duties.

Provisions in our organizational documents and in the Delaware General
Corporation Law may prevent takeover attempts that could be beneficial to our
stockholders.

Provisions of our certificate of incorporation, our bylaws and the
Delaware General Corporation Law could discourage a takeover of us even if a
change of control of our company would be beneficial to the interests of our
stockholders. These provisions include a requirement that our board of
directors be divided into three classes, with approximately one-third of the
directors to be elected each year. This classification of directors makes it
more difficult for an acquiror or for other stockholders to change the
composition of the board of directors. In addition, our certificate of
incorporation authorizes the board of directors to provide for the issuance of
up to 5,000,000 shares of our preferred stock, in one or more series, which
the board of directors could issue without stockholder approval and with terms
and conditions, and having rights, privileges and preferences, to be
determined by the board of directors. The ability to issue preferred stock
could discourage unsolicited acquisition proposals or make it more difficult
for a third party to gain control over us, or otherwise could adversely affect
the market price of our common stock. We are also subject to a section of the
Delaware General Corporation Law which prohibits us from engaging in some
business combinations with stockholders that beneficially own 15% or more of
our voting stock, or with the affiliates of those stockholders, unless our
directors or stockholders approve the business combination in the manner
prescribed by this statute.

You will experience immediate and substantial dilution in your investment.

The initial public offering price of our Class A common stock is
substantially higher than the net tangible book value per share of our common
stock. As a result, you will experience immediate and substantial dilution in
net tangible book value when you buy shares of our Class A common stock in the
offerings. This means that you will pay a higher price per share than the
amount of our total assets, minus our total liabilities, divided by the number
of outstanding shares. Holders of our Class A common stock will experience
further dilution to the extent that outstanding options or warrants to
purchase our common stock are exercised or we issue additional shares of our
common stock at prices lower than the then-current net tangible book value.

Because our Class A common stock price could fluctuate significantly,
investors in our Class A common stock may not be able to resell their shares
at or above the initial public offering price.

From time to time, there may be significant volatility in the market
price for our Class A common stock, which could reduce that price below the
initial public offering price. A number of factors involving

12
<PAGE>

PaeTec and the communications services industry could contribute to future
fluctuations in our stock price. These factors include the following:

. fluctuations in the quarterly operating results of PaeTec or other
communications services companies, which could affect the
attractiveness of our stock compared to the securities of
communications services companies with better results or compared to
the securities of companies in other businesses;

. changes in general conditions in the economy or the communications
industry, which could affect the demand for our products and services
and our operating results;

. our failure to complete and successfully integrate acquisitions of
other companies in accordance with our strategy, which could
adversely affect our operating results and our ability to grow; and

. announcements of new contracts or service offerings by us or our
competitors.

We do not anticipate paying any dividends on our Class A common stock.

We do not anticipate paying any cash dividends on our Class A common
stock in the foreseeable future. Our senior credit facility agreement contains
provisions that prohibit us from paying cash dividends. As a result, you could
only receive a return on your investment in the Class A common stock if the
market price of the Class A common stock increases.

Future sales of our Class A common stock in the public market could lower our
stock price and impair our ability to raise funds in new stock offerings.

Future sales of a substantial number of shares of our Class A common
stock in the public market, or the perception that such sales could occur,
could adversely affect the prevailing market price of our Class A common stock
and could make it more difficult for us to raise funds through a public
offering of our equity securities. Beginning 180 days after completion of the
offerings, 42,435,884 shares of Class A common stock will be eligible for sale
in the public market, of which the sale of 40,774,351 shares will be subject to
volume, manner of sale and other limitations contained in Rule 144 under the
Securities Act. In addition, we have granted holders of 34,502,859 shares of
our outstanding Class A common stock, all 2,635,000 shares of our outstanding
Class B common stock and holders of options to purchase 52,063 shares of our
Class A common stock rights to require us to register the public sale of their
shares under the Securities Act. For information about these registration
rights and potential future sales of our common stock, see "Shares Eligible for
Future Sale" beginning on page 79.

Our forward-looking statements are speculative and may prove to be wrong.

Much of the information in this prospectus consists of forward-looking
statements based on our current expectations. You can often identify these
statements by forward-looking words such as:

. "may";

. "will," "intend," "plan to";

. "expect," "anticipate," "believe," "estimate"; and

. "continue'' or similar words.

You should read these statements very carefully because they:

. discuss our future plans or expectations;

. contain projections of our financial condition or results of
operations; and

. state other forward-looking information.

When you consider these forward-looking statements, you should keep in
mind the risk factors above and the other cautionary statements in this
prospectus because they provide examples of risks, uncertainties and events
that may cause our actual results to differ materially from the expectations we
describe or imply in our forward-looking statements.

13
<PAGE>

USE OF PROCEEDS

We estimate that we will receive $83.2 million in net proceeds from the
offerings, at an initial public offering price of $13.00 per share, after we
deduct an estimated $7.8 million of underwriting discounts and commissions and
other expenses of the offerings payable by us. We estimate that our net
proceeds will be $95.9 million if the underwriters' over-allotment options are
exercised in full, after deducting estimated underwriting discounts and
commissions and other offering expenses of $8.7 million.

The principal purposes of the offerings are to obtain additional capital,
to create a public market for our Class A common stock and to facilitate our
future access to public equity markets. We expect to use the net proceeds for
the following purposes:

. approximately $15 million to fund capital expenditures;

. approximately $12 million for working capital;

. approximately $10 million to hire additional employees;

. approximately $33 million to fund operating losses; and

. approximately $13.2 million for other general corporate purposes.

We pursue acquisitions of other businesses as part of our business
strategy and may use a portion of the net proceeds to fund these acquisitions.
We do not currently have any agreements concerning specific acquisitions to
which we would apply any of the net proceeds.

Management will have significant flexibility in applying the net proceeds
of the offerings. Further, changing business conditions and unforeseen
circumstances could cause the actual amounts used for these purposes to vary
from our estimates. Pending their use, we will invest the net proceeds of the
offerings in U.S. government securities or other short-term, interest-bearing,
investment grade securities.

DIVIDEND POLICY

We have never declared or paid cash dividends on our common stock and we
do not anticipate that we will pay cash dividends on our common stock in the
foreseeable future. The current policy of our board of directors is to retain
any earnings to support our operations and to finance the expansion of our
business. Our senior credit facility agreement contains provisions that
prohibit us from paying cash dividends.

14
<PAGE>

CAPITALIZATION

The following table shows our capitalization as of September 30, 2000:

. on an actual basis, and

. as adjusted to reflect the sale of 7,000,000 shares of Class A common
stock in the offerings at an initial public offering price of $13.00
per share, after deducting estimated underwriting discounts and
commissions and other offering expenses, and the mandatory conversion
of the Series A preferred stock into 17,866,666 shares of Class A
common stock upon completion of the offerings.

You should read this table together with the sections of this prospectus
entitled "Use of Proceeds" on page 14 and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" beginning on page 19, and our
consolidated financial statements and related notes and the other financial
information that appears elsewhere in this prospectus.

<TABLE>
<CAPTION>
At September 30, 2000
-----------------------
(unaudited)
As
Actual adjusted
-------- --------
(in thousands, except
share data)
<S> <C> <C> <C>
Cash and cash equivalents.............................. $ 77,411 $160,611
Long-term debt:
Credit facility(1)................................... 100,000 100,000
Other financing, excluding current maturities........ 6,312 6,312
-------- --------
Total long-term debt, excluding current
maturities...................................... 106,312 106,312
-------- --------
Preferred stock:
Series A convertible, redeemable preferred stock,
$.01 par value (200,000 authorized shares, 134,000
(actual) and 0 (as adjusted) issued and outstanding,
respectively)....................................... 128,326 --
-------- --------
Stockholders' equity:
Common stock:
Class A common stock, $.01 par value (75,000,000
(actual) and 300,000,000 (as adjusted) authorized
shares, 25,275,376 (actual) and 50,142,042 (as
adjusted) issued and outstanding,
respectively)(2).................................. 253 501
Class B common stock, $.01 par value (7,500,000
authorized shares, 2,635,000 (actual) and
2,635,000 (as adjusted) issued and outstanding,
respectively)..................................... 26 26
Additional paid-in capital......................... 93,361 304,639
Deferred stock compensation........................ (391) (391)
Accumulated deficit................................ (96,261) (96,261)
-------- --------
Total stockholders' equity....................... (3,012) 208,514
-------- --------
Total capitalization........................... $231,626 $314,826
======== ========
</TABLE>
--------

(1) The maximum amount that may be outstanding under this credit facility as of
September 30, 2000 was $155 million.

(2) Excludes 4,043,574 shares of Class A common stock subject to options
outstanding as of September 30, 2000, 93,166 shares of Class A common stock
subject to warrants outstanding as of September 30, 2000, and additional
shares of Class A common stock we would be required to issue under existing
acquisition agreements if the market price of the Class A common stock is
not at least $25 per share during valuation periods occurring after the
offerings.

15
<PAGE>

DILUTION

Purchasers of the Class A common stock in the offerings will suffer an
immediate and substantial dilution in pro forma net tangible book value per
share. Dilution is the amount by which the initial public offering price paid
by purchasers of shares of our Class A common stock exceeds the pro forma net
tangible book value per share of our common stock after the offerings. Pro
forma net tangible book value per share represents the amount of our total
tangible assets reduced by our total liabilities, divided by the pro forma
number of shares of common stock outstanding as of September 30, 2000, assuming
the conversion of all outstanding shares of the Series A preferred stock into
17,866,666 shares of Class A common stock upon the completion of the offerings.
Our pro forma net tangible book value as of September 30, 2000 was
approximately $61.9 million, or $1.35 per share of common stock.

After giving effect to the sale of 7,000,000 shares of Class A common
stock in the offerings at an initial public offering price of $13.00 per share
and the application of the estimated net proceeds from the offerings, our pro
forma net tangible book value as of September 30, 2000 would have been $145.1
million, or $2.75 per share. This represents an immediate increase in pro forma
net tangible book value of $1.40 per share to existing stockholders and an
immediate dilution of $10.25 per share to new investors purchasing shares in
the offerings. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share....................... $13.00
Pro forma net tangible book value per share as of September
30, 2000................................................... $1.35
Pro forma increase in net tangible book value per share
attributable to new investors.............................. 1.40
-----
Pro forma net tangible book value per share after the
offerings.................................................... 2.75
------
Pro forma dilution per share to new investors................. $10.25
======
</TABLE>

If the underwriters' over-allotment options are exercised in full, our
pro forma net tangible book value after the offerings would be $2.93 per share,
which would represent an increase in pro forma net tangible book value of $1.58
per share and pro forma dilution to new investors of $10.07 per share.

The following table illustrates, on the pro forma basis described above
as of September 30, 2000, the difference between existing stockholders and new
investors with respect to the number of shares purchased from us, the total
consideration paid and the average price per share paid:

<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 45,777,042 86.7% $221,475,000 70.9% $ 4.84
New investors............ 7,000,000 13.3% 91,000,000 29.1% $ 13.00
---------- ----- ------------ -----
Total................. 52,777,042 100% $312,475,000 100% $ 5.92
========== ===== ============ =====
</TABLE>

All of the foregoing computations assume outstanding options and warrants
to purchase Class A common stock are not exercised. As of September 30, 2000,
options to purchase 4,043,574 shares of Class A common stock at a weighted
average exercise price of $5.07 per share and warrants to purchase 93,166
shares of Class A common stock at a weighted average exercise price of $5.35
per share were outstanding. If all those options and warrants had been
exercised, the dilution to new investors would be decreased by $0.17 per share.
To the extent that any options or warrants are granted in the future and are
exercised, or we issue additional shares of Class A common stock under existing
acquisition agreements if the market price of the Class A common stock is not
at least $25 per share during valuation periods occurring after the offerings,
new investors will experience further dilution.

16
<PAGE>

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

We derived the selected consolidated financial data presented below for
the period from our inception on May 19, 1998 to December 31, 1998, for the
year ended December 31, 1999, and as of December 31, 1998 and 1999 from our
consolidated financial statements, which have been audited by Deloitte & Touche
LLP, independent auditors. The selected consolidated statements of operations
data for the nine months ended September 30, 1999 and September 30, 2000 and
the consolidated balance sheet data as of September 30, 2000 are unaudited, but
include, in the opinion of our management, all adjustments, consisting only of
normal, recurring adjustments, necessary for a fair presentation of such data.
The results of operations for the nine months ended September 30, 2000 are not
necessarily indicative of results to be expected for the entire year or for any
other period. You should also read the information under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 19 and our consolidated financial statements and related
notes beginning on page F-1. We have presented the following data in thousands,
except per share amounts and the information shown under "Operating Data."

<TABLE>
<CAPTION>
Period from inception Nine months ended
(May 19, 1998) Year ended September 30,
to December 31, 1998 December 31, 1999(1) 1999 2000
--------------------- -------------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Service revenue....... $ 150 $ 20,695 $ 7,741 $ 72,127
Equipment sales....... -- 2,652 -- 9,929
------- -------- -------- --------
150 23,347 7,741 82,056

Balance Sheet Data (at
period end):
Cash and cash
equivalents.......... $ 2,434 $ 7,435 $ 77,411
Property and
equipment, net....... 11,784 62,384 91,141
Total assets.......... 15,716 121,986 263,397
Long-term debt........ -- 69,166 106,312
Series A convertible,
redeemable preferred
stock................ -- -- 128,326
Total stockholders'
equity............... 12,635 30,061 (3,012)

17
<PAGE>

<TABLE>
<CAPTION>
At December 31, At September 30,
1999 2000
--------------- ----------------
<S> <C> <C>
Operating Data:
Markets served(3)............................ 25 25
Number of switches deployed(4)............... 8 8
Digital T1 transmission lines installed(5)... 912 3,300
Access line equivalents installed(5)......... 21,200 78,000
Sales force employees........................ 211 263
Total employees.............................. 590 918
</TABLE>
--------
(1) Includes the operating results of Campuslink from September 9, 1999, which
is the date we completed our acquisition of Campuslink.
(2) We have included data with respect to EBITDA because it is commonly used in
our industry as a measurement of financial performance and by investors to
analyze and compare companies on the basis of operating performance. When
we refer to "EBITDA," we mean net earnings or loss before interest expense,
income taxes, depreciation and amortization. EBITDA is not a measurement of
financial performance under generally accepted accounting principles and
should not be considered an alternative to operating income, as determined
in accordance with generally accepted accounting principles, as an
indicator of our operating performance, or to cash flows from operating
activities, as determined in accordance with generally accepted accounting
principles, as a measure of our liquidity. EBITDA is not necessarily
comparable with similarly titled measures for other companies.
(3) Each market represents a metropolitan statistical area as defined by the
U.S. Census Bureau.

(4) Switches are computers that connect customers to our network and transmit
voice and data communications over the network.

(5) An access line is a telephone line which extends from one of our central
offices to our customer's premises. We connect customers to our network by
leasing digital T1 telephone and data transmission lines linking our
customers to the central office. Each digital T1 transmission line provides
the customer with 24 channels for telephone or data service, although some
customers do not use or pay for all 24 channels. We calculate the number of
access line equivalents we have installed by multiplying the number of
digital T1 transmission lines we have installed by 24. Not all of these
channels or paths are used. The number of access line equivalents shown
excludes access line equivalents sold or installed by our Campuslink unit.

18
<PAGE>

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

You should read the following discussion and analysis together with our
consolidated financial statements and related notes and the other financial
information that appear elsewhere in this prospectus.

Overview

Since our inception in May 1998, our principal activities have consisted
of:

. hiring technical, sales and other key personnel;

. raising capital;

. acquiring network equipment and facilities;

. developing, acquiring and integrating operations support systems and
other back office systems capable of handling our service offerings;

. acquiring Campuslink and five other businesses;

. negotiating interconnection agreements; and

. commencing operations in our current markets.

We believe that our revenue and operating results during this period are not
indicators of our future performance. For risks related to our limited
operations, see "Risk Factors--We have a limited operating history, which
limits the information available to you to make an informed decision whether to
buy our Class A common stock" on page 6.

We have developed, installed and continue to invest in an advanced
network that facilitates delivery of our services. We have initially adopted a
cost-efficient network deployment strategy in which we combine telephone and
data transmission lines we lease with other electronic network components we
own and operate. This strategy provides us with control over the quality and
flexibility of our service offerings, reduces our capital investments and
allows us to bring our services more quickly to market. As it becomes
economically attractive for us to do so, we plan to purchase and operate the
telephone and data transmission lines we need to handle growing traffic
volumes.

To supplement our internal growth, we pursue an acquisition strategy that
will allow us to increase penetration of our current markets and expand into
new markets. We seek acquisition candidates that will enhance our ability to
sell and deliver value-added services. Accordingly, we focus our acquisition
efforts on interconnect companies that sell, install and maintain data and
voice networks for customers, on enhanced service providers and on local and
long distance providers. We believe that our acquisition of these types of
businesses will bring experienced back office, technical and customer service
personnel to our company, enhance our suite of service offerings and increase
our customer base. The operating results of each of the six businesses we have
acquired through September 30, 2000 are included in our consolidated statements
of operations from the dates of those acquisitions.

19
<PAGE>

As a result of our development activities, we have experienced
significant operating losses. We had net losses of $5.9 million in fiscal 1998,
net losses of $40.3 million in 1999 and net losses of $50.1 million in the nine
months ended September 30, 2000. Until we establish a sufficient revenue-
generating client base in a market, we do not expect to achieve operating
income in that market. We expect that we will continue to experience increasing
operating losses as we continue to expand our operations.

Revenue. We derive revenue primarily from our sale of communications
services. Our service revenue consists principally of usage fees and monthly
recurring fees. Usage fees consist of fees paid by our customers for each call
made, fees paid by the incumbent local telecommunications providers in our
markets as reciprocal compensation when we terminate calls made by their
customers, and access fees paid by carriers for long distance calls we
originate and terminate. We are paid usage fees both by our customers and by
other carriers. Monthly recurring fees include the fees paid by our customers
for lines in service and additional features on those lines, and include fees
provided over the length of a customer's service contract. Monthly recurring
fees are paid by our end-user customers. We also derive revenue from equipment
sales. This component of our revenue consists of one-time fees our customers
pay for equipment and for our system design and installation services.

Reciprocal compensation constituted approximately 5% of our revenue in
1999 and approximately 8% of our revenue in the nine months ended September 30,
2000. We do not expect that reciprocal compensation as a percentage of our
revenue will significantly increase. Some incumbent local providers have
disputed reciprocal compensation charges related to Internet access service
billed by competitive local providers such as PaeTec. See "Regulation of Our
Services--Federal Regulation--Reciprocal Compensation" on page 52 for more
information about this issue. We derive a significant portion of our reciprocal
compensation revenues from incumbent providers that we bill based on negotiated
rates. As a result, we do not believe that the revenues we derive from
reciprocal compensation will be materially adversely affected by such disputes
in the foreseeable future.

Cost of Sales. Our cost of sales consists primarily of leased transport
charges, usage costs for local and long distance calls, and costs associated
with our equipment sales. Our leased transport charges are the payments we make
to lease the telephone and data transmission lines used to connect our
customers to our network and to the networks of other carriers. Because we
pursue a strategy of leasing rather than purchasing our telephone and data
transmission lines, cost of services is a more significant component of total
costs for us than for our competitors who own their telephone and data
transmission lines. Usage costs for local and long distance are the costs that
we incur for calls made by our customers. Equipment costs are one-time costs we
incur in designing systems and purchasing and installing equipment.

Selling, General and Administrative Expenses. Our selling, general and
administrative expenses include selling and marketing, customer service,
billing, corporate administration and personnel costs. We expect that we will
incur significant selling and marketing costs, primarily reflecting salaries of
our direct sales force and commissions paid to our direct sales force and sales
agents, as we continue to expand into new geographic markets, add new sales
offices and enlarge our current service offerings. In addition, our significant
investment in back office systems will result in a higher concentration of
selling, general and administrative costs during our initial years of
operation.

Depreciation and Amortization. Depreciation and amortization include
depreciation of our telecommunications network and equipment, amortization of
goodwill and other intangible assets related to our acquisitions of other
businesses, and amortization of costs related to securing our loan facilities.

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<PAGE>

Results of Operations

The following table presents information about our revenue and operations
for each fiscal quarter in 1999 and the first three fiscal quarters of 2000.

<TABLE>
<CAPTION>
1999 2000
--------------------------------- -------------------------
First Second Third Fourth First Second Third
Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue (in
thousands)........... $613 $1,774 $5,354 $15,606 $19,041 $27,170 $35,846
Gross margin (as a
percentage
of revenue).......... 22.1% 14.3% 14.0% 34.6% 41.2% 46.6% 47.0%
Operating Data:
Digital T1
transmission lines
installed
By quarter.......... -- 63 180 669 670 842 859
Cumulative.......... -- 63 243 912 1,582 2,424 3,283
Access line equiva-
lents installed
By quarter.......... -- 1,512 4,320 16,056 16,080 20,208 20,616
Cumulative.......... -- 1,512 5,832 21,888 37,968 58,176 78,792
Total employees....... 213 305 513 590 647 812 918
</TABLE>

An access line is a telephone line which extends from one of our central
offices to our customer's premises. We connect customers to our network by
leasing digital T1 telephone and data transmission lines linking our customers
to the central office. Each digital T1 transmission line provides the customer
with 24 channels for telephone or data service, although some customers do not
use or pay for all 24 channels. We calculate the number of access line
equivalents we have installed by multiplying the number of digital T1
transmission lines by 24. The number of access line equivalents shown excludes
access line equivalents sold or installed by our Campuslink unit.

Nine Months Ended September 30, 2000 Compared to Nine Months Ended September
30, 1999

We generated revenue of $82.1 million in the nine months ended September
30, 2000 compared to revenue of $7.7 million in the nine months ended September
30, 1999. Our Campuslink unit, which we acquired in September 1999, accounted
for approximately $13.9 million, or 16.9%, of our revenue in the 2000 nine-
month period. The increase in our service revenue, to $72.1 million in the 2000
nine-month period from $7.7 million in the 1999 nine-month period, also
reflected the effects of expansion of our network and the increase in the
number of employees and sales offices in our markets. As of September 30, 2000,
we had 3,283 digital T1 transmission lines and 78,792 access line equivalents
installed and in service on our network compared to 243 digital T1 transmission
lines and 5,832 access line equivalents installed and in service as of
September 30, 1999. We offered our services through approximately 918 employees
and 29 sales offices in 25 markets as of September 30, 2000 compared to
approximately 513 employees and 23 sales offices in 15 markets as of September
30, 1999. Our operating results for the 2000 nine-month period also reflected
$9.9 million of revenue from equipment sales, of which $4.2 million, or 42.4%,
was produced by our Campuslink unit. We did not receive any revenue from
equipment sales in the 1999 nine-month period.

Cost of sales increased to $44.7 million in the 2000 nine-month period
from $6.6 million in the 1999 nine-month period. In both periods, cost of sales
consisted primarily of leased transport charges and usage costs for local and
long distance calls. Leased transport charges totaled $22.2 million, or 49.7%
of cost of sales, in the 2000 nine-month period compared to $1.6 million, or
24.2% of cost of sales, in the 1999 nine-month period. Usage costs for local
and long distance calls totaled $12.9 million, or 28.9% of cost of sales, in
the 2000 nine-month period compared to $4.0 million, or 60.6% of cost of sales,
in the 1999 nine-month period. In addition to service costs, we incurred $7.5
million of equipment costs in the 2000 nine-month period associated with sales
of equipment. As a percentage of revenue, cost of sales decreased to 54.5% in
the 2000 nine-month period from 85.3% in the 1999 nine-month period. The
decrease was primarily attributable to increases in the number of customers and
customer-related usage and to related operating efficiencies we achieved in our
network operations.

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<PAGE>

Gross margin increased to $37.3 million in the 2000 nine-month period
from $1.1 million in the 1999 nine-month period. As a percentage of revenue,
gross margin increased to 45.5% in the 2000 nine-month period from 14.7% in the
1999 nine-month period, reflecting the effects of our significant revenue
growth.

Selling, general and administrative expenses increased to $72.4 million
in the 2000 nine-month period from $23.4 million in the 1999 nine-month period.
Approximately $28.8 million, or 58.8%, of this increase represented increased
payroll and benefit costs as the number of our employees grew to 918 as of
September 30, 2000 from 513 as of September 30, 1999. Payroll and benefit costs
increased to $44.9 million in the 2000 nine-month period from $16.1 million in
the 1999 nine-month period. Higher sales and marketing costs, which increased
to $9.8 million in the 2000 nine-month period from $0.5 million in the 1999
nine-month period, accounted for approximately $9.3 million, or 19.1%, of the
increase. These higher costs primarily reflected the increased marketing
activities of our expanding workforce and an increase in sales commissions
related to our revenue growth.

Depreciation and amortization expense increased to $12.7 million in the
2000 nine-month period from $1.8 million in the 1999 nine-month period. The
increase principally reflected higher depreciation expense resulting from an
increase of over $45.2 million in property and equipment we purchased as part
of our network deployment and business expansion. Depreciation expense
increased to $8.2 million in the 2000 nine-month period from $1.7 million in
the 1999 nine-month period. Amortization of goodwill from acquisitions also
contributed to the increase. Since September 30, 1999, we have recorded over
$21.0 million of goodwill in connection with acquisitions we completed since
that date. Amortization of goodwill and other intangible assets from
acquisitions totaled $4.5 million in the 2000 nine-month period.

Interest expense increased to $4.9 million in the 2000 nine-month period
from $2.0 million in the 1999 nine-month period. The increase was attributable
to higher average balances of our outstanding borrowings, which increased to
$59.2 million in the 2000 nine-month period from $21.4 million in the 1999
nine-month period, and, to a lesser extent, to an increase in our average cost
of borrowing as a result of higher market interest rates.

Year Ended December 31, 1999

We generated revenue of $23.3 million in 1999. Of this revenue, $7.7
million, or 33.0%, reflected the inclusion of the operating results of our
Campuslink unit from the acquisition date of September 9, 1999. The Campuslink
operations contributed all of the $2.7 million of revenue from equipment sales
we received in 1999. Excluding the Campuslink results, the increase in our 1999
service revenue compared to our fiscal 1998 revenue was primarily attributable
to the longer period in which we generated operating revenue. During 1999, we
expanded our service offerings, activated eight switches and significantly
increased the number of employees and sales offices in our markets. Campuslink
experienced revenue growth in 1999 as a result of the increase in the number of
properties it served from 51 properties as of January 1, 1999 to 60 properties
as of December 31, 1999. Approximately 26.0% of Campuslink's 1999 revenue was
attributable to installation projects. We received $5.0 million, or 21.4%, of
our 1999 revenue from our sale of products and services to one of the customers
we serve as a result of our acquisition of Campuslink. Of this amount, $1.9
million, or 38.0%, was attributable to one-time fees for installation services
and equipment costs. We expect that revenues generated by this customer in 2000
will represent less than 10% of our total revenue in 2000 as we continue to
enter into new markets and expand our business.

Cost of sales in 1999 totaled $16.8 million and consisted of service
costs of $14.6 million and equipment costs of $2.2 million associated with
sales of equipment following our acquisition of Campuslink. Of the service
costs, usage costs for local and long distance calls totaled $7.2 million, or
42.9% of cost of sales, and leased transport charges totaled $5.0 million, or
29.8% of costs of sales. Excluding the effect of our acquisition of Campuslink,
which contributed cost of sales of $6.0 million, cost of sales as a percentage
of revenue was 68.8%.

Gross margin in 1999 totaled $6.5 million. Excluding the effect of our
acquisition of Campuslink, gross margin as a percentage of revenue was 31.2%.

22
<PAGE>

Selling, general and administrative expenses in 1999 totaled $40.3
million. Approximately $25.7 million, or 63.8%, of these expenses represented
increased payroll and benefits costs as the number of our employees grew to 590
on December 31 from 120 on January 1. Of the remaining $14.6 million of
selling, general and administrative expenses, $4.5 million, or 30.1%, was
attributable to facilities expenses and $3.4 million, or 23.3%, was
attributable to accounting, legal and other professional costs.

Depreciation and amortization expense totaled $4.5 million in 1999. We
incurred depreciation expense of $3.7 million on communications equipment we
purchased for $41.8 million and placed in service in 1999. Of our amortization
expense of $0.8 million, $0.6 million was attributable to amortization of
goodwill from acquisitions and $0.2 million was attributable to amortization of
debt issuance costs.

Interest expense of $2.4 million in 1999 more than offset the interest of
$0.4 million we earned on our short-term investments. Average balances of our
outstanding borrowings in 1999 were $34.6 million.

Period from Our Inception, May 19, 1998, to December 31, 1998

We first realized operating revenue in November 1998. During the period
from our inception on May 19, 1998 to December 31, 1998, we generated operating
revenue of $0.2 million, primarily from the resale of long distance telephone
services.

Cost of services in fiscal 1998 totaled $0.1 million and principally
represented the wholesale cost to us of long distance services.

Selling, general and administrative expenses in fiscal 1998 totaled $5.8
million. These costs consisted primarily of the $4.5 million of payroll and
professional costs we incurred in connection with our organization, initial
financing activities and commencement of operations. We also incurred rental
and general office expenses of $0.6 million.

Depreciation and amortization of $0.2 million in fiscal 1998 was
primarily attributable to depreciation of office equipment we placed in
service.

We generated interest income of $0.1 million in fiscal 1998 from our
investment of cash balances in short-term investments.

Seasonality

Our operating results will reflect some seasonality relating to the
portion of our revenue we derive from sales to the university campus market. We
expect that the revenue we derive from our Campuslink unit generally will be
lower in the summer months, when smaller student enrollments at the
universities and colleges we serve result in a reduced demand for our services.

Inflation

Inflation did not have a material impact on our operations during any of
the periods covered in our discussion and analysis of results of operations.

Liquidity and Capital Resources

We have incurred losses from operating activities and negative cash flow
since we began operations. We expect that we will continue to incur significant
and increasing operating and net losses and negative cash flow from operations
due to continued capital expenditures, the increase in the number of markets we
serve and the expansion of services we offer. As of September 30, 2000, we had
an accumulated deficit of $96.3 million. Our net cash used for operating
activities was approximately $3.2 million in fiscal 1998, $39.8 million in 1999
and $43.9 million in the nine months ended September 30, 2000. The net cash
used for operating activities during 1999 and the nine months ended September
30, 2000 was primarily attributable to our net losses.

We historically have depended on the proceeds from the sale of equity
securities and borrowings to fund a significant portion of our investing
activities, which have consisted primarily of the purchase and installation of
property and equipment. We made capital expenditures of $12.0 million in fiscal
1998, $41.8

23
<PAGE>

million in 1999 and $38.0 million in the nine months ended September 30, 2000.
Net cash used in our investing activities was $12.0 million in fiscal 1998,
$37.4 million in 1999 and $44.3 million in the nine months ended September 30,
2000. The net cash used for investing activities was primarily applied to
capital expenditures.

In fiscal 1998, the $17.7 million of net cash provided by financing
activities was primarily attributable to sales of our common stock. In 1999,
net cash provided by financing activities totaled $82.2 million. Net proceeds
of $27.6 million from sales of common stock and $65.0 million of borrowings
under our credit facility accounted for substantially all of the net cash
provided by financing activities in 1999. Of the $158.2 million of net cash
provided by financing activities in the nine months ended September 30, 2000,
$128.0 million was attributable to our sale of the Series A preferred stock.

We currently have a senior secured credit facility under which a
syndicate of lenders provides us with funding of up to $155.0 million.
Covenants in this facility may preclude us from drawing this entire amount. The
managing lenders are affiliates of CIT Lending Services Corporation and
Canadian Imperial Bank of Commerce. The facility, which was increased from
$70.0 million on August 4, 2000, consists of a $100.0 million eight-year term
loan and a $55.0 million eight-year reducing revolving credit facility. We are
required to apply the proceeds of the facility to fund capital expenditures,
permitted acquisitions of other businesses and a portion of our working capital
requirements. We have granted the lenders under this facility a security
interest in substantially all of our assets and in the capital stock of our
subsidiaries. Amounts borrowed under the facility bear interest at our option
at a rate equal to the sum of LIBOR, a specified prime rate or the federal
funds rate plus 0.5%, and an applicable margin. The applicable margin varies
from 4.25% to 2.0% based on a formula tied to our level of indebtedness from
time to time. As of September 30, 2000, borrowing rates under the facility
averaged 11.08%. As of September 30, 2000, $100.0 million of borrowings were
outstanding under this facility. For a description of the operating and
financial restrictions imposed under our credit facility agreement, see "Risk
Factors--Covenants in our credit facility restrict our capacity to borrow and
invest, which could impair our ability to expand or finance our operations" on
page 11. As of December 31, 1999, March 31, 2000 and June 30, 2000, we were not
in compliance with a credit facility covenant that restricts our EBITDA losses
from exceeding specified amounts. As of March 31, 2000, we were not in
compliance with a covenant that specified minimum quarterly revenues we must
achieve. Our lenders waived the application of the EBITDA covenant for the
reporting periods ended December 31, 1999 and March 31, 2000 and the minimum
quarterly revenue covenant for the reporting period ended March 31, 2000. When
we amended and restated the facility on August 4, 2000, these and other
financial covenants were modified to conform with our operating plan for 2000.
We did not pay any additional interest, penalties or fees to obtain the waivers
or modifications of any covenants.

On September 9, 1999, we completed our acquisition of Campuslink. In this
transaction, we assumed a total of $7.3 million of Campuslink indebtedness owed
to four of Campuslink's former principal stockholders. After we completed the
acquisition, we repaid $5.2 million of this indebtedness and issued notes to
the former stockholders representing the remaining $2.1 million of the
indebtedness. We repaid the outstanding balances on these notes, plus all
accrued interest, on March 2, 2000.

In connection with our acquisition of Campuslink, we assumed three term
notes in the total principal amount of approximately $5.6 million. Campuslink
used the borrowings represented by the notes to finance the purchase and
installation of telecommunications equipment at institutions with which
Campuslink has exclusive service agreements. In November 1999, we repaid the
outstanding balance on one of these notes to NEC America, Inc. On September 30,
2000, the outstanding balances on the remaining two notes totaled $4.2 million.
One of the notes, which is payable to MarCap Corporation, matures in 2005 and
bears interest at a 10.4% annual rate. The other note, which is payable to The
CIT Group, matures in 2004 and bears interest at a 9.2% annual rate. Repayment
of both of the notes is secured by a security interest in the equipment
purchased by Campuslink with the loan proceeds.

On February 4, 2000, we sold 134,000 shares of our Series A preferred
stock to institutional investors led by Madison Dearborn Partners and The
Blackstone Group for a total purchase price of $134 million. Of the

24
<PAGE>

$127.8 million of net proceeds we received from the sale of these shares, we
used $45.0 million to repay outstanding borrowings under our senior credit
facility, $37.5 million to fund operating losses, $30.6 million to fund capital
expenditures and $6.2 million to pay a portion of the purchase price for our
acquisition of Pinnacle Software Corporation in April 2000 and Data Voice
Networks, Inc. in May 2000. We intend to use the remaining net proceeds
primarily to fund our capital expenditures and to provide for working capital
and other general corporate purposes. As of September 30, 2000, we had $8.5
million of net proceeds available for these purposes. The shares of Series A
preferred stock are convertible at the holder's option into 17,866,666 shares
of our Class A common stock at a price of $7.50 per share, subject to
adjustment for dilutive issuances of our common stock or other securities.
Cumulative dividends at an annual rate of 8.0% will accrue on the preferred
stock beginning on February 4, 2001 if the preferred stock is not earlier
converted. At the time the Series A preferred stock is converted, we have the
option to pay all accrued and unpaid dividends either in cash or in shares of
our common stock based on the market price of the common stock on the
conversion date. We will require conversion of all of the Series A preferred
stock into Class A common stock upon completion of the offerings and expect to
issue the preferred stockholders a total of 17,866,666 shares of Class A common
stock in connection with this conversion.

We intend to use approximately $15.0 million of the net proceeds from the
offerings to fund capital expenditures, approximately $12.0 million for working
capital, approximately $10.0 million to hire additional employees,
approximately $33.0 million to fund operating losses and approximately $13.2
million for other general corporate purposes. We pursue acquisitions of other
businesses as part of our business strategy and may use a portion of the net
proceeds to fund these acquisitions. We do not currently have any agreements
concerning specific acquisitions to which we would apply any of the net
proceeds of the offerings. Management will have significant flexibility in
applying the net proceeds of the offerings. Further, changing business
conditions and unforeseen circumstances could cause the actual amounts used for
these purposes to vary from our estimates.

Expansion of our network, operations and services will require
significant capital expenditures. We made capital expenditures of approximately
$41.8 million in 1999 and approximately $38.0 million in the nine months ended
September 30, 2000, principally for communications equipment. We currently
estimate that our capital expenditures will total approximately $78.8 million
in the fourth quarter of 2000 and in 2001, of which we expect to incur
approximately $8.8 million in the fourth quarter of 2000 and approximately
$70.0 million in 2001. We expect to make substantial capital expenditures
thereafter. We will make capital expenditures primarily for the following
purposes:

. continued deployment of our network, including acquisition and
installation of network equipment;

. market expansion; and

. infrastructure enhancements, principally for our back office systems.

The actual amount and timing of our capital requirements may differ materially
from our estimate as a result of regulatory, technological and competitive
developments in our industry. At November 30, 2000, we had entered into
agreements with vendors to purchase approximately $14.8 million of equipment
and services.

We have entered into a 20-year lease for our new corporate headquarters,
which we will occupy beginning in the first quarter of 2001. We expect that our
annual rental payments under the lease will increase from approximately $1.4
million for the first year of occupancy to approximately $2.0 million for the
last ten years of the lease term. We also have entered into an agreement for
the naming rights of a new soccer stadium in the Rochester, New York area. We
expect that our payments under this agreement will total approximately $12.8
million over a 20-year period beginning in 2001.

We will be dependent on additional capital to fund our growth, as well as
to fund continued operating losses and working capital requirements. We believe
that, subject to any required waivers or modifications of restrictive covenants
of our credit facility, if necessary, the net proceeds from the offerings,
together with cash on hand, cash flow from operations and borrowings we expect
to be available under our credit facility, will provide sufficient capital to
fund our business as currently planned through the end of 2001. If, however, we

25
<PAGE>

were to breach one or more of the restrictive covenants of our credit facility,
our ability to draw funds from the facility would be impaired, and we could be
forced to delay or abandon our plans to expand our market, operations,
facilities, network and services, which could harm our competitive position. By
the end of 2001, we will need to have secured additional financing to fund our
capital expenditures and working capital requirements. If our plans or
assumptions change or prove to be inaccurate, the foregoing sources of funds
may prove to be insufficient to fund our currently planned growth and
operations. In addition, if we complete acquisitions of other businesses in
accordance with our business strategy, we may be required to seek additional
capital sooner than we currently anticipate. We may seek to obtain this capital
from equity and debt financings or from other financing arrangements, such as
vendor financing. We cannot assure you that additional financing arrangements
will be available to us or, if available, that we can secure them on terms we
find acceptable. If we fail to generate sufficient cash flow from our operating
activities or otherwise fail to obtain sufficient funds for our cash needs, we
may have to delay or abandon some of our development and expansion plans.

The successful implementation of our strategy, including expanding our
network and obtaining and retaining a significant number of customers, and our
achievement of significant and sustained growth in our cash flow are necessary
for us to be able to meet our debt service and other cash requirements. We
cannot assure you that we will successfully implement our strategy or that we
will be able to generate sufficient cash flow from operating activities to
improve our earnings before fixed charges, or to meet our debt service
obligations and working capital requirements. Our ability to meet our
obligations will depend upon our future performance, which will be subject to
prevailing economic conditions and to financial, business and other factors.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to minimal market risks. We manage the sensitivity of our
results of operations to these risks by maintaining an investment portfolio
consisting primarily of short-term, interest-bearing securities and by entering
into long-term debt obligations with appropriate pricing and terms. We do not
hold or issue derivative, derivative commodity or other financial instruments
for trading purposes. We do not have any material foreign currency exposure.

Our major market risk exposure is to changing interest rates we incur on
borrowings we use to fund the expansion of our business and our operating
losses. The interest rates that we are able to obtain on this debt financing
depend on market conditions.

Our policy is to manage interest rates through a combination of fixed-
rate and variable-rate debt and through use of interest rate swap contracts to
manage our exposure to fluctuations in interest rates on our variable-rate
debt. At September 30, 2000, $107.0 million of our long-term debt consisted of
variable-rate instruments that accrue interest at floating rates. At the same
date, through two interest rate swap contracts, we had capped our interest rate
exposure through December 31, 2000 at a rate of 6.29% on $25.0 million of
floating-rate debt and through September 30, 2002 at a rate of 6.72% on $50.0
million of floating-rate debt. A change of one percentage point in the interest
rates applicable to our $32.0 million of variable-rate debt not subject to an
interest rate swap contract at September 30, 2000 would result in a fluctuation
of approximately $0.3 million in our annual interest expense.

Recently Issued Accounting Standards

In December 1999, the SEC issued Staff Account Bulletin No. 101, "Revenue
Recognition in Financial Statements," defining revenue recognition guidelines.
We are currently assessing the impact of these guidelines on our financial
statements.

In June 1998, June 1999 and June 2000, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities," SFAS 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133" and SFAS 138, "Accounting for Certain Derivative
Instruments and Certain

26
<PAGE>

Hedging Activities an amendment of FASB Statement No. 133." These statements
establish accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. These statements require that changes in the fair
value of a derivative be recognized currently in earnings unless specific hedge
accounting criteria are met.

Special accounting for qualifying hedges allows the gains and losses of a
derivative to offset related results on the hedged item in the statement of
operations, and requires that a company formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting. This
accounting is effective for us beginning in 2001. We are currently determining
the impact of SFAS 133 on our consolidated results of operations and financial
position. This statement should have no impact on consolidated cash flows.

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BUSINESS

We are a growing provider of integrated communications services,
including core voice and data services and an expanding suite of voice and data
programs and network operations services. We currently market and deliver our
services to medium-sized and large businesses, institutions and other
communications-intensive users through over 260 members of our direct sales
force and over 600 outside sales agencies. Our sales force works closely with
our customers to develop a package of value-added services tailored to the
customer's specific needs. Through our existing data-ready network, we provide
our services to over 24,000 businesses and institutions primarily in eight
major U.S. cities and an additional 17 metropolitan areas adjacent to those
cities. As of September 30, 2000, we had installed for these customers over
3,300 digital transmission lines which represent over 78,000 telephone lines
and provide us with the capacity to deliver a variety of our value-added
services to these customers over our network at higher profit margins. Since we
began business in May 1998, we have incurred, and expect we will continue to
incur, significant operating losses as we seek continued growth through our
investments in our sales force, back office systems and network.

Our Services

We provide a wide range of high-speed data and voice communications
services to businesses that are end-users or wholesale customers. We organize
our service offerings around four categories of value-added services that
include network connection services, core voice and data services, value-added
voice and data programs that enhance our core services, and network operations
services. Our sales and marketing initiatives, as well as our investments,
focus on bundling the products and services in the latter three categories. We
believe this bundling adds value for our customers and increases our share of
our customers' expenditures on communications services.

The overall market of regulated, switched and unswitched data and voice
traffic in the U.S. is estimated to have generated a total of $212.8 billion in
revenues in 1998 and is expected to grow to $252.2 billion by 2002, according
to International Data Corporation, or IDC. The number of total switched access
lines in the U.S. is expected to grow from 187.5 million lines in 1998 to 232.6
million lines by 2002. Our strategy is to focus on business users, a segment
which represents a significant component of this large market. For example, IDC
estimates that the number of switched business access lines in the U.S. will
grow from 63.3 million lines in 1998 to 84.6 million lines, or 36.4% of the
total switched access lines, in 2002.

We believe that a significant market opportunity also exists for
providers of data and Internet services. High-speed connectivity has become
important to medium-sized and large businesses and institutions as a result of
the considerable increase in Internet usage and e-commerce. The Internet has
become a substantial vehicle for commerce and business operations, as
businesses establish websites and internal and external corporate networks to
expand their market reach and improve their efficiency. Accordingly, to remain
competitive, our target customers increasingly need high-speed Internet
connections to maintain complex websites, access critical business information
and communicate with employees, clients and business partners. According to
Forrester Research, the market for business Internet and data network services
in the U.S. is expected to grow from $3.7 billion in 1998 to $40.3 billion in
2002, representing a compound annual growth rate of 81.7%.

We are focusing our efforts on expanding our range of services in each of
our four service categories so that our customers can meet an increasing number
of their voice and data communications needs through us. We believe our ability
to bundle a suite of value-added communications services will enable us to
penetrate our target markets rapidly and build customer loyalty. We have built
our network, developed our back office systems and trained our employees and
sales agents to support our increasing array of services.

Network Connection Services

We have developed, installed and continue to invest in an advanced data-
ready network that facilitates delivery of our services. We connect our
customers to our network through an expanding variety of technologies. We have
initially adopted a cost-effective network deployment strategy in which we
combine

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telephone and data transmission lines we lease with other electronic network
components we own and operate. This strategy provides us with control over the
quality of our service offerings, reduces our capital investments and allows us
to bring our services more quickly to market. When appropriate to support our
growth, we negotiate leases of telephone and data transmission lines with
specified volumes and lease durations to reduce costs. For example, we have
recently entered into 15-year lease with Global Crossing Bandwidth, Inc. for 24
million fiber circuits. We expect that this long-term lease will reduce our
transport costs. When it becomes economically attractive for us to do so, we
expect to purchase and operate some of the telephone and data transmission
lines we need to operate our business.

We currently obtain most of the digital telephone and data transmission
lines which connect our customers to our network from the regional Bell
telephone companies or from other communications providers such as AT&T,
Worldcom and Time Warner Telecom Inc. These connections provide our customers
with 24 available channels over which we can provide our core voice and data
services. Our strategy is to form relationships with multiple providers of the
communications lines we need to improve service reliability through alternative
network paths and to lower our costs through competitive procurement. Our
membership in the Associated Communications Companies of America, an 11-member
buying consortium, provides us with additional opportunities to benefit from
competitive pricing from multiple suppliers. Members of this consortium include
Qwest Communications International, Inc., Broadwing, Inc., McLeodUSA
Incorporated and ITC/\DeltaCom, Inc. By participating in this buying consortium,
we estimate that we reduce our overall cost of providing services by at least
5%.

We are increasingly using newer connection methods such as digital
subscriber line, or DSL, technology, which offer attractive pricing and are
growing rapidly in accessibility. DSL technology reduces the bottleneck in the
transport of information, particularly for data services, by increasing
transmission speed and the data-carrying capacity of copper telephone lines. We
have signed agreements with DSL providers that allow us to offer DSL service in
all of our current markets, and are seeking agreements with other DSL providers
to cover the remaining markets that we plan to enter. We currently offer our
core data and Internet access services through DSL technology under these
agreements. In the near future, when the technology has more fully developed,
we plan to offer core voice services using DSL technology. Compared to
traditional digital network connections, our DSL arrangements allow us to
connect customers to our network more quickly and at a lower cost. In selected
target markets, we will construct our own DSL connections where we believe this
strategy is justified by a known customer base and favorable competitive
conditions.

We plan to use wireless network connection methods, primarily for
Internet access, as another low-cost alternative to traditional digital lines.
We have formed a relationship with CyberTech Wireless, Inc., a fixed wireless
carrier based in Rochester, New York, to provide wireless services in upstate
New York markets, and anticipate expanding the relationship into additional
cities in the remainder of 2000 and in 2001. We are a 12% stockholder of
CyberTech Wireless. We will evaluate additional relationships of a similar
nature as part of our plan to gain wireless access alternatives in all of our
current and prospective markets.

Core Voice and Data Services

We offer a range of core communications services to the customers
connected to our network. Our current core services include voice services,
such as local dial tone services, domestic and international long distance
services and calling card services, as well as data services, such as Internet
access services and outsourced private networking services. As our network
evolves, we will continue to expand these service offerings, which we expect
will include advanced technologies that will allow us to transmit voice
conversations over a data network.

Local Telephone Services. Our local telephone services include basic
local dialtone service, as well as enhanced services such as call waiting, call
forwarding, call return and caller ID. We also receive revenues from
originating and terminating local voice and Internet traffic of other
communications companies with customers on our network. As of September 30,
2000, we had entered into interconnection agreements with regional Bell
operating companies or other large local telephone companies operating in our
markets. These agreements allow us to interconnect our network with the
networks of those companies to offer local telephone

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services in 13 states and the District of Columbia and enable us to enter new
markets with minimal capital expenditures.

Long Distance Services. We offer a full range of basic long distance
services. These include services that originate and terminate within the same
local transport area and in different local transport areas, international
services, 1+ outbound services and 800/888/887 inbound toll-free services. We
also offer ancillary long distance services such as operator assistance,
calling cards and pre-paid long distance. We provide our own dedicated long
distance services to customers connected to our network. We also have entered
into a partnership agreement to resell the long distance services of Frontier
Corporation, a subsidiary of Global Crossing, Ltd., to customers that are not
connected to our network.

Internet Connectivity and Data Networking Services. We offer our
customers an expanding suite of Internet connectivity and data networking
services. Our goal is to provide end-to-end value-added networking solutions
which are customized to meet specific customer needs. We currently offer the
following data services:

. High-speed dedicated Internet access services. We offer integrated
voice and Internet access over a single digital line and very high
speed Internet services over multiple digital lines. With this
service, our customers are able to obtain voice and Internet services
at competitive prices from a single source. We plan to expand our
Internet access offerings by the end of 2000 to include even higher
speed services over leased optical circuits or leased digital lines.

. High-speed DSL-based Internet services. We offer DSL-based Internet
services to business and institutional customers through partnerships
with national and regional DSL providers. These services afford low-
cost Internet access and provide high-speed connectivity for
businesses operating outsourced, or "virtual," networks.

. Virtual private network services. We offer these services to
businesses seeking a cost-effective means of creating their own
secure networks. These networks link multiple customer locations by
using computer software to dedicate circuits solely for the
customer's use instead of building a physical circuit to the
customer. Businesses generally use these services to create a secure,
outsourced network, commonly known as a virtual private network, for
communicating and conducting business with their employees, customers
and suppliers.

. Campuslink-managed services. Through our Campuslink unit, we manage
the provision of high-speed communications services, including high-
speed Internet access and enhanced voice and video services, at
universities and private student housing complexes to over 26,000
college students who use the Internet to access research materials,
lectures and other online educational resources. Student networks,
which we manage from Campuslink's central network operations center
in Ann Arbor, Michigan, typically employ advanced technologies from
Cisco Systems, Inc. and other major providers.

Networks for Planned Communities. In Los Angeles, at Playa Vista, one of
the nation's largest urban planned communities, we plan, beginning in mid-2001,
to provide high-speed Internet access, as well as other value-added voice and
video services, to over 10,000 residents and businesses. We are marketing our
services to other large, planned community developments that we believe intend
to offer these services to their members.

Transmission of Voice Conversations Over a Data Network Using the
Internet Protocol. We plan to expand the capacity, efficiency and diversity of
our network by implementing a technology that will send data over our network
in efficient segments, referred to as packets. This packet-switching technology
will allow us to provide a service, commonly known as Voice over IP, which will
transmit voice conversations over a data network, such as the Internet, using
the Internet Protocol. We expect that this technology will enable us to expand
our service offerings to include services such as unified messaging, which
integrates voice mail, e-mail, fax mail, video and other types of messages over
a local area network, and other converged voice, data and video programs. This
technology also will allow us to manage voice and data networks as a single
integrated network and should lower our costs of transporting voice traffic,
which would allow us to offer competitive prices for our voice services while
improving our profit margins.

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Comprehensive Voice and Data Programs

We believe that many communications-intensive users are principally
interested in the value-added programs that are used in connection with and
enhance our core voice and data services. Consequently, we offer a growing
range of standard and customized programs to meet our customers' communications
needs, including voice programs, such as conference calling and voice mail, and
data programs, such as e-commerce, Web hosting and Web development,
applications hosting, computerized management of cable and circuit inventory,
and customer trouble management. We also offer an expanding selection of
customized programs for specialized markets that include universities,
hospitals and hotels.

E-commerce. Our approach to e-commerce emphasizes communities of interest
and links business users and their customers through websites that are simple
and inexpensive to establish and maintain. We believe this approach will appeal
particularly to our customers that share common interests and to the higher
education markets we serve primarily through our Campuslink unit. Our internal
graphic design and software engineering staffs design and implement our e-
commerce services, which we market through the same channels as our other
communications services.

Billing services. Many large organizations use a number of separate,
stand-alone software packages to perform their billing functions. We offer a
software billing product designed to allow our customers to provide billing
services to their customers through integrated voice management software that
can track and allocate the costs of voice, data and other communications
charges at the individual, departmental and general ledger levels. Customers
using our software are able to access their accounts to acquire balance and
historical billing information, perform rate inquiries, initiate trouble
ticketing, track work orders and engage in paperless billing. Although we focus
on offering our billing software as part of our comprehensive suite of services
to businesses and institutions in our markets, we also offer our billing
software on a stand-alone basis to customers throughout the U.S.

Enhanced Voice Services. The enhanced voice services we currently offer
include voice mail and conference calling.

Upon completion of the final phase of our planned network deployment, we
plan to use technology which will allow us to send voice conversations and data
over a single network. This technology will allow us to offer additional
enhanced voice services, including converged voice and data applications for
communications-intensive customers such as telemarketers and Web-based services
companies.

Web Hosting Services. We offer Web-hosting services with varying degrees
of customization and value-added content to companies and other organizations
that wish to create and maintain their own websites without maintaining the
computer hardware and software otherwise necessary to do so. These services, in
which we put our customers' websites on our computer, feature advanced Web
servers for high speed and reliability, a high-quality connection to the
Internet, specialized customer support, advanced service features, such as
secure transactions, and reporting of on-site usage.

We plan to continue to broaden our Web hosting expertise and add
business-to-business e-commerce services and other value-added services to our
existing suite of service offerings.

Applications Hosting. Many enterprises and institutions wish to outsource
the hosting and support of their business applications software to reduce
capital expenditures and staffing expenses. We currently offer these customers
e-mail, group productivity, bill printing, customer support and other hosting
services. We also offer a hosting service that allows higher education,
healthcare, governmental and commercial enterprises to manage their
telecommunications expenses. In addition to offering these hosting services in
our markets as part of our package of communications solutions, we offer these
services to select businesses and institutions throughout the U.S.

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Planned Community Networks. We plan to develop customized community
networks to complement our network services business in specialized markets
such as higher education and student housing. In addition to serving as a
portal to the Internet, the high-speed network we have developed for the Playa
Vista community in Los Angeles will allow community residents to access local
transportation schedules and to purchase services online from local service
providers and merchants.

Network Operations Services

As part of our end-to-end solutions offerings, we offer a growing variety
of network operations services that help customers build and operate their own
networks. We offer these services primarily to support the sale of our other
services and to enhance customer retention. Our current network operations
services include equipment sales, installation and maintenance, network
management, network design and implementation, wide area network support and
billing and customer care.

Customer Premise Equipment Sales, Installation, Maintenance and
Repair. We sell, install and repair equipment located on the customer's
premises. This equipment includes private branch exchanges, local area
networks, servers and routers. To complement our own work force, we establish
relationships with local equipment installation companies to sell, install and
repair equipment we do not sell to our customers. Primarily to support the sale
of our other services, we also furnish and install fiber optic and cable
television cables for some of our customers.

Network Management. Some of our customers outsource to us the operations
and management of their network. Our network operations center in Ann Arbor,
Michigan, which operates 24 hours a day, 365 days a year, is equipped with
advanced network, service management and impact analysis tools that enable us
to deliver managed network services to our customers. Our network operations
center technicians monitor our network and our customers' networks to provide a
high degree of network reliability. Our field network technicians and
maintenance partners provide corresponding network management services at our
customers' premises. Through our Campuslink unit, we manage a variety of
networks and networking equipment for over 60 campus locations. Customers may
obtain reports of network performance and make service requests through Web-
based access to our systems. We assign account managers to each customer to
provide personal support.

Network Design and Implementation. We offer design, installation and
maintenance services for networks, including local and wide area networks,
located on our customers' premises.

Billing and Customer Care. Many higher education institutions prefer to
outsource the management of campus telecommunications services programs.
Through our Campuslink unit, we provide billing and customer care services for
the telecommunications resale programs of over 60 campus locations representing
over 50,000 students. Our student customers can speak to our customer care
representatives seven days a week or access automated account information over
the Web. To increase geographic market penetration, we focus the selling
efforts of our Campuslink unit on properties located in the 25 markets served
by our network.

We plan to extend our customer care and billing center to support the
expected significant increase in the use of these services in the business
sector as well as the continued growth in the demand for these services in the
higher education marketplace.

Network and Security Consulting. We help organizations to develop and
implement a comprehensive network security plan to protect their computers
against unauthorized access. The key components of such a plan are systems or
combinations of systems that enforce a boundary between two or more networks.
In addition, we provide the installation, configuration and support of
encryption and other security devices.

We are expanding these services to include protection against computer
viruses, external network vulnerability scans, penetration testing, internal
network audits and customized security training and consulting.

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Planned Applications Support Services. To complement our hosting
services, we plan to offer database administration support for Oracle and other
databases, Unix and Windows NT systems administration, systems operations and
programming support.

Wholesale Services

In addition to the services we provide to end-users, we offer voice and
data services to other communications providers on a wholesale basis. Our
wholesale customers include communications companies that resell the long
distance services of other carriers, cellular and interactive voice response
providers, providers of voice services over data networks, competitive local
telecommunications providers, Web services providers and Internet service
providers. We currently offer the following wholesale services:

. domestic and international termination services;

. dedicated voice and data private line services;

. origination services for competitive local providers and other
carriers;

. design of local resale service for competitive local providers and
other carriers;

. local access to Internet service providers;

. high-speed Internet connectivity for Internet service providers and
Web services applications;

. DSL services;

. network optimization management software for competitive local
providers and long distance carriers; and

. location of customer equipment in our network equipment centers.

We provide our regional customers with the flexibility to extend their
coverage areas without extending their operational centers or investing in
additional personnel through the use of our centralized network equipment
centers. We believe that this has allowed us to become the primary wholesale
vendor for several fast-growing Internet and Web-based service providers.

In addition, we plan to offer the design of local resale service to
competitive local providers and other carriers on a wholesale basis.

Our Business Strategy

Our objective is to become the most customer- and employee-oriented
network-based services provider to medium-sized and large businesses and
institutions in our markets. To accomplish this objective, we:

Offer a full range of bundled services to communications-intensive
users. We focus our growth initiatives on the delivery of communications
services to users that can benefit from our value-added approach. We believe
that our target customer base, which is composed primarily of medium-sized and
large businesses, institutions and other communications-intensive users, has
complex communications needs that are often underserved by traditional
telephone companies. Many communications providers continue to focus primarily
on access, transport and basic voice and Internet access services. We seek to
differentiate ourselves from these providers through superior customer service
that delivers complete solutions for our customers' communications needs. These
solutions combine our advanced network connection services with our core voice
and data services, the value-added communications programs that enhance our
core services, and our network operations services.

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Work closely with our customers to develop end-to-end communications
solutions tailored to each customer's particular needs. We believe that our
sales and service approach, in which we consult with our customers to design
services customized for their particular needs, is an effective strategy for
attracting and retaining customers with complex communications needs. We
establish local sales offices and hire sales personnel in each of our markets
to provide an experienced, locally-based account management team which offers
face-to-face sales and personalized client care for our entire product line. To
achieve superior sales coverage and results, we market our services through our
direct sales force and through independent agents from sales agencies located
throughout our markets. We hire seasoned sales professionals and reinforce the
experience of our employees and sales agents with intensive training in our
service offerings. We seek to motivate and retain our sales employees, sales
agents and agent support personnel with commissions and long-term equity
incentives.

Operate efficient, integrated back office systems. Our strategy requires
that we implement efficient operations support systems and other back office
systems that can support rapid and sustained growth. To realize this objective,
we have assembled a team of engineering and information technology
professionals experienced in the communications industry. This team, working
with third-party vendors, has developed end-to-end systems that will coordinate
multiple tasks, including installation, billing and client care. Unlike legacy
systems currently in use, which require multiple entries of client information
to perform multiple tasks, our systems will require only a single entry to
transfer client information from sales to service to billing. Our customized
systems also will be integrated to minimize the time between client order and
service installation and to reduce our costs. As a result of our focus on
advanced back office systems, we are one of the first U.S. communications
providers to obtain ISO-9002 registration, an internationally recognized symbol
of quality management systems. As of November 30, 2000, all but one of our
planned back office and operating support systems were installed and
operational. We expect that all of our back office systems will be installed,
operational and substantially integrated by the end of 2000.

Continue to deploy an advanced network with reduced capital
expenditures. We have followed a network deployment strategy in which we
initially lease telephone and data transmission lines, but purchase our own
electronic network components for transmission of voice, data and video
communications. Currently, we lease 100% of our transport requirements, but we
expect to purchase and operate some of the telephone and data transmission
lines we need when it becomes economically attractive for us to do so. We
believe that this network deployment strategy allows us to enter new markets
rapidly and apply an increased amount of our initial capital expenditures in
each market to the critical areas of sales and marketing and to our operations
support systems. We also believe that this strategy has resulted in lower, less
risky capital investment than the investments of other communications providers
that initially build their own fiber optic networks.

Supplement our internal growth with strategic acquisitions. To supplement
our internal growth, we pursue an acquisition strategy that will allow us to
increase penetration of our current markets and expand into new markets. We
seek acquisition candidates that will enhance our ability to sell and deliver
value-added services. Accordingly, we focus our acquisition efforts on
interconnect companies that sell, install and maintain data and voice networks
for customers, on enhanced service providers and on local and long distance
service providers. We believe that our acquisition of these types of businesses
will bring experienced back office, technical and customer service personnel to
our company, enhance our suite of service offerings and increase our customer
base.

Sales and Customer Service

Our goal is to be the most customer-oriented network-based provider of
communications services in our markets. We target medium-sized and large
businesses, institutions and other intensive users of communications services
that we believe can benefit from our value-added services. For each prospective
customer, we conduct a profitability and pricing analysis for use in preparing
proposals. This procedure ensures

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that we maintain our focus on obtaining customers that meet our internal
profitability standards, while illustrating the potential benefits that a
customer may realize by using a broader bundle of our services.

Direct Sales. As of September 30, 2000, we conducted our direct marketing
activities through 263 employee sales representatives, of whom 24 were sales
managers. As of the same date, we maintained a total of 29 sales offices in 12
states. We use these sales offices not only to target businesses and other
customers operating within our markets, but also to solicit and service
national accounts and the private student housing accounts managed by our
Campuslink unit.

We pursue a decentralized sales strategy, which grants our sales
representatives substantial responsibility to negotiate the pricing and other
terms of our customer agreements, subject to meeting specified profit margin
and profitability requirements. For this strategy to succeed, we must be able
to attract, train, motivate and retain skilled sales professionals. We seek to
recruit sales representatives with experience working for other communications
providers, telecommunications equipment manufacturers and network systems
integrators in our existing and target markets.

We require each new member of our direct sales force to participate in an
initial in-house training program, which includes seminars, on-the-job training
and direct one-on-one supervision by experienced sales personnel. We also
require members of our direct sales force to participate in an ongoing training
program designed to enhance their knowledge of the communications industry, our
services and the needs of our targeted customers.

We seek to motivate our direct sales force with a compensation program
that emphasizes commissions and eligibility for options to purchase our Class A
common stock. Our sales commission program is designed to reward account
profitability and retention as well as the addition of new customers.

Agent Sales. The efforts of our direct sales force are complemented by
marketing activities conducted by independent sales agents. As of September 30,
2000, we marketed our services through over 600 sales agencies nationwide. We
seek to select sales agencies that are well known to medium-sized and large
businesses and institutions in their markets and train our sales agents on how
to retain and develop the customer accounts they introduce to us. We maintain
an incentive program for our agents in which they are eligible to receive
warrants to purchase our Class A common stock if they achieve and maintain
specified revenue objectives. As of September 30, 2000, 24 of our employees
were dedicated to developing and supporting our agent program.

Marketing. In our target markets, we seek to position PaeTec as the high-
quality alternative for communications services by offering network
reliability, superior customer support and a broad spectrum of communications
services at competitive prices. We intend to build our reputation and brand
identity by working closely with our customers to develop services tailored to
their particular needs. We implement targeted advertising and promotional
efforts that emphasize the breadth of our communications solutions and our
ability to deliver a cost-effective integrated services package to our target
customer base.

Each of our sales teams is led by a sales vice president, who is
responsible for the acquisition and retention of all accounts in the applicable
market and reports directly to the regional president. Each team includes
branch sales managers, account managers, sales engineers and field technicians.
Our sales teams use a variety of methods to qualify leads and schedule initial
appointments, including building canvassing and customer referrals.

To support direct marketing programs, our marketing staff builds and
maintains a prospect database for each primary market based on the number of
access lines, usage of long distance service, demographic data and
concentration of potential customers. Before entering a market, we develop a
profile of prospective customers using our own databases as well as those of
third parties. We initially target high-volume communications users

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with name recognition in the local business community. Securing these "anchor
tenants" as customers facilitates our sales efforts in the local market and
provides locally known references.

Several months before beginning service in a new market, we establish a
local sales team with industry experience in that market and knowledge of the
target customer base. We seek sales representatives with the experience and
relationships to sell our products and services before we initiate network
operations in the market. We have designed this pre-selling effort to shorten
the period between the date our communications equipment serving that market
first becomes operational and the date we first generate revenues. The local
sales representatives make the initial contacts and sales and serve as the
principal customer liaison. At the time of the first sale, we assign the
customer to an account manager who has responsibility for account follow-up and
the sale of additional services. As we develop new services, the account
managers will target existing customers to deepen account penetration. We also
staff each local sales office with support specialists who assist the sales
force and with a sales engineer who coordinates switching the customer to
PaeTec service.

Customer Service. We believe that customer service has become a critical
element in attracting and retaining customers in the communications industry.
We have designed our customer service strategy to allow us to meet our customer
needs rapidly and efficiently. The principal sales representative for each
customer provides the first line of customer service by identifying and
resolving any customer concerns before the delivery of service. Once we have
begun to deliver service, we assign an account development representative to
each customer to supervise all aspects of customer relations, including account
collections and complaint resolution, and to provide a single point of contact
for all customer service issues. Both the principal sales representative and
the account development representative work with our network operations center
when technical assistance is needed. The operations center staff evaluates any
out-of-service condition and directs remedial action to be implemented by our
technical personnel or, where appropriate, our equipment vendors or external
service providers. In addition, the operations center staff maintains contact
with the customer and prepares reports documenting the service issue and any
corrective action taken. The account development representative or sales
representative also may assist in liaison with the customer until the out-of-
service condition has been corrected.

Customer Agreements. Our services agreements generally have initial terms
of one to five years, with indefinite renewal terms that may be terminated by
the customer following a specified notice period. Some of our Campuslink
service agreements have initial terms of up to ten years. We generate a
majority of our revenues under contracts with initial terms of three to five
years.

We received approximately 21% of our 1999 revenue from our sale of
services to GMH Associates, Inc., one of the customers we serve as a result of
our acquisition of Campuslink. GMH Associates is the largest provider of
student housing in the country. As of November 30, 2000, we served 21 of GMH
Associates' locations having a potential student customer base of approximately
17,600 students. We expect that sales generated by this customer in 2000 will
represent less than 10% of our overall revenue in 2000 as we continue to enter
into new markets and expand our business. No other individual customer
accounted for 10% or more of our revenue in fiscal 1998 or in 1999.

Our Network

Network Deployment Plan. We are deploying our network in three phases. We
completed the first phase at the end of 1999 with the installation and
activation of our initial group of eight Lucent 5ESS AnyMedia switches, which
are computers that connect customers to our network and transmit voice and data
communications over the network. Phase one of our plan represented our initial
market entry strategy and enabled us to begin serving customers and generating
revenue. We selected the eight initial switch sites based on the concentration
of potential customers, amount of communications traffic originating and
terminating in the markets, size and strength of the local economy, ability to
interconnect to established or incumbent networks, degree of competition and
regulatory environment. These eight sites allow us to offer our four categories
of services in the cities in which they are located and in an additional 17
metropolitan areas adjacent to those cities. The businesses in these areas
represent over 30% of the total business telephone lines in the United States.
The following table presents information about our phase one markets.

36
<PAGE>

Phase One

<TABLE>
<CAPTION>
Estimated
total PaeTec PaeTec digital T1 PaeTec access
business switch transmission lines line equivalents
access in-service in service as of in service as of
Switch site Markets served by switch lines(1) date September 30, 2000(2) September 30, 2000(2)
----------- ------------------------ ---------- ---------- --------------------- ---------------------
(by
switch) (by switch) (by switch)
<S> <C> <C> <C> <C> <C>
Boston, MA.............. Boston 2,000,000 4/10/99 427 10,243
New Hampshire
Rhode Island
Worchester/Springfield
Rochester, NY........... Rochester 800,000 4/29/99 657 15,758
Buffalo
Syracuse
Miami, FL............... Miami/ 1,000,000 6/11/99 328 7,879
Ft. Lauderdale
Boca Raton/
West Palm Beach
Philadelphia, PA........ Philadelphia 1,200,000 6/11/99 263 6,303
Southern New Jersey
Albany, NY.............. Albany 900,000 8/24/99 328 7,879
Hartford
New Haven/Stamford
Washington, D.C. area... Baltimore 2,200,000 10/13/99 164 3,940
Washington, D.C.
Northern Virginia
New York, NY............ New York City 4,600,000 11/1/99 689 16,546
Northern New Jersey
Long Island
Westchester County
Los Angeles, CA......... Los Angeles 5,100,000 12/10/99 427 10,244
San Diego
Orange County
---------------------- ---------- ----- ------
Totals................ 25 17,800,000 3,283 78,792
====================== ========== ===== ======
</TABLE>
--------

(1) Sources: Federal Communications Commission, Statistics of Common Carriers
as of December 31, 1998, and U.S. Census Bureau data. A business access
line is a telephone line which extends from a telephone company's central
office to the premises of a business.

(2) An access line is a telephone line which extends from one of our central
offices to our customer's premises. We connect customers to our network by
leasing digital T1 telephone and data transmission lines linking our
customers to the central office. Each digital T1 transmission line provides
the customer with 24 channels for telephone or data service, although some
customers do not use or pay for all 24 channels. We calculate the number of
access line equivalents we have installed by multiplying the number of
digital T1 transmission lines by 24. The number of access line equivalents
shown excludes access line equivalents sold or installed by our Campuslink
unit.

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<PAGE>

We are currently implementing phase two of our deployment, which we
expect will be completed by the end of 2001. In this phase, we focus on
broadening the range of our core data services and our voice and data programs
in our current markets, entering additional markets and expanding our sales
channels. We will expand the capacity, efficiency and diversity of our network
by implementing a packet-switching technology that will send data over our
network in efficient, segmented packets. To implement this technology, we have
installed eight high-speed Cisco data routers. This technology will allow us to
transport voice, data and video traffic over one data network. To complete
phase two, we expect to offer our services in the following ten additional
metropolitan areas in 2001:

Phase Two

<TABLE>
<CAPTION>
Estimated total
Metropolitan Area business access lines(1)
----------------- ------------------------
<S> <C>
San Francisco, CA...................................... 1,100,000
San Jose, CA........................................... 700,000
Orlando, FL............................................ 300,000
Tampa, FL.............................................. 500,000
Atlanta, GA............................................ 700,000
Chicago, IL............................................ 2,000,000
Detroit, MI............................................ 1,100,000
Cleveland, OH.......................................... 400,000
Pittsburgh, PA......................................... 500,000
Dallas, TX............................................. 1,200,000
---------
Total................................................ 8,500,000
=========
</TABLE>
--------

When we complete phase two of our network deployment, we expect that our
network will allow us to market our services to potential business customers
that represent over 45% of the total business access lines located in the U.S.

We expect to initiate phase three of our network deployment plan in 2002.
Our objectives for this phase will include completion of our transition to a
packet-switching network, completion of our network and expansion into
additional markets. When we complete phase three, we expect that our network
will allow us to market our services to potential business customers that
represent over 50% of the total business access lines in the U.S.

Current Network Infrastructure. With our current network infrastructure
and operations support systems, we currently are able to control the types of
services we offer, how these services are packaged and how they are integrated
to serve our customers. We generally attempt to limit our reliance on other
carriers and their networks to reach customers in low-density locations and to
interconnection for termination of calls to customers of incumbent local
telecommunications providers. Based on our network technology, we are able to
offer basic and enhanced local and long distance services characteristic of a
full service provider of telecommunications services. We also employ a variety
of network technologies and resale facilities to transmit voice, data and video
signals to our customers at a reduced cost. We customize the mix and delivery
of these services to fit the market, customer and regulatory requirements.

Switches are computers that connect customers to our network and transmit
voice and data communications over the network, and routers serve as the
interface between networks by directing traffic in an efficient manner. We
selected the Lucent 5ESS AnyMedia switches, which employ circuit-switching

38
<PAGE>

technology, as our initial switches because of their record in delivering local
and long distance services and our belief that these switches are capable of
being upgraded to packet-switching technology on a timely basis. As one of the
first communications services providers to offer long distance and local
services exclusively through the use of Lucent switching equipment, we have
been able to accelerate our roll out of new offerings while eliminating the
need to replicate databases. We believe our decision to use Lucent switches
exclusively also has allowed us to generate increased revenues by providing
services to customers more quickly and at a reduced cost.

Our current switches have a variety of custom features which reduce
connect-time delays and efficiently direct calls throughout the network. Where
feasible, our network uses a technology which automatically routes traffic to
an alternative path in the event of a network outage and is designed to reduce
the frequency and duration of service interruptions.

Our customers are currently connected to our network by telephone and
data transmission lines which we lease from a variety of telecommunications
carriers. We may serve some major customers who are difficult to reach by using
high-speed digital microwave technology. Currently, we reach some other
customers by connecting our network to the networks of other carriers and
leasing the telephone and data transmission lines that connect their networks
to their customers' premises.

As our customer base grows, we will replace leased telephone and data
transmission lines with transmission lines we own and operate if we believe
this investment is warranted in view of strategic, operational and financial
factors. As it becomes economically attractive for us to do so, we plan to
purchase some of the telephone and data transmission lines we need to operate
our business.

Planned Network Infrastructure and Backbone Network. We have initiated
the process of adding packet-switching technology to the circuit-switching
technology our network currently uses. Our goal is to meet the current demands
of our customers for reliable, high-quality switched telephone connections,
while also deploying the equipment to satisfy their growing demand for high-
speed data transmission. Circuit switch-based systems, which currently dominate
the public telephone network, establish a dedicated channel for each
communication, such as a telephone call for voice or fax, maintain the channel
for the duration of the call, and disconnect the channel at the conclusion of
the call. Packet-switched systems format the information to be transmitted into
a series of shorter digital messages called "packets." Each packet consists of
a portion of the complete message plus the addressing information to identify
the destination and return address. Unlike circuit-switching, packet-switching
does not require a single dedicated channel between communication points. This
type of communication between sender and receiver is known as connectionless,
rather than dedicated. Most traffic over the Internet, which is a
connectionless network, uses packet-switching technology.

By the end of phase two of our network deployment, we plan to have
operational a primarily packet-based backbone network that we believe will
enable us to offer high-quality Internet access and transport for voice, data
and video services. This backbone network will consist of high-capacity fiber
optic telephone and data transmission lines that we lease and that will allow
us to transport traffic between our switches on our own network. We believe the
cost-effective packet-switching technology we plan to employ for our backbone
network will facilitate the expansion of our network to support growth as well
as provide network reliability and flexibility for the deployment of new
service offerings.

We expect that our backbone will be a network based on the Internet
Protocol, which is an open protocol that allows unrelated computer networks to
exchange data and is the technological basis of the Internet. The Internet's
explosive growth in recent years has focused intensive efforts worldwide on
developing networks and programs based on the Internet Protocol. Internet
Protocol technology should enable us to accelerate network traffic flow and
make it easier and less costly to manage our network. This technology generally
reduces the capacity required for network management tasks, making more of the
network capacity

39
<PAGE>

available for revenue-generating customer traffic. In addition to moving
network traffic faster, we anticipate this technology will allow us to offer
differentiated levels of service at higher prices for performance-sensitive
programs such as video conferencing.

Our planned backbone network will provide a network switching presence
close to the customer to reduce access and switching costs, and should allow us
to expand our network to meet customer demand. This regional design also should
enhance service reliability and allow us to improve quality and speed, because
traffic generally will not have to be routed outside specific regions.

We plan to employ Internet Protocol technologies that will allow us to
integrate our Lucent 5ESS switches into our packet-switched network and provide
voice services over our data network. We believe these technologies will enable
us to transport long distance voice traffic over our backbone network at low
incremental cost, while maintaining service quality. We expect that use of
these technologies also will allow us to offer voice services to the customer's
premises at competitive rates. We plan to employ software that will allow us to
manage voice call routing and processing and to integrate new service
offerings.

We plan to establish advanced technologies in each of our markets that
will allow us to aggregate customer traffic and efficiently connect our
customers to the high-speed core of our network. With this network design, we
expect to be able to access customer sites using a variety of methods,
including, among others, leased lines, DSL and wireless technology. We expect
that our packet-switched network will have the following characteristics:

. Growth Potential. Our network will incorporate advanced switching
technologies and fiber and data products that will quickly provide us
with additional capacity as customer demand grows.

. Flexibility. We plan to employ management technologies that will
permit customers to access the network at very high speeds and
provide them with the ability to manage capacity and quality of
service by type of application for voice, video and other
applications that are sensitive to time delays.

. Availability. Our network will incorporate features intended to
eliminate performance bottlenecks and circuit failures that might
otherwise interrupt the flow of customer traffic. As our business
grows, we will seek additional telephone and data line capacity from
our partners to add network capacity quickly.

. Performance. Our network will employ transmission speeds that will
provide connectivity that is much faster than most Internet business
connections available today.

. Accessibility. Our network will provide high-speed connectivity to
the Internet through both public and private connection points with
other providers.

. Manageability. All network management traffic will be run over a
separate network. As a result, management activities will not
interfere with increased network usage. We plan to have support staff
on site or on call for all network locations 24 hours a day.

40
<PAGE>

Our Back Office Systems

Our information systems and procedures for operations support and other
back office systems enable us to price our services competitively, to meet the
needs of our customers, and to interface with other carriers. We believe our
information systems also provide us with a long-term competitive advantage by
enabling us to implement services in our markets rapidly and to shorten the
time between our receipt of a customer order and our generation of revenue from
that customer.

The following table shows our principal back office systems and their
operational status as of November 30, 2000:

<TABLE>
<CAPTION>
Function Provider Product Status
-------- -------- ------- ------
<S> <C> <C> <C>
Billing and accounts Daleen Technologies BillPlex
receivable Installed and operational
Carrier access billing Cathy Hudson Associates Carrier access billing system Installed and operational
Network management Harris Corp. Network management system Installed and operational
Switch mediation Lucent Technologies Billdats Installed and operational
Local switch
provisioning Lucent Technologies ConnectVu Installed and operational
Fraud management Lucent Technologies Fraud management system Installed and operational
Long distance switch
provisioning Lucent Technologies Service management system Installed and operational
Financial reporting Oracle Financials Installed and operational
Trouble tickets, order MetaSolv Software Telecom business solutions Installed and operational
flow management,
circuit design and
inventory
Flow-through Harmonycom Harmony Expected to be installed and
provisioning and operational in the fourth quarter
service impact of 2000
analysis
Trouble analysis and Applied Digital Access Optis test and service management Installed and operational
testing
</TABLE>

We believe that advanced back office systems are necessary to enable our
employees to provide our customers with consistent, high-quality service. We
have therefore developed our back office systems and procedures according to an
internal quality management system based on the internationally recognized
standards required for ISO-9002 registration, which refers to a series of
documents that provide international guidelines on quality management and
quality system elements. This registration, which we received in June 2000, is
intended to measure a provider's ability to respond to customer service
requirements and requires a company's quality system to be audited by
independent auditors on an initial and periodic basis. We obtained this third-
party verification by documenting the processes we use to respond to, monitor
and fulfill customer requests and to manage the maintenance and upkeep of the
back office and other equipment we use to provide our services. By
standardizing the way we deliver our services, we believe we have achieved
greater operational efficiencies.

We have developed the information systems and procedures for operating
system support and other back office systems necessary to enter, schedule, fill
and track a customer's order from the point of sale to the installation and
testing of service. These information systems also link our trouble management,
inventory, billing, collection, facility management and customer service
systems. MetaSolv Software, Inc. has developed our operations support systems
for managing customer, network and equipment orders. MetaSolv's software
manages our ordering, service provisioning, network inventory management and
design, trouble resolution, gateway interconnections and work-flow management
business functions. We have implemented an equipment management system and
circuit inventory to track our current network facilities and the capacity of
synchronized transport signals throughout our network. We also have a
maintenance and trouble ticketing system that provides the basis for
troubleshooting. In addition, we have implemented service order management and
tracking systems that will be linked to the billing system described below and
electronic gateways to incumbent local telecommunications providers for
provisioning, local number portability and new service offerings.

We have entered into an agreement with Daleen Technologies, Inc. as our
billing system provider. The Daleen billing system was launched in October 1998
and will be able to accommodate the anticipated growth

41
<PAGE>

in our customer base. This billing system provides us with data regarding
payments and credit history, creates reports that track accounts receivable
aging and churn, and tracks agent commissions and margin reports. We have
implemented additional billing enhancements and have evaluated additional
software for traffic analysis, line cost audit and operational financial
reporting. We also have implemented Web Front, an advanced delivery system that
currently provides customers with Web-based access to their accounts. We expect
that this system will also integrate customer bills with traffic reports for
on-line access and enable customers to activate or change facilities without
our direct involvement.

We believe that our ability to provide our customers with a single
integrated bill for all services is a key factor in satisfying and retaining
our customers. Our bills are available in a variety of formats that can be
tailored to a customer's specific needs. For example, we provide account codes
that enable a customer to track expenses by employee, department or division.
To help manage its costs, a customer also is able to use codes to restrict
calling by individuals.

We have entered into an agreement with Harmonycom, Inc. to provide us
with flow-through provisioning and service impact analysis. Harmonycom is a
Cisco Systems partner whose software gives us the ability to integrate our
MetaSolv operations support systems, customer information databases, network
and element management systems and trouble reporting systems. This feature
allows us to provision and track customer connections throughout our network.
When an order is entered into an ordering system, the Harmonycom software will
automatically provision all of our network elements, which are the electronic
components that enable us to transport voice and data communications, to
deliver service to the customer, keep track of Internet Protocol address
assignments and place orders and receive port information from network access
providers. The Harmony system also will automatically transfer customer-
specific data to our network management systems once a customer begins
receiving service and will allow us to determine the impact on customers of any
network element outage.

Acquisitions

We have completed the following six acquisitions since our inception:

Campuslink. As a result of our acquisition of Campuslink on September 9,
1999, we significantly increased our customer base, our force of skilled
technical and sales employees and our suite of data service offerings.
Organized in November 1993, Campuslink provides integrated telephone, video,
data and other communications services primarily to colleges and universities
and the privatized student housing market. Campuslink currently provides these
services under multi-year contracts to approximately 35 colleges and
universities at over 60 campus locations and to approximately 20 privatized
housing complexes with a combined resident population of over 50,000. These
projects include a ten-year service agreement with The United States Military
Academy at West Point and service agreements with GMH Associates, the largest
provider of privatized student housing in the country, with 15 locations
serving approximately 16,000 students as of June 30, 2000.

We believe our acquisition of Campuslink has given us the ability to:

. accelerate our penetration of selected markets by taking advantage of
the significant geographic overlap between Campuslink's customer base
and our existing and planned markets;

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<PAGE>

. provide additional network services at lower cost by moving
Campuslink's local resale traffic to our facilities-based network;

. provide customers with a full range of communications solutions by
adding Campuslink's customer premise equipment solutions to our
network-oriented solutions;

. use the high bandwidth of Campuslink dedicated circuits to offer
additional data services to over 26,000 Campuslink customers; and

. build upon Campuslink's significant back office capabilities and
established customer service organization.

For additional information on the terms and conditions of our acquisition
of Campuslink, see "Transactions Involving Related Parties--Acquisition of
Campuslink" beginning on page 67.

Standard Communications. We expanded our operations in the southeast U.S.
through our acquisition in November 1998 of the customer base of Standard
Communications, Inc., a long distance reseller headquartered in Tarpon Springs,
Florida and doing business as SCI Long Distance Telephone. We gained
approximately 2,250 customers as a result of the Standard Communications
transaction, which we completed by paying $200,000 to two former stockholders
of SCI. We are also obligated to pay the two former stockholders monthly
commissions based on net revenues billed to the acquired customers for a period
of 24 months after the closing of this transaction.

East Florida Communications. We also expanded our operations in the
southeast U.S. through our acquisition in August 1999 of East Florida
Communications, Inc., a local and long distance reseller and equipment provider
headquartered in Daytona Beach, Florida. In consideration of our acquisition of
East Florida Communications, we paid a total of $1.4 million to the two former
stockholders of East Florida Communications and issued each of them 10,000
shares of our Class A common stock. As a result of this acquisition, we
acquired approximately 118 customers and 14 experienced technical or sales
employees.

Telperion Development Corporation. In June 1999, we enhanced our
software engineering capabilities through our acquisition of the professional
staff, consisting of nine technical employees, and specified assets of
Telperion Development Corporation, an Internet consulting company headquartered
in Newark, New York. We acquired the professional staff and assets for
$123,670.

Pinnacle Software Corporation. In April 2000, we acquired Pinnacle
Software Corporation, a professional services and software company
headquartered in Pittsford, New York. This acquisition allows us to offer
software and service solutions, including customer billing, inventory control,
asset management, help desk management and cable management, which are aimed at
helping organizations of all sizes in the higher education, business, medical,
and state and local government markets manage large voice, data and video
networks. Pinnacle had $3.7 million in revenues in 1999 and employed over 30
information technology professionals as of March 20, 2000. In consideration for
our acquisition of Pinnacle, we paid $6 million in cash and issued 500,000
shares of our Class A common stock. In the acquisition agreement, we agreed
that, if our Class A common stock does not have a value of at least $25 per
share during the 18-month valuation period beginning on April 13, 2000, we will
be required to make an additional payment to the former Pinnacle stockholders
for each of the 500,000 shares we previously issued to them. The amount of this
payment for each such share will be equal to the difference between $25 and the
highest per share value of the Class A common stock during the valuation
period. We have the option to make any additional payment in cash, in
additional shares of Class A common stock, or in a combination of cash and
additional shares, except that we must make at least 50% of the payment in cash
if the market value of our publicly traded Class A common stock held by PaeTec
non-affiliates does not exceed $500 million.

43
<PAGE>

Data Voice Networks. In May 2000, we acquired the assets of Data Voice
Networks, Inc., which designs and implements data networks for small to medium-
sized businesses and distributes data products for Cisco Systems and other
vendors. Data Voice Networks, which is headquartered near Philadelphia,
Pennsylvania, had $7.2 million in revenues in 1999 and had over 20 employees as
of March 20, 2000. In consideration for our acquisition of Data Voice Networks
we paid approximately $0.8 million in cash at the closing and are obligated to
pay an additional $2.0 million in five quarterly installments. We also issued
120,000 shares of our Class A common stock. In the acquisition agreement, we
agreed that, if our Class A common stock does not have a value of at least $25
per share during the 12-month valuation period beginning on May 10, 2000, we
will be required to make an additional payment for each of the 120,0000 shares
we previously issued in the acquisition. The amount of this payment for each
such share will be equal to the difference between $25 and highest per share
value of the Class A common stock during the valuation period. We have the
option to pay any adjusted consideration in cash, in additional shares of Class
A common stock, or in a combination of cash and additional shares.

Competition

The telecommunications industry is highly competitive. We believe that
the principal competitive factors affecting our business will be pricing levels
and policies, customer service, accurate billing and variety of services.

Incumbent Local Carriers. As a result of the growth of the overall market
and the number of customers that will be open to alternatives, we believe that
our primary competition will continue to be the incumbent local exchange
carriers, which are the large, established local telephone companies such as
the regional Bell operating companies, in each of our target markets for the
foreseeable future. In most of our current and target markets, we compete or
will compete principally with the regional Bell operating companies, all of
which are pursuing the authority to provide long distance service in their
service territories. The FCC has authorized Verizon Communications to provide
long distance service in New York and has authorized SBC Communications, Inc.
to provide long distance service in Texas. Many industry experts expect more of
the regional Bell operating companies to be successful in entering the long
distance market in a few states in the near future. If they succeed, they will
also be able to offer a full suite of local and long distance services to their
customers in direct competition with us.

Competitive Advantages of Incumbent Local Carriers. Incumbent local
carriers generally have long-standing relationships with their customers, have
financial, technical and marketing resources substantially greater than ours
and have the potential to subsidize competitive services with revenues from a
variety of other businesses. Recent regulatory initiatives, which allow non-
incumbent providers of local services such as PaeTec to interconnect with the
facilities of the incumbent providers, provide increased business opportunities
for us. These interconnection opportunities, however, have been and likely will
continue to be accompanied by increased pricing flexibility for and relaxation
of regulatory oversight of the incumbent providers.

Deregulation of Incumbent Local Carriers. Recent FCC administrative
decisions and initiatives provide incumbent local carriers with increased
pricing flexibility for their private line and special access and switched
access services. In addition, the FCC recently adopted rules that provide the
incumbent providers with increased pricing flexibility and deregulation for
some of these access services after designated competitive levels are reached.
Those rules provide that, when an incumbent provider demonstrates that
competitors have made significant competitive inroads in providing a specified
federally regulated service in a geographic area, the incumbent provider in
that area may offer discounts to large customers through contract tariffs,
engage in aggressive volume and term discount pricing practices for its
customers, or otherwise free itself of regulatory constraints. Regulators in
some states have adopted or are considering similar forms of deregulation.
These actions could have a material adverse effect on providers, including
PaeTec, that compete with the incumbent providers.

44
<PAGE>

Other Competitors for Local Phone Service. We also face, and expect to
continue to face, competition from other current and potential market entrants.
A continuing trend toward consolidation of telecommunications companies and the
formation of strategic alliances within the telecommunications industry, as
well as the development of new technologies, could give rise to significant new
competitors and could put us at a competitive disadvantage.

Long Distance and Other Telecomunications Companies. Prospective
competitors include long distance carriers seeking to enter into or expand
their presence in the local telephone services market, such as AT&T, WorldCom
and Sprint, and other non-incumbent providers of local telephone services,
resellers of local telephone services, service providers offering alternative
access methods, cable television companies, electric utilities, microwave
carriers, wireless telephone system operators, Internet service providers and
private networks built by large end-users. AT&T, WorldCom, Sprint and other
major long distance carriers are currently offering or are planning to offer
local telecommunications services and are building facilities that will allow
them to enter the local services market.

Wireless Carriers. Technological advances and the entry of new
competitors in wireless communications also will provide competition for
PaeTec. National carriers such as Sprint, AT&T, Verizon Communications, Nextel
Communications, Inc. and SBC Communications, as well as smaller regional
companies, may provide local services. Recent advances in technologies also
allow wireless carriers to provide not only voice but also data transmission
and Internet access services. The introduction of fixed wireless applications
has facilitated the creation of companies, such as Teligent, Inc., NextLink
Communications, Inc. and WinStar Communications, Inc., which are in the process
of installing equipment and building networks that may offer the same types of
services that we offer or intend to offer.

Internet Service Providers. Advances in digital transmission technologies
have created opportunities for voice services to be transmitted over the
Internet. Internet service providers such as America Online, Inc., Earthlink,
Inc. and others are exploring ways to become telecommunications service
providers or to exploit their market position through new initiatives and
strategic partnerships with large, well-funded incumbent providers and other
providers.

Competition for Provision of Long Distance Services. The long distance
telecommunications industry has numerous entities competing for the same
customers and a high average turnover rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. Prices in the long distance market have declined
significantly in recent years and are expected to continue to decline. We
expect to face increasing competition from companies offering long distance
data and voice services over the Internet. These companies could enjoy a
significant cost advantage because they do not currently pay carrier access
charges or universal service fees.

Competition for Provision of Internet-Based Services. The market for
Internet-based services is extremely competitive. There are no substantial
barriers to entry, and we expect that competition will intensify in the future.
Our current and prospective competitors generally may be divided into the
following three groups:

. Internet service providers, such as Concentric Network Corp., Exodus
Communications, Inc., Globix Corporation, PSINet Inc., UUNET
Technologies Inc., Global Frontiers, Inc., Genuity Corp., Digex,
Inc., Verio Inc., Applied Theory Communications, Inc. and other
national and regional providers;

. telecommunications companies, such as AT&T, Cable & Wireless P.L.C.,
Sprint, WorldCom, the regional Bell operating companies, non-
incumbent carriers and various cable companies; and

. information technology integrators and outsourcing firms, such as the
"Big 5" accounting firms, EDS Corp. and similar entities.

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<PAGE>

Most of these competitors have significantly greater market presence,
engineering and marketing capabilities, and financial, technological and
personnel resources than we have. As a result, compared to us, our competitors
may be able to develop and expand their network infrastructures and services
offerings more efficiently or more quickly, adapt more swiftly to new or
emerging technologies and changes in customer requirements, take advantage of
acquisitions and other opportunities more readily, and devote greater resources
to the marketing and sale of their products and services. Further, they may
succeed in developing and expanding their communications and network
infrastructures more quickly than we can.

We believe that new competitors, including large computer hardware,
software, media and other technology and telecommunications companies, will
enter the tailored, value-added network services market, resulting in even
greater competition. Some telecommunications companies and online services
providers are currently offering or have announced plans to offer Internet or
online services, or to expand their network services. Other companies,
including America Online, Genuity and PSINet, also have obtained or expanded
their Internet access products and services as a result of acquisitions. These
acquisitions may permit our competitors to devote greater resources to the
development and marketing of new competitive products and services and the
marketing of existing competitive products and services. In addition, the
ability of some of our competitors to bundle other services and products with
outsourced corporate networking services or Internet access services could
place us at a competitive disadvantage.

Properties

We occupy our corporate headquarters and network operations center in
Fairport, New York, which consists of approximately 20,000 square feet of
office space, under a lease which expires in December 2000. The new 100,000-
square-foot corporate headquarters we have agreed to lease is under
construction by an unrelated company in Perinton, New York. We will occupy this
new facility beginning in the first quarter of 2001 under a 20-year lease
expiring in December 2020.

In addition to our corporate headquarters, we maintain 29 sales offices
in various locations in the U.S. under leases expiring between January 2001 and
December 2007. These offices contain a total of approximately 100,000 square
feet of office space and range in area from approximately 2,000 square feet to
approximately 20,000 square feet. The following table lists the location of
each of our sales offices:

California Michigan Pennsylvania
Culver City Ann Arbor King of Prussia
Irvine Springfield
San Diego Eddystone
New Hampshire
Manchester

Connecticut Rhode Island
Hartford New Jersey Providence
Stamford Roseland
Voorhees

Florida Virginia
Boca Raton New York Sterling
Daytona Beach Albany
Lakeland Buffalo
Miami Fairport
Jericho
New Paltz
Massachusetts New York
Waltham North Syracuse
Tarrytown
Maryland Victor
Columbia

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<PAGE>

We maintain eight leased network equipment sites that contain a total of
approximately 53,000 square feet of equipment space, which we generally occupy
with our network equipment and the equipment of our customers and other end-
users. Our leases for the sites, which range in area from approximately
4,700 square feet to approximately 10,000 square feet, expire between October
2003 and February 2009. The following table lists the location of each of our
network equipment sites:

California Massachusetts Pennsylvania
Los Angeles Boston Philadelphia

Florida New York Virginia
Miami Albany Sterling

New York
Illinois Rochester
Chicago

We intend to lease additional sales offices and network equipment sites
as we expand. We believe that necessary space will be available on a
commercially reasonable basis to accommodate our anticipated growth.

Intellectual Property

Our ability to compete depends in part upon our proprietary rights in our
technology and business procedures and systems. We rely on a combination of
contractual restrictions and copyright, trademark and trade secret laws to
establish and protect these proprietary rights. It is our policy to require
employees, consultants and, when possible, vendors to execute confidentiality
agreements upon the commencement of their relationships with us. These
agreements provide that confidential information developed or made known during
the course of a relationship with us must be kept confidential and not
disclosed to third parties except in specific circumstances.

We consider our trademarks to be of material importance to our business
plans. We have received a federal trademark registration for the "PaeTec
Communications" mark and the "Campuslink" mark from the U.S. Patent and
Trademark Office. We also have filed applications for the federal registration
of the following trademarks used in our business: "Where phone service has
become an art," "Where communications has become an art," "TecPath," "Network
Advisor"and "OnNet Mall." Federal registration of trademarks is effective for
an initial period of 20 years and is renewable for as long as we continue to
use the trademarks.

Employees

As of September 30, 2000, we employed 918 full-time employees, none of
whom is covered by a collective bargaining agreement. We believe our relations
with our employees are good.

Legal Proceedings

Eagle Communications, Inc., a business partner of ACC National TeleCom
Corp., initiated a legal proceeding in April 1999 in the Supreme Court of the
County of New York against our subsidiary, PaeTec Communications, Inc., and
four of our executive officers, Richard E. Ottalagana, John P. Baron, Daniel J.
Venuti and Edward J. Butler, Jr., all of whom were formerly employed by ACC or
one of its affiliates. Eagle Communications alleged that the defendants other
than PaeTec Communications, while employed by ACC or one of its affiliates,
were provided with confidential information of Eagle Communications concerning
its information provider or information service provider customers and
unlawfully misused that information while employed by PaeTec to the detriment
of Eagle and to the benefit of PaeTec Communications. Based upon these alleged
circumstances, Eagle Communications seeks injunctive relief and unspecified
damages based on claims of alleged unfair competition, tortious interference
with contractual relations and with prospective economic

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<PAGE>

relations, unjust enrichment, and misappropriation and use of trade secrets
claims. The defendants have denied liability with respect to all of these
claims. The court has issued a preliminary injunction prohibiting the
defendants from using or disclosing the details of a revenue sharing policy
belonging to Eagle Communications, and has denied preliminary injunctive relief
with respect to all other claims. The parties to this suit began conducting
discovery proceedings. No trial date has been scheduled. The parties to the
Eagle legal proceeding have reached an agreement in principle to settle this
proceeding and are in the process of preparing definitive settlement
documentation.

PaeTec is not a party to any other pending legal proceedings that we
believe would, individually or in the aggregate, have a material adverse effect
on our business, financial condition or results of operations.

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<PAGE>

REGULATION OF OUR SERVICES

Overview

Our services are subject to varying degrees of federal, state and local
regulation. Under the Communications Act of 1934, as amended, the FCC's rules
and comparable state laws and regulations, we are considered a competitive
local exchange carrier, which is a provider of local telephone service other
than one of the former monopoly local telephone companies. The former monopoly
local telephone companies are known as incumbent local exchange carriers.
PaeTec and other competitive carriers are required to provide service upon
reasonable request and to interconnect their networks with the networks of
other carriers, and are subject to other regulatory obligations we describe
below.

The FCC exercises jurisdiction over our facilities and services to the
extent they are used to provide, originate or terminate interstate or
international communication services offered to the public. State regulatory
commissions regulate the same facilities and services to the extent they are
used to originate or terminate intrastate communication services offered to the
public. In addition, as a result of the passage of the Telecommunications Act
of 1996, state and federal regulators share responsibility for implementing and
enforcing rules to allow new companies to compete with the traditional monopoly
local phone companies.

Existing federal and state regulations are currently subject to judicial
proceedings, legislative hearings and administrative proposals that could
change, in varying degrees, the manner in which we operate. We cannot predict
the outcome of these proceedings or their impact upon the telecommunications
and Internet service industries generally or upon us specifically.

Federal Regulation

General Statutory Framework. We are regulated by the FCC as a non-
dominant carrier subject to minimal regulation under the Communications Act.
Both the Communications Act and the FCC's rules and policies implementing it
generally favor entry in local and other telecommunications markets by new
competitors, such as PaeTec, and seek to prevent anti-competitive practices by
incumbents.

Under the Communications Act, we are subject to the general requirement
that our charges and regulations for communications services must be "just and
reasonable" and that we may not make any "unjust or unreasonable
discrimination" in our charges or regulations. The FCC must grant its approval
before any change in control of any carrier providing interstate or
international services, or of any entity controlling such a carrier, or the
assignment of any authorizations held by such a carrier. Carriers such as
PaeTec are also subject to a variety of miscellaneous regulations that, for
instance, govern the documentation and verifications necessary to change a
consumer's long distance service provider and require the filing of periodic
reports. As a non-dominant carrier, we are not currently subject to price cap
or rate of return regulation at the federal level, nor are we required to
obtain specific FCC authorization for the installation, acquisition or
operation of our domestic network facilities.

The FCC requires all providers of communications services to the public,
including non-dominant carriers such as PaeTec, to receive an authorization to
provide or resell international telecommunications services. The FCC also has
jurisdiction to act upon complaints against any providers of communications
services to the public for failure to comply with its statutory obligations.
The FCC generally has the power to modify or terminate a carrier's authority to
offer long distance or international service for failure to comply with federal
laws or the rules of the FCC, and may impose fines or other penalties for
violations. Although the FCC does not require non-dominant carriers to file
tariffs with respect to long distance access and domestic long distance
service, it does require non-dominant carriers to file tariffs containing the
rates, terms and conditions for international service.

Federal Rules Promoting Local Competition. The 1996 Telecommunications
Act imposes a variety of duties on local telephone service providers, including
PaeTec, in order to promote competition in the

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<PAGE>

provision of local telephone services. These duties include requirements to:

. interconnect directly or indirectly with other carriers;

. permit resale of services;

. permit users to retain their telephone numbers when changing
carriers;

. provide competing carriers access to poles, ducts, conduits and
rights-of-way at regulated prices; and

. establish reciprocal compensation arrangements for the transport and
termination of telecommunications.

Incumbent carriers are also subject to additional duties that facilitate
entry by competing carriers such as PaeTec. For example, incumbent carriers
must:

. permit competitors to locate their equipment on the incumbent's
premises;

. allow competitors to make use of elements of their networks on an
unbundled basis, and on non-discriminatory, cost-based terms; and

. offer wholesale versions of their retail services for resale at
discounted rates.

Incumbent carriers are required to negotiate in good faith with
competitive carriers, such as PaeTec, that may request any or all of the
arrangements listed above. If the negotiating carriers cannot reach agreement
within a prescribed time, either carrier may request binding arbitration of the
disputed issues by a state regulatory commission. In addition, a carrier is
permitted to "adopt" all or portions of agreements between the incumbent
carrier and other carriers.

PaeTec faces substantial uncertainties stemming from ongoing FCC
proceedings relating to implementation of the staturtory requirements listed
above, as well as ongoing judicial review of the FCC's rules, both of which
could lead to unpredictable changes to these requirements. The FCC has adopted
implementing rules beginning in 1996 and has substantially modified those rules
over the past four years. Reviewing courts, including the U.S. Supreme Court,
have upheld many of the most significant FCC rules benefiting new entrants such
as PaeTec. On the other hand, certain FCC requirements that had benefited
carriers like PaeTec have been reversed by reviewing courts or have been
narrowed by subsequent decisions of the FCC. The following examples illustrate
the types of ongoing rule changes that could affect PaeTec's business:

. In response to a Supreme Court remand, the FCC recently adopted an
order that limited the network elements that competitive carriers are
entitled to purchase from incumbent carriers. Under that order,
incumbent carriers are no longer required to sell competitive
entrants the use of their packet switches, equipment used for
providing DSL service, or, in larger cities, circuit-switching
equipment used for providing traditional telephone and data services.

. A federal court of appeals recently vacated the specific pricing
methodology that the FCC had adopted, although it generally affirmed
the principle that incumbent carriers' prices for network elements
must be based on the forward-looking costs of service. The FCC is
likely to revisit that methodology in the near future.

. The FCC has adopted measures implementing the statutory requirement
that incumbent carriers allow competing carriers like PaeTec to
install their network equipment on the incumbent carriers' premises,
including measures intended to lower the costs of that installation.
Reviewing courts have upheld some of the details of these rules and
have remanded others for further consideration by the FCC, and these
rules are likely to change in the near future.

. To promote deployment of high-speed services by competitive carriers,
the FCC adopted rules to permit so-called line sharing arrangements
between competitive carriers and incumbent carriers. Those rules
require incumbent carriers to allow competitive carriers to use
separated frequencies of a conventional phone line to provide high-
speed DSL services to consumers. A major benefit

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<PAGE>

of these "line sharing" rules is that the same telephone line can
carry both voice and data traffic simultaneously and potentially by
different service providers, which enables competitive entrants like
PaeTec to provide DSL service at a significantly reduced cost.

Federal Regulation of Interconnection Agreements. In connection with
offering local telephone services, we are a party to interconnection
agreements with the following incumbent carriers:

. Frontier Corporation, now a subsidiary of Global Crossing Ltd., for
our upstate New York markets;

. Southern New England Telephone, now a subsidiary of SBC
Communications, for our Connecticut markets;

. Verizon Communications, for our markets in Virginia, Maryland, the
District of Columbia, Delaware, Pennsylvania, New Jersey, New York,
Rhode Island, Massachusetts, New Hampshire and Vermont;

. BellSouth, Vista-United Communications and Sprint United
Communications, for our Florida markets; and

. Pacific Bell, a subsidiary of SBC Communications, for our California
markets.

Each interconnection agreement allows us to enter new markets and to
offer telephone service to our current customer base. Each agreement currently
permits us to provide local service on a resale basis or by purchasing all
unbundled network elements required to provide local service on a facilities
basis, without using our own telecommunications facilities. The terms of each
interconnection agreement, including pricing terms agreed to by PaeTec and the
incumbent carrier, have been approved by state regulatory authorities,
although they remain subject to review and modification by those authorities.
The interconnection agreements do not resolve all operational issues, and we
and the incumbent carriers continue to seek resolution of those issues.

Federal Regulation of Long Distance Services. We are legally able to
offer our customers both long distance and local services, which most of the
regional Bell operating companies currently may not do. Although the
Telecommunications Act permitted the regional Bell operating companies to
enter the long distance market immediately in states where they were not
offering local telephone service, they may not provide long distance service
in states where they are the incumbent providers of local telephone service
until they satisfy several procedural and substantive requirements. At this
time, the FCC has permitted a regional Bell operating company to provide long
distance services in only two states: Verizon Communications, in New York, and
SBC Communications, in Texas. As more regional Bell operating companies are
allowed to offer in-region long distance services, we believe they will offer
single-source local and long distance service, which will give rise to
increased competition to us. This may have a material adverse effect on our
business.

Federal Subsidies That May Increase Our Costs. The FCC has established a
universal service subsidy regime. This program helps subsidize the provision
of telecommunications and information services provided to qualifying schools
and libraries, services provided to rural health care providers and local
telephone services provided in high-cost areas and to low-income consumers.
Providers of interstate telecommunications service, such as PaeTec, must pay
assessments that fund these programs. We also may be eligible to obtain
subsidies for certain services that we provide.

The net financial effect of these programs on us cannot be determined
with certainty at this time. Currently, the FCC is assessing these payments on
the basis of a provider's end-user revenue for the previous year, and is
allowing carriers to pass through the cost of these payments to their
customers. The FCC is considering revisions to its rules for subsidizing
service provided to consumers in high-cost areas, which may result in further
substantial increases in the overall cost of the subsidy program. Various
states are also in the process of implementing their own universal service
programs, which may also increase our overall costs. The FCC and state
regulatory commissions are continuing to make changes to their universal
service rules and policies, and it is difficult to predict how those changes,
and any judicial review, might affect us.

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<PAGE>

Federal Regulation Affecting How We Price Our Services. We have filed
tariffs with the FCC setting the prices, terms and conditions for our
interstate long distance services. However, the FCC has eliminated the
requirement that non-dominant carriers maintain tariffs on file with the FCC
for domestic interstate long distance services, and has required carriers to
eliminate their tariffs over a nine-month transition period which began on May
1, 2000. After January 31, 2001, we will no longer be able to rely on the
filing of tariffs with the FCC as a means of providing notice to customers of
prices, term and conditions under which we offer our interstate services.
Instead, relationships between interstate carriers and their customers will
have to be set by contract. Consequently, we will need to implement replacement
contracts, and this could result in substantial administrative expenses.

We provide access services to long distance companies to originate and
terminate calls over local phone facilities. The law requires access charges to
be just, reasonable and not unreasonably discriminatory. Disputes have arisen
regarding the level and regulation of access charges, and the FCC may resolve
these issues in ways that could reduce our revenue substantially. There
currently is little regulation of the access services provided by local
telephone service providers other than the incumbent phone companies. The FCC,
however, has initiated a rulemaking proceeding seeking comment on whether to
impose greater regulatory restrictions on the access charges received by
carriers such as PaeTec. Any such ruling could have an adverse impact on our
access charge revenues.

Reciprocal Compensation. The law requires interconnecting local carriers,
such as incumbent carriers and new entrants like PaeTec, to compensate one
another when a subscriber of one of the carriers places a local phone call to a
subscriber of the other carrier. Incumbents and competitive carriers have
litigated, before the FCC, state regulatory commissions and various courts,
whether calls from subscribers of incumbent carriers to Internet service
providers served by competitive entrants should be treated as local calls and
thus subject to this reciprocal compensation requirement. A majority of state
commissions and several federal and state courts have ruled that the reciprocal
compensation arrangements in existing interconnection agreements before them
apply to these calls to Internet service providers, but a few state commissions
have reached the opposite conclusion. Some of these rulings are subject to
appeal. Additional disputes over the appropriate treatment of Internet service
provider traffic are pending in other states.

On February 26, 1999, the FCC released a Declaratory Ruling determining
that Internet service provider traffic is interstate for jurisdictional
purposes, but that its current rules neither require nor prohibit the payment
of reciprocal compensation for these calls. In the absence of a federal rule,
the FCC determined that state commissions have authority to interpret and
enforce the reciprocal compensation provisions of existing interconnection
agreements, and to determine the appropriate treatment of Internet service
provider traffic in arbitrating new agreements. The FCC also requested comment
on alternative federal rules to govern compensation for these calls in the
future. In March 2000, a federal court of appeals vacated the February 1999
order and remanded it to the FCC to justify better its reasoning.

Since the February 1999 FCC ruling, some state commissions have revisited
this issue. In May 1999, the Massachusetts state commission reversed a previous
decision and refused to require reciprocal compensation for Internet services
provider traffic, instead encouraging incumbent and non-incumbent carriers to
negotiate mutually agreeable compensation terms. Following this ruling, PaeTec
negotiated compensation arrangements with Bell Atlantic, now a subsidiary of
Verizon Communications, under which PaeTec receives payments on Internet
traffic for all of its Bell Atlantic jurisdictions. Other state commissions
reviewing the matter after the FCC decision have ruled that the interconnection
agreements before them do require payment of reciprocal compensation for that
traffic. Internet service providers are among our customers, and adverse
decisions in FCC or state proceedings or on judicial review of such decisions
could limit our ability to service this group of customers profitably.

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<PAGE>

State Regulation

We provide local telephone service and other services that are primarily
subject to state, rather than FCC, regulation. To provide intrastate services,
we generally must obtain a certificate of public convenience and necessity from
the state regulatory agency and comply with state requirements for
telecommunications utilities, including state tariffing requirements. As of
October 31, 2000, we have satisfied state requirements to provide local service
in 24 states and the District of Columbia and have satisfied state requirements
to provide intrastate long distance service in 48 states.

Some state agencies require us to file periodic reports, pay various fees
and assessments, and comply with rules governing quality of service, consumer
protection and similar issues. Although the specific requirements vary from
state to state, they tend to be more detailed than the FCC's regulation because
of the strong public interest in the quality of basic local telephone services.
We are not currently subject to price cap or rate of return regulation in any
of our current or planned markets. We cannot assure you, however, that the
imposition of new regulatory burdens in a particular state will not affect the
profitability of our services in that state.

States may have to approve the transfer of a carrier's authority to
operate, the transfer of its assets to a new entity, or a change in the control
of an entity that controls a carrier. Some states also regulate a carrier's
issuance of securities or incurrence of debts.

We believe that, as the degree of intrastate competition increases, the
states will offer the incumbent carriers increasing pricing flexibility. This
flexibility may make it easier for the incumbent carriers to price their
services aggressively and otherwise compete with us, which could have a
material adverse effect on us and our revenues.

Local Regulation

Our network is subject to numerous local regulations such as building
codes, municipal franchise requirements and licensing. Such regulations vary on
a city-by-city and county-by-county basis. In some of the areas where we
provide service, we may be subject to municipal franchise requirements and may
be required to pay license or franchise fees based on a percentage of gross
revenue or other formula. It is possible that some municipalities that do not
currently impose fees could seek to impose fees in the future, and that,
following the expiration of existing franchises, fee levels could be increased.

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MANAGEMENT

Directors and Executive Officers

Our management team has an established record of accomplishments in the
communications industry. Many members of our senior management team worked
together for several years at ACC Corp., which was the first competitive local
communications provider to use a network deployment strategy of leasing, rather
than building, telephone and data transmission lines. Our executive management
team has an average of 18 years experience in the telecommunications industry.
Arunas A. Chesonis, our Chairman of the Board and Chief Executive Officer,
served as President of ACC and has over 15 years of industry experience. Our
management also includes experienced personnel in all key functional areas,
including sales, engineering, customer service, operations support systems,
billing, finance and other back office functions.

The table below shows information about our directors and executive
officers as of November 30, 2000:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Arunas A. Chesonis...... 38 Chairman of the Board, President and Chief Executive Officer
John P. Baron........... 39 Executive Vice President
Bradford M. Bono........ 32 Executive Vice President and Director
Edward J. Butler, Jr.... 40 President, Wholesale Markets Group
Joseph D. Ambersley..... 51 Executive Vice President, Mergers and Acquisitions
Richard E. Ottalagana... 57 Executive Vice President and Treasurer
Richard J. Padulo....... 56 Executive Vice President, Engineering and Operations
Daniel J. Venuti........ 41 Executive Vice President, Secretary and General Counsel
Timothy J. Bancroft..... 51 Vice President, Finance
James A. Kofalt......... 58 Director
James H. Kirby.......... 33 Director
Lawrence H. Guffey...... 32 Director
Jefferey L. Burke....... 42 Director
</TABLE>

Arunas A. Chesonis has served as our Chairman of the Board, President and
Chief Executive Officer since our inception in May 1998. Mr. Chesonis became
President of ACC Corp., a competitive local telecommunications provider and the
parent company for all ACC-owned operations in the United States, Canada,
Germany and the United Kingdom, in February 1994 and was elected to its Board
of Directors in October 1994. Mr. Chesonis was also President and Chief
Operating Officer for ACC Global Corp., which coordinated all purchasing and
network optimization for international terminations and fiber capacity for ACC
worldwide. Mr. Chesonis joined ACC in May 1987 as Vice President of Operations
for the U.S. business unit and was named President of ACC Long Distance Corp.
in January 1989. Mr. Chesonis was also President of ACC's Canadian operations
and Managing Director of ACC's U.K. enterprise. Before he joined ACC, Mr.
Chesonis held several positions within Rochester Telephone Corporation, now
known as Frontier Communications Corporation, a subsidiary of Global Crossing
Ltd. Since February 2000, Mr. Chesonis has served on the Board of Directors of
CyberTech Wireless, Inc., a fixed wireless carrier. Mr. Chesonis holds a B.S.
degree in Civil Engineering from Massachusetts Institute of Technology and an
M.B.A. degree from the University of Rochester.

John P. Baron has served as President, Northern Region, of our
subsidiary, PaeTec Communications, Inc., and as one of our Executive Vice
Presidents since June 1998. Mr. Baron also was appointed President, Western
Region, of PaeTec Communications in April 2000. From September 1995 until he
joined PaeTec, Mr. Baron served as Vice President of Sales and Customer Service
for the U.S. operations of ACC Long Distance Corp., or ACC TeleCom. During his
employment with ACC TeleCom, Mr. Baron also managed Account Development,
Customer Service, Sales Support, Information Processing, University Sales and
Service, and Marketing. From September 1992 to September 1995, Mr. Baron served
as President of ETI Technical College, a four-year engineering college in
Cleveland, Ohio. Mr. Baron holds a B.S. degree in Neuroscience from the
University of Rochester and an M.B.A. degree from Syracuse University.

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<PAGE>

Bradford M. Bono has served as President, Eastern Region, of PaeTec
Communications and as one of our Executive Vice Presidents and directors since
June 1998. Mr. Bono also was appointed President, Southern Region, of PaeTec
Communications in April 2000. From August 1997 until he joined PaeTec, Mr. Bono
served as Vice President of Alternate Channel Sales for ACC TeleCom. In 1991,
Mr. Bono co-founded Vista International Communications Inc., a regional
interexchange carrier, where he served as Executive Vice President and Chief
Operating Officer and as director from 1991 until 1997, when Vista was acquired
by ACC TeleCom. Mr. Bono holds a B.A. degree in Political Science from the
University of Delaware.

Edward J. Butler, Jr. has served as President, Wholesale Markets Group,
of PaeTec Communications and as one of our Executive Vice Presidents since July
1998. From August 1988 to July 1998, Mr. Butler served in several positions
with ACC TeleCom. From 1995 to 1998, Mr. Butler served as Director of Carrier
Services for ACC TeleCom. Before he joined ACC TeleCom's Carrier Services team,
Mr. Butler spent seven years in both the University Services and Commercial
Markets sales management departments at ACC TeleCom. Mr. Butler holds a B.S.
degree in Communications from the State University of New York at Buffalo.

Joseph D. Ambersley has served as one of our Executive Vice Presidents
since June 1998 and was appointed Executive Vice President, Mergers and
Acquisitions, of PaeTec Communications in April 2000. Mr. Ambersley also served
as President, Southern Region, of PaeTec Communications between June 1998 and
April 2000. For seven years before joining PaeTec, Mr. Ambersley served as Vice
President of Carrier Sales at National Telecommunications of Florida, a
regional long distance carrier. Before joining National Telecommunications of
Florida, Mr. Ambersley was Vice President of Carrier Sales for ATC/Microtel, a
national fiber optic provider and long distance carrier. Between 1995 and 1998,
Mr. Ambersley was also a member of the Board of Directors of America's Carriers
Telecommunications Association, a national trade association representing a
group of long distance carriers. He has served as the Secretary and Treasurer
of the Association of Communications Companies of America since 1995. Mr.
Ambersley holds a B.S. degree from Florida State University and an M.Ed. degree
from Rollins College.

Richard E. Ottalagana has served as one of our Executive Vice Presidents
and as our Treasurer since May 1998. From 1993 until April 1998, Mr. Ottalagana
served as Vice President and General Manager of ACC National TeleCom Corp.,
where he had responsibility for the start-up of ACC's competitive local
telecommunications operations. During the 20 years before he joined ACC, Mr.
Ottalagana held managerial positions with Rochester Telephone Corporation, now
known as Frontier Communications Corporation, in several areas, including
sales, operations, engineering, labor relations, operator services, regulatory,
accounting and finance. For over ten years, Mr. Ottalagana also served as
Chairman of the Board of the Summit Federal Credit Union. Mr. Ottalagana holds
a B.S. degree in Accounting from Rider University.

Richard J. Padulo has served as Executive Vice President, Engineering and
Operations, of PaeTec Communications and as one of our Executive Vice
Presidents since joining PaeTec in June 1998. From 1992 until he joined PaeTec,
Mr. Padulo served as Director of Engineering and Operations for ACC TeleCom. In
1994, Mr. Padulo participated in the initial development of ACC's local
telephone subsidiary, ACC National TeleCom Corp., where he assisted with
business planning and assumed the position of Director of Engineering and
Operations.

Daniel J. Venuti has served as one of our Executive Vice Presidents and
as our Secretary and General Counsel since June 1998. From March 1994 until he
joined PaeTec, Mr. Venuti served as Vice President and General Counsel for ACC
TeleCom. From September 1984 until February 1994, Mr. Venuti practiced law with
Bond, Schoeneck & King, LLP. Mr. Venuti holds a B.A. degree in Political
Science from Syracuse University and a J.D. degree from the State University of
New York at Buffalo School of Law.

Timothy J. Bancroft has served as our Vice President, Finance, since
September 1998. From June 1993 to June 1998, Mr. Bancroft served as the Vice
President-Finance for a subsidiary of Citizens Communications, Inc., a company
engaged in telecommunications and utilities businesses. From 1971 until June
1993, Mr. Bancroft held several financial positions with Rochester Telephone
Corporation, now known as Frontier Communications Corporation. Mr. Bancroft
holds a B.S. degree in Business Administration from the Rochester Institute of
Technology.

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<PAGE>

James A. Kofalt has served on our board of directors since September
1999. From 1995 until he joined our board of directors, Mr. Kofalt served as
the Chairman of the Board of Directors of Campuslink. Mr. Kofalt also serves as
the Chairman of the Board of Directors of Correctnet Global Information
Solutions, Inc., Chairman of Alliance Cabletel Holdings, L.P., and as a
director of Classic Communications, Inc. He also served from 1995 to 1996 as
Chairman of the Board of Directors of Optel, Inc., a provider of private cable
television and telephone services. From 1976 to 1994, Mr. Kofalt held various
management positions with Cablevision Systems Corporation, a provider of cable
television services, including President, Chief Operating Officer and director.
Mr. Kofalt received his B.S. degree from The United States Military Academy at
West Point.

James H. Kirby has served on our board of directors since February 2000.
Mr. Kirby is a director of Madison Dearborn Partners, Inc., a Chicago-based
private investment firm, where he specializes in investing in companies in the
communications industry. Before joining Madison Dearborn Partners in 1996, Mr.
Kirby worked in investment banking and private equity investing at Lazard
Freres & Co. LLC and The Beacon Group LLC. He presently serves on the boards of
directors of CompleTel Europe N.V., a publicly traded competitive local
telecommunications provider active in France and Germany, and several private
companies, including Madison River Telephone Company LLC., IPlan LLC, GigaRed
LLC, Orblynx, Inc., Reiman Holding Company, LLC and Wireless One Network, L.P.
Mr. Kirby holds an A.B. degree from Princeton University and an M.B.A. degree
from the Harvard Graduate School of Business Administration.

Lawrence H. Guffey has served on our board of directors since February
2000. He is a Senior Managing Director of The Blackstone Group, where he works
in Blackstone's Principal Investment Group, with primary responsibility for the
management of the investment activities of Blackstone Communications Partners I
L.P. Mr. Guffey also currently serves as a director of Centennial
Communications Corp., FiberNet, L.L.C., and Enterprise Software, Inc. Before
joining Blackstone in 1991, Mr. Guffey was a financial analyst with Trammel
Crow Ventures, a real estate investing firm. Mr. Guffey holds a B.A. degree
from Rice University.

Jeffrey L. Burke has served on our board of directors since August 2000.
Mr. Burke is President and Chief Executive Officer of NetSetGo Inc., a
Rochester-based Internet service provider. Before co-founding NetSetGo in May
1999, Mr. Burke held several positions, most recently Vice President and
General Manager, Solutions Business Unit, at Xerox Corporation from 1993 to
1999. Before his service with Xerox, Mr. Burke managed Digital Equipment
Corporation's Network Services Business in the United States. Mr. Burke holds a
B.A. degree in Accountancy from Bentley College.

Executive officers serve at the discretion of our board of directors. For
information concerning legal proceedings involving some of our executive
officers and directors, see "Business--Legal Proceedings" on pages 47 and 48.

Membership of the Board of Directors

General. We currently have six directors. Directors are elected at the
annual meeting of stockholders. Effective upon completion of the offerings, the
board of directors will be divided into three classes serving staggered three-
year terms. The initial terms of the three classes will expire in 2001, 2002
and 2003, respectively. Upon the expiration of the initial term of each class,
the nominees for that class will be elected for a term of three years to
succeed the directors whose terms of office expire.

All of the holders of our Class B common stock have granted to Arunas A.
Chesonis proxies authorizing Mr. Chesonis to vote their shares of Class B
common stock in his sole and absolute discretion. As a

56
<PAGE>

result of the superior voting rights of our Class B common stock and the
authority conferred on Mr. Chesonis by these proxies, Mr. Chesonis will have
the ability immediately after completion of the offerings to elect all of the
members of our board of directors. Under the voting agreement described below,
however, Mr. Chesonis is obligated to cast his votes for election of director
nominees designated by the Campuslink stockholders and our preferred
stockholders.

Membership Rights of Bradford M. Bono. In a stock rights agreement we
entered into with Bradford M. Bono, we agreed that, as long as Mr. Bono is
employed by us and wishes to serve as a director, we would take all actions
within our control which are necessary to cause his election to our board of
directors. Mr. Bono currently serves as a director and has informed us that he
wishes to continue as a director following completion of the offerings.

Voting Agreement. In connection with our sale of the Series A preferred
stock to institutional investors in February 2000, we entered into a voting
agreement containing board membership provisions with the following principal
stockholders:

. the purchasers of the Series A preferred stock;

. the former stockholders of Campuslink;

. Arunas A. Chesonis;

. Christopher E. Edgecomb; and

. Jeffrey P. Sudikoff.

Some of the board membership provisions will remain in effect after completion
of the offerings. These provisions obligate us to take all actions within our
control which are necessary or desirable for the election of the following
persons to our board of directors:

. at least one designee of the Campuslink stockholders;

. at least one designee of our stockholders controlled by Madison
Dearborn Partners, which currently include Madison Dearborn Capital
Partners III, L.P., Madison Dearborn Special Equity III, L.P. and
Special Advisors Fund I, LLC;

. at least one designee of our stockholders who are members of The
Blackstone Group, which currently include Blackstone CCC Capital
Partners L.P., Blackstone CCC Offshore Capital Partners L.P. and
Blackstone Family Investment Partnership III L.P.; and

. any persons nominated by Mr. Chesonis for election to the board of
directors.

The Campuslink stockholders may be entitled to designate more than one person
for election as a director based on the size of the board of directors and the
percentage of our outstanding common stock they hold. In addition, the Madison
Dearborn stockholders will be entitled to designate a second member to the
board of directors if the number of directors constituting our entire board of
directors is increased to nine or more and the Madison Dearborn stockholders
continue to own at least 50% of the number of shares of common stock issuable
upon the conversion of the Series A preferred stock they originally purchased,
so long as those shares constitute 5% or more of our outstanding common stock.

The foregoing board membership rights will terminate in the case of:

. the Campuslink stockholders, when they cease to own beneficially at
least 5% of our outstanding common stock;

. the Madison Dearborn stockholders, when they cease to own
beneficially at least (a) one-third of the number of shares of common
stock issuable upon conversion of the Series A preferred stock they
originally purchased and (b) 5% of our outstanding common stock;

57
<PAGE>

. the Blackstone stockholders, when they cease to own beneficially at
least (a) one-third of the number of shares of common stock issuable
upon conversion of the Series A preferred stock they originally
purchased and (b) 5% of our outstanding common stock; and

. Mr. Chesonis, when he no longer serves as at least one of the
Chairman of the Board or Chief Executive Officer of PaeTec or ceases
to own beneficially, or otherwise ceases to have the right to vote,
any shares of our Class B common stock.

All of the stockholders who are parties to the voting agreement have
agreed to vote their shares of common stock for each of the foregoing
designees.

Under the voting agreement, one director representative of the Madison
Dearborn stockholders and one director representative of the Blackstone
stockholders will be entitled to serve on any committee of our board of
directors.

Immediately following completion of the offerings, Mr. Kofalt will
continue to serve on the board of directors as the designee of the Campuslink
stockholders, Mr. Kirby will continue to serve as the designee of the Madison
Dearborn stockholders and Mr. Guffey will continue to serve as the designee of
the Blackstone stockholders.

Board Committees

Effective upon the completion of the offerings, the board of directors
will have a standing audit committee and a standing compensation committee.

The audit committee, among other things, will be responsible for
recommending to the full board of directors the selection of our independent
auditors, reviewing the scope of the audit plan and the results of each audit
with management and the independent auditors, reviewing the adequacy of our
system of internal accounting controls in consultation with the independent
auditors, reviewing generally the activities and recommendations of the
independent auditors, and exercising oversight with respect to our code of
conduct and other policies and procedures regarding adherence with legal
requirements. The initial members of the audit committee will be Messrs. Kirby,
Guffey and Burke.

The compensation committee will be responsible for establishing the
compensation and benefits of our executive officers, monitoring compensation
arrangements for management employees for consistency with corporate objectives
and stockholders' interests, and administering our stock incentive plans, our
other management compensation plans and our employee stock purchase plan. The
initial members of the compensation committee will be Messrs. Kirby, Guffey and
Burke.

Director Compensation

Directors who are also officers or employees of PaeTec do not receive any
additional compensation for serving on the board of directors or any of its
committees. Following the completion of the offerings, each new non-employee
director will receive options to purchase 10,000 shares of Class A common stock
upon that director's initial election or appointment to the board of directors.
In addition, each non-employee director will receive annual grants of options
to purchase 10,000 shares of Class A common stock on each anniversary of the
director's election or appointment. Each non-employee director, other than
designees of the Madison Dearborn stockholders or the Blackstone stockholders,
will receive a $2,000 fee for each meeting of the board of directors attended
in person, a $1,000 fee for each meeting of the board of directors attended by
conference call, a $500 fee for each committee meeting attended in person and a
$300 fee for each committee meeting attended by conference call. Directors are
reimbursed for their reasonable out-of-pocket expenses incurred in attending
meetings.

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<PAGE>

Executive Compensation

The following table shows the compensation paid for the year ended
December 31, 1999 to our chief executive officer and to each of our other four
most highly compensated executive officers for 1999. We refer to these five
executive officers as the named executive officers.

Summary Compensation Table

<TABLE>
<CAPTION>
Annual
Compensation(1)
------------------ All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($)(2)
--------------------------- ---- --------- -------- ------------------
<S> <C> <C> <C> <C>
Arunas A. Chesonis ................. 1999 124,615 12,100 2,769
Chairman, President and Chief
Executive Officer
John P. Baron....................... 1999 124,615 12,100 2,492
Executive Vice President
Bradford M. Bono.................... 1999 124,615 12,100 2,769
Executive Vice President
Richard E. Ottalagana............... 1999 124,615 12,100 2,778
Executive Vice President and
Treasurer
Daniel J. Venuti.................... 1999 124,615 12,100 2,769
Executive Vice President, Secretary
and General Counsel
</TABLE>
--------
(1) In accordance with SEC rules, information about other annual compensation
in the form of perquisites and other personal benefits has been omitted
because these perquisites and other personal benefits constituted less than
10% of the total annual salary and bonus for the named executive officers.
(2) The amounts shown in this column consist of matching contributions by
PaeTec to our 401(k) savings and retirement plan.

In 1999, the named executive officers were not granted and did not
exercise options to purchase our common stock. As of December 31, 1999, no
named executive officer held options to purchase our common stock. See
"Security Ownership of Certain Beneficial Owners and Management" beginning on
page 70 for information concerning the ownership of our common stock by the
named executive officers.

Stock Rights Agreements

We entered into stock rights agreements with the following executive
officers when we first sold them shares of our common stock: Arunas A.
Chesonis, Joseph D. Ambersley, John P. Baron, Bradford M. Bono, Edward J.
Butler, Jr., Richard E. Ottalagana, Richard J. Padulo, Daniel J. Venuti and
Timothy J. Bancroft. Among other things, the stock rights agreements currently
provide for repurchase rights, noncompetition protection and piggyback
registration rights.

Repurchase Rights. If an executive officer other than Mr. Chesonis who is
a party to a stock rights agreement voluntarily resigns or is terminated for
cause before the fourth anniversary of the date we hired the executive officer,
we have the right to repurchase a portion of the shares of common stock the
executive officer purchased under the agreement. The purchase price for these
shares will be, in the case of Class A common stock, equal to the price the
executive officer first paid for the shares or, in the case of Class B common
stock, equal to the fair market value of the shares. If we merge with another
company or sell all or substantially all of our assets, or if someone acquires
more than 50% of our capital stock, our repurchase option will terminate
automatically. In the case of Messrs. Ottalagana and Padulo, a reduction after
the third year of employment to a part time or consulting status will not be
considered to be a voluntary resignation.

Noncompetition Protection. The noncompetition provisions provide that for
a period of one year after the termination of the executive officer's
employment with us for any reason, the executive officer will not

59
<PAGE>

solicit any of our clients or customers, or compete, directly or indirectly,
against us in any lines of business we are conducting when the executive
officer's employment is terminated.

Under Mr. Chesonis's stock rights agreement, if we terminate his
employment for any reason, or if his employment is terminated as a result of
his death, disability, voluntary resignation or withdrawal, we will make
severance payments to Mr. Chesonis for one year after termination of
employment. In the case of our other executive officers, if the termination is
without cause, we will make severance payments to the executive officer for one
year after termination of his employment, while if the executive officer's
termination results from the executive officer's death, disability or voluntary
resignation or if we terminate the executive officer for cause, we will not
have to make a severance payment. The severance payment in all cases will equal
the executive officer's base annual salary immediately before termination. If
the executive officer dies or becomes disabled or if we terminate the executive
officer's employment without cause, the one-year period during which the
noncompetition covenant is in effect will be counted as a year of employment
for purposes of determining the percentage of shares that are subject to our
repurchase option. If we terminate the employment for cause or the executive
officer resigns voluntarily, we may waive the non-competition covenant or count
the one-year period of the noncompetition covenant as a year of employment for
purposes of determining the percentage of shares that are subject to our
repurchase option.

Registration Rights. If we register any of our equity securities under
the Securities Act, whether or not for our own account, the executive officers
who are parties to stock rights agreements are entitled to require us to
include all or a portion of their shares of common stock in that registration,
subject to our right to exclude some or all of these shares under specified
conditions in the case of underwritten offerings. We will pay all of the
expenses of these registrations, except for underwriting discounts and
commissions. All of the executive officers have waived their rights to have
shares they own sold as part of the offerings.

Conversion of Class B Common Stock. Each stock rights agreement provides
that each share of Class B common stock owned by the executive officer, and
each share owned by a permitted transferee of the officer, will automatically
convert into one share of Class A common stock on the date that the officer
ceases to be employed by us unless, at that date, Mr. Chesonis:

. is our Chairman of the Board or Chief Executive Officer;

. is the beneficial owner of shares of Class B common stock; and

. has, and personally exercises, the power under a proxy to vote the
shares of Class B common stock owned by the executive officer and the
officer's permitted transferees on all matters on which the Class B
common stock is entitled to vote.

Executive officers who purchased shares of our Class B common stock have
executed a proxy giving Mr. Chesonis the right to vote all shares of Class B
common stock owned by those executive officers and their permitted transferees.

PaeTec Corp. 1998 Incentive Compensation Plan

We adopted the PaeTec Corp. 1998 Incentive Compensation Plan on July 1,
1998. The purpose of the plan is to enable us to recruit, reward, retain and
motivate employees on a basis competitive with industry practices. Under the
plan, we may grant our employees options that are intended to qualify as
"incentive stock options" under Section 422 of the Internal Revenue Code, non-
qualified stock options, and stock appreciation rights. Up to 5,300,000 shares
of Class A common stock may become subject to awards under this plan. No awards
will be made under this plan after completion of the offerings.

60
<PAGE>

As of September 30, 2000, outstanding options to purchase up to an
aggregate of 4,013,994 shares of our Class A common stock have been granted
under the plan to substantially all of our employees who are not currently
executive officers. Most of these options are intended to be incentive stock
options. The exercise prices of these options range from $0.40 to $12.00 per
share. In addition, we have granted options to purchase 68,810 shares of our
Class A common stock to Timothy J. Bancroft. The exercise prices of the
options granted to Mr. Bancroft, who is an executive officer, range from $0.40
to $7.50 per share. Generally, initial option grants to employees from our
inception through December 1999 vest with respect to 60% of the shares subject
to the option in four equal annual installments and with respect to 40% of the
shares over a four-year term beginning January 1, 2000. Initial option grants
to employees beginning in January 2000 and other option grants generally vest
with respect to all of the shares subject to the option in four equal annual
installments beginning on the first anniversary of the option grant date.

A committee of our board of directors currently administers the plan and
has the authority to designate eligible participants and determine the types
of awards to be granted and the conditions and limitations applicable to those
awards. Upon completion of the offerings, the plan will be administered by the
compensation committee. The administrator of the plan may authorize amendments
to the plan without stockholder approval except in circumstances prescribed by
applicable law or regulation.

Options. The plan's administrator determines the exercise price of each
option granted under the plan, except that the price of incentive stock
options may not be less than the market value of the Class A common stock on
the option grant date. The option price for incentive stock options granted to
any ten percent stockholder, who is a person who owns more than 10% of the
total combined voting power of all classes of stock of PaeTec Corp. or any
subsidiary, may not be less than 110% of the market value of the Class A
common stock on the option grant date. The aggregate fair market value of the
Class A common stock, as determined on the option grant date, with respect to
which any incentive stock options granted to one optionee are exercisable for
the first time during any calendar year may not exceed $100,000.

Each option will become vested and exercisable at the times and under the
conditions the plan's administrator determines. However, no incentive stock
option may be exercisable before six months after the optionee starts working
for us or more than ten years after the option grant date, or five years in
the case of an incentive stock option granted to a ten percent stockholder.
The plan's administrator may accelerate the vesting of any option in its
discretion.

Subject to approval by the plan's administrator, payment of the exercise
price for shares of Class A common stock purchased upon exercise of an option
may be made in cash, through the transfer to us of shares of Class A common
stock with a market value equal to the exercise price, or a combination of
these methods.

Upon termination of an option holder's employment for any reason, all
unvested stock options held by the option holder will terminate immediately
and all vested stock options will remain exercisable for 30 days following the
employment termination date, or one year following the employment termination
date in the case of death or disability. In the case of non-qualified stock
options, these termination provisions may be modified by the plan's
administrator.

Awards under the plan may not be transferred except by will or the laws
of descent and distribution.

Stock Appreciation Rights. A stock appreciation right is a right to
receive, in the form of Class A common stock, cash or a combination of Class A
common stock and cash, the spread or difference between the fair market value
of the Class A common stock subject to a stock appreciation right on the date
it is exercised and the fair market value of the stock subject to a stock
appreciation right on the date the stock appreciation

61
<PAGE>

right was granted. Stock appreciation rights may be granted in conjunction
with, or independent of, options. The plan's administrator determines:

. the time or times at which and the circumstances under which a stock
appreciation right may be exercised in whole or in part;

. the time or times at which and the circumstances under which a stock
appreciation right will cease to be exercisable;

. the method of exercise;

. the method of settlement;

. the form of consideration payable in settlement;

. whether or not a stock appreciation right will be in tandem or in
combination with any other grant; and

. any other terms and conditions of any stock appreciation right.

Exercisability of stock appreciation rights may be subject to achievement
of one or more performance objectives. Stock appreciation rights issued in
connection with incentive stock options are required to meet additional
conditions.

Other Options

In addition to the options we have granted under the 1998 Incentive
Compensation Plan, we have awarded options outside that plan and outstanding as
of September 30, 2000 to purchase 28,830 shares of our Class A common stock in
connection with acquisitions or other transactions. We granted options to
purchase 10,000 shares at an exercise price of $5.00 per share to James A.
Kofalt in connection with his initial appointment to our board of directors.
The exercise price of the remaining options is $2.50 per share.

2000 Stock Option and Incentive Plan

We have adopted the PaeTec Corp. 2000 Stock Option and Incentive Plan,
under which we will make awards after completion of the offerings. The total
number of shares of our Class A common stock authorized for issuance under the
plan consist of:

. 2,000,000 shares;

. the number of shares of our Class A common stock that would be
available for future awards under the 1998 Incentive Compensation
Plan upon the completion of the offerings; and

. any shares of our Class A common stock that are represented by awards
granted under the 1998 Incentive Compensation Plan or which have been
assumed by us, which are forfeited, expire or are canceled without
the delivery of shares of Class A common stock or which result in the
forfeiture of shares of Class A common stock.

The maximum number of shares of Class A common stock subject to options that
may be granted to any individual under the plan is 800,000 shares.

Under this plan, our board of directors or a committee of the board
administering the plan may grant or issue:

. incentive stock options;

. non-qualified stock options;

. stock appreciation rights;

62
<PAGE>

. Class A common stock with vesting or other restrictions, or without
restrictions;

. rights to receive Class A common stock in the future with or without
vesting;

. Class A common stock upon the attainment of specified performance
goals; and

. dividend rights in respect of Class A common stock.

Our board may amend the plan without stockholder approval at any time,
except in circumstances prescribed by applicable law or regulation. The plan
does not have a termination date, but we may not grant incentive stock options
after the tenth anniversary of the effective date of the plan.

Options. The compensation committee of the board will administer the plan
and will determine who will be granted awards under the plan, when and how the
awards will be granted, and the type and terms of awards granted, including the
exercise period and the number of shares subject to the award. Incentive stock
options will be non-transferable during the optionee's lifetime, but non-
qualified stock options may be transferred to the spouse, children,
grandchildren, parents and siblings of the optionee, to the extent permitted by
the compensation committee.

Restricted Stock and Restricted Stock Units. Restricted shares of Class A
common stock are awards of shares of Class A common stock which are subject to
a substantial risk of forfeiture and which have restricted periods imposed upon
them. Restricted Class A common stock units are awards which represent a
conditional right to receive shares of Class A common stock in the future.
These units are also subject to substantial risks of forfeiture and restricted
periods similar to the restricted shares of Class A common stock.

The compensation committee may impose restrictions on the restricted
shares and restricted units, such as a requirement of continuous employment
with us or the attainment of specific corporate or individual performance
objectives. The restrictions and the restricted period generally will be a
minimum of three years, but may differ with respect to each recipient of an
award. An award of restricted shares of Class A common stock or restricted
common stock units will be subject to a forfeiture if events specified by the
compensation committee occur before the lapse of the restrictions. Subject to
the provisions of the plan, the compensation committee will determine the terms
and conditions of the award of restricted shares of common stock and restricted
Class A common stock units.

Unrestricted Stock. Unrestricted shares of Class A common stock are
shares that are free of restrictions other than those imposed by federal or
state securities laws.

Stock Appreciation Rights. The compensation committee will determine the
time or times at which and the circumstances under which stock appreciation
rights may be exercised in whole or in part, and the other terms and conditions
of any stock appreciation rights. Exercisability of stock appreciation rights
may be subject to achievement of one or more of the same performance objectives
that apply to awards of restricted shares of Class A common stock or restricted
Class A common stock units. Stock appreciation rights are transferable only to
the same extent as the related options.

Dividend Rights. The compensation committee is authorized to grant
dividend rights which will entitle the participant to receive cash, shares of
our Class A common stock or other property equal in value to dividends paid, or
other periodic payments made, with respect to a specified number of shares of
our Class A common stock. Dividend rights may be paid or distributed when
accrued or will be deemed to have been reinvested in additional shares of our
Class A common stock, in awards under the plan or in other investments, and
will be subject to such restrictions on transferability and risks of forfeiture
as the compensation committee may specify.

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<PAGE>

Employee Stock Purchase Plan

Our board of directors has authorized an employee stock purchase plan
that provides for the issuance of up to 1,000,000 shares of Class A common
stock following completion of the offerings. All employees whose customary
employment is more than 20 hours per week and for more than five months in any
calendar year are eligible to participate in the stock purchase plan, provided
that any employee who would own 5% or more of our total combined voting power
immediately after an offering date under the plan is not eligible to
participate. Eligible employees must authorize us to deduct an amount from
their pay during offering periods established by the compensation committee.
The purchase price for shares under the plan will be determined by the
compensation committee, but may not be less than 85% of the lesser of the
market price of the common stock on the first or last business day of each
offering period.

401(k) Plan

We maintain a 401(k) retirement and savings plan for all of our
employees. The 401(k) plan is intended to qualify under section 401(k) of the
Internal Revenue Code, so that contributions and the income earned on those
contributions are not taxable to our employees until they make withdrawals from
the plan. Subject to statutory limits, participants of the 401(k) plan may
elect to contribute up to 15% of their current compensation and we may make a
matching contribution of up to half of the first 6% of an employee's annual
compensation deferred under the plan. All of the contributions to the 401(k)
plan made by our employees are fully vested at all times, while any matching
contributions we make vest in four equal annual installments, beginning on the
first anniversary of the participant's hire date. Benefits under the 401(k)
plan are paid upon a participant's retirement, death, disability or termination
of employment, and are based on the amount of a participant's contributions
plus vested employer contributions, as adjusted for gains, losses and earnings.

Director Liability and Indemnification of Directors and Officers

Our certificate of incorporation provides for the elimination and
limitation of the personal liability of directors for monetary damages to the
fullest extent permitted by the Delaware General Corporation Law. The Delaware
General Corporation Law provides that a corporation may eliminate or limit the
personal liability of each director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director except for
liability for any breach of the director's duty of loyalty to the corporation
or its stockholders, for acts or omissions not in good faith or that involve
intentional misconduct, or a knowing violation of law, in respect of unlawful
dividend payments or stock redemptions or repurchases, and for any transaction
from which the director derives an improper personal benefit. Our certificate
of incorporation provides that if the Delaware General Corporation Law is
amended to authorize the further elimination or limitation of the liability of
a director, the liability of the directors will be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law, as so
amended. The effect of this provision is to eliminate the rights of PaeTec and
its stockholders, through stockholder derivative suits on behalf of PaeTec, to
recover monetary damages against a director for breach of the fiduciary duty of
care as a director, including breaches resulting from negligent or grossly
negligent behavior, except in the situations described above. The provision
does not limit or eliminate the rights of PaeTec or any stockholder to seek
non-monetary relief such as an injunction or rescission upon breach of a
director's duty of care. This provision is consistent with section 102(b)(7) of
the Delaware General Corporation Law, which is designed, among other things, to
encourage qualified individuals to serve as directors of Delaware corporations.

Our bylaws provide that, to the fullest extent permitted by the Delaware
General Corporation Law, we will indemnify, and advance expenses to, each of
our currently acting and former directors and officers.

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<PAGE>

TRANSACTIONS INVOLVING RELATED PARTIES

Since our inception in May 1998, we and our subsidiaries have engaged in
transactions with our directors, director nominees and executive officers, with
owners of more than 5% of a class of our common stock, and with companies of
which these persons serve as executive officers or in which they beneficially
own over 10% of the equity interests.

Sales of Common Stock to Executive Officers

The table below shows the number of shares purchased, and the purchase
price paid, by each of our current executive officers for common stock issued
by us from our inception in May 1998 through October 31, 2000:

<TABLE>
<CAPTION>
Shares of Class
A Shares of Class B
Common Stock/ Common Stock/
Aggregate Aggregate
Name Purchase Price Purchase Price
---- ---------------- --------------------
<S> <C> <C>
Arunas A. Chesonis........................ 43,620/$218,100 2,500,000/$1,200,000
Joseph D. Ambersley....................... 280,000/$175,000 30,000/$25,000
John P. Baron............................. 290,000/$225,000 30,000/$25,000
Bradford M. Bono.......................... 530,000/$275,000 30,000/$25,000
Edward J. Butler, Jr...................... 269,000/$157,500 15,000/$12,500
Richard E. Ottalagana..................... 280,000/$175,000 30,000/$25,000
Richard J. Padulo......................... 265,000/$137,500 15,000/$12,500
Daniel J. Venuti.......................... 280,000/$175,000 30,000/$25,000
Timothy J. Bancroft....................... 32,953/$116,633 5,000/$4,165
</TABLE>

Under our stock rights agreements with some of these officers, we have
granted the officers piggyback registration rights with respect to some or all
of their shares.

Transactions With Preferred Stockholders

In February 2000, we sold 134,000 shares of a new issue of preferred
stock, designated our Series A Convertible Preferred Stock, at a purchase price
of $1,000 per share, or $134 million in the aggregate, to institutional
investors. The preferred stockholders include entities controlled by Madison
Dearborn Partners, which include Madison Dearborn Capital Partners III, L.P.,
Madison Dearborn Special Equity III, L.P. and Special Advisors Fund I, LLC,
entities which are part of The Blackstone Group, which include Blackstone CCC
Capital Partners L.P., Blackstone CCC Offshore Capital Partners L.P. and
Blackstone Family Investment Partnership III L.P., and other institutions.

Our certificate of incorporation provides that we may require the holders
of the Series A preferred stock to convert all, and not less than all, of their
preferred stock into shares of Class A common stock upon the closing of an
initial public offering of our Class A common stock that meets specified
financial criteria. Because the offerings will satisfy these criteria, we will
require conversion of all of the Series A preferred stock into Class A common
stock upon completion of the offerings. We expect to issue the preferred
stockholders a total of 17,866,666 shares of Class A common stock in connection
with this conversion.

Investor Rights. In the preferred stock investment agreement, we agreed
that we would not take specified actions relating to our business, our capital
stock and other aspects of our operations without the prior approval of the
holders of a majority of our shares held by the Madison Dearborn stockholders
and the holders of a majority of our shares held by the Blackstone
stockholders. These voting rights are transferable to any

65
<PAGE>

transferee of shares currently held by either group of stockholders, who will
vote with that group. We also granted the preferred stockholders a variety of
rights relating to their ownership of our capital stock, including preemptive
rights to subscribe to additional issuances of our capital stock and other
securities and the right to require us to repurchase their PaeTec securities in
specified circumstances. The approval rights of the preferred stockholders and
most of these other rights relating to their ownership of PaeTec capital stock
will terminate upon the completion of the offerings. Following the offerings,
for so long as any group of preferred stockholders continues to hold PaeTec
common stock received upon conversion of the Series A preferred stock or
related securities with an original purchase price of at least $10 million
under the investment agreement, those stockholders will be entitled to visit
and inspect our properties, examine our corporate and financial records and
discuss our operations and affairs with our directors, officers and independent
public accountants.

Voting Agreement. At the time of the investment, we and some of our
principal stockholders, including Arunas A. Chesonis and the Campuslink
stockholders, entered into a voting agreement with the preferred stockholders.
In this agreement, we agreed to take all actions within our control necessary
or desirable for the election of designees of the Campuslink stockholders, the
Madison Dearborn stockholders, the Blackstone stockholders and Mr. Chesonis to
our board of directors, and all of the stockholders who are parties to the
agreement agreed to vote their shares for each of these designees. Mr. James H.
Kirby, who is the designee of the Madison Dearborn stockholders, and Mr.
Lawrence H. Guffey, who is the designee of the Blackstone stockholders, were
elected to our board of directors under these board membership provisions. The
preferred stockholders will continue to have board membership rights after
completion of the offerings.

Registration Rights Agreement. In a registration rights agreement we
entered into at the time of the investment, we granted the preferred
stockholders the following registration rights with respect to their PaeTec
common stock:

. we granted the Madison Dearborn stockholders and the Blackstone
stockholders demand registration rights which entitle them to require
us to register the sale of their shares under the Securities Act on
up to two occasions, in the case of the Madison Dearborn
stockholders, and on one occasion, in the case of the Blackstone
stockholders, on a registration statement on SEC Form S-1, and on an
unlimited number of occasions on a registration statement on SEC Form
S-2 or S-3;

. we granted the preferred stockholders shelf registration rights which
entitle them, at any time between the first anniversary and the third
anniversary of the completion of the offerings, to require us to
register the sale of their shares under the Securities Act on a
continuous or delayed basis; and

. we granted the preferred stockholders piggyback registration rights
which entitle them to require us to include their shares in a
registration of our common stock or other securities for sale by us
or by our other security holders.

The foregoing registration rights extend to all common stock the
preferred stockholders will acquire upon the conversion of the Series A
preferred stock and all common stock they may acquire in any other manner and
at any other time, subject to the following limitations:

. neither the Madison Dearborn stockholders nor the Blackstone
stockholders may exercise their demand or shelf registration rights
if an offering of our common stock by such group of stockholders
would have a reasonably anticipated aggregate gross offering price of
less than $20 million if, at such time, those stockholders are free
to sell their common stock under Rule 144 of the Securities Act
without limitation as to volume or manner of sale restrictions; or

. subject to the foregoing limitation, no preferred stockholders may
exercise any registration rights with respect to our common stock if
we issue certificates representing such common stock without any
legend restricting the transfer thereof under the Securities Act or
state securities laws.

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<PAGE>

These registration rights are subject to other conditions, including
notice requirements, timing restrictions and volume limitations which may be
imposed by the underwriters of an offering. We generally are required to bear
the expense of all these registrations, except for underwriting discounts and
commissions.

Acquisition of Campuslink

On September 9, 1999, we completed our acquisition of Campuslink by our
merger of a PaeTec subsidiary with and into Campuslink, which was the surviving
corporation in the merger. We issued a total of 5,919,183 shares of our Class A
common stock in the merger. These shares represented 28.6% of our Class A
common stock and 21.9% of the total number of shares of our common stock
outstanding immediately after the merger. We also issued options to purchase a
total of 161,358 shares of our Class A common stock at an exercise price of
$2.50 per share to nine former holders of warrants to purchase shares of
Campuslink common stock as consideration for the cancellation of their
warrants.

In connection with the acquisition, we assumed a total of $7.3 million of
Campuslink indebtedness owed to four of Campuslink's former principal
stockholders, Alliance Cabletel Holdings, L.P., Kline Hawkes California SBIC,
L.P., The Union Labor Life Insurance Company Separate Account P and Pacific
Capital Group, Inc., and to Kocom Communications, a partner in Alliance
Cabletel. Each of the four former Campuslink stockholders held more than 5% of
our outstanding common stock as a result of the merger. Of the assumed
indebtedness, we repaid $5.2 million upon the closing of the merger. To
evidence the remaining $2.1 million of this indebtedness, we issued notes to
these entities in the following approximate principal amounts: Alliance
Cabletel ($1.3 million); Kline Hawkes ($0.1 million); Union Labor Life ($0.1
million); Pacific Capital Group ($0.3 million); and Kocom Communications ($0.3
million). The notes, which we repaid using proceeds from our sale of the Series
A preferred stock in February 2000, bore interest at an initial annual interest
rate of 8.25%, which was subject to adjustment from time to time to reflect
changes in a specified prime lending rate. We were required to pay interest on
the notes quarterly and to repay the notes in full upon the earlier of June 30,
2002 or the completion by us of one or more specified financing transactions.

We have placed 876,000 of the shares of Class A common stock issuable in
the merger in an escrow account to satisfy the indemnification obligations of
Campuslink under the merger agreement. The escrowed shares not applied to
satisfy these obligations will be released to the former Campuslink
stockholders on December 31, 2000 or a later date if there are indemnification
claims pending on December 31, 2000. We had placed an additional 1,480,000
shares of Class A common stock in the escrow account to secure post-closing
obligations of Campuslink relating to Campuslink's financial statements and to
Campuslink's procurement of consents to the merger from some of its significant
customers with which Campuslink has exclusive service agreements. All of these
additional shares were released from escrow in April 2000.

In connection with the acquisition, Arunas A. Chesonis, Christopher E.
Edgecomb and Jeffrey P. Sudikoff, who at the time held the largest percentages
of our outstanding Class B common stock, entered into a stockholders' agreement
with PaeTec and the former Campuslink stockholders. This agreement provides the
former Campuslink stockholders with co-sale rights with respect to transfers of
PaeTec securities by Mr. Chesonis, Mr. Edgecomb or Mr. Sudikoff and preemptive
rights with respect to new issuances of capital stock and other securities by
PaeTec. These rights will terminate upon the completion of the offerings.

Under the stockholders' agreement, Mr. Chesonis agreed to vote shares of
our stock over which he has voting rights to elect one or more individuals
designated by the former Campuslink stockholders to our board of directors.
These provisions of the stockholders' agreement were restated in the voting
rights agreement

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executed in connection with our sale of the Series A preferred stock to the
preferred stockholders. James A. Kofalt has been elected to our board of
directors under these board membership provisions and Mr. Kofalt, or another
designee of the Campuslink stockholders, will be entitled to continue to serve
as a director after completion of the offerings. In the stockholders'
agreement, we also agreed not to engage in certain transactions without the
approval of the director or directors nominated by Campuslink. These approval
rights will terminate upon completion of the offerings.

In connection with the acquisition, we entered into a registration rights
agreement with the former Campuslink stockholders. This registration rights
agreement was amended and restated in February 2000 in connection with our sale
of the Series A preferred stock to the preferred stockholders. In the amended
agreement, we have granted the Campuslink stockholders registration rights
which are substantially similar to the registration rights we granted to the
Blackstone stockholders under the same agreement.

Transactions With CIT Lending Services Corporation

In November 1998, we entered into a senior debt agreement with CIT
Lending Services Corporation, formerly Newcourt Commercial Finance Corporation,
to establish a $49 million credit facility. At the time we entered into the
credit facility, we sold CIT 600,000 shares of our Class A common stock at a
price of $2.50 per share. These shares represented more than 5% of our
outstanding Class A common stock at the time of the sale. In 1999, CIT
purchased another 217,800 shares of our Class A common stock at a price of
$5.00 per share. We granted CIT piggyback registration rights with respect to
its shares and protections against dilutive future issuances of Class A common
stock, any securities convertible into Class A common stock and any warrants,
options or other rights to subscribe for or purchase Class A common stock. The
protections against dilutive future issuances will terminate upon completion of
the offerings. We also granted CIT the right, which is subject to exceptions
and will terminate upon completion of the offerings, to maintain a specified
percentage ownership in PaeTec. CIT purchased 5,000 shares of the Series A
preferred stock in February 2000 upon the same terms and conditions as the
other preferred stockholders.

We amended our credit facility with CIT in October 1999 to add additional
lenders and increase our maximum borrowing availability from $49 million to $70
million and in August 2000 to add additional lenders and increase our maximum
borrowing availability from $70 million to $155 million. Amounts borrowed under
the facility have borne interest at our option at a rate equal to the sum of
LIBOR, a specified prime rate or the federal funds rate plus 0.5%, and an
applicable margin. The current applicable margin varies from 4.25% to 2.0%
based on a formula tied to our level of indebtedness from time to time. As of
October 31, 2000, borrowing rates under the facility averaged 11.0%. We made
interest payments to CIT of $1.4 million in the nine months ended September 30,
2000 and $1.9 million in 1999. We also paid CIT commitment fees of $0.1 million
in the nine months ended September 30, 2000 and $78,702 in 1999. As of
September 30, 2000, $100.0 million of borrowings were outstanding under the
facility.

In October 1999, we entered into a $10 million unsecured credit facility
with CIT, Canadian Imperial Bank of Commerce and Merrill Lynch Capital Corp.,
as lenders. We granted the lenders warrants to purchase shares of our Class A
common stock which would have been exercisable if the commitments of the
lenders had not been terminated before April 11, 2000 or if there had been an
outstanding balance on the facility on that date. We made no borrowings under
this facility. These warrants were canceled when we terminated the facility in
February 2000.

Transactions With STAR Telecommunications and its Affiliates

In August 1998, we sold 1,200,000 shares of our Class A common stock at a
price of $0.69 per share to STAR Telecommunications, which is a public
facilities-based international long distance provider. These shares represented
more than 5% of our outstanding common stock at the time of the sale. In
September 1998, we sold STAR Telecommunications an additional 1,700,000 shares
of our Class A common stock at a price of $2.50 per share. Under our August
1998 agreement with STAR Telecommunications, we granted that company

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<PAGE>

piggyback registration rights with respect to its shares, protections against
dilutive future issuances of Class A common stock and securities convertible
into Class A common stock, and preemptive rights to subscribe to additional
stock issuances to maintain its ownership percentage in PaeTec.

In August 1998, at the time we first sold our common stock to STAR
Telecommunications, our two companies entered into leases that allow us to
place some of our network equipment within the STAR Telecommunications network
equipment centers. Those leases have initial terms of ten years. We were not
required to make any lease payments in our 1998 fiscal year. Beginning in May
1999, we make total monthly payments of approximately $19,000 under the leases.
Assuming the leases remain in effect through the end of their initial terms, we
estimate that we will make total lease payments of approximately $4.6 million
to STAR Telecommunications. We made lease payments to STAR Telecommunications
of $388,298 in the nine months ended September 30, 2000 and $266,880 in 1999.

In the second half of 1999, STAR Telecommunications sold all of its
shares of our Class A common stock and is no longer a stockholder of PaeTec. We
granted the transferee of 850,000 of the shares sold by STAR Telecommunications
substantially the same piggyback registration rights we had granted to STAR
Telecommunications. Except for this grant of registration rights, all
registration rights, antidilution rights and preemptive rights granted to STAR
Telecommunications were terminated upon its sale of the shares.

In August 1998, in transactions which occurred at the time we first sold
our common stock to STAR Telecommunications, we sold 2,400,000 shares of our
Class B common stock at a price of $0.83 per share to Christopher E. Edgecomb,
the Chairman of the Board and Chief Executive Officer of STAR
Telecommunications. At that time, Mr. Chesonis, our Chairman of the Board and
Chief Executive Officer, was also a director of STAR Telecommunications. Mr.
Edgecomb was granted various rights with respect to his PaeTec shares. These
rights included piggyback registration rights, protections against dilutive
future issuances of common stock and securities convertible into common stock,
preemptive rights to subscribe to additional stock issuances, and co-sale
rights to include Mr. Edgecomb's shares in any sale of PaeTec common stock by
Mr. Chesonis, on the same terms. Mr. Edgecomb's protections against dilutive
future issuances and his preemptive and co-sale rights will terminate upon
completion of the offerings. At the time he purchased his shares, Mr. Edgecomb
entered into a stockholders' agreement with Mr. Chesonis and Mr. Sudikoff in
which he granted Mr. Chesonis proxies to vote his shares of Class B common
stock in Mr. Chesonis's sole and absolute discretion. Mr. Chesonis agreed to
vote all shares of our common stock he owns or controls, or which are covered
by proxies given to him, to elect Mr. Edgecomb or the designee of Messrs.
Edgecomb and Sudikoff to our board of directors, until Messrs. Edgecomb and
Sudikoff together ceased to own a total of 4,800,000 shares of our Class B
common stock. Mr. Edgecomb served on our board of directors from August 1998 to
February 2000. In December 1999, Messrs. Edgecomb and Sudikoff converted all of
their shares of Class B common stock into shares of Class A common stock.

Other Transactions

We employ two members of Arunas A. Chesonis's immediate family. We have
made salary and bonus payments to them of $140,631 for the nine months ended
September 30, 2000, $149,280 for 1999 and $36,346 for fiscal 1998. We also have
issued them options to purchase a total of 15,277 shares of our Class A common
stock at exercise prices ranging from $2.50 to $7.50 per share. In addition,
from time to time, a third member of Mr. Chesonis's immediate family performs
consulting services for PaeTec. For these services, we have paid this
individual $6,800 for the nine months ended September 30, 2000 and $12,338 for
1999.

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<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table shows information regarding the beneficial ownership
of our outstanding Class A common stock and Class B common stock as of October
31, 2000 by:

. each person or entity known by us to own beneficially more than 5% of
the outstanding shares of our Class A common stock or our Class B
common stock;

. each of our directors;

. each of our named executive officers; and

. all of our directors and executive officers as a group.

According to SEC rules, a person is deemed to be a "beneficial owner" of
a security if that person has or shares the power to vote or direct the voting
of the security or the power to dispose or direct the disposition of the
security. Under these rules, beneficial ownership includes any shares as to
which a person has the right to acquire voting or disposition power within 60
days through the exercise of any stock option or other right. More than one
person may be deemed to be a beneficial owner of the same securities. Except as
we otherwise indicate below and under applicable community property laws, we
believe that the beneficial owners of the common stock listed below, based on
information they have furnished to us, have sole voting and investment power
with respect to the shares shown.

Shares of our Class B common stock are convertible into shares of Class A
common stock on a one-for-one basis at the holder's option. Therefore, the
number of shares of Class A common stock we show as beneficially owned by a
stockholder also includes the number of Class A shares the stockholder would
acquire as a result of the conversion of the Class B shares beneficially owned
by that stockholder.

We have calculated information concerning beneficial ownership and voting
power based on:

. the 45,777,042 shares of Class A common stock and Class B common
stock outstanding as of October 31, 2000, giving effect to the
conversion as of that date of the Series A preferred stock into
17,866,666 shares of Class A common stock; and

. the shares of Class A common stock or Class B common stock as to
which the stockholder has the right to acquire voting or investment
power within 60 days after October 31, 2000.

In addition, the information shown for beneficial ownership of our common
stock after completion of the offerings gives effect to the issuance of
7,000,000 shares of Class A common stock in the offerings. The shares of Series
A preferred stock are convertible into shares of Class A common stock at any
time at the holder's option.

The information on common stock voting power also reflects the superior
voting rights of the Class B common stock. Each share of Class A common stock
is entitled to one vote and each share of Class B common stock is entitled to
20 votes.

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<TABLE>
<CAPTION>
Percent of voting
power as a
single class
-------------------
Class A Common Stock
------------------------------------- Class B Before After
Before offerings After offerings Common Stock offerings offerings
------------------ ------------------ ----------------- --------- ---------
Name of Benefical Owner
------------------------ Number Percent Number Percent Number Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Executive Officers and
Directors:
Arunas A. Chesonis...... 2,818,620 6.2% 2,818,620 5.4% 2,635,000 100.0% 55.4% 51.6%
John P. Baron........... 370,000 * 370,000 * 30,000 1.1 1.0 *
Bradford M. Bono........ 600,000 1.4 600,000 1.2 30,000 1.1 1.2 1.1
Lawrence H. Guffey...... 6,666,666 15.5 6,666,666 13.3 -- -- 7.0 6.5
James H. Kirby.......... 9,363,333 21.7 9,363,333 18.7 -- -- 9.8 9.1
James A. Kofalt......... 2,530,478 5.9 2,530,478 5.1 -- -- 2.6 2.5
Richard E. Ottalagana... 360,000 * 360,000 * 30,000 1.1 1.0 *
Daniel J. Venuti........ 295,500 * 295,500 * 30,000 1.1 * *
All directors and
executive officers as a
group (13 persons) .... 23,940,300 52.3 23,940,300 45.4 2,635,000 100.0 77.2 72.0
Other Stockholders:
Alliance Cabletel
Holdings, L.P.......... 2,465,478 5.7 2,465,478 4.9 -- -- 2.6 2.4
Blackstone
stockholders........... 6,666,666 15.5 6,666,666 13.3 -- -- 7.0 6.5
Kline Hawkes California
SBIC, L.P.............. 2,213,652 5.1 2,213,652 4.4 -- -- 2.3 2.2
Madison Dearborn
stockholders........... 9,333,333 21.6 9,333,333 18.6 -- -- 9.7 9.1
Gary Winnick............ 3,335,478 7.7 3,335,478 6.7 -- -- 3.5 3.2
</TABLE>
--------
* Less than one percent.

The shares of Class A common stock shown as being beneficially owned by Mr.
Chesonis include 2,450,000 shares of Class B common stock beneficially owned by
Mr. Chesonis and convertible into shares of Class A common stock on a one-for-
one basis and 367,620 shares of Class A common stock held by a trust for which
Mr. Chesonis's father and mother-in-law serve as co-trustees. The shares of
Class B common stock shown as being beneficially owned by Mr. Chesonis include
185,000 shares of Class B common stock held by our executive officers over
which Mr. Chesonis has voting power under proxies granted to him that are
irrevocable other than in specified circumstances.

The shares of Class A common stock shown as being beneficially owned by Mr.
Baron include 30,000 shares of Class B common stock and 4,500 shares of Class A
common stock held by trusts for the benefit of Mr. Baron's children, and 50,000
shares of Class A common stock held by a trust for which Mr. Baron's brother
serves as trustee. Mr. Baron disclaims beneficial ownership of these shares.
The 30,000 Class B shares are convertible into shares of Class A common stock
on a one-for-one basis.

The shares of Class A common stock shown as being beneficially owned by Mr.
Bono include 30,000 shares of Class B common stock beneficially owned by Mr.
Bono and convertible into Class A common stock on a one-for-one basis and
25,000 shares of Class A common stock held by a trust for which Mr. Bono serves
as trustee.

The shares of Class A common stock shown as beneficially owned by Mr. Guffey
consist of 6,666,666 shares of Class A common stock issuable upon conversion of
50,000 shares of Series A preferred stock beneficially owned by the Blackstone
stockholders. Mr. Guffey is a member of Blackstone Management Associates III
L.L.C., a general partner of each of the Blackstone stockholders. The
Blackstone stockholders include Blackstone CCC Capital Partners L.P.,
Blackstone CCC Offshore Capital Partners L.P. and Blackstone Family Investment
Partnership III L.P. Mr. Guffey disclaims beneficial ownership of these shares.

The shares of Class A common stock shown as being beneficially owned by Mr.
Kirby include 9,333,333 shares of Class A common stock issuable upon conversion
of 70,000 shares of Series A preferred stock beneficially owned by the Madison
Dearborn stockholders. The Madison Dearborn stockholders include Madison
Dearborn Capital Partners III, L.P., Madison Dearborn Special Equity III, L.P.
and Special Advisors Fund I, LLC.

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<PAGE>

Mr. Kirby is a principal of Madison Dearborn Partners, LLC, the ultimate
general partner of Madison Dearborn Capital Partners III, L.P., and Madison
Dearborn Special Equity III, L.P. and the manager of Special Advisors Fund I,
LLC. Mr. Kirby disclaims beneficial ownership of these shares.

The shares of Class A common stock shown as being beneficially owned by Mr.
Kofalt include 2,465,478 shares beneficially owned by Alliance Cabletel
Holdings, L.P. and 10,000 shares of Class A common stock issuable upon the
exercise of options that are exercisable within 60 days of October 31, 2000.
Mr. Kofalt is Chairman of Alliance Cabletel and the sole stockholder and
president of Kocom Communications, Inc., the general partner of Alliance
Cabletel. Because of his service in these positions, Mr. Kofalt may be deemed
to be the beneficial owner of the shares owned by Alliance Cabletel.

The shares of Class A common stock shown as being beneficially owned by
Mr. Ottalagana include 30,000 shares of Class B common stock beneficially owned
by Mr. Ottalagana and convertible into Class A common stock on a one-for-one
basis and 150,000 shares of Class A common stock held by a trust for the
benefit of Mr. Ottalagana's daughter, for which Mr. Ottalagana's wife serves as
trustee.

The shares of Class A common stock shown as being beneficially owned by
Mr. Venuti include 30,000 shares of Class B common stock beneficially owned by
Mr. Venuti and convertible into Class A common stock on a one-for-one basis and
50,000 shares of Class A common stock held by a trust for which Mr. Venuti's
sister-in-law serves as trustee.

The shares of Class A common stock shown as being beneficially owned by all
directors and executive officers as a group include an aggregate of 797,120
shares of Class A common stock and 30,000 shares of Class B common stock
convertible into shares of Class A common stock on a one-for-one basis held by
trusts for the benefit of family members of some of our directors and executive
officers or for the benefit of family foundations established by some of our
directors and executive officers, for which various persons other than such
directors and executive officers generally serve as trustees. The shares of
Class A common stock shown as being beneficially owned by all directors and
executive officers as a group also include 3,942 shares of Class A common stock
held in an escrow account for the benefit of one of our executive officers in
connection with our acquisition of Campuslink. The shares of Class A common
stock shown as being beneficially owned by all directors and executive officers
as a group include options to purchase 18,750 shares of Class A common stock
exercisable within 60 days of October 31, 2000.

The shares of Class A common stock shown as being beneficially owned by
Alliance Cabletel Holdings, L.P. include 364,854 shares held in an escrow
account for the benefit of Alliance Cabletel in connection with our acquisition
of Campuslink. The address of Alliance Cabletel is 360 North Crescent Drive,
Beverly Hills, California 90210.

The shares of Class A common stock shown as being beneficially owned by the
Blackstone stockholders consist of 5,301,117 shares of Class A common stock
issuable upon conversion of 39,758.38 shares of Series A preferred stock owned
of record by Blackstone CCC Capital Partners L.P., 965,549 shares of Class A
common stock issuable upon conversion of 7,241.62 shares of Series A preferred
stock owned of record by Blackstone CCC Offshore Partners L.P. and 400,000
shares of Class A common stock issuable upon conversion of 3,000 shares of
Series A preferred stock owned of record by Blackstone Family Investment
Partnership III L.P. The address of the Blackstone stockholders is 345 Park
Avenue, New York, New York 10154.

The shares of Class A common stock shown as being beneficially owned by Kline
Hawkes California SBIC, L.P. include 252,113 shares of Class A common stock
held in an escrow account for the benefit of Kline Hawkes California SBIC, L.P.
in connection with our acquisition of Campuslink and 7,126 shares of Class A
common stock owned by Kline Hawkes California, L.P. Kline Hawkes California,
L.P. is the sole limited partner of Kline Hawkes California SBIC, L.P., and
holds a minority interest in the general partner of Kline Hawkes California
SBIC, L.P. The business address of Kline Hawkes California SBIC, L.P. and Kline
Hawkes California, L.P. is 11726 San Vicente Boulevard, Los Angeles, California
90049.

The shares of Class A common stock shown as being beneficially owned by the
Madison Dearborn stockholders consist of 9,111,029 shares of Class A common
stock issuable upon conversion of 68,332.72

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<PAGE>

shares of Series A preferred stock owned of record by Madison Dearborn Capital
Partners III, L.P., 202,304 shares of Class A common stock issuable upon
conversion of 1,517.28 shares of Series A preferred stock owned of record by
Madison Dearborn Special Equity III, L.P., and 20,000 shares of Class A common
stock issuable upon conversion of 150 shares of Series A preferred stock owned
of record by Special Advisors Fund I, LLC. The address of the Madison Dearborn
stockholders is Three First National Plaza, Suite 3800, Chicago, Illinois
60670.

The shares of Class A common stock shown as being beneficially owned by Gary
Winnick include 870,000 shares of Class A common stock beneficially owned by
GKW Unified Holdings, LLC and 2,465,478 shares beneficially owned by Alliance
Cabletel Holdings, L.P. GKW Unified Holdings is the majority limited partner in
Alliance Cabletel. Mr Winnick is the sole stockholder, Chairman and Chief
Executive Officer of Pacific Capital Group, Inc., the managing member of GKW
Unified Holdings. Because of his service in these positions, Mr. Winnick may be
deemed to be the beneficial owner of these shares. Mr. Winnick's business
address is 360 North Crescent Drive, Beverly Hills, California 90210.

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<PAGE>

DESCRIPTION OF CAPITAL STOCK

The following description of our capital stock summarizes provisions of
our certificate of incorporation and bylaws as they will be amended before
completion of the offerings.

Authorized and Outstanding Capital Stock

Upon completion of the offerings, our authorized capital stock will
consist of 300,000,000 shares of Class A common stock, $.01 par value per
share, 7,500,000 shares of Class B common stock, $.01 par value per share, and
5,000,000 shares of preferred stock, $.01 par value per share. As of the date
of this prospectus, there were 25,275,376 shares of Class A common stock
outstanding, 2,635,000 shares of Class B common stock outstanding and 134,000
shares of Series A preferred stock outstanding. Upon completion of the
offerings, after giving effect to the issuance of 7,000,000 shares of Class A
common stock by us and the conversion of the outstanding Series A preferred
stock into 17,866,666 shares of Class A common stock, there will be 50,142,042
shares of Class A common stock outstanding, 2,635,000 shares of Class B common
stock outstanding and no shares of preferred stock outstanding.

Common Stock

Class A common stock. Holders of Class A common stock are entitled:

. to one vote for each share held of record on all matters submitted to
a vote of the stockholders;

. to receive, on a pro rata basis, dividends and distributions, if any,
as the board of directors may declare out of legally available funds;
and

. upon a liquidation, dissolution or winding up of PaeTec, to share
equally and ratably in any assets remaining after the payment of all
debt and other liabilities, subject to the prior rights, if any, of
holders of preferred stock.

Holders of our Class A common stock do not have any preemptive, cumulative
voting, subscription, conversion, redemption or sinking fund rights. The Class
A common stock is not subject to future calls or assessments by us.

Before the date of this prospectus, there has been no public market for
the Class A common stock. We expect that the shares of our Class A common stock
will be approved for quotation on the Nasdaq National Market, subject to notice
of issuance, under the symbol "PAET."

Mellon Investor Services, L.L.C. will serve as the transfer agent and
registrar for the Class A common stock.

Class B common stock. Holders of our Class B common stock have the same
powers, preferences and rights as holders of our Class A common stock, except
in the following three respects:

. holders of our Class B common stock are entitled to 20 votes per
share;

. the affirmative vote of holders of a majority of our outstanding
Class B common stock is required to approve specified amendments to
our certificate of incorporation and bylaws; and

. each share of Class B common stock is convertible into one share of
Class A common stock in circumstances specified in our certificate of
incorporation and described below.

The sole beneficial owners of our Class B common stock are the following
members of our senior management and trusts they have established: Arunas A.
Chesonis, Joseph D. Ambersley, John P. Baron, Bradford M.

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<PAGE>

Bono, Edward J. Butler, Jr., Richard E. Ottalagana, Richard J. Padulo, Daniel
J. Venuti and Timothy J. Bancroft. All of the holders of our Class B common
stock have granted to Mr. Chesonis proxies authorizing him to vote their shares
of Class B common stock in his sole and absolute discretion. Mr. Chesonis is
our Chairman of the Board and Chief Executive Officer and the owner of record,
as of the date of this prospectus, of 2,450,000 shares of our Class B common
stock. Upon completion of the offerings, holders of our Class B common stock as
a group will control approximately 53.9% of the total voting power of all our
outstanding common stock. As a result of the superior voting rights of our
Class B common stock and the authority conferred on Mr. Chesonis by these
proxies, Mr. Chesonis will have the ability immediately after completion of the
offerings to elect all of the members of our board of directors and to
determine the outcome of corporate actions requiring stockholder approval.
Under the voting agreement to which he is a party, however, Mr. Chesonis is
obligated to cast his votes for election of director nominees designated by
some of our current stockholders. For information about the voting agreement,
see the discussion beginning on page 57.

By its terms, any proxy granted to Mr. Chesonis may be revoked, and the
voting authority the proxy confers on Mr. Chesonis may be terminated, if any
one of the following events occurs:

. Mr. Chesonis no longer serves as at least one of our Chairman of the
Board or our Chief Executive Officer;

. Mr. Chesonis and/or a trust of which he is the sole trustee, a
limited liability company of which he is the sole member or a limited
partnership of which he is the sole general partner cease to own
directly or beneficially at least 2,000,000 shares of our Class B
common stock, subject to adjustment for stock splits, stock
dividends, stock combinations, recapitalizations and similar
transactions; or

. all of the Class B common stock held by the stockholder who granted
the proxy is converted into Class A common stock.

Each of the proxies has a 20-year term expiring in June 2020.

Under our certificate of incorporation, any holder of Class B common
stock may elect at any time to convert some or all of such holder's shares into
an equal number of shares of Class A common stock. In addition, our certificate
of incorporation provides that the following shares of Class B common stock
will automatically and immediately convert into Class A common stock:

. any share of Class B common stock that is transferred by a holder to
any person other than a permitted transferee under our certificate of
incorporation;

. all shares of Class B common stock held by an executive officer other
than Mr. Chesonis upon the termination of such executive officer's
employment with PaeTec and each PaeTec subsidiary, unless, at the
date of such termination of employment,

. Mr. Chesonis is the Chairman of the Board or Chief Executive
Officer of PaeTec,

. Mr. Chesonis beneficially owns shares of Class B common stock, and

. Mr. Chesonis has, and personally exercises, the power to vote the
shares of Class B common stock of such executive officer and the
executive officer's permitted transferees under a proxy granted to
Mr. Chesonis by such holders; and

. all outstanding shares of Class B common stock, at such time as

. Mr. Chesonis no longer serves as at least one of our Chairman of
the Board or Chief Executive Officer, or

. Mr. Chesonis ceases to have, and to exercise personally, the
power, whether by ownership, proxy or otherwise, to vote shares of
Class B common stock representing a majority of the total voting
power represented by all shares of Class B common stock then
outstanding.

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Under the terms of our investment agreement with the preferred
stockholders, for so long as the Madison Dearborn stockholders or the
Blackstone stockholders have the right to nominate persons for election to our
board of directors, we may not issue additional shares of Class B common stock
without the prior approval of the holders of a majority of our shares held by
the Madison Dearborn stockholders or the holders of a majority of our shares
held by the Blackstone stockholders.

Preferred Stock

Under our certificate of incorporation, the board of directors has the
authority, without further action by our stockholders, to issue up to 5,000,000
shares of preferred stock in one or more series and to fix the voting powers,
designations, preferences and the relative participating, optional or other
special rights and qualifications, limitations and restrictions of each series,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series. Upon completion of the offerings, no shares of any of our authorized
preferred stock will be outstanding. Because the board of directors has the
power to establish the preferences and rights of the shares of any additional
series of preferred stock, it may afford holders of any preferred stock
preferences, powers and rights, including voting rights, senior to the rights
of holders of the common stock, which could adversely affect the holders of the
common stock.

Warrants

We have adopted an agent incentive plan under which we have authorized
the grant to our independent sales agents of warrants to purchase up to a total
of 500,000 shares of our Class A common stock. Under the plan, agents who
achieve specified monthly sales goals may be granted warrants entitling them to
purchase shares of our Class A common stock at exercise prices equal to the
fair market value of the Class A common stock on the dates the warrants are
granted. The warrants may only be exercised if we complete the offerings and
may first be exercised one year after the date on which the offerings are
completed or such earlier date as may be permitted under applicable securities
laws. Warrants issued under the plan generally will vest in five equal annual
installments beginning at the date of grant, subject to the warrant holder's
continued achievement of the sales levels for which the warrant was granted.
Each warrant is exercisable for ten years, and the exercise price may be paid
in cash or by cashless exercise. To the extent a warrant is vested, it may be
transferred to a sub-agent of the warrant holder. As of September 30, 2000, we
have awarded warrants exercisable for 93,166 shares of Class A common stock
under the plan.

Anti-takeover Effect of Our Charter and Bylaw Provisions

Our certificate of incorporation and bylaws contain provisions, in
addition to the provisions granting superior voting rights to the holders of
our Class B common stock, that could make it more difficult to complete an
acquisition of PaeTec by means of a tender offer, a proxy contest or otherwise.

Classified Board of Directors. Our certificate of incorporation provides
that the board of directors will be divided into three classes of directors,
with the classes as nearly equal in number as possible. As a result,
approximately one-third of the board of directors will be elected each year.
The classification of the board of directors will it make it more difficult for
an acquiror or for other stockholders to change the composition of the board of
directors. The certificate of incorporation provides that, subject to any
rights of holders of preferred stock to elect additional directors under
specified circumstances, the number of directors will be fixed in the manner
provided in the bylaws. The bylaws provide that the number of directors will be
fixed from time to time exclusively by resolution adopted by directors
constituting a majority of the total number of directors that we would have if
there were no vacancies on the board of directors. In addition, our certificate
of incorporation provides that, subject to any rights of holders of preferred
stock, and unless the board of directors otherwise determines, newly created
directorships resulting from any increase in the authorized number of directors
and any vacancies on the board of directors will be filled only by the
affirmative vote of a majority of the remaining directors, though less than a
quorum.

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No Stockholder Action by Written Consent. The certificate of
incorporation provides that, subject to the rights of any holders of preferred
stock to act by written consent instead of a meeting, stockholder action may be
taken only at an annual meeting or special meeting of stockholders and may not
be taken by written consent instead of a meeting, unless the action to be taken
by written consent of stockholders and the taking of this action by written
consent have been expressly approved in advance by the board of directors.
Failure to satisfy any of the requirements for a stockholder meeting could
delay, prevent or invalidate stockholder action.

Stockholder Advance Notice Procedure. Our bylaws establish an advance
notice procedure for stockholders to make nominations of candidates for
election as directors or to bring other business before an annual meeting of
our stockholders.

The bylaws provide that any stockholder wishing to nominate persons for
election as directors at an annual meeting must deliver to our secretary a
written notice of the stockholder's intention to do so. The stockholder
generally is required to furnish the notice no earlier than 120 days and no
later than 90 days before the first anniversary of the preceding year's annual
meeting. The notice must include the following information:

. the information regarding each proposed nominee that would be
required to be disclosed under SEC rules and regulations in
solicitations of proxies for the election of directors in an election
contest or otherwise;

. the written consent of each proposed nominee to serve as a director
of PaeTec; and

. as to the stockholder giving the notice and the beneficial owner, if
any, of common stock on whose behalf the nomination is made,

. the name and address of record of the stockholder and the name and
address of the beneficial owner,

. the class and number of shares of PaeTec's capital stock which are
owned beneficially and of record by the stockholder and the
beneficial owner,

. a representation that the stockholder is a holder of record of
PaeTec's capital stock entitled to vote at such meeting and
intends to appear, in person or by proxy, at the meeting to
propose such nomination, and

. a representation whether the stockholder or the beneficial owner,
if any, intends or is part of a group which intends to (a) deliver
a proxy statement or form of proxy to holders of at least the
percentage of PaeTec's outstanding capital stock required to elect
the nominee or (b) otherwise solicit proxies from stockholders in
support of the nomination.

We may require any proposed nominee to furnish such other information as we may
reasonably require to determine the eligibility of such proposed nominee to
serve as a director of PaeTec.

In addition, the bylaws require that notice of proposals by stockholders
to be brought before any annual meeting must be delivered to PaeTec no earlier
than 120 days and no later than 90 days before the first anniversary of the
preceding year's annual meeting. The notice must include the following
information:

. a brief description of the business desired to be brought before the
meeting, the text of the proposal or business, including the text of
any resolutions proposed for consideration and in the event that such
business includes a proposal to amend our bylaws, the language of the
proposed amendment, the reasons for conducting such business at the
meeting and any material interest in such business of the stockholder
and the beneficial owner, if any, on whose behalf the proposal is
made; and

. as to the stockholder giving the notice and the beneficial owner, if
any, of common stock on whose behalf the proposal is made,
substantially the same information that must be furnished with
respect to a stockholder wishing to nominate a candidate for election
as a director.

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Section 203 of the Delaware General Corporation Law

PaeTec is subject to section 203 of the Delaware General Corporation Law,
which, with specified exceptions, prohibits a Delaware corporation from
engaging in any "business combination" with any "interested stockholder" for a
period of three years following the time that the stockholder became an
interested stockholder unless:

. before that time, the board of directors of the corporation approved
either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder;

. upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares
owned by persons who are directors and also officers and by employee
stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer; or

. at or after that time, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned
by the interested stockholder.

Section 203 defines "business combination" to include the following:

. any merger or consolidation of the corporation with the interested
stockholder;

. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;

. subject to specified exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;

. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or

. any receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.

In general, section 203 defines an "interested stockholder" as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by that entity or person.

The application of section 203 may make it difficult and expensive for a
third party to pursue a takeover attempt we approve even if a change in control
of PaeTec would be beneficial to the interests of our stockholders.

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SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the offerings, we will have outstanding 50,142,042
shares of Class A common stock, assuming none of the underwriters' over-
allotment options are exercised. Of these shares, the 7,000,000 shares sold in
the offerings, plus any shares issued upon exercise of the underwriters' over-
allotment options, will be freely tradable in the public market without
restriction under the Securities Act, unless the shares are held by
"affiliates" of PaeTec, as that term is defined in Rule 144 under the
Securities Act.

The remaining 43,142,042 shares of Class A common stock outstanding upon
completion of the offerings, as well as any shares of Class A common stock we
may issue in the future upon conversion of Class B common stock, will be
"restricted securities" as that term is defined under Rule 144. Restricted
securities may be sold in the public market only if they are registered or if
they qualify for an exemption from registration, such as the exemption provided
by Rule 144.

Under lockup agreements with the underwriters, our executive officers and
directors and other existing stockholders have agreed not to offer, sell,
contract to sell, grant any option to purchase or otherwise dispose of any
shares of common stock for a period of 180 days after the date of this
prospectus. All of our outstanding Class B common stock, 20,697,671 shares of
our Class A common stock and the 17,866,666 shares of Class A common stock
issuable upon conversion of the Series A convertible preferred stock upon
completion of the offerings are subject to lockup agreements. These shares
represent approximately 90% of our common shares outstanding as of the date of
this prospectus, as adjusted to reflect the conversion of the Series A
preferred stock. We have entered into a similar lockup agreement with the
underwriters. However, Merrill Lynch and Bear Stearns, in their sole
discretion, may consent to the release of all or any portion of the shares
subject to lockup agreements at any time without prior notice to our other
stockholders or to any public market in which our Class A common stock trades.
Merrill Lynch and Bear Stearns have advised us that they do not currently
intend to consent to the release of any of the shares subject to lockup
agreements.

Specifically, we and these stockholders have agreed in the lockup
agreements not directly or indirectly to:

. offer, pledge, sell or contract to sell any common stock;

. sell any option or contract to purchase any common stock;

. purchase any option or contract to sell any common stock;

. grant any option, right or warrant for the sale of any common, stock;

. lend or otherwise dispose of or transfer any common stock;

. request or demand that we file a registration statement related to
the common stock; or

. enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock
whether any such swap or transaction is to be settled by delivery of
shares or other securities, in cash or otherwise.

These lockup provisions apply to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. They also apply to common stock owned now or acquired later by the
person executing the agreement, other than common stock acquired in the public
market, or for which the person executing the agreement later acquires the
power of disposition.

The restrictions in the foregoing lockup agreements will not apply to
transfers by stockholders of common stock to PaeTec, to affiliates, to family
trusts, by gift, will or intestate succession, under pledges of common stock,
or under agreements entered into before the offerings and disclosed to Merrill
Lynch and Bear Stearns. Each transferee of common stock held by stockholders
subject to the lockup provisions will be required to execute and deliver a
lockup agreement containing the terms described above.

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In addition, the lockup agreement we have signed provides that we may
take the following actions without restriction under the agreement:

. issue Class A common stock upon conversion of the Series A preferred
stock;

. issue Class A common stock under our employee stock, bonus or
compensation plans, or grant options to purchase Class A common stock
or other awards under those plans, in each case as those plans are in
effect on the date of this prospectus;

. file one or more registration statements on Form S-8 covering the
offer and sale of securities issuable under those plans;

. issue warrants to purchase Class A common stock under our agent
incentive plan;

. issue Class A common stock upon any conversion of Class B common
stock in accordance with our certificate of incorporation; and

. issue Class A common stock under the agreements pursuant to which we
acquired Pinnacle Software Corporation and Data Voice Networks, Inc.

The following shares will be eligible for sale in the public market at
the following times:

. 180 days after the date of this prospectus, 42,435,884 shares of
Class A common stock will be eligible for sale in the public market,
of which the sale of 40,774,351 shares will be subject to volume,
manner of sale and other limitations under Rule 144; and

. the remaining 706,159 shares of Class A common stock will be eligible
for sale under Rule 144 from time to time upon the expiration of Rule
144's one-year holding period.

In general, under Rule 144, a person who has beneficially owned
restricted shares of Class A common stock for at least one year would be
entitled to sell, within any three-month period, a number of shares of Class A
common stock that does not exceed the greater of:

. 1% of the then-outstanding shares of Class A common stock, which will
total approximately [501,420] shares immediately after completion of
the offerings; or

. the average weekly trading volume of the Class A common stock during
the four calendar weeks preceding the filing of a notice with the SEC
with respect to the sale.

Sales under Rule 144 are also subject to manner of sale and notice requirements
and to the availability of current public information about PaeTec. Under Rule
144(k), a person who has not been our affiliate at any time during the three
months before a sale and who has beneficially owned the shares proposed to be
sold for at least two years may sell these shares without complying with the
volume limitations and other conditions of Rule 144.

Through October 31, 2000, we have granted to our employees and other
persons options to purchase 4,013,944 shares of Class A common stock under our
1998 incentive compensation plan which were outstanding as of such date. After
the completion of the offerings, we intend to file a registration statement on
Form S-8 to register up to 5,300,000 shares of Class A common stock authorized
for issuance under this plan and up to 2,000,000 shares of Class A common stock
authorized for issuance under our 2000 stock option and incentive plan. The
registration statement will become effective automatically upon filing. Shares
issued under these plans after the filing of this registration statement may be
sold in the open market, subject, in the case of some holders, to the lockup
agreements described above and to the Rule 144 limitations applicable
to affiliates.

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We have granted some of our stockholders registration rights with respect
to their shares of Class A common stock and Class B common stock. As of October
31, 2000, 34,554,922 shares of our Class A common stock, representing 68.8% of
our outstanding Class A common stock immediately after completion of the
offerings, and all 2,635,000 outstanding shares of our Class B common stock,
were entitled to the benefits of these registration rights. We have granted the
following types of registration rights:

. demand registration rights, in which stockholders holding 24,504,874
shares, or 48.8% of our outstanding Class A common stock immediately
after completion of the offerings, are entitled to require us to
register the sale of their shares under the Securities Act on up to
four occasions on SEC Form S-1 and on an unlimited number of
occasions on SEC Form S-2 or S-3;

. shelf registration rights, in which stockholders holding 24,504,874
shares, or 48.8% of our outstanding Class A common stock immediately
after completion of the offerings, are entitled to require us, at any
time between the first anniversary and the third anniversary of the
completion of the offerings, to register the sale of their shares
under the Securities Act on a continuous or delayed basis; and

. piggyback registration rights, in which stockholders holding
34,554,922 shares, or 68.8% of our outstanding Class A common stock
immediately after completion of the offerings, and all of our
outstanding Class B common stock are entitled to require us to
include their shares in a registration of our securities for sale by
us or by our other security holders.

The amounts shown for our Class A common stock include 52,063 shares of Class A
common stock issuble upon exercise of options outstanding as of October 31,
2000. These registration rights may not be exercised during the 180-day lockup
period under the lockup agreements. In addition, these registration rights are
subject to various conditions, including notice requirements, timing
restrictions and volume limitations which may be imposed by the underwriters of
an offering. We generally are required to bear the expense of all these
registrations, except for underwriting discounts and commissions. Any shares of
Class B common stock registered for sale to the public will automatically
convert into an equal number of shares of Class A common stock when sold.

Before the offerings, there has been no public market for our Class A
common stock. A significant public market for the Class A common stock may not
develop or be sustained after the offerings. Future sales of substantial
amounts of our Class A common stock in the public market, or the possibility
that these sales may occur, could adversely affect prevailing market prices for
our Class A common stock or our future ability to raise capital through an
offering of equity securities.

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U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS

The following is a general discussion of selected U.S. federal income and
estate tax consequences of the ownership and disposition of the Class A common
stock that may be relevant to you if you are a non-U.S. holder. For purposes of
the following discussion, a "non-U.S. holder" is any beneficial owner of Class
A common stock other than a person that is for U.S. federal income tax
purposes:

. a citizen or resident of the U.S.;

. a corporation, partnership or other entity treated as a corporation
or partnership for federal tax purposes, created or organized in or
under the laws of the U.S., any state thereof or the District of
Columbia, other than a partnership that is not treated as a U.S.
person under any applicable U.S. Treasury regulations;

. an estate whose income is subject to U.S. federal income tax
regardless of its source; or

. a trust, if a court within the U.S. is able to exercise primary
supervision over the administration of the trust and one or more U.S.
persons have the authority to control all substantial decisions of
the trust.

This discussion does not address all aspects of U.S. income and estate taxes
and does not deal with foreign, state and local consequences that may be
relevant to holders of Class A common stock in light of their personal
circumstances. Further, this discussion is based on provisions of the Internal
Revenue Code of 1986, as amended, existing and proposed U.S. Treasury
regulations issued under the Internal Revenue Code and administrative and
judicial interpretations, in each case as of the date hereof, all of which are
subject to change, possibly with retroactive effect, or to different
interpretations. We advise each prospective purchaser of the Class A common
stock in the offerings to consult a tax advisor with respect to current and
possible future tax consequences of acquiring, holding and disposing of Class A
common stock as well as any tax consequences that may arise under the laws of
any U.S. state, municipality or other taxing jurisdiction.

Dividends

PaeTec has not paid any cash dividends on its common stock and does not
intend to pay cash dividends on its common stock in the foreseeable future. For
a description of PaeTec's dividend policy, see "Dividend Policy." However, if
dividends are paid on the shares of our common stock, these distributions
generally will constitute dividends for U.S. federal income tax purposes to the
extent paid from our current or accumulated earnings and profits, as determined
under U.S. federal income tax principles. To the extent these distributions
exceed those earnings and profits, the distributions will constitute a return
of capital that is applied against, and will reduce, your basis in the common
stock, but not below zero, and then will be treated as gain from the sale of
stock. Dividends paid to a non-U.S. holder of Class A common stock generally
will be subject to withholding of U.S. federal income tax at a 30% rate or any
lower rate that may specified by an applicable income tax treaty. To receive a
reduced treaty rate, a non-U.S. holder must furnish to us or our paying agent a
completed Form W-8BEN or substitute form certifying to the holder's
qualification for the reduced rate. However, dividends that

. are effectively connected with the conduct of a trade or business by
the non-U.S. holder within the U.S. or

. if an income tax treaty applies, that are attributable to a permanent
establishment or, in the case of an individual, a fixed base in the
United States, as provided in that treaty,

are not subject to U.S. federal withholding tax, provided that the non-U.S.
holder furnishes to us or our paying agent a completed Form W-8ECI or
substitute form certifying to the exemption. However, dividends exempt from
U.S. withholding because they are effectively connected with a trade or
business or they are attributable to a U.S. permanent establishment are subject
to U.S. federal income tax on a net income basis at applicable graduated
individual or corporate rates. Any such effectively connected dividends
received by a foreign

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corporation may, under some circumstances, be subject to an additional "branch
profits tax" at a 30% rate or any lower rates that may be specified by an
applicable income tax treaty.

Under current U.S. Treasury regulations, dividends paid before January 1,
2001 to an address outside the U.S. are presumed to be paid to a resident of
such country, unless the payer has knowledge to the contrary, for purposes of
the withholding tax discussed above and, under the current interpretation of
U.S. Treasury regulations, for purposes of determining the applicability of a
tax treaty rate. For dividends paid after December 31, 2000:

. a non-U.S. holder of Class A common stock that wishes to claim the
benefit of an applicable treaty rate, and to avoid back-up
withholding as discussed below, would be required to satisfy
applicable certification and other requirements;

. in the case of Class A common stock held by a foreign partnership,
the certification requirement generally will be applied to the
partners of the partnership, and the partnership will be required to
provide information, including a U.S. taxpayer identification number;
and

. pass-through rules will apply for tiered partnerships.

A non-U.S. holder of Class A common stock eligible for a reduced rate of
U.S. withholding tax under an income tax treaty may obtain a refund of any
excess amounts withheld by filing with the IRS an appropriate claim for refund
and the required information.

Gain on Disposition of Class A Common Stock

A non-U.S. holder generally will not be subject to U.S. federal income
tax with respect to gain recognized on a sale or other disposition of Class A
common stock unless:

1. the gain is (a) effectively connected with a trade or business of the
non-U.S. holder in the U.S. or a U.S. partnership, trust or estate in
which the non-U.S. holder is a partner or beneficiary and (b) if
required by an applicable tax treaty, attributable to a permanent
establishment or fixed base of the non-U.S. holder in the U.S.;

2. in the case of a non-U.S. holder who is an individual and holds the
Class A common stock as a capital asset, the holder is present in the
U.S. for 183 or more days in the taxable year of the sale, or other
disposition and other conditions are met;

3. PaeTec is or has been a "U.S. real property holding corporation" for
U.S. federal income tax purposes at any time within the shorter of
the five-year period preceding the disposition or the period the non-
U.S. holder held the Class A common stock; or

4. the non-U.S. holder is subject to tax under the provisions of U.S.
tax law applicable to specified expatriates.

PaeTec has not determined whether it is or has been within the prescribed
period a "U.S. real property holding corporation" for federal income tax
purposes. If PaeTec is, has been or becomes a U.S. real property holding
corporation, so long as the Class A common stock continues to be regularly
traded on an established securities market within the meaning of section
897(c)(3) of the Internal Revenue Code, only a non-U.S. holder who holds or
held, at any time during the shorter of the five-year period preceding the date
of disposition or the holder's holding period, more than 5% of the common stock
will be subject to U.S. federal income tax on the disposition of the common
stock.

An individual non-U.S. holder described in clause 1 above will be taxed
on the net gain derived from the sale under the regular graduated U.S. federal
income tax rates, unless an applicable treaty provides otherwise. An individual
non-U.S. holder described in clause 2 above will be subject to a flat 30% tax
on the gain derived from the sale, which may be offset by U.S. capital losses,
notwithstanding the fact that the individual is not considered a resident of
the U.S. If a non-U.S. holder that is a foreign corporation falls under clause
1 above, it will be taxed on its gain under regular graduated U.S. federal
income tax rates and, in addition, may be subject to the branch

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profits tax equal to 30% of its effectively connected earnings and profits
within the meaning of the Internal Revenue Code for the taxable year, as
adjusted for specified items, unless it qualifies for a lower rate under an
applicable income tax treaty and demonstrates that it qualifies.

Federal Estate Tax

Class A common stock owned or treated as owned by an individual who is
not a citizen or resident, as defined for U.S. federal income or estate tax
purposes, of the U.S. at the time of death will be includable in the
individual's gross estate for U.S. federal estate tax purposes unless an
applicable estate tax treaty provides otherwise, and therefore may be subject
to U.S. federal estate tax.

Information Reporting and Backup Withholding Tax

Under U.S. Treasury regulations, PaeTec must report annually to the IRS
and to each non-U.S. holder the amount of dividends paid to the holder and the
tax withheld with respect to such dividends, regardless of whether withholding
was required. Copies of the information returns reporting such dividends and
withholding also may be required to be made available to the tax authorities in
the country in which the non-U.S. holder resides under the provisions of an
applicable income tax treaty.

Under current law, backup withholding, which generally is a withholding
tax imposed at the rate of 31% on specified payments to persons that fail to
furnish certain information under the U.S. information reporting requirements,
generally will not apply to:

. dividends paid to non-U.S. holders that are subject to withholding at
the 30% rate, or lower treaty rate, as discussed above under
"Dividends"; or

. for dividends paid before January 1, 2001, dividends paid to a non-
U.S. holder at an address outside the U.S., unless the payer has
knowledge that the payee is a U.S. person.

For dividends paid after December 31, 2000, a non-U.S. holder of common
stock that fails to certify its non-U.S. holder status in accordance with
applicable U.S. treasury regulations may be subject to backup withholding at a
rate of 31% on payments of dividends.

Payment of the proceeds of a sale of Class A common stock by or through a
U.S. office of a broker is subject to both backup withholding and information
reporting unless the beneficial owner certifies under penalties of perjury that
it is a non-U.S. holder, or otherwise establishes an exemption. In general,
backup withholding and information reporting will not apply to a payment of the
proceeds of a sale of common stock by or through a foreign office of a broker.
If, however, the broker is, for U.S. federal income tax purposes, a U.S.
person, a controlled foreign corporation as defined in the Internal Revenue
Code, a foreign person that derives 50% or more of its gross income for
specified periods from the conduct of a trade or business in the U.S., or a
foreign partnership with particular U.S. connections, for payments made after
December 31, 2000, such payments will be subject to information reporting, but
not backup withholding, unless:

. the broker has documentary evidence in its records that the
beneficial owner is a non-U.S. holder and other specified conditions
are met; or

. the beneficial owner otherwise establishes an exemption.

In addition, effective after December 31, 2000, back-up withholding may
apply to the payment of disposition proceeds by or through a non-U.S. office of
a broker in the foregoing cases unless specified certification requirements are
satisfied or an exemption is otherwise established and the broker has no actual
knowledge or reason to know that the holder is a U.S. person.

Any amounts withheld under the backup withholding rules do not constitute
a separate U.S. federal income tax. Rather, any amounts withheld under the
backup withholding rules may be allowed as a refund or a credit against the
holder's U.S. federal income tax liability, if any, if the required information
is furnished to the IRS.

84
<PAGE>

UNDERWRITING

We intend to offer the shares in the U.S. and Canada through the U.S.
underwriters and elsewhere through the international managers. Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Bear, Stearns & Co. Inc. are acting as
U.S. representatives of the U.S. underwriters named below. Subject to the terms
and conditions described in a U.S. purchase agreement between us and the U.S.
underwriters, and concurrently with the sale of 1,400,000 shares to the
international managers, we have agreed to sell to the U.S. underwriters, and
the U.S. underwriters severally have agreed to purchase from us, the number of
shares listed opposite their names below.

<TABLE>
<CAPTION>
Number of
U.S. Underwriters Shares
----------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................
Bear, Stearns & Co. Inc. ........................................
CIBC World Markets Corp. ........................................
Deutsche Bank Securities Inc.....................................
---------
Total....................................................... 5,600,000
=========
</TABLE>

We have also entered into an international purchase agreement with the
international managers for sale of the shares outside the U.S. and Canada for
whom Merrill Lynch International and Bear, Stearns International Limited are
acting as lead managers. Subject to the terms and conditions in the
international purchase agreement, and concurrently with the sale of 5,600,000
shares to the U.S. underwriters pursuant to the U.S. purchase agreement, we
have agreed to sell to the international managers, and the international
managers severally have agreed to purchase from us, 1,400,000 shares. The
initial public offering price per share and the total underwriting discount per
share are identical under the U.S. purchase agreement and the international
purchase agreement.

The U.S. underwriters and the international managers have agreed to
purchase all of the shares sold under the U.S. and international purchase
agreements if any of these shares are purchased. If an underwriter defaults,
the U.S. and international purchase agreements provide that the purchase
commitments of the nondefaulting underwriters may be increased or the purchase
agreements may be terminated. The closings for the sale of shares to be
purchased by the U.S. underwriters and the international managers are
conditioned on one another.

We have agreed to indemnify the U.S. underwriters and the international
managers against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the U.S. underwriters and
international managers may be required to make in respect of those liabilities.

The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreements, such as the receipt by the underwriters
of officers' certificates and legal opinions. The underwriters reserve the
right to withdraw, cancel or modify offers to the public and to reject orders
in whole or in part.

Commissions and Discounts

The U.S. representatives have advised us that the U.S. underwriters
propose initially to offer the shares to the public at the initial public
offering price listed on the cover page of this prospectus and to dealers at
that price less a concession not in excess of $ per share. The U.S.
underwriters may allow, and the dealers may reallow, a discount not in excess
of $ per share to other dealers. After the initial public offering, the
public offering price, concession and discount may be changed.

85
<PAGE>

The following table shows the public offering price, underwriting
discount and proceeds before expenses to PaeTec. The information assumes either
no exercise or full exercise by the U.S. underwriters and the international
managers of their over-allotment options.

<TABLE>
<CAPTION>
Per Share Without Option With Option
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price............... $ $ $
Underwriting discount............... $ $ $
Proceeds, before expenses, to
PaeTec............................. $ $ $
</TABLE>

The expenses of the offerings, not including the underwriting discount,
are estimated at $ and are payable by PaeTec.

Over-allotment Options

We have granted options to the U.S. underwriters to purchase up to
840,000 additional shares of our Class A common stock at the public offering
price less the underwriting discount. The U.S. underwriters may exercise these
options for 30 days from the date of this prospectus solely to cover any over-
allotments. If the U.S. underwriters exercise these options, each will be
obligated, subject to conditions contained in the purchase agreements, to
purchase a number of additional shares proportionate to that U.S. underwriter's
initial amount shown in the above table.

We have also granted options to the international managers, exercisable
for 30 days after the date of this prospectus, to purchase up to 210,000
additional shares to cover any over-allotments on terms similar to those
granted to the U.S. underwriters.

Intersyndicate Agreement

The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their
activities. Under the intersyndicate agreement, the U.S. underwriters and the
international managers may sell shares to each other for purposes of resale at
the initial public offering price, less an amount not greater than the selling
concession. Under the intersyndicate agreement, the U.S. underwriters and any
dealer to whom they sell shares will not offer to sell or sell shares to
persons who are non-U.S. or non-Canadian persons or to persons they believe
intend to resell to persons who are non-U.S. or non-Canadian persons, except in
the case of transactions under the intersyndicate agreement. Similarly, the
international managers and any dealer to whom they sell shares will not offer
to sell or sell shares to U.S. persons or Canadian persons or to persons they
believe intend to resell to U.S. or Canadian persons, except in the case of
transactions under the intersyndicate agreement.

Reserved Shares

At our request, the underwriters have reserved for sale, at the initial
public offering price, approximately 10% of the shares offered by this
prospectus, or 700,000 shares, for sale to some of our directors, officers,
employees, existing stockholders and persons having business relationships with
us. If these persons purchase reserved shares, this will reduce the number of
shares available for sale to the general public. Any reserved shares that are
not orally confirmed for purchase within one business day of the pricing of the
offerings will be offered by the underwriters to the general public on the same
terms as the other shares offered by this prospectus.

No Sales of Similar Securities

We, our executive officers and directors and other existing stockholders
have agreed, with exceptions, not to offer, sell, contract to sell, grant any
option to purchase or otherwise dispose of any shares of common stock for 180
days after the date of this prospectus without first obtaining the written
consent of Merrill Lynch and Bear Stearns. After giving effect to the
conversion of the Series A preferred stock into 17,866,666 shares

86
<PAGE>

of Class A common stock, approximately 90% of our common shares outstanding as
of the date of this prospectus are subject to lockup agreements. For additional
information about these lockup agreements, see "Shares Eligible for Future
Sale" beginning on page 79.

Quotation on the Nasdaq National Market

We expect that the shares of our Class A common stock will be approved
for quotation on the Nasdaq National Market, subject to notice of issuance,
under the symbol "PAET."

Before the offerings, there has been no public market for our Class A
common stock. The initial public offering price will be determined through
negotiations among us and the U.S. representatives and lead managers. In
addition to prevailing market conditions, the factors to be considered in
determining the initial public offering price are the following:

. the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us;

. our financial information;

. the history of, and the prospects for, our company and the industry
in which we compete;

. an assessment of our management, our past and present operations, and
the prospects for, and timing of, our future revenues;

. the present state of our development; and

. the foregoing factors in relation to market values and various
valuation measures of other companies engaged in activities similar
to ours.

An active trading market for the shares may not develop. It is also
possible that after the offerings the shares will not trade in the public
market at or above the initial public offering price.

The underwriters do not expect to sell more than 5% of the shares in the
aggregate to accounts over which they exercise discretionary authority.

Price Stabilization, Short Positions and Penalty Bids

Until the distribution of the shares is completed, the SEC rules may
limit the U.S. underwriters from bidding for or purchasing our Class A common
stock. However, the U.S. representatives may engage in transactions that
stabilize the price of the Class A common stock, such as bids or purchases that
peg, fix or maintain that price.

The U.S. underwriters may purchase and sell our Class A common stock in
the open market. These transactions may include short sales, stabilizing
transactions and purchases to cover positions created by short sales. Short
sales involve the sale by the U.S. underwriters of a greater number of shares
than they are required to purchase in the offerings. "Covered" short sales are
sales made in an amount not greater than the U.S. underwriters' option to
purchase additional shares from the issuer in the offerings. The U.S.
underwriters may close out any covered short position by either exercising
their option to purchase additional shares or purchasing shares in the open
market. In determining the source of shares to close out the covered short
position, the U.S. underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to the price at
which they may purchase shares through the over-allotment option. "Naked" short
sales are any sales in excess of such option. The U.S. underwriters must close
out any naked short position by purchasing shares in the open market. A naked
short position is more likely to be created if the U.S. underwriters are
concerned that there may be downward pressure on the price of the common shares
in the open market after pricing that could adversely affect investors who
purchase in the offerings. Stabilizing transactions consist of various bids for
or purchases of common shares made by the U.S. underwriters in the open market
prior to the completion of the offerings.

87
<PAGE>

The underwriters may also impose a penalty bid. This occurs when a
particular U.S. underwriter repays to the U.S. underwriters a portion of the
underwriting discount received by it because the U.S. representatives have
repurchased shares sold by or for the account of such U.S. underwriter in
stabilizing or short covering transactions.

Similar to other purchase transactions, the U.S. underwriters' purchases
to cover the syndicate short sales may have the effect of raising or
maintaining the market price of the Class A common stock or preventing or
retarding a decline in the market price of the Class A common stock. As a
result, the price of the Class A common stock may be higher than the price that
might otherwise exist in the open market.

Neither we nor any of the U.S. underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Class A common stock. In addition,
neither we nor any of the U.S. representatives make any representation that the
U.S. representatives will engage in these transactions or that these
transactions, once commenced, will not be discontinued without notice.

Other Relationships

Merrill Lynch and Bear Stearns and their affiliates and some of the other
underwriters and their affiliates have engaged in, and may in the future engage
in, investment banking and other commercial dealings in the ordinary course of
business with us. They have received customary fees and commissions for these
transactions. Merrill Lynch and Bear Stearns have each participated in the
syndication of our senior credit facility, and each has received a customary
fee for doing so.

Electronic Distribution

Merrill Lynch will be facilitating Internet distribution for the
offerings to some of its Internet subscription customers. Merrill Lynch intends
to allocate a limited number of shares for sale to its online brokerage
customers. An electronic prospectus is available on the Internet website
maintained by Merrill Lynch. Other than the prospectus in electronic format,
the information on the Merrill Lynch website is not part of this prospectus.

88
<PAGE>

LEGAL MATTERS

The validity of the shares of Class A common stock offered by this
prospectus will be passed upon for PaeTec by Hogan & Hartson L.L.P., McLean,
Virginia. Selected legal matters will be passed upon for the underwriters by
Shearman & Sterling, New York, New York.

EXPERTS

The consolidated financial statements of PaeTec Corp. and subsidiaries as
of December 31, 1998 and 1999 and for the period from May 19, 1998 (inception)
to December 31, 1998 and for the year ended December 31, 1999 included in this
prospectus and the related consolidated financial statement schedule included
elsewhere in the registration statement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein and
elsewhere in the registration statement, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.

The consolidated financial statements of Campuslink Communications
Systems, Inc. and subsidiaries as of and for the year ended June 30, 1998 and
as of and for the six months ended December 31, 1998 have been included herein
in reliance upon the report of Arthur Andersen LLP, independent public
accountants, appearing elsewhere herein and given on the authority of said firm
as experts in auditing and accounting in giving said report.

The consolidated financial statements of Campuslink Communications
Systems, Inc. and subsidiaries as of and for the year ended June 30, 1997
included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the SEC a registration statement on Form S-1,
including exhibits, schedules and amendments filed with the registration
statement, under the Securities Act with respect to the Class A common stock to
be sold in the offerings. This prospectus does not contain all of the
information contained in the registration statement. For further information
about us and our Class A common stock, we refer you to the registration
statement. For additional information, please refer to the exhibits and
schedules that have been filed with our registration statement on Form S-1.
Statements in this prospectus concerning the contents of any contract or any
other document are not necessarily complete. If a contract or document has been
filed as an exhibit to the registration statement, we refer you to that
exhibit. Each statement in this prospectus relating to a contract or document
filed as an exhibit to the registration statement is qualified by the filed
exhibits.

You may read and copy all or any portion of the registration statement or
any other information that we file with the SEC at the following locations of
the SEC:

Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661-
2511

89
<PAGE>

You may obtain information on the operation of the SEC's public reference
room by calling the SEC at 1-800-SEC-0330. Our SEC filings, including the
registration statement, will also be available to the public on the SEC's
Internet site at http://www.sec.gov.

As a result of the offerings, we will become subject to the information
and reporting requirements of the Securities Exchange Act, which will require
us to file periodic reports, proxy statements and other information with the
SEC.

We intend to provide our stockholders annual reports containing financial
statements audited by our independent auditors and to make available quarterly
reports containing unaudited financial data for the first three quarters of
each fiscal year.

90
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL INFORMATION

PaeTec Corp. and Subsidiaries
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1999, and
September 30, 2000..................................................... F-3
Consolidated Statements of Operations for the period from May 19, 1998
(inception) to December 31, 1998, for the year ended December 31, 1999
and for the nine months ended
September 30, 1999 and 2000............................................ F-4
Consolidated Statements of Stockholders' Equity for the period from May
19, 1998 (inception) to December 31, 1998 and for the year ended
December 31, 1999...................................................... F-5
Consolidated Statements of Cash Flows for the period from May 19, 1998
(inception) to December 31, 1998, for the year ended December 31, 1999
and for the nine months ended
September 30, 1999 and 2000............................................ F-6
Notes to Consolidated Financial Statements for the period from May 19,
1998 (inception) to December 31, 1998, for the year ended December 31,
1999 and for the nine months ended September 30, 1999 and 2000......... F-7
Campuslink Communications Systems, Inc. and Subsidiaries
Report of Independent Public Accountants.................................. F-18
Independent Auditors' Report.............................................. F-19
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 1997 and 1998 and December
31, 1998............................................................... F-20
Consolidated Statements of Operations and Changes in Accumulated Deficit
for the years ended June 30, 1997 and 1998, and for the six months
ended December 31, 1998, June 30, 1998 and June 30, 1999............... F-21
Consolidated Statements of Cash Flows for the years ended June 30, 1997
and 1998, and for the six months ended December 31, 1998, June 30, 1998
and June 30, 1999...................................................... F-22
Notes to Consolidated Financial Statements for the years ended June 30,
1997 and 1998, and for the six months ended December 31, 1998, June 30,
1998 and June 30, 1999................................................. F-23
Selected Unaudited Pro Forma Financial Information
Pro Forma PaeTec Unaudited Combined Condensed Financial Information for
the year ended December 31, 1999......................................... F-31
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of PaeTec Corp.
Fairport, New York

We have audited the accompanying consolidated balance sheets of PaeTec
Corp. and subsidiaries (the Company) as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1999 and for the period from May 19, 1998
(inception) to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of PaeTec Corp. and subsidiaries
as of December 31, 1999 and 1998, and the results of their operations and their
cash flows for the year ended December 31, 1999 and for the period from May 19,
1998 (inception) to December 31, 1998 in conformity with accounting principles
generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Rochester, New York
March 22, 2000

(August 4, 2000 as to Note 11)

F-2
<PAGE>

PAETEC CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1998 AND 1999, AND SEPTEMBER 30, 2000
(Dollar amounts in thousands except share amounts)

<TABLE>
<CAPTION>
September 30,
1998 1999 2000
ASSETS ------- -------- -------------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................... $ 2,434 $ 7,435 $ 77,411
Accounts receivable, net of allowance for
doubtful accounts of $2, $2,360 and $3,716,
respectively............................... 158 10,839 28,152
Prepaid expenses and other current assets... 193 806 2,396
------- -------- --------
Total current assets...................... 2,785 19,080 107,959
------- -------- --------
PROPERTY AND EQUIPMENT, net................... 11,784 62,384 91,141
GOODWILL, net of accumulated amortization of
$--, $599 and $2,370, respectively........... -- 38,139 54,841
OTHER ASSETS, net of accumulated amortization
of $--, $192 and $1,680, respectively........ 1,147 2,383 9,456
------- -------- --------
TOTAL ASSETS.................................. $15,716 $121,986 $263,397
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade..................... $ 2,118 $ 12,265 $ 16,801
Accrued expenses............................ 884 2,876 4,056
Accrued payroll and related liabilities..... 79 2,482 7,316
Accrued usage taxes......................... -- 1,654 2,888
Current portion of long-term debt........... -- 3,482 710
------- -------- --------
Total current liabilities................. 3,081 22,759 31,771
------- -------- --------
LONG-TERM DEBT................................ -- 69,166 106,312
COMMITMENTS (Note 9)
SERIES A CONVERTIBLE, REDEEMABLE PREFERRED
STOCK........................................ -- -- 128,326
STOCKHOLDERS' EQUITY:
Class A common stock, $.01 par value;
75,000,000 authorized shares; 8,999,952,
21,732,633 and 25,275,376 shares issued and
outstanding, respectively.................. 90 217 253
Class B common stock, $.01 par value;
7,500,000 authorized shares; 6,285,048,
5,285,048 and 2,635,000 shares issued and
outstanding, respectively.................. 63 53 26
Additional paid-in capital.................. 18,334 75,986 93,361
Deferred stock compensation................. -- -- (391)
Accumulated deficit......................... (5,852) (46,195) (96,261)
------- -------- --------
Total stockholders' equity (deficit)...... 12,635 30,061 (3,012)
------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.... $15,716 $121,986 $263,397
======= ======== ========
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE>

PAETEC CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM MAY 19, 1998 (INCEPTION) TO DECEMBER 31, 1998,

YEAR ENDED DECEMBER 31, 1999 AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000

(Dollar amounts in thousands except share and per share amounts)

<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1999 1999 2000
---------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE
Service revenue............ $ 150 $ 20,695 $ 7,741 $ 72,127
Equipment sales............ -- 2,652 -- 9,929
---------- ----------- ----------- -----------
150 23,347 7,741 82,056
---------- ----------- ----------- -----------
COST OF SALES (exclusive of
depreciation and
amortization shown
separately below)
Service costs.............. 96 14,576 6,602 37,160
Equipment costs............ -- 2,233 -- 7,549
---------- ----------- ----------- -----------
96 16,809 6,602 44,709
---------- ----------- ----------- -----------
GROSS MARGIN................ 54 6,538 1,139 37,347
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
(exclusive of depreciation
and amortization shown
separately below).......... 5,770 40,294 23,416 72,442
DEPRECIATION AND
AMORTIZATION............... 243 4,508 1,849 12,668
---------- ----------- ----------- -----------
LOSS FROM OPERATIONS........ (5,959) (38,264) (24,126) (47,763)
OTHER INCOME, net........... 107 355 711 2,596
INTEREST EXPENSE............ -- (2,434) (2,042) (4,899)
---------- ----------- ----------- -----------
NET LOSS.................... $ (5,852) $ (40,343) $ (25,457) $ (50,066)
========== =========== =========== ===========
BASIC AND DILUTED NET LOSS
PER COMMON SHARE........... $ (0.67) $ (1.93) $ (1.36) $ (1.81)
========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING.. 8,786,000 20,862,000 18,664,835 27,604,449
========== =========== =========== ===========
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE>

PAETEC CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM MAY 19, 1998 (INCEPTION) TO DECEMBER 31, 1998
AND YEAR ENDED DECEMBER 31, 1999
(Dollar amounts in thousands except share amounts)

<TABLE>
<CAPTION>
Common Stock Additional
--------------- Paid-In Accumulated Comprehensive
Class A Class B Capital Deficit Income Total
------- ------- ---------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, May 19, 1998... $-- $-- $ -- $ -- $ --
Issuance of 8,999,952
shares of Class A
common stock........... 90 -- 14,043 -- 14,133
Issuance of 6,285,048
shares of Class B
common stock........... -- 63 4,291 -- 4,354
Net loss................ -- -- -- (5,852) $ (5,852) (5,852)
---- ---- ------- -------- ======== --------
BALANCE, December 31,
1998................... 90 63 18,334 (5,852) 12,635
Conversion of 1,000,000
Class B Shares into
Class A Shares......... 10 (10) -- -- --
Stock issued in
connection with:
Private offering,
5,600,000 shares, net
of expenses totalling
$425................... 56 -- 27,519 27,575
Acquisition of
businesses, 5,939,183
shares................. 59 -- 30,041 30,100
Exercise of stock
options, 193,498
shares................. 2 -- 92 -- 94
Net loss................ -- -- -- (40,343) $(40,343) (40,343)
---- ---- ------- -------- ======== --------
BALANCE, December 31,
1999................... $217 $ 53 $75,986 $(46,195) $ 30,061
==== ==== ======= ======== ========
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE>

PAETEC CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS PERIOD FROM MAY 19, 1998
(INCEPTION) TO DECEMBER 31, 1998, YEAR ENDED DECEMBER 31, 1999

AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(Dollar amounts in thousands)

<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1998 1999 1999 2000
-------- -------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.......................... $ (5,852) $(40,343) $(25,457) $(50,066)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Depreciation and amortization.... 243 4,508 1,849 12,668
Compensation expense incurred
with incentive plans -- -- -- 150
Other non-cash items............. -- -- -- 352
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable............. (159) (7,565) (5,137) (15,952)
Prepaid expenses and other
current assets................. (193) (171) (166) (1,252)
Other assets.................... (349) (423) 861 (114)
Accounts payable................ 2,118 2,889 1,601 8,887
Accrued expenses................ 884 (2,711) 2,003 (4,432)
Accrued payroll and related
liabilities.................... 79 2,403 812 4,830
Accrued usage taxes............. -- 1,654 1,506 1,006
-------- -------- -------- --------
Net cash used by operating
activities.................... (3,229) (39,759) (22,128) (43,923)
-------- -------- -------- --------
INVESTING ACTIVITIES:
Purchases of property and
equipment........................ (12,027) (37,761) (36,296) (37,971)
Loss on disposal of property and
equipment........................ -- -- -- 62
Acquisition of businesses......... -- (300) (300) (6,750)
Other............................. -- 654 654 330
-------- -------- -------- --------
Net cash used by investing
activities.................... (12,027) (37,407) (35,942) (44,329)
-------- -------- -------- --------
FINANCING ACTIVITIES:
Net Proceeds from issuance of
common stock..................... 18,487 27,575 27,575 995
Net Proceeds from issuance of
preferred stock.................. -- -- -- 127,974
Proceeds from exercise of stock
options.......................... -- 94 86 348
Proceeds from long-term
borrowings....................... -- 65,000 43,250 81,014
Repayments on debt................ -- (9,350) (8,615) (48,557)
Payment for debt issuance costs... (797) (1,152) (771) (3,546)
-------- -------- -------- --------
Net cash provided by financing
activities.................... 17,690 82,167 61,525 158,228
-------- -------- -------- --------
NET INCREASE IN CASH AND CASH
EQUIVALENTS....................... 2,434 5,001 3,455 69,976
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD............... -- 2,434 2,434 7,435
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................ $ 2,434 $ 7,435 $ 5,889 $ 77,411
======== ======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest expense.... $ -- $ 2,267 $ 962 $ 4,435
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
TRANSACTIONS:
Purchases of property and
equipment included in accounts
payable......................... $ -- $ 4,020 $ -- $ --
======== ======== ======== ========
Notes payable assumed in a
business acquisition............ $ -- $ 15,970 $ 15,970 $ --
======== ======== ======== ========
Notes payable issued in
connection with a business
acquisition..................... $ -- $ 1,028 $ 1,028 $ 1,908
======== ======== ======== ========
Common stock issued in connection
with business acquisitions...... $ -- $ 30,100 $ 30,100 $ 15,500
======== ======== ======== ========
Conversion of Class B common
stock to Class A common
stock .......................... $ -- $ 10 $ -- $ 27
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.

F-6
<PAGE>

PAETEC CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Period From May 19, 1998 (Inception) to December 31, 1998, Year Ended December
31, 1999

and Nine Months Ended September 30, 1999 and 2000
(Dollar amounts in thousands except share and per share amounts)

1. DESCRIPTION OF BUSINESS

The consolidated financial statements include the accounts of PaeTec
Corp. and its wholly-owned subsidiaries, PaeTec Communications, Inc., PaeTec
International, Inc., PaeTec Capital Corp., PaeTec Communications of Virginia,
Inc., East Florida Communications, Inc. ("EF"), Pinnacle Software Corporation
and Data Voice Networks, Inc. and its majority-owned subsidiary, PaeTec Online,
Inc. (collectively "the Company"). The minority interest for PaeTec Online,
Inc. ("PaeTec Online") is not significant.

The Company operates in one segment and is a nationwide provider of
integrated communications services that offers voice and data services and an
expanding suite of voice and data programs and network operations services
primarily to business and institutional customers.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Statements--The accompanying consolidated balance sheet
as of September 30, 2000, statements of operations and statements of cash flows
for the nine months ended September 30, 1999 and June 30, 2000 and the related
footnote information are unaudited but, in the opinion of management, include
all adjustments (consisting of normal, recurring adjustments) necessary for a
fair presentation for results of these interim periods. The results of
operations for the nine months ended September 30, 2000 are not necessarily
indicative of results to be expected for the entire year or for any other
period.

Consolidation--The accompanying consolidated financial statements include
the accounts of PaeTec Corp. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated.

Cash and Cash Equivalents--For purposes of reporting cash flows, the
Company includes as cash and cash equivalents instruments with original
maturities of three months or less.

Property and Equipment--Property and equipment are stated at cost less
accumulated depreciation. Exclusive service agreements ("ESAs") consist of
amounts paid in connection with agreements between the Company's Campuslink
unit ("CCS") and its customers for the cost of equipment and installation.
These ESAs provide for the exclusive right to provide telecommunication
services by CCS to its customers and are amortized over the life of the ESAs
which range from 4 to 10 years. Interest is capitalized in connection with the
installation of integrated network and related equipment. The capitalized
interest is recorded as part of such assets and is amortized over the asset's
estimated useful life. In 1999, $0.8 million of interest cost was capitalized.
No interest expense was incurred in 1998.

Depreciation is computed using the straight-line method over estimated
useful lives:

<TABLE>
<S> <C>
Switches and switch-related equipment............................. 5-12 years
Computer hardware and purchased software.......................... 3-10 years
Equipment, including ESAs......................................... 5-10 years
Office equipment, furniture and fixtures.......................... 3-7 years
</TABLE>

Goodwill--Goodwill represents the excess of cost over the net assets of
businesses acquired. See Note 10. These costs are being amortized over twenty
years using the straight-line method.

F-7
<PAGE>

PAETEC CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Other Assets--Other assets consist primarily of deferred financing costs,
the fair value of customer lists and workforces obtained through acquisitions,
deposits and miscellaneous other assets. Deferred financing costs are being
amortized over the term of the related debt instruments, customer lists and
workforces are being amortized over their estimated useful lives, which range
from three to four years. In the third quarter of 2000, the Company adjusted
amortization expense for the nine months ended September 30, 2000 to reflect
adjustments made to the value of acquired intangible assets. This adjustment
totaled $0.2 million.

Long-Lived Assets--The Company reviews the carrying value of its long-
lived assets for impairment whenever events or changes in circumstances
indicate that the carrying value of these assets may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to
be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. No impairment charge has been recorded in the accompanying
consolidated financial statements for 1998 or 1999.

Revenue Recognition--Revenue derived from various telecommunications
services is recognized in the month in which the service is provided. Revenue
derived from installation type contracts is recognized upon completion of the
installation and acceptance by the respective customers.

Stock Based Compensation--Certain employees of the Company participate in
the Company's stock compensation plans. The Company accounts for compensation
cost under these plans using the intrinsic value method of accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. Compensation expense is recorded for awards of shares over
the period earned.

Concentration of Credit Risk--Financial instruments that potentially
subject the Company to credit risk consist of cash, cash equivalents and
accounts receivable. Cash and cash equivalents in certain accounts as of
December 31, 1998 and 1999 exceeded the federal insured limit by $2.2 million
and $6.6 million. The Company has not experienced any losses in such accounts.
The Company grants credit to the majority of its customers based on an
evaluation of the customer's financial condition, generally without requiring
collateral. Exposure to losses on accounts receivables is principally dependent
on each customer's financial condition. The Company monitors its exposure for
credit losses and maintains allowances for anticipated losses.

Approximately 21% of the Company's revenue during the year ended December
31, 1999 was from one customer. The accounts receivable balance as of December
31, 1999 related to this customer was $0.8 million. The Company expects that
revenue from this customer will account for a decreasing proportion of the
Company's overall revenue as penetration into new markets and geographic
regions continues. No other individual customer accounted for more than 10% of
the Company's revenues during 1998 nor 1999.

Financial Instruments--The fair value of a financial instrument
represents the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or
liquidation. The fair values of the Company's financial instruments are as
follows:

. Cash and cash equivalents, accounts receivables, certain other
current assets, accounts payable and accrued expenses, and current
maturities of long-term debt: the amounts reported in the
accompanying consolidated balance sheets approximate fair value.

. The fair value of interest rate hedges approximates the estimated
amounts that the Company would receive or pay to terminate the
contracts as of December 31, 1999. (See Note 4).

. Long-term debt as reported in the accompanying consolidated balance
sheet approximates fair market value.

F-8
<PAGE>

PAETEC CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Net Loss Per Common Share--For 1998 and 1999, basic and diluted net loss
per common share is computed based on the actual weighted average common shares
outstanding. Common stock equivalents, which consist of stock options and
warrants, are excluded from the net loss per common share calculations in 1998
and 1999 because the effect would be antidilutive due to the net loss in those
periods.

Comprehensive Income--Comprehensive income includes all changes in
stockholders' equity during a period except those resulting from investments by
owners and distributions to owners. For 1998 and 1999, the Company's only
component of comprehensive income is its net loss for those periods.

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

New Accounting Pronouncements--In December 1999, the SEC issued Staff
Account Bulletin No. 101 "Revenue Recognition in Financial Statements" defining
revenue recognition guidelines. We are currently assessing the impact of the
guidelines on our financial statements.

In June 1998, June 1999 and June 2000, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities", SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133" and SFAS 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities an amendment of FASB
Statement No. 133". These Statements establish accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. These
Statements require that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.

Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the statement of
operations, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting. This
accounting is effective for us beginning in 2001. We are currently determining
the impact of SFAS 133 on out consolidated results of operations and financial
position. This statement should have no impact on consolidated cash flows.

3. PROPERTY AND EQUIPMENT, NET

Property and equipment as of December 31, 1998 and 1999 consists of the
following:

<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Switches and switch-related equipment....................... $ -- $41,759
Computer hardware and purchased software.................... 1,985 10,515
Equipment, including ESAs................................... 450 10,852
Office equipment, furniture and fixtures.................... 44 2,449
Construction-in-progress.................................... 9,548 769
------- -------
12,027 66,344
Accumulated depreciation.................................... 243 3,960
------- -------
Property and equipment, net................................. $11,784 $62,384
======= =======
</TABLE>

Construction-in-progress consists primarily of costs associated with the
build-out of the Company's network switch sites and back office systems.
Depreciation expense for 1998 and 1999 totalled $0.2 million and $3.7 million,
respectively.

F-9
<PAGE>

PAETEC CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

4. LONG-TERM DEBT

Long-term debt as of December 31, 1999 consists of the following:

<TABLE>
<S> <C>
Senior Secured Debt, as described below............................. $65,000
Notes payable to individuals assumed by the Company in an
acquisition, interest due quarterly at 8.25% per annum, principal
due on June 30, 2002 or earlier if the Company obtains financing of
$5 million or greater.............................................. 2,094
Note payable to a commercial lender assumed by the Company in an
acquisition, payable in monthly installments of $76 including
interest at 10.4%, maturing in 2005................................ 4,058
Note payable to a commercial lender assumed by the Company in an
acquisition, payable in monthly installments of $17 including
interest at 9.18%, maturing in 2004................................ 688
Notes payable to individuals issued in connection with an
acquisition, payable in monthly installments of $81 including
interest at 5%, maturing in 2000................................... 718
Other............................................................... 90
-------
72,648
Less: current portion............................................... 3,482
-------
$69,166
=======
</TABLE>

Principal payments on long-term debt are as follows:

<TABLE>
<S> <C>
2000................................................................. $ 3,482
2001................................................................. 7,243
2002................................................................. 10,561
2003................................................................. 10,629
2004................................................................. 13,870
Thereafter........................................................... 26,863
-------
$72,648
=======
</TABLE>

Senior Secured Debt--Effective November 16, 1998, the Company and a
lender entered into a loan and security agreement (the "Senior Debt
Agreement"). The Senior Debt Agreement originally provided for $49 million in
borrowing capacity for the Company to be used for capital purchases and other
operating funding requirements. The Senior Debt Agreement also provided for
future syndication of future borrowings to other lenders.

On October 29, 1999, the Company and its lenders signed an amended and
restated Senior Debt Agreement, which provided for $70 million in borrowing
capacity. Borrowings under the Senior Debt Agreement are secured by
substantially all of the Company's assets. The Senior Debt Agreement contains
covenants which require the Company to maintain certain financial ratios and
restrict the Company's ability to pay dividends and to incur additional
indebtedness. As of December 31, 1999, the Company was not in compliance with a
covenant related to loss before interest expense, income taxes, depreciation
and amortization. On January 25, 2000, the lenders under the amended and
restated Senior Debt Agreement granted the Company an unconditional waiver of
this covenant for the reporting period ended December 31, 1999. See Note 11,
Subsequent Events.

F-10
<PAGE>

PAETEC CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Interest on borrowings under the Senior Debt Agreement are based, at the
Company's option, on a base rate or LIBOR plus, in each case, a specified
margin. The specified margin reduces once the Company meets certain performance
measures. The borrowing period for the Senior Debt Agreement ends December 31,
2000. Borrowings under the Senior Debt Agreement as of that date convert to a
term loan with a maturity of six years. The Senior Debt Agreement is subject to
a commitment fee that ranges from .75% to 1.5% per annum depending on the
outstanding balance. As of December 31, 1999, the applicable rate was .75% per
annum times the unused portion of the facility.

Senior Unsecured Debt--As of December 31, 1999, the Company had available
a $10 million senior unsecured loan agreement with a syndicate of lenders. No
borrowings were made under this unsecured facility and the lenders' commitment
and any other rights under the agreement were terminated by the Company on
February 4, 2000.

Interest Rate Swap--The Company has entered into an interest rate swap
agreement ("Swap") designated as a partial hedge of the Company's portfolio of
variable rate debt. The purpose of this Swap is to fix the interest rates on
variable rate debt and reduce certain exposures to interest rate fluctuations.
As of December 31, 1999, the Company had a Swap with a notional amount of $25
million, and a portfolio of variable rate debt outstanding in the amount of
$71.9 million. Under this agreement, the Company will pay the counterparty
interest at a weighted average fixed rate of 6.29%, and the counterparty will
pay the Company interest at a variable rate equal to LIBOR. The weighted
average LIBOR rate applicable to this agreement was 6.03% at December 31, 1999.
The notional amounts do not represent amounts exchanged by the parties, and
thus are not a measure of exposure of the Company. The amounts exchanged are
normally based on the notional amounts and other terms of the Swap. The
weighted average variable rates are subject to change over time as LIBOR
fluctuates. Terms expire on this Swap on December 29, 2000.

Neither the Company nor the counterparty is required to collateralize its
respective obligations under this swap. The Company is exposed to loss if the
counterparty defaults. As of December 31, 1999, the Company had no exposure to
credit loss on interest rate swaps. The Company does not believe that any
reasonably likely change in interest rates would have a material effect on the
consolidated financial statements of the Company. Risk management strategies,
such as interest rate swaps, are reviewed and approved by senior management
before being implemented. The Company's policy is to limit the maximum amount
of positions that can be taken in any given instruments.

5. INCOME TAXES

The Company had approximately $4.7 million and $49.5 million of net
operating loss carryforwards for federal income tax purposes at December 31,
1998 and 1999, respectively. In addition, the Company has approximately $22
million of net operating loss carryforwards that are subject to an annual
limitation per the Internal Revenue Code. The net operating loss carryforwards
will expire in the years 2018 and 2019, respectively, if not previously
utilized. The Company has recorded a valuation allowance equal to the net
deferred tax assets at December 31, 1998 and 1999, due to the uncertainty of
future operating results. The valuation allowance will be reduced at such time
as management believes it is more likely than not that the net deferred tax
assets will be realized. Any reductions in the valuation allowance will reduce
future income tax provisions.

F-11
<PAGE>

PAETEC CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company's deferred tax assets (liabilities) as of December 31, 1998
and 1999 consist of the following:

<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Current:
Allowance for doubtful accounts......................... $ 1 $ 850
Noncurrent:
Start-up costs capitalized for tax purposes............. 433 336
Basis difference in fixed assets........................ (24) (2,614)
Acquired net operating loss carryforwards............... -- 7,900
Net operating loss carryforwards........................ 1,697 18,059
------- --------
Gross deferred tax assets................................. 2,107 24,531
Valuation allowance....................................... (2,107) (24,531)
------- --------
Net deferred tax assets................................... $ -- $ --
======= ========
</TABLE>

The difference between income taxes computed at the statutory U.S.
federal income tax rate and the Company's income tax expense is as follows:

<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Federal benefit at statutory rate......................... $ 1,990 $ 13,717
State taxes, net of federal benefit....................... 117 807
Valuation allowance....................................... (2,107) (14,524)
------- --------
Income tax expense........................................ $ -- $ --
======= ========
</TABLE>

6. CONVERTIBLE, REDEEMABLE PREFERRED STOCK

On February 10, 2000, the Company completed a $134 million private equity
transaction before issuance costs of approximately $6 million. The private
equity transaction consisted of the sale of 134,000 shares of Series A
Convertible, Redeemable Preferred Stock ("Preferred Stock"), which have a par
value of $.01 per share. The shares of Preferred Stock are convertible
immediately at the holder's option into shares of
the Company's Class A common stock at a price equal to $7.50, the fair value of
the Company's Class A common stock on the date of this transaction. The Company
has the right to require holders of the Preferred Stock to convert their shares
into Class A common stock upon the completion of a qualified initial public
offering. The holders of the Preferred Stock have a mandatory right to redeem
the Preferred Stock on the tenth anniversary of the issue date for a redemption
price equal to $1,000 per share. The proceeds of this private equity
transaction were used to reduce the outstanding balance on the Company's senior
secured debt by $45 million and to repay $2 million principal amount of notes
assumed in connection with the acquisition of CCS (see Note 10). The remaining
proceeds will be used to fund working capital requirements, capital
expenditures and future acquisitions.

The Preferred Stock amount on the accompanying consolidated balance sheet
as of September 30, 2000 has been reduced by direct costs associated with this
transaction totaling approximately $6.2 million. Accordingly, the Company is
required to accrete the Preferred stock amount so that the carrying amount of
the Preferred Stock will equal the mandatory redemption amount at the mandatory
redemption date.

F-12
<PAGE>

PAETEC CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

7. STOCKHOLDERS' EQUITY

Common Stock--The authorized capital stock of the Company consists of two
classes of common stock designated as Class A common stock and Class B common
stock. The shares of Class A common stock and Class B common stock are
identical in all respects, except for voting rights and certain conversion
rights with respect to the shares of Class B common stock. Shares of Class B
common stock may be owned only by the holders of Class B common stock and their
permitted transferees (as defined in the Company's Certificate of
Incorporation). Any share of Class B common stock transferred to any other
person will automatically convert into one share of Class A common stock. In
addition, any holder of Class B common stock may elect at any time to convert
the holder's shares into Class A common stock on a one-for-one basis. The Class
A common stock has no conversion rights. The Class A common stock and the Class
B common stock are entitled to vote on all matters which come before the
stockholders, voting together as a single class on all matters, except as
described below and as otherwise required by law. Each share of Class A common
stock has one vote and each share of Class B common stock has 20 votes on all
matters on which holders of common stock are entitled to vote. Holders of Class
B common stock are entitled to elect three members of the Board of Directors
and to vote with the holders of Class A common stock to elect any additional
directors.

Holders of common stock are entitled to share ratably in dividends when
and as declared by the Company's board of directors out of funds legally
available. On liquidation and dissolution of the Company, each holder of common
stock is entitled to share ratably in all assets remaining after payment of all
liabilities.

During the period from March 1999 to August 1999, the Company sold
5,600,000 shares of Class A common stock to individuals and institutional
investors at a price of $5 per share resulting in gross proceeds to the Company
of $28 million.

The Company's Stock Option Plan--The Company's 1998 Incentive
Compensation Plan (the "Option Plan") provides for the issuance of up to an
aggregate 5,300,000 shares of the Company's Class A common stock. The Option
Plan is designed to create an incentive for the Company's employees and is
administered by a committee of the Board of Directors.

Options granted upon hire vest over a four-year term from the date of
grant for sixty percent of the options, while the remaining forty percent vest
over a four-year term beginning January 1, 2000. Options granted are not
exercisable after the expiration of ten years from the date of grant of those
options.

The Company adopted the disclosures-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock Based Compensation
(SFAS No. 123). No compensation cost has been recognized with respect to the
Option Plan in connection with awards to employees, since the exercise price of
the options on the date of grant approximated fair market value. If
compensation cost for the Option Plan had been recorded based on the fair value
at the date of grant for awards consistent with the provisions of SFAS No. 123,
the Company's net loss and net loss per common share in 1998 and 1999 would
have been increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
1998 1999
------ -------
<S> <C> <C>
Net loss--as reported........................................ $5,852 $40,343
Net loss--pro forma.......................................... $5,877 $40,927
Net loss per common share--as reported....................... $ 0.67 $ 1.93
Net loss per common share--pro forma......................... $ 0.68 $ 1.96
</TABLE>

The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model and using assumed risk-free
interest rates ranging from 4.70% to 6.40% and expected lives of seven years.
The volatility factor assumptions used in the Company's fair value model ranged
from 0% to

F-13
<PAGE>

PAETEC CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

776%. In calculating the fair value of the stock options described above, the
following per share fair market values of the Company's common stock were used:

<TABLE>
<S> <C>
May 1998-August 17, 1998.............................................. $ .40
August 18, 1998-September 14, 1998.................................... $ .69
September 15, 1998-March 24, 1999..................................... $2.50
March 22, 1999-November 30, 1999...................................... $5.00
December 1, 1999-December 31, 1999.................................... $7.50
</TABLE>

A summary of activity under the Option Plan for 1998 and 1999 follows:

<TABLE>
<CAPTION>
Outstanding Weighted-Average
Options Exercise Price
----------- ----------------
<S> <C> <C>
Outstanding shares under option, May 19,
1998......................................... -- $ --
Options granted during 1998................... 1,506,875 $ .77
---------
Outstanding shares under option, December 31,
1998......................................... 1,506,875 $ .77
Options granted during 1999................... 1,647,108 $4.50
Options exercised during 1999................. (193,498) $ .52
---------
Outstanding shares under option, December 31,
1999......................................... 2,960,485 $2.65
=========
</TABLE>

The following table summarizes information concerning outstanding and
exercisable options at December 31, 1999:

<TABLE>
<CAPTION>
Weighted-Average
Remaining
Range of Number Contractual Weighted-Average Number Weighted-Average
Exercise Price Outstanding Life-Years Exercise Price Exercisable Exercise Price
-------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$.40-$7.50 2,960,485 8.52 $2.65 432,611 $1.59
</TABLE>

PaeTec Online Stock Option Plan--In 1999, the Company's majority-owned
subsidiary, PaeTec Online, implemented the 1999 Incentive Compensation Plan
(the "Online Plan") which provides for the issuance of up to an aggregate of
1,500,000 shares of PaeTec Online's common stock. The Online Plan is designed
to create an incentive for PaeTec Online's employees and is administered by a
committee of the Board of Directors.

During 1999, 485,000 options were granted under the PaeTec Online Stock
Option Plan at exercise prices ranging from $.25 per share to $.50 per share.
These options are convertible directly into PaeTec Online stock or into PaeTec
Corp. stock at a conversion ratio of 50 to 1. All options granted during 1999
were outstanding at December 31, 1999, with a weighted average exercise price
of $.25 per share and a weighted average remaining contractual life of 9.75
years. Options granted under this plan vest over a four-year period, and are
not exercisable after the expiration of ten years from the date of grant of
those options. There were no options exercisable at December 31, 1999 under
this plan.

The Company's pro forma net loss and net loss per common share, as
reflected in this Note, would not be materially different as a result of the
issuance of these options. See Note 11, Subsequent Events.

Agent Warrant Plan--In 1999, the Company implemented an Agent Warrant
Plan (the "Warrant Plan") which provides primarily for the issuance of 500,000
shares of the Company's Class A common stock

F-14
<PAGE>

PAETEC CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

based upon the achievement and maintenance of certain revenue goals by its
independent sales agents. The Warrant Plan is designed to create an incentive
for the Company's sales agents and is administered by a committee of the Board
of Directors.

The warrants vest 20% in the first year. Vesting of the remaining 80% is
dependent upon the maintenance of certain revenue levels by the warrant holder.
Warrants are not exercisable until the Company completes an initial public
offering.

As of December 31, 1999, 40,000 warrants with an exercise price of $5 had
been granted under the Warrant Plan to employees of the Company. Warrants
granted will be accounted for as a variable stock compensation plan.

8. EMPLOYEE BENEFIT PLAN

The Company has a 401(k) retirement savings plan under which employees
can contribute up to 15% of their annual salary. Employees are eligible for
participation upon employment. The Company's discretionary contributions for
1998 and 1999 totalled $-0- and $0.4 million, respectively.

9. COMMITMENTS

Operating Leases--The Company has entered into various operating lease
agreements, with expiration dates through 2007, for office space and equipment.
Total rent expense for 1998 and 1999 was $0.2 million and $2.3 million,
respectively. Future minimum lease obligations related to the Company's
operating leases as of December 31, 1999 are as follows:

<TABLE>
<S> <C>
2000................................................................ $ 2,285
2001................................................................ 2,261
2002................................................................ 2,070
2003................................................................ 1,914
2004................................................................ 1,365
Thereafter through 2007............................................. 4,570
-------
$14,465
=======
</TABLE>

Other Commitments--On December 16, 1999, the Company entered into an
agreement with Empire Professional Soccer, LLC for the naming rights of a new
soccer stadium to be constructed in the Rochester, New York area. No payments
are due until construction of the new stadium begins. The Company's future
obligations related to this agreement amount to approximately $12.8 million.
Assuming construction occurs according to the current plan, payments for the
years ending December 31 are scheduled as follows:

<TABLE>
<S> <C>
2000................................................................ $ --
2001................................................................ 500
2002................................................................ 500
2003................................................................ 500
2004................................................................ 500
Thereafter through 2022............................................. 10,800
-------
$12,800
=======
</TABLE>

This obligation is transferable with the prior consent of Empire
Professional Soccer, LLC.

F-15
<PAGE>

PAETEC CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

10. ACQUISITIONS

On August 31, 1999, the Company acquired EF for a purchase price of $1.4
million in cash, stock, assumed obligations and a promissory note. EF is a
provider of local, long distance, and telephone equipment services to business
customers throughout Florida and had operating revenues of $4.1 million in
1998. On September 9, 1999, the Company acquired CCS for approximately $44.0
million which was paid by the issuance of 5,919,183 shares of the Company's
Class A common stock, by the issuance of 161,628 options to purchase Class A
common stock at an exercise price of $2.50 per share, and through the
assumption of $14.0 million of CCS's outstanding debt. Options granted as a
part of this transaction vest immediately. CCS provides local, long distance,
high speed internet access, and cable television services to more than 50,000
residents at over 60 locations throughout the United States, including college
campuses and apartment complexes. In addition, CCS designs, installs, and
maintains private, voice, data, and video for college, residential and
corporate campuses. CCS had unaudited revenues of approximately $16.5 million
in its former fiscal year ended June 30, 1999.

These acquisitions have been accounted for using the purchase method of
accounting and only results of operations of the acquired companies from the
dates of the acquisitions to December 31, 1999 have been included in the
consolidated results of operations. A portion of the purchase price, including
direct expenses of $0.2 million, has been allocated to net assets acquired
based on their estimated fair values. The fair value of the assets acquired
from these acquisitions totalled $19.9 million, while liabilities assumed
totalled $10.0 million. The remaining $35.7 million of the purchase price has
been recorded as goodwill which is being amortized over twenty years using the
straight line method of amortization. The allocation of the purchase prices for
these acquisitions is final. The following reflects the unaudited pro forma
results of operations as if the acquisitions had taken place for all of 1998
and at the beginning of 1999.

<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Revenue................................................. $ 16,512 $ 36,210
Net loss................................................ $(11,287) $(46,875)
Net loss per common share............................... $ (0.77) $ (1.88)
</TABLE>

11. SUBSEQUENT EVENTS (unaudited)

Long-Term Debt

On August 4, 2000, the Company and its lenders amended and restated the
Senior Debt Agreement, which provided for $155.0 million in borrowing capacity.
This amended and restated Senior Debt Agreement is composed of a $100 million
eight-year term loan and an eight-year $55 million reducing revolving credit
facility. Borrowings under the Senior Debt Agreement are secured by
substantially all of the Company's assets. The Senior Debt Agreement contains
covenants which require the Company to maintain certain financial ratios and
restrict the Company's ability to pay dividends and to incur additional
indebtedness. Interest on borrowings under the Senior Debt Agreement are based,
at the Company's option, on a rate equal to the sum of LIBOR, a specified prime
rate or the federal funds rate plus .5% and an applicable margin. The
applicable margin varies from 4.25% to 2.0% based on a formula tied to the
Company's level of indebtedness. The Senior Debt Agreement is subject to a
commitment fee that ranges from 1.50% to 0.75% per annum depending on the
outstanding balance.

F-16
<PAGE>

PAETEC CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

PaeTec Online Stock Option Plan

During the second quarter of 2000, all PaeTec Online options were
converted into PaeTec Corp. options with an exercise price of $7.50 per share.
The Company will recognize compensation expense related to the outstanding
options in the amount of $0.4 million over the vesting period.

Acquisitions

On April 13, 2000, the Company acquired Pinnacle Software Corporation
("Pinnacle") for approximately $18.5 million, which was paid by the issuance of
500,000 shares of the Company's Class A common stock at a guaranteed price per
share of $25, and $6.0 million in cash. In the acquisition agreement, the
Company agreed that, if the Class A common stock does not have a value of at
least $25 per share during the 18-month valuation period beginning on April 13,
2000, the Company will be required to make an additional payment to the former
Pinnacle stockholders for each of the 500,000 shares the Company previously
issued to them. The amount of this payment for each such share will be equal to
the difference between $25 and the highest per share value of the Class A
common stock during the valuation period. The Company has the option to make
any additional payment in cash, in additional shares of Class A common stock,
or in a combination of cash and additional shares, except that the Company must
make at least 50% of the payment in cash if the market value of its publicly
traded Class A common stock held by non-affiliates of the Company does not
exceed $500 million. Pinnacle, which is a professional services and software
company headquartered in Pittsford, New York, provides applications software
systems to customers in the higher education, business, medical and state and
local government markets. Pinnacle offers software and service solutions aimed
at helping organizations of all sizes manage large voice, data and video
networks with integrated services that include customer billing, inventory
control, asset management, help desk management, cable management, and switch
provisioning. Pinnacle had $3.7 million in revenues in fiscal 1999 and employed
over 30 information technology professionals as of March 20, 2000.

On May 10, 2000, the Company acquired selected assets of Data Voice
Networks, Inc. ("DVN") for approximately $5.8 million, which was paid by the
issuance of 120,000 shares of the Company's Class A common stock, at a
guaranteed price per share of $25, $0.8 million in cash, and a $2.0 million
cash payment due in quarterly installments over a 15-month period subsequent to
the acquisition. In the acquisition agreement, the Company agreed that, if the
Class A common stock does not have a value of at least $25 per share during the
12-month valuation period beginning on May 10, 2000, the Company will be
required to make an additional payment for each of the 120,000 shares the
Company previously issued in the acquisition. The amount of this payment for
each such share will be equal to the difference between $25 and highest per
share value of the Class A common stock during the valuation period. The
Company has the option to pay any adjusted consideration in cash, in additional
shares of Class A common stock, or in a combination of cash and additional
shares. DVN designs and implements data networks for small to medium sized
businesses and distributes data products for Cisco Systems and other vendors.
DVN, which is headquartered near Philadelphia, Pennsylvania, had $7.2 million
in revenues in 1999 and had over 20 employees as of March 20, 2000.

These acquisitions have been accounted for using the purchase method of
accounting and only results of operations of the acquired companies from the
dates of the acquisitions to September 30, 2000 have been included in the
consolidated results of operations. A portion of the purchase price, including
direct expenses of $0.2 million, has been allocated to net assets acquired
based on their estimated fair values. The fair value of the assets acquired
from these acquisitions totalled $4.4 million, including $1.7 million of
identifiable intangible assets, while liabilities assumed totalled $1.4
million. The remaining $21.3 million of the purchase price has been recorded as
goodwill

F-17
<PAGE>

PAETEC CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

which is being amortized over twenty years using the straight line method of
amortization. The allocation of the purchase prices for these acquisitions is
final. The following reflects the unaudited pro forma results of operations as
if the acquisitions had taken place for all of 1999 and at the beginning of
2000.

<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------- -----------------
1999 2000
-------- -----------------
<S> <C> <C>
Revenue.......................................... $ 34,355 $ 88,537
Net loss......................................... $(35,352) $(49,954)
Net loss per common share........................ $ (1.65) $ (1.77)
</TABLE>

Corporate Headquarters

The Company has entered into a 20 year lease for its new corporate
headquarters, which it will begin to occupy in the first quarter of 2001. The
Company expects that its annual rental payments under this lease will increase
from approximately $1.4 million for the first year of its occupancy to
approximately $2.0 million for the last ten years of the lease term.

F-18
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Campuslink Communications Systems, Inc.:

We have audited the accompanying consolidated balance sheets of
CAMPUSLINK COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES (a Delaware
corporation) as of December 31, 1998 and June 30, 1998 and the related
consolidated statements of operations and changes in accumulated deficit, and
cash flows for the six month period ended December 31, 1998 and for the year
ended June 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Campuslink Communications
Systems, Inc. and subsidiaries as of December 31, 1998 and June 30, 1998, and
the results of their operations and their cash flows for the six month period
ended December 31, 1998 and the year ended June 30, 1998, in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP
Detroit, Michigan,
September 20, 1999.

F-19
<PAGE>

INDEPENDENT AUDITORS' REPORT

Stockholders and Board of Directors
Campuslink Communications Systems, Inc.
Ann Arbor, Michigan

We have audited the accompanying consolidated balance sheet of Campuslink
Communications Systems, Inc. and subsidiaries (the "Company") as of June 30,
1997, and the related consolidated statements of operations and changes in
accumulated deficit, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Campuslink Communications
Systems, Inc. and subsidiaries as of June 30, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.

DELOITTE & TOUCHE LLP
Rochester, New York
May 29, 1998

F-20
<PAGE>

CAMPUSLINK COMMUNICATIONS SYSTEMS, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1998, DECEMBER 31, 1998
(Amounts In Thousands, Except Share Information)

<TABLE>
<CAPTION>
June 30, June 30, December 31,
1997 1998 1998
-------- -------- ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $ 671 $ 1,937 $ 743
Accounts receivable, net of allowance for
doubtful accounts of $271, $120 and $246,
respectively............................... 638 1,189 3,065
Prepaid expenses and other current assets... 127 235 307
-------- -------- --------
Total current assets...................... 1,436 3,361 4,115
-------- -------- --------
RESTRICTED CASH............................... -- -- 1,186
OFFICE EQUIPMENT, net......................... 600 712 671
OTHER ASSETS:
Exclusive service agreements, net........... 8,727 8,044 11,383
Other assets................................ 886 1,113 512
-------- -------- --------
Total other assets........................ 9,613 9,157 11,895
-------- -------- --------
TOTAL ASSETS.................................. $ 11,649 $ 13,230 $ 17,867
======== ======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable............................ $ 715 $ 1,625 $ 2,492
Accrued expenses............................ 2,305 2,817 3,637
Current portion of long-term debt........... 100 4,682 6,686
-------- -------- --------
Total current liabilities................. 3,120 9,124 12,815
-------- -------- --------
LONG-TERM DEBT................................ 2,606 2,457 5,888
REDEEMABLE PREFERRED STOCK (at redemption
value):
Series B, par value $.001; 800 shares
authorized, issued and outstanding......... 1,911 2,101 2,276
Series C, par value $.001; 1,750 shares
authorized, issued and outstanding......... 3,758 4,177 4,406
Series D, par value $.001; 5,500 shares
authorized, issued and outstanding......... 11,072 12,393 12,971
-------- -------- --------
Total redeemable preferred stock.......... 16,741 18,671 19,653
-------- -------- --------
STOCKHOLDERS' DEFICIT:
Common stock, .001 par value; 7,250,000
shares authorized, 638,100 shares issued
and outstanding............................ 1 1 1
Warrants.................................... -- 104 104
Accumulated deficit......................... (10,819) (17,127) (20,594)
-------- -------- --------
Total stockholders' deficit............... (10,818) (17,022) (20,489)
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT... $ 11,649 $ 13,230 $ 17,867
======== ======== ========
</TABLE>

See notes to consolidated financial statements.

F-21
<PAGE>

CAMPUSLINK COMMUNICATIONS SYSTEMS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
AND CHANGES IN ACCUMULATED DEFICIT FOR THE YEARS ENDED JUNE 30, 1997 AND 1998,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998, AND FOR THE SIX MONTHS ENDED JUNE
30, 1998 AND 1999
(Amounts In Thousands)

<TABLE>
<CAPTION>
Year Ended Six Months Ended
------------------ ------------------------------------
June 30, June 30,
June 30, June 30, December 31, 1998 1999
1997 1998 1998 (Unaudited) (Unaudited)
-------- -------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUE
Service revenue........ $ 5,847 $ 7,931 $ 6,298 $ 3,681 $ 7,507
Equipment sales........ 2,245 2,326 2,325 -- 419
-------- -------- -------- -------- --------
8,092 10,257 8,623 3,681 7,926
COST OF SALES:
Service costs.......... 4,138 4,897 4,102 2,099 5,117
Equipment costs........ 1,950 1,616 2,044 -- 395
-------- -------- -------- -------- --------
6,088 6,513 6,146 2,099 5,512
-------- -------- -------- -------- --------
GROSS MARGIN............ 2,004 3,744 2,477 1,582 2,414
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSE................ 4,692 5,369 3,254 2,929 3,450
DEPRECIATION AND
AMORTIZATION........... 1,345 1,835 901 975 996
ASSET IMPAIRMENT........ -- 467 312 467 1,649
-------- -------- -------- -------- --------
LOSS FROM OPERATIONS.... (4,033) (3,927) (1,990) (2,789) (3,681)
INTEREST EXPENSE........ 417 451 495 316 651
-------- -------- -------- -------- --------
NET LOSS................ (4,450) (4,378) (2,485) (3,105) (4,332)
ACCUMULATED DEFICIT,
BEGINNING OF PERIOD.... (5,214) (10,819) (17,127) (13,163) (20,594)
DIVIDENDS ON REDEEMABLE
PREFERRED STOCK........ (1,155) (1,930) (982) (859) (958)
-------- -------- -------- -------- --------
ACCUMULATED DEFICIT, END
OF PERIOD.............. $(10,819) $(17,127) $(20,594) $(17,127) $(25,884)
======== ======== ======== ======== ========
</TABLE>

See notes to consolidated financial statements.

F-22
<PAGE>

CAMPUSLINK COMMUNICATIONS SYSTEMS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1998, FOR THE SIX MONTHS ENDED
DECEMBER 31, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(Amounts In Thousands)

<TABLE>
<CAPTION>
Year Ended Six Months Ended
------------------ ------------------------------------
June 30, June 30, December 31, June 30, June 30,
1997 1998 1998 1998 1999
-------- -------- ------------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.............. $(4,450) $(4,378) $(2,485) $(3,105) $(4,332)
Adjustments to
reconcile net loss to
net cash (used)
provided by operating
activities:
Depreciation and
amortization......... 1,345 1,835 901 975 996
Amortization of
financing costs...... -- 63 41 63 --
Asset impairment...... -- 467 312 467 1,649
Changes in assets and
liabilities:
Accounts receivable.. (316) (551) (1,876) 297 158
Prepaid expenses and
other current
assets.............. (99) (67) (113) 178 61
Other assets......... 7 160 (17) 291 (3)
Accounts payable..... (909) 910 867 765 999
Accrued expenses..... (61) 512 819 7 923
------- ------- ------- ------- -------
Net cash (used)
provided by
operating
activities......... (4,483) (1,049) (1,551) (62) 451
------- ------- ------- ------- -------
INVESTING ACTIVITIES:
Purchase of property
and equipment........ (552) (292) (66) (134) (46)
Acquisition of
exclusive service
agreements........... (3,006) (1,476) (4,245) (643) (1,604)
(Increase) decrease in
other assets......... -- (350) 419 (624) (816)
------- ------- ------- ------- -------
Net cash used by
investing
activities......... (3,558) (2,118) (3,892) (1,401) (2,466)
------- ------- ------- ------- -------
FINANCING ACTIVITIES:
Proceeds from issuance
of redeemable
preferred stock...... 10,268 -- -- -- --
Proceeds from notes
payable.............. 4,064 6,140 7,029 4,500 1,509
Repayment of notes
payable.............. (5,805) (1,707) (1,594) (1,369) (623)
------- ------- ------- ------- -------
Net cash provided by
financing
activities......... 8,527 4,433 5,435 3,131 886
------- ------- ------- ------- -------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS AND
RESTRICTED CASH....... 486 1,266 (8) 1,668 (1,129)
CASH AND CASH
EQUIVALENTS AND
RESTRICTED CASH,
BEGINNING OF PERIOD... 185 671 1,937 269 1,929
------- ------- ------- ------- -------
CASH AND CASH
EQUIVALENTS AND
RESTRICTED CASH, END
OF PERIOD............. $ 671 $ 1,937 $ 1,929 $ 1,937 $ 800
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION:
Cash paid for
interest............. $ 89 $ 392 $ 315 $ 239 $ 548
======= ======= ======= ======= =======
SUPPLEMENTAL
DISCLOSURES OF NONCASH
INVESTING AND
FINANCING ACTIVITIES:
Conversion of
shareholder loan to
Series C redeemable
preferred stock...... $ 3,500 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
Issuance of common
stock in exchange for
debt................. $ 24 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
Dividends on
redeemable preferred
stock................ $ 1,180 $ 1,930 $ 982 $ 859 $ 958
======= ======= ======= ======= =======
Acquisition of
Exclusive Service
Agreements in
exchange for
assumption of debt... $ 964 $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
Issuance of warrants
in conjunction with
debt................. $ -- $ 104 $ -- $ 104 $ --
======= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.

F-23
<PAGE>

CAMPUSLINK COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended June 30, 1997 and 1998, For the Six Months Ended December
31, 1998 and
For the Six Months Ended June 30, 1998 and 1999
(Amounts In Thousands, Except Share Data)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization--Campuslink Communications Systems, Inc. and subsidiary (the
"Company"), founded in November 1993 and incorporated in the state of Delaware,
is an integrated communications provider to the higher-education and private-
student housing markets (the "Schools"). Typically, the Company provides
design, communication installation, and management of integrated
telecommunications systems at the Schools in exchange for an exclusive service
agreement ("ESA") to provide telecommunication services to the Schools. Once
the telecommunications system is in place, the Company generates revenue
through the resale of telephone, voice mail, video, and data services in
accordance with the ESA. The Company's principal offices are in Ann Arbor,
Michigan.

The Company operates ten ESAs through Select Switch Acquisition
Corporation, a wholly owned subsidiary, created in June 1997 to acquire the ten
ESAs and the related telecommunications assets. (Note 7)

The Company, in association with GMH Properties, operates fifteen long-
term communications contracts through Parklink Communications, Inc., which was
formed in July 1998 to administer long-term communications contracts at private
student housing facilities located throughout the country.

Fiscal Year--Effective July 1, 1998, the Company changed its fiscal year
from June 30 to December 31.

Cash and Cash Equivalents--Cash and cash equivalents consist of overnight
deposits and commercial paper with acquired maturities of three months or less.

Office Equipment--Office equipment is recorded at cost. Expenditures for
maintenance, repairs, renewals, and betterments which do not materially extend
the useful life of the asset are expensed as incurred. Depreciation is computed
using the straight-line method over five years.

Exclusive Service Agreements--Exclusive service agreements (defined
above) consist of amounts paid in connection with agreements between the
Company and the Schools for the cost of equipment and installation. These ESAs
provide for the exclusive right to provide telecommunication services to the
Schools and are amortized over the life of the ESAs.

The Company, on a periodic basis, undertakes a review and valuation of
the net carrying value, recoverability, and amortization period of its ESAs.
For each ESA, the Company considers its financial structure as well as the
recoverability of the initial cost of the agreement based on a comparison of
estimated undiscounted operating cash flows under the contract with the net
book value of the ESA. Based on such analysis, the Company determined that
certain assets were other than temporarily impaired during 1998 and 1999.
Accordingly, the Company wrote down assets to their net realizable value at
June 30, 1998, December 31, 1998 and June 30, 1999. The accompanying
consolidated statements of operations and changes in accumulated deficit for
the year ended June 30, 1998 and for the six months ended December 31, 1998,
June 30, 1998 and June 30, 1999 includes $467, $312, $467 and $1,649,
respectively, related to these asset impairments. The Company's ESAs are
amortized over the respective term of the agreement. Amortization expense for
the years ended June 30, 1997 and 1998 and for the six months ended December
31, 1998, June 30, 1998 and 1999 was $1,186, $1,539, $794, $839 and $857,
respectively.

Fair Value of Financial Instruments--Statement of Financial Accounting
Standards ("SFAS") No. 107, Disclosures About Fair Value of Financial
Instruments, requires disclosures about the fair value of financial instruments
whether or not such instruments are recognized on the consolidated balance
sheet. Due to

F-24
<PAGE>

CAMPUSLINK COMMUNICATIONS SYSTEMS , INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

the short-term nature of the Company's financial instruments other than debt,
fair values are not materially different from their carrying value. Based on
the borrowing rates available to the Company, the carrying value of debt
approximated its fair value at June 30, 1997, 1998 and December 31, 1998.

Revenue Recognition--The Company recognizes revenue upon delivery of
various telecommunication services. The Company bills to the students directly
on a monthly basis for long-distance and out-of-area usage of telephone,
voicemail, video, and data services. Generally, the Company bills the Schools
for a guaranteed minimum technology fee (per student) at the beginning of each
school term. Such fees are recognized as revenue over the applicable period.
Billings to the Schools for administrative services are performed monthly.
Revenue derived from installation-type contracts is recognized upon completion
of the installation and acceptance by the respective Schools.

Concentration of Credit Risk--Financial instruments that potentially
subject the Company to concentration of credit risk consist primarily of
accounts receivable from students for the usage portion of revenue. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally does not require collateral.

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

Principles of Consolidation--The consolidated financial statements
include the accounts of Campuslink Communications Systems, Inc., Select Switch
Acquisition Corporation, its wholly owned subsidiary, and Parklink
Communications, Inc., its majority owned subsidiary. All significant
intercompany balances and transactions are eliminated in consolidation.

Accounting for Stock-Based Compensation--In 1995, the Financial
Accounting Standards Board issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 allows the Company to adopt either of two methods
for accounting for stock options. The Company has elected to account for its
stock-based compensation plans under Accounting principles Board, ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees.

Unaudited Financial Data--The interim financial data relating to the six
months ended June 30, 1998 and 1999 is unaudited; however, in the opinion of
the Company's management, the interim data includes all adjustments, consisting
of only normal recurring adjustments, necessary for a fair statement of the
results for the interim period. The results for the six months ended June 30,
1998 and 1999 are not necessarily indicative of the results to be expected for
the full year or any other interim period.

F-25
<PAGE>

CAMPUSLINK COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

2. ACCRUED LIABILITIES

Accrued expenses and other liabilities consist of the following:

<TABLE>
<CAPTION>
June 30, June 30, December 31,
1997 1998 1998
-------- -------- ------------
<S> <C> <C> <C>
Accrued interest--shareholders............... $ 768 $ 794 $ 831
Accrued carrier charges...................... 933 523 1,018
Accrued taxes................................ -- -- 563
Deposits on installations.................... 308 1,099 348
Deferred revenue............................. -- -- 383
Consulting fees--shareholder................. 165 249 291
Other........................................ 131 152 203
------ ------ -------
Total........................................ $2,305 $2,817 $ 3,637
====== ====== =======

3. LONG-TERM DEBT

Long-term debt consists of the following:

<CAPTION>
June 30, June 30, December 31,
1997 1998 1998
-------- -------- ------------
<S> <C> <C> <C>
Note payable to certain shareholders,
repayable in 22 quarterly installments
maturing in 2002, with interest at 8% per
annum....................................... $1,742 $1,382 $ 1,209
ESA acquisition financing, repayable in 84
monthly installments maturing in 2004, with
interest at 9.18% per annum................. 964 845 806
Line of credit, interest at prime (7.75% at
December 31, 1998).......................... -- 3,250 4,875
ESA financing repayable in 60 monthly
installments maturing in 2002, with interest
at 10.88% per annum......................... -- 960 869
Notes payable to certain shareholders,
repayable on demand, with interest at 10%
per annum................................... -- 700 700
Note payable to certain shareholders,
repayable in 83 monthly installments
maturing in 2005, with interest at 10.4%,
per annum................................... -- -- 4,113
Other........................................ -- 2 2
------ ------ -------
Total........................................ 2,706 7,139 12,574
Less current portion......................... 100 4,682 6,686
------ ------ -------
Long-term portion............................ $2,606 $2,457 $ 5,888
====== ====== =======
</TABLE>

In May 1995, Alliance Cabletel Holdings, L.P. ("Alliance") made a $1,900
bridge loan to the Company. The bridge loan was restricted for use of payment
to a specific subcontractor in charge of installing the cabling infrastructure
related to an ESA. Alliance was granted a security interest in the School's ESA
and all revenue and receivables derived from the ESA. As of June 30, 1996, the
Company had not made any principal or interest payments on the bridge loan. In
November 1996, Alliance deferred all accrued interest on the bridge loan and
restructured the payment terms to 22 equal quarterly principal payments of $86
beginning on December 31, 1996, and reduced the interest rate from 10% to 8%.
In November 1996, Alliance was also granted a security interest in all of the
existing assets of the Company. It is not practical to estimate the fair value
of the bridge loan, which was negotiated for a specific transaction entered
into by the Company with certain of its shareholders. The note matures June 30,
2001.

F-26
<PAGE>

CAMPUSLINK COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In December 1995, Alliance made a loan (the "Shareholder Loan") of $3,500
to the Company. The interest rate was 12% and was due on June 1, 1996, with an
automatic one-year extension if the Shareholder Loan was not repaid in full. On
November 19, 1996, the Shareholder Loan was converted into 1,750 shares of
Series C redeemable preferred stock. In connection with conversion, Alliance
was issued a warrant (the "Series C Warrant") to purchase 1,311,471 shares of
common stock at an exercise price of $.001 per share. The Series C Warrant is
exercisable, in whole or part, at any time for a period of five years from the
date of issuance (Note 4).

In connection with the acquisition of ten ESAs in June 1997, the Company
assumed notes payable in the amount of $964 payable to a financing institution.
The notes are guaranteed entirely by a telephone switch manufacturer and mature
in 2004. Based on the borrowing rates available to the Company, the Company's
carrying value of the notes approximated fair value at June 30, 1997, 1998 and
December 30, 1998.

On March 5, 1998, the Company entered in to a $2,000 line of credit at a
commercial bank. On May 4, 1998, this line of credit was increased to $3,500,
$4,500 in August 1998, and $5,250 in October 1998. The line of credit is due
and payable on March 1, 1999. The line of credit was not renewed at March 1,
1999. Certain shareholders of the Company provided payment to the bank for the
amount outstanding at March 1, 1999 and the Company assumed this debt, payable
to the shareholders. The interest rate on the line of credit is the prime rate
of the commercial bank. In April 1998, certain shareholders of the Company
provided a credit enhancement to the commercial bank. As consideration for
providing the credit enhancement, the Company has agreed to issue to certain
shareholders 505,903 warrants (the "Credit Line Warrants") to purchase the
Company's common stock at an exercise price of $.99 per share. The Company
recorded these warrants at a fair value of $.14 per warrant, which was
determined using the Black-Scholes pricing model. It is anticipated that the
Credit Line Warrants will have the same terms and conclusions as the warrants
issued in connection with the Series C, D-1, and D-2 preferred stock (Note 4).

On September 30, 1997, the Company borrowed $1,004 from a commercial
lender related to a five-year ESA. The term of the loan is 60 months at an
effective interest rate of 10.88%, with monthly payments of approximately $24.
The note is secured by the assets and operations of the ESA. The carrying value
of this note approximates fair market value at June 30, 1998 and December 31,
1998.

On April 8, 1998, the Company borrowed $700 in 10% demand notes from
certain shareholders to provide partial collateral for a bid bond related to a
specific proposal. In addition, the Company has deposited with its commercial
bank $500 as additional collateral for the same bid bond. As consideration for
the loan, the Company has agreed to issue 236,088 warrants (the "Bid Bond
Warrants") to purchase the Company's common stock at an exercise price of $.99
per share. The Company recorded these warrants at a fair value of $.14 per
warrant, which was determined using the Black-Scholes pricing model. It is
anticipated that the Bid Bond Warrants will have the same terms and conditions
as the warrants issued in connection with the Series C, D-1, and D-2 preferred
stock (Note 4).

On December 31, 1998, the Company borrowed $4,154 from a commercial
lender related to an ESA. The term of the loan is 83 months at an effective
interest rate of 10.40%, with monthly payments of approximately $76. The note
is secured by the assets and operations of the ESA. The carrying value of this
note approximates fair market value at December 31, 1998.

F-27
<PAGE>

CAMPUSLINK COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Future principal payments at December 31, 1998 are as follows:

<TABLE>
<S> <C>
1999................................................................. $ 6,686
2000................................................................. 1,213
2001................................................................. 1,308
2002................................................................. 1,083
2003................................................................. 878
Thereafter........................................................... 1,406
-------
Total.............................................................. $12,574
=======
</TABLE>

4. REDEEMABLE PREFERRED STOCK AND COMMON STOCK

Common Stock--The authorized capital stock of the Company consists of
7,250,000 shares of common stock with $.001 par value. All shares of common
stock participate equally in dividends payable to holders of common stock, when
and as declared by the board of directors, and in net assets available for
distribution to holders of common stock on liquidation or dissolution. Each
share has one vote on all matters submitted to a vote of the Company
stockholders and does not have cumulative voting rights in the election of
directors. All issued and outstanding shares of common stock are fully paid and
nonassessable, and the holders thereof do not have preemptive rights.

Redeemable Preferred Stock--The Board of Directors authorized 50,000
shares of preferred stock, $.001 par value, of which 800 shares have been
designated Series B preferred stock, 1,750 shares have been designated Series C
preferred stock, 2,750 shares have been designated as Series D-1 preferred
stock, and 2,750 shares have been designated as Series D-2 preferred stock.
Dividends accrue at a rate of 12% per annum, subject to adjustment in the event
certain conditions have not been met by the Company.

The Series B preferred stock has voting rights and is mandatorily
redeemable in equal installments commencing November 1, 2001, and continuing
thereafter each November 1 until all shares have been redeemed. In connection
with the issuance of the Series B preferred stock, the Company issued 455,000
shares of the Company's common stock for an exercise price of $.001 per share.
The redemption price is equal to the liquidation value of the shares of $2,000
per share plus an amount equal to the accrued but unpaid dividends on the
redemption date. Dividends are accrued at a rate of 12% per annum subject to
adjustment in the event certain conditions are not met by the Company. Accrued
and unpaid dividends amounted to $676 at December 31, 1998.

In November 1996, the Company completed the sale of $11,000 of Series D
preferred stock and converted the $3,500 Shareholder Loan into 1,750,000 shares
of Series C preferred stock and increased the dividend rate of the Series B
preferred stock from 10% to 12%. The proceeds were used to repay the Company's
existing lines of credit of $5,500 ($2,500 at June 30, 1996), accrued interest,
and accounts payable and to provide additional working capital for the Company.
The lines of credit expired upon repayment.

The Series C preferred stock consists of 1,750 shares that have voting
rights and are mandatorily redeemable in equal installments commencing November
1, 2001, and continuing thereafter each November 1 until all shares have been
redeemed. In connection with the issuance of the Series C preferred stock, the
Company issued the Series C warrant to purchase 1,311,471 shares of the
Company's common stock for an exercise price of $.001 per share. The Series C
warrant is exercisable, in whole or in part, at any time, for a period of five
years from date of issuance. The redemption price is equal to the liquidation
value of the shares

F-28
<PAGE>

CAMPUSLINK COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

of $2,000 per share plus an amount equal to the accrued but unpaid dividends
on the redemption date. Dividends are accrued at a rate of 12% per annum
subject to adjustment in the event certain conditions are not met by the
Company. Accrued and unpaid dividends amounted to $906 at December 31, 1998.

The Series D preferred stock consists of 2,750,000 shares of Series D-1
($5,500) and 2,750,000 shares of Series D-2 ($5,500). In connection with the
issuance of the Series D-1 and Series D-2 preferred stock, the Company issued
the Series D-1 warrant and Series D-2 warrant to purchase 704,463 and 704,463
shares, respectively, of the Company's common stock for an exercise price of
$.001 per share. The Series D-1 and D-2 warrants are exercisable, in whole or
in part, at any time, for a period of five years from date of issuance. The
Series D-1 and D-2 preferred stock have the same redemption, liquidation, and
dividend rights as the Series C preferred stock described above. The Series D-
1 and D-2 preferred stock have voting rights equal to the number of shares of
common stock issuable pursuant to the Series D-1 and D-2 warrants. Transaction
fees of $732 were incurred in connection with the issuance of the Series D-1
and D-2 preferred stock. Accrued and unpaid dividends amounted to $2,703 at
December 31, 1998.

In addition to the other securities issued in November 1996, the Company
also issued warrants to Alliance to acquire 915,092 shares of the Company's
common stock for an exercise price of $.001 per share. These warrants were
issued in connection with the deferral of interest and dividends accrued
through November 1996 and guarantees made by Alliance for credit facilities
utilized by the Company. The warrants are exercisable, in whole or in part, at
any time, for a period of five years from the date of issuance.

Accounting for Stock-Based Compensation--The Company accounts for its
stock-based compensation in accordance with APB Opinion No. 25, under which no
compensation cost has been recognized.

The Company has granted certain executives and directors warrants to
purchase the Company's stock. These warrants were issued at prices equal to
the estimated fair market value of the Company's common stock on the date of
issuance. The following table summarizes the Company's warrant activity for
the years ended June 30, 1997 and 1998 and for the six months ended December
31, 1998:
<TABLE>
<CAPTION>
Average
Expense
Number Price
------- -------
<S> <C> <C>
Outstanding, July 1, 1996....................................... 144,713 $3.18
=====
Granted......................................................... 181,843 $3.63
------- -----
Outstanding, June 30, 1997...................................... 326,556 $3.43
-----
Granted......................................................... 23,000 $4.88
------- =====
Outstanding, June 30, 1998...................................... 349,556 $3.52
=====
Granted......................................................... --
-------
Outstanding, December 31, 1998.................................. 349,556 $3.52
======= =====
</TABLE>
No warrants have been exercised or forfeited for the years ended June
30, 1997 and 1998 and for the six months ended December 31, 1998.

The following table summarizes information about warrants outstanding at
December 31, 1998:

<TABLE>
<CAPTION>
Warrants Outstanding Warrants Exercisable
--------------------------------- ------------------------
Weighted Average
Range of Shares Remaining Shares
Exercise Under Contractual Weighted Average Under Weighted Average
Prices Warrant Life in Years Exercise Price Warrant Exercise Price
-------- ------- ---------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$2.01-
$4.88 349,556 3.60 $3.52 155,597 $3.13
</TABLE>

F-29
<PAGE>

CAMPUSLINK COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company has computed, for pro forma disclosure purposes, the value of
all warrants for shares of the Company's common stock granted to employees and
directors using the Black-Scholes pricing model using the following weighted
average assumptions: risk-free interest rate of 6%, expected dividend yield of
0%, and expected lives of five years.

The Company did not grant warrants to employees or directors in 1998.
However, if the Company had accounted for past grants in accordance with SFAS
No. 123, the Company's net loss for the years ended June 30, 1997 and June 30,
1998 and for the six month periods ended December 31, 1998, June 30, 1998 and
June 30, 1999 would have increased as follows:

<TABLE>
<CAPTION>
Year Ended Six Months Ended
------------------ -------------------------------
June 30, June 30, December 31, June 30, June 30,
1997 1998 1998 1998 1999
-------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C>
Net loss--as reported.. $(4,450) $(4,378) $(2,485) $(3,105) $(4,332)
Net loss--pro forma.... $(4,490) $(4,443) $(2,520) $(3,145) $(4,372)
</TABLE>

5. INCOME TAXES

The Company has incurred losses since inception. Accordingly, as there is
no certainty of future profitability, a deferred tax asset has been recorded
and a valuation allowance provided in full in the accompanying consolidated
financial statements. The effective rate is 0% for all periods.

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

<TABLE>
<CAPTION>
June 30, June 30, December 31,
1997 1998 1998
-------- -------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......... $ 3,073 $ 4,489 $ 5,161
Other..................................... 137 86 151
------- ------- -------
Total deferred tax assets................... 3,210 4,575 5,312
Less--valuation allowance................... (3,210) (4,575) (5,312)
------- ------- -------
Net deferred tax assets..................... $ -- $ -- $ --
======= ======= =======
</TABLE>

The Company had approximately $15,200 of net operating loss carryforwards
for federal income tax purposes at December 31, 1998. These net operating loss
carryforwards begin to expire in 2009. A portion of the losses as of June 30,
1995 will be subject to limitation under Section 382 of the Internal Revenue
Code.

6. TRANSACTIONS WITH AFFILIATED COMPANIES

Alliance entered into an agreement with the Company to provide consulting
services to the Company and to be the financial advisor for a period of five
years. The Company is required to pay Alliance a consulting fee of $5 per month
during the first year of the term, $7 per month during the second and third
year of the term, and an amount to be negotiated in good faith thereafter. The
monthly fee shall accrue, but not be paid, until the Company has cumulative net
income of $1 million. Total consulting fees for the years ended June 30, 1997
and 1998 and for the six months ended December 31, 1998, June 30, 1998 and 1999
were $165, $84, $42, $42 and $42, respectively.

F-30
<PAGE>

CAMPUSLINK COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

7. ACQUISITION OF EXCLUSIVE SERVICE AGREEMENTS

On April 22, 1998, the Company was awarded an ESA requiring capital
expenditures of approximately $5,800. To fund the capital expenditures, in
April 1998, the Company received a 10% $1,200 demand note from certain
shareholders and in July 1998 received a $4,900 loan from a leasing company at
an interest rate of 10.48 and a term of seven years.

As of December 31, 1998, the Company has drawn down approximately $1,437
on the $4,900 loan. As of December 31, 1998, $1,186 was held as restricted cash
to support the $4,900 loan, performance bond, and final capital expenditures.

8. COMMITMENTS AND CONTINGENCIES

The Company has various operating leases for equipment and facilities.
Rent expense for the years ended June 30, 1997 and 1998 and for the six months
ended December 31, 1998, June 30, 1998 and 1999 totaled $77, $82, $62, $64, and
$93, respectively.

Future minimum commitments under all noncancellable operating leases at
December 31, 1998 are as follows:

<TABLE>
<S> <C>
1999.................................................................... $121
2000.................................................................... 87
2001.................................................................... 7
2002.................................................................... 2
2003.................................................................... 1
----
Total................................................................... $218
====
</TABLE>

The Company is involved in legal proceedings related to matters which are
incidental to its business. It is the opinion of management that the ultimate
resolution of these proceedings will not have a material adverse effect on the
Company's financial position or results of operations.

9. SUBSEQUENT EVENTS (UNAUDITED)

On January 1, 1999, the Company formed a joint venture with World-African
network to provide integrated telecommunication services to predominantly
African American higher-education and private-student housing markets.

On September 9, 1999, the Company was acquired by PaeTec Corp. for
approximately $44,000. The transaction was funded by approximately $30,000 in
PaeTec Corp. stock and the assumption of approximately $14,000 of the Company's
debt.

F-31
<PAGE>

SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION

On September 9, 1999, the Company acquired Campuslink for approximately
$44.0 million. The following unaudited pro forma condensed combined financial
information of PaeTec and Campuslink, which we refer to as "Pro Forma PaeTec"
has been prepared to demonstrate how these companies might have looked if the
merger and merger-related transactions had been completed as of the dates or at
the beginning of the period presented.

The pro forma information, while helpful in illustrating the financial
characteristics of the combined company under one set of assumptions, does not
attempt to predict or suggest future results. The pro forma information also
does not attempt to show how the combined company would actually have performed
had the companies been combined throughout these periods. If the companies had
actually been combined in prior periods, these companies might have performed
differently. You should not rely on pro forma financial information as an
indication of the results that would have been achieved if the merger related
transactions had taken place earlier or the future results that the companies
will experience now that those transactions have been completed.

The unaudited pro forma condensed combined financial statements should be
read in conjunction with the historical financial statements of PaeTec and
Campuslink which are included in this document.

Pro Forma PaeTec
Unaudited Combined Condensed Financial Information
for the year ended December 31, 1999
(in thousands)

<TABLE>
<CAPTION>
PaeTec Pro Forma
(1) Campuslink (2) Adjustments (3) Combined
-------- -------------- --------------- ---------
<S> <C> <C> <C> <C>
Revenue.................... $ 23,347 $ 9,682 $ -- $ 33,029
Cost of services........... 16,809 6,311 -- 23,120
-------- ------- ------- --------
Gross margin............... 6,538 3,371 -- 9,909
Selling, general and
administrative expenses... 40,294 6,033 -- 46,327
Depreciation and
amortization.............. 4,508 3,155 1,942 9,605
Other (income) expense,
net....................... (355) 46 -- (309)
Interest (income) expense.. 2,434 877 (80) 3,231
-------- ------- ------- --------
Net loss................... $(40,343) $(6,740) $(1,198) $(48,945)
======== ======= ======= ========
Basic and diluted net loss
per common share.......... $ (1.93) $ (1.97)
======== ========
</TABLE>
--------
1. This column is derived from the audited consolidated financial statements of
PaeTec for the year ended December 31, 1999.
2. This column is derived from the unaudited accounting records of Campuslink
for the period from January 1, 1999 to September 8, 1999.

3. We have accounted for the acquisiton of Campuslink using the purchase method
of accounting. A portion of the purchase price, including direct expenses of
$0.2 million, has been allocated to net assets acquired based on their
estimated fair values. The fair value of the assets acquired from this
acquisition totalled $19.1 million, including current assets totaling $5.4
million, ESA totaling $9.9 million and a customer list valued at $2.1
million. Liabilities assumed totalled $9.2 million. The balance of the
purchase price totalling $32.5 million has been recorded as goodwill.
Goodwill is being amortized over a period of 20 years. This column accounts
for the additional amortization of goodwill for the period from January 1,
1999 to September 8, 1999 and eliminates certain interest expense that would
not have been incurred had the acquisition occurred on January 1, 1999.

F-32
<PAGE>

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

Through and including , 2001 (25 days after the date of this prospectus),
all dealers effecting transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.

7,000,000 Shares

PaeTec Corp.

Class A Common Stock

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

Merrill Lynch & Co.

Bear, Stearns & Co. Inc.

CIBC World Markets

Deutsche Banc Alex. Brown

, 2000

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ Subject to Completion +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+ Preliminary Prospectus dated December 8, 2000 +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

PROSPECTUS

7,000,000 Shares
PaeTec Corp.

Class A Common Stock

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

This is PaeTec's initial public offering of Class A common stock. PaeTec is
selling all of the shares of Class A common stock. The international managers
are offering 1,400,000 shares outside the U.S. and Canada and the U.S.
underwriters are offering 5,600,000 shares in the U.S. and Canada.

Investing in the Class A common stock involves risks that are described in
the "Risk Factors" section beginning on page 6.

-----------

<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price............................. $ $
Underwriting discount............................. $ $
Proceeds, before expenses, to us.................. $ $
</TABLE>

The international managers may also purchase up to an additional 210,000
shares of Class A common stock from PaeTec at the public offering price, less
the underwriting discount, within 30 days from the date of this prospectus to
cover over-allotments. The U.S. underwriters may similarly purchase up to an
additional 840,000 shares of Class A common stock from PaeTec.

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

The shares will be ready for delivery on or about , 2000.

-----------
Merrill Lynch International Bear, Stearns International Limited

-----------
CIBC World Markets
Deutsche Bank

-----------

The date of this prospectus is , 2000.
<PAGE>

[ALTERNATE PAGE]

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Consolidated Financial and Operating Data....................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 28
Regulation of Our Services............................................... 49
Management............................................................... 54
Transactions Involving Related Parties................................... 65
Security Ownership of Certain Beneficial Owners and Management........... 70
Description of Capital Stock............................................. 74
Shares Eligible for Future Sale.......................................... 79
U.S. Tax Consequences to Non-U.S. Holders................................ 82
Underwriting............................................................. 85
Legal Matters............................................................ 90
Experts.................................................................. 90
Where You Can Find Additional Information................................ 90
Index to Consolidated Financial Statements and Unaudited Pro Forma
Financial Information................................................... F-1
</TABLE>

---------------
<PAGE>

[ALTERNATE PAGE]

UNDERWRITING

We intend to offer the shares outside the U.S. and Canada through the
international managers and in the U.S. and Canada through the U.S.
underwriters. Merrill Lynch International and Bear, Stearns International
Limited are acting as lead managers for the international managers named below.
Subject to the terms and conditions described in an international purchase
agreement among us and the international managers, and concurrently with the
sale of 5,600,000 shares to the U.S. Underwriters, we have agreed to sell to
the international managers, and the international managers severally have
agreed to purchase from us, the number of shares listed opposite their names
below.

<TABLE>
<CAPTION>
Number
International Manager of Shares
--------------------- ---------
<S> <C>
Merrill Lynch International......................................
Bear, Stearns International Limited..............................
CIBC World Markets Corp. ........................................
Deutsche Bank AG London..........................................
---------
Total....................................................... 1,400,000
=========
</TABLE>

We have also entered into a U.S. purchase agreement with the U.S.
underwriters for sale of the shares in the U.S. and Canada for whom Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Bear, Stearns & Co. Inc. are
acting as U.S. representatives. Subject to the terms and conditions in the U.S.
purchase agreement, and concurrently with the sale of 1,400,000 shares to the
international managers pursuant to the international purchase agreement, we
have agreed to sell shares to the U.S. underwriters, and the U.S. underwriters
severally have agreed to purchase 5,600,000 shares from us. The initial public
offering price per share and the total underwriting discount per share are
identical under the international purchase agreement and the U.S. purchase
agreement.

The international managers and the U.S. underwriters have agreed to
purchase all of the shares sold under the international and U.S. purchase
agreements if any of these shares are purchased. If an underwriter defaults,
the U.S. and international purchase agreements provide that the purchase
commitments of the nondefaulting underwriters may be increased or the purchase
agreements may be terminated. The closings for the sale of shares to be
purchased by the international managers and the U.S. underwriters are
conditioned on one another.

We have agreed to indemnify the international managers and the U.S.
underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the international managers and
U.S. underwriters may be required to make in respect of those liabilities.

Commissions and Discounts

The lead managers have advised us that the international managers propose
initially to offer the shares to the public at the initial public offering
price listed on the cover page of this prospectus and to dealers at that price
less a concession not in excess of $ per share. The international managers
may allow, and the dealers may reallow, a discount not in excess of $ per
share to other dealers. After the initial public offering, the public offering
price, concession and discount may be changed.

85
<PAGE>

[ALTERNATE PAGE]

The following table shows the public offering price, underwriting
discount and proceeds before expenses to PaeTec. The information assumes either
no exercise or full exercise by the international managers and the U.S.
underwriters of their over-allotment options.

The expenses of the offerings, not including the underwriting discount,
are estimated at $ and are payable by PaeTec.

Over-allotment Options

We have granted options to the international managers to purchase up to
210,000 additional shares at the public offering price less the underwriting
discount. The international managers may exercise these options for 30 days
from the date of this prospectus solely to cover any over-allotments. If the
international managers exercise these options, each international manager will
be obligated, subject to conditions contained in the purchase agreements, to
purchase a number of additional shares proportionate to that international
manager's initial amount reflected in the above table.

We have also granted options to the U.S. underwriters, exercisable for 30
days from the date of this prospectus, to purchase up to 840,000 additional
shares to cover any over-allotments on terms similar to those granted to the
international managers.

Intersyndicate Agreement

The international managers and the U.S. underwriters have entered into an
intersyndicate agreement that provides for the coordination of their
activities. Under the intersyndicate agreement, the international managers and
the U.S. underwriters may sell shares to each other for purposes of resale at
the initial public offering price, less an amount not greater than the selling
concession. Under the intersyndicate agreement, the international managers and
any dealer to whom they sell shares will not offer to sell or sell shares to
U.S. or Canadian persons or to persons they believe intend to resell to persons
who are U.S. or Canadian persons, except in the case of transactions under the
intersyndicate agreement. Similarly, the U.S. underwriters and any dealer to
whom they sell shares will not offer to sell or sell shares to persons who are
non-U.S. or non-Canadian persons or to persons they believe intend to resell to
persons who are non-U.S. or non-Canadian persons, except in the case of
transactions under the intersyndicate agreement.

Reserved Shares

At our request, the underwriters have reserved for sale, at the initial
public offering price, up to % of the shares offered by this prospectus, or
shares, for sale to some of our directors, officers, employees, existing
stockholders and persons having business relationships with us. If these
persons purchase reserved shares, this will reduce the number of shares
available for sale to the general public. Any reserved shares that are not
orally confirmed for purchase within one business day of the pricing of the
offerings will be offered by the underwriters to the general public on the same
terms as the other shares offered by this prospectus.

No Sales of Similar Securities

We, our executive officers and directors and other existing stockholders
have agreed, with exceptions described below, not to offer, sell, contract to
sell, grant any option to purchase or otherwise dispose of any shares of common
stock for 180 days after the date of this prospectus without first obtaining
the written

86
<PAGE>

[ALTERNATE PAGE]

consent of Merrill Lynch and Bear Stearns. After giving effect to the
conversion of the Series A preferred stock into 17,866,666 shares of Class A
common stock, approximately 90% of our common shares outstanding as of the date
of this prospectus, are subject to lockup agreements. For additional
information about these lockup agreements, see "Shares Eligible for Future
Sale" beginning on page 79.

Quotation on the Nasdaq National Market

We expect that the shares of our Class A common stock will be approved
for quotation on the Nasdaq National Market, subject to notice of issuance,
under the symbol "PAET."

Before the offerings, there has been no public market for our Class A
common stock. The initial public offering price will be determined through
negotiations among us and the lead managers and the U.S. representatives. In
addition to prevailing market conditions, the factors to be considered in
determining the initial public offering price are the following:

. the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us;

. our financial information;

. the history of, and the prospects for, our company and the industry
in which we compete;

. an assessment of our management, our past and present operations, and
the prospects for, and timing of, our future revenues;

. the present state of our development; and

. the foregoing factors in relation to market values and various
valuation measures of other companies engaged in activities similar
to ours.

An active trading market for the shares may not develop. It is also
possible that after the offerings the shares will not trade in the public
market at or above the initial public offering price.

The underwriters do not expect to sell more than 5% of the shares in the
aggregate to accounts over which they exercise discretionary authority.

Price Stabilization, Short Positions and Penalty Bids

87
<PAGE>

[ALTERNATE PAGE]

short position by purchasing shares in the open market. A naked short position
is more likely to be created if the U.S. underwriters are concerned that there
may be downward pressure on the price of the common shares in the open market
after pricing that could adversely affect investors who purchase in the
offerings. Stabilizing transactions consist of various bids for or purchases of
common shares made by the U.S. underwriters in the open market prior to the
completion of the offerings.

U.K. Selling Restrictions

Each international manager has agreed that

. it has not offered or sold and will not offer or sell any shares of
Class A common stock to persons in the United Kingdom, except to
persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which do
not constitute an offer to the public in the United Kingdom within
the meaning of the Public Offers of Securities Regulations 1995;

. 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 Class A common stock in, from or otherwise involving
the United Kingdom; and

. it has issued or passed on and will only issue and pass on in the
United Kingdom any document received by it in connection with the
issuance of Class A common stock to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 as amended by the
Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1997 or is a person to whom such document may otherwise
lawfully be issued or passed on.

No Public Offering Outside the U.S.

No action has been or will be taken in any jurisdiction except in the
U.S. that would permit a public offering of the shares of Class A common stock,
or the possession, circulation or distribution of this prospectus or any other
material relating to our company or shares of our Class A common stock in any
jurisdiction where action for that purpose is required. Accordingly, the shares
of our Class A common stock may not be offered or sold, directly or indirectly,
and neither this prospectus nor any other offering material or advertisements
in connection with the shares of Class A common stock may be distributed or
published, in or from any country or jurisdiction except in compliance with any
applicable rules and regulations of any such country or jurisdiction.

88
<PAGE>

[ALTERNATE PAGE]

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

Other Relationships

Electronic Distribution

89
<PAGE>

[ALTERNATE PAGE]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

This prospectus does not constitute an offer to sell or the solicitation of an
offer to buy the shares of our Class A common stock in any jurisdiction in
which such an offer or solicitation is unlawful. There are restrictions on the
offer and sale of the shares of our Class A common stock in the United Kingdom.
All applicable provisions of the Financial Services Act 1986 and the Public
Offers of Securities Regulations 1995 with respect to anything done by any
person in relation to the shares of Class A common stock in, from or otherwise
involving the United Kingdom must be complied with. See "Underwriting."

7,000,000 Shares

PaeTec Corp.

Class A Common Stock

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

Merrill Lynch International

Bear, Stearns International Limited

CIBC World Markets

Deutsche Bank

, 2000

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

PART II

Information Not Required in Prospectus

Item 13. Other Expenses of Issuance and Distribution

The following table sets forth the various fees and expenses, other than
the underwriting discounts and commissions, payable by PaeTec Corp. (the
"Registrant") in connection with the sale of the Class A common stock being
registered hereby. All amounts shown are estimates except for the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.

<TABLE>
<CAPTION>
Amount
-------
<S> <C>
SEC registration fee.............................................. $29,753
NASD filing fee................................................... 11,770
Nasdaq National Market listing fee................................ *
Blue sky qualification fees and expenses.......................... *
Accounting fees and expenses...................................... *
Legal fees and expenses........................................... *
Printing and engraving expenses................................... *
Transfer agent and registrar fees................................. *
Miscellaneous expenses............................................ *
-------
Total........................................................... $ *
=======
</TABLE>
--------
* To be filed by amendment.

Item 14. Indemnification of Directors and Officers

Delaware General Corporation Law. Section 145(a) of the Delaware General
Corporation Law provides that a corporation may indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that the person is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by the person in connection with such action,
suit or proceeding if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the person's conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create
a presumption that the person did not act in good faith and in a manner which
the person reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that the person's conduct was unlawful.

Section 145(b) of the Delaware General Corporation Law states that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the corporation to procure a judgment in its favor by reason of
the fact that the person is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by the person in connection with the defense
or settlement of such action or suit if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and

II-1
<PAGE>

except that no indemnification shall be made in respect of any claim, issue or
matter as to which the person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery
or the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such expenses as the Delaware Court of Chancery or such other
court shall deem proper.

Section 145(c) of the Delaware General Corporation Law provides that to
the extent that a present or former director or officer of a corporation has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections (a) and (b) of Section 145, or in defense
of any claim, issue or matter therein, the person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by the
person in connection therewith.

Section 145(d) of the Delaware General Corporation Law states that any
indemnification under subsections (a) and (b) of Section 145 (unless ordered by
a court) shall be made by the corporation only as authorized in the specific
case upon a determination that indemnification of the present or former
director, officer, employee or agent is proper in the circumstances because the
person has met the applicable standard of conduct set forth in subsections (a)
and (b) of Section 145. Such determination shall be made with respect to a
person who is a director or officer at the time of such determination (1) by a
majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, (2) by a committee of such
directors designated by majority vote of such directors, even though less than
a quorum, (3) if there are no such directors, or if such directors so direct,
by independent legal counsel in a written opinion, or (4) by the stockholders.

Section 145(f) of the Delaware General Corporation Law states that the
indemnification and advancement of expenses provided by, or granted pursuant
to, the other subsections of Section 145 shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office.

Section 145(g) of the Delaware General Corporation Law provides that a
corporation shall have the power to purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against such
person and incurred by such person in any such capacity or arising out of such
person's status as such, whether or not the corporation would have the power to
indemnify such person against such liability under the provisions of Section
145.

Section 145(j) of the Delaware General Corporation Law states that the
indemnification and advancement of expenses provided by, or granted pursuant
to, Section 145 shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.

Certificate of Incorporation. The Registrant's restated certificate of
incorporation filed as Exhibit 3.1 hereto provides that, to the fullest extent
permitted by the Delaware General Corporation Law, the Registrant's directors
will not be personally liable to the Registrant or its stockholders for
monetary damages resulting from a breach of their fiduciary duties as
directors. However, nothing contained in such provision will eliminate or limit
the liability of directors (1) for any breach of the director's duty of loyalty
to the Registrant or its stockholders, (2) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the
law, (3) under section 174 of the Delaware General Corporation Law or (4) for
any transaction from which the director derived an improper personal benefit.

II-2
<PAGE>

Bylaws. The Registrant's amended and restated bylaws provide for the
indemnification of the officers and directors of the Registrant to the fullest
extent permitted by the Delaware General Corporation law. The bylaws provide
that each person who was or is made a party to, or is threatened to be made a
party to, any civil or criminal action, suit or proceeding by reason of the
fact that such person is or was a director or officer of the Registrant shall
be indemnified and held harmless by the Registrant to the fullest extent
authorized by the Delaware General Corporation Law against all expense,
liability and loss, including, without limitation, attorneys' fees, incurred by
such person in connection therewith, if such person acted in good faith and in
a manner such person reasonably believed to be or not opposed to the best
interests of the Registrant and had no reason to believe that such person's
conduct was illegal.

Insurance. The Registrant maintains directors and officers liability
insurance, which covers directors and officers of the Registrant against
certain claims or liabilities arising out of the performance of their duties.

Underwriting Agreement. The U.S. Purchase Agreement and the International
Purchase Agreement will provide for the indemnification of the directors and
officers of the Company and certain controlling persons against specified
liabilities, including liabilities under the Securities Act.

Item 15. Recent Sales of Unregistered Securities

The information presented below regarding sales and issuances of
securities by PaeTec Corp. (the "Company") since inception does not reflect the
conversion of the Company's Series A convertible preferred stock into Class A
common stock upon the closing of the offerings. Unless otherwise indicated
below, the consideration for all of such sales and issuances was cash. The
information presented below regarding the aggregate consideration received by
the Company is provided before deduction of offering and other related
expenses.

Fiscal Year 1998 (Inception to December 31, 1998)

In July 1998, the Company issued 2,000,000 shares of Class A common stock
at a price of $.40 per share to seven persons who were founders and executive
officers of the Company. The Company received aggregate consideration of
$800,000. These shares, which were sold to accredited investors, were issued
without registration under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon the exemption from registration under
Section 4(2) of the Securities Act and/or Regulation D thereunder.

In July 1998, the Company issued 2,500,000 shares of Class B common stock
at a price of $.48 per share to a founder and executive officer of the Company.
The Company received aggregate consideration of $1,200,000. These shares, which
were sold to an accredited investor, were issued without registration under the
Securities Act in reliance upon the exemption from registration under Section
4(2) of the Securities Act and/or Regulation D thereunder.

In August 1998, the Company issued 4,985,000 shares of Class B common
stock at a price of $.833 per share to eight founders and executive officers of
the Company and two additional investors. The Company received aggregate
consideration of $4,152,505. These shares, which were sold to accredited
investors, were issued without registration under the Securities Act in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act and/or Regulation D thereunder.

In August 1998, the Company issued 1,200,000 shares of Class A common
stock to one institutional investor at a price of $.694 per share. The Company
received aggregate consideration of $832,800. These shares, which were sold to
an accredited investor, were issued without registration under the Securities
Act in reliance upon the exemption from registration under Section 4(2) of the
Securities Act and/or Regulation D thereunder.

In September 1998, the Company issued 4,000,000 shares of Class A common
stock at a price of $2.50 per share to 41 investors, including directors,
officers, employees, existing stockholders, consultants and vendors. All but
one of the purchasers were accredited investors. The Company received aggregate

II-3
<PAGE>

consideration of $10,000,000. These shares were issued without registration
under the Securities Act in reliance upon the exemption from registration under
Section 4(2) of the Securities Act and/or Regulation D thereunder.

In November 1998, the Company issued 600,000 shares of Class A common
stock at a price of $2.50 per share to one institutional investor. The Company
received aggregate consideration of $1,500,000. These shares, which were sold
to an accredited investor, were issued without registration under the
Securities Act in reliance upon the exemption from registration under Section
4(2) of the Securities Act and/or Regulation D thereunder.

1999

From March through August 1999, the Company issued 5,600,000 shares of
Class A common stock at a price of $5.00 per share to 151 investors, including
directors, officers, employees, existing stockholders, consultants and vendors.
The Company received aggregate consideration of $28,000,000. These shares,
which were sold to accredited investors, were issued without registration under
the Securities Act in reliance upon the exemption from registration under
Section 4(2) of the Securities Act and/or Registration D thereunder.

In September 1999, in consideration for the Company's acquisition of East
Florida Communications, Inc., the Company issued 20,000 shares of Class A
common stock at a value of $5.00 per share to two former stockholders of the
acquired company. These shares, which were sold to accredited investors, were
issued without registration under the Securities Act in reliance upon the
exemption from registration under Section 4(2) of the Securities Act and/or
Registration D thereunder.

In September 1999, in consideration for the Company's acquisition of
Campuslink Communications Systems, Inc., the Company issued 5,919,183 shares of
Class A common stock at a value of $5.00 per share to nine former stockholders
of the acquired company, of whom four were accredited investors. These shares
were issued without registration under the Securities Act in reliance upon the
exemption from registration under Section 4(2) of the Securities Act and/or
Registration D thereunder.

In 1999, the Company issued 193,498 shares of Class A common stock to
employees of the Company or its subsidiaries upon their exercise of options
issued under the Company's 1998 Incentive Compensation Plan at exercise prices
ranging from $0.40 per share to $2.50 per share. The Company paid the aggregate
exercise price of these options, which totaled $93,597, on behalf of these
employees. These shares were issued without registration under the Securities
Act in reliance upon the exemption from registration under Rule 701 promulgated
under the Securities Act and/or Section 4(2) of the Securities Act.

2000

In February 2000, the Company issued 133,334 shares of Class A common
stock at a price of $7.50 per share to two institutional investors and 134,000
shares of Series A convertible preferred stock to 11 institutional investors.
Each share of Series A convertible preferred stock is initially convertible
into 133 shares of Class A common stock at a conversion price of $7.50 per
share. The Company received aggregate consideration of $1,000,005 for the sale
of the Class A common stock and $134,000,000 for the sale of the Series A
convertible preferred stock. These shares, which were sold to accredited
investors, were issued without registration under the Securities Act in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act and/or Registration D thereunder.

In April 2000, in consideration for the Company's acquisition of Pinnacle
Software Corporation, the Company issued 500,000 shares of Class A common stock
at a value of $7.50 per share to 46 former stockholders of the acquired
company, of whom 19 were accredited investors. These shares were issued without
registration under the Securities Act in reliance upon the exemption from
registration under Section 4(2) of the Securities Act and/or Registration D
thereunder.

II-4
<PAGE>

In May 2000, the Company issued 120,000 shares of Class A common stock at
a value of $12.00 per share to Data Voice Networks, Inc. in consideration for
the Company's purchase of assets from that company. These shares, which were
sold to an accredited investor, were issued without registration under the
Securities Act in reliance upon the exemption from registration under Section
4(2) of the Securities Act and/or Regulation D thereunder.

From January 1, 2000 through the date of this registration statement, the
Company issued 89,078 shares of Class A common stock to employees of the
Company or its subsidiaries upon their execise of options issued under the
Company's 1998 Incentive Compensation Plan at an exercise price of $2.50 per
share. The Company received aggregate consideration of $222,695. These shares
were issued without registration under the Securities Act in reliance upon the
exemption from registration under Section 4(2) of the Securities Act.

From January 1, 2000 through the date of this registration statement, the
Company issued to two former stockholders of Campuslink Communications Systems,
Inc. an additional 50,283 shares of Class A common stock upon their exercise of
options at an exercise price of $2.50 per share. The Company received aggregate
consideration of $125,708. These shares, which were sold to accredited
investors, were issued without registration under the Securities Act in
reliance on the exemption from registration under Section 4(2) of the
Securities Act.

None of the foregoing transactions was effected with an underwriter. The
recipients of securities in each such transaction represented their intention
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate legends were
affixed to the stock certificates issued in such transactions.

Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits

II-5
<PAGE>

<TABLE>
<C> <S>
+10.4.1 Stock Purchase Agreement, dated August 20, 1998, between the Company
and Jeffrey P. Sudikoff.
+10.4.2 First Amendment to Stock Purchase Agreement, dated as of February 4,
2000, between the Company and Jeffrey P. Sudikoff.
+10.5.1 Stock Purchase Agreement, dated as of November 16, 1998, between the
Company and Newcourt Commercial Financial Corporation (f/k/a AT&T
Commercial Financial Corporation).
+10.5.2 First Amendment to Stock Purchase Agreement, dated as of February 4,
2000, between the Company and Newcourt Commercial Financial
Corporation.
+10.6.1 Stock Rights Agreement, dated August 13, 1998, among Joseph D.
Ambersley, the Company, PaeTec Communications, Inc. and Arunas A.
Chesonis.
+10.6.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Joseph D. Ambersley, the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
+10.6.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Joseph D. Ambersley, the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
+10.6.4 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Joseph D. Ambersley, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
+10.6.5 Fourth Amendment to Stock Rights Agreement, dated as of August 7,
2000, among Joseph D. Ambersley, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
+10.7.1 Stock Rights Agreement, dated July 17, 1998, among Timothy J.
Bancroft, the Company, PaeTec Communications, Inc. and Arunas A.
Chesonis.
+10.7.2 First Amendment to Stock Rights Agreement, dated September 30, 1998,
among Timothy J. Bancroft, the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
+10.7.3 Second Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Timothy J. Bancroft, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
+10.7.4 Third Amendment to Stock Rights Agreement, dated as of August 7,
2000, among Timothy J. Bancroft, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
+10.8.1 Stock Rights Agreement, dated July 17, 1998, among John Baron, the
Company, PaeTec Communications, Inc. and Arunas A. Chesonis.
+10.8.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among John Baron, the Company, PaeTec Communications, Inc. and Arunas
A. Chesonis.
+10.8.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among John Baron, the Company, PaeTec Communications, Inc. and Arunas
A. Chesonis.
+10.8.4 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among John Baron, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
+10.8.5 Fourth Amendment to Stock Rights Agreement, dated as of August 7,
2000, among John Baron, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
+10.9.1 Stock Rights Agreement, dated July 17, 1998, among Bradford M. Bono,
the Company, PaeTec Communications, Inc. and Arunas A. Chesonis.
+10.9.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Bradford M. Bono, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
+10.9.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Bradford M. Bono, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
+10.9.4 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Bradford M. Bono, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
+10.9.5 Fourth Amendment to Stock Rights Agreement, dated as of August 7,
2000, among Bradford M. Bono, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
+10.10.1 Stock Rights Agreement, dated July 17, 1998, among Edward J. Butler,
Jr., the Company, PaeTec Communications, Inc. and Arunas A. Chesonis.
+10.10.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Edward J. Butler, Jr., the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
+10.10.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Edward J. Butler, Jr., the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
</TABLE>

II-6
<PAGE>

<TABLE>
<C> <S>
+10.10.4 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Edward J. Butler, Jr., the Company, PaeTec
Communications, Inc. and Arunas A. Chesonis.
+10.10.5 Fourth Amendment to Stock Rights Agreement, dated as of August 7,
2000, among Edward J. Butler, Jr., the Company, PaeTec
Communications, Inc. and Arunas A. Chesonis.
+10.11.1 Stock Rights Agreement, dated July 17, 1998, among Richard E.
Ottalagana, the Company, PaeTec Communications, Inc. and Arunas A.
Chesonis.
+10.11.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Richard E. Ottalagana, the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
+10.11.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Richard E. Ottalagana, the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
+10.11.4 Letter Agreement relating to Stock Rights Agreement, dated October
15, 1998, among Richard E. Ottalagana, the Company and PaeTec
Communications, Inc.
+10.11.5 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Richard E. Ottalagana, the Company, PaeTec
Communications, Inc. and Arunas A. Chesonis.
+10.11.6 Fourth Amendment to Stock Rights Agreement, dated as of August 7,
2000, among Richard E. Ottalagana, the Company, PaeTec
Communications, Inc. and Arunas A. Chesonis.
+10.12.1 Stock Rights Agreement, dated July 17, 1998, among Richard J. Padulo,
the Company, PaeTec Communications, Inc. and Arunas A. Chesonis.
+10.12.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Richard J. Padulo, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
+10.12.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Richard J. Padulo, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
+10.12.4 Letter Agreement relating to Stock Rights Agreement, dated October
15, 1998, among Richard J. Padulo, the Company and PaeTec
Communications, Inc.
+10.12.5 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Richard J. Padulo, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
+10.12.6 Fourth Amendment to Stock Rights Agreement, dated as of August 7,
2000, among Richard J. Padulo, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
+10.13.1 Stock Rights Agreement, dated July 17, 1998, among Daniel J. Venuti,
the Company, PaeTec Communications, Inc. and Arunas A. Chesonis.
+10.13.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Daniel J. Venuti, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
+10.13.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Daniel J. Venuti, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
+10.13.4 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Daniel J. Venuti, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
+10.13.5 Fourth Amendment to Stock Rights Agreement, dated as of August 7,
2000, among Daniel J. Venuti, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
+10.14.1 Agreement and Plan of Reorganization dated as of June 4, 1999, among
the Company, PaeTec Merger Corp. and Campuslink Communications
Systems, Inc.
+10.14.2 Agreement and Plan of Reorganization Amendment No. 1, dated as of
July 15, 1999, among the Company, PaeTec Merger Corp. and Campuslink
Communications Systems, Inc.
+10.15 Stockholders' Agreement, dated as of September 9, 1999, among the
Company, Alliance Cabletel Holdings, L.P., Kline Hawkes California
SBIC, L.P., The Union Labor Life Insurance Company Separate Account
P, the individuals and/or entities lised on Schedule A thereto,
Arunas A. Chesonis, Christopher Edgecomb, Trustee of the Christopher
E. Edgecomb Living Trust dated April 25, 1998, and Jeffrey Sudikoff.
+10.15.1 Amendment No. 1 to Stockholders' Agreement, dated as of October 13,
1999, among the Company, Alliance Cabletel Holdings, L.P., Kline
Hawkes California SBIC, L.P., The Union Labor Life Insurance Company
Separate Account P, the individuals and/or entities listed on
Schedule A thereto, Arunas A. Chesonis, Christopher Edgecomb, Trustee
of the Christopher E. Edgecomb Living Trust dated April 25, 1998, and
Jeffrey Sudikoff.
</TABLE>

II-7
<PAGE>

<TABLE>
<C> <S>
+10.15.2 First Amendment to Stockholders' Agreement, dated as of February 4,
2000, among the Company, Alliance Cabletel Holdings, L.P., Kline
Hawkes California SBIC, L.P., The Union Labor Life Insurance Company
Separate Account P, the individuals and/or entities listed on
Schedule A thereto, Arunas A. Chesonis, Christopher Edgecomb, Trustee
of the Christopher E. Edgecomb Living Trust dated April 25, 1998, and
Jeffrey Sudikoff.
+10.16.1 Second Amended and Restated Loan and Security Agreement, dated as of
August 4, 2000, among PaeTec Communications, Inc., PaeTec
International, Inc., PaeTec Online, Inc., PaeTec Communications of
Virginia, Inc., PaeTec Capital Corp., Pinnacle Software Corporation,
Data Voice Networks, Inc. and East Florida Communications, Inc.
(collectively, the "PaeTec Subsidiaries"), as Borrowers; CIT Lending
Services Corporation, as Collateral Agent; Bankers Trust Company and
General Electric Capital Corporation, as Co-Syndication Agents;
Merrill Lynch Capital Corporation and Bear Stearns Corporate Lending,
Inc., as Co-Agents; Canadian Imperial Bank of Commerce, as
Administrative Agent; and the other financial institutions from time
to time parties thereto.
+10.16.2 General Reaffirmation and Modification Agreement, dated as of August
4, 2000, among the PaeTec Subsidiaries, as Borrowers, PaeTec Corp.,
as Guarantor, and CIT Lending Services Corporation, as Collateral
Agent.
+10.17 Amended and Restated Guaranty, dated as of October 29, 1999, by the
Company, in favor of CIT Lending Services Corporation (formerly
Newcourt Commercial Finance Corporation), as Collateral Agent for the
ratable benefit of the Lenders identified in the Second Amended and
Restated Loan and Security Agreement filed as Exhibit 10.16.1 hereto.
+10.18 Proxy for the Class B Common Stock.
+10.19 Voting Agreement, dated as of February 4, 2000, by and among the
Company, Arunas A. Chesonis, Christopher E. Edgecomb, Trustee of the
Christopher E. Edgecomb Living Trust dated April 25, 1998, Jeffrey
Sudikoff, Madison Dearborn Capital Partners III, L.P., Madison
Dearborn Special Equity III, L.P., Special Advisors Fund I, LLC,
Blackstone CCC Capital Partners L.P., Blackstone CCC Offshore Capital
Partners L.P., Blackstone Family Investment Partnership III L.P.,
Ares Leveraged Investment Fund L.P., Ares Leveraged Investment Fund
L.P. II, Newcourt Commercial Finance Corporation, and UnionBanCal
Equities, Inc.
+10.20 Amended and Restated Registration Rights Agreement, dated as of
February 4, 2000, by and among the Company, Alliance Cabletel
Holdings, L.P., Kline Hawkes California SBIC, L.P., The Union Labor
Life Insurance Corporation Separate Account P, and the other
individuals and/or entities listed on Schedule A thereto; Madison
Dearborn Capital Partners III, L.P., Madison Dearborn Special Equity
III, L.P. and Special Advisors Fund I, LLC; Blackstone CCC Capital
Partners L.P., Blackstone CCC Offshore Capital Partners L.P. and
Blackstone Family Investment Partnership III L.P.; Ares Leveraged
Investment Fund L.P. and Ares Leveraged Investment Fund L.P. II;
Newcourt Commercial Finance Corporation; and UnionBanCal Equities,
Inc.
+10.21 PaeTec Corp. 1998 Incentive Compensation Plan, as amended.
+10.21.2 Form of 1998 Incentive Compensation Plan Incentive Stock Option
Agreement for Sales Representatives (with non-solicitation
provisions).
+10.21.3 Form of 1998 Incentive Compensation Plan Incentive Stock Option
Agreement for Administrative Employees.
+10.21.4 Form of 1998 Incentive Compensation Plan Incentive Stock Option
Agreement for Directors and Officers.
+10.21.5 Form of 1998 Incentive Compensation Plan Nonqualified Stock Option
Agreement for Administrative Employees.
+10.21.6 Form of 1998 Incentive Compensation Plan Nonqualified Stock Option
Agreement for Directors and Officers.
+10.22 PaeTec Communications, Inc. Agent Incentive Plan, as amended.
</TABLE>

II-8
<PAGE>

<TABLE>
<C> <S>
+10.23.1 Stock Rights Agreement, dated October 30, 1998, among Katherine A.
Chapman, the Company, PaeTec Communications, Inc. and Arunas A.
Chesonis.
+10.23.2 First Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Katherine A. Chapman, the Company, PaeTec
Communications, Inc. and Arunas A. Chesonis.
+10.23.3 Second Amendment to Stock Rights Agreement, dated as of August 7,
2000, among Katherine A. Chapman, the Company, PaeTec
Communications, Inc. and Arunas A. Chesonis.
+10.24.1 Registration Rights Agreement, dated as of December 8, 1999, among
the Company and the persons or entities listed on Schedule 1
thereto.
+10.24.2 First Amendment to Registration Rights Agreement, dated as of
February 4, 2000, among the Company and the persons or entities
listed on Schedule 1 thereto.
+10.25 Letter to Investors, dated September 20, 1998, together with
Statement of Registration Rights.
+10.26.1 Lease Agreement, dated as of July 7, 1999, between WillowBrook II
L.L.C. and the Company.
+10.26.2 Lease Amendment, dated February 11, 2000, between WillowBrook II
L.L.C. and the Company.
+10.26.3 Lease Amendment, dated March 7, 2000, between WillowBrook II L.L.C.
and the Company.
+10.27.1 Standard Office Space Lease, dated as of July 10, 1998, between 290
Woodcliff Drive Company and PaeTec Communications, Inc.
+10.27.2 Lease Modification Agreement #1, dated September 30, 1998, between
290 Woodcliff Drive Company and PaeTec Communications, Inc.
+10.27.3 Lease Modification Agreement #2, dated October 11, 1999, between 290
Woodcliff Drive Company and PaeTec Communications, Inc.
++10.28 General Agreement, dated as of June 17, 1998, between PaeTec
Communications, Inc. and Lucent Technologies, Inc., as amended by
Addendum Number One, dated as of September 16, 1998, and Addendum
Number Two, dated as of December 17, 1998.
+10.29 Form of PaeTec Corp. 2000 Stock Option and Incentive Plan.
10.30 Nonqualified Stock Option Agreement, dated as of January 13, 2000,
between PaeTec Corp. and James A Kofalt.
+21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche LLP, independent auditors.
23.2 Consent of Arthur Andersen L.L.P., independent accountants.
*23.3 Consent of Hogan & Hartson L.L.P.
+24.1 Power of Attorney.
+24.2 Power of Attorney for Jeffrey L. Burke.
27.1 Financial Data Schedule.
</TABLE>
--------
* To be filed by amendment.
+ Previously filed.

++ Certain confidential portions of this exhibit were omitted by means of
redacting a portion of the text. This exhibit has been filed separately with
the Secretary of the SEC without such text pursuant to our Application
Requesting Confidential Treatment under Rule 406 under the Securities Act.

II-9
<PAGE>

(b) Financial Statement Schedules

The following consolidated financial statement schedule is filed
herewith:

Schedule II--Valuation and Qualifying Accounts.

PAETEC CORP. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
Additions
---------- --------------------- ----------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
of Period Expenses Accounts of Period
---------- ---------- ---------- ----------
Year Ended December 31, 1999
---------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $ 2 $ 1,164 $1,194(1) $ 2,360
Valuation allowance for deferred
tax assets $2,107 $14,524 $7,900(2) $24,531
<CAPTION>
Period Ended December 31, 1998
------------------------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $ -- $ 2 $ -- $ 2
Valuation allowance for deferred
tax assets $ -- $ 2,107 $ -- $ 2,107
</TABLE>
--------
(1) Primarily represents allowance acquired through acquisitions.
(2) Represents a valuation allowance applicable to net operating loss
carryforwards that were acquired by the Company in an acquisition.

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

Item 17. Undertakings

The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of
1933, 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 registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act
of 1933, 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.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such

II-10
<PAGE>

indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant 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 registrant 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 Act and will be governed by the final
adjudication of such issue.

II-11
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Fairport,
State of New York, on December 8, 2000.

Paetec Corp.

/s/ Arunas A. Chesonis
By: _________________________________
Arunas A. Chesonis
Chairman, President and Chief
Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed as of December 8, 2000 by the following
persons in the capacities and on the date indicated.

<TABLE>
<CAPTION>
Name Title
---- -----

<S> <C>
/s/ Arunas A. Chesonis Chairman, President and Chief
______________________________________ Executive Officer (Principal
Arunas A. Chesonis Executive Officer)

/s/ Richard E. Ottalagana Executive Vice President (Principal
______________________________________ Financial Officer)
Richard E. Ottalagana

/s/ Timothy J. Bancroft Vice President-Finance (Principal
______________________________________ Accounting Officer)
Timothy J. Bancroft

/s/ Bradford M. Bono* Director
______________________________________
Bradford M. Bono

/s/ James A. Kofalt* Director
______________________________________
James A. Kofalt
</TABLE>

II-12
<PAGE>

<TABLE>
<CAPTION>
Name Title
---- -----

<S> <C>
/s/ James H. Kirby* Director
______________________________________
James H. Kirby
/s/ Lawrence H. Guffey* Director
______________________________________
Lawrence H. Guffey
/s/ Jeffrey L. Burke* Director
______________________________________
Jeffrey L. Burke
*By: /s/ Arunas A. Chesonis
______________________________________
Arunas A. Chesonis
(Attorney-in-fact)
</TABLE>

II-13
<PAGE>

EXHIBIT INDEX

<TABLE>
<C> <S>
*1.1 Form of U.S. Purchase Agreement.
*1.2 Form of International Purchase Agreement.
*3.1 Form of Restated Certificate of Incorporation of PaeTec Corp. (the
"Company"), to be effective upon completion of the offerings.
*3.2 Form of Amended and Restated Bylaws of the Company, to be effective
upon completion of the offerings.
*4.1 Form of Stock Certificate for the Class A Common Stock, par value $.01
per share, of the Company.
*5.1 Opinion by Hogan & Hartson L.L.P. regarding the validity of the Class
A Common Stock.
+10.1.1 Stock Purchase Agreement, dated July 17, 1998, among Arunas A.
Chesonis, the Company and PaeTec Communications, Inc.
+10.1.2 First Amendment to Stock Purchase Agreement, dated as of February 4,
2000, among Arunas A. Chesonis, the Company and PaeTec Communications,
Inc.
+10.2 Stock Purchase Agreement, dated July 20, 1998, among Algimantas K.
Chesonis, Arunas A. Chesonis, the Company and PaeTec Communications,
Inc.
+10.3.1 Stock Purchase Agreement, dated as of August 13, 1998, between the
Company and Christopher E. Edgecomb, Trustee of the Christopher E.
Edgecomb Living Trust dated April 25, 1998.
+10.3.2 First Amendment to Stock Purchase Agreement, dated as of February 4,
2000, among the Company and Christopher E. Edgecomb, Trustee of the
Christopher E. Edgecomb Living Trust dated April 25, 1998.
+10.4.1 Stock Purchase Agreement, dated August 20, 1998, between the Company
and Jeffrey P. Sudikoff.
+10.4.2 First Amendment to Stock Purchase Agreement, dated as of February 4,
2000, between the Company and Jeffrey P. Sudikoff.
+10.5.1 Stock Purchase Agreement, dated as of November 16, 1998, between the
Company and Newcourt Commercial Financial Corporation (f/k/a AT&T
Commercial Financial Corporation).
+10.5.2 First Amendment to Stock Purchase Agreement, dated as of February 4,
2000, between the Company and Newcourt Commercial Financial
Corporation.
+10.6.1 Stock Rights Agreement, dated July 17, 1998, among Joseph D.
Ambersley, the Company, PaeTec Communications, Inc. and Arunas A.
Chesonis
+10.6.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Joseph D. Ambersley, the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
+10.6.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Joseph D. Ambersley, the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
+10.6.4 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Joseph D. Ambersley, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
+10.6.5 Fourth Amendment to Stock Rights Agreement, dated as of August 7,
2000, among Joseph D. Ambersley, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
+10.7.1 Stock Rights Agreement, dated August 13, 1998, among Timothy J.
Bancroft, the Company, PaeTec Communications, Inc. and Arunas A.
Chesonis.
+10.7.2 First Amendment to Stock Rights Agreement, dated September 30, 1998,
among Timothy J. Bancroft, the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
+10.7.3 Second Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Timothy J. Bancroft, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
+10.7.4 Third Amendment to Stock Rights Agreement, dated as of August 7, 2000,
among Timothy J. Bancroft, the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
+10.8.1 Stock Rights Agreement, dated July 17, 1998, among John Baron, the
Company, PaeTec Communications, Inc. and Arunas A. Chesonis.
+10.8.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among John Baron, the Company, PaeTec Communications, Inc. and Arunas
A. Chesonis.
+10.8.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among John Baron, the Company, PaeTec Communications, Inc. and Arunas
A. Chesonis.
</TABLE>
<PAGE>

<TABLE>
<C> <S>
+10.8.4 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among John Baron, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
+10.8.5 Fourth Amendment to Stock Rights Agreement, dated as of August 7,
2000, among John Baron, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
+10.9.1 Stock Rights Agreement, dated July 17, 1998, among Bradford M. Bono,
the Company, PaeTec Communications, Inc. and Arunas A. Chesonis
+10.9.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Bradford M. Bono, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
+10.9.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Bradford M. Bono, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
+10.9.4 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Bradford M. Bono, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
+10.9.5 Fourth Amendment to Stock Rights Agreement, dated as of August 7,
2000, among Bradford M. Bono, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
+10.10.1 Stock Rights Agreement, dated July 17, 1998, among Edward J. Butler,
Jr., the Company, PaeTec Communications, Inc. and Arunas A. Chesonis.
+10.10.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Edward J. Butler, Jr., the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
+10.10.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Edward J. Butler, Jr., the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
+10.10.4 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Edward J. Butler, Jr., the Company, PaeTec
Communications, Inc. and Arunas A. Chesonis.
+10.10.5 Fourth Amendment to Stock Rights Agreement, dated as of August 7,
2000, among Edward J. Butler, Jr., the Company, PaeTec
Communications, Inc. and Arunas A. Chesonis.
+10.11.1 Stock Rights Agreement, dated July 17, 1998, among Richard E.
Ottalagana, the Company, PaeTec Communications, Inc. and Arunas A.
Chesonis.
+10.11.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Richard E. Ottalagana, the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
+10.11.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Richard E. Ottalagana, the Company, PaeTec Communications, Inc.
and Arunas A. Chesonis.
+10.11.4 Letter Agreement relating to Stock Rights Agreement, dated October
15, 1998, among Richard E. Ottalagana, the Company and PaeTec
Communications, Inc.
+10.11.5 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Richard E. Ottalagana, the Company, PaeTec
Communications, Inc. and Arunas A. Chesonis.
+10.11.6 Fourth Amendment to Stock Rights Agreement, dated as of August 7,
2000, among Richard E. Ottalagana, the Company, PaeTec
Communications, Inc. and Arunas A. Chesonis.
+10.12.1 Stock Rights Agreement, dated July 17, 1998, among Richard J. Padulo,
the Company, PaeTec Communications, Inc. and Arunas A. Chesonis.
+10.12.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Richard J. Padulo, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
+10.12.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Richard J. Padulo, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
+10.12.4 Letter Agreement relating to Stock Rights Agreement, dated October
15, 1998, among Richard J. Padulo, the Company and PaeTec
Communications, Inc.
+10.12.5 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Richard J. Padulo, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
+10.12.6 Fourth Amendment to Stock Rights Agreement, dated as of August 7,
2000, among Richard J. Padulo, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
+10.13.1 Stock Rights Agreement, dated July 17, 1998, among Daniel J. Venuti,
the Company, PaeTec Communications, Inc. and Arunas A. Chesonis.
+10.13.2 First Amendment to Stock Rights Agreement, dated August 13, 1998,
among Daniel J. Venuti, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
</TABLE>
<PAGE>

<TABLE>
<C> <S>
+10.13.3 Second Amendment to Stock Rights Agreement, dated September 30, 1998,
among Daniel J. Venuti, the Company, PaeTec Communications, Inc. and
Arunas A. Chesonis.
+10.13.4 Third Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Daniel J. Venuti, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
+10.13.5 Fourth Amendment to Stock Rights Agreement, dated as of August 7,
2000, among Daniel J. Venuti, the Company, PaeTec Communications,
Inc. and Arunas A. Chesonis.
+10.14.1 Agreement and Plan of Reorganization, dated as of June 4, 1999, among
the Company, PaeTec Merger Corp. and Campuslink Communications
Systems, Inc.
+10.14.2 Agreement and Plan of Reorganization Amendment No. 1, dated as of
July 15, 1999, among the Company, PaeTec Merger Corp. and Campuslink
Communications Systems, Inc.
+10.15 Stockholders' Agreement, dated as of September 9, 1999, among the
Company, Alliance Cabletel Holdings, L.P., Kline Hawkes California
SBIC, L.P., The Union Labor Life Insurance Company Separate Account
P, the individuals and/or entities lised on Schedule A thereto,
Arunas A. Chesonis, Christopher Edgecomb, Trustee of the Christopher
E. Edgecomb Living Trust dated April 25, 1998, and Jeffrey Sudikoff.
+10.15.1 Amendment No. 1 to Stockholders' Agreement, dated as of October 13,
1999, among the Company, Alliance Cabletel Holdings, L.P., Kline
Hawkes California SBIC, L.P., The Union Labor Life Insurance Company
Separate Account P, the individuals and/or entities listed on
Schedule A thereto, Arunas A. Chesonis, Christopher Edgecomb, Trustee
of the Christopher E. Edgecomb Living Trust dated April 25, 1998, and
Jeffrey Sudikoff.
+10.15.2 First Amendment to Stockholders' Agreement, dated as of February 4,
2000, among the Company, Alliance Cabletel Holdings, L.P., Kline
Hawkes California SBIC, L.P., The Union Labor Life Insurance Company
Separate Account P, the individuals and/or entities listed on
Schedule A thereto, Arunas A. Chesonis, Christopher Edgecomb, Trustee
of the Christopher E. Edgecomb Living Trust dated April 25, 1998, and
Jeffrey Sudikoff.
+10.16.1 Second Amended and Restated Loan and Security Agreement, dated as of
August 4, 2000, among PaeTec Communications, Inc., PaeTec
International, Inc., PaeTec Online, Inc., PaeTec Communications of
Virginia, Inc., PaeTec Capital Corp., Pinnacle Software Corporation,
Data Voice Networks, Inc. and East Florida Communications, Inc.
(collectively, the "PaeTec Subsidiaries"), as Borrowers; CIT Lending
Services Corporation, as Collateral Agent; Bankers Trust Company and
General Electric Capital Corporation, as Co-Syndication Agents;
Merrill Lynch Capital Corporation and Bear Stearns Corporate Lending,
Inc., as Co-Agents; Canadian Imperial Bank of Commerce, as
Administrative Agent; and the other financial institutions from time
to time parties thereto.
+10.16.2 General Reaffirmation and Modification Agreement, dated as of August
4, 2000, among the PaeTec Subsidiaries, as Borrowers, PaeTec Corp.,
as Guarantor, and CIT Lending Services Corporation, as Collateral
Agent.
+10.17 Amended and Restated Guaranty, dated as of October 29, 1999, by the
Company, in favor of CIT Lending Services Corporation (formerly
Newcourt Commercial Finance Corporation), as Collateral Agent for the
ratable benefit of the Lenders identified in the Second Amended and
Restated Loan and Security Agreement filed as Exhibit 10.16.1 hereto.
+10.18 Proxy for the Class B Common Stock.
+10.19 Voting Agreement, dated as of February 4, 2000, by and among the
Company, Arunas A. Chesonis, Christopher E. Edgecomb, Trustee of the
Christopher E. Edgecomb Living Trust dated April 25, 1998, Jeffrey
Sudikoff, Madison Dearborn Capital Partners III, L.P., Madison
Dearborn Special Equity III, L.P., Special Advisors Fund I, LLC,
Blackstone CCC Capital Partners L.P., Blackstone CCC Offshore Capital
Partners L.P., Blackstone Family Investment Partnership III L.P.,
Ares Leveraged Investment Fund L.P., Ares Leveraged Investment Fund
L.P. II, Newcourt Commercial Finance Corporation, and UnionBanCal
Equities, Inc.
+10.20 Amended and Restated Registration Rights Agreement, dated as of
February 4, 2000, by and among the Company, Alliance Cabletel
Holdings, L.P., Kline Hawkes California SBIC, L.P., The Union Labor
Life Insurance Corporation Separate Account P, and the other
individuals and/or entities listed on Schedule A thereto; Madison
Dearborn Capital Partners III, L.P., Madison Dearborn Special
</TABLE>
<PAGE>

<TABLE>
<C> <S>
Equity III, L.P. and Special Advisors Fund I, LLC; Blackstone CCC
Capital Partners L.P., Blackstone CCC Offshore Capital Partners L.P.
and Blackstone Family Investment Partnership III L.P.; Ares
Leveraged Investment Fund L.P. and Ares Leveraged Investment Fund
L.P. II; Newcourt Commercial Finance Corporation; and UnionBanCal
Equities, Inc.
+10.21 PaeTec Corp. 1998 Incentive Compensation Plan, as amended.
+10.21.2 Form of 1998 Incentive Compensation Plan Incentive Stock Option
Agreement for Sales Representatives.
+10.21.3 Form of 1998 Incentive Compensation Plan Incentive Stock Option
Agreement for Administrative Employees.
+10.21.4 Form of 1998 Incentive Compensation Plan Incentive Stock Option
Agreement for Directors and Officers (with non-competition
provisions).
+10.21.5 Form of 1998 Incentive Compensation Plan Nonqualified Stock Option
Agreement for Administrative Employees.
+10.21.6 Form of 1998 Incentive Compensation Plan Nonqualified Stock Option
Agreement for Directors and Officers.
+10.22 PaeTec Communications, Inc. Agent Incentive Plan, as amended.
+10.23.1 Stock Rights Agreement, dated October 30, 1998, among Katherine A.
Chapman, the Company, PaeTec Communications, Inc. and Arunas A.
Chesonis.
+10.23.2 First Amendment to Stock Rights Agreement, dated as of February 4,
2000, among Katherine A. Chapman, the Company, PaeTec
Communications, Inc. and Arunas A. Chesonis.
+10.23.3 Second Amendment to Stock Rights Agreement, dated as of August 7,
2000, among Katherine A. Chapman, the Company, PaeTec
Communications, Inc. and Arunas A. Chesonis.
+10.24.1 Registration Rights Agreement, dated as of December 8, 1999, among
the Company and the persons or entities listed on Schedule 1
thereto.
+10.24.2 First Amendment to Registration Rights Agreement, dated as of
February 4, 2000, among the Company and the persons or entities
listed on Schedule 1 thereto.
+10.25 Letter to Investors, dated September 20, 1998, together with
Statement of Registration Rights.
+10.26.1 Lease Agreement, made as of July 7, 1999, between WillowBrook II
L.L.C. and the Company.
+10.26.2 Lease Amendment, dated February 11, 2000, between WillowBrook II
L.L.C. and the Company.
+10.26.3 Lease Amendment, dated March 7, 2000, between WillowBrook II L.L.C.
and the Company.
+10.27.1 Standard Office Space Lease, dated as of July 10, 1998, between 290
Woodcliff Drive Company and PaeTec Communications, Inc.
+10.27.2 Lease Modification Agreement #1, dated September 30, 1998, between
290 Woodcliff Drive Company and PaeTec Communications, Inc.
+10.27.3 Lease Modification Agreement #2, dated October 11, 1999, between 290
Woodcliff Drive Company and PaeTec Communications, Inc.
++10.28 General Agreement, dated as of June 17, 1998, between PaeTec
Communications, Inc. and Lucent Technologies, Inc., as amended by
Addendum Number One, dated as of September 16, 1998, and Addendum
Number Two, dated as of December 17, 1998.
+10.29 Form of PaeTec Corp. 2000 Stock Option and Incentive Plan.
10.30 Nonqualified Stock Option Agreement, dated as of January 13, 2000,
between PaeTec Corp. and James A. Kofalt.
+21.1 Subsidiaries of the Company.
23.1 Consent of Deloitte & Touche, LLP, independent auditors.
23.2 Consent of Arthur Andersen L.L.P., independent accountants.
*23.3 Consent of Hogan & Hartson L.L.P.
+24.1 Power of Attorney.
+24.2 Power of Attorney for Jeffrey L. Burke.
27.1 Financial Data Schedule.
</TABLE>
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* To be filed by amendment.

+ Previously filed.